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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Mongolia’s Cashmere Industry

By Marina Romanova

Feb. 24 – Cashmere is the second largest hard currency-earning export of Mongolia, which makes the emerging Asian nation the world’s second largest producer of the coveted goat’s wool, after China.

According to the latest available statistics, Mongolia produces 6,700 tons of raw cashmere annually, accounting for about 28 percent of the total world supply. The number of cashmere goats in the country increased almost 300 percent between 1990 and 2009. During the same period, the amount of raw cashmere produced increased by 450 percent.

Other major cashmere-producing countries are New Zealand, Nepal, Iran, Afghanistan, Australia, and the United States.

As one of the softest, warmest and longest-lasting materials on the market today, cashmere is said to be eight times warmer than sheep’s wool and about that many times softer. It is also one of the most expensive natural materials on the market today.

Mongolia’s climate and geography is suited for herding cashmere goats, which thrive in harsh dry mountainous climates and produce the highest quality of wool. In moderate climates, goats lose the ability to grow the downy coats that produce the quality cashmere necessary for making luxury garments.

The cashmere manufacturing industry originally developed in Scotland, which was noted for its specialized weave knit techniques in producing underwear. However, in the second half of the 20th Century, cashmere processing and manufacturing increasingly moved to the countries of fiber origin, especially Mongolia and China, although Scotland still produces very high quality cashmere clothing.

Cashmere down hair in China comes from goats grazing on the plains of Inner Mongolia, Xinjiang, and the Himalayan Mountain highlands leading to the Tibetan Plateau — regions surrounding the Gobi Desert, which also constitutes a third of Mongolia’s territory. The fibers are locally combed, cleaned, dyed, and spun before being knitted into fabric in northern Chinese mills or exported.

During Mongolia’s Socialist Era (1921–1990), cashmere was exported mainly to Europe before its focus dramatically shifted to China in the Democratic Era since 1990; a move which benefited the PRC’s manufacturing establishment enormously.

With the rapid growth of cashmere loans from the Western and Japanese banking systems, Mongolian customers were unable to buy the nomads’ raw cashmere. Thus, the nomads increasingly turned to Chinese traders who came to them in the Gobi Desert, usually with much higher offers.

Since 1996, a ban on the export of raw cashmere was replaced with a 30 percent export tax. However, the tax was poorly implemented, as corrupt senior officials realized that they could make fortunes by selling raw cashmere tax-free to Chinese factories. According to estimations, 50 percent of Mongolian raw cashmere is smuggled into China with no duties paid on either side. This has enabled China to capture the Mongolian raw cashmere export market, depress the Mongolian manufacturing sector, and take control of the world cashmere market.

Today, more than half of the raw cashmere in Mongolia is exported to China.

The role of the cashmere industry in desertification
According to U.N. Development Program estimates, 90 percent of Mongolia is fragile, dry land, which is under increasing threat from desertification. Part of the reason for this is thought to be global warming, but in Mongolia’s case another significant factor is the rise of the global cashmere industry.

The large population of cashmere goats is a problem because goats destroy grasslands and soil much more than any other traditional Mongolian livestock, such as sheep, cattle, horses and camels. Goats are much more voracious eaters and consume the root of the grass thereby stopping it from growing altogether.

Following the return of free market capitalism, the size of the country’s livestock population has grown dramatically — almost doubling from approximately 23 million in 1993 to 44 million by 2010. In addition, goats accounted for almost half of the country’s livestock, a record high.

Desertification is the largest environmental threat to the cashmere industry in Mongolia and there is no doubt that over-grazing is exacerbating the problem.

About 21 percent of Mongolia’s land mass is affected by desertification to a medium extent, 3 percent is considerably affected, and 75 percent of Mongolia’s land mass is slightly affected by desertification. About 87 percent of desertification in Mongolia is caused by humans and only 13 percent due to nature. Over the last four decades, the area of land covered by sand has increased by 8.7 percent.

Pastures account for a total of 80 percent of Mongolia’s land mass, while 30 percent of pastures have been affected by desertification.

“The threats of land degradation and consequent desertification are becoming a serious obstacle to the growth of Mongolia,” says Shoko Noda, deputy resident representative of the UNDP.

“It is about moving from quantity to quality of animals, but that is very difficult,” added Noda. “We have tried to discuss this with government, but it sounds as if we are trying to limit the earning potential of herders, who are also voters.”

Such topics are generally unwelcome, especially this year, when Mongolia will hold parliamentary elections.

Some herders, who manage to sell around 150 kilograms of cashmere a year, can earn about US$7,600 – a sizable sum in Mongolia, where one-third of the population lives below the poverty line. However, the future stability of such opportunities is uncertain.

The cashmere industry’s internal problems
In addition to other problems, the industry is blighted by internal issues. According to those who work in the Mongolian cashmere industry, throughout the whole production chain, from the care of the goats to the marketing of the final garments, there are a number of important issues which require immediate attention, including:

  • The quality of the raw fiber
  • Coordination, which makes it difficult for herders to enter formal market arrangements with domestic manufacturers
  • Inadequate domestic spinning capacity, which leads some garment producers to ship raw cashmere to China for spinning, and to import the yarn for manufacturing back in to Mongolia

According to the Mongol Cashmere Association, current annual revenues of around US$180 million are dominated by sales of raw cashmere, which make up 80 percent of total exports. If the country had the capacity to refine all of its cashmere before exporting it, profits could rise to between US$480 million and US$520 million.

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