Last month, Protesters storm the Mongolian capital to denounce corruption in the country’s coal trade. Now the government says it has a solution to end years-long shady business dealings.
Starting next month, Erdenes-Tavantolgoi JSC – the country’s largest state-owned coal miner – will stop signing direct sales contracts with buyers in neighboring China, which last year buys 84% of Mongolia’s total exports. Instead, the company’s coal will be auctioned on the Mongolian Stock Exchange.
The move to sell coal contracts through the exchange comes in response to large-scale anti-corruption protests in Ulaanbaatar in December, sparked by allegations of widespread fraud in the coal industry.
The Erdenes-Tavantolgoi holding company is at the center of the allegations – chief executive Gankhuyag Battulga and several associates as well as family members have been arrested and awaiting trial, accused of embezzling billions of dollars coal revenue. Authorities say the auctions will improve transparency and ultimately result in a higher net profit for the state.
The government had planned to start the bidding process by the end of the year but accelerated the process following public outcry over corruption.
“Instead of waiting half a year, we will trade online starting February and the Mongolian Stock Exchange will handle that,” said Batnairamdal, Mongolia’s deputy minister of mining and heavy industry. with Al Jazeera. “This will give us experience selling coal on an online platform.”
Sandwiched between Russia and China, Mongolia is one of the world’s most sparsely populated countries with 3.3 million people spread over an area slightly smaller than Alaska. In 2021, the country has a gross domestic product (GDP) per capita of about $4,500, similar to that of Indonesia. Mining accounts for about a quarter of the country’s GDP, according to the Mining Industry Transparency Initiative. About half of its export revenue comes from coal.
The contracts apply to coal exported through the Gashuunsukhait border gate, located about 240 km south of the Tavan Tolgoi coal mine in the Gobi desert. In addition to Erdenes-Tavantolgoi, affected companies include Energy Resources LLC, whose parent company is the Mongolian Mining Corporation listed on the Hong Kong Stock Exchange.
Both companies mine coal at Tavan Tolgoi, one of the world’s largest coke and thermal coal mines, with reserves of 6.4 billion tons. Coal from Tavan Tolgoi is prized in China, where it is used to make steel.
China is the world’s largest steel producer, accounting for about 57% of the world’s steel production. But it cannot produce enough coking coal domestically to meet the needs of steel mills.
According to data from the General Administration of Customs of China, in 2022, China imported 170.71 million tons of coal. Mongolia supplied 31.2 million tons, about 18% of the total.
Mongolia’s coking coal has become especially valuable in recent years as China eases its reliance on Australian coal after relations between the two countries deteriorated markedly.
Earlier this month, the stock exchange held a trial run to test the new system – 12,800 tonnes of coking coal were auctioned off to a Singapore-based coal shipping company. The final call price increased 12.2% from the initial asking price, from 1,150 to 1,290 Chinese yuan ($170-190) per ton.
“The initial trade shows that coal contracts will help improve the transparency of coal trade and increase sales revenue,” Javkhlan Ivanov, the exchange’s chief financial officer, told Al Jazeera. “E-coal auctions will be conducted without any brokers and have a trading commission of 0.1 percent.”
back room transaction
The new system comes just a month after a group of coal mining executives and their accomplices were arrested for allegedly defrauding Erdenes-Tavantolgoi JSC. Much of the theft is believed to be accomplished by off-the-books coal sales with Chinese buyers at the border.
The government argued that selling coal through the stock exchange would prevent theft and shadow trading. Mongolia ranked 110th out of 180 countries in the corruption perception index compiled two years ago by Transparency International.
“In the past, state-owned companies signed sales agreements with buyers they found and they did it behind closed doors,” Batnairamdal said. “Under the new system, any buyer can open an account and participate in purchases through licensed brokers on a level playing field.”
There are also plans to expand coal auctions to other minerals. Potential commodities to be traded include copper, iron ore, gold, fluorspar, molybdenum and other minerals.
“The types of contracts will be spot, futures, options and forwards,” Javkhlan said. “The main buyers will be Chinese and Russian importers as well as foreign and local derivatives traders.”
Batnairamdal said Mongolia is looking at commodity exchanges in emerging markets like Turkey and Poland as well as mature exchanges like the London Metal Exchange as a model for Mongolia to use. used when developing your own exchange.
Jake Horslen, senior LNG analyst at Energy Aspects, a London-based market analysis firm, said commodity exchanges can be useful as they bring together buyers and sellers in markets. markets are illiquid or opaque.
“They can also reduce counterparty risk because the exchange acts as a counterparty to the buyer and seller in each transaction, rather than another company,” Horslen told Al Jazeera.
The corruption investigation has changed course of action which has so far resulted in the arrest of 17 people accused of being involved in the theft from the Erdenes-Tavantolgoi Corporation. Former President Khaltmaa Battulga was among those questioned about their involvement.
One sign that things were not going well for the company came in October when the chief executive officer of Erdenes-Tavantolgoi JSC was fired without a clear explanation, and control was given to a special agent. envoy of the Ministry of Finance.
The corruption allegations in December prompted thousands of people to pour into the streets in subzero temperatures to call for accountability. The government has promised to reform Erdenes-Tavantolgoi JSC, hire employees in a transparent process and eventually make it a public company.
“The protesters want a solution. They don’t want cases like [the] coal theft happened again, they wanted the necessary reforms. “We need to reform the mining sector,” said Batnairamdal.
Zolbayar Enkhbaatar, editor-in-chief of Inside Mongolia, a market intelligence newsletter, said the commodity market could help the government regain some of the confidence it lost in the Erdenes-Tavantolgoi JSC fiasco.
“The Mongols seem to see the stock market as a symbol of transparency,” Zolbayar told Al Jazeera. “Coal theft can happen because of a lack of transparency by the companies involved — no one can know how and to whom they sell coal.”
Others are more cautious. Amar Adiya, regional director of strategic consulting firm BowerGroupAsia based in Washington, DC, said that setting up a successful commodity exchange in Mongolia would require a large volume of goods to be delivered. daily translation.
“It was not a simple task,” Amar told Al Jazeera.
While bartering can benefit both coal buyers and sellers in the long run and can help ease public confidence in the coal trade, much more needs to be done to ease the situation. calm public anger over longstanding problems with corruption and quality of life, Amar said.
“The exchange can be seen as a small step towards addressing larger issues related to inequality, cost of living, environment and public health,” Amar said. “But the government needs to take a holistic approach to address these concerns in order to gain public support before the 2024 election.”
