D.Galsandorj, President of the Mongolian Exporters’ Association, consultant mining engineer and professor, talks to B.Tugsbilegt about the erosion in Mongolian mineral products’ export competitiveness and suggests corrective measures to be undertaken.
Although Mongolia may be leading among countries with high economic growth, in reality the country continues to lose its international competitiveness in minerals exports.
Today Mongolia’s financial situation may be positive, with the increased ability to raise shares and bonds, but doubts remain if the country is conducting its export trade in a viable manner, whether the revenue generated from exports is being allocated to visible projects and efficient spending .
What is Mongolia’s export capability?Mongolian export volumes decreased considerably in the past year. Although the growth of the leading economies declined, China’s demand for coal has not declined. Last year Mongolia exported 18 million tons of coal. This was partly due to Erdenes Tavan Tolgoi being unable to export its coal.
On the other hand, Australian and Indonesian exports to China have remained stable. Exports from Russia and the USA have increased. Mongolia has lost its competitive position in coal exports. As for coal, Australia and Indonesia are not our competitors. We are not in a position to compete with them. While in 2012, our share in Chinese imports of coal was 14 percent, it declined to 10 percent in 2013. The main market for Australian exports is not China but Japan. Indonesia exports coal to eight countries and compared to its exports to other countries, exports to China are fairly small. In other words, those states’ international marketing policy and trading tools are much wider than ours. However, Russia is our gest competitor. Furthermore, Russia has signed a long-term coal supply offtake contract with China and is actively pursuing this.
The sole market for Mongolian coal is China. What are the chances of exporting coal to the international market?Coal processing capacities are expanding. Energy Resources has built 15-million-ton washing plant. In addition, Erdenes Tavan Tolgoi is working on the project of establishing a washing plant with a capacity of 20 million tons of coal. Energy Resources has made a trial shipment to Japan. However, transportation costs remain high. According to calculations by the Mineral Resources Authority, transporting coal from Naushki to Nahodka and delivering further to Japan means that total cost of transportation is 100 US dollars per ton. Mongolia sells its coking coal from Tavan Tolgoi based coal mines at 40 US dollars per ton on Ex/mines. Washed coking coal at the Mongolian-Chinese border is sold at 90 US dollars. This means that exporting coal to the international market is not viable.
On the other hand, although Russia joined the WTO, it still follows the international and domestic import tariff rates. Russian railways have been privatized and cargo wagons have been diverted into the hands of private freight forwarding companies. In order to access freight ratesincentives, discussions must be held at the level of the two country’s governments. As for China, they have now prohibited the transportation of coal in open wagons. Tianjin and other Chinese ports do not even have sufficient capacity to transport domestic export shipments.In order to solve the issue, any sort of agreements at the level of the two governments is dire. The representatives of the three nations held a meeting regarding the issue of railway transport. Though it was an important beginning, despite the passing of several months since the discussions, concrete actions are yet to be taken.
Mongolia aims to increasing its export of coal to 30-50 million tons. Do you see potential in this?The Prime Minister N. Altankhuyag paid an official visit to China. The State Secretary of the Ministry of Mining also joined the delegation. During this visit, the initial agreement was reached in that one billion tons of coal will be exported within the next twenty years.
Countries such as Indonesia, Australia are exporting their mineral products on long-term agreements. In international market terms, it is referred as “offtake contract”. Erdenet mining company has three year offtake contracts, Oyu Tolgoi has made 5-8 years’ offtake contracts for over 80 percent of its copper concentrates production. The remaining percentage is sold according to spot market prices.
Unless Mongolia can complete its infrastructure in 2015-2016, it cannot increase its exports by more than 20-25 million tons annually . Without this ability, Mongolia will not be able to pay back the Chinggis, Samurai and Government bank bonds. There is a risk for Mongolia that between 2018-2022, the country will not be able to pay back the 1.5 billion US dollar bonds and face financial constraints.
In terms of copper, related to the real increase in export volumes, trends will also see budget revenues increase. How do you measure Mongolia’s competitiveness in the international copper market? What needs to be implemented to increase the country’s competiveness?Mongolia has not yet reached a position whereby it can compete internationally in terms of copper production and exports. The country holds only 3 percent of the world copper export market and there is potential for increase. During the past year, total revenue from copper sales reached 947 million dollars. Mongolian copper mines are selling their copper concentrates in the Chinese market without trade policy and co-ordination. Although the country joined the WTO in 1997, the country still lacks an national trade law. Within the Minerals Law, there is a mere single clause that refers to the sales of minerals products according to international market prices.Trading in minerals is often undertaken by smaller “traders” or trading companies.
As for copper, Erdenet mining company begun its own copper trading activity since 1991. Since then, Swiss (3), French (1), South Korean (1), Japanese (1) trading companies have been purchasing copper concentrates and they remain until the present time. Copper trading is not transparent. There is a lot of state employees’ involvements in copper concentrates allocation to buyers , which means that for new consumers and end usersof purchasing Erdenet copper concentrates are not is open. For many years, there has been a practice in which Erdenet mining company has been selling its copper concentrates at low prices .
However, trading practices of iron, fluorspar and wolfram concentrates have been rather transparent. Mongolia is preparing for the establishment of its local mineral products’ trading exchange. This will result in a more transparent pricing, trading will become open hence will be able to attract strategic overseas buyers and consumers.
Last year, Oyu Tolgoi mine and copper concentrator were completed and exported 100,000 tons of copper concentrate. In fact, the Oyu Tolgoi concentrator had planned to export 327,000 tons of concentrates in 2013 . Oyu Tolgoi’s own concentrator at the mine and at Chinese bonded warehouses have been filled with copper concentrate. The Oyu Tolgoi copper trading terms are fairly well rated, concentrates’ delivery terms at the Mongolia-Chinese border, but that the company bears certain transportation costs on the territory of China to smelters is cause for concern. This results in direct decrease in Mongolian export revenue. In addition, Oyu Tolgoi mine’s sales terms of by product minerals such as gold and silver are not transparent. Rio Tinto is new in selling copper concentrates to Chinese market.
Copper market recovery in Mongolia is 86 percent. However, according to Exporters’ Association’s calculations copper ore processing cost is high. Can you give an explanation?Copper recovery at Erdenet mine is 86.2 percent. Whereas with the most modern technology at Oyu Tolgoi copper recovery was 86 percent in 2013, this is a very low performance. Rio Tinto’s copper concentrators in Asia and Latin America have copper recovery rates of 90 and 92 percent. Therefore, within this year Oyu Tolgoi concentrator needs to improve its copper recovery rate. Oyu Tolgoi tends to place a greater emphasis on its gold and silver processing and less on copper. As for molybdenum, it is not processed at all. Leaving out the molybdenum processing section decreases copper processing cost considerably.
As for Erdenet mine, operating cost is 50 percent higher than other countries’ copper mines. This high operating cost is attributed to factors such as miners’ wages, electricity, imported equipment and goods that often constitute “shady” deals and increases in taxes such as excess royalty .
Ouy Tolgoi does not release its breakdown production costs, trading terms and needs to operate in a transparent manner.
Is it possible to process by product minerals such as molybdenum, celenium, tellur and renium from the Oyu Tolgoi mine?Oyu Tolgoi copper processing plant needs to treat its molybdenum. By establishing a molybdenum roasting plant at Oyu Tolgoi, the mine can produce renium. All copper concentrators in Chile operate in this manner. Oyu Tolgoi concentrator needs to follow principles applied at the international copper production practice. In addition, the copper concentrator needs to work in decreasing hazardous arsenic impurities. Without the ability to apply this, the concentrator will face fines and hence export revenue will decrease. During the past year, Mongolia exported 3900 tons of molybdenum concentrate which generated the revenue of 30 million US dollars. This derived from Erdenet mine only.
Apart from this, Erdenet mine’s copper ore cut-offgrade is 0.25 percent. They are working at decreasing cut offgrade to 0.15 percent. However, Oyu Tolgoi copper mine’s cut-offgrade is 0.6 percent which is considerably high.
Mongolia is becoming home to several major copper mines. Mongolia’s copper export supply will rise considerably. However, the only buyer is China. Although China accounts for over 40 percent of the world copper consumption, there is a number of new mines entering the Chinese market.There are around ten copper smelters in China.
The Tsagaansuvarga mine and concentrator will be completed in 2015 and will have the capacity of producing 300,000 tons of copper concentrates. In relation to refined copper, this equals to 75,000 tons. Oyu Tolgoi will produce 200,000-300,000 tons of copper from its underground mines.
Erdenet mine pays 5 percent basic royalty as well as 13 percent excess royalty, totally 18 percent, whereas Oyu Tolgoi is paying 5 percent basic royalty on its copper concentrates. According to the new mineral law, if Oyu Tolgoi sells its processed gold to the Central bank, the gold royalty is 2.5 percent. Foreign invested companies operating in Mongolia have differing tax regimes.
Unless Mongolian government implements a co-ordinated trade policy for copper concentrates sales, in future the situation might become difficult. This is due to the increased competition among three Mongolian copper exporters. In the end, only a handful of Chinese smelters will “greet” them. It is absolutely important that the Mongolian government takes a more effective role in copper concentrates marketing. The copper export prices deriving from one country should be fairly uniform. It is effective way if Mongolia conducts its trading through specialised trading houses. A classical example of this is the mineral products exchange. Chile has signed a free trade agreement with China and its products are exported to China without import duties.It is estimated that in 2014, Oyu Tolgoi mine’s production will generate 2.8 billion US dollars.
A small share of this will constitute royalty, imports, wages to remain in the local banks while the rest will be spent through overseas banks for equipment purchase and project finance needs. Mongolian expenditure results in potentially a maximum of 500 million dollars equivalent of hard currency. This issue needs to be clarified.
Similar to copper and coal, iron ore and concentrates exports have had an impact on mineral exports. While Mongolia’s iron ore reserves are not , how economical is it to continue exporting iron ore?As for iron ore, Mongolia has estimated reserves of one billion tons, proven reserves are calculated at 600 million tons. In 2013, Mongolian exportreached its highest at 6.7 million tons, generating revenue of 650 million dollars.There are new iron processing plans to increase iron concentrate export to 10 million tons. The current capacity through railway delivery is 10 million tons. The Mongolian Exporters’ Association is recommending to export iron in value added form, and restrict the export ofiron ore or 52 percent dry concentrates. Currently, the Darkhan Metallurgical Plant’s Tumurtei and Mongolrostsvetmet’s Bargilt iron ore processing plants are exporting 65 percent wet concentrates while others are building such processing plants. The Bargilt iron processing plant will be able to produce one million tons of iron concentrates. The expansion work of the plant needs to be intensified. On paper, the Government has allocated 50 million dollars from Chinggis bond for iron processing plants. Domestic producers such as Beren Mining and others might benefit from such funds.
In future, the policy should be to restrict iron ore export. There are a number of reasons for this. Although the Darkhan metallurgical plant has a capacity of 100,000 tons, currently it is only producing 50,000-60,000 tons of steel products.
Today, Mongolia does not have reserves in scrap iron. For this reason, Mongolia is currently developing iron ore processing plants at existing three deposits, with a capacity of one million tons.The plant will produce 65 percent content concentrates.
Nationwide, there are around 20 smaller iron ore processing plants which are mainly owned by foreigners, particularly Chinese companies. Although the production scale is small, the local demand for iron products are 400,000-500,000 tons with potential for future increase. Domestically, we are currently producing only 50,000-60,000 tons of this local demand.In Darkhan, a new project is underway for processing 500,000 tons of iron concentrates .
For this, there is a need for one million tons of iron concentrates hence it is important to support these local capacities and supply with the necessary raw materials as iron concentrates.
Recently, the Ministry of Industry and Agriculture introduced its plans of developing a steel industry.
Estimates provide that the Sainshand plant will produce 4 million tons of steel. There is not enough water resource. Although the Ministry of Industry and Agriculture has stated that water exploration has been carried out, there is no clear finding if there is enough water needed for producing 4 million tons of steel. Second, for producing this scale of steel, 8 million tons of concentrates are needed. This is an issue to be raised in the future.
Despite the demand in China for steel, 37 percent import duty rate must be taken into consideration. However, China does not impose import duty for iron ore and concentrates. For the case of the Sainshand plant, if the raw materials were to be sourced from Darkhan based iron processing plants, and coal from Tavan Tolgoi, it will be costly. Detailed analysis should be carried out how economical the project will be and this needs to be verified by international financial institutions. There is currently a study conducted by Bechtel USA engineering company but it is a rather general study in the absence of an international study assessing market supply and demand, investment and production costs and future benefits for Mongolia . The feasibility studies and projects carried out by the organization were not successful in Indonesia and other Asian countries.
While there is an estimated need for 3-4 billion dollars for the development of the plant, the value of the products is not so high. The costs for the economy will be high if we are to develop such a plant. There is a saying “think twice about everything”. First to build a direct reduction plant in Darkhan, imports must be substituted domestically. If in Darkhan the plant is to be built , then in order to protect the domestic industries, iron products imports must be subject to import duty. This is referring to foreign trade regulation. Unless the country has a flexible coordination, exports and imports will not develop.
Although Mongolia ranks among the highest in the world in fluorspar production, revenues from it are not as high. What measures need to be taken in order to increase export revenues?Fluorspar export have been decreasing in the past few years. As the main buyer, the demand from Russia has been declining. Hence exports to China have been increasing, with 30-40 percent of exports directed there. Internationally, fluorspar has been defined as strategic product. In the Unites States, by a special decree by the President, they are following the principle of “save, buy from anywhere available”. Up to 20 percent of Mongolia’s exports have been to the United States but due to transportation issues, exports came to a halt.
Mongolia’s fluorspar ore reserves of 20 million tons are not small, last year its export reached 337,000 tons, revenue of 83 million US dollars. Last year, “Mongolrostsvetmet” corporation exported 40,000 tons of fluorspar concentrates with a 95 percent content. This year, the company plans to export 40,000 tons. In other words, around 20-30 percent of Mongolia’s fluorspar exports are value added products with a 95-97 percent content, while the remaining is fluorspar ores or less processed products with 75-82 percent content. Most of the less processed is exported to China and some to Russia. While the 95-97 percent content is sold at a market price of 300 US dollars, the minimally produced are sold at a mere 100 US dollars .
Generally, fluorspar trading in Mongolia is disorganized. There are 50-60 mines in operation. There are also ninja miners with no licence nor do they pay taxes. In Baganuur, Airag, and Bor-Ondor artisanal miners sell fluorspar ores mainly to Chinese companies at low prices. The Ministry of Mining needs to refine it policy in regards to fluorspar exploration and mining. There is a need for a policy for fluorspar, how to increase production, quality and price increases.
There also needs to be some form of accreditation among fluorspar and iron concentrate producers, whether they are large or small. The process involved in its production has major environmental effect with its pollutants. Unless the state defines its policy on which of the producers it wants to operate at certain rate, the situation for the industry may be dire.
The recommendation from our Association is to increase the exports of value added products and halt the low grade concentrates. In the long run, it is possible to produce final products that can be used in aluminum industries. This can increase the per ton value to 900-1200 US dollars. There needs to be a clear working plan for the several fluorspar related NGOs and Associations.
According to the estimates by the Mongolian Exporter’s Association, in the next five years or by 2018, revenue generated from mineral products will reach approximately 10 billion dollars. However, will this be able to meet the required amount for bond repayment?Yes, our calculations estimate that in the next five years, the country’s export of coal, copper, iron concentrates will increase as well as the Erdenet mine’s copper smelting plant with a capacity of 100,000 tons, Darkhan direct reduction plant if these and other plants can be completed within schedule, revenues are estimated to reach over 10 billion dollars. Our studies indicate that less than 20 percent of the 1.5 billion dollar Chinggis bond was being spent on the manufacturing industries and this includes investment for the skin, hides, wool and cashmere factories .
The primary need for Mongolia is to dedicate the incoming revenue for the export oriented plants. By doing this, the country will be able to pay back the bond money within five, ten years. Unless, these steps are taken, we will be faced with dire economic consequences. Analysing the current economic capacity, export revenue from minerals and other manufacturing industries are 4.3 billion dollars. Based on this potential, we can repay 250 million dollars of bond money per annum. On the other hand, even if revenue from mineral exports reached 10 billion dollars, the country may be able to pay up to 500 million dollars per annum. Hence the country needs to invest the bond money into export oriented mineral and non mineral related industry that can “benefit” and be profitable.