Will the “Age of Coal” bring prosperity to Mongolia?

The coal market has been expanding in Mongolia, where the mining industry was until recently reliant upon copper and gold excavations. The buzz surrounding Tavan Tolgoi and other coal deposits has drawn the attention of transnational corporations which have been attracted by the Gobi region like magnets. As for national companies, they have been growing and started investing into coal-breakers and infrastructure development. The words of Ivanhoe Mines CEO Robert Freedland that Mongolia will become the “Saudia Arabia of Coal” have started to become reality with the organization of the Coal Mongolia 2011 Forum. More than 450 people, including representatives from the Government and guests from 12 countries, participated to this Forum, a symbol of the country’s dynamic entrance on the coal world market. 

Mr Batkhuyag, director of the Mineral Resources Authority, explained that investors were not so much interested in finding out the benefits of investing into Mongolia as to identifying the advantages of the Mongolian coal sector in comparison to that of Australia. “If the eyes of the world are set upon China, Mongolia is located just next to it and has vast resources. In other words, there is enough attraction to appeal to investors,” he said.
It has been estimated that Mongolia’s resources approximate 162 billion tons. A quantity which allows it to rank 10th in the world – a position it shares with Australia. Although according to some experts, Mongolia’s coal resources amount to 200 billion tons. In any case, as the country is about to witness the largest investments ever made in its coal industry and a sharp intensification of prospecting operations on its territory, it is likely these numbers will grow up. For instance, world mining giant “Vale” is planning to spend USD5.5 million on the implementation of five coal prospecting projects. “The Моngolian coal industry has a bright future,” declared Mr Paul Sullivan, the company’s project manager.

The advisor to the executive director of the Energy Resource Company Mr R.Sundui remarked that although “Mongolia relied upon the excavations of the good old copper,” the profits resulting from the exports of coal have now surpassed those from copper. “Due to the global economic recovery in the world, especially in Asia, demands in coal have increased. This is, of course, good news for Mongolia whose coal sector is experiencing a revolutionary upsurge,” Mr Sundui added. If in 2010, Mongolian exports of copper concentrate amounted to USD770.6 million, then exceeded that amount by more than USD100 million to reach USD877.6 million. If in 2003 Mongolia exported a mere 500 thousand tons of coal, in seven years time, these exports have been multiplied by 33 and approximate now 16.6 million tons. 

According to Mr R.Sundui, the situation is completely different from a decade ago. “In 2000 Mongolia deliberated how to put the Tаvan Tolgoi coal deposit into economic utility. We asked many countries to invest into the deposit, but nobody responded,” he said, “however, today’s leading companies in the world are competing to invest in Tavan Tolgoi.” Apart from announcing Mongolia as the “new world energy player,” participants to the Coal Mongolia 2011 Forum also warned that there was a substantial amount of work that still needed to be done in the country’s coal sector.

Today Моngolian coal has China for only buyer. The International Atomic Energy Agency estimates that for the People’s Republic of China, which relies on coal for about 70% of its energy needs, its demand for the mineral will substantially increase. According to experts of the Japanese Nomura Bank, by 2020 China will double its coal production capacity. US Citigroup also estimates that China will import 233 million tons of coal this year, an amount  which will exceed the annual capacity of the world’s largest coal ports such as South Africa’s Richards Bay and Australia’s Newcastle, investment specialists at the Deutsche Bank affirm. Mr Randolph S.Koppa, President of the Trade and Development Bank, declared in a speech that “50% of Chinese coking coal imports can be supplied by Mongolia.” In 2009 ,China imported a total of 34.5 million tons of coking coal, of which 66% came from Australia, and 11% from Mongolia. However, in 2010 Mongolian exports of coking coal to China surpassed 30%. An increase which might let think that Mr S.Koppa’s prediction could well soon realize.   

However, it would be a mistake to assume that our southern neighbor will always be a large coal importer. Chinese leadership has set the goal to decrease its reliance on coal as its main energy source by 63% by the year 2015 in order to reduce its levels of greenhouse gas emissions. It should be reminded that, in order to reach this goal, they intend to diversify their energy sources and develop their nuclear program. Meanwhile, they are doing their best to “denigrate” the quality of Mongolian coal to lower its value. Therefore, it would be wrong to assume that we can achieve development by relying on a single buyer only. Mongolia needs to follow experts’ advice to diminish its reliance on China by increasing its number of buyers, and start exporting coal to countries such as Japan and South Korea who both buy coal at a high price.

Nevertheless, Mr D.Achit-Erdene, President of the MICC Investment Bank, warned “of the current disadvantages of transporting coal to third markets such the Republic of Korea.” “Of course, if the price of coal increases, there is no denying it will be a profitable operation,” he said, “it is necessary to conduct an expert assessment of the economy first.” Mr J.Gankhuyag, director of the Ulaanbaatar Representative Office in Tianjin, remarked that Tianjin was the shortest route for Mongolian natural resources to reach the international market. But coal miners expressed their concern over the high cost of transportation via roadways and railways, which are the only ways to reach Tianjin.  

“The issue of transportation logistics is extremely important for coal exploration and its supply to the world market. Transportation of coal mineral resource by trucks is expensive businesswise and damaging to the environment. Actually, coal should be transported via railway,” Mr R.Sundui affirmed. Mr Graeme Hancock, Senior Mining Specialist at the World Bank, cautioned that “the Government did not approve the proposal for the construction of a railroad through private sector’s investments.” “Тherefore, the Government should take responsibility for the environmental consequences of coal transportation via roadway,” he said. Member of Parliament Mrs D.Oyunhorol emphasized that, in view of the current geopolitical situation, it is necessary to build a railway to the South. Mongolia’s Government approved the construction of railroads with wide tracks on its territory, and in doing so, has obstructed the construction of railway tracks to the South. Specialists also criticize the fact that the Government is also failing to accelerate the construction of a railroad to the North, which represents, according to them, a major impediment to the supplying of Mongolian coal to the world market. 
 “The construction of railway tracks will definitely begin within this year. At first, the railroad will be built towards Sainshand. The work will require two years to complete. The construction of a railway to the North via Choibalsan will start after this. Once the railway tracks reach Sainshand, it will be possible to transport coal towards the North and South via the main railway track,” the State Secretary of the Ministry of Roads, Transportation, Construction and Urban Development Mr J.Bat-Erdene claimed. Since the railway construction has not started yet, it is impossible to say whether or not it will come into operation in two years time. Consequently, state-owned Erdenes Tavan Tolgoi will have to transport coal via roadways for the time being. 

“More than 1,500 trucks heavily loaded with coal regurlarly transit through our soum.  Consequently, dust has become an important issue,” Mr G.Tsog-Urnukh, Governor of the Tsogtsetsii soum of Southgobi province, explained. He also announced that the Energy Resource Company is building approximately 250km of tarmac road from Tavan Tolgoi to Gashuun Sukhait in order to resolve this issue. Nevertheless, there is plenty of evidence that show a certain lack of Government policy when it comes to roadways. Today, as well as construction works of roadways to the South by Оyu Tolgoi, Energy Resource and Chinhua Mak, plans to build roads have also been made by Erdenes Tavan Tolgoi. “Should we build 10 roads to transport our wealth to the South? Will many trucks race next to each other?” Mr R.Sundui asked. It is obvious that Mongolia needs a common policy for the development of its infrastructure. 

“It is our goal to increase production of coal and value-added products. Currently, the large domestic companies have started to utilize coal washing technologies; they will require more thorough processing at the Sainshand industrial complex,” Minister for Mineral Resources and Energy Mr D.Zorigt said. Energy Resource Company is putting into operation a coal-breaker and plans to extract seven million tons of coal and export five million tons of coal concentrate. Of course, all sides of the economy will profit from the export of value-added products. Jobs will be created; there will be an increase in the prices of coal and a decrease in transportation costs. Experts approve the governmental policies supporting this development. Such policies as royalty for the right to use resources and the adoption of the Law on Air Pollution Payment, which decreases taxation for the increased processing of coal, demonstrate the Government’s commitment.

It is a positive development that business entities start to wash and process coal. Scientists note that Mongolia’s future goal should be to produce final products, export fuels and energy rather than raw coal. “Due to the increase in oil prices, expenses on extracting liquid fuel from brown coal have become acceptable. Our scientists have studied this technology a long time ago, and now it is time to put it into practice. As a result of the extraction of liquid fuel from coal, many types of complimentary products will be produced,” Prof. S.Tserendorj, director of the Mining Project and Research Center, said.

Of course, at a time when the coal industry is rapidly growing in Mongolia, the the consequences of coal mining on the environment will become a critical issue. Member of Parliament Mrs D.Oyunhorol said that “the majority of companies operating in the coal sector do not conduct sufficient land rehabilitation activities and do not send their activity reports to the relevant authorities,” further adding that “the Ministry of Mineral Resources and Energy does not have the authority to close down business entities that break the law.” “All this shows that our policies for the mining sector are unfit and underdeveloped,” she concluded. Every speaker reminded that now was the time to pay attention to environmental protection issues. Member of Parliament Mrs S.Oyun announced during the Forum that she was drafting a law on the establishment of the rehabilitation fund.
If only all these issues are properly regulated by the Government, then Mongolian coal will be able to fully and truly reach the world arena, and Mongolians will firmly establish their place on the international coal market. May the “Age of Coal” bring value-added products, appropriate infrastructure policies, rehabilitation regulations and the creation of jobs!