CHARTS: The coming critical minerals trade war is BRICS short of a load
"While a large number of countries around the world continue to talk about securing raw material supply, China is actually doing something about it."
Mongolia struggles to develop its largest coal mining project, Tavan Tolgoi, with reserves of 7.4 billion tonnes of coal, after the Mongolian Government failed to secure $4 billion in funds. Development of the mine, halted by politics and weak government institutions, reflects the resource curse as Mongolia’s Parliament failed to transfer ownership of the coal mine. The transfer of ownership to a consortium of Chinese and Japanese companies, was part of Mongolia’s plan to increase investors’ stake holdings in 2015 and 2016.
Mongolia’s continuously developing mining sector and vast resources cause obstacles in managing Mongolia’s resources. The development of Oyu Tolgoi and Tavan Tolgoi represent a mining boom that could be short-lasting as the country experiences boom-bust cycles in line with international demand and international commodity market prices. Mongolia’s double-digit growth of the last few years and in 2014 slowed to 7.8%. In 2011, there was 17.3% GDP growth.
Mongolia wishes to discover and exploit its vast mineral reserves worth nearly $1.3 trillion. Mongolia, in addition to coal, produces tungsten, copper, gold, fluorspar, uranium and tin; in 2010, mineral exports accounted for 46% of its GDP. According to a Reuters article, “Mongolia relies on China to buy nearly all of its minerals and petroleum, which made up [86%] of exports in the first six months of 2015.” Mongolia’s currency, the tugrik (or tögrög, MNT), slipped 24% according to Bloomberg business reporting. The recent tugrik slipped because of a drop in commodity prices and China’s yuan devaluation. The tugrik also slid 12% in September 2013. Current inflation as of August 2014, is 13.70%, but has averaged around 12.5% the last seven years.
Tavan Tolgoi is Mongolia’s largest coal mine and located in the South Gobi desert close to the border with China. Tavan Tolgoi is divided into six sections: Tsankhi, Ukhaa Khudag, Bor-tolgoi, Borteeg, and South-west and Eastern coalfields. It has been ranked the world’s most profitable and untapped coal deposit. It is said to be the second largest coal deposit in the world. The coal mine has often been hailed as a panacea for Mongolia’s economic problems along with cooper gold mine, Oyu Tolgoi.
Tavan Tolgoi, along with other mining ventures including Oyu Tolgoi, Booroo and Gatsuurt, represent the non-diversification of Mongolia’s economy and Mongolia’s concrete reliance on mineral production. Mongolia is experiencing the resource curse and heavily relies on mineral markets that results in non-competitiveness of other GDP sectors. Mongolia’s mining sector accounts for 55% of its industrial output. Mongolia, like other resource rich nations, rely on mineral markets to develop other sectors; while other sectors should be developed simultaneously.
The reliance on commodity exports to generate revenue contributes to increased market and macroeconomic volatility. Without proper governance, most mineral rich countries, the over reliance on minerals and the reliance on foreign mining companies to exploit the resources creates conflict. The presence of foreign mining companies often clash with national and local governments which halt the exploration of mineral resources. Consequently, contracts get mired in shifting politics and production is stalled.
Sharp declines in foreign investment impact the mining and commodity exports. Exploration of the Tavan Tolgoi mine is a risk as global coal markets have been on a decline. The U.S. viewed coal as a “clean” alternative and a way to provide jobs but has shifted from coal to focus natural gas extracted from shale (fracking). China has also burned less coal and China is one of Mongolia’s biggest coal buyers. New coal deposits (or fields) in South Africa and in Mozambique have increased supply and could divert business and development away from Tavan Tolgoi. Overall, other development opportunities in more financially transparent, politically stable countries may lure investors away from Mongolia.
Tavan Tolgoi’s developer should be concerned about the lack of political backing for investment according to the Financial Times. Failure to support companies may result in the abandonment of projects and lack of future investment. Mongolia’s waning business climate, ranked 72 according to the World Bank Ease of Doing Business Index, makes the country less competitive. However, the new Prime Minister seeks to provide foreign companies “the same regulatory treatment as local counterparts and freezing a 10 per cent corporate tax rate for up to 22.5 years for large inward investors.” For Mongolia, foreign direct investment inflows totaled $2.15 billion in 2014 compared to $4.451 in 2013 reported the World Bank.
In November 2010, the Mongolian Government re-opened bids for the Tavan Tolgoi coal mine after the government had scrapped the contract-mining arrangement which would have made “the government is responsible for financing development of the deposit, including the cost of any related infrastructure such as roads.” A group of Japanese companies, Chinese Shenhua Group and U.S. Peabody Energy were among the strategic investors. The U.S. Peabody, Russia, and Chinese Shenhua were chosen to lead the exploration. Almost four years later, the mine is not operational and the government so far has failed to secure the $4 billion investment. In April 2015, Parliament, before the deal was finalized, struck down the agreement as one Member of Parliament feared that it was in violation of Mongolian law. Mongolia’s parliament, the unicameral Great State Hural, opposes the Tavan Tolgoi project, but officials attribute the main blockage to China’s declining growth, not political squabbles.
Revisions to the 1997 Minerals Law in 2006 have deterred foreign investors. Other legislation, including 2009 Law on the Prohibition of Mineral Exploration in Water Basin Areas and Forest Areas, which revoked hundreds of licenses. The 2012 Strategic Entities Foreign Investment Law of Mongolia (SEFIL), ignited concerns about resource nationalism as the law “was designed to restrict foreign investment in firms in sectors like mining to just 49 percent.” Reporting from Reuters states that the SEFIL discouraged foreign investors and held them back including a restriction that “all foreign SOEs will need the approval of Mongolia’s cabinet in order to buy into a Mongolian firm.” SEFIL was amended in 2013, but still puts limits on telecommunications, mineral and finance. In May 2013, Mongolia passed a new Securities Markets Law focused on “facilitating dual listings of companies with assets in Mongolia, aligning Mongolian capital markets with international standards and bolstering the attractiveness of those capital markets domestically and abroad.” With the new laws, Mongolia is attempting to strike a balance between building strategic and financial partnerships and maintaining control over its mineral resources.
During the two-day “Discover Mongolia” from 3-4 September (also referred to as Invest in Mongolia 2015), foreign investors cited common problems with Mongolia’s business climate including the need for a healthy legal environment, “fixed principles on cooperation,” stable politics, not to polarize mining issues, and to move on the Oyu Tolgoi and Tavan Tolgoi products according to the UB Post, a Mongolian news site.
Mongolia shows promise in other economic sectors including transportation which can be enhanced by mining operations and international development programs. To escape the resource trap, Mongolia needs to continue to engage in supporting a broad-based economy and development. Mongolia should also contribute to its textile industry, healthcare and environment. Even though mining would serve as a large source of revenue, fickle national politics and regulations may prevent exploration of the mines.
