audio project - ocean shipping

Amber and Kevin discuss the financial aspects of ocean shipping. In the past, it was difficult to move money between places, so the bill of lading and letter of credit were used to control custody of cargo while money was transferred. The letter of credit ensured that the buyer would receive their money and the bank would hold the bill of lading. Incoterms, defined by the International Chamber of Commerce, clarify the terms of sale in international shipping. They determine who is responsible for transportation and payment. It is important for clear communication in trading. Hi, this is Amber, and today I'm here with Kevin Chester to talk about the financial aspects or banking aspects of ocean shipping. So, like, what about, like, banking related to ocean trade, or just, like, a whole... Related to ocean trade, yeah. Yeah, okay. So, if you back up a couple hundred years to the days of when you didn't have the digital communications so much, and it was more difficult to move money from one place to another, so somebody at the origin has a product that they've produced that they want to sell. Let's say it's in China, and you have somebody in Chicago who wants to buy that product. And we're all retail customers, we just go to the store and buy a product, so we don't really think about... The bill of lading was one way of controlling custody of this cargo while the money moved back and forth. And then a letter of credit is related, a letter of credit is something that the bank would issue that would say, remember, we talked about the guy in Chicago giving ten million dollars to the bank in Chicago? Well, the bank would either be the same bank, like an international bank, they would have an office in China and an office in Chicago, or there would be two different banks that had a working agreement with each other. So the bank would issue a letter of credit in China, promising the guy in China that he would get his money, and then the bank would hold, would keep control of the... And then the bill of lading would be given to the bank, so now the bank has the bill of lading, because they've given this letter of credit, and the letter of credit will have terms on it that says, it's okay to release the money if this happens, or when this happens, it's okay to release the oil if this happens and when this happens. And so the bank gets in the middle and protects both the buyer and the seller to make sure that neither of them are taking advantage of the other one. Yeah, I heard you mention Incoterms, do you want to talk about that, just kind of define it, and then talk about its significance in, I guess, trading or international shipping? Yeah, so Incoterms I think are defined by the International Chamber of Commerce, they're an international standard, there's a lot of them, and you'll hear things like Ex Works, Export, Ex-Port, CIF, Cost Insurance and Freight, and they're meant to clearly define the terms of sale. So when that company in China is selling oil to Chicago, basically at what point in the line of transportation are they selling the oil? So if they're selling the oil in China, and they say, oil in China, come get it. So then the guy in Chicago is responsible for arranging the transportation from China to a destination in the United States. If the oil is being sold by China, Cost Insurance and Freight, CIF, then that means that the Chinese supplier is not just selling the oil, but they're also responsible for arranging the transportation and paying for the transportation all the way to the destination. So it's sort of who's paying and responsible for the transportation leg, is what Incoterms helps define. So if you're buying FOB or Free Alongside, FAS, they're two very different things. You're still buying it in Seattle, but yeah, Incoterms are the standard for everybody to really be clearly communicating about that. Hi, this is Amber, and today I'm here with Kevin Chester to talk about the financial aspects or banking aspects of ocean shipping. So what about banking related to ocean trade? Ocean trade, yeah. About if you back up a couple hundred years to the days of when you didn't have the digital communication so much, and it was more difficult to move money from one place to another. So somebody at the origin has a product that they've produced that they want to sell. Say it's in China, and you have somebody in Chicago who wants to buy that product, and we're all retail customers. We just go to the store and buy a product, so we don't really think about it. The bill of lading was one way of controlling custody of this cargo while the money moved back and forth. And then a letter of credit is related. A letter of credit is something that the bank would issue that would say, remember we talked about the guy in Chicago giving $10 million to the bank in Chicago? Well, the bank would either be the same bank, like an international bank. They would have an office in China and an office in Chicago, or there would be two different banks that had a working agreement with each other. So the bank would issue a letter of credit in China, promising the guy in China that he would get his money, and then the bank would hold, would keep control of the... and then the bill of lading would be given to the bank. So now the bank has the bill of lading because they've given this letter of credit. And the letter of credit will have terms on it that says it's okay to release the money if this happens or when this happens. It's okay to release the oil if this happens and when this happens. And so the bank gets in the middle and protects both the buyer and the seller to make sure that neither of them are taking advantage of the other one. Yeah. I heard you mention Incoterms. Can you talk about that? Just kind of define it and then talk about its significance in, I guess, just trading or international shipping. Yeah. So Incoterms, I think, are defined by the International Chamber of Commerce. They're an international standard. There's a lot of them. And you'll hear things like Ex Works, Export, Ex-Port, CIF, Cost Insurance and Freight. And they're meant to clearly define the terms of sale. So when that company in China is selling oil to Chicago, basically at what point in the line of transportation are they selling the oil? So if they're selling the oil in China and they say, it's oil in China, come get it. So then the guy in Chicago is responsible for arranging the transportation from China to destination in the United States. If the oil is being sold by China Cost Insurance and Freight, CIF, then that means that the Chinese supplier is not just selling the oil, but they're also responsible for arranging the transportation and paying for the transportation all the way to destination. So it's sort of who's paying and responsible for the transportation leg is what Incoterms helps define. So if you're buying FOB or free alongside FAS, they're two very different things. You're still buying it in Seattle. So Incoterms are the standard for everybody to really be clearly communicating about that.