Did you ever wonder how companies go about buying a bargeload of benzene? Most logistics managers will scratch their heads, pore over clipboards, flip through Rolodexes, and then pick a contact they know to be trustworthy.

Because the buying and selling of industrial chemicals is an area of commerce that has traditionally relied on trust and old-fashioned personal relationships, it has been resistant not only to online exchanges, but to electronic commerce in general. That is changing. According to IT consultancy Forrester Research, e-commerce within the U.S. petrochemical industry will jump from $4.7 billion in 1998 to $178.3 billion in 2003 -- that's 13.5 percent of the $1.3 trillion industry.

One of the things that is driving the chemicals industry's acceptance of e-commerce is the efficiency of online exchanges, which provide worldwide access to bulk quantities of industrial chemicals. Companies can log on and anonymously post the chemical and quantity they want to buy or sell; then interested parties start bidding. Once the bidding ends, the buyer and seller enter a chat room, hammer out an agreement, and close the deal.

However, without trust, this cyberprocess can easily break down. The new exchanges recognize that they must soothe the fears of people who have worked in this industry for dozens of years. "The average size of a transaction is in the $200,000 range," says John Beasley, CEO of ChemConnect (proposed Nasdaq: CMCT), a real-time online exchange that trades everything from petrochemicals to plastics to pharmaceuticals. "To complete a transaction online of that size, you must feel confident that the party is going to do what they say."

So trust has become a commodity almost more valuable than the chemicals themselves. Online chemical exchanges are therefore working quickly to establish, maintain, and enforce a sense of trust in this centuries-old industry, where reputation and preлxisting relationships can easily take precedence over the lowest prices.

BENZENE RINGS

In the virtual world, the aspects of traditional businesses that instill trust remain constant -- high-quality products and services, low prices, good reputation, and personal relationships. But trust can be harder to come by and harder to hold onto when dealing with hazardous materials, huge sums of money, and foreign governments.

The first companies to enter this nascent space are betting that industry experience and personal relationships are the best way to create trust. "The chemicals industry is still very small," says Mr. Beasley. "People know each other, and reputations are extremely important. We're piggybacking on what's already in place."

Founded in 1995, ChemConnect has put together an impressive list of industry executives to help guarantee that its trades are on the up-and-up. The company lists online profiles of its exchange members that include their professional associations (like the Chemical Manufacturers Association) in order to help firms decide whether or not they want to trade with a certain supplier.

Another newcomer taking a similar approach is CheMatch (proposed Nasdaq: CHEM). Launched 18 months ago, it's a real-time online trading system for bulk petrochemicals. Its mighty crew of executives hails from companies like Shell Chemical, Koch Chemical, and Performance Polymers. "We have focused on bringing in industry experts because it is an enterprise where people need to trust one another," says CheMatch's chairman, John Bohn.

CheMatch members preapprove companies in the exchange, screening out those they don't want to do business with based on preлxisting relationships, past experiences, and word of mouth. Although buyers and sellers are anonymous, they know they will only be matched with members they have specified. "They'll trust that it's not someone in Malaysia who will repackage a chemical and ship to the Philippines under a new name," says CheMatch vice president, Kevin Wenta.

Both ChemConnect and CheMatch claim their neutrality is a major component of gaining trust; a crucial part of the exchange model is the third party's reputation for honesty. "We are independent of industry players and of any commercial interest," says Carl McCutcheon, president and CEO of CheMatch, a wholly owned subsidiary of PetroChemNet Holdings.

E-Chemicals, another company that includes auctions in its order-fulfillment model, sees trust as a matter of brand recognition. By outsourcing three of its most essential functions -- IBM hosts the Web site, Yellow Services bangs out the logistics, and Sun Trust Bank supplies credit, collections, and accounts receivable -- e-Chemicals is betting that credibility by association will be crucial in the impending business-to-business boom.

CHEMICAL FORMULA

Maintaining industry credibility is another matter. ChemConnect claims that it monitors its membership base, follows up on every transaction, and takes action when a member misbehaves. Although ChemConnect can't check the credit ratings of every company around the world, it uses a five-star system to evaluate a member's transaction history. It also investigates members that have defaulted on transactions, sometimes suspending or denying membership to companies that haven't followed the rules of the exchange.

E-Chemicals's auction model only registers qualified buyers; the general public can't just sign up. "If you are running an art auction and selling a million-dollar piece, you don't let just anyone come off the street," says Jim Alampi, president and CEO of e-Chemicals. Members of e-Chemicals must comply with standards set by the National Association of Chemical Distributors and the Synthetic Organic Chemical Manufacturers Association; e-Chemicals says it routinely turns away suppliers from noncompliant countries.

Maintaining anonymity is a must. Following the lead of the Chicago Board of Trust and Nasdaq, online exchanges protect the names of buyers and sellers to move bids competitively and create true market efficiency. However, Marvin Massey, product manager at Allchem Industries (a ChemConnect member), takes solace in the fact that once the identity of the buyer or seller is revealed, he still has the right to back away. "If I don't trust them, I don't do the deal. I'm never locked in to the point where I can't walk away."

CONCENTRATED SOLUTION

With trust still so fragile in this fledgling environment, reliable receipt of goods is a problem that remains unsolved, says Vernon Keenan, an analyst at the Internet research firm Keenan Vision. While most exchanges depend only on contracts, Mr. Keenan says that new companies like Identrus may change this.

One-year-old Identrus plans to issue "digital IDs" that contain identification, credit information, and receipt data, and are backed by financial institutions like Barclay's and Deutsche Bank. "The most fundamental component of trust is certainty of identity," says Paul Donfried, chief marketing officer at Identrus. The company will target online exchanges when it launches its system in March 2000. Eventually, Identrus will offer a real-time online validation service and a jointly issued warranty to protect buyers and sellers.

Not only will companies like Identrus increase the level of trust on exchanges, they also could decrease the overall cost of goods sold through exchanges by 3 to 5 percent, estimates Mr. Keenan, who says companies can eliminate service fees for international money transfers. "If you keep thinking along this road, the effect could be rather profound. I call it the Internet tax cut -- it could free up $100 billion."

BALANCED EQUATIONS

Because they are involved with physical delivery rather than with futures or price manipulation, online exchanges are not subject to Securities and Exchange Commission regulations. However, chemicals bought and sold online are subject to the same hazardous-materials and responsible-care standards as their offline counterparts. For this reason, the most trusted exchanges will be those based in first-world countries. "You want the FBI or Scotland Yard on your side in case of fraud," Mr. Keenan says.

As online exchanges become more widely used, the need for a regulatory agency will become critical. "It's quite confusing," says Craig Hodges, vice president of marketing for IBM's chemicals and petroleum industry group in Houston. "There are taxation issues, cross-border issues, cross-state issues, and global encryption issues," he says. "If you look at regulatory oversight, you'll see regulations come out to govern how e-commerce is conducted."

For now, online exchanges have no choice but to do their best to become self-policing, trustworthy institutions. They know that their potential for profit in this trillion-dollar global industry is enormous. So too is the potential for major problems. Thus far, online exchanges are betting on trustworthiness to avoid those hazards.

Nora Isaacs is a San Francisco-based freelance writer. Send comments to letters@redherring.com.