What is FOB in Commodity Trading? Free on Board Explained

Free on Board (FOB) means the seller's obligations are fulfilled when goods are loaded on board the vessel at the named port of shipment. From that point, the buyer bears all costs (freight, insurance) and risks (loss, damage) for the remainder of the journey. The seller is responsible for export clearance, inland transportation to the port, and loading costs.

FOB is specifically designed for sea and inland waterway transport where goods are loaded directly onto a vessel. The 'on board' moment — when the goods cross the ship's rail — is the critical point where cost and risk transfer from seller to buyer. This is documented on the bill of lading.

FOB is the default Incoterm for bulk commodity exports because it gives buyers control over the most expensive variable: ocean freight. A mining company in Australia is expert at producing and loading iron ore, but the Chinese steel mill buying it has better freight relationships with shipping companies on the Australia-China route.

FOB pricing also enables clean price comparison between origins. When comparing copper cathode from Chile (FOB Antofagasta) versus the DRC (FOB Durban), both prices exclude freight, allowing the buyer to add their own freight cost to each and determine which is cheaper delivered. This transparency is why commodity benchmark prices are almost always quoted on an FOB basis.

In a typical FOB transaction: the buyer nominates a vessel and provides the expected arrival date at the loading port. The seller prepares the cargo and arranges export customs clearance. When the vessel arrives and is ready, loading begins according to the contracted loading rate. Once loading is complete, the seller presents the bill of lading and other documents, and the buyer's payment obligation is triggered.

The loading laycan (loading date window, e.g., '15-25 March') must be agreed in the contract. If the buyer's vessel arrives late, the seller may claim demurrage (compensation for delay). If the seller fails to have cargo ready within the laycan, the buyer may claim damages or cancel. These logistics contingencies are standard in FOB commodity contracts.