November 2008
The recent issue of the Finance magazine names Russia’s top 500 companies, ranking them by the size of the capital they command. The third on the list appears “Russian Railways” shareholding company.
Last year the company recorded 84 billion roubles net profits, which is worth mentioning as this “empire” of Mr. Yakunin may be identified as one of the key players in developing Mongolia’s deposits of strategic importance.
Although Mongolians haven’t been able to agree on changes and amendments to the Minerals Law and the talks about the Investment Agreement have faded since long ago, many foreign companies have already started preparations for participating in the large scale minerals development in the Mongolian Gobi.
The issue of foremost importance is infrastructure. Studies indicate that 75% of the total minerals endowments of Mongolia’s Gobi region is contained in Tavan Tolgoi, Oyu Tolgoi and Tsagaan Suvarga deposits of strategic importance. Therefore, electricity grid, paved roads and railways leading to the eastern Gobi are to be developed first, followed by extending this infrastructure out to the west of the Gobi on to Ovoottolgoi, Sumber and Nariin Sukhait.
Russians have shown a huge appetite to partake in this gigantic development project. On the other front, the Chinese have already planned to lay their railroad toward Mongolia’s southern borders. The Canadian and British companies, operating at Oyu Tolgoi have slightly different ideas about the transportation route for the concentrate they will produce. A top of these, we will see the birth of another one entity to manage the 188 million USD funds earmarked for improving Mongolia’s railways from the Millennium Challenge Account.
Briefly, behind Mongolians’ naive and simplified expectations about “money-rain“ to pour upon us as soon as the amendments are finalized and the agreement is concluded, a serious confrontation of interests attached to the gigantic development project is likely to emerge.
The time is ripe for Mongolia to skillfully coordinate the efforts and positions of the interested parties in such a manner that is beneficial for the host country itself, Mongolia.
Yakunin gains speed as he rushes to Mongolia on the Trans-Mongolian railroad.
He might be convinced in his right to exceed the allowed speed limit.
Then, why would Chinese be any worse? I must note here that in their five-year plan adopted under fervent applauds they made two border crossing markings on their borderline with Mongolia. Let us try to read the mind of the Mongolian Government, which can be identified with a regulator at an extremely speedy and hectic traffic.
What Do the Russians Want?
Russian businesses harbor an insatiable interest to possess the rich coking coal resources of Tavan Tolgoi deposit. As studies have shown, the resources are huge as at only 30 million ton annual production, the deposit will live for 200 years, and under much generous assumption of twice as much annual production, the deposit will feed coal for a whole century. A railroad will be needed only for coal transportation as for other deposits the produce can be transported by trucks.
In an interview past spring, Mr. Yakunin, Chairman of the Russian Railways, noted: “We are ready to undertake rehabilitation and improvement of Mongolian railroads, in return, we would like to be repaid by the Mongolian Government with a license to use Mongolian natural resources. Then we would transfer the license to a Russian company to be chosen to mine the deposit. Viktor Vexelberg and Vladimir Potanin drew me to this venture.” My careful reader must have already noticed why Yakunin mentioned in his talk the names of Russian billionaires. The probability is high for a Russian consortium formed by Vexelberg, Potanin and Yakunin participates as a strong competitor in an international tender bid on TavanTolgoi.
You may have already started visualizing chains of trains full with coal rushing busily across vast the Mongolian Gobi. Although this may seem quite far ahead in the future, the preparations have already started at full speed – the larger the project, the earlier the competition starts. Since not long ago Mr. Yakunin began being “invited” to partake in the largest projects. His invitation record has been enriched by an invitation he received last summer to participate in Udokan deposit development. Since railroad grid is essential for transporting coal and other minerals, he thus learned “depositing” his rails in major minerals projects. The 42 km long railroad to Udokan was announced to have a book value of 2.1 billion roubles.
If Russians do partake in TavanTolgoi mine development, a question will rise about the transportation routes it would set for the Tavan Tolgoi coal. A World Bank consultant Richard Bullock has done a preliminary study on potential routes for railroad from TT. Mr. Bullock started his study in May with the WB funding this year and produced an independent expert conclusion, which is a valuable material for Mongolians to study.
Mr. Bullock presents four different options for railroad routes which do not only encompass Tavan Tolgoi, but also cross through Oyu Tolgoi. Of these options the most expensive route is a line from Tavan Tolgoi to Mandalgobi. This idea to transport coking coal toward north through Mandalgovi to reach Trans-Mongolian railroad can come to the minds of Russian billionaires only.
China’s Plan
China has already clearly marked in its 5-year plan its intention to deploy Mongolia’s minerals resources for its development. While the Russians crave to link Tavan Tolgoi to trans-Mongolian railroad, the Chinese have already “hooked” both Tavantolgoi and Oyu tolgoi in one line and have “appropriated” them along with Gashuun Suhait. They have marked the trajectory for a new line to Baotou, which they would build in a twinkle of an eye. In this way the Oyu Tolgoi copper concentrate is “already transported“ to Chinese plants through “dotted lines” on the map, at least as things stand today.
China annually imports 10 million tons of concentrate, therefore the Oyutolgoi resources are conveniently close to its market, notes Mr. Bullock. Moreover, he concludes that the Tavan Tolgoi “Oyu tolgoi” Gashuun Suhait railroad is relatively cheap and therefore is a more realistic option. Besides, since China’s border ports Linhe and Ceke are located close to Mongolian borders, it is highly probable that quite soon new routes will be laid across Mongol-China borders close to these ports.
China needs both copper concentrate and coking coal. To meet this demand, Chinese leaders have already contrived plans to secure good quality Tavan Tolgoi coal to its steel plants in central and western China. In their long-term visualization beyond the 5-year plan they have also projected to lay a railroad close to our eastern borders as well. They apparently named this route as Choibalsan route. Their conceived idea to link the northern China to Far East would definitely be supported by Russia.
Our Policy
“Our experts did not sit idle as well. We are also doing some studies” said D. Battur, State Secretary of the Ministry of Finance of Mongolia. He confirmed that Mongolian specialists are doing a cost-benefit analysis on the most reasonable and realistic according to Mr. Bullock Tavan Tolgoi “Oyutolgoi” Gashuun Suhait option. Besides, a new route to connect Tavan Tolgoi and Oyutolgoi to Zuunbayan is being studied. This new route may “check and balance” the pros and cons of connecting the deposits to the trans-Mongolian railway. Another merit of this route is that, it, as if “by the way“, crosses through Tsagaan Suvarga. Though it may be too early to discuss Tsagaan Suvarga development today, this route may reflect the vision of the plans of our experts.
Under any option, the Mongolian Government is not able to finance the railroad projects solely at its own. It has no other choice than to partner with the private sector and cooperate with foreign investors. Perhaps, an example of a public-private partnership is the Energy Resources project to finance a railroad from Uhaa Hudag to Gashuun Suhait.
Can Millennium Challenge Account funds be used for construction of railroads?
A legitimate question to expect is whether the bulk of the MCA funding, the 188 million earmarked for Mongolian railroad dollars be used for financing infrastructure development for the major deposits. The account funds shall not be given to the Ulaanbaatar Railways. Instead, a revolving fund to operate as an independent entity is likely to be established. In other words, anew private company is to be born soon. With these aid funds, the signaling system will be upgraded and a modest share of trains and locomotives will be renewed. No investments of a greater magnitude, say, to build railroads to the major deposits will be made with the MCA grant money. However, if the rolling stock is rehabilitated to a certain extent, new forms of partnership such as leasing may be introduced sometime in the future.
Thus, a new private company is going to be established in Mongolia’s railways. Experts foretell the creation of a sovereign system to manage internal and external logistics of the development of Tavan Tolgoi and Oyu tolgoi deposits. Moreover, V.Yakunin, the Chairman of the Russian Railways company is said to be working actively to cooperate with Mongolians to establish this structure. “We are discussing options to establish a joint venture with the Mongolian Government, or cooperate with the company proposed by them. We have formally presented our proposal to the Prime Minister and President of Mongolia. They haven’t yet responded” – he said in an interview.
In brief, these developments necessitate creating a new legal and regulatory environment for private entities to operate in Mongolia’s railways sector.
Will the Miner Build and Maintain the Roads?
This is also a natural question to emerge. In Russia, for instance, in most cases, the mines own railroads. In some cases, a third party – a private company provides logistics services to them. In China Shenhua corporation has its own coal transportation infrastructure. In Mongolia, where the closest to production mine is Oyu Tolgoi, there are some experts to believe that railway transportation is more suitable for coal rather than copper concentrate.
The Oyu Tolgoi project people haven’t yet expressed any position yet on this issue. In any case, there is a prevailing understanding that 200-250 trucks with trailers would run daily to transport Oyu Tolgoi concentrate to the Chinese border. Assuming that a truck would carry 2-3 trailers, we should also think of the extent of degradation of the Gobi ecosystem. Oyu Tolgoi project managers are likely to prioritize the possibilities to transport their produce through the closest railroad. Obviously, the project does care very much about the safest and promptest ways of transportation of its equipment and machinery, other suppliesand, of course, its workers, to the mine site. Although there is truly a big demand for expeditious and secure transportation to Oyu Tolgoi, many experts and specialists view that laying a railroad to Oyutolgoi is not justifiable unless this road reaches Tavan tolgoi, in which case, a railroad would serve meaningful.
Is it right for Tavantolgoi mine owner also own the railroad? – a question came from the audience addressed to Mr. Bullock. A question to learn from the decades long experience of a pundit in railroad development studies.
Not an easy question. In Australia, the mine owners also own the railroads. There were cases when such a structure leads to a discrimination against small mines. An extremely well-thought regulation is needed therefore. Since Mongolia is quite likely to lay a trans-border line, talks should be held with the relevant Chinese authorities. Government regulation will come to play a vital role.
Some companies have obtained licenses to build railroads. How should this issue be regulated?
A license agreement should be concluded with the license holders.
Chinese companies are interested to get actively involved in Mongolia’s railway sector. What should Mongolians beware of?
Attracting foreign investment is said and, indeed, is plausible and needed. Yet, as an independent researcher I would advise to thoroughly examine the potential effects and impacts. This is especially important for Mongolia for some very special features she has, responds Mr. Bullock.
Everywhere, where concerned, maps are being drawn to carry Mongolian minerals. The shortest and fastest routes are being marked with dotted lines. Yet, it’s doubtful whether they all are careful about engineering designs and solutions and environmental impacts. These are the issues to be double-checked by ourselves, the Mongolians. The Government will thus have to conclude a new transit transportation agreement with China. No easy talks might start with Russia about Mongol-Russian joint ownership of railways under new emerging realities and pressures. Mongolia will have to develop neat calculations and estimations to benefit from its selling coal not only to our two immediate neighbors but also to South Korea and Japan. For this, the first step would be to secure a reliable road to lead to China’s border ports. Though Chinese railways are praised by specialists as one of the best railways in the world with well managed traffic, because of the extremely busy traffic, they schedule the traffic on their grid much early in advance. Besides, we may expect complications and pressures in the future which might be caused by the capricious nature of minds of our two neighbors’ governments that we would eventually won’t be able to change our tariffs as we please. As of the moment, Russia charges thrice as much their domestic tariffs for transit traffic.
In such a way, the Mongolian government should be makingprecise estimations and projections about the future of Mongolian minerals. A policy will also be needed to engage and support Mongolian national companies in the gigantic development projects in Mongolia’s southern Gobi. Equally important is assessing environmental impacts of major infrastructure projects and development of townships in the vicinity of the mines. For all these ventures the Mongolian government would only be better off if it seeks cooperation with internationally renowned experts so as to eliminate, at least to mitigate the risks inherent in major mining and development projects.
The terms and conditions for licensing railroad transportation should be clearly defined as a private railway operator will very soon become a reality in Mongolia. For obvious reasons, Russian and Chinese companies will seek to obtain such a permit. While the air in Mongolia is filled up with numerous question marks, the world’s coal giant Peabody Energy, homed in the US, has for the first time filed its application to participate in Tavan Tolgoi international tender bid. This sounds akin to Peabody’s interest to run its locomotives in Mongolia’s vast Gobi. Recently Americans voiced their request to engage reputable American companies in Mongolia’s major infrastructure projects, whereas the world’s second largest coal producer Shenhua is almost certain in its victory in the tender bid. Should Shenhua win the tender, the company hopes, Chinese steelmakers will use Mongolian coal supplied to them all the way through Shenhua railroad. Mr. Yakunin will always be there, in our back, to prompt the process.
The Koreans to our east have also finalized the structure of its consortium to partake in the Tavan Tolgoi bid. They conveyed that Korean largest private companies would want to bid in the tender in association with the Korean Government. Moreover, they are proposing a new route for Tavan Tolgoi coal transportation. Russians and Koreans have agreed to materialize the most costly option to lay a railroad from the deposit to Choibalsan. The route would further lead to the Siberian line through Solov’yovsk station. From then on, the coal will be delivered to Koreans through Vanino. In this article I have summarized the draft plans of our neighbors and beyond to gain access to Tavan Tolgoi coals, while the deposit itself might still be seen as a “sleeping beauty of the Govi”. It is worth noting that in this rush for coal, foreigners are amazingly cooperative and accommodative of each others’ moves. Yet, they will all be governed by the signal to be given solely by the Mongolian government, which is to exert utmost prudence and diligence to provide wise policy guidance for all stakeholders.