Mongolia’s future as commodities exporter

By Leslie Hook in Ulan Bator

Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?

After spending a week in the Mongolian capital and speaking with everyone from the prime minister to coal miners, my sense is that no one is in any rush to boost exports of natural resources.


Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.

Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route.

Politicians from both sides of support the decision. It will help develop Mongolia’s domestic processing industry, they say, pointing to plans for an industrial park in Sainshand, where the railroad from Tavan Tolgoi will connect to the trans-Mongolian line. And with coal-washing plants in place, Mongolia’s minerals can fetch a higher price. (Word on the street in Ulan Bator, the capital city, has it that Chinese traders are offering as little as $150 per tonne for unwashed coking coal – yes, coking coal – at the border town of Gashuun Sukhait, where coal from South Gobi province is trucked out along a dirt track.)

The new rail line will also allow Mongolia to play China and Russia off each other to see who can offer the better price, and it is understood that Mongolia is negotiating for port access via the Chinese rail system, ideally allowing exports of coking coal to anywhere in the world. And if the politicians are right, companies will be lining up to get a piece of the action in Sainshand. According to one banker, engineering group Bechtel is bidding for a role in the planning and development of the industrial zone.

This approach is part of a broader strategy: politicians seem focused on developing the resources sector in a way that gives Mongolia the best deal.

There will be a general election in about 12 months and everyone wants to able to tell their constituents that they are defending Mongolia’s national interest, particularly in terms of China. There’s something of a rush for the government to complete the planned IPO of part of the Tavan Tolgoi deposit before the elections take place, a process that would give 10 per cent of the shares to every man, woman and child in Mongolia. But there is much less urgency on developing the infrastructure to get the coal to market.

There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.

This caution may not be a bad thing for Mongolia: already the currency is straining under the influx of foreign investment. But it is certainly a frustration in Beijing, where state-owned mining companies can be heard waxing eloquent about their northern neighbour. Not to mention the fact record prices for thermal coal have caused power outages in some Chinese provinces. China may have to wait a little longer though, before Mongolia really comes online.

Source:Financial Times newspaper


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