PROM­I­NENT ECO­NOM­ICS PRO­FES­SOR G.KHASHCHULUUN GIVES HIS TAKE ON MON­GO­LIA’S EN­ERGY AND COAL SEC­TOR

The UB Post - - BUSINESS & ECONOMICS - By B.CHINTUSHIG

Dr. Ch.Khashchuluun is a pro­fes­sor at the Depart­ment of Eco­nom­ics, a mem­ber of the Aca­demic Coun­cil and the board of the Na­tional Univer­sity of Mon­go­lia. In ad­di­tion to his teach­ing, Dr. Ch.Khashchuluun serves as an ex­ec­u­tive direc­tor of the Mon­go­lia Oil Shale As­so­ci­a­tion and is manag­ing a num­ber of non-gov­ern­men­tal or­ga­ni­za­tions and re­search con­sult­ing ac­tiv­i­ties. From 2010 to 2011, he was ap­pointed as the in­au­gu­ral chair­man of the board of di­rec­tors to lead the es­tab­lish­ment of the De­vel­op­ment Bank of Mon­go­lia, and from 2006 to 2012, he was a mem­ber of the board of di­rec­tors of the Cen­tral Bank of Mon­go­lia.

Dr. Ch.Khashchuluun was awarded a bach­e­lor's de­gree in eco­nom­ics by the Moscow State Univer­sity in 1989, a mas­ter's de­gree in eco­nom­ics from the Grad­u­ate School of Eco­nom­ics of Yoko­hama City Univer­sity in Yoko­hama, Ja­pan in 1996 and a Ph.D in in­ter­na­tional eco­nom­ics by the Grad­u­ate School of Eco­nom­ics of Keio Univer­sity in Tokyo, Ja­pan in 2003.

The price of coal has in­creased on the global mar­ket. How will this af­fect Mon­go­lia’s econ­omy?

There is no such thing as a global coal mar­ket. Many peo­ple mis­un­der­stand this no­tion. They say “we are ex­pand­ing our coal mar­ket”, yet coal con­sists of two mar­kets. The first is coal for the en­ergy sec­tor or brown coal as it is named. This is a whole dif­fer­ent mar­ket. Of course, in the end, all of the prod­ucts are coal. But these mar­kets tend to dif­fer vastly in terms of sup­ply and de­mand. Brown coal is very abun­dant glob­ally. China, the USA, In­dia, In­done­sia, and Aus­tralia are the main five coun­tries that make up around 70 per­cent of the to­tal global mar­ket. It is a very pe­cu­liar mar­ket in which the largest pro­ducer is also the largest con­sumer.

On the other side of this is the coal that is used for steel pro­duc­tion, which is cok­ing coal. In some cases, shale gas can be sub­sti­tuted for cok­ing coal. How­ever, coal is one of the most abun­dant re­sources on earth. It has been around 100 years since we have started coal pro­duc­tion in Mon­go­lia. Yet, the do­mes­tic de­mand is low and has shown signs of an uptick only re­cently.

The main cus­tomers and con­sumers of our coal are out­side of Mon­go­lia. Our south­ern neigh­bor, the Peo­ple’s Re­pub­lic of China is our ma­jor mas­sive mar­ket. There are in­stances in the sec­tor’s his­tory where we have ex­ported mod­er­ate amounts of coal to other coun­tries out­side of China. The top coal pro­duc­ers in the coun­try are Er­denes Ta­van Tol­goi, Mon­golyn Alt (MAK), then SouthGobi Sands LLC, and En­ergy Re­sources LLC. Look­ing at the fig­ures, it is clear that Er­denes Ta­van Tol­goi and MAK are the two main ex­porters of coal.

In the last decade or so, re­source na­tion­al­is­tic rhetoric such as those say­ing that “Mon­go­lia’s wealth is be­ing ex­ploited by out­siders, they will only leave empty holes” has been in­creas­ing. What are your thoughts on this is­sue?

To be frank, our coun­try did not have the ca­pac­ity or abil­ity to sell and ex­port our coal un­til 2005. The global de­mand for coal was also not very high. At that time, po­ten­tial mines with mas­sive coal re­serve de­posits were found but with­out the nec­es­sary cap­i­tal or equip­ment to make use of it, we were left to ask ma­jor for­eign min­ing com­pa­nies to es­sen­tially op­er­ate it. Rhetoric around that time seemed to lean towards just giv­ing the min­ing li­cense to for­eign com­pa­nies in an ef­fort to start pro­duc­tion.

In the early 2000’s, one of the largest min­ing com­pa­nies in the world ac­quired the li­cense for Ta­van Tol­goi and gave it back to the gov­ern­ment, ba­si­cally say­ing that the ven­ture would be a point­less one. At that time our Cab­i­net even of­fered the min­ing li­cense to the North Korean gov­ern­ment. This sit­u­a­tion per­sisted un­til around 2006.

It only be­came ap­par­ent around 2006 that we had op­por­tu­ni­ties for ex­port. This is when we be­gan to re­search more about how we could ex­port the coal. In the Mon­go­lian coal mar­ket, there are not many for­eign in­vestors. It is unique in that the main play­ers are our do­mes­tic com­pa­nies.

You men­tioned that do­mes­tic de­mand for coal is low. Isn’t coal the main source of en­ergy?

The do­mes­tic de­mand for coal is mostly cen­tered on en­ergy. In en­ergy pro­duc­tion, six to seven mil­lion tons of brown coal is needed. Since coal is so abun­dant in es­sen­tially ev­ery cor­ner of Mon­go­lia, there is no need to move coal around. Ba­si­cally, ev­ery prov­ince has at least one coal mine. If they don’t have a coal mine in prox­im­ity, they bring in some from the neigh­bor­ing prov­ince. So we can see that the main con­sumer of the coal is our do­mes­tic power net­work sys­tem. This sys­tem con­sists of four to five sub­sec­tions, in­clud­ing the cen­tral power grid, the Khangai power grid, the west­ern power grid, the eastern power grid, and the Gobi has a sep­a­rate sub­sta­tion.

In re­cent years, all signs point towards the en­ergy con­sump­tion of our coun­try in­creas­ing even fur­ther. Cur­rently, around 90 per­cent of all power is pro­duced us­ing coal. The re­main­der is hy­dro­elec­tric, so­lar, and wind power. These re­new­able en­ergy ini­tia­tives have been very suc­cess­ful in the west­ern re­gion of the coun­try. We also im­port en­ergy from our two neigh­bors. The power needed for Oyu Tol­goi is routed from China and the north­ern part of the coun­try lives off of power from Rus­sia. We are pay­ing a sub­stan­tial amount of money to use elec­tric­ity. The goal of our gov­ern­ment is to de­crease the amount of en­ergy we buy from other coun­tries and in­stead fo­cus on sup­ply­ing Mon­go­lia’s de­mand do­mes­ti­cally.

Mon­go­lia’s power grid is pe­cu­liar in that es­sen­tially none of them are con­nected to­gether. The rea­son is, Mon­go­lia en­com­passes a vast amount of land and set­tle­ments are few and far be­tween. If we wanted to con­nect them, it will take a mas­sive amount of grids. In sim­ple terms, we will have to erect a lot of elec­tric­ity poles. This is ex­pen­sive. In the fu­ture, fo­cus­ing on link­ing the five sta­tions to­gether to feed off of each other is a long-term project we must fo­cus on.

There are also plans to de­crease the amount of coal we use for en­ergy pro­duc­tion and in­stead fo­cus on wind, so­lar, and other re­new­able en­ergy. For in­stance, our coun­try has set the goal to source 30 per­cent of all en­ergy from re­new­able sources. That is why projects such as the Sain­s­hand wind farm in South Gobi are be­ing sup­ported. Re­cently, one was built in Darkhan Prov­ince. I hear there are plans to build an­other in prox­im­ity to Ulaan­baatar. In hy­dro­elec­tric power, there is a lot of push and pull and many mov­ing parts. This has less to do with the elec­tric­ity and more to do with the wa­ter sup­ply.

How does wa­ter come into the coal equa­tion?

Wa­ter is an essen­tial re­serve, espe­cially for Mon­go­lia. The wa­ter re­serves of the coun­try are be­ing de­pleted rapidly. We can name a lot of rea­sons for this in­clud­ing global warm­ing. On top of that, we are los­ing our wa­ter over our bor­ders. We can’t make use of our wa­ter re­serves. Yet we need wa­ter. Two large sec­tors, min­ing and agri­cul­ture, need wa­ter. The 2010 wa­ter pol­icy ap­proved by Par­lia­ment sought to keep Mon­go­lia’s wa­ter re­serves within the coun­try.

In or­der to cre­ate large re­serves of wa­ter, we need large wa­ter stor­age fa­cil­i­ties. Wa­ter stor­age fa­cil­i­ties are usu­ally built along with a hy­dro­elec­tric power plant. This cre­ates a re­serve of wa­ter next to the power plant.

In other words, the con­struc­tion of hy­dro­elec­tric power plants helps cre­ate wa­ter re­serves for a coun­try. If Mon­go­lia wants to de­velop its man­u­fac­tur­ing sec­tor, a hy­dro­elec­tric power plant that pro­duces cheap elec­tric­ity is essen­tial.

There is one prime ex­am­ple of this. Our Se­lenge River flows into Lake Baikal. Lake Baikal has four ma­jor hy­dro­elec­tric power plants. All four of those are pri­vate and not owned by gov­ern­ment. They be­long to Rus­sian billionaire Oleg Deri­paska. His plants pro­duce cheap elec­tric­ity to sup­ply his own fac­to­ries.

There­fore, if our coun­try builds a hy­dro­elec­tric power plant, the think­ing is that the amount of wa­ter go­ing to Lake Baikal will de­crease some­what. This is not about pro­tect­ing Lake Baikal. Yet, they say that Mon­go­lia, which has been ex­pe­ri­enc­ing in­creased de­ser­ti­fi­ca­tion, can­not use it. We have the right as a na­tion to keep 10 per­cent of all wa­ter flow­ing through Mon­go­lia within our coun­try.

Many of our coal pro­duc­ers do not wash or process their coal and in­stead ship out raw coal. What are your thoughts about this sit­u­a­tion?

Mon­go­lia has two coal wash­ing plants. There is a small coal pro­cess­ing fac­tory in Sharyn Gol. The other one is owned by En­ergy Re­sources LLC. Coal is mixed with gravel and dirt when it is first ex­tracted. It is nec­es­sary to wash coal in or­der to sep­a­rate it. They call washed coal, pro­cessed coal. There are sev­eral com­pa­nies that do ex­port raw coal in Mon­go­lia. The rea­son is wash­ing coal re­quires equip­ment and wa­ter.

Aside from the in­ter­na­tional dis­putes re­gard­ing hy­dro­elec­tric­ity, Mon­go­lia has not been able to build one ma­jor power plant. The in­fa­mous ther­mal power sta­tion No. 5 is a prime ex­am­ple of this. When do you reckon this sta­tion will be­come op­er­a­tional?

As of right now, the four sta­tions are able to pro­vide enough elec­tric­ity and heat­ing. How­ever, in the fu­ture, the heat­ing the cur­rent power grid pro­vides will not be enough. The de­mand for heat­ing will sur­pass that of the de­mand for elec­tric­ity. This is why there is dis­cus­sion about build­ing the fifth power sta­tion. Cur­rently there are plans to ex­pand the third and fourth power sta­tions to pro­duce heat­ing to go with elec­tric­ity. In the fu­ture, we will need to build a sta­tion in Ulaan­baatar, Uvurkhangai, Khen­tii, Zavkhan, Arkhangai, Dund­govi, Tuv, and Govi-Al­tai prov­inces.

All of them will be built in close prox­im­ity to a coal mine. Our coun­try has vast amounts of coal. We can use our re­serves for thou­sands of years. In ad­di­tion, many new mines are be­ing found ev­ery day. Min­ing ex­plo­ration ex­pe­di­tions have only fo­cused on the cen­tral and eastern re­gion of Mon­go­lia. The ex­pe­di­tions have not been able to reach the west­ern parts. We don’t know what lies there. There could be an­other Ta­van Tol­goi or Oyu Tol­goi in the west­ern re­gions. The ex­plo­ration ef­forts are un­der­way. There­fore, it is en­tirely pos­si­ble that the cur­rent coal re­serve of the na­tion could in­crease ex­po­nen­tially.

If the prod­uct is ready but it can­not be sold or ex­ported, doesn’t it make it an un­prof­itable sec­tor?

Geo­graph­i­cally speak­ing, Mon­go­lia doesn’t have great ex­port mar­ket po­ten­tial. Rus­sia ex­ports 10 times the coal we ex­port to China. We are in di­rect com­pe­ti­tion with our north­ern neigh­bors in this aspect. In other words, our two coun­tries have only one mar­ket, the Chi­nese one. It makes no dif­fer­ence to the Chi­nese com­pa­nies whether they buy from Rus­sia or Mon­go­lia.

Mon­go­lia’s coal ex­port in 2015 reached 13 mil­lion tons. How­ever, this is not that high. Mon­go­lia cur­rently has the ca­pac­ity to ex­port around 20 mil­lion to 30 mil­lion tons. We do have a lot of op­por­tu­ni­ties. Op­ti­misti­cally speak­ing, Mon­go­lia can ex­port 60 mil­lion tons of coal an­nu­ally. But we mustn’t forget that the mar­ket is only sin­gu­lar. If coal prices drop, the de­mand will fall with it. China has 100 times the ca­pac­ity to pro­duce coal com­pared to Mon­go­lia. They them­selves have trou­ble with sell­ing off its do­mes­tic coal to Chi­nese com­pa­nies.

China has large amounts of pol­lu­tion due to the fact that it sources most of its elec­tric­ity and heat­ing from coal power plants. In or­der to de­crease the pol­lu­tion, there are ef­forts to de­crease the pro­duc­tion of coal. Some power plants have been shut down al­ready. Mon­go­lia’s en­ergy coal ex­ports will dwin­dle even­tu­ally. China im­ports 200 mil­lion tons of coal an­nu­ally. One fifth of this is used for steel pro­duc­tion. One fifth of that was pro­vided by Mon­go­lia. The rest was im­ported from Rus­sia, Aus­tralia, and other coun­tries. The mar­ket will prob­a­bly not ex­pand any fur­ther.

Our ex­ports have been sharply de­creas­ing in re­cent years. The price has de­creased also. The Mon­go­lian coal sec­tor was able to sur­vive this cri­sis. But we have en­tered into a very dif­fi­cult sit­u­a­tion. This same sit­u­a­tion has caused many Amer­i­can com­pa­nies to de­clare bank­ruptcy.

For in­stance, Pe­abody, which op­er­ated in Mon­go­lia, de­clared bank­ruptcy. Many mines are be­ing closed in China and Aus­tralia. Even though mines are not be­ing close in Mon­go­lia, the ex­port has de­creased sig­nif­i­cantly. This has been on­go­ing for many years.

Photo by E.KHARTSAGA

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