Mongolia Mining Corporation: When coal drives the fate of an entire nation
MMC, a leading Mongolian miner of coal, is struggling due to low profits, a high debt burden and is both intrinsically and extrinsically motivated to maximise production volumes. Its success in growing production and profits will impact the development trajectory of the entire Mongolian nation.
Economic and business background
Mongolia Mining Corporation (MMC) owns and operates a portion of the world’s largest coking coal deposit called Tavan Tolgoi (TT). It is located in the south-east of Mongolia, 200 km from the border with China, a big consumer of Mongolian coal. Despite only having a population of 3 million people, in 2014 Mongolia produced 33 mT (million tonnes) of coal; Mongolia is the 19th largest global coal producer, but is #1 in terms of coal production per capita. Mongolia is an emerging market and a developing country, with GDP per capita (US$ PPP, 2015) of $5,900, roughly on par with Indonesia ($5,200).
For most of its history, the Mongolian economy and culture were centered on animal husbandry. But in recent years, Mongolia industrialized and started developing its vast endowments of copper and coal. Since the mid-2000s Mongolia’s coal production went parabolic, and is currently at 33 mT. 40-60% of this coal is exported, primarily to China, and the rest is consumed domestically, mainly for power generation. Coal export revenues constitute 5-10% of Mongolia’s GDP.
MMC produces circa 8 mT of coal and generates zero profits due to high transportation costs of trucking the coal to the Chinese border. This led MMC to recently default on its debts and enter restructuring negotiations. MMC is mainly owned by the Mongolian government, and the government very much wants MMC to be profitable. As a result, the government is facilitating the building of a railway link between the mine and the Chinese border, which would significantly reduce transportation costs and allow MMC to turn a profit. This in turn would increase budget revenue and GDP.
Mongolia’s mining sector expansion helped GDP per capita compound at 15% p.a. (in US$ terms) in the past 15 years, but environmental costs are also believed to be readily observable. In urban areas, smog from coal-burning is worsening. The expansion of the mines has also necessitated the construction of housing and infrastructure for mining workers, which impacted the livelihood of cattle farmers in areas of close proximity and caused concerns about encroachment of traditional pasture lands. 40% of Mongolia’s inhabitants are herders, making this a particularly sensitive topic.
Emissions intensity per unit of GDP is high relative to global peers. Mongolia generated 19 mT of CO2 in 2012, 78% of which was from coal production and consumption within Mongolia. However, since half of the coal that Mongolia produces is exported to China (where it is burned in power plants or used to make steel), these figures are virtually certain to understate the true global CO2 impact of Mongolian coal. Safe to say, Mongolia’s government is keenly aware that the country is over-reliant on coal, both for its own energy uses (coal is used for 85%+ of internal power generation) and for export revenues. The government recently announced a commitment to reduce CO2-per-$-of-GDP by 60% by 2030. Whilst this is a noble long-term goal, in the short term, the government does not have the luxury of worrying about the environment as the decision-makers are preoccupied with staving off an economic depression driven by a collapse in the copper price; since 2011, the global price of copper halved, and copper exports account for 10-20% of Mongolia’s GDP. Low export revenues have resulted in a 20% public budget deficit, and some of the public sector workers have not been paid in months. Linked to all this, the Mongolian currency (the Tugrik) has been rapidly depreciating. The government is thus scrambling for money and is uniquely motivated to grow any export revenues that it can find, including coal. The government’s plans to diversify the power generation sector away from coal towards renewables is also taking a back seat.
MMC’s sole business is to extract and transport the world’s environmentally-dirtiest commodity. And because Mongolia is an emerging market early in its development phase and is also sitting on top of some of the world’s largest coal deposits, it has little other options at this stage other than maximizing coal production to satisfy own power needs and generate export profits. The proximity to China and China’s insatiable demand for natural resources are also important factors. All these things combine into a blessing (a cash cow) and a curse, and will be an eternal source of tension.
(word count = 795).
 EIA International Energy Statistics
 Above sources, combined with GDP data from EIU Mongolia Country Report
 MMC investor relations
 World Bank data
 Batsuri & Erickson (2015), “The net CO2 impact of increasing exports of coal from Mongolia to China”.
Student comments on Mongolia Mining Corporation: When coal drives the fate of an entire nation
Great article Miras! I like how you outline the economics and trends in Mongolian coal. However, I am slightly frustrated by the fact that there seems to be no short-term solution to the issue.
One possibility I could imagine is for other more developed countries, who have already burned their fair share of coal to achieve industrialization, to pay into a fund for developing markets to reduce their consumption of carbon emitting resources. This is already done in a similar fashion with deforestation where for example the UN and other international organisations pay Indonesia to limit its deforestation. Mongolia could use these funds to invest in other more sustainable industries.
Miras, this was a thought-provoking article. Building on Stefan’s suggestion, Mongolia could also try to secure international funding to refurbish its coal plants to make sure they are as clean as possible so that it minimizes its GHG emissions as well as better protects the health of its citizens. Though Mongolia could ask for this as a carrot, international development organizations could also adopt a similar approach as a stick and refuse to fund more investment in Mongolian coal unless it is at a minimum ‘clean coal’.
Miras, this is very engaging. Coming from the mining industry of a mining-intensive country, I can relate with the the key pain points of the Mongolian government.
In terms of mining, I understand that every step in the mining value chain is contributing to climate change – right from exploration to transportation of extracted minerals. At the same time, there are some sustainable initiatives taken by major mining players like Tata – at their coking coal plants, the leftovers are used at small power plants used to power the units. This may not be the method of the future, but it atleast helps minimize the damage.
I would love to see if any other ideas are being acted upon by the Mongolian government.
Miras, this was a fascinating read and reminded me of the ‘resource curse’ discussions prevalent with regard to Sub Saharan Africa and, in particular, countries such as Angola, Sierra Leone (both diamond rich) and Nigeria (oil). As you have brilliantly described, the temptation to focus on export lead growth is hard to resist for countries at an earlier developmental stage and can lead to one of three issues, inter alia, namely:
(1) “Dutch Disease” whereby the national currency, in this case the Tugrik, appreciates extensively in line with its primary export and renders other national industries uncompetitive.
(2) Aggressive rent seeking by government players who are often industry owners resulting in a wealth paradox where inequality increases in line with total GDP, which feeds political instability.
(3) Higher economic susceptibility to exogenous macro shocks, as you have highlighted with copper.
I agree with the comments above in so far as there are mechanisms by which Mongolia can trade and minimise emissions over and above efforts they can make to minimise emissions in their processes themselves, but I think there is a broader question of equal interest, which regards how sustainable the industry is politically and economically and whether it ought to be allowed to proliferate at the expense of other industries. The mitigating factor regularly mentioned is human capital development and North East Asia (e.g. South Korea) is often used as an illustrative comparison to resource cursed countries; the idea being that human capital is siphoned off to commodity led businesses while other industries suffer and by that token, higher levels of education and training across the population can help to develop other non-commodity focused industries. The idea is to re-balance the export product mix to minimise revenue volatility and the associated balance of trade shocks linked to the commodity base. I would be interested to know if you think this is something the government is inclined to consider or if the temptation to carry on with business as usual is simply too great.
Very cool article and topic, Miras88! It’s always a sensitive topic when talking about how developing economies handle environmentally friendly practices. I doubt that Mongolia has the same level of environmental scrutiny as developed economies and I wonder what sort of climate-friendly resistance is being put into action by local communities. I’m sure the fact that a significant portion of the population is herders, there could be some resistance but I doubt is has the necessary resource and political clout to make a significant stab into the issue.