By B.Tsolmonbayar
By L.Bolormaa
Faced with a yawning budget deficit, Prime Minister Julia Gillard last year came up with a 30%-tax on the “super profits” from the mining of iron ore and coal in Australia. From 1 July 2012, a company was to pay the tax when its annual profits reached $75 million. Around 320 companies fell into the net. The impact on the economy was devastating. $75 billion worth of anticipated investment in the country’s mining sector did not materialise, and Gillard’s move was a major reason why her Labour Party lost the Parliamentary election last summer.
The new Australian Prime Minister has made a clear statement that he “will support all businesses and investments” and that his government “will be different from Gillard’s”. The same scenario is seen in Mongolian politics. Every time a new political grouping wins power, it blames all the country’s woes on its immediate predecessor and promises to follow a totally different path.
Last year saw major mining companies of the world shy away from investments by suspending some of their projects and/or cutting costs in various ways. The trend continues.The amount of money raised at the London Stock Exchange in the first quarter of 2013 was 80 per cent lower than the amount in the corresponding period last year. Similar, if not so drastic, results have been seen at the Toronto and Australian stock exchanges. All these ‘silent moves’ indicate that a cycle is coming to a close, that the days of spending are over. Actually, business saw the signs of the mining spurt coming to an end early enough and began tightening belts. You may all remember how what happened at stock exchanges on 8 August, 2011 led to the day being marked in memory as the Black Monday. Politicians were among the last to understand the true nature and import of developments, and even when they did, usually erred in their response. The Australian example with which I started shows exactly this.
A decade or so of rise incommodity prices is over and the drop is likely to continue in 2014 and 2015. Bloomberg’s research desk thinks coal, copper and gold will all see prices significantly lower than today’s. Mongolians have realised they are on a downhill run, and all eyes are on how state policy will help in a safe landing, and not a crash. President Ts.Elbegdorj was unequivocal when he addressed the economic forum in September, saying, “We have reached the bottom.”
This is a time to recall how crazily we acted in the last ten years when mining bloomed. A large number of Mongolians remain in poverty, but there are also thousands who established themselves in business. What stands out is how political decisions throughout the decade harmed the economy in the long run.
The chart you see above relates the main eventsin Mongolian politics to some economic indicators. Please note how stock prices fell right after both the Presidential and the Parliamentary elections. The gest drop was after 1 July, 2008. Not just then, but actually stock prices of companies dealing with Mongolian deposits tumbled immediately after announcement of almost every political decision on mining. There was some correction when a news report was published about the worth of a certain deposit. Every curve of the line determines the destiny of thousands of individual shareholders, companies and the government also.
Now let us come to the next chart. You can see how the long and still unresolved dispute between the Government of Mongolia and Rio Tinto LLC on financing the underground mine at Oyu Tolgoi has affected the economy. On July 29, Rio Tinto announced that it was suspending work on the second phase of the project and this immediately led to a total stop in inward foreign currency flow. Eventually, the MNT rate against the USD reached its lowest point since the peak of the crisis in March, 2009. Government bonds lost in value and Moody’s lowered its credit rating for Mongolia. Stock markets showed little interest in the country, until the Government announcement in September that it will sell Samurai Bonds somewhat revived enthusiasm. Whatever the merits of the monetary policy of the Mongol Bank, it is the political decisions that cause the swings in our economy and in investors’ moods. Such unpredictable swings affect the fortunes of small and medium businesses and thus the livelihood of the thousands of households that own and run them.
Let me take another example of a prime player in the political soap opera. This is a rich deposit named Tavan Tolgoi, which has Baruun Tsankhi and Zuun Tsankhi coalfields.
Export of coal from Zuun Tsankhi began in August, 2011, exactly one year after the formal inauguration of work onthe coalfield. Soil removal at Baruun Tsankhi began last February and only after six months its products began to be sold to Winsway and other companies. Baruun Tsankhi is expected to export 3.5 million tons of coal this year and earn $120 million. On the other hand, Zuun Tsankhi is still repaying its debts with the coal it exports. Why are ZuunTsankhi and Baruun Tsankhi so different?
Zuun Tsankhi fell victim to political machinations. Soil removal there began when global coal price were at their highest peak. Australian mines were hit by floods, and Mongolia became the number one supplier of coal to China. Prudent commercial planning by the company would have seen it go for an IPO in 2011, the most sensible way to raise funds in a market economy. If, together with this, we had gone ahead with construction of the railway from Tavan Tolgoi to Gashuunsukhait, Mongolia would have become one of the major players in the world coal market. However, Mongolian politics came to the fore, and, instead, got us eliminated from the field.
The financial woes of Erdenes Tavan Tolgoi can be traced to two follies. The first was the election-oriented promise of former Prime Minister S.Bayar to give MNT1.5 million in cash to every citizen and the second was the successful pressure by Minister Kh.Battulga, solely to protect Russian interests, to scuttle work on the most sensible export route. The absence of the railway impacts not just Erdenes Tavan Tolgoi, but also hides the resources of entire Umnu Gobi from their buyer and leaves us out of the trade triangle of China, Russia and Kyrgyzstan. These two motivated and foolhardy decisions of the Government will be damaging the prospects of generations of Mongolians.
Currently, Zuun Tsankhi is repaying money it received as advance payment from Chalco. The initial agreement had fixed the price of coal at $70 per ton, but in the third quarter, it was further reduced to $47 per ton, in keeping with prevailing global rates. Chalco’s CEO visited Mongolia in September and finalised the deal, pressuring ETT to clear the advance payment as soon as possible. It is widely believed that he was instrumental behind the waiver of customs duties on coal transportation from Zuun Tsankhi to China’s Gants Mod port. This is another example of a ‘political’ decision on the coal of Zuun Tsankhi, as coal exported by other Mongolian companies still has to pay $3 per ton as loading and unloading charges at Tsagaan Khad.
There is no foreseeable end to overt and covert political pressure from our two neighbours on our political leaders to take measures affecting the economy of the country. There is little hope that the Prime Minister’s impending visit to China will see him negotiating as anequal.
The agreement between Chalco and Erdenes Tavan Tolgoi included a provision that Chalco would sell to Japan and South Korea 30 per cent of the Mongolian coal it bought. Not a ton has been sold this way so far. Chalco’s explanation has been that it does not have to fulfill its responsibilities if the Mongolian Government doesnot implement its side of the deal. It’s clear that Zuun Tsankhi cannot go forward without help from Chalco and the price for this will be to accept Chalco’s terms on certain issues. Mongolia compromised on several issues in September, only to enable the Prime Minister to take up railway issues on his visit to China.
The world does not sit idle as successive political decisions in Mongolia keep harming the economy, and corrective actions are late in coming. Major companies change their strategy to adapt to situations as they unfold.
For example, BHP Billiton will be expanding its coal exploration programme in Queensland by 50 per cent, even when it has stopped many of its projects and cutting costs in several areas. It also plans to increase production at its Pilbara iron ore sector. In another development, Australia has plans to spend $3 billion every year on shale oil production. What do all these plans imply? It seems BHP is positioning itself to pre-empt any move by America’s shale oil producers to supply gas to the Asian market. Shouldn’t Mongolia also hurry with its coal liquefaction projects to stave off imports?
Big companies cannot survive without appropriate responses to movements and changes in the market. They have to reshuffle priorities, keeping enough funds for their top projects, while putting others on the back burner. Since being hit on the Black Monday, the strategy of the world’s mining companies has been to increase efficiency at top projects, paring uneconomical expansion. Rio Tinto is making its priority projects more cost-efficient, even as it freezes some others until 2015, thereby saving $5 billion in the coming two years.
Individual Mongolian companies are also doing this, but where exactly is our comprehensive state policy? Parliament House has been the last place to notice the end of the supercycle. The MPs are now busy correcting the mistakes they made in the last few years. Maybe they have learnt that we have an economy based on mineral products export where market fluctuations will always be a given.
A studys hows that copper has been the commodity with the most price fluctuations in the last 30 years. As you see in the chart, its average fluctuation has been 6.52 per cent per month. Prices of minerals, especially heavy industry metals, fluctuate much more than those of agricultural products like meat and wheat. Political decisions to regulate them must therefore be taken prudently and carefully.
