Some news reports with grand headlines look more like political posturing than great commercial breakthroughs. What is the full story behind a press release?
This is the latest headline grabber, “Mongolian Coal Firm Signs Four-Nation Deal Including North Korea”.
The story was picked up by multiple news agencies, including Bloomberg as reported by Michael Kohn http://bloom.bg/1J75rG0
investors may require additional Independant due diligence about the rest of the story.
Here are a few professional observations based on my six years coverage of Mongolia’s railway exporting problems. The essential theme is that “distance matters”.
Getting to the Pacific Ports via the round about Russian connecting eastern Trans SIBERIAN rail route is physically possible. But at the distance involved, it may be a bad logistics route when costs per ton-km are calculated.
Plus, there may be too many SIBERIAN coal mine origins along the long route path to compete with these remote Mongolian origins. In the long run, Mongolian origins at best will likely be a marginal provider. If the route is too long. Is there enough volume to “show the flag”. Yes. Long term profit sustainable? Not unless the rail freight rate is priced as almost a donation.
Why would RUSSIA RZD “donate” scarce track access paths for !omgolian origin shippers that compete for export sales with a siberian mines? Geo-Resource politics might be a complex reason. Who can say?
From a publicity stand point, yes it appears that arranging the circuitous route can be “hailed as a major achievement” as stated to the news media by Batbaatar Bandan, the company’s chief executive officer. “For Mongolia to have four-country cooperation, I think it is historic,” he said at the signing of a memorandum of understanding. Note: this is a MOU. That is not a contract commitment.
The company would sell the coal to Mongol Sammok Logistics Co., a new joint venture between South Korea’s Sammok Shipping Co. It is also an arm of the Mongolian government says one source.
The coal has to moved more than 4,000 kilometers (2,500 miles) by train to the North Korean port in the city of Rason, via Russia. And then it has to rely on friendly rates and reliable train operation between the North and South Korean governments in order to cross North Korea into South Korea Sounds a bit risky.
Yes, they will likely move a trial load. But that proves little about long term reliable and sustainable route profitability. The shipper, Sharyn Gol, claims to reporters that it is “in a position to export several hundred thousand tons of coal per year.” From a due diligence view, that is a rail volume “niche market”.
Some claim a possible annual volume at some unknown future time of perhaps 300,000 metric tons of exports a year. But there is no pricing agreement yet.
Investors should probably check for “the rest of the story”. ———
The alternative is to take up the Chinese offer to use the China rail network via the Mongolian southern proposed rail gateways to reach the CHINESE Pacific ports and then use ocean barge or ocean ship to reach the Korean markets. That commercial offer was made almost a year ago by China and as of this point in the summer of 2015 appears “dead in the water”. There were limits I believe as to which rail inland gateways could be used, but all of the southern routes out of Mongolia are far shorter to reach the Pacific ports versus going through RUSSIA.
And distance does matter as a logistics cost. The Mongolians have collectively as a nation been wrestling with this rail access issue for almost a decade.