Last month, protesters stormed the Mongolian capital to denounce corruption in the country’s coal trade. Now the government says it has a solution to the decades-old business.
Starting next month, Erdenes-Tavantolgoi JSC – the state’s largest coal miner – will stop signing direct sales contracts with buyers in neighboring China, which last year bought 84 percent of Mongolia’s output. Instead, the company’s coal will be traded on the Mongolian Stock Exchange.
The move to sell coal contracts through the exchange comes as a result of large-scale anti-corruption protests in Ulaanbaatar in December, which are caused by allegations of widespread corruption in the coal industry.
Erdenes-Tavantolgoi JSC was at the center of these cases – its CEO Gankhuyag Battulga and several associates and relatives were arrested and awaiting trial, accused of stealing billions of dollars in coal money. Officials say the sale will make things less visible and ultimately bring more benefits to the government.
The government had planned to start the project at the end of this year but it hastened the project following public complaints about corruption.
“Instead of waiting half a year we will be trading online from February and the Mongolian Stock Exchange will deal with it,” Batnairamdal, Mongolia’s deputy minister of mining and heavy industry, told Al Jazeera. “This will help us learn more about selling coal online.”
Sandwiched between Russia and China, Mongolia is one of the most sparsely populated countries in the world with 3.3 million people spread over an area slightly smaller than Alaska. In 2021, the country had a gross domestic product (GDP) per capita of about $4,500, similar to that of Indonesia. Mining accounts for nearly a quarter of the country’s GDP, according to the Extractive Industries Transparency Initiative. About half of the country’s exports come from coal.
The agreements apply to coal exported through the Gashuunsukhait border, which is about 240km (150 miles) south of the Tavan Tolgoi coalfield in the Gobi Desert. In addition to Erdenes-Tavantolgoi, the affected companies also include Energy Resources LLC, whose parent company Mongolian Mining Corp is listed on the Hong Kong Stock Exchange.
Both companies mine coal from Tavan Tolgoi, one of the largest coal deposits in the world, with 6.4 billion tons of reserves. Coal from Tavan Tolgoi is valuable in China, where it is used to make steel.
China is the world’s largest producer of steel, with about 57 percent of the world’s steel production. But it cannot produce enough coal domestically to meet the needs of its steel industry.
In 2022, China will produce 170.71 million tons of coal, according to data from the General Administration of Customs of China. Mongolia contributed 31.2 million tons, about 18 percent of the total.
Mongolian coal has become more valuable in recent years as China has lost its reliance on Australian coal following a strained relationship between the two countries.
At the beginning of this month, the stock market made a test sale to test the new system – 12,800 tons of coking coal were sold to the Singapore coal carrier. The final call price was 12.2 percent higher than the original asking price, from 1,150 to 1,290 Chinese yuan ($170-$190) per ton.
“The initial sales show that the coal contracts will help to ensure the transparency of the coal trade and increase the trading costs,” Javkhlan Ivanov, the exchange’s chief financial officer, told Al Jazeera. “The sale of coal will be done without a lender and will have 0.1 percent.”
Background products
The new order comes just over a month after a group of coal mining executives and their accomplices were arrested for allegedly robbing Erdenes-Tavantolgoi JSC. Most of the thefts are said to have taken place during the sale of coal to Chinese buyers across the border.
The government says selling coal through the stock market will prevent theft and profiteering. Mongolia was ranked 110th out of 180 countries on the corruption index by Transparency International two years ago.
“In the past, state-owned companies signed purchase and sale agreements with the buyers they found and did so behind closed doors,” Batnairamdal said. “Under the new system, any buyer will be able to open an account and participate in the purchase of products through brokers who are licensed in the same sector.”
Also on the horizon are plans to expand the coal market to other minerals. Items that can be traded include copper, iron, gold, fluorspar, molybdenum, and other minerals.
“The types of contracts will be spot, futures, options, and forwards,” Javkhlan said. “The biggest buyers would be sellers from China and Russia as well as foreign and domestic traders.”
Mongolia is looking at commodity exchanges in emerging markets such as Turkey and Poland and mature exchanges such as the London Metals Exchange as models that Mongolia can use when developing its own exchange, said Batnairamdal.
Jake Horslen, chief LNG analyst at Energy Aspects, a London-based market research firm, said commodity exchanges can be useful when bringing together buyers and sellers in low-cost or opaque markets.
“They can also reduce peer-to-peer risk because the exchange acts as the buyer and seller of each transaction, not just another company,” Horslen told Al Jazeera.
A corruption investigation that led to many changes has led to the arrest of 17 people who allegedly stole from Erdenes-Tavantolgoi JSC. Former President Khaltmaa Battulga is one of those being asked to take action.
An indication that all was not well with the company happened in October when the director of Erdenes-Tavantolgoi JSC was dismissed without explanation, and the authority was given to a special representative from the Ministry of Finance.
The corruption allegations in December prompted thousands of people to pour into the streets in subzero temperatures to call for accountability. The government has promised to reform Erdenes-Tavantolgoi JSC, hire employees in a transparent process and eventually make it a public company.
“The protesters want a solution. They don’t want cases like [the] If coal theft happens again, they want a proper change. We have to change the mining sector,” said Batnairamdal.
Zolbayar Enkhbaatar, editor-in-chief at Inside Mongolia, a market intelligence newspaper, said the commodity market could help the government regain the trust it lost during the fiasco involving Erdenes-Tavantolgoi JSC.
“Mongolian people seem to see stock trading as a sign of transparency,” Zolbayar told Al Jazeera. “Coal theft was possible because the companies involved disappeared from the public eye – no one saw how they were selling coal and who sold it to them.”
Others are more cautious. Amar Adiya, regional director of the Washington, DC-based strategic advisory firm BowerGroupAsia, said that establishing a good exchange of goods in Mongolia will require a large amount of goods to be traded on a daily basis.
“It’s not a straightforward job,” Amar told Al Jazeera.
While the exchange will benefit both coal buyers and sellers in the long run, and may help reduce public confidence in the coal trade, more needs to be done to reduce public anger over long-standing issues of corruption and welfare, Amar said. he said.
“This exchange can be seen as a small step towards solving the big problems related to inequality, cost of living, environment, and public health,” said Amar. “But the government needs to take measures to deal with these problems in order to gain the support of the people before the 2024 elections.”
