For Debt and Coal: the China-Mongolia Deal

Tavan Tolgoi coal mine in Ömnögovi Province., Mongolia. Image from wikipedia

Mongolia recently reached a new deal to sell coal to China, helping it boost its faltering economy and start repaying billions of dollars it owes Wall Street lenders.  Under the landmark agreement completed late 2016, Mongolia’s state-owned mining company will sell coal to China at roughly double the previously agreed-upon rate.  The deal follows a devastating four-year period when Mongolian miners exported coal to China at deeply-discounted prices, sometimes for as little as 11% of the global benchmark price, undercutting Mongolia’s economic growth. Mongolia agreed to those punitive terms to get the loan from China and has been struggling to repay it.

The new export agreement will help Mongolia pay its mounting debt, including bonds held by BlackRock Inc., Fidelity Investments, UBS Global Asset Management and other global investors that bought the debt for its double-digit yields, according to bond investors.

But the export deal has a downside for Mongolia: It effectively transfers much coal production from China, which is bent on cleaning up its environment, to its poorer neighbor…  Trucks carrying coal are backed up for nearly 40 miles at Mongolia’s southern border with China, in what some analysts call the world’s largest traffic jam…Yet Mongolia seems willing to make that trade-off, with coal prices soaring since China has begun cutting production, analysts say. Market prices for the type of coal produced in Mongolia, which is used in steel- and iron-making operations, skyrocketed 200% in 2016 to $225 a ton.

Mongolia is also in talks with some Asian firms to develop its Tavan Tolgoi coal reserves, analysts say. The Gobi desert site is one of the world’s largest untapped coal mines, with more than six billion tons of coal deposits.

Excerpts from the New China-Mongolia Mining Deal: Economic Windfall or Environmental Threat?, Wall Street Journal, Jan. 21, 2017

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s