One Step Closer to a Mongolian Minerals Commodities Exchange


The Mongolian Mining Journal /May.2021/


Mongolia came one step closer to controlling the price of domestically extracted minerals when a  new report from the Mongolian Exporter’s Association on the establishment of a Mongolian Minerals Commodities Exchange was submitted to the government appointed working group. 

Its recommendations are to be part of the new draft Minerals Law, and were submitted to the Ministry of Finance to be reviewed by government.  The proposed exchange aims to establish fair market prices for mining products, improve pricing transparency, bring Mongolian mineral prices in line with the global market, and set standards for the establishment of consistent royalties and taxes from mining proceeds.   The mineral exchange could bring much needed price stability to the Mongolian mining sector. However, the challenge, particularly with smaller mining operations, would be for mining companies to agree to and comply with set mineral quality standards, and the development of independent testing and inspection facilities. 

The proposed exchange aims to address three challenges currently facing the mining sector.  According to R. Ochbadrakh, Advisor to the Minister of Mining and Heavy Industry, there is currently no system for determining the fair value of Mongolian mineral products. There is also a lack of transparency in product information.   
A second challenge is that because there is no organized market for the sale of mining products in Mongolia, the products are sold consistently  below world market prices, particularly from state-owned mining companies. The third challenge is the loss of government royalty and tax revenues due to the undervalued sale of minerals to domestic and international buyers.

Mr. Ochbadrakh indicated that the proposed mineral exchange would be an independent state-owned enterprise. It is expected to be self-sufficient through the use of royalties, commissions, and service fees based on the sale of financial instruments that could be traded domestically on the Mongolian Stock Exchange. This would require expansion of the MSE infrastructure and changes to improve several laws.   In 2019, Erdenes Mongol  estimated the required investment to be 28 billion MNT (9.8 million USD), MMHI believes that this cost can be significantly reduced to an estimated five million USD by incorporating mineral commodities into the Mongolia Stock Exchange (MSE), based on the 2016 MSE study and current efforts on the establishment of a similar agricultural exchange.   

The concept of a minerals exchange has been in discussion since 2012. The first draft law was developed in 2015, and revised in 2018.  The current working group is expanding on the 2014 State Policy on the Mineral Sector,“for the purpose of making the sale of mineral products at foreign and domestic markets transparent, prudent, highly efficient and in compliance with the market principles, setting fair price and developing domestic stock market, a mineral exchange will be established”.  As indicated by Mr. Telmentansag, Economic Advisor to the working group, as with the succession of government policy, the work on establishing a mineral exchange will continue. 

Basing their recommendations on the assessment of existing international institutions such as the London Metal Exchange (LME), the working group sees this as a financial market instrument requiring a baseline for products in order to work.  The Head of the Financial Policy Department and the Ministry of Finance, N. Manduul, indicated that the exchange needed to be based on mining product quality standards that are laboratory-certified and can be brought to the buyer on time, through many steps such as border control, custom and transportation.  Currently there is no consistency in the quality and content of mineral products sold. 

According to Mr. Altai, Executive Director of the MSE, this would require large infrastructure investment and commitment by both the government and the mining sector towards testing and standardization, and could negatively impact the smaller extractors and sector actors.  If a system similar to the LME is implemented based on pure metals and strict classifications, the cost of compliance would be beyond the ability of many small producers and negatively impact the industry. According to Mr. N. Algaa, a mining Lawer, developing the supporting infrastructure would go beyond the testing and setting of product standards.  Adjustments would need to be made to Mongolian customs and logistical systems to compete with China’s spacious warehousing capacity and developed transportation systems. 
Mr. Algaa
also indicated that many of the current standards are being set indirectly by China, the main buyer of Mongolian mineral products; the exchange would have to incorporate the needs of these external actors and balance them against domestic interests. u
Setting medium- and long-term contractual obligations through the Exchange could create challenges throughout the mining value chain and strain Mongolia’s capacity to ensure sustainable mineral supplies. 

Mr. Altai and others recommended a cautious start to the exchange with one product as pilot and developing the necessary processes and infrastructure before expanding the scope of offerings. 

Potential Solution to Mineral Pricing 

The challenge will be in developing the products that  will be sold on the Exchange. As indicated by  G.Battsengel, Executive Director of Energy Resources LLC, “Looking at international standards, end users do not participate in the trade of copper and zinc at the London Metal Exchange. The product means more a financial instrument .” The largest mining companies sell their products directly to end users through long term contracts and not through exchanges. But in setting their contracts, they refer to the exchanges for pricing.
Of issue is that state owned mining companies tend to sell their products below global market values which in turn depreciates value for the private sector.   As the state-owned companies are proposed to be the first required to trade openly on the exchange, this would help in the establishment of consistent pricing and quality that can then be used as a benchmark by private mining companies.  This would help in harmonizing royalties and taxation, creating a clear system for all. Many also perceive the potential role of the exchange as an indicator of market supply and demand.

Executive Director L. Naranbaatar from Glogex Group indicated that the exchange can also play a role in determining Mongolia’s place in the global market.  He indicated how, for example, the exchange could give insight into how sales from Erdenes Tavan Tolgoi “determined by the coal price in six Chinese indices will be regulated”.  Getting a better understanding of how Mongolian products compare on the international stage will help to improve pricing strategies and corporate valuations. As indicated by M. Dagva, Director General of QMC Group, there are many new large  development projects pending due to a lack of foreign direct investment. The exchange could provide a 5–10-year bridging period for “companies that have not yet firmly resolved their processing and marketing problems.” He also indicated that with new mineral resource markets emerging, Mongolia needs to plan how it will participate and set a new framework to take advantage of new opportunities, including the role and impact of potential future privatization of state-owned enterprises.

Key to Mineral Export Standardization

“In our country, there are products of many different qualities from one deposit…. At present, in terms of quality standard, infrastructural, logistical and customs conditions have not been yet created” stated Mr. Algaa.  This makes it difficult for Mongolian companies to enter long-term contracts guaranteeing consistent volumes and quality.  China, Mongolia’s primary mineral client, has multiple classifications for coal quality used in valuing products, and has contracted Erdenes Tavan Tolgoi, a state-owned company, to meet a strict quality and volume standard.  According to E. Mandkhai, a mining export entrepreneur, only two private companies – Energy Resources and MAK – are able to extract and process coal to Chinese standards.  The majority export raw unclassified coal subject to the buyers’ pricing whims.  According to  Mandkhai this indicates that Mongolia’s mining sector is not ready for quality standards. 

But the issue is not only with coal. Mr. Battsengel stated that “In our country, the copper concentrate from the Oyu Tolgoi Deposit contains gold. Erdenet Corporation produces copper concentrate containing molybdenum.” He went on to explain that the issue is even more complex as often exported unprocessed ore is of inconsistent quality and content. Even processed ore is exported in the form of concentrate that contains varying levels of other minerals. This makes both the standardization and classification of mineral commodities and ensuring compliance to standards challenging. 

During discussions on establishing an exchange, Mr. Dagva indicated issues arising around the possibility of setting prices for groupings of processed products of varying quality, and packaging them into a standardized quality instrument. The primary issue is that currently large volumes of minerals are being sold raw or with minimal processing without quality metrics. Also, there are no domestic or international requirements for trading products such as copper concentrate through exchange mechanism, which may require additional legislation and enforcement to ensure compliance. He sees the exchange as a long-term solution that will require 15-20 years to mature, as both legislation and infrastructure of the Mongolian market adapts to a new era of mineral resource management. 

Cautious Start

Although the benefits of the exchange could have long term benefits for Mongolia’s minerals sector, Mr. Altai and others recommended a cautious start to the exchange. The predominant view is for an exchange initially operated through the MSE, and mirroring the agricultural commodities exchange being tabled by the Ministry of Agriculture. The simultaneous incorporation of mineral and agricultural commodities into the Mongolia stock market would increase the number of investment products making the MSE more attractive and the expansion process more efficient and cost effective. 

A phased approach based on a limited number of mining products offered through the MSE would provide time and opportunity for the development of both financial and infrastructure requirements, and give companies time to adapt to the new requirements.  As capacity builds, more products could be developed based on consumer and industry demands.  
Of concern in the potential impact of law finalization prior to the development of the investment process, was the possibility of fees and taxes being implemented under the law that are not compatible with market realities. 

This was of particular concern to smaller mining actors for whom compliance to quality standards may become a significant barrier. Another concern is the timing for implementation.   Mandkhai pointed out that with all of the required infrastructure changes and other urgent issues affecting the mining sector, too much effort and resources are being put on the law.  This issue has been discussed by several working groups over the past ten years without resolution, according to Mr. Algaa. 

As an instrument to stimulate potential foreign and domestic investment in the mining sector, there appears to be agreement that the concept of a mineral commodities exchange should proceed. As stated by Mr. Battsengel, “If it is going to expand the domestic stock market, then it should be possible to trade minerals on the stock exchange under one infrastructure and management…  Energy Resources is ready to conduct transparent trading utilizing this version or by establishing a mineral exchange and signing a contract.” 

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