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MaterialsXchange Is Bringing Commodities Trading Into The Digital Age

For companies needing to source production raw materials, the commodities markets can be daunting. Particularly for small firms, getting price transparency for purchasers, and dealing with credit risk for sellers, have been significant challenges.

Those were some of the reasons why, when the CME Group CME +2% started trading lumber futures on its electronic Globex system in 2009, Michael Wisnefski was quickly interested. He’d been trading lumber since the 1990s, buying railcar quantities, dividing them into smaller lots, selling them and shipping them to customers. He got into futures trading as well, back when they were still bought and sold on an open outcry trading floor.

So that nascent transition to digital caught his attention. “On the first day of trading, I made $1,000 just because of my knowledge of the electronic side,” said Wisnefski. At the same time, he was enthralled with how digital technology was beginning to transform our personal lives as well. “Amazon AMZN -2.4% and Grubhub GRUB -0.8% and ride-sharing were really taking off,” he explained. “The first time we got an Uber UBER +6.1%, my wife and I were taking pictures.” So when the lumber trading pit closed down in 2015, he began exploring how algorithms could streamline spot market trading. “I said to myself, ‘I could put something together,’” he said. “I got connected with Connamara [a trading platform software and services provider], and they said they could customize and create a solution. Our platform was born from that.”

That platform, the MaterialsXchange (MX) lumber e-commerce system, first went live last October. By May it had 10 mills and wholesalers as active users. The company behind it is a completely bootstrapped effort. All the founders have invested in the startup, along with their friends and family members. Wisnefski now serves as the company’s CEO.

“It’s important to understand, we didn’t create a new market,” Wisnefski said. “We just digitized it. We built a great user interface that’s been really well-received. It’s a three-legged stool: we match the buyer and the seller on the interface, which makes it very similar to buying stocks or equipment. We move the goods. And we transfer the dollars.”

Ashley Boeckholt is the company’s Chief Revenue Officer, and has spent his whole life in the lumber business, having started young at his family’s lumber yard on the outskirts of Chicago. “People in the lumber industry are surprised it’s as easy as it is,” he said. “Outside the lumber industry, people are surprised we’d still been doing things the old way.”

Deacon Lumber Company of Independence, Missouri, is one of the new platform’s customers. Owner Stinson Dean said, “I trade physical lumber–I buy low and sell high. Liquidity is key. These guys allow me to leverage price discovery and do more with less. It really commoditizes lumber.”

Dean says it’s particularly attractive to small businesses like his. “Everyone in supply chain is consolidated–over the past 20 years they’ve all bought each other up. It’s the same on the demand side–the top five or six players dictated things, and that could make lumber one of the most volatile products traded. MX helps small companies like me be on an even playing field with the bigs. And it gives me access to customers I otherwise wouldn’t have.”

According to Dean, the background of the MaterialsXchange founders is key. “These guys have great relationships. They’re well-positioned to disrupt the industry, because they understand the industry.”

MaterialsXchange recently partnered with Raven Logistics for railroad shipping solutions. “Raven has the transparency from their carriers on rates,” Wisnefski said. “They provide us the current rate on any lane prior to the transaction.” MaterialsXchange is working on more in that regard on the trucking side. “As we grow, it’ll afford us the opportunity to find and fix inefficiencies in the trucking market as well.”

The team sees ample additional opportunity. In the lumber market, they believe the information their platform collects can lead to more improvements in how the supply chain works. “Mills turn round logs into square products, things they’ve been making for 150 years. They may or may not be the best solution for the end product,” said Wisnefski. “One of the things we’ve been working on is helping identify in real time what the end users really need and what they’re willing to pay for it. Over time that would make the market more efficient.”

But lumber has always only been the first step for the team. “We have the technology to create digital transactions where they don’t exist today,” Wisnefski said. “We see some obvious other opportunities–rebar, for example, and recycled paper and corrugated. Our company name is what it is because we know the materials that trade like commodities. We’re open to any market that makes sense. Our technology is agnostic to the materials being bought and sold.”

But they’re in no rush. “There’s no timeline on additional markets yet,” said Boeckholt. “We’ve been approached by other lumber verticals we’re not working with yet, so we’ve got plenty to do.”

They’re happy with their progress so far. “It feels pretty cool to be at this point in our careers,” said Wisnefski. “We’re using technology to create a real solution for people, and we’re doing good for industry at the same time.”
Source: Forbes

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