Mongolia Rivals Australia to Supply China’s Resources Demand.
April 3rd, 2012 · Bee Lin Ang · 6 Comments
One of the world’s largest countries, sparsely populated, with extensive minerals in its remote hinterland deserts. Sound like Australia? This is Mongolia. On the cusp of an investment boom, fuelled by Chinese demand for resources and driven by Mongolia’s position just to the north of China’s industrial heartlands. Mongolia’s economy, like Australia’s, has defied the global gloom.
However, a projected slowdown in the Chinese economy has started to rattle confidence “Down Under”. Shares of Rio Tinto and BHP Billiton have already fallen from this year’s highs. Meanwhile, Mongolia is becoming an investors’ darling. Recent deals in the debt markets from the Development Bank of Mongolia and Mongolian Mining Corporation have seen huge demand from investors.
As the country’s resources are developed, more and more of its coal and minerals will be sold its fast-growing Chinese neighbour. Last year, Mongolia overtook Australia as the leading exporter of coking coal to China. Its proximity to China gives it an edge over Australia and the country is already emerging from the shadows to be an important player in the resources sector.
Coal, Uranium Reserves
With much of its land covered by steppes, Mongolia has proven coal reserves of about 12.2 billion tons, according to the country’s Ministry for Fuel and Energy. That is a reserve of almost 4.5 million tons per person, compared with Australia’s 3.3 million tons. Mongolia is known to be under-explored relative to Australia. According to the International Atomic Energy Agency, Mongolia has undiscovered uranium resources of about 1.4 million tons, the highest among Asian countries.
The current top three producing countries are Canada, Kazakhstan and Australia. Together they provide almost 60 per cent of the world’s uranium and the three countries hold about 50 per cent of known global economically recoverable uranium resources. While Australia is expected to remain a dominant producer in the next five years, Mongolia potentially may become a formidable competitor as it starts to supply Russia and China. Mongolia’s mining sector currently accounts for about one fifth of its Gross Domestic Product, compared with a ratio of one tenth in Australia.
Bordered by only two countries, Russia and China, Mongolia formerly had a great influence on the world. Genghis Khan created the largest contiguous land empire, and one of man’s greatest engineering feats, the Great Wall of China, was built thanks to the Mongolians.
“To imagine Mongolia, you can think of Australia on many fronts,” said one investment banker. “No Harbour Bridge, but think Pilbara or perhaps Bowen Basin. For UB, think Mackay or Karatha. Mongolia has plenty of resources, especially coal, and lots of Chinese money trying to buy quality assets.”
Brian Fisher, an Australian economist who has conducted a study of the economic impact of Oyu Tolgoi, the copper- gold mine that is expected to account for a third of Mongolia’s economy by 2020, likened the country to Australia in the 1930s.
Investors have already arrived in their hordes as Mongolia requires railways, roads, power grids, electricity and water supply to help unravel the resource potential in the world’s second-largest landlocked country after Kazakhstan. China Investment Corp., owned by the Chinese government, is a prominent player. Competition is intense and Australian companies are waving their trump card: expertise in geological drilling, advanced mining techniques and environmental management.
Among the Australian listed players flying the flag in Mongolia, Leighton Holdings Ltd. is the largest mining contractor, Sedgman Ltd. is the biggest purveyor of coal handling plant, Runge Ltd. is the leading geological firm and Macmahon Holdings Ltd. has won the contract to mine the Eastern Tsankhi fields of the Tavan Tolgoi deposit, the world’s largest untapped coal deposit. Private Australian companies such as Calibre, Connect Resources and SRK are also undertaking large projects related to the resources sector.
“Mongolia has real proximity advantages in supplying coking coal, iron ore and other commodities to China, however transportation bottlenecks need to be cleared,” says Will Clay, the vice chairman for Asian debt-capital market at ANZ.
You don’t have to look far to find the Aussies. At an Irish Pub in central “UB,” as Ulaanbaatar, the capital city, is known, you will see a range of Australian company logos on visitors’ fleece jackets.
In the third quarter of 2011, Mongolia’s economy grew by 21 per cent compared with the same period in 2010. The IMF expects growth to average 14 per cent a year between 2012 and 2016. In 2013, the year production is due to begin at OT, GDP growth is forecast to reach 22.9 per cent.
The Scramble for Tavan Tolgoi
A squabble among international exploration companies over mining rights to the Mongolia’s Western Tsankhi tenements in Tavan Tolgoi underscored the country’s increasing importance in the global resources’ sector. Last July, the government announced it was awarding mining rights in West Tsankhi in the South Gobi desert to a consortium comprising China’s Shenhua Group, U.S.-based Peabody Energy and a Russian-Mongolian group.
Excluded countries, such as Japan and South Korea, cried foul, forcing the Mongolian government to cancel the award and seek a better alternative. Not surprisingly, they have yet to announce one, probably for fear of offending different parties, including domestic interests, who increasingly believe the government should keep and develop the fields using contractors as it is with the Eastern Tsankhi tenements, which are reportedly likely to IPO in the autumn of 2012.
Most recent international news has focused on the Erdenes Tavan Tolgoi IPO of the Eastern Tsankhi Tenements, allegedly due this autumn, delayed from spring. Goldman Sachs and Deutsche Bank have won the lead roles but have failed to make much progress for the last twelve months.
Amid previous allegations of North Korean money being processed through the Mongolian banking system and recent claims of Belorussian money laundering, the country’s banking system has come under focus.
Khan Bank, the largest bank, is majority Japanese owned. Xac Bank has European Bank for Reconstruction and Development (EBRD) and Western private equity investments and the country’s Trade Development Bank recently sold a 4.8% stake to Goldman Sachs. Mongolia’s banking system is largely considered to be developing well with leading banks seen adopting international standards as they seek offshore capital to grow. Investors like the transparency that comes with 22 years of democratic development, compared to say, the more opaque systems of the Middle East.
Australian Banks are represented in Ulaanbaatar. “Australian banks such as ANZ have many years of experience and expertise in financing and advising the natural resources and infrastructure sectors,” says Clay at ANZ. “ANZ already banks global resource clients operating in Mongolia as well as large Mongolian businesses.” Clay and his North Asia resources and financial institutions colleagues visit Mongolia about 10 times a year.
Macquarie has a handful of prize mandates, including a junior role on the Erdenes Tavan Tolgoi IPO. The big European and American banks are very active: Goldman Sachs and Deutsche Bank have led with investments while JPMorgan and Bank of America Merrill Lynch are frontrunners in introducing investors. Merrill, ING and JP Morgan were involved in the recent inaugural bond offering for Mongolian Mining Corp. Citibank, Credit Suisse and HSBC all have credentials to show in the country.
While Mongolia shows great promise in delivering investors’ returns, rising inflation and increased government spending have sparked concerns that the economy may overheat and cause a “boom-and-bust cycle.”
“Overcoming the natural resource curse and transforming its mineral endowment into renewable assets for sustainable and broad-based development are Mongolia’s most significant development challenges,” the World Bank said on its Website.
Despite the concerns, investors appeared undeterred. “I see Mongolia as a place for resources investment with less risk on the downside than many jurisdictions” said an investor familiar with Mongolia.
Bee Lin Ang is a writer and blogger based in Sydney. She was a former editor with Bloomberg News in Hong Kong and spent 10 years as a correspondent with Reuters in Singapore, London and Melbourne, specialising in Asian equities and commodity markets. She is fluent in Mandarin and speaks various other Asian languages.Search terms: australia economy 2013, part of the business cycle you believe the australian economy is at currently, australian business cycle 2012, business cycle australia 2013, business cycle in australia 2012, anz mongolia