SGS metaltrak--managing risk in international steel trade.

SGS has adopted a proactive role in the monitoring of steel production and along the subsequent supply chain to minimise the inherent risks associated with international trade in steel products. MetalTrak is a quality assurance process which incorporates the latest data management and reporting

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Whereas improvements in the fundamental steel making process have been steady since the early 1900s, the relative quality of semi-finished steel material, and particularly its packaging remains variable across the world. This can largely be attributed to the fact that, until fairly recently, much of the world's steel investment and knowledge transfer remained in the hands of governments who gauged steel making as a strategic industry.

International access in the early 1990s to previously inaccessible steel making capacity, particularly that of Eastern Europe, opened new supply opportunities in the area of lower cost semi-finished material. The cost-benefit of new investment in semi-finished material has had to be balanced against the risk and cost of procurement of material from high capacity regions. As a result, international trade in semi-finished steel has proliferated, bringing with it the need for innovative risk management to address the challenges that procurement from these regions presents.

SGS has positioned itself, particularly in Eastern Europe, to assist in this area of risk management, by adopting a proactive role in the monitoring of steel production at the producing mills and along the subsequent supply chain.

This article addresses the inherent risks associated with international trade in steel products from these regions and outlines the technical approach SGS has adopted to assist in mitigating this risk.

SGS employs a methodology called 'MetalTrak' to do this. MetalTrak ensures a quality assurance process at each point-of-presence along the supply chain, and incorporates the latest data management and reporting technologies to support the rapid flow of data to each point and then on to other parties around the world.

QUALITY: MULTI-EDGED SWORD

In an ideal world, the mill would sell and deliver its material ex-works, and the buyer, with its manufacturing plant located immediately adjacent, would take delivery, duty paid, at his facility. In reality, the material has to cross the road from one facility to the other, and it is this crossing that leads to the risk and complexity of international trade. It is also along this journey that we encounter the diverse relationships that generate the disparity between what the mill produces and what is finally delivered. The longer and more disorganised the journey, the greater this disparity is. As we explore this journey, we will focus on five key areas of quality, these are:

--The material itself;

--The packaging of the material;

--The documentation;

--Handling and transportation; and

--Storage.

Unless each of these quality aspects is monitored and controlled, both individually and relative to the others, the overall quality of the transaction deteriorates. It is not difficult to see why. There is typically no single party along the supply chain that attends to the overall quality of the transaction.

For example, the Ukrainian mill that that goes to great lengths to provide quality material in suitable packaging ex-works, has little or no control over the delivery and handling. Furthermore, it may not even be familiar with the handling procedures at load or disport, and so its 'suitable' packaging may be less than appropriate for a given situation. In addition, handling at the port of loading and stowage on board vessel may be poorly executed. The quality of the final product at time of delivery is, therefore, likely to be somewhat different to the quality at departure.

Quality control systems need to be in place along the entire supply chain. When they are not, the classic economic 'tragedy of the commons' frequently takes place. While blame will be plentiful, there is limited or no opportunity to find accountability in the complexity of an unrecorded journey. Ultimately, the receiver of the material at a disport in another region of the world sees only the poor quality material of Mill XYZ supplied by Trader ABC and judges the transact on and these parties accordingly.

QUALITY OF THE MATERIAL

This describes the inherent quality of the material according the defined and agreed grades and standards, and simply stated, requires that the chemical composition and mechanical attributes are validated and conform to the specification. For the most part, few problems are encountered in this area. Most mills are equipped to monitor the quality of their products and have little incentive to try and push through poor material.

There are many instances where foreign standards underpin the transaction, and it is here that the mill can benefit from independent inspection and quality assurance. For example, a mill in the Ukraine may need to produce material for delivery under ASTM A510M-93. SGS, through its experience with international standards, provides expertise to ensure conformity to the required standard. The mill also benefits from SGS's credibility, as buyers and trade finance providers are granted assurance that the material is in production and that no material will leave the mill that does not comply with the specification.

QUALITY OF PACKAGING

While most buyers can probably assume that the material produced will meet the quality standards they require the same level of confidence cannot be assumed when it comes to the packaging. Improperly packed or bound material is the most common cause of subsequent damage along the supply chain (Fig 1). Unfortunately, unless this is addressed at the source, the problem is difficult to fix downstream.

[FIGURE 1 OMITTED]

Unless there is sufficient knowledge about handling methods at points of loading and discharge, packaging that may be suitable in one instance may well be inappropriate in another. Again the benefits of independent inspection' ensure that both the mill and the buyer can be assured that the material will meet subsequent handling, transport and storage requirements before the material departs the mill.

QUALITY OF DOCUMENTATION

A significant part of the SOS MetalTrak methodology addresses the quality of the documentation. As part of SGS's quality assurance inspection process, Mill Quality Certificates are entered into the MetalTrak application, including scanned copies of the original documentation, so that this data may be compared along the supply chain. The reason for this is twofold:

--To ensure that the material conforms to the documentation, and provide a basis for subsequent inspections at future points of handling;

--To ensure that other trade documents, for example Shipping Orders, Rail Waybills, Bills of Lading and so On, that are based on these documents, are also in conformity.

In the absence of independent weighbridge results, the primary commercial document that describes the weight of the material is the Mill Quality Certificate. The commercial transaction usually depends upon the weights declared in the Bills of Lading, which in turn derive their information from the Mill Certificates. As the Shipping Orders and Packing Lists are also derived from these same documents, unless the Mill Certificates are validated, any errors in these original documents are simply compounded along the journey.

SGS places great emphasis on validating these documents, by inspection and monitoring at time of loading of rail wagons and their weighing at the mill weigh bridge. SGS records this detailed data, to the unique level of heat numbers, in its MetalTrak data management application, which forms the basis of subsequent inspection and validation. SGS's experience at load and disport reveals that many short-weight discrepancies are very often the result of similar but not the same material being shipped as per the documents. For example, two 60-tonne wagons containing exactly the same piece count of billets may vary in weight by up to 2 tonnes even though the material is of exactly the same dimension and grade. Such variance can compound on a shipment to significant levels.

The MetalTrak methodology also ensures tally to the lowest measurable unit, so that where possible individual piece counts are performed in addition to bundle counts (which are usually the lowest unit on documents). At time of vessel loading, SGS inspectors record heat numbers where possible. (Figs 2 & 3)

[FIGURES 2-3 OMITTED]

This is all part of the process of ensuring that the material conforms to the documentation at each point along the supply chain, with checks and balances introduced to validate the integrity of the documentation itself. All original documents are scanned and attached together with the independent inspection results and detailed data, to provide a comprehensive record along the supply chain.

QUALITY OF HANDLING

While Incoterms define the contractual costs and responsibilities of trade parties for moving the material along the supply chain, they cannot and do not adequately control the execution thereof by third parties. In many cases it is impossible for either the buyer or seller to determine how damage or loss may have occurred and to recover these costs, because of the ambiguous nature of the handling and storage process. Also unless someone observes and documents the event, the vagaries of time allow parties to shift blame.

SGS applies its MetalTrak methodology to ensure a point-of-presence at each stage of handling, change in transport or storage to monitor the material and provide independent record at points of damage or loss.

As part of the SGS MetalTrak methodology, photographs and a damages catalogue are used to grade defects and report on any discrepancies. (Fig 4) This helps all parties along the supply chain understand the problems as they occur, and also to remedy issues for future transactions.

[FIGURE 4 OMITTED]

QUALITY OF STORAGE

Because of the extensive database of prior activity and material description available to SGS field personnel, SGS is more adequately equipped to manage the material during storage prior to shipment, including aspects such as re-labelling or remarking. This ensures that the relationship of these changes to the original documentation is maintained. Very often material is incorrectly loaded or stowed, especially if the material is marshalled for load over a long period of time. For example, storage space at Ukrainian ports is at a premium and it is rare to find all material in a consignment neatly stored in a single location (Fig 5).

[FIGURE 5 OMITTED]

The ability to monitor the warehouse, and keep track of material scattered at different locations is an important activity. It ensures that the material is not damaged during other loading operations, and that it is not misappropriated in the wrong shipment. A natural extension of this is Collateral Management or Monitoring Services, where SGS's independent stature gives banks and other institutions the confidence to apply trade finance products to facilitate cross border trade.

A RESULT

SGS has developed a methodology that includes both process management and advanced data management capabilities, to provide both buyers and sellers with a quality of transaction that is underpinned by independent validation along the entire supply chain. SGS uses its extensive physical and knowledge network to provide experience at all points-of presence, and applies technology to support these teams. The MetalTrak data management application is developed and maintained to ensure that the data moves from point to point effectively and efficiently. This data is made available to clients anywhere in the world using the Internet and other enabling technologies (Fig 6).

[FIGURE 6 OMITTED]

Ultimately all parties benefit from having an independent partner monitor quality along the entire supply chain.

--Mills are able to offer a better product to the market, confident that their product meets specification when it leaves their control;

--Traders gain an advantage in being able to control their risk and transport, insurance and storage costs by having a continual point-of-presence;

--Buyers and financiers transact with the assurance that they are applying their funds to materials that meet their requirements in terms of specification, documentation and physical condition.

Ultimately, the journey across the road is more than just quality of the material--it is the quality of transaction.

VALENTINO F GRAHAM, MD, SGS Ukraine