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November 1, 2007

READY FOR A NEW MODEL?

ThyssenKrupp Materials NA’s August acquisition of OnlineMetals.com, an Internet-based small quantity metals supplier, has once again shone the spotlight on the notion of buying and selling metal via the Internet. But is history doomed to repeat itself, or is ThyssenKrupp Materials seeing something many others are not?

The recent acquisition calls to mind the 2003 closure of U.S. Steel's Straightline Source online steel distribution unit. The Pittsburgh-based steel giant began the business in 2001 with about 100 employees as a means to increase sales to smaller customers. But in its two years, Straightline Source never turned a profit, and in its final year, it lost $70 million.

Three years prior to the birth of Straightline Source, MetalSite Inc. CEO Patrick Stewart had high hopes for his Pittsburgh-based online steel distribution company. Like many other dot-com ventures, MetalSite ran out of money and closed in June 2001. Management Science Associates (MSA) reopened it in 2002, but the online company never gained footing.

Even ThyssenKrupp Steel—which shares the same parent company as ThyssenKrupp Materials—made a recent departure from the e-commerce arena. In September, ThyssenKrupp Steel and ArcelorMittal announced closure of the e-commerce platform STEEL24-7, which the two companies jointly ran. “The evolution of information technology and the fast-paced consolidation of the steel industry have given a decisive competitive edge to more individualized solutions, thus making the original concept of STEEL24-7 obsolete,” the companies said in a release, adding that both would be developing their own e-commerce solutions.

So why have so many online metals efforts failed? There may have been a disconnect between the sites’ programmers and industry end-users, says Bob Richard, senior metals analyst at Cleveland, Ohio-based Longbow Research. Many online programs don’t address the complexity and uniqueness of the metals-buying process. “There wasn’t enough utility in those prior efforts for someone to go in and promptly fill their needs,” Richard says. “It was a heck of a lot easier talking to someone on the phone for 30 seconds than it was logging on to these things because of all the different grades of steel, all the different types of steel products.”

With online commerce, customers also may lose the in-depth knowledge that comes from an informed sales rep. “Relationships do mean a lot,” Richard says. “Someone out there buying secondary from U.S. Steel is going to be a heck of a lot more comfortable with the sales rep than dealing with a computer.”

Eddy Ledford, president of Winchester, Kentucky-based Elco Inc., which has owned and operated online metals store MetalsDepot for more than a decade, contends that some prior efforts may have failed partly because they weren’t given enough time. “You’ve got to give it five years to see its potential,” he says. “If it’s still not working, abandon it.” Straightline Source closed after two years and MetalSite after three.

But clearly, e-commerce does have its place in the industry. MetalsDepot, for example, has found much success by focusing on small-quantity orders, Ledford says. “We’ve found a niche taking care of customers that are too small for traditional service centers,” he says.

Large-quantity orders, he maintains, require more human interaction because of the need for competitive pricing. Smaller orders, on the other hand, can be placed by referring to detailed online catalogs and talking to sales representatives over the phone when necessary, Ledford says.

Those smaller customers may be just what ThyssenKrupp Materials had in mind when it sought out OnlineMetals.com. In a statement, the company said the acquisition would give it “a new efficient channel for management of small orders.” The company declined further comment.

Ledford believes this acquisition may set off a round of mega service centers absorbing online companies. “Lots of people want to break into this market. [These acquisitions] will give [large service centers] a jumpstart,” he says. Despite the evidence to date, “there is a lot of money to be made,” he adds.

—Michelle Bowles