How Mongolia Mining Reform Impacts Coal Export
The anti-corruption December demonstrations have created new opportunities for the mining industry in Mongolia to be reformed, particularly through the liberalization of the publicly owned Erdenes Tavan Tolgoi (ETT or simply TT) coal mine.
The regulators are now thinking about an electronic commodities trading exchange for TT that is driven by market forces and spot pricing in response to the demonstrators' demands to make the coal sector more transparent.
The first step, according to the mining minister who is pro-business, is to transition TT from annual long-term coal contracts to shorter index-linked contracts.
Price assessment organizations in China, where coal prices are decided, are likely to index the pricing.
The mining minister anticipates that the new electronic coal trading exchange will make Erdenes Tavan Tolgoi's marketing and sales more accessible to traders and investors.
However, it is a large "if," as global commodity markets like the Dalian exchange rely on a high volume of crude oil, gold, and gas being traded every day in order to function.
The state-owned Erdenes Tavan Tolgoi will be the first to test the mining minister's exchange. If the TT experiment is successful, it is intended to incorporate other private coal miners and perhaps, in the future, other commodities like copper (read: Erdenet Mining and Oyu Tolgoi)l.
As more speculative activities occur, the shorter and more open contracts completed on the electronic market may increase the volatility of coal pricing. The dangers might increase when more complex and derivative financial transactions like futures and options are permitted, disrupting the government's stable revenue stream.
Furthermore, if spot prices fall amid the current economic and financial crisis, Chinese purchasers may break their long-term contracts (read: set pricing).
Once the coal exchange is up and running, this poses yet another serious risk to TT.
The lack of awareness of how China and Mongolia conduct their coal trading business is the main cause of the present public outrage. It might be a formula for catastrophe for the government if you add complex financial and trading derivatives (that nobody understands) to it.
In an apparent effort to diversify traders and get better coal deals, the mining minister said that the government may set a quota on each coal transaction made by TT.
Norinco and E-Commodities, two obscure Chinese firms, are among the biggest customers of TT.
Mongolia's capacity to deal with the Chinese can be enhanced by a commodities exchange that establishes and upholds policies and processes for standardized commodity transactions.
Another issue with the new coal exchange is that Mongolian coal cannot be independent of Chinese price index rules (e.g. Fenwei).
Coal prices in China fluctuate depending on the port of import and the volume of the shipment.
Fluctuations in the yuan and U.S. dollar also impact Mongolian coal prices.
Amar Adiya is an Editor-in-Chief of Mongolia Weekly and a former regional director at the strategy firm BowerGroupAsia in Washington D.C.