Mineral riches drive Mongolia's dream transformation

YOU won't find a McDonald's restaurant in Ulan Bator. Nor will you find a Starbucks, nor any of the other franchises that typically crop up as a country begins to transform into a globally connected capitalist economy.
But, if you fancy buying a Louis Vuitton handbag or a Ermenegildo Zegna suit, there are conveniently located stores in the city's centre.
So rapid has Mongolia's economic growth been that the country's capital has bypassed the typical icons of an emerging capitalist economy and leapt straight to the top-end luxury brands.
Mongolia is in the middle of a stunning economic transformation, making the jump from geographical backwater to global investment hotspot, thanks to some massive newly unlocked mineral riches.
The profitability of restaurants in Ulan Bator increased by 800 per cent last year.
The country's economy is growing at around 17 per cent a year, making it one of the fastest-growing economies in the world.
One just has to look at the skyline of Ulan Bator, home to a little more than 1.1 million people, to get a sense of the change that is gripping the city.
Looking south from Central Tower home of Louis Vuitton, Zegna and a host of other top-end boutiques, and itself a recent addition to the Ulan Bator skyline 27 cranes are visible, each hovering over a new multi-storey office or apartment development.
The Mongolian Stock Exchange was the best performer in the world in 2010. A flood of foreign mining companies -- including Australian listed groups Xanadu Mines, Aspire Mining, Hunnu Coal and Haranga Resources -- and numerous international contractors have arrived in the country to join in the hunt.
The driving force behind Mongolia's phenomenal growth is two massive resources projects in the country's south, near the Chinese border.
The Oyu Tolgoi copper-gold deposit was first explored without success by BHP in the 1990s. Canada's Ivanhoe Mining subsequently took another look at the project, and found it actually contained one of the world's largest copper-gold deposits.
Rio Tinto has since bought a 48.5 per cent stake in Ivanhoe, and is spending $US7 billion ($6.8bn) developing it into a mine that will rank among the five largest copper mines in the world.
A short distance from Oyu Tolgoi is the six billion-tonne Tavan Tolgoi coal deposit, the largest undeveloped coking coal deposit in the world.
The western portion is being auctioned off to international investors, while the eastern portion will be listed in Hong Kong and/or London through an initial public offering in which the Mongolian government will retain a major shareholding.
Production from those projects is still years away, but already the construction efforts at Oyu Tolgoi and the development of smaller mines around the country have had a huge impact on the Mongolian economy.
In 2004, Jargalsaikhan Dugar, now president of Mongolian consultancy MIH Group, helped the Mineral Resources Association of Mongolia put together six-year growth forecasts for the country's mining industry. By 2010, both production and revenues from the mining industry were double even the most optimistic numbers that the association was able to come up with.
Under its best-case scenario, the group had hoped for 27,000 jobs in the mining sector by 2010. Instead, there are 48,000 employed in the industry.
"Our dream scenario has been exceeded, our dream has come true," Mr Jargalsaikhan told the Discover Mongolia investor forum in Ulan Bator last week.
Unsurprisingly, given the pace at which Mongolia's mining industry has taken off, the growth has created its share of problems in the country.
Mongolia has struggled to strike the right balance on administering taxes and royalties on the mining sector, having restructured its regime four times since the late 1990s.
The agreement struck between Oyu Tolgoi and the Mongolian government in 2009 replaced what had been a damaging windfall profits tax and appeared to have settled the debate. But with elections on the horizon next year, a group of 20 politicians has begun petitioning for a bigger piece of the mining revenue pie.
Rio Tinto's country head in Mongolia, Cameron McRae, did not mince words when discussing the latest talk of another revision to the country's mining tax regime. He warned the dissenting politicians could undermine investor confidence in the country. "These few will have to answer to the many Mongolians whose jobs will be on the line, and the local businesses whose prospects will be jeopardised," he said.
As much as the country's miners would like to attribute the rebel voices to a rogue element, the persistent niggling from corners of Mongolia's parliament reflects a portion of the Mongolian population that does feel it is being short-changed by the mining industry.
Revenues from the mining sector are flowing into Mongolian society, but not evenly, fostering perceptions of a class divide. Every job created by mining is forecast to create another four jobs elsewhere in the economy, but that takes time and substantial pockets of the Mongolian population are growing impatient.
Two expatriate consultant geologists who have lived in Ulan Bator for several years told The Australian they had experienced an increasing amount of ill will from the locals. One had moved to elsewhere in Asia as a result, and the second was planning to follow suit. Anecdotally, muggings of both expats and locals are said to be on the rise in Ulan Bator in response to the perception of rising class divisions.
Many of the side-effects of Mongolia's mining boom are reminiscent of those being felt in Australia, although the effects in Mongolia are arguably more pronounced.
There are concerns that the appreciation in the Mongolian currency, the tugrik, on the back of its increasing mineral exports, will hurt other industries such as tourism and the cashmere trade. Some industries are complaining of a "brain drain", with the brightest employees lured away to the higher salaries on offer in the mining industry.
Mongolia also continues to be dogged by perceptions of corruption. The most recent Transparency International corruption rankings put Mongolia a lowly 116th. That put it behind the likes of Indonesia, Bolivia and the Solomon Islands.
Bureaucracy is another common complaint, with several companies at the Discover Mongolia forum citing slow approvals as the most frustrating aspect of working in the country.
"Bureaucracy has been the biggest hurdle; it's the biggest issue you face," said Peter Akerley, the chief executive of Erdene Resources, which has been working in Mongolia for 14 years.
"On the positive side, I'm not sure there's anywhere else in the world where you can go out and find world-class deposits just outcropping from the terrain."
Infrastructure is struggling to keep up with the pace of economic growth. The Ulan Bator international airport has been overwhelmed by the rise in visitors and power outages are common.
The core mining provinces remain under-serviced by infrastructure. The country's coal exports are taken by truck primarily along dirt roads down to China.
Mr Akerley said that by next year, a truck carrying coal will arrive at the Chinese border every minute. Mr Akerley has a photograph he took while visiting one of his company's prospects, showing hundreds of trucks queued in the Gobi desert, waiting to truck coal to China.
Infrastructure is critical if Mongolia is to continue its growth. The government is already working to build or upgrade some 5000km of road around the country, and construction of a planned $US5bn, 1800km railway linking southern Mongolia with the northeast is due to begin at the end of next year.
Any growing economy is bound to experience teething problems. The challenge for Mongolia is ensuring its many teething problems do not derail its transformation.
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1 comment:

  1. Can we stop gushing about Mongolia's "riches" already, for a change? You know what the backdrop to those 27 cranes, 800%, luxury stores etc is? An earth-quake prone basket with all the eggs in it, a 40 percent poverty level, wide-spread corruption, sad empty lands beyond the capital, disenchanted and angry youth, a Dutch disease around the corner, a clear and present danger of total economic dependence, you name it.

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