Chinese Coal Demand Fuels New Rail Project

BMI View: Chinese demand for Mongolian resources have dramatically boosted the Mongolian economy. Despite this, the country's infrastructure still lags behind its regional peers - an issue that will need to be addressed. As such, and exemplified by a new rail line to link coal fields to the Chinese border, we expect the construction sector to perform well over the coming years.

Following state-owned mining company Erdenes Tavan Tolgoi's invitation to bid for a new one-year contract to mi ne the western Tsankhi area of the Tavan Tolgoi coal field in early May, the national rail authority has awarded Samsung C&T a contract to build a railway line to connect the field to the Chinese border . The US$483mn contract will see Samsung as the sole contractor build a 2 17km line over a 30 month period between Tavan Tolgoi and the border town of Gashuun Sukhait. Samsung C&T only entered the Mongolian construction market in May 2012 when they began the USD273mn project to build the Shangri-La Hotel in Ulan Bator.

The announcement follows a recent court ruling on a previously considered rail line between Ukhaa Khudag (part of the Tavan Tolgoi field) and Gashuun Sukhait. The line was also to connect to Oyu Tolgoi, home to some of the world's largest copper and gold reserves. Mongolian Mining Corporation have been awarded US$59mn in compensation after the rail line they were developing on a government concession was cancelled as part of the government's rail project consolidation plan, bringing several planned rail schemes under its direct control.

Indicative of how the mining sector drives infrastructure development in Mongolia, Mongolian Mining Corp. will be granted 50% of the capacity of the new line, as well as potentially having its compensation paid to them in the form of equity in the new railway project. Other rail projects in the pipeline to facilitate the mining industry include the 595 km line running west from the existing network at Erdenet to Mörön and the Ovoot Coking Coal Project, which SMEC is currently carrying out feasibility studies for.

Mongolia's Resource Wealth Heads To China
Major Coal, Gold And Copper Deposits in Mongolia

Coal from the Tavan Tolgoi field is currently exported to China via road. T he coal field has deposits estimated at 6.4bn metric tons, 70 percent of it coking coal for steelmaking. This is reportedly large enough to satisfy Chinese demand for 40 years. As such demand for the line is there, and will significantly reduce transport costs , add ress ing the current risks to the project . A brief suspension in exports due to a disagreement between Erdenes Tavan Tolgoi and their Chinese customers Aluminium Corporation of China (CHALCO) has now been resolved, but did present downside to investment in the planned rail link . Erdenes Tavan Tolgoi claimed that the price s they were receiving from CHALCO were below that of production. CHALCO is one of the mine's biggest creditors, after a 2011 deal under which the company lent the mine $250m that was to be repaid in coal shipments.

Mongolia Lags Behind Regional Peers
World Economic Forum's 2012/2013 Global Competitiveness Report, Overall Infrastructure And Rail Infrastructure Scores

Whilst Mongolia currently lags behind its regional counterparts in terms of the quality of its infrastructure, we believe that over the coming years the country's economic growth will translate into major investment ( see ' Economic Growth Back To Single Digits', 20 May) . BMI 's mining team believe Chinese demand for Mongolian coal will remain. This is for both thermal coal for China's growing coal-fired electricity generation capacity and coking coal for steel production due to its competitive price , helped by its geographic proximity in relation to other sources such as Australia.

We have previously noted the potential for Mongolia's infrastructure sector and the recently announced one-year contract to mine the western Tsankhi area Tavan Tolgoi drives home the need for improved export options for Mongolia's resources ( see ' Rail Goes Off Road Yet Plan On Track' 10 February 2012) . Considering this, we foresee that Mongolia's construction industry, buoyed by demand for infrastructure to cater for the mining industry, will grow strongly over the coming years.

This article is tagged to:
Sector: Infrastructure
Geography: Mongolia, Mongolia, Mongolia, Mongolia

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