ECONOMIST EXPLORES COAL TRADE OPPORTUNITIES FOR MONGOLIA
2016 was an exceptional year for the coal market. In Mongolia's case, its export to China jumped by 85.2 percent to 23.56 million tons last year, putting Mongolia just behind Australia in terms of coal export volume to China.
Local and foreign economists expect Mongolia's export to China to increase this year as China has placed a ban on North Korean coal.
Head of Coal Research Department at the Mineral Resources and Petroleum Authority M.Mendbayar delves into this issue and nearby coal trade prospects in the following interview.
Mongolia's export volume has risen due to the recent coal price spikes. How much coal is Mongolia estimating to export this year?
Local coal producers are capable of exporting at least 70 to 80 million tons of coal a year. Besides the price rate, we must consider coal demands of importing countries to ensure efficient and streamlined operations that maximize profit. Mongolia exports coal to only one country so it’s heavily dependent on it.
Our coal companies will try to sell coal to China even for low prices as long as there’s demand for it. The past few months have been difficult for local producers, but they didn’t stop exporting. All producers are interested in selling raw material and minerals in large volumes to other countries when the situation is good. However, Mongolia exported 25 million tons to China last year because China wasn’t interested in importing more than that.
Miners record annual export forecasts in their mining plan based on their capacity. Our department approves mining plans without making cuts to support their business. However, miners are unable to meet their estimations by the end of the year in most cases. For example, some companies hope to export around 50 million tons of coal this year, but they moderated it in their outlook.
Is it true that Mongolia's outlook for coal export is 23 million tons?
That’s right.
China has announced that it will continue to reduce its domestic coal production. Under such condition, can Mongolian miners hope to increase export volumes?
China is closing a lot of their small mines. As their economy grows further, the Chinese are required to use more energy. This means that their coal use for energy will also increase.
In your opinion, how will China’s coal demand change in the future?
The Chinese economy remains the single largest contributor to world GDP growth, making up nearly 50 percent of it. Their energy and coal consumption will not decrease. I doubt that their policy for coal importation will change in the near-future.
The fact that China decreased the operating days of mining operations to 276 days a year impacted the most in spiking mineral prices. Because the Chinese government banned coal imports from North Korea, there’s room for additional 24 to 32 million tons of coal import.
Foreign economists predicted that coal prices would become cheaper until autumn. How accurate do you think this prediction is?
We must make our outlooks based on the market we’re part of. China’s energy consumption hits the lowest between March and June. The same applies to Mongolia. Heating is stopped during the summer so energy use drops significantly. In China’s case, cold seasons usually end in March. The weather in China became warmer after their New Year’s so their energy consumption gradually shrank since then along with their demand for coal.
However, China’s weather becomes hottest in June and people who live there are forced to turn on air conditioners. We could expect coal demands to increase around that period.
As for coal prices, I think it’s at its most affordable rate. It’s highly unlikely that coal prices would rise back up. In fact, we should brace ourselves for it to drop further.
The Chinese government lifted coal production curbs for large mines just recently. How will this impact mineral prices?
That’s right. The extension to the working days of some miners gives them the opportunity to operate 300 to 330 days a year. The Chinese government is increasing its supply to control price spikes. They will most likely continue to control prices to prevent mineral prices from increasing.
International economists forecasted that coal prices of Australia, the biggest overseas supplier of China, wouldn’t rise so much in the future. World Bank experts estimated that the price of coal would start to drop from mid-2017 and slowly rise from 2019 or 2020.
Mongolia is attempting to increase exports to Russia and China. How will the price of coal impact Mongolia's exports?
Coal is rarely exported to faraway countries because they are heavy and transportation costs are high. In other words, coal producers compete within a specific region. Mongolia sells coal only in northern regions of China. Lately, demands are emerging in Tianjin and Shilong Shandui. In line with this opportunity, Mongolia and China have started negotiations for trading coal. If it’s successful, no other country could be able to compete against Mongolia.
Russian producers need to transport coal through a railway across Russian Far East. Since it’s too far away, the transportation cost will be added to coal prices, making it less competitive against Mongolia’s low price.
Is it possible to conduct long-term trade with Tianjin and Shilong Shandui?
Coal buyers there are relatively stable so we could maintain long-term trade.
Has Mongolia started transporting coal to Tianjin?
A new door has been opened as a result of efforts made by Mongolian and Chinese entrepreneurs. Mongolia could reach a much bigger market beyond Tianjin once it meets their demand.
Anyhow, Chinggisiin Khar Alt LLC, a license holder of one of Alag Togoo’s deposits in Dalanjargalan soum of Dornogovi Province, has struck a deal with a Chinese company to start transporting coal to Tianjin.
It’s said that transportation conditions and high tariffs make it extremely difficult to transport goods across China. Has Mongolia discussed easing transportation terms and cutting tariffs with the Chinese side?
Governments of both sides discussed this matter in the past. Negotiations are ongoing even to this day. The main problem is that transportation agreements are established between two companies. The government has scarce opportunities to interfere and tell them to settle transit transportation issues in a certain way.
Moreover, it seems that the Chinese government doesn’t manage domestic railway transportation issues by itself. Apparently, their logistics and transportation companies that advertise as freight forwarders and export trade brokers have considerable power in China. Hence, there’s a low chance of reducing transportation tariffs through an intergovernmental agreement. Logistics companies set tariffs based on costs.
Since it’s definite that Mongolia will transport coal to Tianjin, can we use it to connect with a third market? Do you see any other avenues?
It’s possible but we must first calculate how much it would cost for companies to transport coal to Tianjin and then to the third market, and whether it’ll require water transportation fees. We must also compare costs with other companies. In other words, how much it would costs for another company to do the same trade.
Besides, everything depends on whether another country apart from Chinggisiin Khar Alt LLC can get a deal to trade in Tianjin.
China imposes tax on coal imports from Mongolia. Last year, they started charging customs duty on imported raw materials. What is the Mineral Resources and Petroleum Authority doing to reduce or lift Chinese taxes?
Earlier this month, the Chinese government went over their 2016 annual report and discussed new goals for 2017. They didn’t mention about making changes to their tax policy on coal imports.
I don’t really think that the fact that local administrations imposed customs duty on imported coal is directly linked to China’s state taxation policy.
Compared to other countries, how is Mongolia’s taxation environment for the mining sector?
Our tax isn’t as high as other countries. There are countries that impose really high taxes. Trends in tax rates and burdens show that Mongolia’s tax rate has been declining in recent years. The average tax for the mining sector used to be between 30 and 35 percent, but now, it’s around 25 percent.
Taxes and fees on construction materials, gold and coal are lowest. In general, around 25 percent of the total sales are projected into the state budget as tax.
Investment in Mongolia is expected to increase. Will investment in the coal sector accelerate?
The investment environment hasn’t improved just yet. Significant amount of investment was made to the coal sector before 2012. They are still giving off yields.
For instance, repayment for the CHALCO deal is expected to end this year. Investors are probably observing to see how much return they would get. Also, the sales and marketing opportunities are limited.
How much money was centralized to provincial and state budgets last year?
It hasn’t been finalized yet.