China supplies 50 percent of the world’s total cement production.  Historically, China has been the major supplier of cement for Mongolia and should continue to be in the near term. However, supply falls far short of demand and is contracting, providing unique access for volume growth and price increases.  In addition, the trend of import growth may start to slow in line with increased production from Mongolian producers.  Furthermore, the Chinese Yuan (“RMB”) has appreciated almost 22 percent against the United States dollar-linked MNT over the last three years, making Mongolian imports from China more expensive. The RMB is expected to continue appreciating as it remains undervalued and China continues to maintain current account surpluses and growing foreign exchange reserves.

In addition, the 11th Five-Year Plan (the latest in the series of Chinese economic development initiatives), saw China launch a large-scale clean up to lower energy costs and cut greenhouse gas emissions[1]. China has been consolidating and shutting down factories to reduce pollution, decreasing the supply of cement available for export. In 2007, 17 cement companies (with a production capacity of 1.42 million tons) and 85 clinker companies (with a production capacity of 4.6 million tons) were closed. Inner Mongolia (an autonomous region in northern China) has also shut down factories with a combined cement and clinker production capacity of 20 million tons, and the region is set to lower capacity by a further 5 million tons. Furthermore, the destruction caused by the May 2008 earthquake in Sichuan (a province in western China) should also decrease the export supply of cement in the near term. The Chinese government is also planning to increase taxes on cement exports, which will further increase the price of cement delivered from China to the Mongolian market. The combination of an appreciating RMB, the closure of many cement factories in China, the increase in local Chinese demand for cement and the planned cement export tax increases should provide support for price increases to the Ulaanbaatar cement market. Should Mongolian domestic producers become more efficient, the price of domestic cement may become more competitive with Chinese cement and capture a larger share of the domestic market.

[1] China Business News, April 1, 2008.