Yuanjiacun iron ore project of Taiyuan Iron & Steel (Group) Co., Ltd. (000825.SZ) is expected to put into production in H1 of 2012, and the project is estimated to produce 22,000 kt raw ore and 7,500 kt iron ore concentrate every year. According to the agreement between Taiyuan Stainless Co., Ltd. and Taiyuan Iron & Steel Group, the iron ore from Yuanjiacun Iron Ore Project will provide to Taiyuan Stainless at the price of 15% lower than the market price. When Yuanjiacun project put into production, it is predicted that Taiyuan Stainless will buy more and more iron ore form Taiyuan Iron & Steel and the purchase proportion will increase gradually form the previous 50%, and the cost advantage of Taiyuan Stainless will be further strengthened.

Gross Margin of Shanxi Taigang Stainless Steel by Product, 2009-2011

Source: Taigang Stainless Steel; ResearchInChina

Currently, the overcapacity of stainless steel in China is more prominent compared with that of carbon steel, however, its concentration is higher than carbon steel, its capacity which can be put into operation is lower than actual capacity, and the gross margin of stainless steel products maintains 6%-10% with steady performance since 2000 driven by the mature technology. It is predicted the gross margin of Taiyuan Stainless’ stainless steel product will keep about 8% in 2011 and 2012.