In the world of raw material procurement, a single misstep in contracts can cost industries millions in losses. Whether it’s coal, iron ore, steel billets, or coke, bulk raw material contracts are the backbone of industrial supply chains. But unlike buying finished goods, these contracts involve volatile prices, shifting global trade policies, unpredictable logistics, and quality risks.
According to McKinsey, raw material costs account for 50–70% of total production costs in heavy industries like steel, cement, and power. With such high stakes, entering into a bulk raw material contract without a thorough checklist is like navigating a storm without a compass.
This blog presents the ultimate checklist to ensure buyers are 100% prepared before signing on the dotted line.
1. Define Your Demand Profile Clearly
Before even talking to suppliers, buyers must calculate exact consumption patterns.
- Monthly/quarterly demand (in MTs)
- Peak vs. off-peak cycles
- Seasonal variations (e.g., monsoon disruptions in coal or iron ore mining can lower supply by up to 30%)
Example : A 1 MTPA steel plant requires ~80,000 MT of coal monthly. Without forecasting, sudden shortages could add 15–20% emergency sourcing costs.
2. Quality Parameters Must Be Non-Negotiable
Every raw material has quality grades that directly affect efficiency and cost.
- Coal : Calorific value, VM, sulfur, moisture
- Iron ore pellets : Fe content, size distribution, reducibility
- Coke : FC, VM, CSR, CRI
- Scrap : Chemistry, contamination levels
Tip : Ask for independent third-party lab test reports before shipment. A 1% drop in iron content in pellets can increase fuel consumption in blast furnaces by 2–3%, eating into margins.
3. Lock in Transparent Pricing Mechanisms
Bulk raw materials are highly price-sensitive. In 2022, thermal coal prices rose more than 180% due to supply disruptions.
Key pricing models :
- Fixed-price contracts (stable, but risky during downturns)
- Index-linked contracts (tied to Platts, Argus, or govt. indices)
- Hybrid contracts (fixed + floating components)
Prepared buyers negotiate clear escalation/de-escalation clauses to avoid disputes during price swings.
4. Logistics & Delivery Commitments
Supply chain delays can be more damaging than price hikes.
- Lead times : Imports can take 20–45 days vs. domestic 7–10 days.
- Demurrage costs : Idle vessels can cost $15,000–20,000/day.
- Handling losses : Coal shipments typically have 0.5–1% loss during transit.
Always insist on delivery guarantees with penalties for non-performance.
5. Credit Terms & Payment Security
Cash flow is king. Ensure clarity on :
- Advance payments vs. LC (Letter of Credit)
- Credit periods (30–90 days depending on supplier strength)
- Bank guarantees for high-value contracts
Example : A buyer importing $10M worth of coal under LC terms avoids liquidity crunches that could otherwise choke operations.
6. Risk Management & Force Majeure Clauses
COVID-19, monsoons, port strikes, or global conflicts can derail supply overnight.
- Ensure force majeure clauses cover pandemics, weather disruptions, and trade bans.
- Consider dual sourcing strategies (domestic + import).
Stat : In 2020, Indian coal imports fell by 29% due to pandemic-related restrictions, forcing plants to run at reduced capacity.
7. Compliance & Sustainability Alignment
With ESG gaining traction, buyers must ensure contracts align with compliance standards.
- Emission regulations (low sulfur coal, cleaner coke)
- Traceability (origin certifications to avoid illegal mining material)
- CSR & sustainability clauses
Many large buyers now mandate suppliers to meet ISO 14001 (environmental) or SA 8000 (social accountability) certifications.
8. Supplier Track Record & References
A strong contract is useless without a reliable supplier.
Checklist items :
- Years in business
- Major clients served
- Historical delivery performance (%)
- Financial strength (credit rating)
Example : Missing just one 50,000 MT coal shipment can cost a steel mill $6–8M in production losses.
9. Dispute Resolution & Arbitration Mechanism
Disputes in quality, delivery, or pricing are common in bulk trade.
- Define jurisdiction (India, Singapore, London arbitration are most common).
- Set time-bound dispute resolution (e.g., 60 days).
Without this, disputes can drag for years — paralyzing working capital.
10. Exit Strategy & Contract Flexibility
Markets change fast. Contracts must allow flexibility.
- Volume flexibility clauses (±10% supply adjustment)
- Renegotiation triggers (major FX fluctuation >10%, policy changes)
- Termination clauses
This ensures buyers are never locked into loss-making deals.
Smart contracts today, stronger supply chains tomorrow
A well-prepared buyer is a powerful buyer. Bulk raw material contracts are not just about negotiating the lowest price , they’re about ensuring supply security, quality consistency, financial stability, and long-term trust.
With raw material markets projected to remain volatile in 2025 and beyond, using this 100% Prepared Buyer’s Checklist will help businesses not just survive but thrive.