Incoterms 2020 explained for chemical importers: FOB, CFR, CIF and DAP

When you receive a quotation for caustic soda, urea or palm olein, the price is only half the story. The three letters next to it (FOB, CFR, CIF, DAP) decide who books the vessel, who pays the insurance, and, most importantly, the exact moment the goods become your responsibility. Get this wrong and two offers that look alike can land at very different total costs.

This guide covers the four Incoterms® 2020 rules that chemical importers meet most often, and what each one means in practice.

What Incoterms do and do not cover

Incoterms are standard trade terms published by the International Chamber of Commerce (ICC). The current edition, Incoterms 2020, defines three things:

• Delivery: where and when the seller has done its job.
• Risk: the point at which loss or damage to the goods passes from seller to buyer.
• Costs: which party pays for transport, loading, insurance and customs formalities.

They do not set the price, the payment terms, the transfer of ownership or the product specification. Those belong in the sales contract. An Incoterm is always followed by a named place, for example "CFR Mombasa" or "FOB Antwerp". Without that place, the term is incomplete.

It also matters that FOB, CFR and CIF are designed for sea and inland waterway transport. For goods in containers that are handed over at a terminal rather than loaded by the seller over the ship's rail, the ICC recommends FCA, CPT or CIP instead. In day-to-day chemical trade, however, FOB, CFR and CIF remain widely used for both bulk and containerised cargo, so it is worth understanding them well.

FOB: Free On Board

Under FOB (named port of shipment), the seller clears the goods for export and loads them on board the vessel nominated by the buyer. Risk passes to the buyer once the goods are on board.

The buyer arranges and pays for the main sea freight, marine insurance, unloading, import clearance and onward transport.

When it suits you: you have your own freight forwarder or shipping line contract and want full control over routing, transit time and freight cost.

What to watch: you carry the risk for the entire ocean voyage. You also need to coordinate vessel nomination with the seller, so that the goods and the ship meet at the port on time.

CFR: Cost and Freight

Under CFR (named port of destination), the seller books and pays for the sea freight to your port. But risk still passes to you at the port of shipment, once the goods are on board.

This split is the most misunderstood point in the Incoterms. With CFR, the seller pays for the voyage, but you bear the risk during it. Insurance is not included, so you should arrange your own cover from the loading port.

When it suits you: you want a delivered-to-port price for easy comparison, and you already have an open marine insurance policy.

What to watch: destination charges (terminal handling, demurrage and detention) are usually for the buyer. Ask what is included before you compare offers.

CIF: Cost, Insurance and Freight

CIF (named port of destination) is CFR plus insurance. The seller pays the freight and takes out marine insurance in your favour, and risk again passes at the port of shipment.

Under Incoterms 2020, the minimum cover required for CIF is Institute Cargo Clauses (C), a limited level of cover, for 110% of the contract value. If you need broader protection, for example Institute Cargo Clauses (A), agree it in writing in the contract.

When it suits you: you do not have your own insurance arrangement, or your bank requires an insurance certificate as part of a documentary credit.

What to watch: check the insurer, the level of cover and how a claim would be made at destination.

DAP: Delivered At Place

Under DAP (named place of destination), the seller delivers the goods to the agreed place (a port terminal, a warehouse or your plant), ready for unloading. Risk passes to you only on arrival. You handle unloading, import clearance, duties and taxes.

When it suits you: you want the seller to manage the whole journey and carry the transport risk, while keeping customs clearance in your own hands.

What to watch: define the place precisely. "DAP Lagos" is too vague; "DAP [warehouse address], Lagos" is not. Clarify who pays for any waiting time at the delivery point.

Choosing the right term

A simple way to decide is to ask three questions:

1. Who has the better freight rates and logistics network on this lane? If you do, consider FOB. If the seller does, consider CFR, CIF or DAP.
2. Do you have marine insurance? If not, CIF or DAP avoids leaving the cargo uninsured.
3. How far do you want the seller's responsibility to extend? DAP moves the risk closest to your door.

Whatever you choose, make sure the Incoterm, the named place and the edition ("Incoterms 2020") are written identically in the quotation, the contract and, where relevant, the letter of credit.

How Dhow Group handles this

We quote on the Incoterm that fits each customer. Most often this is CFR or CIF to the destination port, with DAP available on selected routes. We state the named place, the insurance level and the destination charges clearly in every offer, so that you can compare like with like. Our logistics team books the freight, follows the shipment and keeps you informed until the goods arrive. Learn more about our logistics service.