Feeding Frenzy

China’s ever-growing appetite for resources fuels the Mongolian economy.

China’s seemingly insatiable demand for base metals has sent shockwaves through the global mining industry, and the country’s booming economy is a key driver in maintaining stratospheric metals prices across the globe. On the back of rampant industrialization and urbanization, China has become the world’s largest consumer of aluminum, copper, lead, nickel, tin, zinc and iron ore.

China has now reached a stage in its development where its demand for metal commodities is especially intense. Its metal consumption as a share of world consumption has jumped in the past decade from 10% to 25%. Since 1999, China has consumed two-thirds of the world’s growth in base metals output. Since 2002, China has accounted for half the world’s growth in consumption of steel, copper, and aluminum, almost all the world’s growth of nickel and tin, and more than world’s growth of lead and zinc.

With most analysts predicting no significant slowdown in Chinese copper consumption for years to come, mining and metal companies are pouring capital into new production. Companies that have mines up and running are generating record profits, while companies developing projects are racing to build mines before prices fall. Inflated cash flows have also triggered a spate of mergers and acquisitions in the mining industry as companies look to consolidate.

China’s breakneck development is having a serious knock-on effect on its northerly neighbor, Mongolia. For better or worse, the Mongolian economy has been increasingly oriented toward ballooning China’s markets, and China is now Mongolia’s major trading partner is China. Almost half of the country’s exports went to China and a quarter of its imports were from China in 2004.

With mineral and precious metals at their highest prices in a decade, billions of dollars of investment is knocking at Mongolia’s door. The investment offers and expected revenues from sales of its resources have led to speculation that Mongolia will become a “21st Century El Dorado.”

More often, Mongolia is predicted to become comparable to Chile, a true democracy that is rich in mining resources and has a diverse, market-based economy driven by a strong private sector. Even without major new investments in mining, Mongolia has enjoyed averages of 7 – 11 percent annual growth during the past decade, and the country is on-track for 8 percent or higher growth in 2007.

Mongolia is endowed with enormous, untapped mineral wealth, and more than 30 percent of the isolated, windswept nation, nearly the size of Western Europe, has been licensed for exploration and mining. Minerals currently account for 30 percent of GDP; however, projections show the three main mineral deposits to be extracted will produce an annual value ten times greater than Mongolia’s current GDP. The government’s National Development Strategy 2021 anticipates per capita income increasing from US$1,100 today to US$7,000 in five years and US$15,000 by 2021.

With growing demand from both China and Russia for Mongolian resources, the future looks bright for the Mongolian economy. However, there are concerns about corruption and environmental degradation, and given the country’s recent past, many Mongolians are wary of relying too much on either one of their powerful neighbors to north and south.

Images: Daniel Allen

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