Russian export rules are again affecting B.C. business.
SouthGobi Resources (TSX:SGQ) said in May that Russia had dramatically cut fuel exports to Mongolia where the company operates a coal mine.
The situation results from a fuel deficit in Russia, which is the primary fuel supplier to a number of Mongolian businesses.
SouthGobi said its Russian fuel supplier would not be able to meet its contracted supply of fuel in May, forcing the company to look elsewhere for diesel for its trucks.
The Vancouver-based company, which has operated its Ovoot Tolgoi mine in Mongolia since 2008, had 722,000 litres of diesel on hand when the news was made public, and quickly secured an additional 2.8 million litres from another supplier.
That should keep the mine running for another month, but president and CEO Alexander Molyneux isn’t concerned that it will shut down.
“I think SouthGobi is well covered to last out beyond when the issue is resolved,” Molyneux said. “The issue is hugely substantial for Mongolia, and Mongolia is a very strategic country for both Russia and China. So I expect this issue could be resolved in the next month to three months.”
Salman Partners coal analyst Mike Plaster believes there is “considerable risk of production curtailments” at the mine if the situation can’t be resolved soon.
That could spell trouble for the company, which recently posted its second-highest quarterly revenue since the mine began operations.
“I’m concerned … but I think they have a quarter or two to work it out,” commented BMO Capital Markets analyst Meredith Bandy.
She noted the company had 800,000 tonnes of coal stockpiled, so even if the mine runs out of fuel the company still has several months worth of coal ready for customers.
Meantime, there’s no word when the Russian government might lift export duties, forcing SouthGobi to negotiate with other countries in the region for alternative supplies of fuel.
Molyneux said Kazakhstan is one option; China is another. Unfortunately, China is also facing a fuel shortage, and because Chinese authorities subsidize diesel for local use, it’s unclear whether it’s even legal for that country to export fuel to Mongolia.
“It’s very uncertain whether that could be achieved,” Molyneux said.
Several other Vancouver companies, including Ivanhoe Mines (TSX:IVN) and Prophecy Resource Corp. (TSX-V:PCY), have projects in Mongolia, but haven’t said if the fuel shortage affects them.
The fuel situation isn’t the first time that Russia’s export rules have affected B.C. business.
In 2007, Russia introduced a 25% tax on log exports to improve business for its sawmills. The move caused China, which traditionally sourced its logs from Russia, to look elsewhere.
One of the places it looked was B.C.
That’s fuelled demand for B.C. logs in China, but in December Russia announced an agreement with Finland to slash its export duties in a bid to join the World Trade Organization. Russia has yet to say if it will come to a similar agreement with China, but according to Washington-based Wood Resources International LLC, Russia increased log exports this year for the first time in four years.
Wood Resources president Hakan Ekstrom said total softwood and hardwood log exports were up 40% in the first few months of this year, primarily to markets in China, Finland and Japan.
Ekstrom expects the trend to continue throughout the rest of the year as log export taxes are reduced.
But Russ Taylor, president of International Wood Markets Group in Vancouver, said the numbers don’t add up.
According to Taylor, Russia’s log exports to China were up only 2.7% in the first three months of 2011 while exports to Japan remained at record-low volume levels. That means if Russia’s log exports have increased, the product is largely destined for markets in Finland, where B.C. exporters don’t compete.
On top of that, Russia has remained quiet on whether or when it might reduce export taxes, and Taylor said the global recession has left its industry fractured. As a result, B.C. log exporters shouldn’t fear a resurgence of the Russian bear any time soon.
“Their infrastructure has been destroyed,” said Taylor. “The export tax started the ball rolling, but the global economic recession caused huge dislocations of their industry (see “Jobless recovery in B.C. forests is shortchanging communities”, page 29).