Hello all,

I am sorry for not being able to write and answer many of your questions for quite some times. I have been very busy on my latest projects and the bad internet connection recently made it difficult for me to write too.

Here let me write a topic that I think some of you probably need as refference.

I was inpired to write about this topic by a young fellow trader who happens to be my junior in a local organization in my city. He was excited to find out that I am being an Ali Expert that he decided to stop by my office and have a chat.

During the chat, he showed me a contract draft telling me that he is in final step of closing a deal with a furniture buyer. As soon as i read the darft, I could tell why he was so excited about it. The contract value was USD1.4M!

At first I saluted him with his achievement. I asked if he had exported furnitre before and if he is really sure that he can supply the products according to the contract. He told me that he was sure about it because he himself is running a furniture workshop in a very well furniture producer area in Indonesia.

But then I realized that there was something wrong with the draft. I especially worried to see the contract time frame which is for 4 years.

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When I was a new comer, I must admit that in negotiating business with a potential buyer, contract value was the first point that attracted me. The bigger it is the more excited I become to handle it. I did not even have a clue that a lot can go wrong during the long contract period. 

I guess this young junior is the same. I began to ask him several questions to make him realize what risk lies behind long term contract. I asked him questions like the followings:

1. Have you calculated exactly how long will it take for you to finish the whole quantity? He said "4 years"
2. Have you included the shipping period in your calculation? Yes you probably are able to finish one container within a month. But have you added more time for shipment booking? What if the ship is available only within a week or even two? He said "No"
3. Can you predict that there is no significant change in raw material price or other costs during the 4 year of contract period? He said "No"
4. Have you talked with your buyer what will happened if such case happens? If raw material price or other costs significantly changed? He said "No"

Well, those are just few questions that you should ask yourself before entering into a long term contract.

Based on my experience, many people do a long contract for bulk commodity such as mining materials. Still, one year is considered long enough. Even for this one year contract, both seller and buyer should realize that there is always a chance that significant change happens with price, cost, political situations, currency exchange, etc. For this reason, both seller and buyer should include such clause that will accomodate if such significant chage happens.

In my opinion, if you are new, it is always good to start for small quantity first. By doing this, you can give your time a chance of having your real hands on experience, and also to anticipate if eventually you are axposed with some risks.

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I was happy because finally I inspired this young junior trader to renegotiate his deal. I hope this article will inspire some of you too so that you are not exposed to unrealized danger in trading.

Good luck