Mongolia favours Russia as rail route for minerals

By David Stanway

ULAN BATOR, Sept 7 (Reuters) - Linking Mongolia's desert mines with foreign clients will require billions of dollars of investment over a decade and some investors fear suspicion of China, rather than pure economic logic, is shaping its plans.

Mongolia's vice-minister of transportation, AmarjargalGansukh, told Reuters in an interview on Tuesday that the country would need to spend $8.8 billion to build 5,600 km of critical railway infrastructure over the next few years to deliver its surging mineral output to foreign markets.

But analysts say the country's dependence on its powerful and resource-hungry neighbour China worries policy makers.

So instead of building a direct route south, it has chosen amore circuitous and expensive option that will connect its minesto Russia and the Pacific via a huge new industrial park aimed at adding value to its mineral reserves.

Graeme Hancock, senior mining specialist with the WorldBank, said overdependence on China was a concern but thedifference between a 1,500 km trip to a Chinese port and a 4,500km trip to the Russian Far East was considerable.

"If you can make a margin of $70 a tonne selling through China or $5 a tonne selling through Russia, which would you do?You have to look at the economic fundamentals."

"Sacrificing commercial value for a political objective needs to be very carefully weighed."

The southern Gobi desert, close to the Chinese border, i shome to what many regard as the world's biggest untapped copper deposit at Oyu Tolgoi and the biggest coking coal mine at TavanTolgoi -- capable of producing 50 million tonnes per annum.

China offers a guaranteed market for both.

Three quarters of Mongolia's exports went to China in 2009,with millions of tonnes of coal heading south through an already overwhelmed rail link, and foreign investors say their future could depend on easing the bottleneck.

Peter Geerdts, geologist with Gobi Coal and Energy, which owns mines in Mongolia's southwest, said his company would initially use trucks to ship 2 million tonnes of coal a year to China's northwestern regions of Gansu and Xinjiang, but once output reaches 10 million tonnes, that will not be feasible.

"We will really need the railway," he said.

Mongolia eventually plans to build a rail route crossing the country from west to east, but Gansukh said it was unclear when construction on the western section of the project would begin.

Mongolia first wants to ease its dependence on China and seek out other options -- which inevitably involve Russia.

TRANS-SIBERIA

In June, Mongolia's parliament, the Great Hural, said priority would be given to a rail link from the Tavan Tolgoi project to an as yet uncompleted industrial park in Sainshand,where it can be processed and shipped north to Russia.

Foreign mine investors expressed worry at the decision,saying it made little economic sense and had no funding.

According to a World Bank report, shipment costs via a rail link to the Chinese city of Baotou would stand at $33 per tonne,but it would cost $95 to transport it to the Russian border.

The decision was made even though private financing had been made available for a dedicated 270-km route from Tavan Tolgoi to the border with China. That project has been consigned to the second phase.

Gansukh said discounts had already been negotiated withRussia's rail network, and the Pacific option could even becheaper than the route to China's ports.

"Mining companies are saying it is too expensive, but we are arranging it so it is not so expensive," he said.

"We have negotiated with Russian Railways and they have already given us a 65 percent discount."

He said after the concessions are granted, the cost of delivering a tonne of coal to Russia's far eastern coast would stand at $27, compared to $35 to the Chinese port of Tianjin.

He said financing the project would also be straightforward.

"We're going to set up a joint venture, and we are already negotiating with two big potential investors in South Korea."

Much of the discussion has also concerned the rail gauge to be used in Mongolia. Russia was believed to be putting pressure on Mongolia to use its own unique broad gauge system even though China and the rest of the world used a narrower one.

Gansukh said Mongolia had no choice but to work with the existing infrastructure, which was built by the Russians.

"If we bring in the narrow gauge then it won't be integrated with the rest of our network," he said.

Jim Reichert, infrastructure expert with the World Bank in Ulan Bator, said Mongolia's resources were likely to go where the demand is, and the China option would probably prevail in the end.

"The view here at Tavan Tolgoi is that they are going to need the route to the south," he said.

"The border crossing can't handle what they've got already and if you start putting 20 million tonnes of coal through there, that could force the issue." (Additional reporting by Jargal Byambasuren, Editing by Anthony Barker)

Source:Reuters News Service