Mongolia on Friday unveiled a raft of new investment agreements with China--including an oil-exploration deal—that Mongolian Prime Minister Norovyn Altankhuyag said in an interview would build up the landlocked country's infrastructure and deepen ties with its largest customer for its resource exports.
The series of deals opens fresh fronts of bilateral cooperation at a time when the easing of a decadelong commodities boom weighs on Mongolia's growth, compounded by year-old nationalist policies in the resources sector that Ulaanbaatar is now trying to undo.
It also comes as Mongolia grapples with the impact of its strong economic ties with longtime rival China.
Under the agreement signed during an official visit to Beijing this week, state-controlled PetroChina Co. will lead oil exploration in eastern Mongolia, Mr. Altankhuyag said. He said Mongolia hopes to increase its crude-oil exports to China to 800,000 metric tons, or 5.86 million barrels next year. This would represent an increase of 38% from this year, he said. PetroChina didn't respond to a request for comment late Friday.
Mongolia's fledgling resources industry is by far its largest driver of growth, accounting for 85% of investments into Mongolia and 40% of state revenue. Foreign direct investment in this sector propelled Mongolia in 2011 to become the world's fastest-growing economy, according to World Bank data.
Mr. Altankhuyag said growth this year is still likely to be in the "double digits," though he said "there may be some slight decrease" from prior years. GDP growth fell to 11% in the first half compared with a year earlier from 12.2% last year and 17% in 2011. But foreign investment slid 47% in the first eight months from a year earlier, triggering an emergency parliamentary session this fall in Ulaanbaatar.
Mongolia was until last year seen by investors as a prime destination for capital. Its Tavan Tolgoi coal deposit is the world's largest, containing more than a billion tons of high-quality coking coal used to make steel. But plans for a $3 billion public offering never came to fruition as commodity markets faltered. Ulaanbaatar in July 2011 scotched an auction to develop the western portion of the coalfield that it first awarded to—and later took back from—China Shenhua Energy Co. Ltd., Peabody Energy Corp. of the U.S. and a Mongolian-Russian consortium.
Mr. Altankhuyag said Friday that Mongolia was now going to focus on building up its infrastructure before proceeding with Tavan Tolgoi's listing or reviving the bid process.
"Coal prices right now are not competitive, and we are pretty much focused not on how to exploit Tavan Tolgoi but how to develop the infrastructure for Tavan Tolgoi," he said.
Chinese coking coal prices have fallen 21% this year to 826 yuan a ton this week. Mongolia's biggest coal client isn't buying as much from its smaller neighbor this year. Mongolia coal exports to China have fallen 24% on year in the first nine months, compared with 7.8% growth in 2012, according to Chinese customs data, due to slower Chinese demand.
Coal is Mongolia's biggest export by value but Australia and Indonesia surpassed it this year as China's largest suppliers.
Mongolia has at times been wary of relying too much on China. It enacted a law designating "strategic sectors" including the mining sector in May last year after state-owned Aluminum Corp. of China, or Chalco, sought to pay $920 million for control of 800 million metric tons of Mongolian coal through a 60% stake in SouthGobi Resources Ltd. The deal fell apart after Ulaanbaatar then suspended some of SouthGobi's licenses. Earlier this year, Ulaanbaatar was also caught in a three-month spat with Chalco over the terms of a coal pricing deal.
Mr. Altankhuyag said he is hoping Mongolia could export as much as two billion tons of coal to China in 20 years. Mongolia is working with China's largest coal producer, Shenhua Group, on a border railway project, he said.
Mr. Altankhuyag said his country wants to build four new border trade checkpoints with China, up from the current one. Ulaanbaatar is also "in advanced stages" of shortlisting companies, including Chinese investors, that would be invited to invest in developing its rail lines.
Mongolia's railway is a symbol of how its desire to diversify its slate of strategic allies potentially conflicts with economic gravitation toward its historical rival and biggest customer China, which accounts for 80% of Mongolia's trade.
Mongolia has traditionally balked from changing its railway gauge, meaning the width of the rails, which it inherited from its days as a Soviet client and which remains 85 millimeters (or 3.4 inches) wider than the Chinese gauge. This means trains carrying coal from Tavan Tolgoi to China must switch cars at the Chinese border, adding to the cost of the Mongolian export.
Mr. Altankhuyag said it still wasn't clear if Mongolia will switch to the Chinese gauge for newer lines.
"The basic system will be in broad gauge, but we have not decided for a small part of the railway near the exporting points," he said.
