Exchange to Face a Hard Sell

GSX will target world market for steel products.

Four of the worlds largest steel companies are joining forces to launch in May a global online metals exchange. A seeming latecomer to an already crowded business, the Global Steel Exchange, or GSX, will distinguish itself from the more than a dozen online metals marketplaces through its ability to provide services to support buying and shipping steel globally.

Using GSX, registered buyers and sellers will be able to trade more than 50 steel products. The four founding members—Cargill Inc., Duferco, Samsung Corp. and TradeArbed SA—will provide services such as arranging for international shipments to be offloaded and cleared through U.S. Customs, insuring cargo in transit, financing and ensuring the quality of goods.

Initially, only the four founding members will be able to offer quotes on steel products and services, but GSX CEO Louis Schorsch hopes to have 10 service providers by the end of the year.

International traders using GSX will benefit from lower costs, better pricing and supply/demand information, greater efficiency, increased revenue, and minimal risk, Schorsch said.

"No one else is going after the interregional market like we are," Schorsch said. "People will be able to find the more optimal transaction partner through the Internet than is the case today."

GSX, based in Chicago, is entering a market that not only is in its infancy but has a long way to go before it matures, according to some who participate.

"Unfortunately, todays market is not really lending itself to these [online] transactions," said Glenn Pulianas, coordinating director for nonprime sales and e-commerce at National Steel Corp., in Mishawaka, Ind.

The challenge of changing the culture of the steel business so that it accepts online trading is compounded by current economic conditions, Pulianas said. Because of lower demand for steel, mills dont have the human or financial capital to spend on enhancing their e-commerce systems or integrating them more directly into e-marketplaces. Without that integration, the suppliers dont gain the efficiencies that would make business-to-business e-commerce more attractive.

"Theres just not a whole lot of incentive for customers to learn something new," said Pulianas, who trades on the online exchange.

Although GSXs strong industry backing gives it a good chance for survival, analyst Leif Eriksen, of Boston-based AMR Research Inc., warned that the steel industry and the general economy have both seen better days.

"Its a tough industry to do business in," Eriksen said, adding that the steel market tends to be conservative and political. When demand does pick up, a potential stumbling block to use of multiple metals exchanges is the lack of a common protocol for tying internal systems to e-marketplaces, observers said.

But GSXs biggest initial hurdle is getting and keeping enough volume on the exchange to attract customers, Schorsch said. GSX is launching with $5 billion in volume commitments over two years from its four founders and 13 steel mills around the world.

"They are backed by a lot of significant industry players; they have a very strong management team with a lot of experience," AMRs Eriksen said. "Theyre not going to have to worry about cash for a while; theyre going to have time on their side to build an infrastructure."

Trading industrial metals on the Web is gaining some traction. Pittsburgh-based MetalSite Inc., for instance, posted more than 2 million tons of products last year and closed more than 50,000 sales orders, officials said. And it is not just excess scrap; the exchange reported a 10,000 percent growth in trading of prime metals in the first quarter this year compared with the same quarter last year.

Although GSX is billed as a global exchange, business initially will be conducted only in English. Over time, Schorsch said, the site will expand to include Russian, Chinese, and three or four other languages. GSX plans to target Eastern Europe (as a supplier) and Asia (as a consumer).

Buyers and sellers can choose their own currency, but GSX will collect its fee in U.S. dollars. The exchange will support itself with transaction fees but expects to switch to a subscription model eventually, Schorsch said.

While some may consider GSX a late entry into the world of online exchanges, the site is debuting at a time of "major growth" for global e-marketplaces, said Matthew Sanders, an analyst at Forrester Research Inc., of Cambridge, Mass.

According to Sanders projections, nearly $70 billion worth of manufactured goods, including steel, will be exported annually through e-marketplaces by the end of 2004. Thats up from the $1.2 billion worth expected to be exported via Internet sales this year.

Sanders sees GSXs ability to trade internationally as a real differentiator.

"It would be futile for [other metals exchanges] to compete with GSX in international trade" because GSX has trade and financial services, he said.

But, Sanders cautioned that GSX will find success only if it balances its big-name industry sponsorship with independence, making sure to protect users privacy and ensure specific, neutral trading rules.

"If their purpose is to include lots of buyers and lots of sellers, they really have to invest and make sure its a neutral trading platform," he said of GSX. "If they dont protect neutrality, theyre doomed."

Nationals Pulianas said he believes it will take longer than most metals exchanges anticipate for the industry to move much of its business onto the Internet. "Its going to take time," he said. "All the e-hype we had last year has simmered down to reality now."