United, Mongolia would compete divided, it falls

4th of 4, 2018


Prime Minister U.Khurelsukh, who is to pay an official visit to China on 10-13 April, will be followed there by President Kh.Battulga in June, the dates yet to be decided. There is no official word on the subjects to be discussed by them and the agreements to be signed, but the general expectation is that these will focus on collaboration in Mongolian mega projects so that economic growth is accelerated.

Among areas most likely to be discussed are mining, energy, transportation, and the border, and all indications are that the Prime Minister’s talks will yield some tangible progress, going beyond expressions of intent, on the comprehensive development of the Tavan Tolgoi deposit, which would include the Tavan Tolgoi-Gashuunsukhait railway project  and uninterrupted and stable means of coal supply.

Much ground has to be prepared before any high-level visit and extensive backroom negotiations are conducted. Accordingly, a team led by the Minister for Road and Transportation, J.Bat-Erdene, was in China in early February to talk with the Chinese Minister of Transport, Li Xiaopeng, on the railway, especially on financing its construction, on upgrading the coal haul road, and on relieving the traffic pressure between Gashuunsukhait and Gantsmod ports.

The Chinese have agreed to examine the issues but at the same time they have offered some suggestions of their own to help increase Mongolian exports by reducing transportation costs. The route between Zamiin-Uud and Erlian is too crowded and China is offering to start work on the Zuunbayan-Khangi railway project, and upgrading the Khangi-Mandal border port. Mongolia is willing to explore the possibilities and some members of parliament are studying local conditions in the south.

On assuming office, Khurelsukh promised to speed up economic recovery and move the mega projects, including Tavan Tolgoi. Certain remarks he made about Tavan Tolgoi, after a visit to South Korea, indicated his thinking. He said China was interested in developing the project and since at the moment China is the only buyer of Tavan Tolgoi coal, Mongolia should work with it. How that cooperation could be most effective would be mainly for Mongolia to decide, but China would be the constant. It could partner with Erdenes Tavan Tolgoi alone, but other national companies could also be involved. This, and other details of the cooperation, will be   decided by Parliament but, the Prime Minister added, it will have to be a national decision, overriding partisan considerations.

That Tavan Tolgoi is entirely dependent on China is very true and the Prime Minister was merely stating the obvious. What was interesting was that he did not say a word about the consortium of Energy Resources, China Shenhua Energy and Sumitomo that is supposedly responsible for investing in the project.  Apparently, that chapter is closed and the consortium has no further role in Tavan Tolgoi.
It would also appear that Mongolia has given up, at least for now, its hopes of seaborne exports to markets beyond our southern neighbour and is reconciled to being dependent on China as the sole market for its coal. We failed to attract investments from any of our third neighbours and have made no real progress in issuing the Erdenes Tavan Tolgoi IPO on an international market. China is the sole purchaser of our coking coal, and when the Prime Minister said we have no choice but to work with China, he was just being realistic.
Given this, our next target is getting a loan from China to develop Tavan Tolgoi. By its very nature, any inter-government loan, even when taken for an avowed business purpose, is more political than commercial. What will we have to give to get it? Another problem might be that the terms of the IMF program place a limit on our borrowing. And, then, how risky would it be for the state to invest a huge amount – most, if not all, of it a loan – in what is, after all, a commercial project? What will be the political price of such “neighbourly” support? We should consider freeing the state from being a business enterprise, and allow Erdenes Tavan Tolgoi to raise funds purely on commercial considerations, thus taking a burden off from the state budget.
It is all the more necessary to think in a new way, as the situation today is completely different from what it was five years ago, not to go back more in time. The coal market is improving and analysts expect conditions to remain good. India is the world’s second largest importer of coking coal, but it is expected to reach to its peak demand in the next 10 years, improving the prospects of Mongolian coal companies. Last year we saw what one single year of high commodity prices can do to the economy. Things would have been even better for coal companies operating at Tavan Tolgoi if extraneous events had not impeded their capacity to export freely.

Ever since its establishment, ErdenesTavan Tolgoi had been repaying debts and meeting interest dues with the coal it mined, until, for the very first time, freed of the debt burden, it made a profit of MNT438 billion last year. Energy Resources, which had invested $1 billion in their Ukhaakhudag project, posted its largest gross profit since 2011.

All this makes a good case for encouraging coal exporters to come together and establish a joint project to raise funds from abroad. MICC President D.Achit-Erdene is confident that an honest prospectus will give Erdenes Tavan Tolgoi access to any bank or investment fund. The present issue gives the findings of an MICC market research on the company. It is, of course, essential to pay attention to improving infrastructure, reducing transportation costs, and to try shedding the over-dependence on one buyer.

Last year’s experience has taught us that building a good railroad, constructing a multiple-lane highway, and increasing the number of export points will not avail much without a long-term coal buying agreement with China. Even today the queue at Gashuunsukhait is 70 km long, and this will become manageably shorter only when China has an interest in getting its contractual quota.

Another priority is to implement decisions already taken or long talked about, such as giving international status to our border ports, thus keeping them untouched by the vagaries of local decisions from either side, easier railway connectivity, getting access to Chinese seaports, and to get reduced rates for transport from the border to such ports. Getting these done is the Government’s job, but business enterprises can handle the rest on their own.

Before beginning negotiations with the Chinese side, we have to put our own house in order, speak with one voice and use the resources at Tavan Tolgoi to their maximum value. Thus it is not the sole responsibility of state-owned Erdenes Tavan Tolgoi, but all other state, local government and private companies which operate at Tavan Tolgoi must come together. Tavan Tolgoi is not an issue on which the state and the private sector should be in competition; instead they must join hands to strengthen the national stand during negotiations and thus enable the Mongolian coal sector to be more competitive at the international level.
The three companies that operate at Tavan Tolgoi have different production and transportation costs, and they also sell their coal for different prices. Former Prime Minister J.Erdenebat was very right in asking them to adopt a joint marketing policy, to set the same standards for the quality of the coal, and use the same extraction process and the same delivery system. A change of government does not make less potent this prescription to make Mongolian coal more competitive. Selling the coal at a better price, no matter which company sells it, would ultimately serve the country’s interests.

The Prime Minister has to settle these domestic matters before sitting down for talks with China. Only when Mongolian companies, used to competing with one another, come together will he have a strong hand at the negotiating table and project Tavan Tolgoi as a whole against foreign competitors.

If one company has a facility nearby to wash coal, with capacity to spare, why cannot the others use it, to add value to their raw coal? Our coking coal exporters have to resolve this and other similar issues if they wish to have a stronger presence in the Chinese market, and this is what the Prime Minister can help them do, knowing that domestic unity to back him will empower him politically when talking with a foreign government.

Given China’s green policy, it is clear that Mongolian efforts alone will not be enough to increase the volume of coal export. This is why and where quality comes in, and this quality can be achieved only when the two major companies – one public and the other private – agree not to dissipate their international competitiveness by domestic contradictions. A rare opportunity is on offer and it is for us Mongolians to grab it or waste it.

Absolutely the first thing to do is for ETT to start using the Energy Resources processing plant. It has a capacity of 15 million tonnes but in 2017 used no more than half of it. The national demand is for maximum use of the plant so that both Erdenes Tavan Tolgoi and Energy Resources have value-added and thus more competitive coal to export, at a better price. This will also shorten the long queue of ETT trucks at the border.

Erdenes Tavan Tolgoi will one day have its own coal processing plant and coal haul railway. Until then, it should unhesitatingly take whatever opportunity there is to better its prospects. As Prime Minister of the country, U.Khurelsukh should pressure the state-owned company, if persuasion does not work, to act in the bigger national interest.
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