Good chemistry between suppliers and the internet

By most people's standards, the chemical industry has been quicker off the mark to embrace e-commerce than the paper industry. In fact, a number of third party sites such as CheMatch, ChemConnect and e-Chemicals have been serving the sector for several years. More recently, the chemical suppliers themselves have been embracing new e-business initiatives and most divisions at the major companies have an e-commerce manager of some sort. Not only are they setting up their own sites to sell products, but chemical suppliers are increasingly using the third party websites to buy their own raw materials.

It is hardly surprising that the suppliers are getting themselves into a stir over the internet if the analysts' forecasts are anything to go by. An estimated $300 billion worth of chemical trade is expected to move online by 2003, according to Forrester Research. Goldman Sachs' forecasts are slightly more conservative with around $300 billion of chemicals trading over the internet a year later in 2004.

In spite of the seemingly huge potential in trading chemicals online, the suppliers and independent websites are not just limiting their action to buying and selling chemicals. They are being forced to cast their nets far wider than that as the competition for the top spot in e-chemicals heats up. The days of one function website are numbered and companies are increasingly searching for that extra angle or niche factor that will bring them success. For example, chemical websites are now branching off into the following areas:

Clinching the chemical niche. A number of companies have decided to focus on specific sectors of the chemicals industry in a bid to win the battle for customer clicks. So far though, there are hardly any sites that have decided to concentrate solely on the pulp and paper industry. The site that comes nearest to it is ChemicalDesk, which recently started a pulp and paper exchange on its site. But the company also deals with a wide range of water treatment chemicals.

According to ChemicalDesk, the exchange allows buyers to search globally and by region for the most cost-effective supplies, while suppliers benefit from expanding their customer base around the world without increasing the sales force. The motivation behind the establishment of a purely pulp and paper chemicals exchange is clear-ChemicalDesk is keen to get a piece of the action in what it describes as "the $8 billion global paper chemicals market".

Other sites have held back from setting up in this sector so far. One of the reasons behind the lack of chemical sites for pulp and paper might be that many of the products used in the industry are highly specialized. According to Ian Kirkpatrick, director of Business Development and Communica-tions for North America at Eka Chemicals, performance chemicals require expertise in their application in order to gain added value. "We don't support the auction of these types of chemicals on the internet since the application and service is an essential part of the product to ensure maximum paper quality and paper machine runnability," he explains. "We're pro e-business, but if you are talking about purchasing via reverse auction for performance chemicals over the internet, then we have serious reservations," he adds.

Neil Bardach, vice president and chief financial officer of Mineral Technologies, shares the view that e-commerce is important but not appropriate for certain chemical sales. He points out that, "Most of our products are sold on the basis of very specific site and application requirements. Third-party e-commerce sites are most effective for the trading of products that are more fungible than ours. It is impossible to imagine selling a 10-year commitment for precipitated calcium carbonate (PCC), presumably requiring the construction of a satellite plant, over the internet."

Until now, this has been the opinion of many people in the specialty chemicals business. But with recent advances in internet technology, that situation might just be changing. Even though there are not many sites specifically designed for pulp and paper, the industry need not fear that it will be left out for two reasons. Firstly, there are plenty of sites out there that are trading pulp and paper chemicals as part of a larger portfolio. Secondly, a number of initiatives are underway which may remedy the situation-from both inside and outside the industry.

For example, Kemira is working to implement an e-business strategy across the whole of its organization, according to Kari Autio, vice president for business development. "We have defined our e-business strategy and have a couple of initiatives in operation. For example, we think that in the long term linking systems and ERP is the way to go in the pulp and paper industry."

For the moment though, the company is keeping the details of any projects well out of the limelight.

BASF is another of the major suppliers to the pulp and paper industry that is bashing out a solution specifically for its customers in this field. According to Saori Dubourg, e-business task force coordinator for dispersions, "We are striving forward with e-business, it is very important to us. BASF is working on two e-business strategies-system-to-system integration and a paper portal."

The new paper sector site will include communications tools, information and dedicated services. Or as Dubourg puts it, "It's a value package plus transactions. We are convinced that we need to offer added value and not just transactions to our customers."

The company has already identified several key pilot customers and the project has reached the development stage. Dubourg expects the new paper portal to go online in the next couple of months, but until then the name of the site is being kept carefully under wraps at BASF.

In terms of timing, another large supplier to the industry is more advanced with its e-business project for the pulp and paper industry. Bayer was set to launch a large new website for its paper chemicals business on October 9. Commenting on the launch, Stefan Wiedenhoefer, e-commerce manager for the paper business unit at Bayer, says, "The new site can be found at www.solutionsforpaper.com. The first stage will include information, a database of technical information, an online technical service function, the opportunity to send queries, request quotes, etc. The second step will include an actual order management function. We have to integrate the site with our ERP system first though, and this should be ready early next year."

Wiedenhoefer believes that it is important to offer pulp and papermakers the chance to order their chemicals online, but he believes that they still need the partnership with a specialist supplier. As he puts it, "The other sites are for auctions. In paper, the customer needs solutions and technical expertise."

Special kind of service. One of the few independent sites to identify an apparent gap in the internet market is IndigoB2B.com. The company describes itself as a one-stop electronic marketplace designed to meet the needs of consumers and suppliers within the $200 billion specialty chemical industry.

Founded by former managers from the chemical industry, including several from Ciba Specialty Chemicals, the company was launched in February this year. Chris Whiston, vice president of marketing and sales and a co-founder of IndigoB2B, says, "We realized when we were working for other firms that there was nothing out there on the internet for specialty chemicals. This need created a vacuum in the industry and we saw filling this vacuum as an enormous opportunity to help ourselves, while also supporting the industry at large."

Until now, many of the major specialty chemical suppliers have not considered the independent sites to be a threat to their business as they focus largely on commodity chemicals and auctions. While on the outset, IndigoB2B could be perceived as more of a problem by the traditional suppliers, the company emphasizes that its main purpose is to unite the industry and encourage collaboration between traditional and new players. When the sites goes fully live within this quarter, the company may well have succeeded in doing what many industry insiders believed was impossible-selling specialty chemicals over the internet.

So what is the secret behind IndigoB2B.com's site? According to Whiston, "The technical buyer will have access to all the data that he needs. For example, he will have resources to measure the functionality and performance of the products on offer. One major advantage is that Indigo has its own technical laboratory. Our objective is to be as close as possible to a virtual specialty chemicals company."

Another trick up IndigoB2B's sleeve is that the company has a fair few years of experience in the specialty chemicals industry spread out among the managers. As Whiston explains, "Indigo has been designed by specialty chemicals people for specialty chemicals people. We have been close to the customer side and we know about their needs and motivations. We would like to create an interactive specialty chemical community where all are welcome and the needs of all major specialty chemical stakeholders are addressed."

One major hurdle that the company has to face is convincing suppliers to work over the internet. Apart from the usual benefits of aggregating purchases, cutting down on procurement time, gaining access to huge databases of suppliers and customers, IndigoB2B claims to offer another unique advantage to its users. With its own laboratory, the company will also be able to offer independent testing.

According to Whiston, "This is a big problem in specialty chemicals because each manufacturer measures each batch against its own standards. But Indigo aims to create an independent standard for the industry, while catering to users' specific needs, customizing solutions on a situational basis."

While IndigoB2B has chosen to brave it out in the specialty chemicals arena, another website has gone in totally the opposite direction. Tim Blankenstein, vice president e-commerce at Covalex, explains the reasoning behind his site's focus. "Most online exchanges today support only large transactions and focus broadly on the chemical industry. We've decided to focus on basic commodity chemicals and middle market transactions, which are not usually served," he says.

Basic commodity chemicals represent an $800 billion global market, part of which includes sales to the pulp and paper industry. And Covalex certainly appears to have been successful in this area so far, according to Blankenstein. "Approximately 85% of our chemicals traded to data are heavy pulp and paper," he points out.

Covalex is not just about trading though, and the site offers three service modules: the Market Maker, the Supply Chain Management/Integration and the Information Bureau. Planned services for the future also include financial hedging mechanisms, online bartering, supply chain intelligent event management, automated inventory monitoring, financial settlement, international trade management and logistics management services. "Online trading is just one piece to the puzzle. Companies like Covalex are behind the scenes facilitators, not in between buyer/supplier relationships," Blankenstein explains.

Integrate or disintegrate. The supply chain advantages and additional services that the internet can offer have not gone unnoticed in other areas of the chemical industry, either. When the internet first kicked off, the spotlight shone on the benefits that trading would offer companies across all industries. But in many sectors, the trading has not always taken off as well as expected or as quickly as many would have hoped, leaving websites to look for something else that bring in some revenue. On top of that, the proliferation of trading sites has not helped matters.

On the supplier side, some people believe that it is more realistic to get customers ready for e-business before trying to force-feed it to them. According to Katherine Abernathy, global marketing communications manager at Hercules, "We have recently surveyed 7,000 pulp and paper customers. The analysis indicated that most of them are not ready for e-commerce transactions."

But it is not all doom and gloom, though. As Abernathy adds, "However, they are ready for a more in-depth exchange of key information. We are currently working with paperloop.com to sponsor their new 'solutions' pavilion. We expect to learn a great deal about our customers' interests and what they use the internet to access."

In a recent article in Pulp & Paper, managers from OSI Software pointed out that, "Whereas e-commerce is the webification of a business process, e-business is the effort of changing the business process to take advantage of the web."

In many cases, customers and suppliers in the chemicals industry are still at the e-business stage of the process and there are a number of sites ready to help them advance in this area. For example, e-Chemicals has clearly turned its spotlight on to supply chain optimization for the chemicals industry. The company believes that the potential revenues of internet-based transactions will only be realized when customers evolve beyond using the internet for information gathering and online transactions and move to developing e-supply chains that reduce costs and increase speed, as well as efficiencies.

On top of its neutral online marketplace, e-Chemicals now offers what it calls machine-to-machine connectivity between all the major parties along the chemicals supply chain. In fact, the company's ambitious goal is to become the "supply chain backbone of the chemical industry worldwide".

Over the past few months, e-Chemicals has wrapped up some pretty important deals in this area, including an agreement with the UK giant, ICI, to implement the company's e-supply chain. Going forward, the company's CEO, Peter McCullagh, predicts that, "In the next 12-18 months, we will start to see supply chains competing against other supply chains, instead of companies against companies."

Integration issues. Other internet sites have also switched the focus of their business away from vertical trading sites to supply chain integration matters. The industry2industry company initially set up a site called i2ichemicals with the aim of trading products through an exchange. The company's aim now though, is to develop e-commerce for individual businesses, according to Chris Pryor, sales and business development manager at industry2industry.

"After seeing our software, companies asked us to expand our services and deliver our technology platform as a product. We can provide the central element, ie the ability to do transactions. People are interested in their own SCM/ERP systems first and they want to develop a private portal," Pryor explains.

Though there has been a shift of emphasis at industry2industry, the company is maintaining the vertical trading side of the business. According to Pryor, "The reason that we are maintaining the vertical sites is so that eventually private sites can be interlinked. Companies can put a query on an open site if needed and have the opportunity to deal with their normal customer and to spread the net wider."

Fob is another company that appears to be changing its direction. Among the company's interests are the sites, fobpaper.com and fobchemicals.com, but according to recent releases on the sites, the company no longer supports individual product sales. Based on feedback from their customers, fob is turning its efforts toward delivering an eProcurement services platform for its customers, rather than running a system that aggregates demand to lower prices.

From the start. While customer demand has forced companies like fob and i2i to change their business models, one new internet player decided to start off with supply chain integration as its main aim. Elemica has been founded by eight of the high flyers of the chemical industry-Atofina, BASF, Bayer, BP Amoco, Dow, Dupont, Rohm & Haas and Shell-and other companies will also be participating.

When Elemica is up and running at the end of 2000, its members will be able to buy and sell basic, intermediate, specialty and fine chemicals through the site. Unlike other websites, transactions will be based on contractual sales that represent most of the worldwide chemical market, according to the company. But perhaps the most revolutionary aspect of the site is that the focus is on supply chain improvements rather than on the trading itself.

The site is not an aggregator of chemical purchasing nor a buyer, seller or owner of products. Through established ERP connections Elemica serves as a singular contact point (or hub model) for the exchange of information between customers and suppliers and automates transactions based on agreed contract terms.

The advantage for specialty chemicals buyers and sellers is to be seen in a single ERP connection with Elemica instead of multiple connections to different partners.

Dubourg at BASF points out that Elemica is another e-business channel for the company to use and it will help to "integrate the customer ERP landscape, which is quite different in Europe".

Gerard Peyronne, e-business leader for Du Pont Europe, also believes that the chemicals industry is in dire need of a site like Elemica. As he explains, "A marketplace or hub will have a lot of value for the industry. It is not so much about auctions, which are already available, but about integration-SCM, logistics etc.-and how to make the industry more efficient. It is not just people connecting, but systems too."

Trading places. Although many sites are switching focus to supply chain issues, this does not mean that the exchange models have all failed-far from it in some cases. But the first-mover advantage certainly seems to be paying off and the competition for places is fast and furious on this side of the internet field. For example, ChemConnect was set in 1995 which was "very early for the internet", according to ChemConnect's director of marketing communications, Michele Hincks. The site started its World Chemical Exchange (WCE) in July 1999. The WCE is an internet-based trading platform that brings together three types of users-suppliers of chemicals and plastics, buyers who use these products and finally, the intermediaries, who assist clients in buying and selling chemicals and plastics. According to Hincks, "Members trade products within days and hours on the exchange floor, as opposed to weeks and months of negotiations. The WCE also has two other floors on top of the exchange. Members can use corporate trading rooms with auction capabilities and a commodities floor."

One company that has clearly benefited from ChemConnect's services is Ciba Specialty Chemicals. The company recently slashed two and a half months off their typical chemical procurement timeline by using a ChemConnect corporate trading room to negotiate an annual procurement contract for key raw materials.

Real-time competitive bidding helped reveal the true market price for the product that Ciba needed for their contract. This would not have become apparent as quickly through traditional negotiations, according to the company. In a half-hour online negotiation, Ciba wrapped up its annual contract with a significant saving in time and at a better than expected cost savings. "It was confirmation of what the future of contract negotiations will be," according to Forrest Peeples, Ciba Specialty Chemical's purchasing manager.

Another success on the trading front has been CheMatch. Since making its first trade in February 1998, the site had managed over $350 million in transactions by September this year. According to Clay Jeansonne, vice president of investor relations and corporate communications, the majority of the trading was done in the first nine months of 2000, which indicates that the chemicals industry is warming up to online trading.

In September this year, CheMatch also put a very interesting deal into the bag with the Chicago Mercantile Exchange (CME). Under the agreement, the two parties will jointly develop a "co-branded complex of certain chemical futures and options products that will trade on the Globex2 electronic trading system." Put simply, this means that CheMatch will be able to trade chemical futures on its site.

As Jeansonne explains, "At the moment we have two types of trading-physical products and OTC/non-regulated derivatives between two companies. The third leg of our stool will be ready in early 2001 and this involves regulated financial derivatives."

If all goes to plan, then by mid 2001 CheMatch will be able to transact in all three types of contracts. "This is the first time that chemicals futures will be able to trade on a business-to-business internet site," Jeansonne adds.

The reaction to the deal has been positive both inside and outside the chemicals arena. Commenting on the deal, Forrester Research's Jim Walker says, "CheMatch.com gains credibility [through the deal]. By joining with the 102 year-old CME, CheMatch.com instantly gains from the exchange's venerable reputation as a global commodities marketplace."

On top of that, Walker also believes that the futures contracts will provide a benchmark price for assessing the expected supply/demand balance in the industry. Financial institutions will also be encouraged to jump in and buy the new chemical futures and option contracts, he believes.

Within the chemicals industry, Jeansonne reports that the sound bites have been very positive as well. As he says, "The reaction from risk management departments in chemicals companies has been good-they hope the deal will reduce pricing volatility."

Chemistry with the net. Whether more sites will offer chemical futures or not remains to be seen, but the future of chemicals on the internet seems to be a dead cert. The hardest part for some e-business providers has been convincing people to take up the challenge. As Hincks at ChemConnect puts it, "E-business is here whether we like it or not. The chemicals industry should embrace it, not fear it. It's just another channel. Together we can tame this tiger called the internet."

Blankenstein at Covalex agrees that the main hurdle for many independent sites has been trying to convince the more traditional suppliers of the benefits of e-commerce. As he says, "Recently we have been seeing a trend toward suppliers recognizing that there actually is value that can be derived by embracing the internet and they are not as reluctant to participate. Suppliers are becoming aware that they are fighting a losing battle. The future will involve the empowered buying community. Those that cooperate and embrace new capabilities to service their customers will discover new opportunities to maximize the relationship."

In turn, the main chemical suppliers that have jumped on the e-business bandwagon are now having to sell their ideas to customers, especially among pulp and paper producers. But Autio at Kemira is upbeat about the industry's reaction so far. "Pulp and paper customers are recognizing the importance of e-commerce now and we think they will be willing to co-operate," he says.

With the growing number of sites on offer, pulp and paper customers are certainly being spoilt for choice in terms of chemical purchasing and services over the internet. And Autio expects this to change even further in the future. "The chemicals internet sector will not look same in six months. It is very possible that more suppliers will join up to carry out joint ventures, we should also expect new sites and some will disappear," he explains.

When it comes to using the internet for chemical procurement, pulp and paper companies may be wise to follow the lead of their chemical suppliers when choosing which internet path to go down. Many of the chemical suppliers appear to have hedged their bets by getting involved in a number of initiatives. For example, both BASF and Bayer are involved in Elemica and are setting up their own portals at the same time. As a chemical customer and internet user, the pulp and paper industry has even more freedom to pick and choose where they will place their purchases and to choose which sites will offer the best package in terms of cost and time savings, not to mention ease of integration. It is up to the chemical industry to try their best to tempt them with the latest e-business offerings.