Sourcing & Procurement

Once an opportunity is identified, the next challenge is securing supply. This involves finding the right counterparty, negotiating terms, and formalizing the agreement in a contract.

Sourcing Methods

Method	Description	Commitment Level	Typical Duration
Spot purchase	One-time transaction	Low	Days-weeks
Term contract	Agreed volumes over time	Medium	Months-years
Offtake agreement	Committed % of production	High	Years-decades
Equity offtake	Ownership stake = supply right	Very High	Life of asset
Prepayment	Pay now for future delivery	Very High	Years

Spot Purchasing

Process Flow

SPOT PURCHASE WORKFLOW
──────────────────────

1. IDENTIFY SELLER
   - Existing relationships
   - Broker introductions
   - Market inquiries

2. REQUEST OFFER
   - Volume, quality specs
   - Delivery window
   - Pricing basis

3. NEGOTIATE TERMS
   - Price (fixed or formula)
   - Quality tolerance
   - Loading window
   - Payment terms

4. CREDIT ASSESSMENT
   - Internal credit check
   - Determine payment security
   - L/C requirements

5. CONTRACT EXECUTION
   - Legal review
   - Signature
   - Confirmation

Spot Contract Key Terms

Term	Description	Typical Options
Price	How payment is calculated	Fixed, floating, formula
Quantity	Volume with tolerance	±5% or ±10% option
Quality	Specifications	Detailed specs, ref standard
Incoterms	Delivery point	FOB, CIF, CFR, DES
Loading window	When to deliver	10-15 day range
Payment	When/how paid	L/C, CAD, open account

Incoterms in Detail

Term	Risk Transfer	Cost Split	Common Use
FOB	Ship’s rail at load port	Buyer arranges freight	Oil, bulk
CFR	Ship’s rail at load port	Seller arranges freight	Bulk
CIF	Ship’s rail at load port	Seller freight + insurance	Bulk
DAP	Destination	Seller full delivery	Inland delivery
DES	Ship at destination	Seller full voyage	Specialized

FOB vs CIF

FOB gives buyer control over shipping (and shipping optionality). CIF shifts logistics risk to seller. Major traders often prefer FOB to control the logistics chain.

Term Contracts

Why Term Contracts?

Benefit for Trader	Benefit for Producer
Guaranteed supply	Guaranteed offtake
Volume certainty	Revenue visibility
Quality consistency	Reduced marketing cost
Relationship building	Working capital

Term Contract Structure

TERM CONTRACT EXAMPLE: 1-YEAR CRUDE OIL
───────────────────────────────────────

PARTIES:
Seller: [National Oil Company]
Buyer: [Trading House]

VOLUME:
30,000 bbl/day ± 10% (at Buyer's option)
Monthly liftings: 900,000 bbl ± 10%

PRICE:
Dated Brent + $1.50/bbl
Dated Brent = Average of 5 days around B/L

QUALITY:
Per standard specifications (attached)
Quality adjustment per formula

LIFTING SCHEDULE:
10-day window, nominated 30 days ahead
Vessel nominated 7 days before laycan

PAYMENT:
L/C at sight, 30 days from B/L
L/C issued by approved bank

TERM:
12 months, renewable by mutual agreement

Volume Optionality

Type	Description	Value
Min/max	Range commitment	Flexibility in demand
Buyer’s option	Buyer decides volume	High value to trader
Seller’s option	Seller decides volume	Producer manages inventory
Fixed + optional	Base + additional volumes	Balanced

Offtake Agreements

What is an Offtake?

Long-term agreement to purchase a percentage of a producer’s output, often linked to project financing.

OFFTAKE AGREEMENT STRUCTURE
───────────────────────────

                 ┌───────────────┐
   BANK ────────>│   PROJECT     │
   (Lender)      │   (Producer)  │
                 └───────┬───────┘
                         │
                 Offtake Agreement
                 (5-15 years)
                         │
                         ▼
                 ┌───────────────┐
                 │    TRADER     │
                 │   (Offtaker)  │
                 └───────────────┘

The offtake agreement secures:
- Revenue stream for producer (bankable)
- Supply security for trader
- Comfort for lender

Offtake Key Terms

Term	Typical Structure
Volume	50-100% of production
Duration	5-15 years
Pricing	Market-linked formula
Take-or-pay	Minimum volume obligation
Force majeure	Production interruption protection
Assignment	Rights transferable (with consent)

Offtake Economics

Example: Copper Mine Offtake

MINE PRODUCTION: 200,000 MT/year copper concentrate

OFFTAKE TERMS:
Volume: 100% of production
Duration: 10 years
Price: LME copper minus TC/RC (treatment/refining charge)

TRADER ECONOMICS:
Annual volume: 200,000 MT @ $50 margin/MT
Annual profit: $10,000,000
Over 10 years: $100,000,000

INVESTMENT:
Working capital committed: $50,000,000 (average)
ROI: 20% per annum

STRATEGIC VALUE:
- Supply security for 10 years
- Market position in concentrate
- Relationship with producer

Prepayment Deals

What is a Prepayment?

Trader provides upfront capital to producer in exchange for guaranteed future supply at agreed terms.

Prepayment Structure

PREPAYMENT DEAL MECHANICS
─────────────────────────

YEAR 0:
Trader pays Producer $500 million upfront

YEARS 1-5:
Producer delivers copper concentrate
Each delivery: Valued at LME - TC/RC
Value applied against prepayment balance
Plus: Interest on outstanding balance (LIBOR + 300 bps)

SECURITY:
- Pledge of production
- Parent guarantee
- Offtake priority
- Reserve account

OUTCOME:
Trader: Secured supply at known cost + interest income
Producer: Capex funding without equity dilution

Prepayment Risk Analysis

Risk	Description	Mitigation
Production shortfall	Mine doesn’t produce expected	Insurance, reserve account
Price collapse	Value of deliveries < prepayment	Minimum price floor
Counterparty default	Producer goes bankrupt	Security package
Political risk	Expropriation, export ban	Political risk insurance

Real-World Example: Glencore-Chad Deal

GLENCORE-CHAD OIL PREPAYMENT (2014)
────────────────────────────────────

STRUCTURE:
Glencore provides: $1.3 billion prepayment
Chad delivers: Crude oil over several years
Repayment: Via crude oil deliveries at market price
Security: Government guarantee

OUTCOME:
Chad: Immediate cash for budget needs
Glencore: Secured oil supply from Chad production

This is how traders finance sovereign clients.

Counterparty Assessment

Due Diligence Checklist

Area	Questions	Sources
Financial	Can they deliver? Solvency?	Financials, credit agencies
Operational	Production capacity? Quality?	Site visits, references
Legal	Contract enforceability?	Legal review, jurisdiction
Compliance	Sanctions? AML?	Screening databases
Reputational	ESG issues? Controversies?	News, NGO reports

Credit Assessment

COUNTERPARTY CREDIT SCORING
───────────────────────────

QUANTITATIVE (60%)
- Financial ratios (D/E, coverage, liquidity)
- Payment history
- Credit ratings (if available)

QUALITATIVE (40%)
- Management quality
- Market position
- Country risk
- Relationship history

OUTCOME:
Credit Limit: Maximum exposure
Payment Terms: L/C required? Open account?
Tenor: How long can exposure run?

Contract Negotiation

Key Negotiation Points

Point	Trader Wants	Producer Wants
Price	Lower / buyer-favorable formula	Higher / seller-favorable formula
Volume flexibility	Buyer’s option	Fixed or seller’s option
Quality adjustment	Wide tolerance	Tight tolerance
Payment terms	Longer	Shorter
Force majeure	Narrow definition	Broad definition

Negotiation Process

CONTRACT NEGOTIATION TIMELINE
─────────────────────────────

WEEK 1: Term sheet exchange
- Key commercial terms
- Non-binding

WEEK 2-3: Draft contract
- Legal review
- Markup exchange

WEEK 4: Negotiation
- Face-to-face meeting
- Resolve open points

WEEK 5: Final review
- Legal sign-off
- Credit approval

WEEK 6: Execution
- Signature
- Contract effective

Documentation

Key Contract Documents

Document	Purpose
Term sheet	Preliminary agreement, non-binding
Letter of intent	Serious intent, may be binding
Sale/purchase contract	Full legal agreement
General terms & conditions	Standard provisions
Specifications	Quality requirements

Standard Contract Forms

Form	Commodity	Publisher
SESCO	Oil	Shell
CONCAWE	Oil	Industry consortium
LME	Metals	London Metal Exchange
GAFTA	Grains	Grain and Feed Trade Assoc
FOSFA	Oils/fats	Federation of Oils

Key Takeaways

1. Multiple sourcing methods — Match method to opportunity
2. Relationships matter — Access comes from trust
3. Contracts must be detailed — Ambiguity creates disputes
4. Credit assessment is critical — Bad counterparty = bad trade
5. Long-term agreements create value — Offtakes and prepays build positions
6. Negotiation is ongoing — Every term is a variable

References

• ICC Incoterms 2020
• GAFTA Contract Forms
• LME Warrant Terms
• Commodity Trade Finance Standards