Mongolia to Construct $2.5 Billion Russian Rail Export Link, Chinese Route Still Beckons

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Researched by Industrial Info Resources (Sugar Land, Texas)--Mongolia's rich mineral resources are driving decisions concerning the size of foreign stakes in mining projects and the fast-track development of infrastructure to enable the efficient export of bulk ores, in particular coal, for which China is a growing customer.

The latest decision to come from the Mongolian government is for a 1,000-kilometer railway that will run from Dalanzadgad in Omnogobi province in the south of the country to Chooibalsan in Dornod province in the east. The decision to build the railway to link with the Russian system, rather than go for a shorter route south to China, has been dictated by Mongolia's desire not to become over-dependent on China and its voracious appetite for resources.

A 2010 World Bank report said that freight shipped by rail to the Chinese city of Baotou would cost $33 per ton, whereas a ton would cost $95 to transport to the Russian border. Independent finance was then available for a 270-kilometer line from the Tavan Tolgoi coking coal deposit to the Chinese border. It was also estimated that the 1,500-kilometer route to a Chinese port for export would give a positive margin of $70 per ton, whereas the 4,500-kilometer trip to Russia's northeast coast would only pay a positive margin of $5 per ton.

But to soften the negative economic comparison, a 65% discount was negotiated with the Russian rail network, and this is claimed to bring the cost of transporting a ton to the Russian coast below that of a ton to the Chinese coast.

Construction work on the Mongolian Railway Company's new link will begin before mid-2011 and will take up to 36 months to complete, requiring an investment of $2 billion to $2.5 billion. It is reported that Mongolia has made a decision in favor of the Russian broad-gauge track for the link rather than the narrow-gauge track used in China and most other countries.

To unclog and develop Mongolia's transport infrastructure, an investment of $9 billion will be needed in the medium term, and this could see the shorter route from Tavan Tolgoi to China being built, as rail links to the south are not coping with the millions of tons of coal already in demand from China. Add to this the Chinese demand for copper from the major deposit at Oyu Tolgoi when the new mine comes into production. In 2009, China took 75% of Mongolian exports and millions of tons of coal are now being trucked south to avoid the rail congestion. But as tonnages rise toward a potential of 50 million tons per year from Tavan Tolgoi, trucking will not be an option and an efficient rail export line to the South will be a necessity.

For related information, see February 17, 2011, article - India Proposes Mongolian Steel Plant and Bids for Tavan Tolgoi Coking Coal.

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