Steel industry tries to hammer out e-business plans
Bethlehem Steel wants to go deeper online, but the economy isnt cooperating. "We had big plans, but they are still on the shelf at this point," says Jeffrey Karsonovich, director of business development and e-business of the nations second largest steel producer.
In fact, across the steel industry, plans to capitalize on e-commerce have sputtered, as prices for the commodity have dipped to a 30-year low. Several companies are in bankruptcy, and IT projects have been sacrificed to stem the rising tide of red ink.
Its one reason but not the only one that e-commerce is coming slowly to the steel industry. A slew of steel e-marketplaces have shut down in recent months, leaving only a handful of survivors. At its peak, 211 e-marketplaces were selling metals last September, according to Mitch Gingham-Barrow, a salesman of Metal Bulletin, which tracks the metals business. Today, only five or six look viable.
Despite these early meltdowns, businesses are forging new e-commerce ventures, tempered by stronger backing and sharper focus. Established steel companies, rather than technology startups, are behind the newest ventures. They dont promise to change everything overnight, but their plans could have revolutionary effects long term.
One example is the Global Steel Exchange (GSX), which opened in May, a year after Cargill Steel, Duferco, Samsung and TradeArbed started the joint venture. The four steel trading companies targeted a market that they know well: getting information to speed trades on the inter-regional market, where buyers from Asia or Europe dont know suppliers from the Americas, but need steel quickly.
"Its difficult even for the largest and best-informed companies to know whats going on all around the world. Its a market thats information-poor," says Lou Schorsch, CEO of GSX. By providing that information, GSX believes it can capture 10 percent to 15 percent of the $50 billion intercontinental spot market. The founding traders have backed the business with pledges to do $2.5 billion worth of transactions during each of the first two years.
Its a wise precaution. Low transaction volumes forced shutdowns recently at Aluminium.com, MetalSite, MetalSpectrum and others, and nearly claimed e-Steel as well, before the company shifted direction.
"The limited notion of a marketplace didnt cause anyone to change how they did business," says Michael Levin, e-Steels CEO. In the summer of 2000, the company realized it had to change gears if it wanted to survive, so it phased out the marketplace portion of its business and instead focused on selling applications and technology to steel companies. E-Steel has since licensed its software to Australian steelmaker BHP and Ford Motor; in July, Covisint, the automotive industry e-marketplace, effectively adopted e-Steel as its private-label steel-buying service.
Instead of transactions, companies want ways to manage their steel buying and inventory management, Levin says. "The need to reduce design times, speed up time to market and roll out product is an area that gets excitement," Levin adds. "Big companies are spending money when they see [return on investment]."
Jupiter Media Metrix analyst Jon Gibs says that involves sharing more information with trading partners. "Were seeing a movement away from buying and selling towards different types of collaborative activity," Gibs says. It helps sellers spend less time on routine order-taking and more on managing relationships.
That seems to be the direction that U.S. Steel is taking with an e-marketplace that the company is expected to announce as soon as August.
Whats attracting attention, industry officials and analysts say, is that it could supplant some of the work done by service centers the distributors that chop up plates and coils into smaller pieces for customers. U.S. Steel officials arent revealing details. "Were not ready to talk about it," says Roy Dorrance, the executive vice president who will head Newco, U.S. Steels e-marketplace.
Its unclear whether the U.S. Steel "virtual service center" will compete against or complement existing service centers. Analysts say it would be a mistake for U.S. Steel to cut out the distributors that now serve smaller customers. Removing the centers "is really not in anybodys best interest. The service opportunities that companies are putting out are not working out as well as the organizations hoped," Gibs says.
There is another approach that U.S. Steel may take, according to Bethlehem Steels Karsonovich. Manufacturers of all kinds want to become assemblers of end products, leaving smaller companies and suppliers to handle the processing that leads up to it. Its the approach that Cisco Systems takes, handing most manufacturing operations to subcontractors, leaving Cisco free to concentrate on design and marketing. Having outsiders process steel while selling it under a major brand name could be a key strategy for U.S. Steel.
"Theyre potentially looking at competing with service centers and handling the relationship with the customer," Karsonovich says. "The value is not in producing the steel."
Thats one way the Internet could forge the steel business, but its not the only way. For example, the Internet has opened a channel for an energy conglomerate to venture into the steel business. Enron took what it knew about energy trading and used it to start the first steel commodities market last November. It is a profitable business, and has bought and sold about a million tons of steel so far, says Ray Bowen, chief operating officer of Enron Industrial Markets.
"This is a market getting used to the idea of a trading market," Bowen says. The steel industry lacked a commodity market because there was no agreement on price. The variety of grades, conditions and manufacturers of steel kept the question up in the air. Enron simplifies matters by dealing in one kind of steel: flat-rolled steel. "For customers, as long as it meets baseline quality, the stuff trades on price," Bowen says. "We had to get people to admit that."
The Internet was a crucial part of Enrons strategy, making it possible to collect and distribute the information that the company needed to make the business work. Buyers and sellers were initially tentative, sticking to traditional phone and fax dealings. However, about 60 percent of Enrons steel transactions are now being processed online, Bowen says. "Once weve proven its value, the second and third transactions tend to migrate, because its a whole lot less time-consuming," he adds.
Time as well as money is what the steel business wants to save. Karsonovich talks about taking orders online so that Bethlehem Steel will cut two days out of production planning. The company also wants to use Internet-based collaboration to reduce the inventory held by Bethlehem Steel or the service centers that buy from it. But the company has to wait for the economy to heat up before it fires up its e-commerce furnace.
It will be a slow, expensive process. "The low-hanging fruit has been plucked. Now the hard work of taking old industries and dealing with all the legacy systems comes up," Karsonovich says.