China eyes Mongolia’s resources

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This is the third in a series of articles that looks at China’s borders. As China has grown in the last 30 years, so have the often complicated relationships it has with its many varied neighbors. In this article, we take a look at Mongolia.

By Joyce Roque

Jan. 8 – Through much of its history, Mongolia had been subject to the whims of its two giant neighbors. A country of vast, grassy steppes spanning 1,564,100 sq. km and wedged between Russia to its north and China to the south, Mongolia was home toGenghis Khan, the great Mongol warrior who unified the country’s many tribes and conquered much of Asia in the 12th century. The Mongolian Empire reached as far west as Egypt and but following the death of Kublai Khan, it went into sharp decline and China and Russia began to reassert their influence over the land-locked country. China successfully invaded Mongolia the Ming Dynasty and following World War II, Mongolia became a vassal of “big brother” Soviet Russia as its 16th satellite republic.

Today, Mongolia’s neighbors are again playing a vital role in the present and future of the country. Russia is the country’s top importer while China dominates its export market, accounting for 71.8 percent of all exports.

In light of China’s economic hold on Mongolia, it is no surprise that it is drifting more towards the company of its Eastern neighbor. Mongolia has already made plans to join organizations where China is also a member and in turn China has said that it will support the country’s bid to be a part of the Asia-Pacific Economic Community (APEC), and the Asia-Europe Meeting (ASEM). For the moment, Mongolia enjoys observer status as part of the Shanghai Cooperation Organization (SCO) which includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

In 2006, China and Mongolia signed economic agreements that gave Mongolia a special export loan of US$300 million, 2,000 tons of wheat and promises of oil and coal exploration. The most recent available figures for the first six months of 2006 shows bilateral trade between the two amounted to US$1.13 billion.

Mining the Cash Cow
Mongolia is a miner’s dream come true. The country boasts of 680 mineral deposit sites that contain stores of coal, copper, gold, silver, iron, wolfram, molybdenum, and fluorspar, to name a few. These minerals, base and precious metals are necessary for the production process of anything from energy to construction to mobile phones and transportation.

In detail the mineral snapshot of Mongolia presents the potential of roughly eight million tons of copper, 0.24 million tons of molybdenum, 146.8 tons of gold, 10 thousand tons of silver, 452.8 million tons of iron, 50 thousand tons of uranium, 70 thousand tons of wolfram, and 18 million tons of fluorspar.

For the first nine months of 2006, Mongolia Web News reports that the mining sector produced 4.8 million tons of coal, 386.9 thousand tons of cooper concentration containing 96.7 thousand tons of copper, 2,088 thousand tons of molybdenum concentration with 47 percent contents, 13.1 tons of gold, 180.0 thousand tons of iron ore, 102 thousand tons of spar concentration, 76.3 thousand tons of zinc concentration, 81.8 tons of tungsten concentration and 1742.7 tons of cathode copper. According to International Reports, the mining sector accounts for 30 percent of Mongolia’s GDP.

Mining contracts have been pouring into its capital, Ulaan Bataar, with such enthusiasm that many have tagged the country as possibly the “21st Century El Dorado.”

The country boasts of a wealth of 80 kinds of minerals but copper takes the top spot as its main cash cow. As of August 2007, copper sales contributed 44.3 percent of total exports to China followed by molybdenum concentrate.

Copper is used extensively in the construction industry through wiring, roofs, heating systems, finishings, gas and water tubings. A typical house today would need around 200 kg of copper alone to outfit it with bathrooms and appliances. Molybdenum on the other hand is mainly used as an alloy for stainless steel, cast iron, and super alloys for infrastructure building.

Although China is one of the primary producers of molybdenum, with some 200 molybdenum mines located in the Huludao Region, administrative problems have decreased yields and ballooning domestic demand for the metal have led the country to impose export duty tax and import more supply.

As for copper, China’s mammoth needs are in stride with its rapid industrialization. The country alone buys 21 percent of world copper supplies. Wang Chiwei, executive director and deputy general manager of Jiangxi Copper Co., told China Radio International (CRI) during 5th World Copper Conference that in the last five years, the country’s refined copper demand soared by 87 percent.

He added that refined copper demand should average 5.5 million metric tons per year till 2010 while consumption growth continues at an average 9 percent annually.

China’s biggest copper producer has already bought a 49 percent stake in Yunnan Copper Group to mine copper in Mongolia in anticipation of domestic demand in the coming years. The Aluminum Corp. of China hopes the purchase will yield 600,000 tons of copper per year by 2010.

Molybdenum demands are also expected to increase due to China’s need for steel. The China Metallurgical Mining Association reports that the country’s steel output grew by 18 percent in 2006 and is expected to tally in at 11 percent for 2007.

Another area of interest for China because of its potential and proximity to the border is Mongolia’s South Gobi desert which holds two promising sites: Tavan Tolgoi and Oyu Tolgoi.

Tavan Tolgoi is the world’s largest undeveloped coking coal deposit and has been attracting suitors interested in winning its licensing rights. The mine is estimated to be capable of yielding 1.5 billion metric tons of coking coal and 3.6 billion tons of thermal coal which can produce as much as 30 million tons a year for a minimum of 30 years.

Tavan Tolgoi’s yield is said to be equivalent to three year’s worth of Chinese coal imports. Recently, rights to the Tavan Tolgoi mine have been suspended with the Mongolian government’ decision to seize the site.

“Tavan Tolgoi has become an issue of national security and public interests,” the newly-elected Prime Minister Sanj Bayar said during his inaugural speech to Parliament. “The government will decide who and which company should invest and
participate and sign the agreements.”

Previously, energy companies including BHP Billiton Ltd., Peabody Energy Corp. and China’ Shenhua Energy Co. had all been angling for the rights to develop the US$2 billion coal project.

On the other hand, the Oyu Tolgoi mine license is managed by Ivanhoe Mines Limited and Rio Tinto. According to an Ivanhoe Mines study, the site could annually produce in excess of one billion pounds of copper and 330,000 ounces of gold for at least 35 years.

China’s largest electricity provider, State Grid Corp. of China (SGCC) has also decided to invest in Mongolia with plans to develop three 3,600 megawatt coal-fired power plants to cater to North China’ Beijing, Tianjin and Hebei province.

“It is a growing trend in China to seek cheaper and reliable energy resources from foreign countries to fuel the fast-growing economy,” an official from SGCC told China Daily during an energy forum in Beijing.

He added that given the country’ current growth rate, by 2020, only 75 to 80 percent of electricity demand can be met domestically. The China Statistical Bureau reports that 70 percent of the nation’s energy requirement is supplied by coal making it the world’s biggest consumer of the fossil fuel.

The Willing Captive
China’s iron grip on Mongolia has led it to the path of economic growth at a steady rate of seven percent annually since 2005 with 2008 figures forecasted to maintain the same rate. The country’s destiny seems to be trapped by its land-locked and isolating geographic position that leaves it no choice but to make the best of its dependence on China. Unless Mongolia works to diversify its reliance their mineral wealth it will be at the mercy of foreign investment to drive growth.

The country is still lacking in terms of attracting business investments because of its poor infrastructure, political instability, and rampant corruption. In 2006, protests pressured the government to hastily pass a new mining tax law that would require foreign companies to give up to 70 percent of profits on mineral resources reaching a certain price level.

China has used its economic leverage on Mongolia to push its own political agenda, requiring Mongolia to recognize China’s sovereignty over Taiwan and not to participate in any military movement against the country. Then there is also the tense issue of Inner Mongolia being an autonomous region of China. Any official criticism over Chinese jurisdiction of the province is not encouraged for fear of souring diplomatic relations. In the same vein, nationalist movements rallying for the unification of Mongolia, Inner Mongolia and Mongolian Buryatskaya have also been suppressed.

This is the third in a continuing series that focuses on China’s borders. The complete series to date can be found here. For more information about Mongolia, please see our sister publication, Mongolia Expat.

2 thoughts on “China eyes Mongolia’s resources

    April G says:

    Greetings, just stopped by. Wasn’t exactly what I was looking for, but fine site. Thanks.

    FOX says:

    it would be nice to see Monnis and CGG team up on some projects!!!

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