Mongolia pushes to expand rail capacity in chase after lost revenue

By bne IntelliNews April 15, 2014

Terrence Edwards in Ulaanbaatar -


A lack of planning has meant the softening global coal market has put Mongolia through the wringer. 

Mongolia's policymakers failed to get to grips with developing the country's rail network while the economy was booming. Now the economy is slowing and coal prices are falling, the government is finding it can't make up the difference by boosting export volume because of bottlenecks in the transportation network.

Mongolia in April continued construction of its railway network as it attempts to boost exports of minerals, such as coal from its enormous Tavan Tolgoi coal mine, which is currently serviced by truck. The nation sandwiched between Russia and China plans to quadruple the size of its railway network to a total of 5,600 kilometres, starting with 265km from Hong Kong-listed Mongolian Mining Corporation's Ukhaa Khudag mine in the Gobi Desert to the Chinese border, says Yondon Manlaibayar, director general of the department of railway and maritime transportation at Mongolia's Ministry of Roads and Transportation.

Mongolia's cabinet in March approved the state-owned Erdenes Tavan Tolgoi's participation in a consortium of miners operating in the Tavan Tolgoi coalfields. Called Gashuun Sukhait Railway, the joint venture plans to launch construction of 13km of rail from the Gants Mod border port, said Manlaibayar, to where a temporary offloading port will be built for trucks to unload their coal hauls. "They don't want to wait for us to complete the whole line," says Manlaibayar. "They want to start loading from here immediately, this year."

The reason is it makes good economic sense to do so, he says. Currently, only a limited pool of truck drivers has permission to travel to the border zone to unload coal exports onto a railway line in China. That gives the handful of drivers allowed to make the pick-up and delivery enough leverage to demand big salaries.

Although the ownership structure of the Gashuun Sukhait Railway joint venture is not yet finalized, the Chinese-owned energy company Shenhua Group is expected to own 49%. State-owned miner Erdenes Tavan Tolgoi, local miner Tavan Tolgoi and Mongolian Mining's unit at Ukhaa Khudag, Energy Resources, would each own 17%.

The gauge debate

The miners at the Tavan Tolgoi coal deposit have long argued for a direct rail line to China. After years of waiting, Hong Kong-listed Mongolian Mining in June 2012 signed a concession agreement with the government and even held a ground-breaking ceremony a few days later. But that plan was rejected in May the following year. Instead, the government contracted Korea's Samsung C&T to do the job. The 217km of railway will be installed as soon as the embankment is finished, which is expected to happen by July, says Manlaibayar.

One reason the government has dragged its feet is the issue over what standard of gauge to use. China's railways utilize what is considered to be the international standard. However, Mongolian rail policy, implemented in 2010, requires Russia's wider gauge. Some have fretted about the added costs of having to move tonnes of coal from one carriage to the next for the gauge transfer as well as the environmental toll from all the dust kicked up from moving such large cargoes of coal.

Although China is the destination for nearly all of Mongolia's mineral exports, it is in no rush to roll out a direct line to the country. Mongolia has long worried about China exerting political and economic control over the country. For some, direct access into the country by China is a security threat.

Many, however, are losing patience. "Currently the Mongolian coal industry is on the brink of survival essentially, with huge structural and competitive issues… It can hardly afford this gauge debate," says Dale Choi, head of Independent Mongolian Metals & Mining Research.

The rail line that Shenhua has promised to help build will use the Chinese gauge, while the Samsung C&T line will use the Russian gauge. A railway station for gauge transfer will be built 40km north of the Chinese border as well as 27km of additional rail heading south to join the Samsung and Shenhua rail lines, explains Manlaibayar. He said the current projected cost of having to change gauges would be an added $3 to every tonne of coal.

Transit is profitable

Now that developing the railways is gaining some traction, land-locked Mongolia also has plans to build a more comprehensive railway network to the east and west of the country. It plans to expand its rail freight capacity by 60% to 33m tonnes a year by 2015, with an eventual target capacity of 100m tonnes. "The rail was built in the 1950s – it needs a major upgrade," says Manlaibayar.

Last year, Mongolia saw the transit of 2.2m tonnes compared with 15m tonnes from neighbouring Kazakhstan. Manlaibayar reckons that transit of 10m tonnes would be worth over $200m a year.

Japan's Nippon Koei has 86% completed the design of an eastbound rail line that could link to rail lines able to reach ports in China's Bohai region. That would gain Mongolia better access to seaports in China for deliveries of its coal products to markets such as South Korea and Japan. The existing line heading south towards Beijing, says Manlaibayar, was not optimal because of the heavy congestion created by China's own domestic cargo transit.

Profiting from the growing trade within the region is a long-term strategy. One area that the country can look to exploit is the growing volumes of cargo travelling between Russia and China. Russia plans to increase the value of its trade with China by 150% from last year to $200bn by 2020, Manlaibayar says. "Obviously, a major part of that will be oil and gas, which won't be transported by rail, but there will be a need to transport these huge amounts of cargo," he says. "That's why we want to increase the capacity of our transit lines. Transit is a profitable thing.

Mongolia could facilitate that trade with its planned route in the east as an alternative to the already congested train lines from China's Manzhouli line to Russia, says Manlaibayar.

Mongolia has plans outside of its two giant neighbours, too. Earlier this year, Mongolia launched a trial run for the transport of goods from Jinzhou in China to Frankfurt in Germany, via Mongolia. He says the trial took 15 days to reach the destination and 14 days to return. "We shipped computer part products and because the product is so expensive itself, a small difference in transportation costs doesn't bother them," says Manlaibayar. 

"Time is more important," he adds - a lesson that Mongolia's policymakers would do well to learn.


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