Mongolia: Building for the boom

Economic growth linked to Mongolia’s huge mining potential has raised the prospect of long-awaited funds arriving for the construction of badly needed infrastructure projects in power, transport and other municipal sectors.

While much of the rest of the world suffered from market turmoil in the summer of 2011, Mongolia’s economy grew by 17.3%, with copper and coal industries the greatest single contributor by far. Foreign direct investment rose to $1.2bn in the first five months of 2011, while industry and construction expanded 10.1% year-on-year in real terms.

As Chinese, Korean, US and Russian firms compete for rights to develop the vast Tavan Tolgoi coal project, estimated to hold some 6.4bn tonnes of coal, their countries’ political leaders are offering Mongolia enhanced cooperation in construction and infrastructure. The government has said a final decision on development rights for the mine will be made by October. The Chinese firm Shenhua, the US firm Peabody Energy and the Russian government-owned company Russian Railways are said to be shortlisted, along with Japanese and Korean interests.

During an August 23 visit, South Korean President Lee Myung-bak signed an
“action plan” with Mongolian President Tsakhia Elbegdorj calling for expanded South Korean investment in Mongolia’s infrastructure and construction sectors. The plan included South Korean firms’ participation in a project to build 100,000 apartment units in Ulan Bator, Mongolia’s capital.

The project, which began in April, is estimated to cost MNT800bn ($645m), of which MNT467bn ($376.6m) would be allocated to the construction sector. The Ministry of Roads, Transportation and Urban Development is working on a draft construction law to meet the project’s requirements. Economic progress means the construction sector is also benefitting from the capital’s rapidly growing population, which has doubled to 1.2m in the last decade.

On August 26, Elbegdorj met with Zhou Yongkang, a senior official of the Chinese Communist Party. During the meeting the president said he hoped cooperation with Beijing would be expanded in regard to infrastructure development. China is Mongolia’s biggest trading partner, accounting for about 90% of the country’s total exports, of which 75% is comprised of coal and other mineral exports.

During his August 22 visit, US Vice-President Joe Biden noted the “Millennium Challenge Corporation” compact commits the US to providing another $285m in critical infrastructure development assistance across Mongolia, with a particular focus on making the important north-south corridor more accessible.

Mongolian and US officials have also reportedly been discussing a $1bn underground coal gasification gas-to-liquids project that would create 3000 construction and 150 permanent higher salaried jobs. The project’s backer, a US firm named Envidity, however, is involved in a legal dispute with the government over how to push the project forward.

There are similar plans for infrastructure cooperation with Russia, which shares a 3441-km border on Mongolia’s north-west. In 2010, Russian Railway agreed to invest $250m into the Ulaanbaatar Railway, and to grant long-term tariff rebates to Mongolian transit freight passing through Russian territory. A year earlier, cooperation by Russian and Mongolian specialists resulted in work being completed early on 108 km of the Mandal­Davaany line’s continuously welded track.

Investment reports estimate $1.7bn will be needed for the construction of a new rail line to the Tavan Tolgoi coal mines, with $500m necessary for modernisation and the purchase of rolling stock up to 2015.

Meanwhile, construction work is also needed for the $6bn Oyu Tolgoi copper and gold mine, of which Canada’s Ivanhoe Mines owns 66%. It is expected to be producing gold and copper by the fall of 2012. The mine’s construction will cost $2.3bn and employ 14,200 people. Analysts estimate the mine will produce 1.2m pounds of copper and 650,000 ounces of gold annually.

In August, Ivanhoe awarded Mongolian companies contracts to build the mine’s power transmission line. Tower construction is scheduled for completion during the fourth quarter of 2011, with line stringing expected to commence spring
2012. The transmission line is planned to extend south of the border, with Chinese contractors tying their lines into the Inner Mongolian electrical grid.

That grid is also raising the prospects of Mongolia exporting electricity to China, with Sükhbaataryn Batbold, Mongolia’s prime minister, saying in June he expects Mongolia to issue a debut sovereign bond by autumn, aimed at developing enough capacity to export power to its neighbour.

Batbold said the sovereign bond’s proceeds could be used for the landlocked country’s plans to build railway lines and roads to neighbouring China and Russia, plus links between power plants.

“We have a demand for power and electricity, and we have a plan to build a major power generation system in the mineral development areas,” he said. “There is growing demand inside Mongolia and also huge demand inside China, so we could export energy to China.”

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