Exports revenue is essential to our country, which purchases every commodity from abroad except for bread, sweets, alcohol and meat. Therefore, our socio-economic outlook is fully dependent on the prices of coal and copper we are selling to China.
In 2012, mining income generated one third of our GDP and coal and copper sales comprised 40 and 20 percent of total export revenue respectively. The Ministry of Finance estimated that one fourth of our total government revenue (1.7 trillion MNT) will be generated by this sector in 2013. This estimation produces a number that is 60 percent higher than that of last year.
However, coal prices fell significantly in the first quarter of this year and its sales, which were supposed to generate 466 billion MNT of the budget, was greatly reduced. Although it was planned that 28 million tons of coal would be exported this year and 8 million would be used domestically, we only managed to export three million tons in the first quarter.
According to a study carried out by the Nomura Research Institute, Chinese coking coal imports are projected to reach 56.3 million tons this year. It offers only a 5 percent increase from last year where it had a 20 percent increase from the year before. Our southern neighbor imported 5.4 million tons of coking (metallurgical) coal in February this year, which was an amount greatly reduced compared to January 2013 (7.2 million tons) and December 2012 (7.6 million tons). Some statistics from the customs agency show that China imported 2.5 million tons of coking coal from Australia, 1.21 million from Canada, 527,000 from Russia, 409,000 from the United States, 200,000 from Indonesia, 36,000 from Columbia and 70,000 from Mozambique in February this year. In the same period of time, Mongolia supplied only 336,000 tonnes of coal to China. It was 81 times less than what it was last year and 76 percent less than the January exports. Mongolia surpassed Australia and supplied one third of Chinese coking coal imports in 2011.
As a consequence of an increasing number of suppliers, washed and processed coal (the prices of which used to reach 140 USD a ton) cannot even reach 100 USD today. The price at Chinese sea harbors decreased from 200 USD to 140 USD as well.
Mongolian coal companies say that the total coal exports this year could be reduced to 16 million tons. Our budget revenue plan has seriously begun to be disrupted.
BUBBLED BUDGET AND WORKS WITH NO PROGRESS
When approving the budget for this year, the government estimated that prices of unprocessed coal and washed coal would be 131 USD a tonne and 166 USD respectively. It was also planned to continue the operations of Tavantolgoi mine and make changes to the Oyu Tolgoi Investment Agreement to impose higher royalties.
Only 5 percent of the 20 million tons of metallurgical coal that our country exported in 2012 was value-added coal washed by Energy Resources. People have no idea what happened to the Tavan Tolgoi plans to build a concentrator and offer its shares to international stock exchanges.
However, Tavan Tolgoi mine stopped its operations and the Oyu Tolgoi Agreement is not likely to be changed. Also, coal exports and prices have both decreased dramatically. It looks like the budget revenue to be generated by coal sales will be 150 billion MNT, which is three times less than the amount originally planned.
We need to ensure the enforcement of the agreement we have established with China, our only buyer. Furthermore, a long-term agreement needs to be established with flexible conditions, price limits and a commitment to share profits as well as losses.
One of the factors that is contributing to the loss of competitiveness in our mineral resources sector is transportation costs. It is obviously profitable and efficient to transport huge amounts of coal on trains. However, it has been many years since progress was made to build railways due to the long-lasting debate around what gauge to use.
Kyrgyzstan, on the contrary, is going to start implementing a large project to build a narrow gauge railway using Chinese resources and connect it to Iran through Uzbekistan.
WHY SPENDING NEEDS TO BE CUT
A trend has emerged that, when our budget revenue is not generated, deficits are made up by acquiring international loans instead of cutting or freezing government spending. Therefore, we need to pass a debt ceiling law that sets the limit of national debt in relation to economic capacity. There should be a mechanism that automatically reduces certain expenditures when the national debt hits its limit.
It is also time to come up with a list of expenditures that will be cut in the first place in case budget revenue is not achieved. However, government spending such as investments to build palaces for political parties, expensive visits abroad or the 50 billion MNT with no breakdown, must be the first expenditures to be cut. Rather it seems we are cutting expenditure in education, health, law enforcement or judiciary organizations.
When budget revenue is planned so abstractly false information is spread to the public, giving people the idea that it is the fault of companies that did not pay their taxes. There is a worrying concern that it might keep causing a conflict between the private sector and ordinary people. This attack is mostly directed at mining companies in particular and puts the biggest blame on them.
A very special thing about this government is that they already started using the revenue from selling government bonds, 1.5 billion USD and the 500 million USD raised by the Development Bank outside the budget.
It is interesting how the government (which is not cutting their expenditure in spite of the decrease occurring in the budget revenue passed by the law) would use the money generated by selling government bonds with no legal commitments.
This year, the government budget deficit is likely to be greater than estimated. It is time for the parliament to pose questions to the government about this. However, they cannot do anything because every member of the government is a member of parliament as well. It looks like that they are going to make a budget clarification each quarter to acquire permissions to get loans every time the budget revenue is reduced.
The government did nothing more than talk about making realistic estimations when developing the budget, predicting the lowest possible prices of mineral resources exports, accumulating extra revenue in a Sovereign Wealth Fund and using the funds in case insufficient amounts of budget revenue is collected.
The government lacks the desire to establish a Sovereign Wealth Fund that estimates price fluctuations in order to ensure good management of natural resources. The government greatly needs to cut its spending as well.
Translated by B.AMAR