Policy and politics
PM’s nudge brings ETT and ER together
2016-12-16
The Mongolian Mining Journal /Nov.2016/
S. Bold-Erdene
During a working visit to the Southgobi earlier in November, Prime Minister J. Erdenebat had a meeting with senior executives of the three companies operating in the Tavan Tolgoi deposit to explore the possibility of selling their coal from one point. The outcome of the talks has been positive as Energy Resources and Erdenes Tavan Tolgoi have started cooperating with each other.
In the last four months, rising demand for and price of coking coal has opened up opportunities for Mongolian miners, particularly companies in Tavan Tolgoi. Claims and counterclaims on whether the state owned entity Erdenes Tavan Tolgoi and the local government owned company Tavan Tolgoi were selling coal cheap at the mine mouth and thus blocking other miners such as Energy Resources to take advantage of the price rise in the market continued to be made. Erdenebat was persuaded to deal with the issue by bringing all coal exporters together and use the one-window policy.
His meeting with executives of the three companies and of Erdenes Mongol lasted approximately three hours. There was no formal statement to the press after the meeting, but it was revealed off the record that Erdenes Tavan Tolgoi executives had explained to the Premier that they could not raise the price under their agreements with Chalco and TTJVco, the Chinese operator in the East Tsankhi of Tavan Tolgoi. Erdenebat had countered this by suggesting that they could surely charge TTJVco more. His argument was that while the 2012 agreement with Chalco did not allow any unilateral price determination on the part of ETT, there was nothing in the agreement with TTJVco to stop ETT from raising the price. He also wondered why Tavan Tolgoi, which was not constrained by any agreement, continued to sell coal for the same cheap price as ETT.
There was no way the companies could ignore the Premier’s intentions, so they started looking for a solution. Energy Resources offered to buy ETT coal at market rates but ETT said it had no coal left to sell to it, as 35 percent of the output from East Tsankhi goes to Chalco as debt repayment and the other 65 percent to TTJVco as their service fees. The alternative emerging from the talks between ER and ETT was to immediately start extraction in West Tsankhi, and follow this up by getting the coal from there processed at the ER plant to finally sell it for the higher market price. Article 35.11 of the Mineral Law stipulates that “extracted, enriched or semi-processed raw materials will be first supplied to the domestic processing plant in the country”. Ignored for so long, this may now become the basic condition for the two companies to work in tandem.
It promises to be a win-win situation for both companies. Erdenes Tavan Tolgoi resumes work in West Tsankhi, kept idle for long. The money from the sale of coal from there greatly improves ETT’s financial situation and, not to forget, puts more money into the State coffers. Selling West Tsankhi coal to ER will also help ETT increase the price of East Tsankhi coal. The 65 percent of the coal extracted from East Tsankhi that TTJVco buys at the same cheap price as Chalco, it now sells to Chinese trading companies for a cheaper than market price (and still makes a profit), and this is what made it difficult for Tavan Tolgoi and ER to raise their coal price. Once ETT starts charging TTJVco more for its coal there would be no cheap coal for Chinese trading companies, thus allowing ER and ETT to sell coal price at the market rate. These higher prices would also allow ETT to settle its debt to Chalco sooner. That would seem to be the major reason behind ETT agreeing to get its coal processed by ER.
If this arrangement is profitable for ETT, it is also so for ER, except for certain risks. Even when it buys ETT coal at the market price (say, $50/t), and washes it in its own plant at its own cost, it would sell the washed coal for over $100/t. Since ER will pay ETT the same price for its coal as TTJVco, the source of cheap coal supply to China will dry up.
The risk or uncertainty lies in ER’s ability to pay ETT on the spot for the coal, Another worry is what happens if coal prices fall again, and coal washing becomes unprofitable. Anyway, ER may very well choose to cross the bridge when it comes there, and make the most of the present opportunity to sell coal at a fair price.
Much will depend on the specifics of the two parties’ agreement, the terms of which are being worked out by them and the Ministry of Mining and Heavy Industry.
It is not clear where the local TT will stand in the one-window policy now under negotiation. The Civil Representatives’ Khural of Umnugobi aimag has got new members after the election, and so a change in the company’s board and senior positions is quite likely. If and when that happens, we shall have to wait for their stand on the policy.
Anyway, things are moving on the right track, at least for the short term. Even such temporary gains are no small matter in the present economic situation, though the main test for the Government lies in how it manages the larger issue of exploiting the Tavan Tolgoi deposit. Will the Shenhua-Sumitomo-Energy Resources consortium be back on stage or will some other wooer be chosen?