China's Shenhua Signs First Coal Trade Deal with Mongolia

China's biggest coal producer, the Shenhua Group, has signed a deal to buy 1.2 million tonnes of high-grade coking coal from Mongolia, a move that could help pave the way for the state-owned firm to invest in one of Mongolia's biggest mines.

China's State-Owned Assets Supervision and Administration Commission (SASAC) said in a notice posted late on Friday that the transaction signed by Shenhua's foreign business arm and Mongolia's Energy Resources LLC was the first such deal between the two sides and would "build good foundations for future cooperation in trade and other activities".

Neither Shenhua nor Energy Resources, a subsidiary of the Hong Kong-listed Mongolia Mining Corporation, were available to comment when contacted on Sunday.

Along with Energy Resources and Japan's Sumitomo Corporation (SSUMF) , Shenhua is part of a consortium expected to take over operations at the massive Tavan Tolgoi coking coal mine, close to Mongolia's southern border with China.

Desperate to rejuvenate its flagging economy, the Mongolian government agreed to hand over the construction and operation of Tavan Tolgoi to the consortium earlier this year, but the deal still needs to be ratified by parliament.

An official with the state-owned firm running the mine, Erdenes-Tavan Tolgoi, said in Beijing on Friday that a vote on the issue was due within one or two weeks and could still be rejected.

"We are not sure if parliament is going to approve or not," said Batbileg Batbayar, head of the firm's sales division.

He said legislators were currently deadlocked, with many wanting a more diversified consortium featuring U.S. or Russian firms.

If the investment agreement is approved soon, a $1 billion railway link connecting the mine directly to customers in China could be completed within two to three years, cutting freight costs into China by more than $10 per tonne, Batbileg said.

Mongolia has long been concerned about the increasingly dominant role that China is playing in its economy, but it has struggled to find alternative sources of investment, especially amid a fall in global commodity prices and a long dispute with Anglo-Australian miner Rio Tinto (RTNTF) over the construction of the Oyu Tolgoi copper project.

Batbileg said Mongolia was still hopeful of developing rail links that would allow the country to sell its coal to other countries via ports on Russia's Pacific coast, but conceded that such routes would currently add $50-$60 per tonne to the company's freight costs.

(Reporting by David Stanway; Editing by Jeremy Laurence)