China’s Ban on North Korean Coal Supplies Is A Silver Lining for Mongolia

Mongolia’s coal exports up nearly 500%, courtesy China’s ban on North Korean coal supplies

While the copper (CPER) and gold (GLD) mining industries in Mongolia have increased foreign investment to look forward to, the coal (KOL) industry has a slightly different outlook. May 2017 saw Mongolian coal exports to China (FXI) (YINN) surge 42% from a year ago to 3.16 million tonnes. China’s ban on North Korean coal supplies proved to be a silver lining for Mongolia which quickly stepped up to fill in the supply gap, along with Indonesia (EIDO). The nation is a large supplier of anthracite coal that is widely used by the steel industry. Mongolia’s overall coal exports had risen by nearly 500% as of May 2017, primarily driven China’s aforementioned ban on North Korean anthracite coal supplies. With global coal prices rebounding, the boost in exports was particularly lucrative.

China halted all coal imports from North Korea in February for the rest of 2017 amid growing tensions in the Korean Peninsula following the test firing of the Pukguksong-2 medium long-range ballistic missile, which China viewed as a provocation.

Cyclone Debbie may bring further windfall to Mongolia

Cyclone Debbie in Australia (EWA) (March 23- April 7), which affected areas including Queensland, New South Wales, and New Zealand, also resulted in a significant shortage in the global coking coal market. This led to a sharp increase in coking coal prices, again, benefitting Mongolia’s case.

Energy sector attracting investment too

And, it’s not just metals and mining that’s attracting investment into the economy. In an announcement made in mid-June, the World Bank committed to contributing $54.4 million towards reliable electricity and renewable. The funding will include assisting in the development of the country’s first large-scale, 10 MW solar PV power plant. “We are encouraged by the government’s target to increase the share of renewables to 30% by 2030. With its abundant solar and wind power resources, the country is now considering to more effectively and efficiently incentivize renewable energy investment to fully use its potential,” said Peter Johansen, Senior Energy Specialist at the World Bank.

Read Three Reasons Why Investors Are Still Betting on Mongolia to understand more about why investors have continued to bet on this Asian (AAXJ) (VPL) nation.

Why Peru and Colombia Have a Higher Spread of Profitability than Emerging Markets Globally

Higher profitability + idiosyncratic opportunities

Felipe Asenjo, regional head of equities at SURA Asset Management sees valuable investment opportunities in the Pacific Alliance countries of Mexico (EWW), Chile (ECH), Columbia (ICOL) and Peru (EPU). Asenjo expects companies in these regions to grow at 17% CAGR over the next 3 years. “The Pacific alliance has always had a higher spread of profitability than global emerging markets… the second region in the world in the last 15 years with the highest delivery of earnings growth,” said Asenjo.

Meanwhile, Diana Kiluta Amoa, senior portfolio manager on the local-currency team at JP Morgan (JPM) Asset Management sees idiosyncratic investment opportunities in Peru and Colombia.

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Private investment in Peru (EPU) is expected to bounce back and grow 0.5% in 2017 and gradually reach 6.5% growth by 2021, according to the Economy and Finance Ministry. The Ministry expects greater infrastructure investment due to the resumption of projects linked to Brazilian enterprises, to be the primary driver of such growth. The agency also expects increased mining activity to boost private investment. The Finance Ministry also forecasts public investment to rise by 15% in 2017 and in 2018.

The Peruvian economy has already shown its resilience towards the El Niño phenomenon (causing heavy rains and flooding), by slowing less than expected. Prudent actions taken by the central bank such as cutting interest rates should “boost activity” and put Peru on track towards an expected 3% overall economic growth, claims Prime Minister Fernando Zavala.

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According to Santiago Angel, head of the Colombian Mining Association, enormous potential lies on offer in the mining industry (XME) in Colombia (ICOL), which serves as a major growth engine for the economy. Angel sees the industry bringing in a whopping $1.5 billion in 2017 and $1.7 billion in 2018, with a five-year investment of $7.5 billion; provided the government guarantees legal certainty to businesses. Coal (KOL), gold (GLD), and copper (COPX) remain the three main mining sectors in Colombia.

AngloGold (AU) and Eco Oro Minerals (GYSLF) are the larger players in Colombia’s gold sector. The biggest coal companies are Drummond, Glencore (GLNCY) (GLNCF), Murray Energy, Colombia Natural Resources, and Cerrejon, which is jointly owned by BHP Billiton (BHP), Anglo American Plc (AAUKF) and Glencore.