Monday, July 21, 2014

China's coal to liquid/gas plans will be a rocket boost to the Mongolia economy

The Mongolian economy has certainly disappointed many investors over the last couple of years. In fact I know of several people that have packed up and left Mongolia as the hype they traveled there for did not match reality. This was mostly caused by poor decisions by the government in the runup to the presidential elections a couple of years ago. The ongoing discussions, and failure of the GOM and Rio to reach an agreement, regarding the Oyu Tolgoi underground expansion have also cast a wet blanket over investors perceptions. I think investors views are going to change in the next month or so. According to Khan Investment Management:

"China’s Sinopec has agreed to back Mongolia’s first coal gasification plant. President Xi Jinping will make an official visit to Mongolia from August 20th during which the USD 30B investment agreement is expected to be signed and other significant investment “sweeteners” are expected to be announced, including an extension to the MNT / RMB swap facility. The USD 30B coal gasification mega infrastructure project alone represents almost three times Mongolia’s 2013 GDP."

This one mega project would be worth almost three times Mongolia's entire yearly GDP! Why would China do this? China is oil and gas poor and its population is demanding more and more hydrocarbons as per capita income increases. The Chinese are strategic thinkers and do not make policy based on two year congressional election cycles, nor do they buy into currently fashionable memes like man made global warming. This article from Fortune magazine goes into depth on how important coal is to the Chinese economy:

Much of this coal, the government says, is not for burning. While they will supply a large share of China’s urban electricity, to a large degree the coal clusters are being built to convert coal into other forms of energy—synthetic natural gas, coal-based gasoline, chemicals, and fertilizer. That’s in addition to coalbed methane, a gas captured in association with coal deposits, which already powers the bus and taxi fleet in Taiyuan, the capital of Shanxi Province.

These coal-to-liquids and coal-to-gas projects form the keystone of China’s 21st century energy strategy.  Simply put, China has plenty of coal but little petroleum. (The company is trying to unlock its reserves of shale gas, but these are trapped in “tight,” or geologically challenging, formations, and drilling technology in the country is at least a decade behind the U.S.).

China is the world’s second-largest importer of oil, behind the U.S., buying more than 5 million barrels of oil a day. Much of that supply squeezes through the Strait of Malacca, the narrow passage between Malaysia and the Indonesian island of Sumatra that forms the gateway between the South China Sea and the Indian Ocean. Chinese strategists are keenly aware that a military attack, an act of terrorism, or an embargo that shut down the Malacca waterway would quickly squeeze the country’s energy supply. Thus, building vast chemical complexes to convert coal to liquid fuels is more than an economic move; it’s a geostrategic imperative.

You see the difference in the policy initiatives that China is pursuing versus the ridiculous policies the US is following. Who would you bet on over the next 5, 10, 20 years? Anyway this announcement if it occurs will represent huge news for Mongolia and should go a long way in changing investors perceptions on the Mongolian economy. I have been talking about Mongolia for several years and it appears that we may finally be getting to the point where the payoff is going to come. What happens when you shove $30 billion dollars into a $12 billion dollar economy? A stock and real estate boom I would guess. I am long various MSE stocks and Mongolia Growth Group, a real estate firm in Ulan Baatar.

All is not lost at the Oyu Tolgoi mine either. The open pit is producing just fine and "OT's open pit production is generating impressive results. Export of copper concentrate exceeded production this year with 94% of total output for 2014 already committed under contract, and some 84% of copper production from OT has now been contracted for 8 years, according to the first quarter report by Turquoise Hill Resources Ltd." In fact the mine is cash flow positive as of last March. All of this seems to be missed by western reporters. However this lack of accurate info is what leads to opportunity.

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