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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Mongolia’s Cross-Country Railway Project Faces Delays

Feb. 13 – The extensive cross-country railway capable of delivering Mongolia’s swelling coal output to South Korean and Japanese markets through Russian territory originally scheduled to start last year is not likely to begin before 2017, the country’s railway authority told reporters.

The funds required to finance a series of feasibility studies and project designs (around US$50 million), drawn up last year when the decision to quadruple the country’s rail network was made, remain on paper.

“We still don’t have permission from the government to announce an open tender to build the railways, and in general there is still a deadlock when it comes to funding and building infrastructure,” Purevbaatar Luvsandavag, vice-chairman of the Mongolia Railway Authority, told Reuters on the sidelines of the Coal Mongolia conference in Ulaanbaatar.

He said the government had sought funding for the projects through overseas equity markets, instead of the railway authority’s preferred option involving public-private partnerships with investors from Japan and South Korea, who have a keen interest in getting the railway construction project underway.

Mongolia’s aim of quadrupling its rail network may reduce its reliance on the Chinese market and could boost economic development as well. Mongolia has grown increasingly dependent on commerce with China since the 1991 collapse of the Soviet Union, with more than 75 percent of exports going to its giant neighbor in 2009, according to EU figures. The Coal Industry Association of Mongolia gives an even greater figure of 98 percent.

Mongolia exported 22 million tons of coal in 2011, with virtually all of it delivered south to China at more than US$25 per ton lower than the international average. Competitive pricing for Mongolia coking coal makes it favored in China. During Q1-Q3 2011, the average sale price for imported coking coal from Mongolia was US$75.5 per ton vs. US$221.4 per ton for Australian coking coal.

The planned 400-kilometer link from the Tavan Tolgoi coal basin and Oyu Tolgoi copper deposit, two of the world’s largest untapped resources, will join with an existing rail line north to Russia and south to China.

So far, the nation drives to lay 5,700 kilometers of track across the country and to Russia’s Far Eastern ports.

The existent Trans-Mongolian Railway connects the Trans-Siberian Railway from Ulan Ude in Russia to Erenhot and Beijing in China through Ulaanbaatar. The Mongolian section of this line runs for 1,110 kilometers.

There are also two spur lines: one connects Darkhan to the copper mines of Erdenet, while another connects Ulaanbaatar with the coal mines of Baganuur. A separate railway line exists in the east of the country between the Mongolian town Choibalsan and the Trans-Siberian at the Russian station of Borzya.

As many investors have noted before, a transportation network capable of reaching consumers is the missing link in the Mongolian mineral resource rush.

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