( Dr. A.S.Firoz is Chief  Economist at the Economic Research Unit of the
Joint Plant Committee and Convenor of Steel Exporters' Forum.)

E-trading steel : breaking new grounds

By Dr. A.S.Firoz

In the days of e-commerce meltdown, there are new thoughts on the future of this revolutionary new way of doing business. It has been more so in steel. What has happened so far to the models of B2B future has not been as fascinating to steel business than it was at the time when these new concept had taken root.

There was no reason to expect a revolution at the time e-commerce came with a big bang. All that the industry should have looked for is a steady evolution of this new business concept - to evolve gradually to accommodate concrete realities and complexities of individual sectors. However, the eagerness to try something untried till then, ambition to beat competition at low costs, urge to get into the latest in the fear of not being left behind, tap the easy money that was available as venture capital and the absolute need to cut cost to survive competition made e-commerce in steel a hot commodity - hotter than many anticipated. One analyst said recently, "In 1999, many people looked at e-commerce as pixie dust, the belief that e-commerce would magically create shareholder value. Rather, they saw that they would use e-commerce for what makes good business sense."

Shakeouts and mergers have reduced competition. Innovations have kept some going. More important, e-commerce has brought in new use. Most importantly, e-commerce companies have learnt that steel e-business cannot be enhanced by displacing the marketing personnel. E-commerce has become a tool in the hands of the steel executives. It will be more so in the days to come.

E-commerce has reduced the information gap. It has reduced speculation. It has helped companies to dispose of the stocks quickly to customers they could not have reached or were not in their fold in the past. It has helped small buyers to come on to the Net to get a wide choice of sellers. It has helped them deal directly with companies without the intervention of the trader in the town. But, in that, most analysts and steel companies believed that the gains from e-commerce were to go largely to the buyers. Many believe that the steel mills were reluctant to go for e-commerce precisely because there were not enough money for them in it.

Looking at e-commerce purely from this angle would not help steel mills. It is an additional and efficient marketing front for them. By now, most steel mills have joined e-commerce in some way or the other in a big or small way. Some are doing it themselves from their own portals. Others are coming to some neutral sites. In the first place, they are all displaying their inventories.

The buyer knows that what has been offered on the Net is first a liability to the seller. Therefore, they can expect a lower price. The seller knows, if there is a response from a willing buyer, that is because the buyer does not have a steel mills' marketing executive knocking at the door with ready assurance of delivery. Or, that the buyer has not been able to get that with a telephone call or fax. In this, there is negotiation and at the end of it is a price. Both are happy. The seller gets to sell his surplus at whatever price reasonable for it and the buyer gets a better price.

Yet, the dream of e-commerce covering all the steel trade and a couple of steel mill executives or buyers carrying out businesses from a small computer is far away and going by the current trends, that will never be realised from the current models. That is less disputable.

But e-commerce, significantly, has also brought out new business models. In the US, you can buy or sell hot rolled coils on Enron's bid or buy system. They are market makers. They deal with forward deliveries too. They, in the first place, are selling steel financials and then steel physically. At present, the company is offering only 7 gauge, 10 gauge and 12 gauge hot-rolled steel in 48- and 60-inch widths for deliveries up to September. All deliveries are from Chicago at present. Soon, the company plans to have more delivery points like Cleveland, Detroit, Houston and Los Angeles.

They are market makers, because their offers are transparent and open for trade by anyone. For example, Enron offered US-made hot-rolled steel in 10 gauge, 48-inch width, for April delivery in Chicago for $225 a ton in February.

The company was buying the same for April at $215 a ton. It so had happened that in February, the steel mills in the US tried to jack up the prices of hot rolled coils by as much as $30 a ton to take those to as high as $ 265. The Enron offers and bids were much lower. It is not known how much they sold or bought at those prices. But what is a matter of importance is that the prices in the US market started weakening from the beginning of April. The mills in February itself had to be content with about $ 20 per ton hike - much less than what they had expected.

The Enron's business is not based on commission it may earn from transactions. They are principals in the business from both sides. They offer guaranteed delivery. That is their headache. By this, they provide a service most reputed steel trading companies do. They survive on hedging for which the accuracy of the forecast of the market is important. They take the risk off you, for which you pay. There is no such e-business model working this way.

The idea of talking about Enron is not to promote their business interest. So much has been discussed about it because it is a unique model located at the high end of e-commerce evolution. It is a well known business of hedging and futures in trade that has been made so simple with the help of e-commerce technologies. While we will wait to see the company's success or failure on its balance sheets, what is important to note here is that Enron is not engaged in typical e-commerce. It is merely using it effectively for its new kind of trading in steel.

There are more interesting developments. There is a whole lot of effort to assess whether steel exchanges can now be developed on the lines of the London Metal Exchange.

One such venture is already off the ground. A new company, Global Steel Exchange (GSX) has already launched a pilot version of an international trading platform available for active trading by partnering companies. Already, as per reports, 23 international steel companies have agreed to participate in this new system having 35 locations. They have at present a wider range of products - stainless steel, pig iron, wire rods, hot rolled coils, cold rolled sheets, rebars, plates and billets.

GSX is to redefine the operation of the steel spot markets. They claim that the spot markets are inefficient and less transparent. All e-commerce companies claim the same. But what is different here is that it may reduce the speculation based volatility in steel prices, a character of the spot market well known for steel.

E-commerce should be developed for more efficient pricing in steel. It has to provide new services to buyers as well as to sellers. It is in the search for new services that can be provided, wherein lies the future of e-commerce, at least in steel.

(The views expressed here are of the author.)