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 put an end to years of shady dealings.
Starting next month, Erdenes-Tavantolgoi JSC — the country’s largest state-owned coal mine — will stop signing direct sales deals with buyers in neighboring China, which bought 84 percent of Mongolia’s total exports last year. Instead, the company’s coal is auctioned off on the Mongolian stock exchange.
The move to sell coal contracts through the exchange comes in response to large-scale anti-corruption protests in Ulaanbaatar in December, sparked by allegations of widespread fraud in the coal industry.
Erdenes-Tavantolgoi JSC has been at the center of the allegations – its CEO Gankhuyag Battulga and several employees and family members have been arrested and awaiting trial on charges of embezzling billions of dollars in coal proceeds. Authorities say the auctions will improve transparency and ultimately bring higher returns for the state.
The government had planned to start the bidding process later this year, but rushed the process after public outcry over corruption.
“Rather than waiting half a year, we will let it trade online from February and the Mongolian stock exchange will take care of it,” Batnairamdal, Mongolia’s vice minister for mining and heavy industry, told Al Jazeera. “This will help us gain experience selling coal on an online platform.”
Nestled between Russia and China, Mongolia is one of the world’s most sparsely populated countries, with 3.3 million people spread across a landscape slightly smaller than Alaska. In 2021, the country had a gross domestic product (GDP) per capita of about US$4,500, similar to Indonesia. Mining accounts for about a quarter of the country’s GDP, according to the Extractive Industries Transparency Initiative. About half of its export earnings come from coal.
The contracts apply to coal exported through the Gashuunsukhait border post, located about 240 km (150 miles) south of the Tavan Tolgoi coal deposit in the Gobi desert. In addition to Erdenes-Tavantolgoi, the companies affected include Energy Resources LLC, whose parent company Mongolian Mining Corp is listed on the Hong Kong Stock Exchange.
Both companies mine coal at Tavan Tolgoi, one of the world’s largest coke and thermal coal deposits with 6.4 billion tons of reserves. Tavan Tolgoi coal is highly valued in China, where it is used to make steel.
China is the world’s largest steel producer, accounting for about 57 percent of global steel production. But it can’t produce enough coking coal domestically to meet the needs of its steel mills.
In 2022, China imported 170.71 million tons of coal, according to China Customs Administration. Mongolia supplied 31.2 million tons, about 18 percent of the total.
Mongolia’s coking coal has been particularly prized in recent years as China has reduced its reliance on Australian coal following a sharp deterioration in relations between the countries.
Earlier this month, the exchange organized a dry run to test the new system – 12,800 tonnes of coking coal was auctioned off to a Singapore-based coal transporter. The final asking price was up 12.2 percent over the original asking price, from 1,150 to 1,290 Chinese yuan (US$170 to 190) per ton.
“The first trade shows that coal contracts will help improve coal trading transparency and increase sales revenues,” Javkhlan Ivanov, the exchange’s chief financial officer, told Al Jazeera. “Coal e-auctions are conducted without a broker and carry a trading commission of 0.1 percent.”
The new system comes just a month after a group of coal mining executives and their co-conspirators were arrested for allegedly defrauding Erdenes-Tavantolgoi JSC. Much of the theft was allegedly carried out by conducting coal sales with Chinese buyers at the border.
The government argues that selling coal on the exchange will deter theft and backroom deals. Mongolia was ranked 110th out of 180 countries in a Corruption Perceptions Index compiled by Transparency International two years ago.
“In the past, state-owned companies signed purchase and sale agreements with buyers they found and they 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 goods through licensed brokers on equal terms.”
Plans to expand coal auctions to other minerals are also on the horizon. Possible tradable commodities are copper, iron ore, gold, fluorspar, molybdenum and other minerals.
“The contract types 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 views commodity exchanges in emerging markets like Turkey and Poland, as well as established exchanges like the London Metals Exchange, as models for Mongolia to use in developing its own exchange, Batnairamdal said.
Jake Horslen, senior LNG analyst at Energy Aspects, a London-based market research firm, said commodity exchanges can be useful in matching buyers and sellers in sparsely liquid or opaque markets.
“You can also reduce counterparty risk because the exchange acts as a counterparty for buyers and sellers in every trade, and not as another firm,” Horslen told Al Jazeera.
The corruption investigation that sparked many of the changes has so far led to the arrest of 17 people suspected of being involved in the theft of Erdenes-Tavantolgoi JSC. Former President Khaltmaa Battulga is among those being questioned about her involvement.
An indication that all was not well with the company emerged in October when the chief executive of Erdenes-Tavantolgoi JSC was fired without explanation and control was handed over to a special envoy 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] Coal theft happen again, they want the necessary reforms. We need to reform the mining sector,” said Batnairamdal.
Zolbayar Enkhbaatar, editor-in-chief of Inside Mongolia, a market research newsletter, said the commodities market could help the government regain some of the confidence lost during the Erdenes-Tavantolgoi JSC fiasco.
“Mongolians seem to see the stock exchange as a symbol of transparency,” Zolbayar told Al Jazeera. “The theft of coal was possible because there was a lack of transparency by the companies involved – no one could see how they were selling coal and who they were selling it to.”
Others are more careful. Amar Adiya, regional director of Washington, DC-based strategic consulting firm BowerGroupAsia, said establishing a successful commodity exchange in Mongolia will require trading a high volume of commodities on a daily basis.
“It’s not an easy task,” Amar told Al Jazeera.
While a commodities exchange could benefit both buyers and sellers of coal in the long-term and help allay public distrust of the coal trade, more needs to be done to calm public outrage over long-standing problems related to corruption and quality of life, Amar said .
“The exchange can be seen as a small step towards solving larger problems related to inequality, the cost of living, the environment and public health,” Amar said. “But the government needs to take a comprehensive approach to addressing these concerns in order to garner public support ahead of the 2024 election.”