Sector Research

Mongolian Prime Minister Sukhbaatar Batbold has confirmed the Mongolian Government’s preference to retain 100% ownership of the massive Tavan Tolgoi coal project and use a “mining contractor” model.  Therefore, the international tender for equity stake in Tavan Tolgoi is now in doubt. While the equity sale option has not been entirely ruled out, the Government intends to hire a mining contractor to develop and operate the Tavan Tolgoi deposit.

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For decades, national investment vehicles have been operated by a number of countries, but sovereign wealth funds (SWFs) have only recently become important players in global financial markets. Sovereign funds have been around since 1953, when the Kuwait Investment Authority (KIA) was established to benefit future generations of Kuwaitis when the oil stopped flowing. But it is only since the turn of the millennium the SWF’s asset base has grown significantly and that the importance of sovereign funds in the global financial markets has increased substantially. Estimates suggest that sovereign wealth funds have quadrupled in size between 2003 and 2007 and in 2006 alone, the SWF’s asset base grew by US$1,200 billion.

The key economic force behind these funds’ growth is the imbalance in world trade; some countries are running huge surpluses. Funds in Asia, and more particularly in China, have been boosted by income from huge trade surpluses. In addition, the rising price of oil and gas has prompted Middle East countries to accumulate substantial foreign reserves. As a result, middle income countries in Asia and the Middle have become able to assert themselves in international financial markets to an extent unprecedented in modern history.

Overview

Central Asia has become a strategically important region with respect to gas supply security for Europe and the CIS. Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan jointly possess 4.8% of world’s proven gas reserves (about 8.2tcm (trillion cubic meters)). The region is the largest gas supplier for Russian Gazprom and potentially for European Nabucco and Chinese CNPC in the future. Gazprom is channeling more than 60bcm (billion cubic meters) of Central Asian gas to Europe and the CIS, and this figure is growing. The Europe-oriented Nabucco pipeline project is encouraging countries in the region to commit supplies in order to minimize dependence on Gazprom. In its turn, Russia is initiating new alternative routes to Nabucco in order to maintain its position as a primary supplier of gas and its influence on Europe’s energy security. To support growing demand in its economy, China is also trying to maintain and increase its access to and share of the region’s gas. Read more

Eurasia TOP‐50 Resource Companies marketcap up 48.5% YTD in 1H2009

Eurasia TOP‐50’s combined marketcap rose 48.5% to US$1.22trillion in 1H2009 from US$821.6bn at end‐2008. The rise reflects surge in commodity prices: UBS Bloomberg Commodity Index soared 16.1%YTD.

Majors gained 45%

The largest 10 companies, making US$920.4bn in marketcap (75.4% of TOP‐50), gained 45% or US$285.7bn The largest 5 best performers in terms of gain in US dollar were PetroChina (US$107.1bn), China Petroleum and Chemical, also known as Sinopec (US$39.9bn), Gazprom (US$38.1bn), China Shenhua Energy (US$31.2bn) and Rosneft Oil (US$19.6bn).

Metals & Steel stocks outperformed

Metals & Steel stocks increased 69% followed by chemicals (66%), mining (62%), oil and gas (44%) and power and transport (40%) Kazakhmys, a FTSE‐100 member with assets in Kazakhstan, surged 172.7%YTD on gains in copper prices.

Only 4 companies declined

China’s Offshore Oil Engineering is the worst performer followed by Panzhihua New Steel, Irkutskenrgo and Qinghai Salt Lake Potash.

Eurasia Top 50 Resource Companies value fell 67% • Eurasia Top 50 combined market capitalization fell 67% to US$816.4bn in 2008 from US$2.45 trillion in 2007. • The fall reflects sharp commodity price downward corrections: WTI oil prices dropped half YoY, UBS Bloomberg Commodity index plunged 33% YoY. Majors lost 65% in market capitalization • Top 10 making US$639.7bn in market capitalization (78% of top 50) lost 65% both share price and market capitalization (US$1.2 trillion). • The largest 5 worst performers in terms of loss in US$ were PetroChina (US$463.7bn), Gazprom (US$247.1bn), Sinopec (US$167.4bn), China Shenhua Energy (US$114.8bn) and Rosneft Oil Company (US$61.7bn). Chemicals and mining stocks lost less • In terms of share price performance, mining stocks suffered relatively less in 2008, posting an average 60% fall in comparison with 62% in oil and gas, 72% in metals and steel, and 73% in power and transport. Chemicals stocks lost even less, 59%.

Eurasia Capital views that outlook for infrastructure market in Mongolia is positive. The Mongolian government and the Parliament will continue considering the sector as a priority. Launching major mines in the southern region will lead to increased demand for infrastructure services, and, given financing constrains of Mongolia’s internal sources, offer strong investment opportunities. Major mining companies, expected to exploit the mines, may be committed to develop the infrastructure, related to the inside mine area only. The nation’s authorities are likely to offer outside‐mine area to international infrastructure companies in power, water and transport industries. International financial institutions are also likely to continue financially support the infrastructure development in the country. Considering the current low global prices for coal and copper, expecting that the prices for these commodities will rebound soon, as well as recognizing the strategically importance of avoiding futher grow in poverty, the authorities are likely to speed up their efforts in creating and improving legislations and regulations to involve private investors in the country’s infrastructure. With cofinancing and advisory support by the IFIs, the mining companies and interested partners, private investors participation in the market is viewed to grow.

Despite the ongoing financial crisis and heightened volatility, the long-term outlook for commodities is bullish. Planned global economic stimulus spending will fuel demand for commodities. Optimism that the world economy will recover sooner than later will encourage resource companies to increase investments and output to meet future demand. China, Japan, Korea and Russia will be the leading acquirers in the global resource industry to secure supply for domestic consumption and export amid future rising prices, as well as for political considerations. Sovereign wealth funds, in particular those from the Middle East, will also increase their investments to gain attractively priced resource assets beyond their home markets.