In April 2007 Mitsui & Co. Ltd. (Mitsui) acquired a 25% stake in Erdos EPM, representing its largest ever investment in China. It was the latest step in the remarkable branching out of cashmere giant Erdos Cashmere Group from resource-rich Inner Mongolia into the coal mining, power generation and ferrous alloys businesses. Harnessing the trust generated over 30 years of cashmere partnership, Mitsui supported Erdos Cashmere Group in taking this bold leap, helping it to create an important new global ferrous alloy supply source for the steel industry.

Electric power plant, Erdos EPM

In 2003 Erdos Cashmere Group established Erdos Electrical Power & Metallurgical Co., Ltd. (Erdos EPM), against a backdrop of surging raw material prices and constraints on supply of ferrous alloys indispensable for steel production. Erdos EPM, it announced, would engage in coal mining, coal-fired electric power generation, production of ferrous alloys, and related logistics business such as pumping of industrial water from the Yellow River. It would operate seven coalmines and two power plants, and it intended to become a major producer of ferrous alloys such as ferrosilicon and silicomanganese for use in the process of high-grade steel production. What prompted Erdos Cashmere Group, which produces around 40% of the world's cashmere, to branch out into such different industries?

First, the timing was propitious. Rising raw material prices and increased demand for ferrous alloys were creating strong need for new supply sources. Second, the Chinese government's Western Development Strategy was presenting tax and other incentives for companies that would develop western China's natural resources. And third, the Inner Mongolia Autonomous region of China had the necessary natural resources. The region's abundant coal reserves could be used to generate thermoelectric power, which could in turn be employed to operate electric furnaces to produce ferrous alloys. Inner Mongolia also had vast reserves of silicone-a raw material for the alloys. Erdos Cashmere Group could develop a fully self-contained operation. By running its own coalmines and power plants, it could control power costs-major costs associated with ferrous alloy production. The only resource it would need to import was high-quality manganese ore.

On hearing of its long-term partner's plans to enter the ferrous alloy industry and produce 550,000 tons of ferrosilicon annually (around one-tenth of the world's annual consumption), Mitsui was initially surprised, but soon saw the potential to become involved. Diversifying from processing and selling Cashmere goat fibers into coal mining, power plant operation and metallurgy would represent a major challenge for Erdos, and it seemed that the group would benefit from an experienced partner to help it succeed.

Mitsui knew Erdos Cashmere Group and its business strengths. Over thirty years of alliance in the cashmere business it had developed strong trust with the group and grown to appreciate its professional senior management, sound business administration systems and international approach. The challenge Erdos was taking on was a significant one, but it was in no way insurmountable.

Erdos expressed a willingness to work with Mitsui, realizing that its long-term partner in the cashmere business also had the experience and expertise in ferrous alloy production, power plant operation and coal mining. In short, it had the business engineering capabilities to match Erdos Group's vision of diversifying into further business areas, and they were already trusted partners.

EJM Manganese Alloys Co., Ltd., a joint venture of Erdos EPM, JFE Steel Corporation and Mitsui

Mitsui's first steps were measured. At the end of 2003, it agreed to purchase a small quantity of 2,000 tons of ferrosilicon from Erdos EPM, primarily as a trial. When Erdos EPM made the delivery, Mitsui was impressed by the quality of both the product and the business operation that had developed. Becoming convinced of the project's future, Mitsui decided that considerably larger orders would be possible.

Then, in spring 2004, Mitsui and Erdos EPM began a joint feasibility study on producing manganese alloys such as silicomanganese. Mitsui knew that JFE Steel Corporation, its customer and Japan's second-largest steelmaker, was also seeking silicomanganese supply sources, and invited the company to come on board as a third partner. The feasibility study yielded the expected positive results, and in September 2004 Mitsui set up Inner Mongolia Erdos EJM Manganese Alloys Co., Ltd. (Erdos EJM) along with Erdos EPM and JFE, with an agreement that Mitsui would import the required high-grade manganese ore. Erdos EPM would have a 51% stake in the joint venture, with Mitsui and JFE each having 24.5%. The first Erdos EJM plant came online in July 2006, with the capacity to produce 75,000 tons of silicomanganese per year, and has been operating smoothly ever since.

Meanwhile, Mitsui and Erdos EPM continued to steadily build the project's core ferrosilicon business, with Erdos EPM handling production and Mitsui coordinating sales and marketing for export. The operation of the ferrosilicon plant commenced with annual production in the 20,000-30,000 ton range in 2004, and production climbed to 350,000 tons in 2007. Mitsui and Erdos EPM are targeting full production--550,000 tons--in 2008.

Water drawing and cleaning plant, Erdos EPM

Mitsui's involvement with Erdos EPM was growing by the day. The unique advantages of the project were becoming increasingly evident, ranging from the cost efficiencies of Erdos EPM having its own coalmines and power plants to the benefits for Mitsui of having a trusted local partner to help it navigate the waters of central and regional government policies and regulations. Mitsui was eager to develop the relationship further, and Erdos Cashmere Group suggested that Mitsui boost capital in the operation by purchasing a share in Erdos EPM.

Mitsui took the suggestion positively. In autumn 2005 Mitsui began a preliminary feasibility study on investing in Erdos EPM, and in spring 2006 started a full feasibility study. After six months, the feasibility study, undertaken with independent consultants, concluded that the project met Mitsui's investment criteria, and in September 2006 Mitsui entered into a basic agreement to acquire a 25% stake.

Mitsui's acquisition of a stake of this size would make Erdos EPM a foreign-funded company under Chinese law, so the next step was to acquire Chinese government approval. This process took a number of months, with Mitsui completing the acquisition in April 2007 for approximately ¥19 billion, making it the company's largest ever investment in a single project in China.

Mitsui and Erdos Cashmere Group have since continued to develop their partnership. In October 2007, Mitsui, Erdos EPM and JFE agreed to construct a second silicomanganese plant that would double the Erdos EJM joint venture's silicomanganese production capacity to 150,000 tons, making it the largest producer of the alloy in China and one of the largest in the world.

Qipanjing Industrial Park, home of Erdos EPM (foreground: employee apartments; background: electric power plant)

In four short years, an aspiration has become a reality, and Mitsui and Erdos have developed a major new source of ferrous alloys to supply the world's steelmakers. The project's future looks bright. Mitsui expects Erdos EPM to achieve combined annual production of ferrosilicon and silicomanganese of one million tons within the next two to three years. At the same time, the partners intend to develop the project's coal mining and power generation businesses, with Mitsui envisaging that its investment in Erdos EPM will lead to other opportunities in these businesses in China.

Mitsui and Erdos Cashmere Group are also exploring ways to complement the project's standard operations with new businesses with high added value. A good example is production of high-purity silicon for application in solar panels and semiconductors, while promising opportunities also exist in myriad fields ranging from chemicals to environment business. Mitsui sees limitless possibilities for the partnership in the future, building on its track record of successfully branching out into new areas.

The posted information is as of the date of issuance. The information may change without notification.