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Developing Mongolia’s coal industry

World Coal,

In the last two decades, with assistance and advice from various multi-lateral and bi-lateral donors, Mongolia has begun reforms to move from a centrally planned economy towards one with market characteristics. At the same time, geological surveys have shown it to hold vast reserves of coal, copper, gold, silver, uranium, molybdenum, iron, tin, nickel, zinc, tungsten, phosphates, fluorspar and some oil. The government of Mongolia recognises both that exploitation of its mineral wealth is essential if the economy is to grow and that it must establish a sustainable way forward if it is to avoid the problems that have affected several other resource rich developing countries in the past.

It has a strong vision of how the country should be developed, with an aim to establish major and long-lasting opportunities for Mongolia. The mining operations will need to meet all the environmental regulations and standards, so as to limit adverse impact on air quality, loss of water supplies and destruction of the fragile ecosystem. The government has declared that it will use the proceeds from mining activities to develop essential services. These need to include education and health care, as well as creating capable workers with equal access to opportunities to fill jobs in the mining and construction sectors. This will require a longer-term investment culture, with the prospect that the country can gain added value from its coal and other resources that will fulfill a crucial and beneficial role in the country’s overall development.

Mongolian investment environment: losing its credibility

In order for such an ambitious objective to be met, major investment is needed to develop the mines and associated infrastructure. The latter must include extensive rail/road links, an uprated and integrated power transmission and distribution grid, new power plant facilities, other industrial facilities, and townships in mining regions. Consequently, there is a need for external assistance. This requires a robust business and economic development plan for Mongolia, which includes an increase and enhancement of co-operation with the private sector, while also expanding international investment opportunities by creating a stable and secure environment for domestic and foreign investors. However, in practice, the lack of consistent implementation policies together with weak legal and regulatory frameworks means that the country is facing severe development challenges.

In the past, certain mining agreements were made without due regard to Mongolia’s best interests. Recently this has become apparent to much of the population. The adverse reaction that arose has led to the government to declare that it may renegotiate various coal production agreements, as well as other resource agreements such as the Oyu Tolgoi copper and gold mine contract. This retrospective approach is likely to lead to either a significantly more cautious or to a negative approach by international investors just at a time when a massive influx of capital is needed. Whereas the investment climate in Mongolia was previously seen as highly favourable, it is now seen as being overtly risky. This is resulting in unwillingness by international companies to support new projects until it is clear that a consistent approach is to be established that will cover both new and existing contractual commitments.

While it is essential to maintain foreign investment, it is also important to manage the economy as far as is practicable to limit vulnerability due to the impact of cyclical mineral prices. For example, GDP growth accelerated to 17.3% in 2011 from 6.4% in 2010, with government spending rising by 56% in 2011. Forward payments have been made to various cities in anticipation of continuing future revenues, which will not be achieved due to the flaws in the implementation plans within the mining sector. Thus, a further 32% increase in GDP growth was expected in 2012, but this is not now likely to be achieved as the global economy is facing a substantial slowdown in growth due to the continuing European sovereign debt crisis. This situation is made worse by China’s further cutback in coal imports due to the ongoing disputes over market accessibility. It seems that, in the near term, there will be a sharp drop in the Mongolian government revenues.

Mongolian coal: a minnow between two giants

The development of several major coal deposits to generate income for the greater good of the country is at the forefront of the resource exploitation boom. In this regard, Mongolia’s location between two very large countries, with major economies, offers some very complex challenges. While China is seen as an obvious market for its coal, there are very strong doubts about letting its state-owned companies gain a direct input into Mongolia’s energy (and other minerals) sectors. At the same time, Mongolia also remains dependent on Russia for petroleum products, and its industries (including the agricultural sector) remain vulnerable to any interruptions to that supply chain.

Consequently, Mongolia needs to establish a balanced relationship with the two, not least as both are keen to improve bilateral trade, while both can determine whether Mongolia can establish a route to establish its own significant export routes for bulk commodities. The steps taken so far have not necessarily worked to Mongolia’s advantage. It remains to be seen whether it can reach a financially and economically viable accommodation with its two neighbours and beyond them to the many international mining groups that can actively assist Mongolia to establish a sustainable coal-based economy.

Growing a clean coal economy

At the same time, Mongolia has a small population and until recently has had little industrial input. As such, there is a need to build up its own capacity to ensure there is sufficient scope for its people to take on more than unskilled jobs within the various mining sectors. It also needs to gain expertise and experience in the introduction and application of coal utilisation technologies if it is to establish a growing energy economy based on clean coal, to be supplemented with renewable energy as appropriate.

There is an international co-operative venture under way in the mining sector, with a broad agreement having been made between Mongolia and Germany to set up a Mining Academy that will cover joint research, workshops and advanced training. When clean coal utilisation is considered, there is considerable scope for Mongolia to engage with various independent expert bodies, such as the IEA Clean Coal Centre. There is a significant need for techno-economic based capacity building and associated technology awareness training to be provided, covering the efficiency and environmental impacts of clean coal and alternative technologies. This is necessary both to assist the nation in its near-term development plans and also to build up the national capacity from a longer-term sustainable perspective.

Dr Andrew Minchiner OBE is principle associate at the IEA Clean Coal Centre. His full report is available from the IEA Clean Coal Bookshop.

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