New China-Mongolia Mining Deal: Economic Windfall or Environmental Threat? wsj.com
Mongolia recently reached a new deal to sell coal to China, helping it boost its faltering economy and start repaying billions of dollars it owes Wall Street lenders.
Under the landmark agreement completed late last year, Mongolia’s state-owned mining company will sell coal to China at roughly double the previously agreed-upon rate.
The deal follows a devastating four-year period when Mongolian miners exported coal to China at deeply-discounted prices, sometimes for as little as 11% of the global benchmark price, undercutting Mongolia’s economic growth. Mongolia agreed to those punitive terms to get the loan from China and has been struggling to repay it.
The new export agreement will help Mongolia pay its mounting debt, including bonds held by BlackRock Inc., Fidelity Investments, UBS Global Asset Management and other global investors that bought the debt for its double-digit yields, according to bond investors.
But the export deal has a downside for Mongolia: It effectively transfers much coal production from China, which is bent on cleaning up its environment, to its poorer neighbor.
That means worsening environmental damage is nearly certain in Mongolia, as its coal output ramps up, analysts say. Mongolia’s arid climate has been getting drier, in part because mining activities require large amounts of water. Dry conditions have been driving more of the population to the capital, Ulaanbaatar, where people commonly burn coal to stay warm.
Trucks carrying coal are backed up for nearly 40 miles at Mongolia’s southern border with China, in what some analysts call the world’s largest traffic jam.
"These trucks are on unpaved roads, the air pollution is getting worse, it impacts the communities and the region,” says Damdinnyam Gongor, a Mongolian and independent researcher on natural-resource governance.
Yet Mongolia seems willing to make that trade-off, with coal prices soaring since China has begun cutting production, analysts say. Market prices for the type of coal produced in Mongolia, which is used in steel- and iron-making operations, skyrocketed 200% in 2016 to $225 a ton.
“The Mongolian government’s most pressing target should be to create sustainable economics for its country,” said Adrienne Lui, an Asia economist for Citigroup. “The smog problem will improve alongside when more people are fed, working and warm.”
Mongolia is also in talks with some Asian firms to develop its Tavan Tolgoi coal reserves, analysts say. The Gobi desert site is one of the world’s largest untapped coal mines, with more than six billion tons of coal deposits.
Under emperor Kublai Khan, the Mongols conquered China in the 13th century and ruled a powerful empire that eventually collapsed. Today, the country of three million people is the most sparsely populated in the world, according to the United Nations. About 21% of Mongolians are in poverty, and 40% are classified as nomadic, the U.N. says.
Even before the new coal price agreement went into effect last quarter, Mongolia was benefiting from a boost in exports to China, after Chinese miners cut back production over the government’s environmental concerns. In November, Mongolia shipped 3.36 million tons of the fossil fuel to its neighbor —a 186% year-over-year increase, according to Chinese customs data.
Some analysts are forecasting coal sales to China will boost Mongolia’s economic growth by double-digits. BDSec JSC, Mongolia’s largest broker and investment bank, estimates that Mongolia’s economy could expand by as much as 25% this year if it continues to produce coal at the current rate and if plans for the development of Tavan Tolgoi move forward.
Mongolia needs that income to pay back debt. The government is on the hook this year for $800 million in external debt-service obligations, or 7.5% of its gross domestic product, according to Moody’s.
The country began borrowing heavily from banks, bond investors and China in 2012 to build infrastructure projects, including an agreement with metal and mining company Rio Tinto to develop copper and gold deposits in the Gobi desert.
But a collapse in commodity prices and internal government squabbles delayed mining projects that Mongolia was relying on to pay back those loans. Now the country is seeking new loans from the International Monetary Fund and China.
Mongolia’s debt burden upended a once-booming economy, which went from double-digit growth between 2012 and 2014 to about 1.3% this year, according to Standard & Poor’s.
Investors have demanded higher yields for taking on the credit risk that comes with the collapse in growth. The country’s most recent bond issue last year sold at an 11% yield, versus similar bonds that were sold in 2012 at 4% yields.
Published Date:2017-01-23