Mongolian traders in disarray as China’s zero-Covid policy chokes business

Mongolian traders in disarray as China’s zero-Covid policy chokes business
The markets of Ulaanbaatar are suffering goods shortages amid the Covid border closures. / Mario Carvajal CC-BY-SA 2.0
By Antonio Graceffo & Khangal Odbayar, & Enkhjin Erdenetulga December 15, 2021

China’s zero-Covid policy continues to result in prolonged closures of the Mongolia-China border, causing supply chain disruptions, higher inflation and goods shortages. Mongolia’s exports and income also take substantial hits.

New coronavirus cases continue to arise in China’s Inner-Mongolia province and there is understandable nervousness over the advent of the new Omicron variant of the virus. In keeping with the government’s zero-tolerance Covid policy, strict lockdown measures thus remain in place. Beijing, meanwhile, places the blame at Mongolia’s door for the continued Covid outbreaks in neighbouring Inner Mongolia. It has even punished Inner-Mongolian officials for what Beijing refers to as “their slack response to recent outbreaks”. Consequently, prospects for a re-opening of the border with Mongolia have not improved lately.

Mongolia is dependent on China for 33% of its imports, 89.1% of its exports and more than 60% of its overall economy. Border closures have dramatically reduced income in the export sector, while the inability to import products and materials from China have caused disruptions throughout society.

Mongolian coal exports are down to about one-third of what was seen last year. The reduced coal exports have contributed to shortages of both coal and energy in China, while causing economic hardship in Mongolia. Border closures have left 3,500 Mongolian coal truck drivers at Chinese dry ports, stuck in long queues. SouthGobi Resources, one of Mongolia’s largest mining companies, reported that its sales dropped off 80% in August, leading to a suspension of mining operations.

Thousands of Mongolian coal trucks have become stranded at the Chinese border (Image: Brücke-Osteuropa, public domain).

Rising transportation costs and continued congestion in the logistics network have contributed to Mongolia’s inflation rate hitting 9.6%, with food, meat, solid fuels, and gasoline experiencing the largest price increases. By September, meat prices in Ulaanbaatar had risen 16% and fuel prices 38.8%. Other factors driving inflation include increased costs of transport, logistics congestion and supply-side factors.

“The supply chain is always a problem for all developing landlocked countries,” lamented Dulguun Damdin-Od, director of operations at the International Think Tank for Landlocked Developing Countries (ITC for LLDCs). He went on to explain that the current situation was even worse than usual, noting that “only a few trucks are allowed through the border each day.” This explained why products were in short supply and were becoming more expensive in Mongolia, but the grocery store shelves were not completely wiped out.

Huge bottleneck

G. Orgil, president of Mongolian Freight Forwarders Association (MFFA) and CEO of New Logistics, said: “At the Erenhot [land border crossing between China and Mongolia] there is a quarantine that is causing some problems. Mongolian drivers are getting quarantined there. Normally there would be 300 trucks [crossing per day], now it is only 100. It’s a huge bottleneck.”

The border crossing has always been a bit of a red tape problem with a great deal of paperwork needing to be completed for customs clearance. According to Dulguun, presently it can be necessary to submit as many as 12 documents to send through a container of goods.

Orgil said: “The process used to take two to three business days. Now it is seven to 10 days. But seven to 10 is an inconsistent estimate. It varies, from time to time.”

“Thousands of international containers are stuck in Tianjin,” added Dulguun, referring to the Chinese seaport most used for Mongolia’s trade with the rest of the world. He added that there were also thousands of containers stuck in the dry port between China and Mongolia.

Much of Mongolia's economy is founded on exporting natural resource riches to China.

Orgil said that the prices for shipping were increasing and there was a shortage of trucks.” Looking at air freight, Orgil said: “For importing air freight, there used to be four aviation companies performing two flights each. So up to five to 10 flights per day. Now there might be one to two daily planes coming in. Some days, there are none.”

Jargal Altan-chimeg, the accountant for Tsakhiur Togoo, a transportation company located in Sukhbaatar province, close to the Chinese border, told how the company’s business had been adversely affected. “Because borders are usually closed now, transportation is not going well. Because of Covid, our financial situation is difficult now.” Jargal went on: “Before Covid, in a month we had around 100 to 200 trucks going to the Chinese border, but now, this month we have none.”

Since the border closure has made it impossible for Mongolia’s exports to reach the sea, other options had to be explored, such as overland, through Russia or via plane, which are all much more expensive.

“Small business owners are suffering,” said Dulguun.

Airline prices double

Byamba-Jargal, export manager at Angel Felting, a company which produces sheep’s wool slippers for the domestic and export markets, explained that the company normally exported by both plane and overland. “Because of the pandemic, the prices of airlines that we have always used have doubled,” said Byamba-Jargal. “The transportation cost per product was three euros, then it increased to six euros, and now, sometimes seven to eight euros.”

Supply chain disruptions have also caused hiked prices for raw materials. “For instance, sole materials have doubled in price,” said Byamba-Jargal. “We used to buy rubber material for 6,000 tughrik, but now it is 12,000 tughrik. And also sewing thread, that has increased in price tremendously. And auxiliary materials are now expensive, as well.”

Angel Felting, said Byamba-Jargal, was unable to increase its export price, so its profit margin was down. The company had, however, raised its domestic price. “Generally, we used to sell much cheaper domestically, but we’ve increased the domestic price.”

Byamba-Jargal wished to increase exports and was worried about future lockdowns. “I hope there is no strict quarantine in the country again. I hope we will have the chance to work constantly.”

Angel Felting was also worried about increased raw material costs. “And if the price of auxiliary materials keeps going up, it will impact us significantly,” Byamba-Jargal said.

While a price increase for finished slippers might be warranted, Byamba-Jargal worried that increasing the price would negatively impact sales and revenues. Were raw material prices to remain high, “we will have no other option but to increase our price, but then our distributors and customers can’t buy our products. So, that means our sales will decrease.”

On the domestic market, many sellers are dependent on import flows from China, the volumes of which are now greatly reduced.

Munkhgerel, a vegetable stall owner in Hall A of the large Bumbugur market in Ulaanbaatar, said that his stall bought in most products from ‘bars’, or supply markets, with green vegetables coming from outside of Mongolia and potatoes sourced domestically.

The lockdowns, said Munkhgerel, had dramatically impacted business because there was a shortage of green vegetables, one of the most important revenue earners. “There is a large decrease in revenue, almost a 50% decrease. For example, today I would have sold 200,000 tughrik worth of vegetables to restaurants, but I wasn’t even able to make a profit of 10,000 tughrik.”

According to Munkhgerel, potatoes were abundant, because they were produced locally: “People nowadays eat a lot of green vegetables. People used to eat five kilograms of potatoes. Now, they eat two kilograms of potatoes and eat one piece of broccoli and 500 grams of spinach and bok choy [a Chinese cabbage]. Perhaps this is due to health reasons. Having no green vegetables is decreasing profits massively.”

'Everything is stagnant'

“Nothing is coming in, everything is stagnant [since the border closures were made,” said Munkhgerel. “For example, garlic that would have normally been 60,000 tughriks has become 120,000 to 140,000 tughriks.”

As for attempting to source vegetables elsewhere, Munkhgerel said: “There are no sources. In the morning, I go and get my products. The day before yesterday, I got some Russian tomatoes and cucumbers. I rarely find any Mongolian lettuce, and it is very overpriced, up to 20,000 to 30,000 tughriks. And those lettuces are so hard to sell, since they are so overpriced.”

A fruit seller in Bumbugur market, Erdenetsetseg, agreed that the border closures had drastically affected business. “There are shortages. Some products that are coming in from Russia are extremely overpriced. During regular times, I used to buy bananas for 70,000-75,000 tughrik. Now, the same amount of bananas would cost me 182,000.” And of course, the higher costs are passed on to the customers. “Since we are buying for so much, we have to sell at higher prices. And the biggest victims are my customers. If the Chinese borders were to close permanently, we would be in a very tough situation.”

Some products were available, but in limited amounts and at higher prices. Other products were simply unavailable, Erdenetsetseg said. “From Russia I can get Polish apples, pears, lemons, oranges and grapes. This is all I have. We don’t have kiwis and peaches, for example. Normally, we would have at least four types of grapes, but now, I only have one. My stand is usually full. Now, I can’t fill it up,” added Erdenetsetseg.

Erdenetsetseg’s bottom line has been hit hard. “It is affecting profit a lot. We are all trying to just pay our rent, and we have no extra money in our hands.”

Another vegetable seller, Battsetseg, said that Chinese border closures had completely disrupted the supply market. “The bars only get new products once or twice a week. Before the closing of the border, product volumes were already in decline.” This was due to COVID-19 lockdowns and restrictions in China, which put a brake on exports to Mongolia. Now that the border was closed, the situation was worse. “Since the borders closed, there has been shortages and a 50% increase in prices,” added Battsetseg.

Lkhatulga, a tea seller, said of the border closure: “There are effects such as shortages as we are unable to buy products and also some increases in transportation costs.”

Shortages of secondary inputs, such as packaging, have halted local production of certain products. “Mongolian tea companies have stopped producing, due to a shortage of tea packets. Some milk tea companies don’t have external plastic packing to put their products in. All these support products come from China,” Lkhatulga said.

Coffee shops are running out of takeaway cups. Some shops only have small cups, no other sizes. That causes about a 15% reduction in revenue per cup of coffee sold.

According to Lkhatulga, some companies try to get around the lack of packaging. “A few companies have been producing regardless of the shortage in support materials. They are selling with no teabags. All these companies buy their raw materials from China.” And of course, prices were going up. “Some companies are increasing their prices because of higher transportation costs and higher prices in the raw materials market.”

Lkhatulga’s profits decreased. “People want to buy their products for the same price. But we cannot sell at the same price because we’re buying for much more. They blame us for increasing the price. I used to buy some products for 4,000 tughrik and sell them wholesale for 4,300 or sell them at 4,500 individually. Now, I buy them for 5,000 and sell them for 5,500. That might seem like the same for my profits. But because of the price, people are buying less, so profits are down.”

Lkhatulga also concurred that business was being affected by shortages of secondary materials, saying: “The plastic bags have become 100 tughriks already, and I can’t just give them away for free. So, I charge my customers for them, and they are very unhappy with the prices.”

Michael Morrow, executive director at MACU LLC, a cheesemaking company, said that in addition to the immediate challenges, the lockdowns and supply chain issues have altered his company’s long-term planning. He said: "Covid has been very hard for small businesses in Mongolia. We're no exception. Our fromagerie has suffered from lockdowns and other restrictions. Our main goal, to cooperate with rural communities to export high-quality artisan cheeses made from Mongolia's nomadic pastoral dairy, has been set back years.” Among the many issues MACU was facing was a shortage of milk caused by government subsidy changes that drove up the price.

Scramble to catch up

Continued Covid restrictions within Mongolia were also a problem. “From the beginning of 2021, there was a very strict quarantine all over the country, so we lost the busiest four months of manufacturing, because everyone was staying at home,” said Byamba-Jargal. When workers were permitted to return to work, they had to scramble to catch up on existing orders. “So, in July and August, we had to work frantically to finish two months’ worth of work in one month. It was very difficult for our workers. Very busy.”

Workers coming out of lockdown have faced the dire need to catch up (US Dept of Defense, public domain).

Worker fatigue, short-staffing, the dire need to catch up, overtime, as well as a lack of worker rotations and rest periods were among other problems specified by business owners and workers.

Christian, an American, working at the Oyu Tolgoi gold and copper mine in the Gobi Desert, said: “I normally work 12-hour days, on a rotation of 28 days on-site, followed by 14 days off to rest. During 28 days on-site it is mandatory that all workers should get a fatigue [rest day], usually at mid-point, day 14. When the roster goes over 28 days, workers are to be given one day off every week. My last roster, I did 50 days straight, and I was not given my day off until my 23rd day, and only got two days off after that, one of which was a half-day to transfer to night shift. Many workers at MCSI [an engineering contractor working at Oyu Tolgoi] are doing 70-day rotations.”

All in all, nearly two years of Covid lockdowns and restrictions have hit Mongolia’s economy rather hard. Right now, Mongolia is opening up, but the zero-tolerance Covid policy in China is keeping borders closed. As a result, Mongolian exporters are finding it difficult or impossible to keep up with export volumes. Sellers are having problems finding goods to sell or inputs for the manufacture of finished products. Some products are still terribly scarce, particularly fruits and vegetables. Many Mongolians are suffering from reduced income, while the whole population is experiencing high inflation. Most of these problems would dissolve, if China would adopt a less stringent Covid policy.