| Industry Overview |
 Cement is one of the most basic construction materials, and an essential item for the infrastructure development of the country. Mongolia is one of the world’s current economic growth leaders, and is developing rapidly. This economic expansion, spurred by growth of FAI, has resulted in a significant increase in the demand for building material. While mining, textiles, and tourism are driving exports, domestic growth is booming, spurring a need for roads, buildings, and infrastructure. With the explosion of the mining and construction industries, the demand for cement will double or triple in the next 18 months.In developing countries, consumption of cement averages one ton per person per year. The total consumption in Mongolia is approximately 1.5 million tons a year. With a population of 2.63 million, the cement industry has not yet hit full capacity. For reference, consumption in China averages 3 tons per person per year. According to the Ministry of Infrastructure, annual building approvals increased by 750% between 1999 and 2004, the last year of published results. With 25 new residential projects and 15 commercial buildings in Ulaanbaatar alone, recent construction projects have increased even further. There are currently more than 50 construction companies operating in Mongolia. With the country’s infrastructure sector lagging far behind the economic growth, it is expected that large scale projects, such as roads, bridges, airports, dams, mines, and silos will continue to create tremendous upward demand on cement producers. As is typical in a developing country, large demand from small scale builders is fuelling a construction boom for individual houses, many of which are located in the ger districts. The total demand for cement in Mongolia is approximately 500,000 tons and is growing at about 20% per annum. Due to tax optimization strategies and border smuggling, it is quite possible that actual consumption is substantially higher. Consumption has increased dramatically since 2001, and production has not followed pace. It is expected that for gold mills, uranium mills, and mining projects, this figure will double in the next few years. When the large mining companies begin to build the actual mines—especially for uranium, which requires thick walls—the demand for cement will soar to approximately 1000 tons per day. In addition, there is demand from Russia for the importation of about 300,000 tons into the southern Siberian region, where domestically produced cement is much more expensive. Historically, China has been the major supplier of cement for Mongolia. Roughly 200-300 trains a day cross the border at Zamanurd, carrying cement. However, for a number of reasons, this trend is now reversing. The Chinese Yuan (RMB) has appreciated almost 22 percent against the dollar-linked togrog over the last three years, making it more expensive to import all construction materials, including cement. Most predict a continued appreciation as China continues to try to control its inflation. Secondly, China has been consolidating and shutting down factories to reduce pollution, decreasing the supply for exports. 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 shut down. Inner Mongolia has also shut down factories with a combined cement and clinker production capacity of 20 million tons, and is set to lower capacity by 5 million more tons. In accordance with the 11th Five-Year Plan, they have launched a large-scale clean-up to lower energy costs and cut greenhouse gas emissions. Furthermore, the destruction caused by the May 2008 earthquake in the Sichuan province will decrease the export supply of cement for the near future. The price of cement, though not regulated by the government, fluctuates dramatically during the course of the construction season, with the peak of the season in July. Each year, the demand gets very tight after a certain point in the summer. Due to border logistic issues with China, there are tremendous supply bottlenecks. Thus, for example, the price of cement soared from 65USD per ton in January 2007 to 130USD per ton in August 2007. The price of cement also fluctuates dramatically regionally, cheapest in China and most expensive in Russia. In Russia, the price increases by 15-20 percent in each city farther from China or Mongolia. There are only two other large cement factories in the entire country: Hutuul Cement and Erel Cement. The competition faced is thus quite limited. Neither are in Ulaanbaatar—Hutuul Cement is located 260 kilometers west; Erel Cement is located 225 kilometers south, in Darkhan, and is owned by the local conglomerate, Erel Corporation. Together, they produce an average of 180,000 tons of cement annually and supply almost 50 percent of the national cement demand. Both produce their own clinker. However, they are almost at maximum production capacity, approximately 200,000 tons per year. Hutuul Cement The state-owned Hutuul Cement, opened in 1984, produces 70,000 tons of cement and 40,000 tons of clinker a year. Plans are in place to privatize Hutuul Cement in 2008. Its installed capacity is 500,000 tons annually, though it only uses approximately 25% of its installed capacity, and one of the production lines is no longer functional. Furthermore, unless it renovates and upgrades the technology it is using, the operating line’s capacity is no more than 50 percent. Its lowest production was in 1999, when it only produced 27,600 tons—about 5.5% of its capacity. It shuts down during part the summer peak for cleaning and maintenance. Hutuul and Erel both do not have the technology to operate during the harsh winters. Additionally, Hutuul has limited financial capacity, uses thermoelectric power, outdated equipment, and the outdated “wet” technology—all of these factors greatly have resulted in its low operational capacity. Erel Cement Erel Cement, opened in 1968 and state-owned until 1998, has an installed total capacity of 180,000 tons. It uses about 47.5 percent of its operational capacity. They lack access to limestone, used to make clinker. The equipment used is also out of date. Combined, these two factories are using 25 percent of their total installed capacity. Neither is presently run to an international standard, presenting opportunities for improvement in management and operational efficiencies.
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