Mongolia: Industry changes in the making

Mongolia’s government is emphasising its plans to diversify from reliance on mining-related revenues and investment in the hope that the development of the manufacturing and agricultural sectors will create a more advanced industrial base.

With the Oyu Tolgoi copper mine alone set to account for one-third of Mongolia’s GDP by 2020, the reliance on the booming mining industry has raised fears of “Dutch disease”, a term describing cases in which the financial benefits of a resource boom lead to a hollowing out of other sectors.

“It is important to have a good mining industry,” Prime Minister Sükhbaataryn Batbold told Bloomberg in March. “But it is a tool of moving many other things forward. What we want to focus on [is] creating jobs in many other industries. We’d like to focus now on value-added products.”

In September the Ministry of Finance issued MNT300bn ($234.6m) worth of Mongolian bonds to support the wool and cashmere sector. Of the funds to be raised, MNT150bn ($117.3m) will go towards developing small and medium-sized enterprises, MNT100bn ($78.2m) is to support the producers of wool and cashmere products, and MNT50bn ($39.1m) will go to herders who sell camel and sheep wool to domestic factories.

The deputy minister for food, agriculture and light industry, Kh. Zoljargal, told local media in mid-September that MNT108bn ($84m) in bonds had already been sold, adding that the money would be distributed to businesses in the form of loans through commercial banks.

In 2009 the cashmere industry provided jobs and income for a third of the country’s population of 2.6m, supplying about 20% of the global market. However, an oversupply of goats is negatively affecting biodiversity and undermining herding livelihoods. A further challenge has been overdependence on demand from China, which has historically bought around two-thirds of the country’s cashmere exports, though often through back-door deals that have led to suppliers selling their products for prices far below market value.

While prices rose around 50% year-on-year in April for Mongolian cashmere derived from the Khentii and Sukhbaatar regions, according to data from Australian wool exporter G Schneider, industry leaders say profits could be much higher on the back of strong competition from legitimate buyers in China and Europe.

According to the Mongol Cashmere Association (MCA), current annual revenues of around $180m are dominated by sales of raw cashmere, which makes up 80% of exports. If the country had the capacity to refine all of its cashmere before exporting it, profits could rise to between $480m and $520m. The MCA also said in May that the government’s plan to raise MNT100bn ($78.2m) in financing for the sector could lead to the addition of around 1800 jobs for the industry.

On October 10 the prime minister thanked farmers and other agriculture workers on behalf of the government for the biggest harvest in the country’s history, with 433,400 tonnes of wheat, 191,500 tonnes of potato and 97,200 tonnes of vegetables having been produced. The agriculture ministry reported in July that 160,000 stockholders were breeding approximately 43m livestock.

The positive results in agricultural output come as plans to establish an agricultural raw materials exchange are gathering pace. Set to start work in January 2012, the proposed exchange is hoped to do away with middlemen and allow herders to deal directly with buyers of their goods and products, with the aim of ensuring fair prices for both and also improving product quality.

Although the agriculture sector is showing signs of development, the UN Industrial Development Organisation stressed in a February report that it is equally important for the government to maintain a focus on manufacturing, which employed just 48,000 Mongolians in 2008. The UN body suggested there should be regular dialogue between the public and the private sectors, with the government providing support in the form of credits, improved infrastructure, and training and education initiatives.

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