China, Mongolia seek to mend
differences By Alicia J Campi
The kabuki-style dance of trade partners
Mongolia and China began again in earnest when on
January 15 the third meeting of the Mongolia-China
Cooperation Commission on Mineral Resources and
Energy met in Ulaanbaatar.
Minister of Mining Davaajav Gankhuyag led the
Mongolian side and the deputy director of China's
National Development and Reform Commission, Zhang
Xiaoqiang, headed the Chinese delegation.
According to Zhang, "Boosting co-operation in
mineral resources and energy, which account for
the bulk of China-Mongolia economic and trade
relations, is in the interests of both countries
and can help Mongolia turn its advantages in
resources into economic development."
Although China and Mongolia see great
benefits in continuing
their vibrant trade in
minerals, each side has a different vision on how
to proceed. This has led to a tense relationship
that often, mistakenly, is described by global
financial commentators as resource nationalist
sentiment in the Mongolian parliament and
Mongolia exported a total of
US$4.38 billion worth of products in 2012, 89% of
these being minerals that represented 20% of the
country's gross domestic product (GDP), according
to the Mongolian National Statistics Office. All
of Mongolia's coal, iron ore, copper, zinc and tin
concentrate as well as much of its gold are
exported to China. Chinese state-owned enterprises
(SOEs) and private corporations in 2011 were the
largest investors in Mongolia's mineral sector
with $2.3 billion foreign direct investment - five
times the amount China invested in 2006. This
close reliance is hardly the definition of
Two of the prime
goals of the Mongolian side during the
consultations were to renegotiate upwards the
prices the Chinese pay for Mongolian raw minerals
and lessen transit tariffs for Mongolian shipments
destined for third nations, such as South Korea
The Mongols also raised the
issue of the failure of Chinese mining operations
to obey all Mongolian environmental and safety
laws, demanded the employment of more Mongolian
mine workers and discussed plans for construction
of mineral processing plants inside Mongolia.
China pressed for more stability in the
legal environment regulating bilateral trade and
foreign investment. Deputy director Zhang also
suggested that the two countries focus on
developing large mining projects and constructing
a connected railway transportation and coal
transport border infrastructure.
both sides agreed has potential for expansion is
in oil products. PetroChina's investment of $1.4
billion in the oil sector made it the biggest
investor in Mongolia last year. This oil
production is exported to China for refining.
Minister Gankhuyag told the Chinese side that
Mongolia considered it necessary to make the
border checkpoint where the crude oil crosses into
China (Bayankhooshuu-Uvdug) a permanent one, to
process the raw Mongolian crude in China and
return the product, and to make an agreement on
implementation of a 2008 memorandum between
PetroChina and the Oil Authority of Mongolia to
supply 10,000 tonnes of oil products monthly as
well as purchase additional volume.
Mongolia imports all its refined oil and
diesel, with more than 90% coming from Russia. To
overcome this lopsided dependence, the government
has set a goal of building a state oil refinery
with Japanese technology that would be functional
in 2015. In the interim, it wants to cooperate
with China to diversify its oil imports.
The Mongols expected the consultations
would be open to the public; however, at the
request of the Chinese, it was held behind closed
doors. Midway through the discussions, Zhang and
Gankhuyag issued a joint statement, but refused to
take questions from journalists. In their
statement they noted that bilateral trade volume
in 2012 reached $6.6 billion and announced that
negotiations would continue over infrastructure
and railroad projects as well as oil cooperation.
Changes to law complicate
picture These bilaterals were influenced by
the fact that 2013 began with the foreign
investment picture in Mongolia again in turmoil,
because of President Tsakhia Elbegdorj's proposals
for revising Mongolia's Strategic Entities Foreign
Investment Law (SEFIL) of May 2012 that imposes
tight regulations on investments in mining,
banking, finance and media communications.
Passed in a rush by Mongolia's parliament
after the state-owned Aluminum Corporation of
China (Chalco) attempted to acquire a majority
stake in a privately held coal mine controlled by
South Gobi Resources (owned by Canadian company
Ivanhoe, now renamed Turquoise Hill), the law
requires Mongolian governmental review of all
assets in the affected sectors with foreign
state-owned FDI or cross the value threshold of
100 billion togrog (US$70 million).
Chinese mineral assets are hit the hardest by
these new regulations, China and Western investors
are on the same side - although apparently not
working together - to counter the SEFIL and
moderate its provisions.
complaints about the law in recent months were not
unnoticed by President Elbegdorj. The day after
Christmas, he went on Mongolian television to give
support to respecting the controversial 2009 Oyu
Tolgoi (OT) agreement wherein Rio Tinto and its
partner Turquoise Hill hold 66% to Mongolia's 34%
of a huge deposit in the Gobi projected to contain
31 million tonnes of copper, 1,328 tonnes of gold
and about 7,000 tonnes of silver.
cautioned that Mongolia must respect legal
documents and warned that the nation's "reputation
for having a favorable investment environment is
being tarnished as domestic demand is growing for
the government to hold more shares in the
project". One day later, the president's 91-page
draft proposals (published on December 5, 2012) to
parliament for amending the 2012 Mineral Law were
discussed in a news conference by Minister
Gankhuyag, who while serving as a parliamentarian
was known for his demand that Mongolia renegotiate
the OT agreement and hold a larger stake in all
major strategic mineral resources.
minister announced the government is seeking to
revise upward the threshold of FDI that triggers
automatic government review to as high as 300-400
billion togrog ($210-280 million). Gankhuyag
speculated such changes could be introduced for
parliamentary debate in mid-February around the
recess for the traditional lunar New Year holiday.
The Business Council
of Mongolia, with some 250 members (although apparently no Chinese ones),
sent a letter on January 7 to
the Office of the President
commenting on the president's draft law proposals. The
council's strongly-worded document had five macro-conclusions: 1.
"The significant increase in regulation and
intruding State control" would deter greater
growth and prosperity"; 2. "The impact of the
Draft Law on the minerals industry will be to halt
current minerals exploration and development in
Mongolia and greatly discourage any future
investment" - citing in particular, the
development of Tavan Tolgoi coal deposit; 3.
The draft law would be "over politicized" in the
upcoming June presidential election; 4.
Mongolia's "brand as an investment destination"
would be damaged, resulting in repelling not
attracting FDI; and 5. The draft needed at
least six months of debate before a vote.
Slow down in Mongolian coal exports to
china Mongolia's overall exports in 2012
fell 8.99% - a decrease of $430 million from 2011.
The main reason was the drop in mineral exports to
China. In 2012, Mongolia exported 20.9 million
tonnes of coal, 574,000 tonnes of copper
concentrate, 6.4 million tonnes of iron ores,
3,570 barrels of crude oil, 2.8 tonnes of
semi-processed and unprocessed gold and 140,000
tonnes of zinc concentrate.
represented 43.2% of the country's exports, copper
concentrate 19.1%, and iron ore 12.1 per center.
Iron ore exports increased by 10% and crude oil
exports grew by 40%. Despite the downward trend
and the slowing of China's economy, it was
predicted by Mongolia's Mineral Resource Authority
that Mongolian coal exports would grow 32% this
During the consultations, it is
likely that the Mongols informed the Chinese that
development of Mongolia's 7.5 billion tonnes coal
project of Tavan Tolgoi - 300 kilometers from the
Chinese border and operated by the state company
of Erdenes Tavan Tolgoi (E-TT) - would be further
delayed until after 2013.
Batsuuri, appointed to E-TT last October, had
announced in mid-January that E-TT was suspending
all coal deliveries to its client, Chalco, because
it had run out of funds for overland trucking
service fees (it owes $3.6 million) and wanted to
renegotiate its supply contract with Chalco.
E-TT's finances were drained in 2012 when it was
forced to pay $310 million into the Mongolian
government's Human Development Fund, so it could
disburse promised monies to each citizen just
prior to the June 2012 parliamentary elections.
Chalco had paid Mongolia $250 million in
July 2011 for an unannounced amount of coal, but
at a price Batsuuri claimed was close to $53 per
tonne - a price analysts agree is considerably
lower than international standards. When the
bankrupt E-TT recently sought government
assistance, it was promised in January $355
million from Mongolia's Development Bank to resume
work, repay its debts and possibly refund in cash
to Chalco the contract's coal obligations.
Batsuuri explained that Mongolia wishes to
maintain a relationship with Chalco, but change
the nature of their cooperation and price formula.
Claiming that E-TT loses over $5 on every tonne
under the present arrangement, he indicated that
the government wanted to sell its coal at world
prices to other nations if it can dissolve the
Chalco agreement: "Paying by coal is not
profitable for the company. We are losing on coal
trade. That's why the government made the decision
to pay out the remainder. We will pay the
remaining $180 million in cash."
a written response to Bloomberg's Mongolian office
regarding the news that E-TT was stopping delivery
of its coal maintained the "fundamental terms of
the agreement should not be changed", separately
and reportedly including "secret terms".
The January consultations with the Chinese
covered the topic of expanded Sino-Mongolian rail
construction for Tavan Tolgoi to replace the
present truck transport of coal. Zhang said "the
Chinese side will give support to construct a
railway to be built in southern Mongolia and pay
attention to transporting products at cheaper
prices after the railway is constructed. The
Chinese side is willing to render support to
construct a railway from Tavan Tolgoi to Sainshand
[the linkage point to Mongolia's rail south] based
on an economically profitable basis."
finalist bid list, consisting of China's Shenhua
Group Corp Ltd, Peabody Energy Corporation of the
United States, and a Russian Railway-Mongolian
consortium, for foreign investment rights to Tavan
Tolgoi's western section has been held up for two
years by protests over the selection process,
particularly from Japanese and South Korean
Shenhua had put up $200 million
as a good faith gesture to secure its finalist
position. Shenhua Energy has not made a statement
on the situation but the Mongolian Ambassador to
China, Tsedenjav Sukhbaatar, revealed discussions
How to proceed with this
western field bid list has delayed Mongolia's plan
this year to raise up to $3 billion in funds in an
initial public offering (IPO) for development of
Tavan Tolgoi's eastern field, to be handled by BNP
Paribas, Deutsche Bank, Goldman Sachs and
Macquarie. Batsuuri explained the IPO cancellation
by saying: "We decided to wait until the market
recovers, the price of coal increases, and until
E-TT starts regular construction of its wash
plant. Plus we need to increase our exports."
Strategies going forward The
Chinese government has been very circumspect in
commenting on recent trade disputes with the
Mongols. This posture is far different from the
1990s, when rail freight traffic often was severed
to punish Mongolian actions or influence Mongolian
decision-making. This change in strategy may
reflect the realization that a hard-line approach
with Mongolia politically was counterproductive
and that Inner Mongolian factories have become
more dependent on Mongolian minerals with each
The Chinese have used Mongolian news
outlets to voice disappointment during this third
round of Sino-Mongolian consultations about what
they see as Mongolia's uncertain legal regime and
changeable mineral sector regulations. These same
media sources claim that the Mongols had "high
expectations" for negotiations on the big issues,
such as the unprocessed coal price that were not
met and concluded that "many questions are still
left without answers".
Chinese could not fail to note that on the same
day as the Sino-Mongolian consultations, Mongolian
Minister of Foreign Affairs Lu Bold started his
official visit to India with meetings in Mumbai
with Indian Chamber of Commerce businessmen to
encourage more investment in the already
burgeoning Indo-Mongolian mineral relationship.
On January 24, it was announced in Beijing
that after attending the 21st Annual Meeting of
Asia-Pacific Parliamentary Forum in Vladivostok,
Wu Bangguo, chairman of the Standing Committee of
the National People's Congress, will pay an
official goodwill visit to Mongolia from January
27 to February 1 at the invitation of Mongolian
Parliamentary Chairman Zandaakhuu Enkhbold. These
visits are signs that Sino-Mongolia relations will
continue to be played out in Asia at the very
highest levels as 2013 progresses.
lack of clarity on how bilateral mineral trade
will proceed, however, reflects both Mongolian
domestic political sensitivity over Chinese
predominance among foreign investors and a growing
Mongolian desire to develop mineral deposits more
slowly under their own auspices.
been mostly reactive, trying to parry Mongolian
moves. It seems to understand that with Mongolia's
new assertiveness, political and strategic factors
are as important as economic ones, so for now
Beijing remains calm and relatively tolerant.
Dr Alicia Campi has a PhD in
Mongolian Studies, was involved in the preliminary
negotiations to establish bilateral relations in
the 1980s, and served as a diplomat in
Ulaanbaatar. She has a Mongolian consultancy
company (US-Mongolia Advisory Group), and writes
and speaks extensively on Mongolian issues.
This article was amended
on February 5 from the original.