What is FOB Pricing, and How to Handle Unauthorized Cargo Release?

FOB (Free On Board), also known as "shipping price," is a widely used trade term in international trade. It means the seller is responsible for delivering the goods to the buyer's designated vessel at the port of shipment, after which the risk transfers to the buyer. The buyer bears the costs of transportation and insurance from the port of shipment to the destination.

Key Points About FOB

1. Seller’s Responsibilities:

• Deliver goods to the buyer’s designated vessel at the agreed port and time.

• Notify the buyer once the goods are loaded.

• Cover domestic transportation and local port charges.

2. Cost Considerations:

• FOB Price Composition: Domestic freight + local port charges + product cost.

• Avoid confusing FOB with EXW (Ex Works), as EXW excludes domestic freight and port charges, which can erode profit margins.

3. Common Misconceptions:

• CIF (Cost, Insurance, and Freight) is often mistaken for "delivered price," but it is not. In CIF, risk transfers to the buyer once the goods cross the ship’s rail at the port of shipment, not at the destination port.

• DES (Delivered Ex Ship) is the true "delivered price," where the seller bears all costs and risks until the goods are delivered to the destination port.

Risks of FOB: Unauthorized Cargo Release

Under FOB terms, the buyer typically appoints the carrier (often a foreign freight forwarder), giving the buyer control over the shipment. This can lead to unauthorized cargo release (releasing goods without the original bill of lading). Here’s how it happens:

• Two Sets of Bills of Lading:

• The freight forwarder obtains the master bill of lading from the shipping line.

• The seller receives a house bill of lading from the forwarder (or sometimes none at all).

• Risk: The forwarder can release the cargo to the buyer without requiring the original bill of lading, leaving the seller with no control over the goods.

How to Mitigate Risks?

1. Choose Safer Trade Terms:

• CIF or CFR: These terms give the seller more control over shipping and insurance, reducing the risk of unauthorized release.

• CIF Advantages: The seller manages the entire process (procurement, shipping, insurance), ensuring smoother operations and reducing risks.

2. Understand Shipping Routes and Costs:

• Longer shipping routes delay payment cycles, increasing financial risks due to currency fluctuations.

• Always inquire about the shipping duration and costs to avoid unexpected losses.

3. Verify Forwarder Fees:

• Before finalizing FOB terms, confirm the local port charges with the buyer’s designated forwarder to avoid unexpected costs.

Conclusion

While FOB is a common trade term, it carries significant risks, especially unauthorized cargo release. Sellers should carefully evaluate trade terms, prioritize CIF or CFR when possible, and ensure clear communication with buyers and forwarders to protect their interests.