Dennen SteelSalvor Partnership Blooms

November 10, 2006
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GRAND RAPIDS — So far, customers have appeared both interested and somewhat intrigued by the strategic partnership between Dennen Steel Corp. and the Web-based SteelSalvor, which markets and auctions non-prime, or secondary, steel online.

Dennen Steel recently invested a "significant" but undisclosed sum in SteelSalvor of Pennsylvania, and through the partnership they formed in June, the two companies hope to speed the distribution of secondary steel products, as well as provide customers and suppliers with greater access to those products.

"We see this as a potentially powerful vehicle to benefit the industry," said Peter Dennen, senior vice president of Dennen Steel. "We have 50-some years of industry relations with steel suppliers, and we know a lot of the players. SteelSalvor didn't have those relationships, so we've been trying to bring those relationships through Dennen Steel to SteelSalvor."

When Dennen became an equity holder in SteelSalvor and SteelSalvor became closer to the Dennen world, they both learned a great deal about one another's respective business, said SteelSalvor CEO Scott Shapiro.

"Once we finalized the documents and became partners, there were lots of things we began learning about each other, learning about the industry, and I think most importantly, learning about how our union would impact or be perceived in the industry," Shapiro said.

It all started about a year ago when Dennen came across the SteelSalvor Web site and discovered there was some steel available that he didn't know existed. His company placed a bid and was able to gain access to a lot of steel.

"Scott's customer was happy because we paid the highest price, so it was a win-win," Dennen recalled. "That got Scott and I talking about whether SteelSalvor could be used for more than just a vehicle for Dennen Steel to buy steel. We became familiar with the SteelSalvor business model, and we believe it can play a role as a vehicle in the changing supply chain."

Since 2001, there has been major consolidation in the steel industry at the producer level, and the same kind of consolidation is now starting at the distributor level, which makes it difficult for independent operators to compete effectively, Dennen explained. With fewer suppliers and larger competitors in the marketplace, it's becoming more and more difficult to gain access to steel.

"There has been a fundamental shift in the way steel is being sold; it's sold on a 'relationship basis,' which means that, in a lot of cases, access to it depends on who you know and how long you've known them," Dennen noted.

He said his company didn't invest in SteelSalvor just to get access to more steel; it invested in the company because it believes in the SteelSalvor business model.

"As it gets harder to gain access to steel, the idea is that by opening up that access on a non-exclusive basis, there will be more availability offered to the whole market in general," he explained. "That's something that we believe will ultimately lead to higher revenues for the sellers of the steel. It's going to create a larger marketplace, and the auction process is going to create a more competitive environment."

There's nothing the two companies can do to stop the changes from happening, but what they can do is be an enabler of change within the industry. As Dennen sees it, the investment in SteelSalvor puts his company in a position to add value to the marketplace. The value added on the supply side is that Dennen Steel gets closer to the steel producers if it's able to bring them more revenue through the SteelSalvor model. Dennen Steel benefits just as everybody else benefits if the buyer gains greater access to steel.

Dennen said his company has been able to bring some credibility to the SteelSalvor site for people who know Dennen Steel but have not heard of SteelSalvor. His main objective over the first four months of the partnership has been to introduce SteelSalvor to Dennen customers. He said most of the people he has talked to have responded favorably.

"Once I explain the SteelSalvor business proposition, they're intrigued," he added.

Locally, the partners have worked with some manufacturers and service centers to help them sell off some of their excess secondary steel and obsolete inventory at more favorable prices, so those customers have experienced firsthand the benefits of using the Web site, Dennen said. 

Shapiro said SteelSalvor has demonstrated its ability to communicate with large numbers of people almost instantaneously for very little cost. He said his company takes some of the technologies available in the market, applies them in a cost-effective way, and creates a competitive environment where people can visit the site and bid on steel, therefore providing the maximum value for the seller.

"What we find is that when a good idea gets delivered to the market that benefits a greater percentage of the involved parties — that's a company that creates value," Shapiro remarked. "We think we have an opportunity to be one of those companies that's going to create enormous value within the steel industry. If we create value for buyers and sellers by giving sellers the opportunity to sell their steel at a high price and giving buyers non-exclusive access to steel that they desperately need, we think that's a formula that ultimately benefits everyone."

In 2005, SteelSalvor had 116,000 tons of steel available for auction. Shapiro said over the past 15 months, the company has averaged about five sales per day. A truckload of steel, or 42,000 pounds, sells for about $12,000; SteelSalvor normally doesn't sell less than one truckload per transaction.

Shapiro said this year his company is on track to grow by 50 percent over last year. The company has grown approximately six times in gross revenue in the past two years. It posted fiscal 2005 revenue of $22 million. SteelSalvor's database of buyers and sellers also has grown dramatically — to more than 6,000 — over the last several years, which Shapiro attributes to brand recognition and the trust and confidence SteelSalvor has built among customers as a reliable place to buy non-prime steel. He said more and more people from both the buy side and the sell side are getting to know the company.

"In a large part due to Peter's efforts, and to some extent my efforts, we're getting more and more people to start looking at and thinking about the site on a more and more regular basis," Shapiro said. "So many of our clients could potentially use our site to either buy steel or sell steel depending upon the timing. Right now there's an abundant supply of steel in the marketplace so it's relatively easy for us to find sellers, so we have to concentrate our energy more on finding buyers."

The Dennen-SteelSalvor partnership is the kind of business opportunity that requires full commitment, Dennen noted. These days, he spends about three-quarters of his time working with and marketing SteelSalvor.

"You really have to believe in something like this to sell it effectively," Dennen said. "I believed in it the first time we did business with SteelSalvor as a customer. Fortunately, I have a partner, who happens to be my brother, who believes in it as well, and he has allowed me the time and the resources so I can spend more of my time working with SteelSalvor without impacting the Dennen Steel business in a negative way."    

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