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China, rich with coal, seeks more next door in Mongolia to meet its energy needs

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TAVAN TOLGOI, MONGOLIA — Overlooking a deep black gash in the Gobi Desert, Od Jambaljamts watched Caterpillar trucks rumble across the rim of the world’s biggest undeveloped coal deposit — and mused on Mongolia’s good fortune to have the world’s most voracious consumer of coal just a few scores of miles away.

China is so big that even if they cut their economy in half they will still need what we have here,” said Od, a former Mongolian diplomat in Washington who, along with his younger brother, now controls the Mongolian Mining Corp.

With China so close and so hungry for energy — and Mongolia so rich in what China needs — locals with mining licenses and a swelling swarm of foreign investors believe that only the absence of modern transport links to China clouds Mongolia’s future as a would-be Saudi Arabia of coal.

It should therefore have come as good news when Mongolia recently started preparations for a new railway line from Tavan Tolgoi, the first such link with the epicenter of this landlocked nation’s nascent, China-driven mining boom.

But there is a problem: The new track will not go to China. Instead, it will head hundreds of miles in the opposite direction toward Russia — and carry a heavy freight of suspicion and wariness that impedes China’s global quest for energy.

China’s demand for the coal, uranium and other minerals that Mongolia has in abundance — but has so far barely touched — is gargantuan and growing. China, which surpassed the United States as the world’s biggest energy user in 2009, needs to find enormous quantities of new fuel to meet what, according to the International Energy Agency, will be a 75 percent increase in its energy needs by 2035.

But as China scours the globe for coal, oil, uranium and natural gas — and hunts for rivers just beyond its borders on which to build electricity-generating dams — it increasingly confronts a stubborn reality: What Beijing and foreign businessmen embrace as a simple law of supply and demand stirs complex, and sometimes dangerous, political passions, security fears and big power rivalries.

“In the 21st century, whoever controls energy controls everything,” said Sanjaasuren Oyun, a member of the Mongolian parliament, Cambridge University-educated geologist and former foreign minister. She says that Mongolia needs a railway to the Chinese border but that it has to make sure the country doesn’t just become a grab bag for China-bound minerals.

Mongolia last year nearly doubled its sales to China, which absorbed 84 percent of all its exports — three-quarters of which were coal and other minerals. But this is just the start. The vast bulk of Tavan Tolgoi is still untouched and eagerly eyed by Chinese, Russian and American companies that want to profit from China’s insatiable demand. Mongolia could multiply its coal exports across its southern border many times over — if only it could get the stuff there swiftly and cheaply.

Coal is transported in convoys of trucks across unpaved desert tracks, a method that is expensive, slow and hazardous.

“A railway line to China is a no-brainer,” said Od, the former diplomat. (China is due to finish a line to its side of the frontier later this year.)

Battulga Khaltmaa, a former wrestling champion who is in charge of Mongolia’s railway-building program, said that a track to China will come one day but that first Mongolia needs to start laying rails away from China. That, he said, will curb dependence on the Chinese market by opening up alternative export routes to Japan and South Korea and also anchor a planned industrial zone at home. Mongolia, he said, doesn’t want to just shovel raw materials into China and end up “lazy” like oil-fattened Saudi Arabia, with a “few families controlling the country and making all the money.”

“We have to think about national security, our traditions, our lifestyle — not just profit,’’ said Battulga, Mongolia’s minister of roads, transportation, construction and urban development.

China has large quantities of coal, which provides around 70 percent of its energy, but it still needs more and is now a major importer. It particularly needs what lies just below the surface at Tavan Tolgoi: huge quantities of high-quality and easily mined coking, or metallurgical coal, which is used to manufacture steel. Mongolia’s Gobi Desert contains enough to meet China’s current level of import needs for at least 160 years.

Over the past five years, China has increased its imports of coking coal tenfold. Mongolia last year accounted for a third of those, and it could play an even bigger part in firing its neighbor’s steel mills as China’s mines run out of the high-grade coal required by modern blast furnaces.

The license that Od and his brother Odjargal have to dig up a tiny part of Tavan Tolgoi dates from 2006, a time when foreigners and many locals saw little profit in the remote, inhospitable region. They have since built a small airport, a power station and a coal processing plant — and even tried to build a private railway to the Chinese border, but that got snarled in politics. They are building a road instead.

When Mongolian Mining Corp. listed on the Hong Kong stock exchange last year, investors, impressed by its China prospects, splashed out $650 million to buy 20 percent of the company. That means that Od, president of a holding company called MCS, and his brother, the executive director of the mining company, are billionaires, at least on paper.

Wariness of China

Bitter rivals for centuries, with each ruling the other at various times, China and Mongolia get on for the most part.

But China’s sheer size, its past claims on Mongolian territory and its desire for Mongolia’s mineral wealth stir a deep wariness of what will come from ever-closer ties between an authoritarian and sometimes truculent would-be superpower with 1.3 billion people and a mostly uninhabited, democratic land with a population of 2.8 million.

Asked in a recent nationwide opinion poll “which country is the best partner for Mongolia,” respondents ranked China last — behind Russia, the United States, Japan, South Korea and the European Union.

There are now more students studying Chinese in Mongolia than Russian, once a lingua franca in what was until 1991 an effective Soviet colony. But suspicion of the Chinese is strong, at times rising to the level of hostility.

Nearly a quarter of the 25 Chinese teachers at the Ui-Tsai Secondary School, in the capital of Ulaanbaatar, have been mugged this year. Lou Zhengquan, the head of a Chinese construction firm building a tall office block in the center of the city, said he never walks the street alone and advises his Chinese laborers to stick to the building site.

Around the world, China — much like the United States in the past century or Britain before that — offers hope of greater prosperity but is also a target for anger, fear and resentment, despite its oft-stated insistence that it just wants to do business and doesn’t tangle itself in the affairs of other states.

In the past few weeks, Chinese oil-drilling contractors working for a subsidiary of state-controlled Sinochem have been kidnapped by leftist guerrillas in Colombia, a Chinese hydropower project in Burma has gotten caught up in fighting between Kachin rebels and government forces, and some 35,000 Chinese workers on oil projects and other enterprises have fled Libya to escape violence there.

In April, Mongolia shut down all traffic traveling across the Gobi Desert from Tavan Tolgoi to the Chinese border after protests by nomadic herders furious about convoys of coal trucks throwing up huge clouds of grit and a series of fatal accidents.

Many of the drivers, according to Battulga, the transport minister, were Chinese trespassing deep into Mongolian territory to collect coal.

China has also at times interrupted border traffic. It closed the frontier briefly in 2002 to protest a visit to Mongolia by the Dalai Lama, the Tibetan spiritual leader, who has many followers here.

Limiting China’s clout

Mongolian leaders play down anti-Chinese sentiment and cheer the opportunities offered by China’s growth, but they also try to keep China’s clout in check.

When Mongolia invited bids for the development of huge Tavan Tolgoi deposits still in the hands of the state, it promoted the idea of an alliance between China’s state-controlled Shenhua Energy and Peabody Energy, a coal company based in St. Louis. But the hoped-for Sino-American partnership collapsed, Mongolian officials said.

Now, after repeated false starts, authorities are due to announce a decision soon on competing bids from China, Russia, the United States, Japan and elsewhere. Beijing, Moscow and Washington have each leaned on Mongolia to opt for its candidate.

Making a decision “is not an easy job,” as it involves “big politics, geopolitics and also economics,” said Enebish Baasangombo, executive director of Erdenes MGL, the state company in charge of the bidding process and overall development of state-held portions of Tavan Tolgoi.

Eager to juggle its various suitors, Mongolia will probably ask Shenhua of China, America’s Peabody and Moscow’s entry, state-owned Russian Railways, to develop a big chunk of Tavan Tolgoi together.

Mongolians “are nomadic people” but “cannot just move away from here,” said President Tsakhia Elbegdorj, a former military journalist and a big fan of Genghis Khan, whose grandson conquered China in the 13th century. Geography, the president said, means that Mongolia has to balance the interests of China and Russia while nurturing close ties to the United States.

China and Russia have offered money to help finance Mongolia’s railway-building plans from Tavan Tolgoi. Beijing wants the line to head south and use Chinese-gauge tracks. Moscow wants it to go toward Russia and to use Russian-width track, which is incompatible with China’s network.

For the moment, tangled feelings toward China have trumped linear economic logic. But, predicted Od, the former diplomat in Washington, this will change. China is “like a big vacuum that sucks everything in,” Od said. “We are very lucky.”

Elbegdorj is not so sure.

“The challenge of our generation is how to deal with that sucking,” the president said.

© The Washington Post Company