The prices of building inputs on the rise in Mongolia's construction sector, driven by fast-growing demand for materials

In 2014 Mongolia’s construction industry saw a major uptick in output. Driven in large part by the government’s ongoing residential housing development programmes, the sector grew by 16.3% over the course of the year, according to data from the National Statistical Office. One key challenge during this period of rapid expansion has been sourcing construction materials. Only a handful of domestic companies produce building supplies in Mongolia – primarily cement, concrete, bricks and a small number of iron products. The bulk – around 70% – of the construction materials used in the country are imported, and the largest suppliers are China, Russia, South Korea and Germany.

Given Mongolia’s remote location and low-quality national transport networks, shipping materials to Ulaanbaatar – where most of the new building is taking place – is a logistical challenge. Depending on the importing country, materials are moved into Mongolia via road or rail. The nation’s rail network, which consists of only a handful of lines, has been overburdened in recent years, in particular, with mining equipment and other heavy machinery.

Price Volatility

Given the limited supply, increasing demand and challenging logistical situation, it is surprising that construction materials prices have not jumped more than they have in recent years. Mongolia’s harsh, extreme climate likely plays a mediating role here. The country’s construction industry is highly seasonal, with almost all of the work taking place during the short, warm summers, which generally begin in May and end in early September. For most of the rest of the year it is simply too cold to build. Materials prices reflect this seasonality.

Generally, in the first three to five months of the year, prices for all types of construction material rise steadily, as local firms begin to stockpile materials in preparation for the building season. In 2013, for example, materials prices across the board rose 6.3% during the first half of the year. During the summer months demand jumps rapidly, resulting in a spike in prices for both imported and locally produced materials. When temperatures begin to drop again in early autumn, materials prices start falling as well, before beginning the whole cycle again in January.

At the same time, rapidly expanding demand for materials of all types in 2013 led to a blanket price increase of nearly 13% over the course of the year. Materials from China – Mongolia’s largest supplier – jumped in price by nearly 16% during this period, while those imported from Russia grew by 15.5% during the same period. Domestic prices, meanwhile, grew by around 6% over the course of the year. These price increases were slightly up on the previous year, though not surprisingly so. According to data from MAD Investment Solutions, Chinese materials posted a price jump of around 14% in 2012.

Taken as a whole, construction materials posted price growth of more than 200% in real terms over the course of the three years through the end of 2013. During the period 2011-12 materials imports jumped by nearly 100% according to data from the World Bank. As mentioned previously, this rapid uptick is the result of limited supply, steadily increasing demand and local construction firms that are willing to pay a premium.

Stabilising the price and supply of building materials has been a key focus of the government in recent years. In 2012-13 the Bank of Mongolia, the central bank, channelled substantial new financing into various construction materials-related segments to smooth out market volatility. Under the umbrella of the government’s price stabilisation programme, by the end of 2013 more than $100m in subsidised loans had gone towards domestic materials producers, who were instructed to boost supply. Additional financing has gone towards materials importers.

Local Production

As of 2014 Mongolia’s total domestic cement production capacity was estimated at around 2m tonnes per year. Mongolia’s oldest cement producers are Erel Cement, which was established in 1968, and Hutuul Cement, which was launched in 1984. These firms boast total installed capacity of 180,000 tonnes per year and 500,000 tonnes per year, respectively. New producers include Remicon JSC, which was established in 2013 and has a total installed capacity of 300,000 tonnes per year; and more recently, a new project launched by the Mongolyn Alt Group, a major local conglomerate, which will reportedly be able to produce around 1m tonnes of cement per year once completed.

Steel

Despite its abundant coking coal reserves, Mongolia’s domestic steel production capacity remains on the drawing board. Most of the local demand for construction metal materials is met by neighbouring China, which imports raw materials from Mongolia. In 2014 the government announced plans to establish the Sainshand Industrial Complex project as a way to diversify the local economy and reduce its dependence on imports. According to the ministry’s feasibility studies, the complex is expected to include a coal chemical plant as well as a steel and metallurgical manufacturing facility.

Although largely intended for exports, the arrival of domestic steel production would also benefit large infrastructure projects in rail and power plants – with these set to come on stream in the next 5-10 years subject to financing agreements. The cost of local steel materials is expected to be dramatically lower due to favourable logistics and ready access to raw materials. The iron ore, according to available geological surveys, can be sourced from the Tomortein deposit, which has total proven reserves of around 230m tonnes.

Connected by railways and highways, the strategically located complex is expected to be in a strong position to serve the demand in Ulaanbaatar as well as remote provinces. As an emerging industrial centre in its own right, the project is set to generate a spike in demand for construction materials. Meanwhile, the construction sector demand for steel is likely to be covered by imports from China in 2015 and 2016. Softer commodity prices in 2014 and early 2015 are likely to translate into savings for Mongolian importers though volumes will be at historical lows due to slowdown in construction activity.

Availability of lower-cost steel is likely to boost the expansion cast-in-place construction methods that will help extend the country’s notoriously short construction seasons. Local companies specialising in this concept of prefabricated steel structures are likely to take advantage of the lower price to build up strategic reserves of steel material.

Sector Financing

Even so, construction sector sources have cautioned that the ability to finance the purchases of construction material will ultimately depend on the credit terms offered by Chinese firms, as well as the availability of local financing. They point out that despite a fall in cost, financing terms have tightened due to pressure on Mongolia’s credit rating and volatility within the banking sector.

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The Report: Mongolia 2015

Construction & Real Estate chapter from The Report: Mongolia 2015

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