M.Dagva: Market for coal will shift away from Mongolia
As part of Unuudur’s reader-reporter column, mining adviser and analyst Ch.Otgonchuluus sat down with M.Dagva, advisor to the Minister of Mining and General Director of QMC Group (Qualified Mining Consultants), to speak to him in-depth about the mining sector and its development.
M.Dagva is a founder and General Director of QMC Group. From 2001 and 2006, respectively, till present, he has been a senior lecturer at the School of Mining Engineering of the Mongolian University of Science and Technology (MUST) and deputy director of the Mining Research and Design Center of MUST. He was awarded a bachelor’s and master’s degree in mining technology by MUST.
Under his management, QMC Group has become one of the leading national mining consulting companies. M.Dagva has a strong academic and teaching background and possesses a solid, over 10 years of experience with proven track record in leading teams engaged in mining studies, including exploration, feasibility, mine development, mine production and mine supporting infrastructure.
In 2016, M.Dagva was appointed as the advisor to the Minister of Mining Sh.Dashdorj. After D.Sumiyabazar replaced Sh.Dashdorj as minister, he elected to keep M.Dagva as his advisor. His main focus has been to maximize profitability of mines, increasing competitiveness of state-owned mining companies, improving laws and the legal environment surrounding mining, and to speed up the implementation of largescale projects.
The following is a formatted version of the interview between the reader-questioner Ch.Otgonchuluu and M.Dagva.
MINING NEEDS TO BE 4 TO 5 TIMES BIGGER THAN IT IS NOW
I participate in international mining conferences about two or three times a year. Ministers, private sector executives, administrators of state-owned companies, and professional associations from Chile all essentially say the same thing at their presentations. Almost like they arranged it beforehand.
In Mongolia’s case, what a minister says can be completely different from what his team says. The private sector also tends to be very critical of the government. In any case it does not look good from the outside. There seems to be no continuity in Mongolia’s policy. How big of an issue is this?
I have been working in this sector for 18 years. As a person that has seen how many times mining policies have changed under new administrations and how much turnover there is at the head of state-owned mining companies, it worries me. Looking at Chile’s experience in this regard, it seems like the smaller the benefits or the narrower the issue is; the less likely it is that there will be a consensus.
Chile has a lot of revenue from mining. But the main goal of Chile is not mining revenue anymore. It is more important to use mining as foundation to activate its other economic sectors and gradually move away from mining dependence. Seeing as this is the most critical common goal, whether it be the government, the private sector, or associations, they all have the same viewpoint that it is better for the country overall.
Second, Chile has ambitions to become a big player on the global mining stage. They are of the viewpoint that they can be big players like Australia or Canada. A uniting ambition essentially cancels out the smaller domestic issues. We all need to come to an understanding that the mining sector needs to be four to five times bigger than it is now in order to be significant enough to find solutions to Mongolia’s problems.
I told Minister D.Sumiyabazar that there is a misconception brewing amongst the public that all Mongolia needs is Tavan Tolgoi and Oyu Tolgoi. This is not true. Increasing the annual revenue from mining from its current level of six billion USD to 20 billion USD would make it a world-class mining economy. Not only that, the proceeds from that revenue need to be used to help Mongolia reach the goals it has set to achieve by 2030.
Our economy is extremely dependent on mining. Today, the economy is mainly dependent on two large projects, the Tavan Tolgoi coal mine and the Oyu Tolgoi project. Some have said that it is wrong to have large quantities of small mines and that it is ruining the environment. Is it realistic to expect a healthy economy with only two to three megaprojects?
Say a champion named Otgonchuluu (interviewer’s name) wins the Naadam wrestling competition for 10 years straight, people begin to be bored. Say a new wrestler named Dagva (interviewee) is entering the competition, people will hope that Dagva will beat Otgonchuluu easily and become the new champion. The logic behind this is that the public is discounting the 10 years that Otgonchuluu poured into his craft and the times that he made them happy in hopes of seeing a new champion.
Right now the champion of the economy is mining. In the future, a new wrestler such as tourism or agriculture might arise. Continuing the metaphor, in order to climb the ranks, tourism and agriculture need at least 20 to 30 years to become contenders. What happens in five years in wrestling will require 20, 30, 40, or even 50 years in terms of the industrial sector. About three or four years ago, there was some discussion to fully forgo mining and mainly deal in the business of exporting wool and anklebones. This is a conceptually misguided effort.
Believing that Oyu Tolgoi and Tavan Tolgoi alone is enough is a misconception in itself. Coal is a two billion USD sector and so is the copper sector. Gold is 500 million USD sector and petroleum and iron ore are around 300 to 400 million USD sectors. The remaining mining products amount to 100 to 200 million USD, rounding out the current six billion USD mining sector.
A billion-dollar sector is capable of developing on its own. We have the opportunity to create two more sectors worth more than two billion USD. The gold and fluorspar sector can be developed into billion dollar sectors. No matter how large a fluorspar or gold mine is, it cannot measure next to the Oyu Tolgoi mine.
Therefore, in order to develop the sector, small to mid-size mines need to be developed to increase exports up to a billion dollars. It is essentially diversification within mining. The fluorspar mines currently in operation are unorganized and largely informal artisanal miners. If the mines were increased to 40 to 50, there could be a basis to build a processing factory. Government support of hydrogen fluoride aluminum fluoride manufacturing could increase the economic benefits of fluorspar by seven to eight-fold. This will ascend the sector into a billion-dollar one.
In terms of gold, there needs to be about 10 more mines like Gatsuurt and Boroo. But there is no policy on this. We have not yet understood that exploration needs to be 20 years ahead of production. Large mineralized zones need to be determined and exploration needs to be conducted in around 10 regions that have high likelihood of large gold deposits. It cannot be done just randomly.
Exploration needs to be more targeted. If we find 10 more mines like Boroo or Gatsuurt, there is a chance that gold exports could exceed a billion USD. When the price of copper falls and coal follows suit, the market price of gold might stay the same and fluorspar could also remain relatively stable.
If we create these four large sectors, Mongolia’s economy would be ready for boom-bust cycles of the four commodities. If this happens, we will not see a repeat of 2014 and 2015 as we will be able to replace certain large mining sectors with others.
‘WE CANNOT AFFORD TO SIT AROUND WAITING FOR THE NEXT FRIEDLAND’
You said that it is better to have more mines as options when the reserves of one is depleted instead of having a few large scale mines. The copper sector is a major factor in the economy. It is liable to affect 40 to 50 percent of total exports in any given year. Almost 90 percent of foreign direct investment is into copper. Mining has essentially become dependent on copper. What if the Oyu Tolgoi mine does not pan out and the Erdenet copper mine is depleted in 20 to 30 years. How will Mongolia survive this shock?
Become more and more dependent on one mining commodity only makes Mongolia more vulnerable to risks. Our southern neighbor is actively trying to bring down the prices of copper. In the face of this, we need to further develop the copper sector, not shy away from it.
The benefits of a copper mine only begin to be reaped after about 20 years of operations. Therefore, if the reserves of Erdenet begin to be depleted, we need to be looking for the next big mine.
MARKET FOR COAL WILL SHIFT AWAY FROM MONGOLIA
There seems to be a big misconception amongst the public. Mongolia does not have the largest reserves of coal. The world will go on with or without Mongolia. China has hundred times the amount of coal reserves as Mongolia. They dictate the market.
China does not even have to import coal from Mongolia if it chooses not to.
China maintains the policy of purchasing cheap coal from multiple sources. Sometimes it tries to create competition between Australian and Mongolian coal. Our politicians seem to believe that the world will not be able to continue without Mongolia’s resources and that Mongolia leads the world in resources. Has this misconception had a negative effect policy-wise?
We prepared a 200-page book for members of Parliament in the lead up to the discussion of the bill to speed up the implementation of the Tavan Tolgoi mine. The book includes information about the coal market. Total global imports of coking coal annually reach 250 million tons.
When we say we want to increase our coking coal exports to 100 million tons, are we really saying that we will account for almost half of the total global coking coal exports? We need to take a step back and look at all the geopolitical and foreign policy ramifications before talking about such a large issue. Looking at the forecasts, by 2025, India not China, will become the largest importer of coking coal.
In other words, the main coking coal market will move away from Mongolia’s vicinity. It is wrong to act like no other country in the world has natural resources and that Mongolia is the center of the world. We began mining in 1990 with very little experience and we have made many mistakes for the environment and society since then.
This has only escalated and ultimately created a segment of the Mongolian population that does not support mining at all. Politicians that arise from this segment rarely support mining. One of the biggest and most important tasks is to show the public that this sector can be handled and managed properly.
So I will assume that it is possible for Mongolia to increase its coal exports to 50 to 60 million tons annually. Correct me if this is wrong but I believe that the annual import capacity of coal for China is around 60 to 80 million tons. Moving forward, it might remain around 90 million tons but is expected to decrease in the long-term. There is an increasing movement to forego fossil fuels such as coal. From the economic stand- point, if Mongolia exports 50 million tons of coal, the price of coal will plummet. Will this ultimately be detrimental to Mongolia?
Mining must always be interconnected to the global market. Increasing the supply of coal will undoubtedly lower prices significantly. As a result, there has been a lot of criticism surrounding the goal to increase coal exports to 50 to 60 million tons. Would you agree with this criticism?
What you are saying is undoubtedly one of the biggest risks. There have been many benefits promised by politicians, including more revenue from the Tavan Tolgoi project. In the book given to members of Parliament, we have a section that includes the projected risks from the Tavan Tolgoi project. It includes specific risks and how it could be handled. Some people are talking about astronomical numbers, saying things like the Tavan Tolgoi mine is worth 50 or 60 billion USD.
If 200 million tons of coal is produced annually from Tavan Tolgoi for the next 40 years without any delays, the real worth of the mine is 140 to 150 billion USD. But there is no market to purchase this much coal. Therefore, it needs to be calculated more realistically. If state-owned Erdenes Tavan Tolgoi produces 30 million tons of coal, around 24 to 25 million tons will be sold in reality.
If Energy Resources produces 15 million tons of coal, it will sell around 10 million tons. As a result, the most realistic number of coal that can be exported from the Tavan Tolgoi mine is around 30 million to 40 million, maybe 50 million tons of coal annually. Is the threat of a price plummet real? Yes. But we cannot sit around doing nothing.
Around 60 to 70 percent of washed coal will be sold to China. We have no other option but to also seek out other markets. Whether we like it or not, the majority of coal use will shift from China to India. If possible, it would be ideal to export our coal through Tianjin or Vladivostok ports. It could be four to five million tons sold to India and around the same amount to Japan and South Korea.
People laugh when someone brings up the possibility of exporting coal to Europe. In terms of coal exports, we need to diversify our customers and at least show that we are not dependent on only one country by exporting at least one to two million tons overall to several markets in Europe. Five Asian countries, China, Japan, South Korea, Taiwan, and India make up more than 80 percent of the total global coking coal imports.
...There seems to be a big misconception amongst the public. Mongolia does not have the largest reserves of coal. The world will go on with or without Mongolia. China has hundred times the amount of coal reserves as Mongolia. They dictate the market...