Mongolia's Treasure Chest
By Taizo Ishida
May 4, 2012
There has been much hype recently over the treasure chest of natural resources in Mongolia. Dubbed the next “Saudi Arabia of coal,” Mongolia claims more coal than China, which produced nearly 4 billion tons last year, according to a report by Bernstein Research. At the same time, however, there continue to be conflicting reports from the Mongolian government over who may be allowed to develop and ultimately own the rights to the country's precious resources. One key concern among global investors is “natural resource nationalism,” a term used to describe the tendency of governments to assert control over these resources. (Venezuela and Zimbabwe are extreme cases of this).
In late April I spent a few days in the South Gobi Desert to research the Tavan Tolgoi coal field, one of the world's largest coking coal deposits. The sheer size of Mongolia’s reserves there is impressive. As we stood at the edge of the open pit, we could not help but feel awed by the enormous scale of the operation before us, which was just a testing ground. The field operators were just beginning to scratch the surface of the entire mine stretching from east to west as far as the eye could see.
On the surface, Mongolia (population 2.8 million) appears to have the potential to reshape the global supply of key metal commodities over the next decade. It is the world’s lowest-cost coal producer with better quality coal for coking than that of Australia. Two important things to consider, however, are local politics and relations with China, Mongolia’s biggest trading partner.
Local politics tend to be tricky for foreigners to gauge, but it is safe to say that Mongolia is prone to populist policymaking, and decisions take time in such a democracy. Infrastructure is a big issue and development is still lacking in terms of roads, railways, power and running facilities. Tavan Tolgoi is located 200 kilometers from the Mongolia-China border and at the moment the only way to move coal is by truck on dirt roads. Railways are needed to increase load capacity to meet increasing demand from China. Plans are surely underway amid this frontier environment, but timely executions remain to be seen. Regardless of differences in Mongolia’s political parties, it seems to me that they are at least aligned in the common interest of sharing the wealth in the untapped potential of their mineral assets.
Like it or not, Mongolia needs to better cope with large Chinese state-owned enterprises, and try to manage China's increasing demand for resources. While in Ulaanbaatar—Mongolia’s largest city and surprisingly modern capital—we met with one central banker who remarked, “Even if China’s GDP were to decline to 0%, we would be fine.” I took this to mean that with Mongolia’s economy so relatively small, any amount of consumption from China would benefit it. With such high quality resources, Mongolia also maintains its competitive advantage. It’s with this frame of mind that Mongolia-watchers should consider the country’s future.
(c) Matthews Asia