Chemical Giants Go Online for More Customers

Seeking to broaden its market reach and drastically reduce distribution and procurement costs, the US$1.6 trillion oil, gas, and chemical industries are rapidly ramping up their online presence.

This week Shell International announced a deal with Commerce One Inc. to create an online global exchange in oil, gas, and chemicals for the energy industry.

The Dow Chemical, one of the world's largest chemical companies, announced at the end of last week that it will partner with ChemConnect, an online exchange for buying and selling commodity chemicals to put its products online.

Dow and Shell join such giants as Eastman Chemical and Rohm and Haas in using an online marketing and distribution channel.

"We believe our customers need to have choice, a strong company Web site and participate on a third party exchange," said Dennis Merrens, director of corporate venture capital at The Dow Chemical, in Midland, Michigan.

The Shell-Commerce One joint venture expects to go live by the second quarter, linking buyers, initially just Shell, to sellers in the energy industry.

In a prepared statement Shell said, "we welcome other energy companies to join in."

While Shell's and Commerce One's market reach is still coalescing, ChemConnect's exchange has been operating for about five years and has over 4,000 companies buying and selling products. The average transaction size is $200,000, said a ChemConnect spokesperson.

"We deal in chemicals shipped in freighters and tankers not in barrels or beakers," said Linda Stegeman, senior vice president of marketing at ChemConnect, in San Francisco.

ChemConnect receives 1 percent from each the buyer and the seller for every transaction. Typical distribution costs range from 2 percent to 5 percent according to Merrens.

The ChemConnect exchange uses a dynamic pricing model similar to the stock exchange. Suppliers can go online with a fixed price basis or "nominate" a price, Merrens said.

At the same time buyers can post requests to pay a price.

The benefits to buyers and sellers, of which Dow will be both, span all levels of the business process, according to Merrens, and include the ability to manage inventories in a shorter period of time, reach new customers and get the best price available.

"From our perspective if a buyer wants specific products he will go directly to our Web site, but if buyers are looking for a commodity product at best price they will use this exchange to acquire the product," Merrens said.

In a business-to-business environment dynamic pricing exchanges also allow companies to manage risk by purchasing only a portion of their long-term needs at a fixed price and buying the remainder on the spot market, Merrens said.

ChemConnect also provides industry-related content at its site.

For better or worse, the dynamic pricing model will bring speculators into the industry, according to ChemConnect's Stegeman and Dow's Merrens.

"It will increase the velocity or the number of times the product changes hands; speculators will come in," Merrens said.

"It is inevitable that there will be a marketplace made, like oil or futures and that doesn't exist now," Stegeman added.

While final transactions created on ChemConnect's site are now done off line, in the second quarter the company plans to use Andersen Consulting and to deploy WebMethods Business-to-Business Portal technology to manage the transactions online.

In the Shell deal, Commerce One will receive license fees for its exchange technology while Shell will be the majority stakeholder.

ChemConnect, in San Francisco, can be reached at http://www.chemconnect.com/.

Commerce One Inc., in Walnut Creek, California, can be reached at http://www.commerceone.com/.

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