Mongolian coal enters the world arena ...

Robert Freedland’s words that “Mongolia may become the Saudi Arabia of Coal” have started to come true in real life. Mongolia’s coal mining sector and its export volume have increased with the speed of light. In addition to this, the Tavantolgoi coal deposit, which, with its gigantic reserve, is among the top deposits in the world, is going to enter the market very soon. In order to conduct mining operation there, mining sharks compete to discuss about the need to make an IPO of Erdenes Tavantolgoi, world’s leading bankers came to Ulaanbaatar and the words “Mongolian coal” began to appear on newspapers’ first pages throughout the world…       
There are many evidences showing that coal, and not copper, is the locomotive of the country’s economy today. In 2010, Mongolia gained an income of USD770.6 million from her copper concentration export, while income from coal export exceeded this amount by over USD100 million by reaching USD877.6 million. In 2008, Mongolia exported 4.2 million tons of coal. Within two years, that number reached 16.6 million tons, representing a 4 fold increase. Specialists remark that, comparing to the previous year, the increase of coal mining by 91.8% became an important push to the 10% growth of Mongolia’s industrial sector in 2010.
Within two years only, the country’s coal sector has grown beyond recognition. Mongolian coal came into fashion and Mongolian companies stepped on the international stock market. Energy Resources and Mongolian Mining Cooperation both issued their shares at the Hong Kong stock exchange and Hunnu Coal, a coal exploration company, made an IPO in Australia. Moreover, a Mongolian state owned “shark” – a new player with the label “Mongolian Coal” was born on the world’s coal market. This shark is, of course, Erdenes Tavantolgoi Company, a daughter company of Erdenes MGL. To issue shares of Erdenes Tavantolgoi on the international stock exchange, over 20 world’s leading investment banks such HSBC, Deutsche, Credit Suisse, Citi, Macquarie and Morgan Stanley have sent their representatives to Mongolia.  

In the eastern part of Tavantolgoi, in the Tsankhi area, where most studies and surveys were conducted, Erdenes MGL will conduct mining by making investment itself. D. Zorigt, Minister of Energy, pointed out that it has been estimated that about 15 million tons of coal would be mined out annually during the first phase. “Stripping has started and it has become ready for extraction operation,” he noted. MESCO Steel of the Republic of India, Macmahon of Australia, BBM Operta of the Federal Republic of Germany compete for the right to conduct its mining operation. In all, 15 foreign and domestic companies compete to be selected as strategic investors for conducting mining operation in eastern Tsankhi. It seems that mining operations will be conducted in these two areas within the year. With this, it has become clear that in 2011, coal mining and export will increase to levels never reached before, or even predicted. Now the matter will be whether there is a government policy on the subject or not.

For many years, Erdenet Mining revenues accounted for most of Mongolia’s budget. But the growth of the coal mining industry shows that this situation is about to change resolutely. However, it is rather strange that the income to be allocated from the coal mining sector in the country’s 2011 State Budget has not been clearly stated. Now that the 68% windfall tax has been repealed, it is sure that money milked from Erdenet into the budget will be reduced. But because coal export volume exceeded those of copper concentration, it is logical that a considerable amount of money from coal exports will be allocated to the budget. It seems it is now time to estimate how much tax revenue will be collected from coal mining companies and to think of how the government will support the sector in turn.  

If Mongolian Coal is to become a world reference, much work has yet to be done and many issues resolved, specialists warn. Coal is classified in various groups according to its quality. Therefore, there is more than one price for coal, which causes issues. Some complain that because the Government controls the price of coal supplied to power stations, several mining companies which supply the centralized power grid system are going bankrupt. Anyhow, the price of coal for exportation is also complicated. Price is different for brown coal, coal and coking coal. In addition, market rate is different depending on contracts signed between coal companies and their buyers. The government establishes what royalty fee to collect from companies using to prices posted on the Chinese webpage Nobody seems to care whether or not these rates are similar to contracts prices of coal exporting companies. The reason is that there are no representatives from companies running their operations in the sector in the price-setting council.

The next main issue is that there is currently only one buyer of Mongolian Coal: China, also called the “stomach without bottom”. Before, the main coal supplier of the People’s Republic of China was Australia, a position which Mongolia is starting to assume, Alexander Molyneux, President of South Gobi Resources, noted. In 2009, China imported a quantity of coking coal totaling 34.5 million tons. 66 percent of that amount was exported by Australia and 11 percent by Mongolia. But last year Mongolia alone represented 30 percent of Chinese coal import. There is a hypothesis that this year, Chinese coal import will increased by 63 percent to reach to 200 million tons. A good news for Mongolia who is rich in coal resources. Nevertheless, specialists recommend that Mongolians diversify its coal export by supplying coal to Japan and the Republic of Korea, who both buy coal at high prices. Last year, Mongolia carried out a coal shipment trial to the world market through Vladivostok. Another good news.  Now it needs to work towards regularizing these shipments.

The question of whether Mongolians should keep exporting their coal raw forever is also an important issue. It is encouraging that private companies make initiative and start paying attention to the processing of their product. Energy Resource is running its operation in Ukhaa Khudag area and plans to mine out and process 7 million tons of coal. Very soon its processing plant will start operating. MCS group aims at constructing a plant to produce fuel gas and intends to bring it into operation by the end of this year. There is a real need for a government policy on processing coal and manufacturing value added products. Mongolia has even the opportunity to stop fuel and petrol import - 100 percent of its oil for domestic consumption is imported- by establishing a liquid gas producing factory, but authorities have not done anything until today.

But talking about the coal sector also implies talking about the country’s infrastructure sector. Government policy on railway transportation was finally approved after a long discussion accompanied by several stalemate. But stripping at Tavantolgoi has now started, even though news of a new railway, on which Mongolian coal export will be dispatched, has yet been heard of. How does the government coordinate the water and electricity supply of all the coal mines in operation and those about to start operating? How is the work of improving roads and border points going? The coal mining sector confirms out that there is a lot to do. 

There is also an issue that is rather important for the Mongolian people, the one concerning environmental protection or environmental reclamation. I believe no Mongolian will not be broken hearted seeing that mountains, rivers, trees are threatened by mining excavation, in spite the fact that high and sophisticated technology is being employed. Starting from now, the government is demanded to set high requirements on environmental reclamation. It is obvious that disturbed areas will not return to their original state, as they were when untapped, even if all sorts of reclamation activities are conducted. But it is common in many countries such as the Federal Republic of Germany, the United States of America and Australia that areas disturbed by mining operations are turned into tourist camps and recreation zones by making them even more beautiful than they were before.   If we cannot do this, what need is there today to sell the country’s underground resources? If environmental reclamation is to be conducted by employing the best and most modern technology, Mongolia can effectively and truly become “Saudi Arabia of Coal.”