Time to be cautious and to keep overall control

The process of selecting a strategic partner for Tavan Tolgoi has reached its second stage, with the Government holding talks with the 6 companies short-listed earlier. There is no official indication of who will be chosen, nor if the choice will fall on one company/consortium or more. It is no coincidence that the six companies are from six broad geographical distributions: Asia, Europe, North America, South America, Australia and Euro-Asia. The National Security Council guidelines last April was clear that the choice must help “create favourable external conditions for the country’s development and strengthen balanced political and economic relationships”.  In their turn, the Governments of the countries of the companies in the race have been lobbying hard to land the prize contract. 

The first to throw its hat in the ring was a Russian-Korean consortium as early as November 2009, during a visit by Prime Minister S.Batbold to Korea. The Russians emphasised their strength in the area of the railway while the Koreans had the power of money. Both Governments entered the fray, their officials making frequent visits to Mongolia. In their turn, Mongolian officials also visited these countries and signed a number of Memorandums of Understanding. An MOU is not an agreement but one such MoU signed by the Prime Minister  on developing infrastructure has been so widely and cleverly publicised that many have come to believe the consortium has been already selected by the Government.

Similar manipulation of the media was seen when the investment banks for the Erdenes Tavan Tolgoi IPO were being selected, with the contesting banks throwing morsels to bolster their chances while discrediting competitors. Likewise, the last few days have been full of news that a Korean consortium will build the northern railway, strongly hinting that the Russian-Korean consortium was close to be chosen as the strategic partner on Tavan Tolgoi.   

The consortium has been single-mined in the pursuit of its goal all these months. As the Mongolian Government started to set preconditions, it brought into its fold best Japanese companies such as Sumitomo, Itochu and Marubeni. As more demands were made by the Mongolian working group, the consortium wooed China, whose cooperation would be of great help in  building the 1,100-km railway that will transport the coal to exporting points. The southern neighbour, however, gave a cold shoulder to V.Yakunin’s overtures that included offers of a tripartite transit transport agreement to take the coal through the south for ultimate export through Numrug port in the far East.

Instead, China’s Xinhua Energy formed an alliance with Mitsui of Japan. It dissolved its original partnership with Peabody Energy, which had been seen as a strong contender for Tavan Tolgoi. In its turn, the U.S. giant chose as partner Winsway, a comparatively small Chinese company listed on the Hong Kong Stock Exchange. The main asset of Winsway is its existing infrastructure network to transport the coal it buys cheap at the Mongolian border. Actually, Winsway uses Xinhua’s railway, such cooperation being normal in China. It will indeed be ironic if the Russia-Korea-Japan consortium were to join hands with Xinhua-Mitsui as that would effectively give the neighbours almost total control of Mongolian coal.

Is the Mongolian Government aware that the choice of the Russian- Japanese-Korean consortium to work in the Tsankh’s western part, even without any addition to its strength, would put control of mining, marketing, transportation and export on three countries, one of which is likely to reap the political benefits, while the two others will be happy with their share of the profits? Maybe it is, and that is why the working group is considering several options.
The second strongest of the 6 contenders is Peabody-Winsway. Officially, Peabody Energy has bid on its own, but its joint venture with Winsway is common knowledge. Peabody is certain to bring in the best technology, and Winsway will make up for its lack of transportation facilities. 

Preconditions that the working group insists upon include building a railway to transport the coal, negotiating favourable transit transport rates, making arrangements with the ports that will handle the export, use of best technology, building processing plants and advance payment. The bidders will be graded on how they fulfil these demands. The importance of a substantial advance payment has become less with the economic recovery.

The ace in the hands of the Russian Railway-led consortium is its ability to offer transit transport discounts. Vladimir Yakunin frequently harps on this and promises it will get something much better  than what the Ministry of Road, Transportation, Construction and Urban Development has got from the Russian government. No specific details are available and what has been signed so far  are MoUs, but it is known that Russia has so far not accepted the Mongolian demand for long-term rates, suggesting instead that these should be reviewed every year. Deputy Minister A.Gansukh’s talks in Moscow in February have, however, raised hopes that the proposed tariff agreement will be for three years. It is likely that any final decision will be taken only after the Tavan Tolgoi investor is named.

Another precondition is about building a processing plant. At least three of  the short-listed companies are among the world’s gest steel or iron ore producers -- Arcelor Mittal, Vale and Xstrata. Transit transport rates, however, overshadow  all other preconditions.

Competition among the six company-consortiums has become fierce. So has lobbying. An impression is gaining ground that in fact, it is the neighbours who are pushing their preconditions, and not the other way. The Government must not waver and the independence of the working group must not be allowed to be compromised in any way.