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April 30, 2018
Digitizing the steel market: Not if, but when
By: Richard Oppelt

The dotcom era of the late 1990s saw the launch of a number of metals e-commerce marketplaces. Almost all failed within a few years. The reasons? Mostly their inability to deliver value to participants and to achieve critical scale. Those early failures have arguably created a degree of skepticism that persists about the desirability and/or viability of online platforms succeeding in today’s steel market.

But such attitudes may be dangerously misplaced. In virtually all consumer and industrial markets today, digital technologies are powering online marketplaces and ecosystems. And their conspicuous success in delivering the value promised by the early dotcoms should serve as a red flag to both producers and distributors in the steel market. In the not-too-distant future, digitally-enabled commercial platforms will disrupt the existing steel business. It’s a matter of when, not if. Acting now could be the difference between survival and extinction.

We believe that digital platforms will likely become a significant mode of steel commerce within a decade. For a sign of the future, consider the Chinese domestic market, for example. E-commerce platforms led by venture capital backed Zhaogang are already supporting trade that equates to more than 10 percent of the domestic market.1 That represents a volume that is equivalent to approximately 60 percent of the overall U.S. market.It’s not a huge conceptual stretch to see Amazon or its equivalent similarly taking an interest in the B2B market that it has largely overlooked to date.

Steel supply chain efficiencies have shown little improvement over the past decade. The industry share of the top ten service centers remains at around 30 percent.3 Rising customer expectations (driven by digital experiences from other industries and services) and the potential for step-change improvement in overall supply chain efficiencies will power the growth of digital platforms.

And the impact of that growth will be felt keenly by both producers and distributors. In today’s market configuration, service centers control a significant proportion of the market. They have the relationships with end-customers and receive the demand signals that inform pricing strategies. There are, at any one time, on the order of two to three months’ worth of inventory in the U.S. distributor chain.4 It could be argued that the inventory is there, not as a buffer to meet fluctuations in demand, but largely to enable price arbitrage.

The ability of a platform to disintermediate a market and create transparency that reduces or even eliminates the possibilities for price arbitrage is amply evidenced in many other markets. Being able to take advantage of direct customer relationships and respond to their demand signals offers new value to producers who are today largely excluded from unmediated customer interactions. But it also means that producers need to develop a new range of capabilities—understanding how to become active players in the market rather than operating as more passive order-takers. Access to, and analysis of, indicators of consumption can drive a more efficient and responsive supply chain including optimized scheduling of consumption.

What about today’s service centers? As traditional ways of selling give way to streamlined, highly automated processes with increased price transparency, large parts of today’s sales organizations and apparatus will become redundant. Planning functions will be transformed through the power of analytics and advanced forecasting techniques. The boundaries between “mill business” and “service center business” will become blurred as both groups vie to meet online customer orders. So, to compete, service centers will have to leverage platforms to expand product offerings and service capabilities rather than focusing on arbitrage. Those that do not, will likely disappear.

If industry players are slow to act, others who already possess the experience and technologies from other marketplaces will take the lead in creating and operating digital platforms for steel. Some incumbents are already showing the way. Others need to follow their lead. The steel industry faces a truly disruptive next few years. Those that respond by understanding and adapting to the power of platforms will survive. Those that resist are likely to find themselves increasingly marginalized.


Sources:
1 Accenture Strategy project experience and analysis of AISI and AMM data.
2 Ibid.
3 Ibid.
4 Rudarakanchana, Nat. “US distributors’ steel shipments rise in ’17,” Metal Bulletin, January 16, 2018. Factiva, Inc. All rights reserved. (Accessed February 1, 2018).

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