Tag Archive for mongolia

Mongolia premier pledges to end Tavan Tolgoi coal mine & railroad delays

From the Financial Times news report comes this upbeat news from Mongolia.

The headline:

Is this just more public relations political hype? Another “junk” rated bond issue to please voters? Is this necessary? Probably a bad idea. Again.

More long delayed plans for the east-west low margin financial feasibility railroad towards Japan? These sound more like a belief in Santa Clause than a sound strategic recovery for the nation.

I would wish more then this for my many Mongolian friends I have worked with.

The good news is that there is a way to make Mongolians strategic winners” if they pull together on tactics and engineering that are sound best practices.

Cheers!

For the FT report, log onto: http://www.ft.com/intl/cms/s/6e7a241a-20c7-11e5-ab0f-6bb9974f25d0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F6e7a241a-20c7-11e5-ab0f-6bb9974f25d0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=#axzz3erCpC6bE

Here are a few of the reported public relations statements in the news report. ——- Saikhanbileg Chimed indicated that “Mongolia planned to launch another sovereign bond as the country seeks to get “back to business” following two years of slowing growth in gross domestic product, plummeting foreign direct investment and rating agency downgrades of its junk-rated “Chinggis” bonds.”

“Official approval for investors to start work on the Tavan Tolgoi (TT) coking coal mine in the Gobi desert should follow soon after a review of the investor agreement in parliament this month, Mr Saikhanbileg told the Financial Times in an interview.”

Investors in the project include China’s Shenhua Energy and Japan’s Sumitomo Corp. “TT will be unlocked in the very near future,” he said.

HOWEVER—

“Several members of Mongolia’s parliament have raised objections to financial and legal aspects of the TT investor agreement, raising the possibility that the mine… …could suffer a similar fate to that of Oyu Tolgoi, a $5bn copper mine, where an expansion project was unblocked in May only after two years of wrangling. This year, Mongolia resorted to a mobile phone referendum to shore up public support for the project…

The minister still believes in 220km rail line from the mine into China — delayed now for more than three years.

Mr Saikhanbileg also told the FT reporters that he also believes in a second potential rail project that would run east-west about 1,300km to reach coal markets in Japan and the US, a Mr Saikhanbileg said.

BEWARE:

This E-W rail line is a much higher investment risk according to my due diligence research on Mongolia rail options dating back to 2006.

Investors need to carefully reexamine these projects with updated due diligence.  Mongolia needs a real heavy haul big train design to make their expectations a reality.  That means trashing most of their prior rail designs.

It also means a fresh due diligence review of the feasibility options. In particular, it is a bad idea to depend upon a due diligence feasibility report that is prepared by the builders.  They are not exactly Independant.

Competition for met coal sales to China in the summer of 2015

Reuters data http://mobile.reuters.com/article/idUSL3N0Z823E20150622?irpc=932

China’s imports of coking coal fell 24.2% to 14.7 million tonnes in the first four months of the 2015 from the same period last year.

Australia has about a 50% share of China’s imports Yet, shipments dropped 26.2 percent in the first four months as China’s steel production has fallen.

China’s imports from Mongolia increased by 9% to 4.5 million tonnes. It could have been higher if only Mongolia had a working export railway by now.

The next two largest coke coal suppliers are Canada and Russia. This year their shipments to China fell 14% and 39% respectively.

My technical observations.

MONGOLIA FUNDAMENTAL PROBLEMS as a COMPETITOR

The Mongolia customs price in northern China is about $46 a tonne as of April 2015. To that has to be added the rail cost to reach eastern Chinese steel producing markets. That adds a lot to the price given Mongolia’s poor rail infrastructure. It has zero heavy haul rail capability.

The quoted price from competing sources are $105 to $106 from Australia ~ $110 from Canada, ~ $93 from Russia mines Price to Japan Third quarter contracts for delivery from Australia to Japan were settled at $93 a tonne for premium hard coking coal, according to two people familiar with the negotiations says Reuters.

Back in 2012, the price was $330 a tonne.

The contract price tends to influence the spot price.

However, sellers need to price to a more reasonable long term contract rate to survive periodic economic down cycles.

Long term ten year challenge of lower iron ore prices for rail planners

From Mongolia to South Africa and Brazil to West Africa the “go go” former strategic outlook for big new rail and port projects that bet on iron ore NEED SERIOUS DUE DILIGENCE rethinking.

This is an economic message I have been beating the drum about with my customers, friends, and readers for the past three years.

Only the strongest and lowest cost per ton-km railroad supply chains will be the sustainable economic competitors if the Citigroup strategic projections are correct

That translate to big train heavy axle technology if you as a rail and port logistics chain want to be winners going forward. Who is up for this challenge? ————-

From a Bloomberg report on May 26, 2015 “Global iron ore demand will contract over the 2020s as steel consumption growth in China peaks, according to Citigroup Inc.”

This independent due diligence estimate marks a long-run price forecast for the raw material by 32 percent.

To read the entire article, go to http://bloom.bg/1PLH5Fs

Here is below added background from a multiple of sources on this subject from my previous experience and files.

1) Global iron ore demand will contract as steel consumption growth in China peaks over the next decade according to Citigroup Inc.

2) The long-run deliver iron ore price estimate was cut to $55 a metric ton from $81 as the world’s major mining companies will add overtime to the global over supply. The expert prediction is by analyst Ivan Szpakowski. He suggests that from 2016 to 2018, prices may average $40.

3) SUPER CYCLE REVERSE “The next decade is shaping up to be a complete reversal of the past decade,” Citigroup said.

4) Marginal higher cost per ton producers and supply chains are the ones most threatened In this commercial scenario, the marginal producers will likely falter Small train higher operating cost railways won’t cut it in that kind of global competition shift. This will particularly impact planners who continue to hold onto rail design plans that use light weight less than 33 metric ton axle loads and short trains.

As one specific example, Mongolian Gobi rail planners need to wake up and adjust to a Plan B big train engineering design that some of us suggested in 2006. Twenty five or less tons per wagon axle just will not get the job done against stronger global supply chain comoetition.

5) “Perhaps the greatest structural challenge facing the iron ore market is the rolling over of Chinese iron ore demand, driven by declining domestic steel demand and rising scrap availability,’ the bank said. ‘ ‘As a result, despite growth from other emerging markets, we forecast a decline in global iron ore demand over the 2020s.’’

6) New Growth Predictions out towards 2025 Demand for seaborne iron ore in China will likely slump to 982 million tons in 2025 That marks a decline from the revised expected high market demand that will likely peak around an estimated 1.2 billion tons in 2020 according to this Citigroup forecast.

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Long supply chains feeding ore towards China and India by seaborne delivery to ports by rail will over the next decade see a drop over the period.

7) In the short term, prices for the ore at a 62% content at Qingdao will likely see periods of up and down movement. As an example, iron ore recently was paying around $47 a dry ton in April for delivery but then rose to about $63 a ton this week reports Bloomberg. Most suppliers need to get paid more than $90 in order to be financially sustainable as unsubsidized iron ore businesses.

THE STRONGEST MAY PROSPER. OTHERS WILL STRUGGLE

‘‘The two lowest-cost producers per ton of iron ore are Rio Tinto and BHP”… Other sources like Goldman Sachs have previously reported this. These two giant mone companies have a pipeline of extremely low-cost mostly brownfield capital projects “that should see their combined production exceed 900 million tons by 2025”. These two source suppliers would under these calculations account for “roughly 70 percent of global import demand,” Citigroup predicts.

For the other 30%, including a big chunk from VALE, the other grand projects may struggle to see if their logistics chains can compete.

This fundamental predicted market demand and supply model means that a bunch of rail and port blueprints around the world “need a Plan B”.

Are they holding or to their old Plan A or adapting?

Those who reach out for help and change will be the ones to prosper.

What do you think?

Sent from Jim’s iPhone

More than 60% of megaprojects mines face cost overruns –. LIKELY for rail also

WHERE IS THE DUE DILIGENCE on these ambitious project feasibility cost estimates?

This was a timely report on the internet business news

A 60% rate of large project cost over runs reported from a after the fact due diligence review.

What executives were “watching out for the investors’ interests”?

Where was the pre-project due diligence review?

As exuberance over China “go-go” growth cools down now to more realistic levels, some formerly free wheeling mine executives are probably going to be reassigned or worse.

Likely a similar fate awaits many project rail planners.

The cited EY study below is not focused on the supporting railway projects. But this significant mining failure implies similar rail project cost over run impacts from Mongolia to South Africa and from Mali to India.

Mongolia’s rail plan execution failure out of the Gobi Desert TT fields is probably a close parallel to this report’s conclusions. Almost now a decade in only partial construction, the Mongolian project is a similar “failure to execute” on time and on budget. But here, the blames rests on government rather than executives.

MASSIVE MISS IN ESTIMATING THE TRUE PROJECT COSTS

How can so many screw up so badly?

COSTS as identified in the EY evidence were on average 60% or more over the initial predictions.

Who did the original diligence checking?

Where was the investor/banking over sight?

60% is what most of us who are economist refer to as the conceptual level accuracy of costs. That is terrible for an actual post project delivery audit..

60% is a flunking grade if judged logically.

60% suggests that there was never a serious project feasibility assessment of the market and economics.

Will this lesson learned be used by project leaders going forward now that feasibility may be even more difficult if the resources super cycle is behind us?

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The report title is: ‘Opportunities to Enhance Capital Productivity’

Here are a few highlights.

1) EY found that “an average budget overrun of 62% was reported on the 108 megaprojects investigated.”

2) “The projects considered were at various stages across the investment and project delivery life-cycle.”

3) “The projects were geographically diverse and related to the development of copper, iron-ore, gold, coal, nickel and other commodities.”

4) Cumulatively, “the projects represented global investment of $367-billion.”

5) “An estimated 50% of projects were reporting schedule delays even after remedial acceleration initiatives had been applied.”

The study spokesperson at EY is its global mining and metals advisory leader Paul Mitchell.

Mine company leaders now admit to their shareholders that with the good old high growth China days behind them… … the project managers need to be much more precise with their due diligence in order to achieve the promised investment margins. There is now a lot less room for error.

The report cites that total capital expenditure for the subject projects examined “have dropped from $142-billion in 2012 to an estimated $96-billion this year”.

For more details, please go to the Mining Weekly report from an Earnst Young special study at: http://www.miningweekly.com/article/more-than-two-thirds-of-megaprojects-face-cost-overruns-ey-report-2015-05-21

How would you score the report card based on the E&Y report?

Sent from Jim’s iPad

Bank of America has just dumped coal | is this the sustainable new pattern?

A gradual pattern shows that major capital backers are sliding away from coal projects.

Are global rail planners from India to South Africa and Mongolia paying attention? Or do they think this pattern will not affect their commercial fortune?

Time to ramp up the “due diligence.”

See story at: http://www.mining.com/bank-of-america-has-just-dumped-coal/

 

There are technical commercial solutions to Mongolia’s current rail problems — despite the headline

I’ve spent a lot of time in Mongolia evaluating the freight railway situation there, and there are some reasonable solutions to the current rail problems, which I describe in this paper distributed by Frontier LLC.

Official Emblem of Mongolia

Official Emblem of Mongolia

The headline Frontier added to the white paper, “Why Mongolia Rail Will Not Be Successful? [sic]” doesn’t suggest that solutions are available. But they are, and I describe them in the paper, which you can download as a PDF at this link:

Why mongolia rail will not be successful-FULL.