Producing construction materials in Mongolia

By B.Zulbayar

(Published on 25th Aug 2013, The UB Post, a national English newspaper in Mongolia) 

Last week National Statistical Office of Mongolia released its much-awaited Social and Economic Report for first seven months of 2014. The disappointing figure of a 5.3% GDP for the first half of year was not welcomed by anyone.

Having said that, not all of the economic indicators have been negative. Compared to the last year figures, agriculture sector has grown by 16.3% and construction sector expanded by 10.1% which have been significantly contributed to the growth of overall economy for the period.

According to the report, there appears to be a definite correlation between the dramatic increase in the cost of imported construction materials such as cement, pipes, paints, decorating items etc. and a noticeable decline of 14.6%, which is equivalent to USD 536.9 million, in the country’s total import for the first seven months of the year.

For instance, the costs of Chinese wooden flooring and Korean made wallpapers have increased by 77.8% and 41.8% respectively, in contrast to the previous year’s figures. Such a dramatic jump in prices of foreign goods may have influenced in the deficit of external trade balance to have narrowed by USD 1.1 bn to USD 207.6 ml in the first 7 months of 2014 in comparison with the figure of USD 1.3 bn for the same period of 2013.

These figures clearly signal that, even though, the whole economy is experiencing an economic slowdown, there is a plenty of room in the market for domestically produced construction materials which can be manufactured locally in a cost effective way and sold at competitive prices.  Therefore, domestically produced materials will eventually be able to replace the imported ones since these materials are closer to the end-users.

As of now, China, the main trade partner of Mongolia, is accountable for the country’s 32% of import and 90% of export. Mongolia, as a landlocked country, is hugely dependent upon transport network for construction materials supply, especially from railway. So, the southern port of Zamiin-Uud, where the country’s main railway passes through, is becoming a bottleneck of the country’s foreign trade.

Import by country (In the first 7 months of 2014)
	USD (000')	%
China       (Foods, consumer goods, construction materials, equipments)	1,017,556.70	32.3%
Russia        (oil, electricity, wheat)	915,744.41	29.1%
Japan         (car, electronic goods, equipments)	244,915.62	7.8%
South Korea (consumer goods, electronics, cars, equipments)	204,358.36	6.5%
USA            (consumer goods, machinery)	174,778.43	5.6%
Germany   (consumer goods, cars, equipments)	94,156.88	3.0%
Other	496,562.92	15.8%
Total	3,148,073.3	100.0%

Source: Customs General Administration of Mongolia

In 2013, 85% of total cement consumption in Mongolia were imported. The government recognized the situations in the construction sector and promoted programs on Import Substitution Industrialization and took necessary actions such as removing VAT Tax on imports of machinery and equipments, financing the manufacturing oriented projects with assistance of Development Bank of Mongolia and establishing the government owned mortgage corporations. As a result, there are a number of cement factories, either newly opened or being developed, which have attracted foreign investments or financing from multilateral development institutions like EBRD and Denmark’s Export Credit Agency (EKF) in addition to locally owned cement producers such as Hutul Cement, Erel Cement, Remicon JSC and Central Asian Cement. According to the country report of Oxford Business Group, construction materials industry in Mongolia had received MNT 292.1 bn ($175.3m) through Price Stabilization Program at the end of third quarter of 2013. Therefore, there are clear supports from the policy makers for construction sector in Mongolia in addition to previously announced housing programs such as “40 000 homes” and “100 000 homes”.  

Of course, building residential and commercial property requires a hundreds of construction items such as electric cables, paints, bricks, pipes and more.

Therefore, investors, who have a long term outlook on their investment returns may easily recognize that Mongolia’s current unfavorable exchange rates, a double-digit inflation and uncertainty over current economic situation have convinced Mongolians to consume fewer foreign goods, opting instead to purchase  more domestically produced goods. This means that are a growing number of good opportunities emerging in Mongolia for manufacturing and selling domestically produced construction materials. 

Zulbayar Badral works for Lehman Bush LLC which is a consultancy firm providing business consultancy, market intelligence, corporate services. Lehman Bush LLC has affiliate offices in Beijing, Shanghai, Hong Kong and Houston, USA. For more information, please visit. www.lehmanbush.mn. You can reach Mr.Zulbayar through Zbadral@lehmanbush.com