Cashmere Program sparks anticipation for national producers

Cashmere is Mongolia’s third largest official export, after copper and gold, and provides income to over 100,000 people, 90 percent of whom are women, and 80 percent are people below the age of 35. Currently, there are about 150 wool and cashmere factories active in Mongolia. Local and international experts assessed that the quality of raw cashmere has degraded over the years due to the lack of a proper national strategy for livestock health and gene pool and herders’ interests to grow goat population rather than produce high-quality products. The priority to increase the number of adult goats has led herders to neglect the quality of raw materials from goats and thicken the average fiber diameter for cashmere, which is attributed to slight decline in production and revenue. In Mongolia, herders gather fine cashmere fibers from bound goats in March and April. Mongolia has an estimated total of 27 million goats and an annual cashmere production capacity of 9,400 tons. This spring, herders are selling their cashmere to dealers for an average price of 105,000 MNT per kg, which is almost 40,000 MNT higher than last year’s price, indicated reports of the Mongolian Agricultural Commodity Exchange (MACE). However, domestic producers are facing financial difficulties in gathering raw cashmere for their production and herders have stated that foreign companies are directly approaching them for exclusive high-quality cashmere. Although they wish to support local producers, some herders said that they find offers by foreign companies tempting, especially because they offer to pay upfront in cash. This type of cash is beneficial to foreign companies as it allows them to pay much lower tax without being charged with the customs tax, according to the Ministry of Food, Agriculture and Light Industry. This isn’t the first time, foreign businesses have cooped up this type of beneficial negotiation for their side. In fact, it’s been ongoing for almost a decade, according to some dealers. Like so, Mongolia continues to let golden opportunities to gain high profits slip away by exporting raw and washed cashmere without refining. As a result, local producers face a shortage of raw cashmere and utilize less than 60 percent of their full capacity, which immediately impact productivity, workers’ wages, and thus, the number of people interested in working in the sector. To resolve these challenges, the government launched the Cashmere Program in February this year.

Silver lining for cashmere

Both public and private sectors are expecting major changes in the Mongolian cashmere industry over the next four years and hoping for large booms in the following years now that a new Cashmere Program is underway. The four-year program focuses on domestic production of final cashmere products, technological innovations, and financial support for cashmere producers. “Now that washing and combing processes of cashmere production have been upgraded, the program focuses on supporting the next stages -- spinning process, yarn production, production of knitted products, and exportation. In particular, its main idea is to keep domestically producible cashmere, use it to make final products within the country, and reduce exportation of cashmere of low-level processing, or washed cashmere,” stated First Deputy Chief Executive Officer of Development Bank of Mongolia Ch.Enkhbat. The government expects the program to help keep 5,500 existing jobs in the textile industry, while creating 3,600 new jobs. It forecasts that the production and export of final products will surge by 5.7 times by the end of the program. Other expected results include increased investment and discounted loans to cashmere producers, launch of eco-friendly final cashmere products capable of competing on the global platform, establishment of a testing and research institute, and diversified services provided by professional agricultural associations. The Cashmere Program will be implemented in two phases. The first phase is from 2018 to 2019. During this period, the government plans to use 40 percent of total raw cashmere in domestic production, improve current legislation on cashmere production and sales, increase production and export volumes through accurate financial support to businesses, advance final-level processing, promote clustering, enhance reputations of Mongolian cashmere, and strengthen the preparation system of raw materials. The second phase will run from 2020 to 2021. Targets for this period include increasing the volume of raw cashmere used in domestic production to 60 percent, and improve productivity and quality of final cashmere products using advanced technologies. The funding for the project will be sourced from the state budget, provincial budgets, foreign loans and aid, and government securities. Ch.Enkhbat said, “The program will run for four years. For starters, we plan to provide working capital investment for a period of two years depending on production stage to make it possible to evaluate and fix errors on the go. In specific, the cashmere combing industry will receive a working capital investment for six to eight months, while knitting – final processing – will receive investment for up to two years. Additional investment will be allocated depending on results and if a company managed to operate normally without errors. “The investment for technological innovation, on the other hand, will be provided for no less than five years. The interest rate for working capital investment has been set at 12 percent a year. This rate can depreciate depending on the economic situation and budget. For example, it’s possible to reduce the interest rate next year if the government supports the program and allocates a budget for filling the interest rate gap. The interest rate and duration vary for technological innovation loans because it’s possible to get discounted loans from Exim Banks of cashmere technology producer countries. Hence, loan interest rates and duration will be more favorable for producers.” The performance of the program will be determined based on the following criteria.

¹	Criteria	Baseline (2017)	Target (2021)
1.	Washed cashmere export	5,409.7 tons	2,632 tons
2.	Combed cashmere	571.4 tons	1,579 tons
3.	Knitwear	915,600 pieces	2.2 million pieces
4.	Permanent jobs	5,582	9,110

 

Positive signs

The National Statistics Office reported that 12 percent of all cashmere resources were processed last year, attributing to 2.3 percent of the national industrialization, seven percent of industrial processing, and 55 percent of light industry. GDP growth contribution from agriculture in Mongolia increased to slightly over 2.25 trillion MNT in the fourth quarter of 2017 from 1.82 trillion MNT in the third quarter of 2017. GDP from agriculture averaged 992 billion MNT from 2010 until 2017, reaching an all-time high of 2.25 trillion MNT in the fourth quarter of 2017 and a record low of 45.96 billion MNT in the first quarter of 2011. Last year, Mongolia produced 5,413 tons of washed cashmere, 509 tons of combed cashmere, and 915,000 pieces of knitwear. The majority of production was first stage processing, with final product manufacturing only accounting for 10 percent. The government is certain that 19.8 million tons of knitwear and textile products can be exported for a total of 2.2 trillion MNT to 4.3 trillion MNT in sales if Mongolia begins to process and refine its cashmere through the Cashmere Program. Mongolia’s GDP from agriculture is projected to be 566 billion MNT in the first quarter of 2018, according to a trading economics poll. The Cashmere Program is already showing good results, peaking the price of raw cashmere from 49,700 MNT per kg in January 2017 to 105,000 MNT in April 2018.

Strides to globalize cashmere trade

MACE sealed a deal with China’s Bohai Commodity Exchange (BOCE) on March 30 to open a new online platform for global trade in an effort to boost profit from sales of wool to some of the world's priciest luxury fashion companies. MACE said the platform should begin trading in mid-April. Until now, traders had to be physically present to buy cashmere from only permitted cashmere trader in Mongolia. The exchange said trading in agricultural products and also coal and copper could follow at a later date. But cashmere currently accounts for around 90 percent of the exchange's total trade. In 2017, 7,000 tons of washed cashmere were sold on MACE with a total value of 521 billion MNT. “Cooperation with the BOCE is opening up a market for Mongolian commodities not only in China but to other countries as well,” remarked B.Chuluunbaatar, the general manager of the MACE. “Italian buyers will be able to buy Mongolian cashmere via BOCE, for example. The online platform allows factories to purchase Mongolian cashmere through the exchange directly, without sending their representatives to Mongolia.”