Mongolia’s economy has been suffering from an economic downturn due in part to lower commodity prices. Arshad Sayed, President for Peabody Energy in Mongolia and India, talks to MMJ on Mongolia’s economic outlook and how to enhance value creation in the country’s mining industry.
You worked as the World Bank Country Manager in Mongolia and you left the Bank three years ago. In your opinion, what has changed in Mongolia’s economy compared to the time when you worked at the World Bank?
The Mongolian economy has definitely grown. GDP has almost doubled in the last five years. We continue to see improvements to the city in terms of housing, roads, basic infrastructure, and electricity. So there are many improvements in people’s lives in urban areas. In rural areas, there are still some challenges in terms of employment and the quality of public services in the education and health sectors. And so Mongolia’s economic growth needs to benefit more people in the countryside as well as urban areas.
What in your opinion are Mongolia’s main economic risks?
I think the main risk for Mongolia is the same as for any commodity-dependent economy. Mongolia is now a commodity-dependent economy, as it is a commodity-rich country. So the main risk is that you are not able to use the wealth that is below the ground and transform that into sustainable financial and human capital. This is the central challenge for all resource-rich economies. The gest risk is that you take wealth from the ground and yet do not create sustainable value and capacity building for the future. The gest challenge then is how to best manage an economic downturn like the present because all commodities go through high and low cycles. These cycles happen. And the question really is how Mongolia and Mongolians can manage not just the upside, which is also very important when you are growing very fast, but also how do you manage during the downturn when prices go down and multiple shocks impact the economy? These macroeconomic shocks and risks will always be present in a commodity-dependent economy, and it is important to manage them accordingly.
There was hope that the Mongolian budget will be healthier after the Fiscal Stability Law passed June 2010. In your opinion, has this hope been realized or not?
I think the Fiscal Stability Law is a good law. The question is how do you implement it and maintain fiscal stability by not having too many off-budget items and off-budget spending. It is important to implement this law in the right way and make sure you’re not using off-budget, off-balance sheet items and financing things off-budget.
Our country is facing an economic crisis. What do you think the results of this crisis will be? How long will this crisis continue? What would be the country’s economic outlook by the second half of 2014?
What’s happening is being driven by recent macroeconomic slowdowns across Europe, and more recently in China and India. There have been concerns that we are entering a phase of the global economy where the prospects for growth are less certain. Overall I think we will continue to see good long-term demand growth for commodities. But at the same time we shouldn’t underestimate the existing uncertainty in the global economy in the near-term.
The Mongolian coal sector is facing a crisis. What do you think of the future of Mongolian coking coal?
Steel production will continue to rise in China and India. If you look for-instance at the statistic that every day 160,000 new cars are sold in the world, all of which require steel, the answer is clear. How much of that demand will come from China and other countries? How much of that demand is going to result in the greater use of coal? As far as Mongolia concerned, if you look into the future, it’s very clear that you have a large market next door that will rely on the use of Mongolian coking coal. I believe Mongolia is well positioned for long-term competitiveness.
In 2011, Mongolia exported 21 million tonnes of coal, five million more tonnes than in 2010. And in the first half of 2013, we have exported about 8 million tonnes. Mongolian coal is facing a lot of competition from Australian coals and even from the United States. And Mongolia’s coal will have to compete with that. So until we have railway and a strong infrastructure network to lower delivered prices, Mongolian coal volumes and prices will remain somewhat subdued. But as soon as the recovery in China starts happening you could see a consolidation in the coal sector, and hence Mongolian coal prices could rise.
Peabody has a lot of experience in the coal sector. How can we develop the Tavan Tolgoi deposit? How can we accelerate value creation in this deposit?
It is a very important question on how to develop TT in terms of value creation. I think there are several things that need to happen. First, we have to think of TT as the start of a Mongolian world-class coal industry. How can TT become the basis for Mongolia to have a world-class coal industry? It is a good to start with that vision first. If we say we want to have a world-class coal industry, then we ask what are the things to do to make it happen? Now there are several things that need to happen inside of TT right now. First, and very important, is to really think of this resource as a long-term resource. So we mine it in a way that is safe, efficient, environmentally friendly, and sustainable and that has local community support and involvement as an integral part of the development process, with the understanding that we can make sure that the development is steady and reliable regardless of whether prices go up or down. Currently, what is happening in TT’s development is not sufficient to meeting these necessary requirements. Whether it is East TT or West TT, the Government of Mongolia is still trying hard to manage the development successfully.
Importantly, what needs to happen is an integration of the coal blocks at TT. Developing TT as one single, integrated resource with a comprehensive infrastructure plan that does not duplicate roads, water, power plants, and wash plants is essential. Any such duplication would waste resources, create a larger environmental footprint, and limit overall coal resource recovery potential. Then what we need to have is a world-class operator who knows how to develop this in the best possible manner. Companies like Peabody Energy, which mines more than 100 million tons per year in one mine, know how to develop deposits such as TT in a long-term sustainable manner on a scale.
We have also need to introduce best practices and technology in the production to keep costs low. We also need to make sure that the environment is safe and we’re doing operations in a very safe manner. Peabody has an excellent safety record. These are important because in the medium and long run we need standards to be uniform across the entire TT. And we can only do that by developing the deposit as integrated blocks so that you do not have one standard here, another standard at next block, and a third standard at other block.
It is very important to have one overarching operating system: safety standards, environmental standards, and social and community standards so that we can develop the deposit in the best manner in terms of efficiency and also sustainability. And then finally, what is needed is the understanding of how we want to develop the infrastructure effectively? What is the most efficient, economical way to get the coal out? Developing the deposit in commercial terms is critically important. Is it going to be a resource that will provide the highest value for Mongolian coal? What are the most effective ways to maximize TT value when the IPO is issued at the stock exchanges?
What’s the main purpose of your company’s operations in Mongolia? How many projects are you currently implementing in Mongolia? In the future, what projects will you implement in Mongolia?
Peabody has several activities in Mongolia. One is to look at opportunities to work with Mongolian partners either in coal-to-liquids or coal-to-gas. We are in discussions with a number of Mongolian companies. And we are happy to support the work they are doing. Second, we have a joint venture, Peabody Winsway Resources, that holds exploration licenses and pursues opportunities for developing Greenfield or brown field coal mines. Third, and very importantly, we have completed Mongolia’s first-ever complete coalmine reclamation. With this project we have demonstrated to the ministries, government and local stakeholders what are industry best practices, how it could be replicated elsewhere in Mongolia, how you ensure you are bringing the land back to its original condition or better, and so on.
Also, we are working with the Government of Mongolia and the people of Mongolia to form a partnership for TT. It is important because we believe that in the long run, the country and its people want to maximize value and benefits from TT. A company like Peabody can do it based on its rich experience over the past 130 years.
Peabody has a global presence. It works on 6 continents and has offices in a dozen countries. It is a global company that can bring not just a technology, but also marketing skills and trading expertise. It can also bring training and knowledge sharing, which is very important for Mongolian youth. It is very important for Mongolian workers so that their skill level is similar to what is outside. So as Mongolia’s mining industry becomes ger, it is very important that you have a high-skilled labor force and high-skilled management. These will come together with Peabody. Other American and international companies come, as well. Because of their presences and also Mongolian partnerships with them, you will raise your level of skills, training, expertise, knowledge, and education.
Peabody has a program for Mongolian graduates. We supported Mongolian graduates from top U.S. mining schools. Our Mongolian scholarship program provides training, developing new talent, and developing the human capital for mining and mining-related activities in the country.
Peabody supports clean coal projects, especially in CCS technology’s field. What are potentials to implement this type of technology?
Our Chairman and CEO advocates clean coal solution technologies. Peabody has been and is involved in a number of projects globally. The projects include GreenGen in China, the Global CCS Institute and Australia COAL21 Fund. Peabody is also involved in a clean coal consortium at Washington University in St. Louis in the U.S. We have invested in Great Point Energy, which aims to convert coal into gas in the most efficient and low-cost way. So that’s several of the CCS institutes and areas where Peabody is involved. Peabody’s firm goal is to introduce and use clean coal technologies so that minimize the impact on the environment and yet you are able to get a very cheap source for fuel and electricity that helps development and livelihoods of people globally.
How do you plan to implement a clean coal project in Mongolia based on your extensive experiences and the Mongolia’s rich coal resources?
Mongolia has a great potential for coal-to-liquids, coal-to-gas, and other similar technologies. Mongolian companies themselves are actually quite advanced in related dialogues. The companies are forming consortiums to find ways to make sure that you can make this technology economically viable. And if you have a certain amount of scale or volume, these technologies become viable. Of course they require a lot of capital up front, which is not easy to get under the current economic condition. But as the markets improve, I am confident that you will be able to find ways to have technology which is not that capital-intensive and is still able to utilize coal in a way that gives you different byproducts, whether it’s natural gas, or benzene, or something else. And I think that is another area that Mongolia needs to think seriously about. And the best way of doing this is to invite foreign participants and investors and build a partnership with local Mongolian firms who have the ability to bring talent, have sustained local presences and able do all ground works. Bringing both local and foreign companies together we will have a very good way to make this happen. And Peabody Energy would be happy to be part of that.