Maturing in a realm of unpredictability 

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Mongolia’s Mining Technology Providers

May 20, 2024

Image courtesy of Oyu Tplgoi

For all its remoteness, relatively limited market, and unsteady past, the Mongolian mining sector is very well-served by a good mix of local and international service, technology and equipment providers. Some of these were born at the height of the mining boom, when many big international firms rushed to Ulaanbaatar, while even more numerous local mom-and-pop businesses sprung up. In 2012, there were about 300 drilling companies in the country, most of which have since vanished. Other companies date back to the 1990s, as part of a first wave of local entrepreneurship and international courtship of the newly opened market following the demise of communism. Today’s survivors share a hard-tested resilience, built out of navigating an environment where planning around demand, supply, and logistics seems to have been the hardest part. 

The incongruencies of demand make planning difficult. The commodity downturn filtered out many contractors, engineers, legal firms, and all sorts of suppliers that came to the country during the boom years. Those who stayed had to reduce costs to the minimum by restructuring into leaner organizations, and clinging onto the few customers that kept them afloat. For example, SRK Consulting, a global engineering and consultancy group, only retained the geology and mineral resource estimation expertise in-country, while drawing from the wider SRK group for other disciplines. Local players like Minespec, a distributor of welding equipment and accessories founded in 2009, survived the market downturn thanks to its association with the Oyu Tolgoi (OT) mine. 

Association with OT was a lifeboat for many big and small providers, which points to the fact that the demand challenge is not only cyclical, but also structural: The mining services industry was largely built and continues to levitate around the OT. The mine in the Gobi Desert has been the entry-point for most international companies coming to Mongolia and remains to this day either the largest or even the only customer for some suppliers. RJE Global, an Australian engineering and construction company, had worked for Rio Tinto at its two mines in Australia before being approached to work at the OT in 2015. For Normet, a leader in auxiliary underground equipment, the OT has been the only customer in the country, but also the second largest customer worldwide for the Finnish OEM. A contract with the OT has become a make-or-break condition for the many local suppliers. Among the 200 accredited geodetic survey providers in Mongolia, integrated geospatial solutions company Geomaster has managed to become a leader thanks to its continuous work with the OT, a partnership now in its 23rd year. 

“If the OT caught a cold, we would catch pneumonia,” said David Turnbull, managing director for Transwest Mongolia, the official distributor of Komatsu equipment in the country. 

Transwest, which started its journey in Mongolia with a large contract for the OT in 2015, is one of many other equipment suppliers that has launched a strategy of diversification to better manage the risks of depending on a single major customer. OT remains a significant part of Transwest’s business, but the company has also signed large deals with other companies, most recently with Mongolyn Alt (MAK) for a fleet size similar to that provided to the OT. 

The issue with diversifying within the mining sector is the relatively small size of the market, with not enough projects to command large orders of equipment, construction, and other services, especially for more specialized players. The market becomes even smaller if we take out the state-owned enterprises (SOEs), which some providers prefer not to engage with. For instance, structural mechanical piping (SMP) contractor Saade Construction, founded in the late 1990s by Dishad Ali, refrains from participating in tenders with government entities: “Government tenders, governed by a preference for the lowest bid, stand incongruent with our quality-focused approach, prompting our strategic decision to abstain from participation,” commented Ali. 

Besides the limited market size and its concentration in the OT, other factors that cause demand instability is a market wired for the short-term: Mining customers think in short periods of time, between elections, contracts, and seasons. Elections cause periods of inaction, where permitting is delayed or not granted at all, resulting in project cancellations even after the project was awarded to a contractor. Contracts are also negotiated for short periods, requiring bidders to participate in repeated tenders and take risky loans without any guarantees. And, lastly, perhaps a symptom of the perpetual instability, decisions tend to be made last minute: "Every year, the winter ends, and customers make the order for drill rigs and other equipment, rather than doing it months in advance. Since we are looking at six to nine months lead times for most items, we can only sell if we have enough stock. On the other hand, keeping too many things in stock is also risky. For these reasons, the bigger companies in Mongolia tend to get bigger, and the smaller, to disappear. The business is capital-intensive and keeping all this inventory available for customers who don’t plan ahead is not affordable for many,” said Mark Gabel, the CEO of MSM Group, one of the top 30 largest corporations in the country.  

In a small economy with a small mining industry, diversification across different sectors can be the best option. MSM, for example, has three distinct business lines in automotive, mining supply and beverages, even as 35% of its revenues continue to come from the OT: “People drink during good and bad times, while a mine owner will most likely also be our Dom Perignon customer and drive a Mercedes or a BYD, especially in Mongolia’s small economy, where everyone knows everyone,” said Gabel.

We can see this trend of diversifying from mining – a reflection of the economy itself – especially in the equipment suppliers sector. In recent years, Swedish engineering group Sandvik has begun selling into sectors that it had not sold since 2014. Minespec, a dealer of welding equipment from brands like ESAB, Hyundai, or Honeywell, has been involved with the Sunshine Oil and Gas refinery, an Indian-Mongolian JV investment of almost US$1 billion, while also looking out for other opportunities in methane gas with TMK Energy, and the uranium project developed by Badrakh Energy. Minespec is not only broadening its customer base to sectors outside of the minerals industry, but also diversifying its suppliers’ list, including more South Korean and Chinese brands. According to Ganbaatar Chimeddorj, Minespec’s founder, Chinese brands tend to be preferred by government-owned entities like the large Erdenet copper mine. The same strategy can be found at MSM Group, which traditionally partnered with Western brands like Terex, but now also offers Chinese ones like Sany.

Chinese and even South Korean products make sense from a cost and logistics perspective. Mongolia’s location, as a locked landbridge between Russia and China, is as advantageous for Chinese suppliers as it is disadvantageous for their Western competitors. According to Sandvik, logistics costs are about 15-20% higher compared to other locations served by the Swedish player. MSM estimates logistics make up for about 12% of the total cost of the product in the country, while the Asian Development Bank puts that figure higher, at 30%. Costs may be passed down to the customer, but delivery schedules remain the providers’ responsibility. With the Russian border impacted by international sanctions, the main route to Mongolia is through China, especially through the nearest port, in Tianjin, which is often clogged. Our interviewees mentioned that there are 6,000 containers coming to Mongolia stuck at Tianjin on a consistent basis, with delays of up to three months. 

Even after arriving in Mongolia, suppliers again need to cover thousands of kilometers between different mines. The typical supply geography in the country is that of a main office in the capital city of Ulaanbaatar and a secondary entity (usually a warehouse) in the South Gobi, near the OT and ETT mines, which again creates isolation when it comes to serving the more distant mines and exploration projects in the West or East of the country. For that reason, Titanobel (recently merged with Australian Dyno Nobel), entered Mongolia in 2019 with a different plan. Soyol-Erdene Tsegmid, the CEO of Titanobel Mongolia explained: “One of our main differentiators is our logistics setup. Our plant is in Nalaikh, which is about 40 km away from Ulaanbaatar. By having a plant in central Mongolia, we can serve mines across the country, whereas our competitors have built their production close to certain mining sites. From the beginning, we envisioned a diversified customer base, rather than plugging into one main customer; if you have five customers, building five plants becomes highly inefficient. From our centralized plant, we can transport non-explosive emulsions to mining sites and couple these emulsions with on-site charging trucks. We are now advancing this concept by building tank storage for explosives at our customers’ bases.” 

Lastly, equipment supply and construction in Mongolia is also made complicated by the unusual climate conditions. Since it is a small market, OEMs will not produce specifically for Mongolia, while engineers and builders will need to tailor their solutions to accommodate for the harsh weather. Canadian companies, like Redpath - a leader in shaft sinking technology and which has worked at the OT for 20 years, are well accustomed to low temperatures. This can be an opportunity to differentiate through a highly customizable offer, as it is for MMD Sizers, a supplier of material processing equipment: “The significance of weather conditions cannot be understated, and our expertise, honed in the harsh climates of Canada and Inner Mongolia, equips us with the right tools to navigate extreme temperatures. We adeptly tailor our equipment to meet specific requirements, ensuring optimal performance of our machines even in the most challenging conditions,” said Jonathan Cain, managing director at MMD Green Mining Solutions.

The first to feel the signs of an upturn or a downturn, the equipment and service providers sector in Mongolia has been created out of the immense opportunity opened in the early 2010s and thinned out by the many challenges the industry has gone through since. Today, the sector is solid, mature, and ready to grow again. Investments by established players and new ones are on the horizon. Local diversified company Mera Group is building a new ammonium nitrate plant with a capacity of 200,000 t/y to be completed this year, which will reduce the needs for imports from Russia and China, further localizing the explosives market. Monnis Group, another large local conglomerate and distributor of Liebherr equipment, has inaugurated a Company Rebuilt Center in Ulaanbaatar, where used Liebherr equipment will be reassembled into new products, again reducing the needs for imports.

Transwest, which has been growing at around 20-25% yearly, is boosting its capital expenditure from US$4 million in 2023 to US$16 million this year, focusing on new equipment and infrastructure, as well as a new dedicated Transwest Training Institute, which will also boost in-country local skills capacity. Multiple equipment suppliers are investing in Khanbogd neighboring the OT mine, where a new hub is rapidly growing. 

For those with a history in the country, navigating instability has become second nature, a rite of passage to reach maturity. For those looking for the first time at Mongolia, the main advice everybody seems to share is to take due diligence seriously and ideally find a good local partner. We will explore in the next article how local partnerships have been key to the development of a true centre of excellence and how these could be scaled up. 

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