Notes on the structures behind physical markets.
Physical markets are shaped as much by documents, finance and logistics as by supply and demand.
These short notes set out how we think about those structures, from the perspective of a principal.
They are general information only, not investment, legal or tax advice.
A documentary letter of credit is a bank’s undertaking to pay the seller against documents that comply with the credit’s terms. It replaces the buyer’s credit risk with the bank’s.
What it does not do is guarantee the goods. Banks deal in documents, not cargoes: if the documents comply, the bank pays. The buyer’s protection lies in what the credit requires, above all an independent inspection certificate.
For the seller, the risk is discrepancy. A misspelt name, a late shipment date or an inconsistent quantity can give the bank grounds to refuse documents, turning a secured trade into an unsecured one.
Confirmation by a second bank adds protection against the issuing bank and its country. Whether it is needed depends on who issued the credit, and where.
In physical trade, the bill of lading is more than a receipt. It evidences the contract of carriage and, when negotiable, serves as a document of title: whoever holds it can claim the cargo.
Payment, insurance claims and transfers of ownership all depend on documents that agree with one another and with the contract. Small inconsistencies cause most of the delays and disputes in otherwise sound trades.
Electronic trade documents are gaining legal recognition in a growing number of jurisdictions. They promise speed and fewer openings for fraud, but only where every party in the chain can accept them.
Until then the discipline is unchanged: check every document against the contract and the credit before it is presented.
A name that is not on a sanctions list is only the start. Several regimes extend restrictions to entities owned or controlled by listed persons, so ownership has to be traced, not assumed.
Vessels carry their own risk. Changes of name or flag, gaps in tracking data and ship-to-ship transfers at sea can all signal an attempt to disguise origin or destination.
Routing and documents complete the picture. Cargo that takes an unusual route, or certificates of origin that do not match the loading port, deserve a second look before anyone commits.
Screening is therefore continuous across the life of a trade, not a single check at onboarding.
Two offers at the same headline price can be very different trades. Delivery terms decide who pays for freight, insurance, port costs and delay.
Freight rates and insurance premiums can move sharply with route risk and vessel availability, and war-risk cover in particular can change quickly.
Time has a cost too. Demurrage accrues when vessels wait, and every day between payment and receipt is a day of financing.
So we compare opportunities on a delivered, risk-adjusted basis. The cheapest price on paper is not always the cheapest trade.