Putting E-Pedal To The Metal

In the steel business, it can take weeks, if not months, to hammer out a deal to purchase a large order of raw or processed steel. But earlier this month, Columbus, Ohio-based Worthington Industries cut a deal to sell 350 tons of hot-dipped galvanized steel to one of the Big Three automakers in Detroit without picking up the phone.

What's even more startling to Alan Petzo, purchasing manager at Worthington (www.worthingtonindustries.com), is the fact that his company didn't even know the automaker was in the market. The buyer, which requested that it not be named, simply responded to an auction posting on e-Steel, one of a handful of start-ups battling for a piece of the $700 billion steel market.

"We would have never known that order was available to us, so it's an absolute plus," Petzo says. "It also shows you just how efficiently the process can be handled."

If there were ever any doubts that a dinosaur industry such as steel could make use of the Internet, companies such as Worthington are proving those doubts have long since been relegated to the scrap heap. The steel industry is, in fact, moving quickly to adapt Internet technologies for the buying and selling of its supplies and products for the very same reasons other industries have been pressured online — competition, fear and customer demand.

Big steel buy ers such as General Motors have told suppliers they plan to make all purchases electronically within the next two to three years. Suppliers can either go online or start shopping for another client.

Two players have emerged as front-runners in the metals market place race: Metal Site (www.metalsite.com) and e-Steel (www.esteel.com). They also face competition from a variety of smaller or niche players such as Material Net (www.materialnet.com) and VerticalNet (www.vertical.net), as well as from emerging international players such as iSteelAsia (www.isteelasia. com), a Singapore-based venture that got off the ground in December 1999.

MetalSite and e-Steel began as two very different entities, with clearly distinguished objectives, investment and business strategies. In recent weeks, however, the rivals have made a series of moves that have brought their strategies much closer together. Analysts say the realignment was inevitable.

"These sites are driven by users with the same needs," says Emily Andren, a senior analyst at GartnerGroup. "Over time, we expect the sites will become more similar and more competitive."

MetalSite got its start in August 1998, when Richard Riederer, president of Weirton Steel, posed the question: "If airline tickets could be sold on the Web, why not steel?" The country's eighth-largest steelmaker joined forces with LTV Steel, the third-largest integrated steel producer, and Steel Dynamics, the nation's second-largest minimill operator, to create a marketplace for the sale of off-grade or excess products.

Patrick Stewart, the former chief information officer at Weirton (www.weirton.com), accepted the role of MetalSite's chief executive. Stewart says the long-term goal was to create a marketplace that could service all aspects of the steel industry, but in the initial stage it made sense to concentrate on secondary and excess products.

"By starting with off-grade products, we could allow them to get comfortable with us. Then we could start moving up the food chain."

The other core strategy was to co-opt the industry. In addition to signing on LTV and Steel Dynamics as initial investors and partners, Metal Site also se-cured equity investments from Bethlehem Steel, the second-largest integrated steel producer in the country, and Ryerson-Tull, the largest distributor of processed steel products in North America.

In many ways, MetalSite wrote the book for Ariba, Commerce One and Oracle, which have also adopted strategies of co-opting big industry players. In the past six months, MetalSite has generated revenue growth of nearly 400 percent. While the company isn't disclosing a dollar figure for revenue, Stewart says it is now doing more than 4,000 transactions per month, with the average transaction in the $10,000 to $30,000 range. Simple math puts monthly transactions at greater than $40 million, from which MetalSite claims fees of 1 percent to 2 percent.

On top of that, MetalSite earns transaction fees from its request-for-quote service. The service allows a buyer to request a certain steel grade or finished product and submit it to a specified group of suppliers for a quote. MetalSite takes 0.25 percent to 1 percent commission on RFQs.

The number of sellers has grown from its original three to 40, and the company says it has registered some 7,000 users. That figure is expected to more than double in the months ahead, when MetalSite puts the entire Ryerson-Tull catalog online by the end of the first quarter. That move is expected to add another 15,000 buyers to the user base.

Neutral territory

E-Steel approaches the market from the opposite end of the spectrum. Rather than trying to co-opt some of the biggest players in the industry, it has made a point of not taking investment from the industry. But while it touts itself as a truly neutral marketplace, it has some pretty heavy hitters on its side.

Initial financial backers include Bessemer Venture Partners, Greylock, and the Midas touch of Kleiner Perkins Caufield & Byers. In December 1999, The Goldman Sachs Group led a second venture round for $66 million, bringing total venture capital funding to just over $100 million.

CEO Michael Levin, who has 25 years in the steel business, says the company has invested heavily in developing technologies that will allow steel buyers and sellers to integrate their back-end and legacy systems directly into the e-Steel exchange. The company has forged an alliance with eXtensible Markup Language specialist WebMethods to build software that will allow companies to create orders in their in-house Enterprise Resource Planning systems and push them out to e-Steel.

Another major differentiator, according to Levin, is that e-Steel was built from the ground up to serve as a negotiating platform for buyers and sellers, whereas MetalSite began as an auction platform. "You're dealing with two very different versions of the origin of the universe," he says. "Every single element of a negotiation that can go on in the real world can take place on e-Steel."

Levin declines to release financial information related to the site. And the only major customer he is revealing is Worthington Steel, which actually made the first purchase on the site — $50 million of rolled steel from Cargill Ferrous International — when e-Steel launched the site in September 1999. E-Steel takes a transaction fee in the range of 0.875 percent to 1 percent.

MetalSite, for its part, says it's working hard to add negotiation and back-end integration features to its site. In December 1999 it announced completion of the first stage of an integration project with Bethlehem Steel. It also somewhat addressed the industry ownership question, when business-to-business investment fund Internet Capital Group (www.internetcapital. com) pur chased Weirton's 44 percent stake in MetalSite for $180 million in cash and stock.

E-Steel's Levin is still betting, however, that the ownership question will be the major differentiator be tween the two sites going forward.

"You can get some quick gratification by hooking up with one or two big buyers, but over time it doesn't work," Levin says. "It takes a little longer to prove yourself [as a neutral site], but the long-term benefits are tremendous."