December 2009
When the President, the Parliament Speaker and the Prime Minister held a meeting on November 17 at Government Palace, it might not have been billed as a formal meeting of the National Security Council but was effectively one. It also discussed very important issues.
There were others also at the meeting. Apart from the big three, chairmen of standing committees and Ministers expressed their views on the proposed railway routes and the meeting also discussed problems of commercial banks. Both issues were closely connected to geo-politics and geo-economics as they affect the country. Parliament has already decided to finalise and adopt a railway policy before the new year, and once this is done, the new routes from Tavan Tolgoi will be clear in principle. It would also imply that the state has completed the primary preparations for the second phase of choosing the Tavan Tolgoi investor.
The list of high ranking foreign officials visiting Mongolia in the last one year has become a very long one. Similarly long is the list of projects in Mongolia in which foreign countries have shown interest in the same period. Private businesses from Russia, China, Japan, Korea, USA, India, Germany, UK and France have expanded their operations. High-level Government delegations of these countries have visited Mongolia to show support to their businesses. It is clear the world is working hard to enter the mining sector of Mongolia. The Mongolian Government has been receiving favourably their proposals with due diplomatic courtesy, without any public hint on what policy it will follow.
Russia
The Russians have been dramatically active right from December, 2008, when they put forward a number of proposals on the railway sector. At a time when the joint Russian-Mongolian Ulaanbaatar Railway sat idle without transit transport and suffered huge losses, the Russians made a proposal to set up a new joint venture. The company named Infrastructure Development was formed in a short time. It was agreed that the two countries would have equal shares. One remarkable feature of this joint venture has been that it always manages to find solutions to any problem in a very short time. V.Morozov has been appointed as the Director of the new joint venture and the Mongolian media did not get the time even to ask why a Mongolian could not be appointed director.
Infrastructure Development LLC is now registered as a Mongolian company. The governing board has such people as a former Mongolian Ambassador to Russia, L.Khangai, and T.Batbold, who has been working in the railway for many years. Major projects have been announced in no time. A blueprint of a railway from Tavan Tolgoi to Sainshand has been already made and V.Yakunin, head of the Russian railway company, has been busy in search of funds to implement the project. An international conference was organized in Ulaanbaatar in the middle of October where the diplomatic corps and international agencies in Mongolia were invited. To coincide with the conference V.Yakunin was shown on Russian TV saying that Mongolia would make a mistake if it wanted to sell its natural resources after processing. All this activism was capped by the Russian President, Prime Minister and Parliament Speaker, all visiting Mongolia within one year.
Mongolia has big plans to process mineral ores in the country and to export value added products instead of just minerals. When gratuitous advice from V. Yakunin started becoming excessive, the question automatically cropped up whether Mongolia was ready to define independently its infrastructure policy, which would include an industrial complex in Sainshand, or whether it was going to build the complex only to justify Yakunin’s poposed railway. Mongolia needs as many railway routes as possible. All transportation means through both Russia and China would be economically beneficial. Then why is V.Yakunin so much against all prospective railway routes except his own? Is there a signal in all this that if Mongolia does not give priority to the Russian Railway project, Ulaanbaatar Railway debts will not be allowed to decrease? Mongolia has clearly seen in the last one year that if transit freight falls, Ulaanbaatar Railway faces serious financial crisis.
The Russian Railway project is striving to involve the Ministry of Railway of China. Mr.Yakunin keeps making polite requests to the Chinese for help in increasing Zamiin Uud-Erlian capacity while the Chinese reply that the Erlian-Jining railway can in no way take any further load. At the moment Zamiin Uud-Erlian port hardly handles any domestic import, so busy is it with Russian and European transit freight. Following the increasing industrialization in the central and northwestern regions of China, it has become difficult even for local Chinese companies to get their transport quota included in the annual Erlian-Jining railway plan. In these circumstances, it is doubtful that the Chinese will be enthusiastic about transporting Tavan Tolgoi coal through Erlian.
Mongolia is dependent on Russia for its railway transport and petroleum import. In addition, meat processing and banking sectors are seeing increasing Russian involvement.
China
China dominates both the wholesale and retail trade and the grocery market. It also controls the market of raw material of animal origin. In addition, the Chinese have a number of licences of iron ore deposits. At the moment, it appears keen on establishing control of the coal sector, but it cannot hope to continue the open sales methods of a few years ago. Professional inspection and NGOs have stopped them from expanding in the provinces. As the Mongolian Government has tightened supervision in its border ports, transport of coal to China has been restricted. Capacity strengthening issues of Shivee Khuren, Gashuun sukhait and Khangi ports was discussed by the Government in June and it could not come to a decision at that time. The Government is planning to reopen discussions shortly.
As China is and will remain the biggest customer of coking coal from Tavan Tolgoi it has completed construction of a railway in Inner Mongolia. This is called Linhe andis the property of the Ministry of Railway of China. It runs parallel to the Mongolian border for about 200 km, meeting the transport needs of the coal from Shivee Khuren, Gashuun Sukhait, Khangi and Zamiin Uud ports. At the same time, Linhe also provides a favorable facility to transport coal from mines in the northern regions of China. The railway was intended to supply the coal to Bugat steel mill and the centralized steel mills of Xangxi region. At present, the Chinese are planning to build a new extended line towards Tavan Tolgoi. It is not clear whether it will be the responsibility of the Shenhua group or the Ministry of Railway of China. Matters will be clearer once it is known if the Shenhua group wins the Tavan Tolgoi bid.
In recent times the Chinese Government policy has been to try to acquire a certain percentage of ownership of the deposit for which it invests in infrastructure. This is particularly true of Chinese investments in Africa and it is to be seen if it will be the same in Mongolia. The choice of the winner in Tavan Tolgoi will depend on some extent on this.
Chinese imports come from far destinations, while Mongolia is right next to it. This is a relative advantage of Mongolia. China has dramatically increased its volume of concentrated coal import from Australia in 2009. Australians are also happy to send its washed coal to China by sea. By the way, why has Australia not built at least one coking plant during such a long time? What is the reason behind continuing to export the same quality coal as of Tavan Tolgoi’s just in washed form to Asian markets? This sale brings plenty of profit to Australia which supplies half of the world’s high quality coal needs. Now, it has a new competitor, Mongolia. Australia has openly acknowledged this. Mongolia has to carefully estimate and compare the washed coal market, coking coal market, profits and returns.
Another major project planned by the Chinese is the construction of a power plant based on Shivee Ovoo coal. Both Governments have agreed in principle and work is likely to begin as soon as a decision is taken on how to fix coal price in commercial terms. The Chinese might like to use its promised soft loan to Mongoliain this project. While Mongolia must be hoping to use the electricity generated here at the proposed industrial complex in Sainshand the Chinese will certainly use the extraelectricity to supply its power-deficit northern region with energy. China has its own interests in being significantly involved in the energy sector of Mongolia. This can be seen from the fact that a Chinese company was the lone bidder for the fifth power station in Ulaanbaatar. There could be no selection without a competitor and the second bid will be announced in the second quarter of 2010. Mongolia should try to be independent of China in the energy sector, especially as in many other economic sectors, the dependence is already heavy.
Japan
Japan is interested in Mongolian uranium. It can also be said that Mongolia has been made a party to Japanese-Russian collaboration in a major uranium project. In return, Japan will buy from Mongolia mutton, the demand for which has shown a sharp increase there recently. Jamts salt (hard rocky salt, very common in Mongolia) is a rare delight in Japan. Pure natural food and mineral rich vegetables are in high demand in developed countries and Japan has started implementing a major project to raise Mongolian cattle for ultimate sale in Japan. It is closely working with the University of Agriculture. JICA is implementing a project in the Ministry of Food and Agriculture.
Another sector that is of interest to the Japanese is the banking sector. It seems Japan wishes to aggressively enter the banking and financial sectors. The Mongolian Government has taken a decision to set up a State-owned development bank. The Japanese want to invest in it and has promised all sorts of assistance. Khan Bank, whose major shareholder is a Japanese, is an important player on the Mongolian financial stage. Savings Bank, owned by a Russian but with Mongolian management, has a number of branches in the provinces. There are 16 commercial banks in Mongolia with 2,000 branches, most of them of the Khan, Savings and Mongol Post Banks. It is clear that the banks with the most branches are all owned by foreigners.
South Korea
South Korea was the first country to officially express its interest in Tavan Tolgoi. During an official visit of the Prime Minister of Mongolia to Korea in October last year, 11 top Korean companies expressed an interest to participate in the Tavan Tolgoi bid under the auspices of the Korean Government. They even made a presentation with pictures and graphics. Although Korea has no history of developing minerals, it is ready to invest in the railway mega project to transport Tavan Tolgoi coal. It also wants to buy coking coal from Mongolia. Korea has already made an agreement with Russia on this project. Russia can offer experience of railway construction, while Korea can offer the funds. Russia and Korea are not just expecting something to happen in Tavan Tolgoi. They have agreed to collaborate on another coal deposit recently.
A number of Korean securities companies are interested in the capital market of Mongolia. Several of them are working here preparing for the expansion of the mineral sector. Mireco, a state owned Korean company, has expanded its operation in Mongolia. In general, a number of projects are to be implemented by Koreans in the near future. KOICA will be an instrumental aid to achieve this goal. In addition, the service sector in Mongolia receives investments mainly from Korean companies.
Germany
German mining machinery and equipment suppliers have shown considerable interest in Mongolia and any close collaboration between the two in machinery and technology sectors cannot but be beneficial to Mongolia. A visit by the Prime Minister of Mongolia in March to Germany played an important role in this. Deutsche Bahn is responsible for the management of railway construction of Ukhaa Khudag-Gashuun Sukhait. I wish Mongolian companies, Ministries and agencies would actively participate in the upcoming mining machinery and equipment exhibition in Germany in April and expand their network.
Other countries
Jindal Steel of India is clearly interested in Tavan Tolgoi. The company transcends its Indian idenitity and it is more appropriate to call it a world class and prestigious competitor. The Indian Government has recently pledged USD 25 million in aid to Mongolia and it seems to be used as an expression of support to an Indian company.
The U.S.A views Peabody Energy as the most suitable bidder for Tavan Tolgoi and the last U.S. Ambassador made this clear on a number of occasions. The company representatives held meetings with the Foreign Minister and the President of Mongolia when they were in the U.S.A. When an uncomfortable situation arose following the Russian rejection of Millennium challenge aid, America chose to be patient to protect the interests of Peabody.
There are many Canadian invested companies operating in Mongolia. Most of them are uranium and gold exploration companies. The passing of the Nuclear Energy Law, which states that the state would directly appropriate 51% of the company equity has put Canadian companies in an uncertain situation. The involvement of Canada, which has rich experience of mineral production, is important for Mongolia and friendly relations with the Canadian Government is vital for Mongolia.
The Ambassador of the U.K to Mongolia has the main task of protecting Rio Tinto’s interests in Mongolia. He must have been relieved when the Oyu Tolgoi investment agreement was finally signed.
For Mongolia, it is important to attract state of the art technology and to have reliable Western companies in the mining sector. To have multiple partners in this sector, from countries like the U.K. Germany and Canada will be an important factor in geo economics.
The French Government is behind its company Areva. There is no other company in the world which has the full 8 cycles of radioactive mineral development starting from uranium mining to nuclear energy production. Therefore, having the French working in Dornogobi is important for Mongolia. Mrs.Louverge, President of Aerva Group, recently paid a day’s visit to Mongolia to check how the stringent provisions of the Nuclear Energy Law could affect the company.
I have tried to show the interests of many countries in Mongolia. They all have people here working hard to put them in an advantegous position. They are waiting for more clear signals from the Mongolian Government. The extended meeting held in the Government Palace discussed their claims and interests but is not known to have come to a decision. Geopolitically, a mulipolar approach is crucial at the moment. Mongolia has to find many different trade routes and have multiple partners. We are living in interesting times.