Developing costly infrastructure is a big gamble, but one worth taking

28th of 8, 2018


Parliament’s approval of a resolution supporting steps to get the Tavan Tolgoi deposit into economic circulation was a tribute to the persuasive skills of the sector minister, D.Sumiyabazar, though the tacit backing of the Prime Minister and the absence of opposition from the President also played a part. The minister was in a hurry as he knows 2019 is almost upon us and members of parliament would have issues closer to their heart to consider before the elections. These would include paying children’s money to all children, irrespective of the family’s economic condition, reviewing the ban on entry of coal into Ulaanbaatar, etc. and when politicians are busy courting the public, they cannot be expected to pay attention to mega and giga projects of national interest. The minister has taken his first step successfully, but he cannot afford to be seen smiling until after the IPO is similarly successful.

At the outset, it has to be noted that the resolution supports “steps to get the Tavan Tolgoi deposit into economic circulation”. It might have been more direct in supporting “moving the deposit into economic circulation” and not just the steps to do so, but this semantic quibbling may not be exactly welcome when the Mongolian press is all praise for the resolution and many people, in the sector and out of it, are still unwilling to believe that Tavan Tolgoi will be moving.

Since the most important part of the resolution is on infrastructure development, this article will give brief details about what Tavan Tolgoi mainly needs in infrastructure, especially railways and roads. Poor infrastructure has for long made our mining sector unattractive to foreign investors but all that may now become a thing of the past. However, there can always be too much of a good thing, and the Tavan Tolgoi infrastructure building runs the risk of being just that.

Among these projects is our well known Tavantolgoi-Gashuunsukhait railway. For those who do not keep track of events in Mongolia, the surprise is not that it is included, but that it is not yet completed, for work on it was begun years ago. There will also be a heavy paved road in the same direction, to be built parallel to the current paved road. These roads and the railway will get Tavan Tolgoi coal to the Chinese market -- and hopefully to markets beyond our neighbours -- cheaper, quicker, and in increased volume.

Many think the third markets should be reached through our northern neighbour but as many others see getting the coal to Russia’s Far East ports as too expensive. The recent Russia-Mongolia transit transport agreement creates an opportunity for Mongolian coal to reach these ports at a relatively low cost. At the same time it allows the Tavantolgoi resolution to include the 400-km Tavantolgoi-Zuunbayan railway project, which will carry Tavantolgoi coal to the central line. Of course the project would make sense only after the capacity of the central railway is raised.

Two more heavy paved road projects are included in the resolution. One is the Tavantolgoi-Oyutolgoi-Khangi road. You may ask why this would be needed once the Tavantolgoi-Gashuunsukhait road is completed. The simple answer is that It would expand the market opportunity. Bugat in Inner Mongolia is the major market for Mongolian coal, and if we get it there in a direct way, it would be cheaper and so more in demand. The idea is so attractive that even a rail route was also talked about. For the moment, the railway has to wait, and it is the paved road that has been put in the resolution.

Increased extraction means Tavantolgoi coal has to be exported through many directions, and the one that comes next starts from one end of the 32-km Tavantolgoi-Baruunnaran road to be linked to the Tsagaandel Uul road project, at a point 270 km away. Roads to Gashuunsukhait and Khangi ports are clearly important but many eyebrows have been raised that Tsagaandel Uul has been put into that category.

Will there be money for all these projects? That would depend on how successful the Tavantolgoi IPO is. The general opinion is that approximately $1.5 billion will be raised. That is too little as railways and road projects take up billions of dollars. It would then be interesting to note how the money is divided among these projects and what other financing source is explored.
From having no railway, Tavantolgoi is now to have two railways and several paved roads. Our president must be very happy that a railway is being built to the northern direction.

Will the expenses on these roads and railways be justified? Apparently yes, as they will take more of our coal farther. However, if coking coal price gets below $130/t, these advantages will be nullified and even the operational efficiency of Tavantolgoi will be under strain.

The market will always be volatile and as its behavior will never be fully predictable, one can only take precautions but never plan to be fully safe. If things turn out badly, the expenses on these projects are sure to be criticized, but if they click, they might change our economy radically. 

Other countries’ experiences can be educative and interesting but they can never be applied to Mongolian conditions. Sandwiched between two large and powerful neighbours Mongolia is unique with its geography and harsh climate. We are now entering a new phase in our history and the infrastructure development plan is a big gamble. 

Of course these projects cannot be implemented at the same time, and should be taken up in phases. Even though they will carry output from other mines, they will be mostly for Tavantolgoi coal and can be named only as Tavantolgoi roads, as was done in the resolution. Only the future will tell if this is right or wrong, but for the moment we do not have an answer to so many questions. One little discussed aspect of exporting Tavantolgoi coal to third markets through either Chinese or Russian ports is how these long journeys might impact the quality of the coal. Japanese and Korean steelmakers want to diversify their coal suppliers but they do not compromise on quality.

Our present major, actually only, market is China, which is trying to make itself cleaner. Among the measures it has taken to reduce air pollution is stopping coal transport on trucks. We should help in the country’s clean policy and build the railway to stop coal transport by road. For ourselves also, we should think again before we build another paved road.

Tavantolgoi railways    

Tavantolgoi-Gashuunsukhait 240 km railway
The rail capacity is 30 million tonnes/year, narrow gauged, required investment is $1.1 billion. Currently Mongolia has already made $279 million investment into the rail construction. The rest finance would be dealt with investment from 49 percent share owner and bank loan. In other words, $268 million to be sourced from 49 percent shareholder for its share of ownership and the rest $553 million to be sourced from bank loan.
Rail transport would cost $7/t, much cheaper than the current road transport cost.     

Tavantolgoi – Zuunbayan railway
With the resolution 153 by the government (2018 May 23rd) Zuunbayan Railway LLC was set to be established with MTZ 51% ownership and Eastern Railway 49% and the rail to be built with DBOT concession .

Railway length 414.6 km, wide gauged, $1.2 billion project.   

Tavantolgoi roads

Tavantolgoi-Gashuunsukhait 259 km heavy paved road with 115 tonne loading capacity. The paved road to be built next to the current paved road with DBOT concession formula. With the resolution 166 by the government (2017 June 14th) the road project was included in the state owned concession list.  Advantage of the project is to increase transport size by 2-2.5 times and make sure traffic/transport safety by separating loaded and unloaded truck traffic (current existing road would be for unloaded truck and new one would be for loaded truck).

Tavantolgoi-Oyutolgoi-Khangi 435 km paved road
Through this road Tavantolgoi coal to be directly supplied to the steelmakers in Bugat city, Chinese Inner Mongolia. Export to surge and reduce pressure on Gashuunsukhait port and get the deposits along the way into the economic circulation.

From end of Tavantolgoi-Baruunnaran 32 km road to the Tsagaandel uul port  (270 km) paved road project
This road would be key to developing Tsagaandel uul – Ulzii port. Mongolia and China have been cooperating to establish border port at that place since 2014 and in May 2016 border point was set jointly. With the resolution 279 by the government (2017 September 22nd) the road project was added to the concession list.

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