Last month , Protesters stormed the Mongolian capital To denounce corruption in the country’s coal trade. Now the government says it has a solution to end years of shady business deals.

Starting next month, Erdenes-Tavantolgoi JSC – the country’s largest state-owned coal miner – will stop signing direct sales contracts with buyers in neighboring China, which last year bought 84 percent of Mongolia’s total exports. Instead, the company’s coal will be auctioned on the Mongolian Stock Exchange.

The move to sell coal contracts through the exchange comes in response to widespread anti-corruption protests in Ulaanbaatar in December, sparked by allegations of widespread fraud in the coal industry.

Erdenes-Tavantolgoi JSC has been at the center of the allegations – its chief executive, Jankoyaj Battulga, and several of his associates as well as family members have been arrested and awaiting trial, accused of misappropriating billions of dollars in coal revenues. Authorities say the auctions will improve transparency and ultimately bring higher returns to the state.

The government had planned to start the bidding process later this year but has accelerated the process in the wake of public outcry over corruption.

“Instead of waiting for half a year, we will be trading online starting from February and the Mongolian stock exchange will handle that,” Patnirmdal, Mongolia’s deputy minister of mining and heavy industries, told Al Jazeera. “This will help give us experience selling charcoal on an online platform.”

Trucks carrying coal in Mongolia.
Mongolia’s coal exports account for about a quarter of its gross domestic product [File: B Rentsendorj/Reuters]

Sandwiched between Russia and China, Mongolia is one of the most densely populated countries in the world with a population of 3.3 million people spread over an area slightly smaller than Alaska. In 2021, the per capita GDP is about $4,500, similar to that of Indonesia. Mining accounts for nearly a quarter of the country’s gross domestic product, according to the Extractive Industries Transparency Initiative. About half of its export earnings come from coal.

The contracts apply to coal exported through the Jachunsukhet border point, located about 240 kilometers (150 miles) south of the Tavan Tolgoi coal deposit in the Gobi Desert. In addition to Erdenes-Tavantolgoi, affected companies include Energy Resources LLC, whose parent company Mongolian Mining Corp. is listed on the Hong Kong Stock Exchange.

The two companies are prospecting for coal in Tavan Tolgoi, one of the world’s largest deposits of coking coal and thermal coal, with reserves of 6.4 billion tons. The coal mined in Tavan Tolgoi is highly regarded in China, where it is used in the production of steel.

China is the world’s largest steel producer, producing about 57 percent of the world’s steel production. But it cannot produce enough coke domestically to meet the needs of the steel mills.

In 2022, China imported 170.71 million tons of coal, according to data from China’s General Administration of Customs. Mongolia provided 31.2 million tons, about 18 percent of the total.

Mongolian coke has become particularly valuable in recent years as China weaned off its dependence on Australian coal after a sharp deterioration in relations between the two countries.

Earlier this month, the exchange organized a trial trade to test the new system – 12,800 tons of coke were sold at auction to a coal transport company in Singapore. The final call price is up 12.2 percent from the original asking price, from 1,150 to 1,290 CNY (170-190 USD) per ton.

“Initial trading shows that coal contracts will help improve the transparency of coal trading and increase sales revenue,” Javkhlan Ivanov, CFO of the exchange, told Al Jazeera. “The electronic coal auctions will be conducted without any intermediaries and carry a trading commission of 0.1 percent.”

Back room deals

The new order comes just a month after a group of coal mining executives and their co-conspirators were arrested for allegedly defrauding Erdenes-Tavantolgoi JSC. Allegedly, much of the theft was done by selling coal off the books with Chinese buyers at the border.

The government argues that selling coal through the stock exchange will prevent theft and backroom deals. Mongolia ranked 110th out of 180 countries in the Corruption Perceptions Index compiled by Transparency International two years ago.

“In the past, SOEs signed purchase and sale agreements with buyers they found and did so behind closed doors,” Patnermdal said. “Under the new system, any buyer will be able to open an account and participate in the purchase of goods through licensed intermediaries on an equal footing.”

Plans to expand coal auctions to other minerals are also on the horizon. Commodities that can be traded include copper, iron ore, gold, fluorspar, molybdenum, and other metals.

“The types of contracts will be spot, futures, options and futures,” said Javkhlan. “The main buyers will be Chinese and Russian importers as well as foreign and domestic derivatives traders.”

Patnairmdal said Mongolia is looking to commodity exchanges in emerging markets such as Turkey and Poland as well as mature exchanges such as the London Metal Exchange as models for Mongolia to use in developing its own exchange.

Commodity exchanges can be beneficial when they bring together buyers and sellers in low-liquid or opaque markets, said Jake Horslin, senior LNG analyst for Energy Aspects, a market analysis firm based in London.

“They can also reduce counterparty risk because the exchange acts as a counterparty to the buyers and sellers of each transaction, rather than another company,” Horslin told Al Jazeera.

A corruption investigation that has led to many changes in the movement has so far led to the arrest of 17 people allegedly involved in the theft from Erdenes-Tavantolgoi JSC. Former President Khaltama Battulga was among those questioned about their involvement.

A sign that all was not well with the company came in October when the CEO of Erdenes-Tavantolgoi JSC was fired with little explanation, and control handed to a special envoy from the Finance Ministry.

A protester in Mongolia stands with a small megaphone in front of a line of police officers in turtlenecks.
Thousands of Mongolians took to the streets in sub-zero temperatures last month to protest alleged corruption and the high cost of living [File: B. Rentsendorj

The corruption allegations in December prompted thousands of people to pour into the streets in subzero temperatures to call for accountability. The government has promised to reform Erdenes-Tavantolgoi JSC, hire employees in a transparent process and eventually make it a public company.

“The protesters want a solution. They don’t want cases like [the] Coal theft again, they want needed repairs. “We need to reform the mining sector,” said Patnermdal.

Zolbayar Enkhbaatar, editor-in-chief at Inside Mongolia, a market intelligence newsletter, said the commodities market could help the government regain some of the confidence lost during the fiasco involving Erdenes-Tavantolgoi JSC.

“It seems that Mongolians view the stock exchange as a symbol of transparency,” Zulbayar told Al Jazeera. “The theft of coal was possible because the companies involved lacked transparency – no one could see how they were selling the coal and to whom they were selling it.”

Others are more careful. Creating a successful commodity exchange in Mongolia will require a significant volume of commodities to be traded on a daily basis, said Amar Udaya, regional director of Washington, D.C.-based strategic advisory firm BowerGroupAsia.

“It’s not a direct mission,” Ammar told Al Jazeera.

While the exchange of commodities can benefit both buyers and sellers of coal in the long term, and may help quell public distrust of the coal trade, there is more work to be done to quell public anger over long-standing issues of corruption and quality of life, According to Ammar. He said.

“The exchange might be seen as a small step towards addressing the larger issues of inequality, cost of living, the environment, and public health,” Ammar said. “But the government needs to take a comprehensive approach to addressing these concerns in order to win public support ahead of the 2024 elections.”

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