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Dull Can Be Hot Too: Raw Material Exchanges Ramp Up By Erin Joyce August 21, 2000 The going market rate for ferro alloys and bulk ores may not qualify as a sexy topic on most investment bulletin boards, but away from the retail masses online, producers and buyers of these raw materials are becoming hot for online exchanges. Take CoreMarkets.com, an Alley start-up that bills itself as a neutral exchange for ferro alloys and bulk ores, the raw materials that go into stainless steel and the manufacture of other metals. Since launching in late June, the company said it has reviewed and qualified buyers and sellers from over 175 companies across 35 countries. Howard Feldman, the CEO of CoreMarkets, says within weeks of announcing itself, the exchange helped close just over a half million dollars worth of trades. The momentum has been building as producers and manufacturers get in the queue to join. Not bad for a company that was formed barely nine months ago and recently raised $5 million from venture backers. Leading the investment was Yazam, a major seed-stage investment firm based in New York that recently raised $60 million to fund its international expansion. In addition to its New York offices, Coremarkets now has offices in Beijing, Moscow and South Africa, three major spots around the globe where metal resources are mined extensively. In an industry where market makers take commissions of between 3 and 8 percent (or even bigger on a large deal) in the offline world, Coremarkets says it charges a flat rate of 1.5 percent on most trades it helps bring together. Feldman says the operation is also taking a commission on ancillary or trade services, which at this point, he says will vary, depending on the degree of service needed after the parties agree to do business. Feldman and his management team, including Larry Schwartz, vice president of marketing, peg the market they're trying to reach at about $50 billion worth of materials bought and sold each year. Others estimate it at around $30 billion worth of materials traded. Of the three parts to the site - information about market conditions, facilitating the trade and fulfillment - the last leg of the deal, in which contracts are generated and fulfilled, is where Feldman and Schwartz see their opportunity. "Unless a broker is adding a certain amount of value (to the exchange), then the market for this service is not that large," says Feldman. "So we started looking at ancillary trade services: shipping, warehousing, commodity trade finance," for example. The company has lined up Fortis Bank to help facilitate financing behind the deals, such as letters of credit. CoreMarkets also has a strategic partnerships with SGS Mineral Services to help manage deals, post trade. "There's a tremendous amount of work for the market to do in this area," says Schwartz. Right now, the Internet hasn't helped remove a lot of the inefficiencies in the manual processes that still exist" in back offices. "This is one area we think market will be quick to adapt." Feldman, a former commodity metals trader, says one aspect that is critical to the company's acceptance is the site's flexibility in offering public and private trading "floors" to participants. This aspect helps them determine how visible they want to be, especially when they need to move product and move it fast. For example, if a small producer needs to sell a few hundred tons of chrome ore to lighten his inventory quickly, he may not want the rest of the world to know if it's going at a lower price than usual. And on the buy side, a US company looking to snap up a small shipment of metals may not want to be inundated with bids from producers it has never worked with before. But anonymity can also make for a ripe fraud environment, which is why more outfits such as CertCo, a New York-based real-time validation company that authenticates all the parties to a deal, are becoming a critical aspect in these exchanges. Market watchers say since President Clinton signed the digital signature law, certificate authorities are becoming more of a necessity in the online exchange marketplace. Another player in the neutral exchange marketplace is Materialnet.com, which launched itself about nine months ago and secured $12.5 million in its first institutional funding round in March. MaterialNet.com bills itself as helping original equipment manufacturers to streamline the process of procuring metals without the hassle of phones, faxes and the mountains of paper that is generally pushed around between parties on a deal. Its request for quotation system, or RFQ, is focused on buyers and sellers of carbon steel, stainless steel, titanium and aluminum, for example. And not to be outdone on the service side, the Lake Success, NY company says it offers a procurement platform that helps participants manage their supply base while looking for distributor buy-outs. Materialnet also helps calculate freight charges in addition to the invitation-only trading that it organizes within the site. The company also just struck a deal with OnlineMetals.com, a Seattle-based stocking distributor of cut-to-length materials orders for smaller businesses. Company officials say the agreement addresses buyers' small quantity needs while allowing both companies' suppliers to focus on more traditional service center business. They may not be household words, but molybdenum concentrates and ferro molybdenum are hot words to players in metal commodities -- and apparently, to venture investors in online exchanges. *Story corrects Larry Schwartz reference in seventh graph*