INTRODUCTION
Mongolia is located to the north of China and is said to host 10% of the world’s known coal reserves which is estimated to be equivalent to 162 billion tons. Coal export accounts for the largest chunk of total Mongolian gross domestic product (GDP) at roughly 22%. This is equal to approximately 80% of the county’s exports (Voroshilov 34). In the country, production and exportation of coal, specifically coking coal, is primarily undertaken by the Mongolian Mining Company (MMC). Coking coal refers to a type of coal that is absolutely essential to the process of steel production. By comparison China is both the world’s largest producer and consumer of coal. This due to the fact that economic growth has been at a high rate in recent years. This resulted in an increase in energy demands. This paper offers a broad view of the relationship between China and Mongolia with specific focus on coal trade between the two countries.
Various reports have pinpointed that despite china being naturally endowed with the world’s largest coal reserves, it cannot cut out importing coal as its local coal contain high percentage of impurities which make it unattractive in the international market. This therefore means coking coal trade between Mongolia and China continue to be a hot business and what needs to be done is professional marketing to identify domestic Chinese buyers since the country has restricted foreign investors from entering its domestic market for so many years. The following are key issues that are likely to influence coking coal importation to China which every trader must be conversant with to avoid breaching china trade rules and regulations.
CHINA TRADE POLICY ON COAL IMPORTS
Coal is the fuel in the economic development engine of the People’s Republic of China (PRC). It can be credited with roughly half (49%) of total coal consumption in the world. This is supported by the fact that it is also the top producer of coal at also roughly half (46%) of total production in the world (Priddle 43). As such, coal importation in China is done primarily to cover the deficit in the country’s own production of the mineral. While this deficit is more clearly seen in energy production, it is also noticeable upon inspection of the metallurgical (steel forming) industry which utilizes coking coal. Coking coal is the second most utilized type of coal in the PRC after anthracite coal which is used in energy production. There are policies in place that facilitate the current state of coal mining and trading in the PRC.
The greatest challenge faced by the PRC as far as coal consumption is concerned, is the finite nature of coal. Coal is a fossil fuel. In spite of it being found in abundance across the entire world, it is finite. In the last two years, 2014 and 2015, the PRC has made significant cuts in its coal consumption and this is primarily due to policy. With the rapid growth experienced in the coal industry caused by energy demands, there existed few restrictions to govern the growth thus causing concern in the world regarding greenhouse gases produced during the use of coal in energy production (Priddle 55).
The sovereignty of the PRC meant that there was no obligation to report accurately the data on coal consumption. There was speculation that coal consumption in the PRC was much higher than reported and this was actually proven to be true when recently, new (old and concealed) data was released. This came in the wake of the discovery that coal consumption in China had declined by 2.9% in 2014 and 3.7% in 2015 (Priddle 43). New policies have been put in place to establish newer and cleaner sources of energy to reduce dependence on coal as a primary energy source.
In 2013, the PRC was actually at the top position in quantity of renewable energy produced in the entire world (Priddle 49). This is what carried over into the subsequent years curbing the need for use of coal as an energy source. Part of the policy was a target to reach maximum coal consumption volume of no more than 3.8 billion metric tons and to peak by the year 2030. This is all in an effort to decrease greenhouse gas emissions which cause climate change by global warming.
The PRC has large reserves of natural resources and is the largest gold producer in the world. It is however not self-sufficient in terms of mineral and the environment. About 300 cities in the PRC did not live up to the national air quality standard in 2015. This was in spite of an increase in capacity of renewable energy generation by 34% for wind power and 74% for solar power (TheGuardian.com). Coal is still the country’s fuel due to the large population and diverse economy that requires energy for domestic and industrial sustainability.
CHINA MARKET ACCESS
Mongolia is ranked nineteenth in the world by volume of coal production at 33.2 million tons in 2014. With 10% of known world coal reserves, being located within its borders however, it has the capacity to produce more. Its location on the northern border of the PRC means a ready supply for settling the deficit of the PRC’s coal consumption demands. In addition to the great quantity of coal reserves discovered, the coal itself is considered to be of prime quality for the steel production industry. This means that Mongolia is a hot property to mining and steel industry companies. The country’s proximity to the PRC is enhanced by the existence of a railroad that links it to china and allows for convenient transport of the bulky coal. The final destination of the coal is the Hebei province of the PRC which is the steel producing province. Unfortunately, the railway does not pass directly through Hebei and as such, supplementary transport is necessary.
There are plans underway to establish a new railway but one that is mean to connect the coal processing province of Shanxi and the steel producing province of Hebei in the PRC. Combine that with the decrease in demand for coal and a problem for coal production arises. The bulk of coal mined in Mongolia is exported to the PRC with a little of it going to Russia. With expected decrease in demand for coal in the PRC, marketing coking coal to other markets will be a necessity. Luckily, Mongolian coal possesses the known advantage of being of high quality and in steel production, this is a consideration. Steel is an alloy and as such requires a perfect blend of its constituent elements in order to be of the optimum strength. Coking coal quality is determined based on its percentage content of: moisture, ash, sulfur, volatile matter, the net caloric value and the size. Based on these considerations, Mongolian coking coal is considered to be of the highest quality.
The decline in the PRC’s coking coal imports in 2015 resulted in much less growth in steel output. Steel output drives the consumption of coking coal. This means that the increase in coking coal productions is not being met with increased demand, at least not in the PRC. Again, the coal must go somewhere and marketing here comes into play; the need to seek out other markets apart from the steel industry in the PRC. Fortunately, this does not gravely affect mining operations seeing as coal is not perishable. This means that if need be, the mined coking coal can be stockpiled until a suitable market is found for export. The durability of coal also allows for long distance shipping to distant markets.
Today, importation business has improved in China since it joined WTO. Both local and foreign companies can now import to china various products that are approved by the government. All these businesses are required to seek approval from the ministry of commerce (MOFCOM) which oversees the trade practices in the country. The China trade tariff stands at 9.8% from the previous 15.3% at the time when only a limited number of Chinese companies that were granted foreign trading rights had absolute control over importation business (Ambler et al. 52). The relaxation of the trade tariff by half has promoted international business. Businesses in Mongolia can now enjoy exporting coking coal to china through either seeking domestic partnership with Chinese based companies or strategic alliance with major firms with highest import quota to facilitate business growth and expansion.
The only challenge likely to affect China and Mongolia mining sector is the classification of coal as a restrictive import. This move is intended to regulate pollution in the country which is already ailing of pollution. However, there is a window of hope to businesses that have exhausted their import quota through contacting MOFCOM for further exemption but at a higher tariff which is seen as a strategy to suppress over importation which is likely to topple the China balance of payment (BOP) in the international trade (Ambler et al. 78). The country is keen at attaining economic growth and stability while furthering its coal mining business with least environmental impact.
China has a complex inspection and clearance system which is likely to derail the importation business as no goods can enter the country without the Chinese clearance certificate. The certification of imports is move to curb substandard products from entering the country. Businesses that desire to establish a long term trade relationship with China must then comply with every importation standards for it to qualify for better preferential treatment in the future as a strategic partner.
CHINA FREE TRADE ZONE
Free trade zones in China provide window of hope for many foreign businesses that have eye on the Chinese market but cannot constantly meet the tariff requirement which is higher in the non-free trade zones. In these zones, there is a preferential tariff and tax treatment for traders in these zones. This is likely to stimulate coking coal trade between Mongolia and china in these zones. SMEs and sole-proprietors in Mongolia are always headed for business growth through maximizing trade in the free trade zones. China has two main free trade zones classified either as bonded zone or economic development zones.
In these zones, traders are exempted from the usual custom regulations. This has improved business efficiency as there are no complex clearance procedures and other restrictive practices which harbor business growth. However, any business not keen to utilize these zones may find itself outside the free trade zones and thus will be subjected to the normal custom and tariff regulations which may be disadvantageous to small and medium enterprises that always require faster and low cost transactions for their efficiency and growth (Ambler et al. 85). In my view, free trade zones provide better business terms for coal importation in china due to the low cost of transaction and relaxed trade rules and regulations.
MARKETING
Steel industry is well established in the PRC and has been the major market for Mongolian coking coal. For the future however, there are other ripe markets such as India where the steel industry is the backbone of the county’s wealth which would go well with coking coal mining in Mongolia where that is the backbone. The Mongolian mining company, which is responsible for coking coal mining in Mongolia has already implemented ecommerce strategies to enhance their service delivery. The company has a website where one can find information concerning their mining operations along with contact and location information which is available free and easily.
The only challenge here is the lack of advertising for the website, that is, you have to be looking for the website to find it since they do not advertise on third party websites. This is not a major challenge seeing as the majority of mining operations in Mongolia are overseen by the company. The majority of their operations are in Ukhaa Khudag and Baruun Naran both found in the Southern Gobi province of Mongolia (Voroshilov 5).
In the southern Mongolian Province of Ömnögovi is Tavan Tolgoi, ranked among the biggest untapped deposits of coking coal in the world (Voroshilov 5). It remains untapped due to management challenges. The Mongolian government in an attempt to maximize investment in mining in their country, has created obstacles that now prevent them from securing the necessary funding for development of mines in the regions. As a result, there are now arrangements to bring in foreign companies and grant them the same operating privileges as the local mining companies. This has already been done in other regions where smaller deposits were discovered such as in Gobi province mentioned above.
The advantage to having foreign companies is the guarantee of markets where the coal will be sold seeing as most foreign companies line up buyers before securing the product. In any case, there is always a market for coal. It is a primary fuel in electricity generation in a number of counties in the world. The reason for a spotlight focus on the PRC is the environmental degradation that has remained unaddressed until the air quality started to pose a risk to the health of citizens living in cities and near electricity generation plants.
MONGOLIAN TRADE POLICY
There has been lax in implementation of the policy especially as far as diversification of mining products in concerned. However, the other two items of interest appear to have experienced improvement specifically in the improvement of mining capabilities. This was accomplished mainly by encouraging intervention from foreign mining companies who brought in better equipment and expertise thanks to funding that is available to such privately owned companies.
Processing is important in the mining industry for value creation. Unfortunately, this only applies to minerals such as copper and gold which require purification. For coal, due to its properties, no extensive processing can be carried out only sorting of the coal by grain and sized along with removal of heavy non-coal materials that may be found in the coal. In the case of coal containing high amounts of sulfur and other impurities, it is washed with water or a chemical bath to remove the impurities. All these processes require high investment which state-owned companies might not secure from their primary investor: the state. This is the reason for collaboration between the states and privately owned companied be they local or foreign.
MARKET IDENTIFICATION
Most mined minerals are used as raw materials in other industries and therefore market identification simply requires finding companies that require the minerals and offering better deals for supply such as covering whole or part of the transport cost depending on the location. The way to do this would be collaboration of companies that deal with a particular mineral such as coal, presenting themselves as a consortium rather than as individual competing companies.
This would work better as a marketing strategy seeing as the companies will be more likely to secure supply deals as a consortium. After all, coal is mined, sold and supplied by the ton. And presenting themselves as a united front from Mongolia would essentially be placing themselves in the world market as an inescapable monopoly for the high quality coking coal found in Mongolia.
TRANSPORTATION
The bulky nature of coal warrants the use of rail for transportation. In Mongolia, the railroad is one from Russia to Beijing China. The Mongolian sector is approximately 1.1 kilometers long and does not adequately cover the mines to allow it for use in transporting minerals from mines. For that purpose, heavy trucks are used to ferry the load from the mines to the processing and storage sites.
In the PRC the situation is the same. The railroad does not adequately cover mining sites and as such is not used to ferry minerals straight from the mining sites to other destinations. These destinations include the processing and storage facilities operated by the mining companies that are active in the sites.
The problem is common due to the fact that the existing railroad system was not designed with future mining operations in mind. The purpose was mainly long distance public transportation. It is for this reason that both Mongolia and China are currently making plans to build brand new railroad systems to specifically serve the mining industry’s needs. In the PRC, the proposed railroad will run from the Shanxi coking coal mine province to the Hebei province where the steel industry is established. In Mongolia, Ukhaa Khudag, which is in Tavan Tolgoi is to be connected to Gashuun Sukhait at the Chinese border via Oyu Tolgoi, by 260 km stretch of standard gauge rail for a continuous link with China's railway system (Zwass 110).
The underdeveloped transport networks in Mongolia coal reserves as well as the Chinese coal reserves make it difficult to utilize rail transport which barely links the reserves. Using long distance trucks remains the only feasible means of transport likely to provide ease of access to the market. However, rail transport could have offered a better means of transport due to the low cost involved in shipping the coking coal consignment to China.
ENVIRONMENTAL CONCERNS
Environmental concerns continue to inform china decision on coal importation following its accession to world trade organization. This means that the peoples’ republic of china is obliged to follow international laws and regulations which cover various economic sectors such as mining. However, china economy is highly pegged on coal mining and the country is still finding best way to burn its coal not to breach the WTO environmental laws. Consequently, china has listed coal under restricted imports unlike the past. Any business that desire to trade coal with china is granted an annual coal importation quota. After depleting one’s allowed quota, there cannot be further importation business between that entity and China until a new year begins when a new trade quota will be issued.
In Mongolia, the same is true. There is a rush to exploit the discovered resources that is driven by foreign companies who wish to work on new sites almost as soon as they are discovered. This is in contrast to China where the mining was driven by the need to supply energy demands. Strip mining (also referred as open cast, surface or mountaintop mining) is the preferred method of coal mining since it requires a lot less labor while yielding a lot more coal than underground mining. It is characterized by removing soil and rocks to get to coal deposits which are sometimes found close to the surface. Often, the ground is literally blown apart to get to the thin coal seams within. This leaves perpetual deformations.
In the case of Mongolia, the trucks used to transport minerals travel across the landscape across pastureland gradually destroying the pasture land with their immense weight. The Country is the most sparsely populated in the world and as such what is most greatly degraded is the landscape as well as the biodiversity.The trend of environmental degradation has been caught early in Mongolia, not so much in China. All the same, there are measures that have been implemented to guarantee preservation of the environments including the avoidance of strip mining and leaving woodlands untouched. There are also efforts to cover up existing exhausted strip mines.
CHALLENGES LIKELY TO AFFECT MONGOLIA-CHINA MINING SECTOR
There are three main challenges that are likely to derail coking coal business between these two countries. To begin with, financial challenges, is the first hurdle that is certain to down business operations. There is high cost involved in the mining and preparation of these goods for shipment. This requires huge capital to facilitate all these processes which businesses find difficult in financing these operations. Next, transportation problem dominates the mining business with underdeveloped road networks between the two countries. Poor road networks makes it difficult to access the ready market in China and these leads to persistent financial loss when the business cannot serve the market demand while it spends a lot of money in facilitating the transportation of the consignment. Lastly, import quota restriction makes it difficult to satisfy local business needs which rely on constant supply of the product. Businesses sometimes wish to supply more coking coal but their operations are cut by the quota restrictions each year.
In order to improve business between these two countries, forming trade blocs is the best way China and Mongolia should do. According to (Dlabay and Calvert 61), economic trade blocs help in removing restrictive quotas and opens up the business borders. The two countries can then work on a joint modern road construction network that will help grow the business and improve the living standards of the citizens. Trade blocks have succeeded in helping many states achieve efficiency and desired economic prosperity. Some of these popular trade blocks include the European Union (EU), EAA, and NAFTA among others globally. This is the right way China and Mongolia should go to better trade in these countries.
LEGAL ISSUES
Businesses deals especially in the international marked is marred with legal breaches which either arise due to contract breach by business partners or a breach of the state laws that governs the operation of such businesses. In china, culture plays a crucial role in solving business conflicts. The Chinese business partners advocates for negotiations and as such any business doing business in china must give negotiation a chance before resorting to any conflict resolution mechanism such as the court system (Ambler et al. 257). However, a partnership breach within the Mongolia border is subject to Mongolia laws which the Mongolia court will determine for the purpose of compensation.
E-COMMERCE
Electronic businesses continue to redefine international business with the ease at which transactions are done. The mining business between Mongolia and China can be highly boosted through transferring a great part of the business to e-commerce to improve business efficiency and better customer relationship which is necessary for continued business growth ((Snijders and Weatherill 3). It can help in the business logistics, marketing, and financial transactions which forms core business activities.
CONCLUSION
Certainly there has been triumph in the mining industries in both China and Mongolia with some still to be evident in the future. But in those triumphs are monumental failures such as the loss of worker’s lives in mines. It is evident that the industry’s focus is askew but fortunately there are steps being taken to counter that by the country’s respective governments. Preservation of the environment is making a comeback to the forefront. It is up to the authorities to ensure that the numerous foreign companies exercise social responsibility in handling the environment well so as to leave it as functional as they found it if not better. Some foreign companies would neglect the environment seeing as it is not their own.
Development of the mining industry in any country is a means towards economic grown. The important thing is to not get carried away with it. The focus should be placed on sustainability when it comes to exploitation of any natural resource, not profitability lest we end up in a world that no longer possesses the natural. Concrete jungles are fine as long as we remember that they are facilitated by real woodlands.
Works Cited
Ambler, Tim, Morgen Witzel, and Chao XI. Doing Business in China. London and New York: Routledge, 2008. Print.
Dlabay, Les R., and James Calvert. Scott. International Business. Mason, OH: South-Western Cengage Learning, 2011. Print.
Priddle, Robert. “Coal in The Energy Supply of China” International Energy Agency. 2015. Web.
Snijders, Henk, and Stephen Weatherill. E-commerce Law: National and Trasnational Topics and Perspectives. The Hague: Kluwer Law International, 2003. Print.
Voroshilov, Enkhbold. “Mongolia’s Coking Coal Export Potentials in Northeast Asia” N.p. N.d. 2014. Web.
Zwass, V. “Electronic Commerce: Structures and Issues” International Journal of Electronic Commerce, 2006. Web
