Natural Resources in Emerging Markets

Chinggis Khan and Marcus Aurelius

Tomorrow I will be traveling with my MIT Sloan classmates to Mongolia. Many people react very weirdly when I talk about my next destination.  Would they react the same way if I’d tell them about a trip to Rome, Italy? Beyond a Mongolian filet, very few things in our day-to-day come from Mongolian heritage. This trip will help us discover the greatness of the steppes and its secret and not-so-secret resources potential. We will discover the land of the largest empire in human history.

 

My fascination for Mongolia started about three years ago on a rainy Sunday afternoon in Puerto Azul, a beach club in Venezuela.  Trapped in a tropical storm, I was talking random stuff with my father.  We were talking on how the Roman Empire heritage touches many aspects of our day-to-day culture: from religion and law to language and technology.  However, the Mongolian Empire, almost quadrupling Roman Empire’s extension, has left very few things to the modern human being, but some chromosomes (around 8% of the Pacific to Caspian ocean populations posses Mongolian genes, according to a study written by T. Zerjal, Y. Zue, et all, The Genetic Legacy of the Mongols, 2003 ⁽¹⁾). Moreover, if the Mongolian empire would exist today, it would cover from China, Russia and Iran to Germany!  Many of us wonder: what happened to the Mongolian Empire that didn’t leave a historical heritage comparable to that of Rome? That answer might be a complex one, but lack of culture, religion and short length of the invasions might probably explain it.

 

So, how is Mongolia today? Well, lets put it in the Chinggis Khan words: “Perhaps my children will live in stone houses and walled towns - Not I". In our MIT Sloan Course Natural Resources in China and Mongolia, my classmates and I are learning about the current historical crossroad Mongolia is going through. In our first class, with Mr. Lawrence and the University of Mongolia, we learned that Mongolia GDP will grow 12.7% on an average yearly basis during the remaining of this decade. 5% of this growth will come from Oyu Tolgoi, one of the biggest mines in the world.  This means that Mongolia will be in the nearest future the fastest growing country in the world. In our last class, we learned from Alicia Campis, President of the US Mongolia Advisory Group, the depth of Mongolian culture.  For example, many people ask themselves how Mongolia doesn’t have a paved road to China, given that 80% of Mongolia trade is with China and they share a ~5,000 Km of borders. Well, the Mongols are not only facing economic questions, but also wondering how to manage this explosive growth without losing their self-identity to their neighbors.

 

I look forward to meeting the Mongols. I am very fascinated to talk to them in their own land, and understand how they will build their economy taking into considerations the social aspect and identity of the Mongolian people.  This will be something I will put special attention when we meet the Mongolian Finance Minister, Government representatives and business leaders. However, I also look forward to immerse in the nomad culture next weekend when we sleep in the yurts. I must acknowledge though, that as a Venezuelan I don’t look forward to riding a horse at -30 Celsius in a dust storm. However, this will help me understand the life of the Mongols during springtime.

 

Finally, I look forward to leave Mongolia with a sense of fulfillment. The Chinggis Khan was with no doubt one of the greatest leaders of the last millennium. His strength, sense of purpose and law enforcing systems created the Clan Unions and consequently the Mongolian identity. These strengths have been present through history. Only 73 years ago, the Mongols successfully defended their land from Japanese invasion with a primitive, Chinggis Khan style cavalry. Today, that sense of pride is alive, more than ever. Nonetheless, Mongols should leverage on their historic leader courage, and combine it with traits from other leaders. Marcus Aurelius, a Roman Emperor, was a successful conqueror, one of the best, but also one of the greatest Stoic philosophers of history. If Mongolia can leverage on their more than $1trillion natural resources potential ⁽²⁾ to develop its own people, their second historical chance of expansion will be, this time, long-lasting.

 

(1)  http://web.unife.it/progetti/genetica/Giorgio/PDFfiles/ajhg2003.pdf

(2) http://www.theatlantic.com/international/archive/2011/11/could-mongolia-be-the-next-dubai/248136/

 

The Benefits of a Study Tour

    This is a reflection at the end of the semester of my study tour experience, and most importantly how it changed me and brought some great new perspectives and interests into my life.

Friends:

    After spending 2 weeks travelling in the wonderful craziness that are both Mongolia and China and sharing funny stories, travel mishaps and most importantly amazing discoveries, I can now comfortably say that the group of students who went on the China/Mongolia study tour with me, we are tight! We’ll cross in the halls, share some memories, call each other by newfound nicknames. We had a party to get back together and hang out (and perhaps taste some of the delightful culinary prizes we were able to bring back). Of my experience at Sloan, this is one, where I feel like I have had the opportunity to truly bond with great people. It helps that we all had some interest in the two countries and so had a common bond. Speaking of interests, every so often now students will send out some interesting news article or tidbit about the country or companies we saw. This leads me to my next point.

Newfound interests:

With all the amazing companies we met, and hearing their stories of their work, you are bound to discover something new or enhance a passion for something you know you already like. For me, the enhanced passion was natural resources. Going to Mongolia and getting to hear the panoply of people talking about how natural resources were impacting them was fascinating. I have always been interested in large primary industry companies. Hearing the CEO of Oyu Tolgoi, (de facto CEO of Rio Tinto Mongolia) really opened up my ears to the challenges in an industry like mining. From that meeting and then a subsequent course at MIT, I was able to dig a bit deeper into that interest and write  a research paper on a  new form of mining, deep sea mining!

But enough about crazy newfangled technologies, what about the discovery side? For me, discovery was international development. I honestly in the past associated international development as really narrow focused work, helping an area building schools here, providing money for wells here, and was not satisfied with this idea of international development. I couldn’t understand how people were actually helping each other. In Mongolia, learning about the role groups like the International Finance Corporation play and hearing countless stories about how a whole country was going to go from one of the poorest to one of the richest in only the span of a generation, I finally understood how international organizations and how focused development could help. I am now wondering if there is a role I could play in these organizations.

So, looking back, as I was debating signing on to the study tour, I remember my thoughts. There were many other opportunities of treks and trips, interesting conferences, but I will never regret going to on the China/Mongolia study tour. Simply put, it was an awesome experience and brought me so many new good stories to tell. Thank you Ted, Fan, JJ, Ian, Wes and Roberta.

Africa is China's China

Having spent the last few years working in Africa, I have a perception of China that has been flavored by their implementation of large-scale infrastructure projects in countries like Kenya and Rwanda. Roads and buildings are going up in Nairobi and Kigali at a staggering speed and scale.

Throughout our trip, we repeatedly heard from Chinese companies about their strategic interests in Africa. Goldwind, the world’s second largest wind turbine manufacturer, recently built a 50MW wind farm in Ethiopia, and is planning additional capacity in Sudan. China Machinery Engineering Corp. (CMEC) also does a lot of work in Africa, focusing on construction of new plants due to a less developed and structured energy sector. CMEC’s main competitors in Africa are other Chinese companies. Sinopec, China’s 2^nd largest oil and gas producer, is also focusing investment on the Middle East and Africa.

There has been a lot of media frenzy around China’s investment in Africa recently. According to an article in last month’s Economist, China is Africa’s biggest trading partner and buys more than one-third of its oil from the continent.

In the mining sector, African countries have mixed feelings about Chinese investment. Sinopec, for example, recently “explored in a Gabonese national park. Another state oil company has created lakes of spilled crude in Sudan. Zimbabwe’s environment minister said Chinese multinationals were ‘operating like makorokoza miners’, a scornful term for illegal gold-panners.”[1]

It will be interesting to see how African sentiment evolves towards Chinese companies in the next few years, with China expected to invest $50 billion annually in infrastructure deals.

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[1] “The Chinese In Africa: Trying to Pull Together,” The Economist, Apr 20 2011, Available at http://www.economist.com/node/18586448

Food and Diversity in Xi’an

One of the side trips that we made on our trip was to take the train from Beijing to Xi’an. Xi’an is the capital of Shaanxi province, and is located about 690 miles west of Beijing (12 hours on the overnight train). It is one of the oldest cities in China – the old city walls are still standing – and is home to approximately 8 million people. Walking around Xi’an during lunch and in our free time, I was struck at the cultural diversity in the city, both in people and in the food.

Minority Groups in Xi’an

One significant minority group in Xi’an is the Muslims. As one of the first cities on the Silk Road, Xi’an attracted many traders from the Middle East as early as 1^st century BC. In addition to bringing their wares, they also brought their religion. According to our guide, Islam has been thriving in Xi’an for almost a thousand years, and was officially brought to China when an Islamic prophet was sent to teach Emperor Gaozong about Islam. The first Muslims in Xi’an were traders from Iran, Iraq and Afghanistan, and there are about 60,000 Muslims today, mostly from the Hui minority. Most of them stay behind the main Drum Tower in Xi’an, in the Muslim Quarter (Islamic Street) and worship at the Great Mosque of Xi’an, which was built in the 7^th century.

What impressed me was how well this group had integrated itself into the city. Walking down the street, many Muslim women were wearing headscarves, but were chatting happily to the other street vendors in Mandarin, who where non-Muslim. Many of these ladies were selling Islamic snacks, such as lamb skewers (a spicier version of our kebab), and flatbreads, which were enjoyed by locals and Muslims alike.

Food Culture in Xi’an

Eating in Xi’an was a completely different experience as compared to Beijing, in part because the cuisine was a blend of Chinese and other cultural influences. One dish that I found particularly interesting was Yang Rou Pao Mo (Mutton Stew with Bread). Served in many restaurants near the Muslim Quarter, this was a hearty mutton stew that was cooked with sweet garlic, spices, pieces of crumbled unleavened bread soaked in the stew, and some glass noodles. It tasted Chinese, and yet had influences from the Far East (unleavened flat bread).

Another street snack that I enjoyed was Jing Gao (Mirror Cake), which was a flat glutinous rice cake steamed in bamboo steamer. After the vendor tapped out the cake, it was dusted in sugar, peanut and sesame seeds and served on a bamboo skewer pierced on its side. The result: it looked like an edible handheld mirror, and was absolutely delicious. In addition to these, the entire neighborhood was packed with vendors selling Chinese and Islamic snacks – peanut candy, piles of bean pastries, spicy grilled rice cakes, and buckets of dried dates and persimmons.

 

If you ever think China is a culturally homogenous society, look again. China has had a rich history of trade with other countries: my two-hour experience in the Muslim Quarter was just a little peek into all the influences that have been mixed in over the centuries.

 

 

 

The growth story of China Wind Energy Industry

Over the past five years, China’s Wind energy sector has experienced significant growth. According to the Global Wind Energy Council (GWEC), China’s annual wind energy capacity installation grew at the rate of 92% CAGR from 2005 to 2011, and in 2011, China’s cumulative capacity is at 63GW, which surpassed USA’s 47GW and made China become the world’s largest wind turbine market. In 2011, China has accounted for 44% of the new total global wind capacity installations. In only six years, China has become the most important country in the wind energy industry.

In my mind, the fundamental of the Chinese wind energy growth story was driven by the three following major reasons: 1) Policy toward renewable energy 2) Wind energy is the most cost-efficient, mature, and feasible renewable technology for policy makers. 3) Policies favorable to Chinese domestic wind energy players. Here, I would like to briefly discuss these reasons. Currently, Coal has accounted for 70% of China’s primary energy needs but is also the major sources of the pollutants and greenhouse gases. With the aim of improving the pollution status and the needs of diversification of energy usage, Chinese government has formed two important policies for renewable energy industry:  1) The Renewable Energy Law in January 2006 (amended in 2010), which created a clear framework and incentives for renewable energy stakeholders, and 2) The Medium and Long-term Plan for Renewable Energy Development in China in September 20007, which set a clear renewable energy target for China government with the aggressive target that expect renewable energy account for 10% of the primary energy needs in 2010, and 15% of the primary energy needs in 2020. Also, with the aim of building Chinese own wind energy supply chain, Chinese government created a domestic-favorable policy “Notice on Wind Power Generation Facility Construction and Management Requirements” in 2007, which requested that 70% of turbine must be domestically produced and thus cause the strong market share growth of domestic wind energy players in China, in contrast to the structural market share loss on the foreign wind energy players side.

Takeaways from visiting the China Wind Turbine Players

For me, the most exciting thing in the trip would be the company visits opportunities with the leading wind energy players in China. During our two weeks study tour, we visited Vestas, the largest wind turbine maker in the world and the first foreign wind turbine maker coming to China, and Goldwind, the largest wind turbine maker in China. After the visitings, I found a significant competitive disadvantage for foreign players in China, majorly because the government has formed a policy we mentioned previously that requested 70% wind turbine in China to be domestic produced and this policy combined with the natural of the government wind project will favor state-owned wind energy companies more than domestic private-owned than foreign private-owned companies. Therefore, I have seen a clear trend of Chinese domestic wind energy player gradually gaining market share and wiping out the room for growth for foreign players, even though the foreign players have the advantage of R&D and operational track record in the wind farm.

Although the 70% domestic produced requirement was removed in 2009, the competitive landscape has already been changed and the Chinese players are becoming more aggressive in the global markets now. I have seen Chinese companies become larger and larger and now during our visiting at Goldwind, I found its aggressive international expansion plan under its Direct-drive proprietary technology interesting. The recent industry rumor that China’s domestic players Sinovel and Goldwind want to cooperate to bid to acquire Vestas, the largest wind turbine maker in the world is also the demonstration of Chinese players’ ambition in the global wind energy market.

Thoughts about the traffic in Beijing

If you are first time visit Beijing, you will be surprised about the inefficiency of the Beijing transportation. Usually it will take 3X of the time Google Map tells you for you to communicate, and in the rush hour, it would be even worse. Understanding of the current situation of Beijing transportation, I think there is a huge room of improvement for the Governor to increase the efficiency of the city transportation and thus increase the economic productivity of the city. If you are an entrepreneur who always want to think of an idea to solve people’s problem and earn money, it might be worth for you to study about the value-chain of the Beijing transportation infrastructure system and find out your own niche under this huge opportunity. If you are an real estate developer or investor, it might be worth to take a look at the historical city planning pattern to see if there is any area that has the higher possibility of being chosen as the next fast-speed transportation solution’s stations, and thus the price of the land and the housing surrounded the chosen stations would have chance to outperform the market. I am not an entrepreneur and not an real estate developer, I would like to see if there is other alternatives besides Beijing for me to live, so I could better utilize my time wisely. 

Thriving Entrepreneurial Community in Monoglia ~ Great Surprise!

Looking back on our trip to Mongolia, I can't help but not think how exciting the entrepreneurial community is in Mongolia. When you think of Mongolia, you think nomadic heritage, mining, even lamb (!) -- not necessarily entrepreneurship. But innovation and drive is what I saw at the Startup Weekend that we attended. I was so impressed by the pitches that we saw and the level of buzz and activity in the room. All of the people who attended the conference were there to meet people, get to know us from MIT and ask for advice on how they could improve their ventures. One person that struck me the most was an app developer. He told me that he did not finish college and instead taught himself how to program. I asked him how he learned to program, and he told me that he watched all of the free video lectures from the MIT and Stanford websites! I was completely blown away by this. Such conviction and resourcefulness are so rare even in the West, let alone an emerging economy like Mongolia. He even showed me his app which was a type of social networking tool. Everyone there had ideas around tech, mobile, social networking, health care, and many more. It was so refreshing to see and hear all of the ideas.

I was also very impressed by Startup Weekend Mongolia themselves. SW Mongolia is a local non-profit, founded in June 2011 by a community of Mongolian entrepreneurs and leaders. The organization strives to inspire, educate and support entrepreneurs that generate social values. Startup Weekends are 54-hour events where developers, designers, marketers, product managers and startup enthusiasts come together to share ideas, form teams, build products, and launch startups! The organizers have held 3 events to date and have helped educate over 300 entrepreneurs in Mongolia thus far.

I am sure that we will see some exciting and innovative things to come out of the Mongolian entrepreneurs!

Mongolia's Future: Counting on its Youth

Reflecting on the Mongolia visit, I was really struck by how extraordinary the youth of Mongolia is. Mongolia is a young country; the median age is approximately 26/27 years old! One of Mongolia's young leaders that really impressed me was Enkhmunkh Zurgaanjin who happens to also be an MIT alum. Enkhmunkh got his B.S. in Computer Science from MIT and Masters in Education from Stanford. In my short conversation with him, I was impressed by his drive to help educate the youth of Mongolia. He is currently the Principal of the Sant School, which is ranked number 1 in Mongolia in terms of national entrance examinations for the last six years. He also initiated the On Laptop Per Child program in Mongolia in 2005, successfully deploying more than 10,000 laptops.

Enkhmunkh is also part of the Global Shapers program in Mongolia, which is led by Ganhuyag Chuluun Hutagt, the Vice Minister of Finance. Global Shapers are young extraordinary individuals with great potential for future leadership roles in society. They are 20 to 30 years old at the time of nomination. Shapers are organized in a network of local hubs based in each major city around the world. They undertake events and activities that generate a positive impact within their local community. We had the opportunity to give a presentation about MIT Sloan to the Global Shapers in order to raise more awareness about MIT and the MBA program. I was very impressed to see the eagerness by these members for higher education. I think this is a great opportunity for them to attend MBA and collaborate with students from around the world on how to tackle problems in developing economies. I was also so impressed by Vice Minister Gan's strong involvement in the organization. It is rare to see such high level of commitment and involvement from a senior level government official.

Mongolia's future is in the hands of its youth. Based on what I see, the future looks very bright!

Chinese Hospitality: CMEC and Quan Ju De Experience

Reflecting back on the China & Mongolia study tour, I can't help but remember the great Chinese hospitality we received from CMEC at Quan Ju De 全聚德.

I felt very honored that we were able to meet the most senior level management including, Yang Wansheng, Chairman (and also MIT alum!); Zhang Chun, President; Ai Wei, Assisstant President and Wan Qian, Deputy General Manager, among others. Besides hosting a lively discussion about CMEC, we were also treated to an amazing and traditional dinner at Quan Ju De, the oldest Peking Duck restaurant in Beijing. Quan Ju De was established in 1864 during the Qing dynasty. The roast duck is famous because of Quan Ju De's exceptional quality. During the dinner, staff from Quan Ju De explained how each duck receives a special certificated of quality. The duck is hung in the oven and roasted over fruit-wood for 45 minutes. The finished duck has crispy skin and tender meat which is separated and eaten with thin pancakes, scallion slices and sweet sauce. We had fun at our table eating the duck and helping other classmates who had never tried the dish before.

In addition to the amazing food, we were also able to meet other members of the management team from CMEC. I was really impressed by how much time they took to get to know us and spend time asking us questions about our trip and offering any assistance to us. It really shows their commitment to supporting education and institutions like MIT. I was very happy to meet them and learn that not only does CMEC have an active role in China but it also plays an even larger role in international projects.

The Saga of Oyu Tolgoi

Oyu Tolgoi is the  name , meaning “Turquoise Hills”, of one of the world’s largest undeveloped copper/gold resources.

Located in the Southern Gobi desert, it is an unique complex project with an interesting history influenced by commodity prices, a developing nation, international mining players and incredibly difficult logistical challenges.

A matter of timing: the links between Arizona and Mongolia

In the 1980’s, a joint Mongolian Russian team surveyed the area and reported a molybdenum anomaly.[i] In 1996, a Mongolian geologist noticed indications of copper in this area and introduced Magma Copper, an American mining company, to it, who subsequently secured exploration tenements. Magma was a major  copper company with a long history in the American Southwest and Arizona.

In late 1996, BHP Billiton was looking to grow and become one of the largest copper producers. Magma was acquired by BHP Billiton for $ 3.2 billion dollars. It was the largest takeover of a foreign company by an Australian and it would be one of the most disastrous. Shortly thereafter in the late 90s, the price of copper tanked, and BHP Billiton found itself closing down the assets it had acquired and selling off what it could.  The prime copper mine in San Manual, Arizona was shut down.

I’ve attached a great video I found of the story of the mine closure:

 

 

But the loss of BHP Billiton and San Manuel was also the gain of Mongolia.

In the early 2000’s, Ivanhoe, a  midsize mining company based in Canada led by Robert Friedland, a colourful character in the mining world, bought the rights to the Oyu Tolgoi site from BHP Billiton. With a reputation for leading exploration in difficult mining properties and often being “ahead of the curve”, Robert Friedland saw a golden opportunity (“literally as most copper mines are associated with gold deposits”) and took it.  

See here for a slightly hilarious article of Robert Friedland. It glosses over his mining achievements but does give a bit of color to his eclectic history.

http://articles.businessinsider.com/2011-10-24/tech/30315390_1_steve-jobs-summitville-mining-interests

Continuing a drilling program that BHP Billiton had started, in late 2002, Ivanhoe drilled in the far northern zone of their Oyu Tolgoi license and confirmed a large underground deposit of one of the world’s highest grade gold/copper porphyry systems.[ii]

 

Development: sharing the pie with the big miners

Securing the adjoining licenses, they then entered into agreement with Rio Tinto for development of the mine.  As development of a mine in the Gobi desert would present significant logistical and challenges, notwithstanding the financing for all the infrastructure and operations, a large player like Rio Tinto was now needed. Rio Tinto is one of the largest diversified mining companies in the world.

Oyu Tolgoi's average annual production estimated at 1.2 billion pounds of copper, 650,000 ounces of gold and 3.0 million ounces of silver for the first 10 years of production.[iii] Production is scheduled to begin in 2013.

Study Tour and Oyu Tolgoi

In the midst of full ramp up to production, we got to go to the corporate offices of Oyu Tolgoi (or “OT” as it is known in Mongolia) and meet with Cameron McRae, President and CEO of Oyu Tolgoi LLC. What an amazing task he has to run the construction of a mine in a remote desert ( -40C in winter, + 40 C in summer) without road. We heard about all the challenges of bringing in power with new lines from China, finding ways to use water wisely in a desert, develop a workforce in Mongolia and essentially build a city with all needed resource such as recreation centers and grocery shops,  not to mention maintain relationships with the government. The ultimate general management task!

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[i] (Ivanhoe)

[ii] (Ivanhoe)

[iii] (Ivanhoe)