Imagine this: a massive shipment of iron ore is halfway across the ocean. A storm hits, and the cargo is damaged. Who pays for the loss? The mining company that sold it, or the steel mill that bought it?
The answer, worth millions of dollars, comes down to three little letters in the sales contract: FOB, CIF, or DDP.
These are Incoterms, and they are the universal language of global trade. They are a set of simple, standardized rules that define exactly where a seller's responsibility ends and a buyer's begins. Getting them right is critical for avoiding costly disputes and ensuring your operation runs smoothly.
Think of Incoterms as answering four huge questions in any international deal:
- Who pays for shipping?
- Who arranges for the transport and insurance?
- Who handles customs?
- Where exactly does the risk transfer from seller to buyer?
Let's break down the most common Incoterms you'll see in the mining business, in plain English.
A Practical Guide to the Four Most Common Incoterms in Mining
Think of these terms as a spectrum, from the seller doing the absolute minimum to the seller doing absolutely everything.
1. EXW (Ex Works): The "You Pick It Up" Term
Think of this as the "mine gate" price. Under EXW, the seller’s only job is to have the goods ready for pickup at their own location (the mine, a warehouse, etc.).
From that point on, everything is the buyer's problem: loading the goods onto a truck, arranging transport to the port, clearing export customs, shipping, import customs, and final delivery. Because it places all the burden and risk on the buyer, EXW is rarely used for international bulk commodity sales.
2. FOB (Free On Board): The Classic for Bulk Shipments
This is the workhorse for bulk materials like iron ore, coal, and concentrates shipped by sea. Under FOB, the seller is responsible for everything needed to get the goods loaded "on board" the ship nominated by the buyer at the named port.
The seller handles trucking to the port, clearing export customs, and paying all costs up to that point. The moment the crane lifts the material over the ship's rail and it's safely on the vessel, the risk and responsibility flip. The buyer is now responsible for the ocean freight, insurance, and everything that follows. The transfer of risk is clear and clean.
3. CIF (Cost, Insurance, and Freight): The "Seller Arranges the Shipping" Term
This is another very popular term, especially when the seller has strong shipping relationships. Under CIF, the seller does everything they would under FOB, but they also take on two additional responsibilities:
- They pay for the Cost of ocean Freight to the destination port.
- They arrange for a minimum level of Insurance coverage for the buyer during the journey.
It’s important to note that even though the seller arranges and pays for these, the risk still officially transfers to the buyer once the goods are loaded onto the ship, just like with FOB.
4. DDP (Delivered Duty Paid): The "White Glove, Door-to-Door" Service
This term places the maximum responsibility on the seller. The seller handles everything: transport, export, shipping, insurance, import customs, and paying all duties and taxes. Their job is not done until the goods are delivered to the buyer's final destination, ready for unloading.
You won't see DDP used for a 100,000-tonne shipment of coal, but it's very common for high-value goods like specialized mining equipment, spare parts, or valuable reagents, where the buyer wants a simple, all-inclusive price.
Getting It Right: Common Pitfalls to Avoid
Incoterms are simple, but they are also precise. Small mistakes can lead to big problems.
- Warning #1: Mismatching the Term and the Transport. Some terms (like FOB and CIF) are designed only for sea and inland waterway transport. Using them for air or truck freight can create confusion.
- Warning #2: Being Vague on Location. Simply writing "FOB Port Hedland" isn't enough. Be specific. "FOB Port Hedland, Berth 3" is much better. The more precise the location, the clearer the point of risk transfer.
- Warning #3: Forgetting the Version. The Incoterms rules are updated every decade. Always specify the version you are using (e.g., "FOB Port Hedland, Incoterms® 2020") to avoid any confusion.
More Than Just Fine Print
Incoterms are not just legal jargon to be left to the lawyers. They are fundamental commercial tools that directly impact your costs, risks, and cash flow. Choosing the right term for the right deal is a critical part of successful international trade.
A final piece of advice: always ensure the Incoterm in your sales contract matches the one on your letter of credit and insurance documents. A small mismatch can cause major headaches and payment delays.