Last month, protesters stormed Mongolia’s capital to denounce corruption in the country’s coal trade. Now the government says it has a solution to end years of murky business deals.
Starting next month, Erdenes-Tavantolgoi JSC — the country’s largest state-owned miner — will stop signing direct sales contracts with buyers in neighboring China, which bought 84 percent of Mongolia’s total exports last year. Instead, the company’s coal will be auctioned on the Mongolian Stock Exchange.
The move to sell coal contracts through the stock exchange comes in response to large anti-corruption protests in Ulaanbaatar in December, fueled by allegations of widespread fraud in the coal industry.
Erdenes-Tavantolgoi JSC has been at the center of allegations — its CEO Gankhuyag Battulga and several associates as well as family members have been arrested and are awaiting trial, accused of embezzling billions of dollars in coal revenues. Authorities say the auctions will improve transparency and ultimately bring higher net returns to the state.
The government had planned to start a bidding process later this year, but accelerated the process after public outcry over corruption.
“Instead of waiting for half a year, we will trade online starting in February and the Mongolian Stock Exchange will sort it out,” Batnairamdal, Mongolia’s deputy minister of mining and heavy industry, told Al Jazeera. “This will help us gain experience in selling coal on an online platform.”
Sandwiched between Russia and China, Mongolia is one of the most sparsely populated countries in the world, with 3.3 million people spread over a landscape slightly smaller than Alaska. In 2021, the country had a gross domestic product (GDP) per capita of around US$4,500, similar to that of Indonesia. Mining accounts for roughly a quarter of the country’s GDP, according to the Extractive Industries Transparency Initiative. About half of export earnings come from coal.
The contracts relate to coal exported through the Gashuunsukhait border post, located about 240 km (150 miles) south of the Tavan Tolgoi coalfield in the Gobi desert. Along with Erdenes-Tavantolgoi, the affected companies include Energy Resources LLC, whose parent company Mongolian Mining Corp is listed on the Hong Kong Stock Exchange.
Both companies mine coal in Tavan Tolgoi, one of the world’s largest deposits of coking and thermal coal, with 6.4 billion tons of reserves. Coal from Tavan Tolgoi is highly valued in China, where it is used in steel production.
China is the world’s largest steel producer, with about 57 percent of global steel production. But it cannot produce enough coking coal in the country to meet the needs of its steel mills.
In 2022, China imported 170.71 million tons of coal, according to data from China’s General Administration of Customs. Mongolia supplied 31.2 million tons, about 18 percent of the total.
Mongolian coking coal has become particularly prized in recent years as China has reduced its dependence on Australian coal following a sharp deterioration in relations between the countries.
Earlier this month, the exchange held a trial trade to test the new system – 12,800 tonnes of coking coal was auctioned to a Singapore coal carrier. The final selling price rose 12.2 percent above the original asking price, from 1,150 to 1,290 Chinese yuan ($170-190) per tonne.
“The first trading shows that the coal contracts will help improve the transparency of the coal trade and increase sales revenues,” Javkhlan Ivanov, the exchange’s chief financial officer, told Al Jazeera. “Coal e-auctions will be conducted without any broker and will carry a trading commission of 0.1 percent.”
Behind the scenes work
The new system comes just a month after a group of mining executives and their co-conspirators were arrested for allegedly defrauding Erdenes-Tavantolgoi JSC. Much of the theft was allegedly carried out through off-the-books sales of coal to Chinese buyers at the border.
The government claims that selling coal through the stock exchange will prevent theft and backroom deals. Mongolia ranked 110th out of 180 countries according to the corruption perception index compiled by Transparency International two years ago.
“In the past, state-owned companies used to sign sales contracts with the buyers they found and they did it behind closed doors,” Batnairamdal said. “According to the new system, every customer will be able to open an account and participate in the purchase of goods through authorized brokers under equal conditions.”
Plans to expand coal auctions to other minerals are also on the horizon. Potential tradable commodities include copper, iron ore, gold, fluorspar, molybdenum and other minerals.
“The types of contracts will be spot, futures, options and forwards,” Javkhlan said. “The main buyers would be Chinese and Russian importers, as well as foreign and local derivatives traders.”
Mongolia is looking at commodity exchanges in emerging markets such as Turkey and Poland, as well as mature exchanges such as the London Metal Exchange, as models for Mongolia to use as it develops its own exchange, Batnairamdal said.
Jake Horslen, senior LNG analyst for Energy Aspects, a London-based market analysis firm, said commodity exchanges can be useful when they bring together buyers and sellers in illiquid or opaque markets.
“They can also reduce counterparty risk because the exchange acts as a counterparty for buyers and sellers in each trade, rather than another company,” Horslen told Al Jazeera.
The corruption investigation that triggered many changes has so far resulted in the arrest of 17 people suspected of being involved in the theft from Erdenes-Tavantolgoi JSC. Former President Khaltmaa Battulga is among those questioned about their involvement.
A sign that all was not well with the company came in October when the CEO of Erdenes-Tavantolgoi JSC was removed with little explanation and control handed over to a special envoy of 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] In order for coal theft to happen again, they want the necessary reforms. We need to reform the mining sector,” said Batnairamdal.
Zolbayar Enkhbaatar, editor-in-chief at Inside Mongolia, a market intelligence newsletter, said the commodity market could help the government regain some of the confidence lost during the fiasco involving Erdenes-Tavantolgoi JSC.
“Mongolians seem to see the stock market as a symbol of transparency,” Zolbayar told Al Jazeera. “Coal theft was possible because there was no transparency for the companies involved – no one could see how they were selling the coal and who they were selling it to.”
Others are more cautious. Amar Adiya, regional director for Washington, DC-based strategic advisory firm BowerGroupAsia, said establishing a successful commodity exchange in Mongolia would require a large volume of commodities to be traded on a daily basis.
“It is not an easy task,” Amar told Al Jazeera.
While a commodity exchange could benefit both coal buyers and sellers in the long run and help calm public mistrust of the coal trade, more needs to be done to quell public anger over lingering problems related to corruption and quality of life, Amar said.
“The exchange can be seen as a small step towards addressing larger issues related to inequality, the cost of living, the environment and public health,” Amar said. “But the government must take a comprehensive approach to addressing these issues to gain public support ahead of the 2024 election.”