The Mongolian Mining Journal /March.2022/
Even though the price of coal is reaching its peak in the international market and drives the growth of our country’s exports, there are still delays to process shipments at the border due to the pandemic. At the same time, a number of Mongolia’s commodity export railways are being finished. Journalist from MMJ, B.Tugsbilegt, spoke with J. Zoljargal, the Executive Director of the Mongolian Coal Association.
Rising coal prices show that there is great opportunity, but Mongolia’s coal exports are still declining. In the first two months of the year, coal exports were 3 million tonnes less than in the same period last year.
At the time of the mining boom, there was speculation that our country would reach the level of Canada and Australia. The difference is that they have a market with multiple direct access routes to the sea, whereas our market is very small and has a very poor logistics system. This is our main weakness. Therefore, if we want to develop our mining industry, we need to improve transportation and logistics. We came to realize during the last two years that having more resources is not the main advantage. I think it’s huge progress that people who initially didn’t understand have finally accepted hard realities.
In order to benefit from rising coal prices, we need to develop logistics. We have important raw materials, but we can’t export them. Customers also don’t buy them. The reason for this has long been associated with the pandemic. We’ve been using this excuse for three years. There are reports that the numbers of infections are growing in China. So again, there are fears that this situation will not improve for a long time.
In addition to the pandemic, the international order is changing due to the sudden war between Russia and Ukraine. In this case, infrastructure, especially railways, are very important. In recent years, the railway projects have made significant progress.
There was hope that the completion of the Shiveekhuren and Gashuunsukhait coal terminals would help to expand coal exports. Why are exports through these two border stations not increasing?
The construction of the terminal was designed to increase exports. Currently, coal is exported in containers through the Gashuunsukhait terminal. But the export volume is small. Our companies propose to the Chinese side to increase their purchases of coal. The Chinese express their willingness to buy more, but complain that the export volume from Mongolia is not sufficient. In other words, they say that our exports are not well organized.
There were cases of COVID infection among people who worked at the container terminal. Although the terminal follows strict COVID protection protocols, infections continue to occur. So the parties agreed that infection control at the terminal should not be loosened. Low export volumes mean that organizational requirements are met only to some extent. In reality, however, it is unclear why exports are not increasing.
Agreeing on an opening date of this terminal was expected after a commission from China worked at the Shiveekhuren border station on 15 February. Unfortunately, there is still no decision made. At Shiveekhuren border station, the terminal is almost complete, and they are waiting for the truck weighbridge stuck on the other side of the border for months. Coal exports through the border point have been stagnant for almost half a year. This is not a normal situation. I don’t see it as a good thing for bilateral relations. The Chinese say that such COVID-related requirements are applied not only to Mongolia, but to all countries sharing land borders with China. Both countries are members of the World Trade Organization. Mongolia established a comprehensive strategic partnership with China. Because our economy is fragile, I think we need to regularly remind them as good neighbors to focus on our trade relations.
Construction of the Zuunbayan-Khangi railway is underway. How do you think the coal industry would benefit from it?
As number of export channels increases, so do opportunities. The coal market has been changing a lot. Demand sometimes grows and sometimes declines. China is a country that regulates its coal industry. The country’s coking coal consumption is relatively stable, while thermal coal consumption sometimes increases. In the case of thermal coal, Mongolia must be prepared for change in demand due to shortages caused by global events or other reasons. Small changes on the Chinese market will have a big impact on Mongolia. If we improve our logistics and manage to supply larger volumes when needed, we can earn a lot of money. In that sense, the Zuunbayan-Khangi railway is very important for the export of thermal and coking coal. There are other mineral deposits in this area. I agree that the Tavan Tolgoi-Gashuunsukhait railway should be built first, and then extended towards the east. Construction of the railway to the east is the right thing for Mongolia. After all, we have the goal to cover the whole country with a railway network. We have no choice but to take advantage of the mining industry to build the railway.
The price of thermal coal is rising. Will there be new opportunities for our coal industry? The Chinese experts said at the Coal Mongolia conference that exporting thermal coal is not very profitable for Mongolia. Is the situation changing now?
Growth in thermal coal consumption stalled due to policies against climate change.
The growth is declining, but overall, the demand will continue to be stable for many years to come. I think this is a more realistic explanation. It is impossible to stop using coal. But it is possible to stop consumption growth. China consumes 3.8 billion tons of coal. This is a very large amount. Fluctuations of 2-5% in such markets are normal and happen regularly. It makes no sense to say that coal consumption will not grow due to climate change and we will lose our market.
If we manage to take advantage of slight price fluctuations, there are tremendous opportunities for us. Therefore, to be prepared, we need to resolve our transportation and logistics issues. Now, the price is high, but the companies can not export coking coal, and some entities can’t even increase their price because they could not complete their contractual obligations signed two years ago, and have accumulated a lot of debt. At the same time, we cannot take advantage of the increase in thermal coal prices. There is a great opportunity, but we can’t use it. Besides that, we face the issue of customs and borders again. We need to learn to speak about raw materials. Knowledge and logistics are needed to turn raw materials into wealth. Otherwise, it will still be just raw materials.
Due to the Russia-Ukraine war, energy prices are growing sharply. They may decrease over time. However, as mentioned earlier, small changes will have a big impact on our country; so it would be an exaggeration to say that coal will no longer be needed. Instead, it would be better to settle the border and customs issues and decide how to build the infrastructure.
The Tavan Tolgoi-Zuunbayan railway is being commissioned. The Zuunbayan-Khangi railway is scheduled to be commissioned in September. Exporting iron ore through Khangi will reduce the transportation pressure on Zamyn-Uud by eight million tons of freight. Will there be more opportunities for exporting coal through Zamyn-Uud?
We talk about exporting to third countries. Two years ago, it was reported that an agreement was reached to provide mutual tariff discounts on rail transportation between Mongolia and Russia. There is a similar agreement with China. As a result of the reduction in transportation tariffs, the costs of transporting coal to Vladivostok and Tianjin are similar. However, tariffs are still relatively high. Coking coal is estimated to be profitable if it sells for more than $200 per ton. If the price rises above $300-400, then I see an opportunity to export our coal to third markets.
Therefore, if iron ore is transported along Zuunbayan-Khangi route, it is possible to export coal to the third market through the international gateway in Zamyn-Uud. But China’s Erlian city is becoming a major hub connecting three countries. Erlian city’s priority is to transport more expensive goods and products. This means that there is less interest in shipping bulky cheap goods through modern large cities. There is a belief that it may be more appropriate to transport minerals via the Khangi-Mandal route. We have talked about accessing international markets for many years, but in reality we are not able to do it. It is unclear whether the Khangi border station will achieve international status.
Oil and gas prices are rising. What do you think about energy prices in the long run? Western economic sanctions against Russia are likely to continue for some time.
The world is going to be different if a direct ban is imposed on Russian oil and gas because of the current war. Russia’s revenues will instantly drop. The infrastructure to supply oil and gas to China is not available yet. There was a question on what would happen if the West didn’t buy oil and gas. The European Union is likely to continue to import oil and gas for some time. At the same time, exports from Russia to China will increase. International analysts say that China will not support Russia even if it doesn’t join the international sanctions. If the West that imposed sanctions still keeps buying oil and gas from Russia, why China who didn’t join those sanctions should not do otherwise? That is the logic.
So the Chinese will keep buying oil and gas. During the Winter Olympics, the presidents of Russia and China signed an agreement on the Sakhalin gas pipeline before Russia sent troops into Ukraine. The gas pipeline project through Mongolia has been under intense discussion for the past two years. This confirms the prospects for China buying more. We talked for many years that the world will have multiple centers against Western dominance, and that Russia and China will join forces. I think that strengthening trade relations between the two neighboring countries is the foundation for future cooperation. Therefore, the trade in natural gas and oil will gradually shift to the east.
It is clear that energy prices will stay high. This is because as supply drops and risks increase, prices also grow. Second, assuming the war is over, sanctions and tensions will not ease so quickly. Russia is criticized by the West for using energy as a weapon and as political leverage. There is information that Russia now owns 60% of Venezuela’s oil companies. So Venezuela became one of the world’s largest oil suppliers. If Russia’s influence in Venezuela is high, then its influence in the global energy market is also high.
And if they don’t settle their issues with the West, the price will remain high. If natural gas and oil prices are high, coal prices are likely to be high. These things are always connected. It means that energy prices are increasing. Interestingly, even if this war didn’t happen, it was clear that energy prices would have risen. Fuel consumption began to decline due to climate change. The economy is based on fuel, therefore the demand for fossil fuel wouldn’t drop significantly. The tax on carbon emissions or carbon tax has been discussed at the United Nations for many years. This is the notion of taxing the volume of carbon dioxide emitted per unit of output.
This will help to reduce energy consumption. Some countries introduced a partial carbon tax such as 60 euros per ton of CO2 emissions in Germany and $50 per ton in China. One clear example is a program called CDM (Clean Development Mechanism) implemented jointly by Japan and Mongolia. Greenhouse gas reduction projects and technologies are supplied by Japan at a 50% discount
In return, according to the carbon trade principle, for every CO2 emission savings, the Japanese side takes all the credit for reducing greenhouse gas emissions. This is how the price of CO2 is calculated. So this is a carbon tax that has already been introduced. However, this does not mean that the whole world formally accepted it. It will take some time for the world to do so. That means there is a $50- $100 carbon tax per ton. If you use a ton of coal, you must pay $50. Paying $50 per ton of coal is acceptable in a country where you buy and use coal worth $400. It’s hard to imagine paying $50 if you use $15 coal.
A report on hydrogen by McKenzie research firm predicts that the world will switch to clean energy and use hydrogen fuel or non-fossil fuels. It is estimated that if the carbon tax per ton of emissions is more than $100, hydrogen fuel will be economically viable. So that’s a very high number. What I mean is that even if there was no war, energy prices would have continued to go up. But what is currently happening has accelerated that process.
Energy has to be made more expensive. It was used at a much lower cost than the actual cost of fossil fuels. It did not take into account damage to the environment. The foundation of the production industry was established in the 20th century using such free raw materials. Now, due to climate change, all this has to be taken into account. So it’s getting closer to the real cost. Therefore, we can assume that prices will remain high if the war does not stop, and prices will not decline even if the war is over. Our country has a good opportunity to sell fossil fuel.
Carbon Capture Storage/Sequestration (CCS) technology is considered as the future of the coal industry at this time when extreme policies are adopted by countries to fight climate change. Will this technology be introduced in our country? On the other hand, as Mongolia’s coal exports increased in recent years, greenhouse gas emissions also rose. There are certain promises made by our country in the Paris Agreement. What kind of approach shall we take regarding these promises? Are you worried that keeping our promises will be too costly?
Some research on CCS was conducted in Mongolia. If Mongolia establishes a plant to produce liquid fuel from coal, it will emit CO2. The question is where to store the emissions. A study was conducted to address this issue. We will need to do Carbon Capture Sequestration. Mongolia established the National Geological Survey (NGS), responsible for discovery of the mineral resources of the country, not just business exploration to meet today’s needs.
If CCS technology is important for development of the industrial sector, NGS should conduct a survey to assess this situation. The National Geological Survey needs to discover formations that could store carbon dioxide. The storage area may be part of the groundwater. There are no toxins in CO2. The development of this technology requires space to lock in carbon dioxide. It is not possible for the private sector to invest in it. So NGS should conduct a study in this area but I don’t think any concrete work has been carried out so far.
There is an updated greenhouse gas inventory 2020 report that tracks the achievement of national objectives contributing to the implementation of the Paris Agreement. I took part in the comprehensive estimation of total greenhouse gas emissions of the industrial sector. According to the report, the volume of greenhouse gas emitted by Mongolia’s heavy industry is rising and will continue to grow. Mongolia pledged to reduce greenhouse gas emissions. We also identified the methodology to achieve this target by 2030. So, investment must flow in to implement this work.
If we can do that, we will be able to keep our promises. However, high carbon taxes in our country will negatively affect our competitiveness. In addition, as a sovereign member of the international community and the United Nations, Mongolia has the right to propose that landlocked countries with a cold climate pay zero or low carbon taxes in some economic sectors. In general, the carbon tax should be different in each country depending on the level of development. The key is to come up with a weather-related formula.
In general, we must fulfill our global commitment to green growth. There is a lot of exaggerated information by internationally funded research. I don’t think that exaggeration would be in line with Mongolia’s national objectives. We need to be realistic. We need to speak up early about the need for a different approach. What issues should be raised and addressed by the international community? We should raise our own issues and not just listen to others. Carbon taxes need to be set differently according to the level of economic development and climatic zones.
Will the adoption of CCS technology at the plant be cheaper than paying the carbon tax?
CCS technology is gaining momentum. Establishing a CCS would be cheaper than paying $50 per tonne of emissions. In the case of power plants, an oxyfuel furnace must be installed to separate carbon dioxide before it comes off the pipes and inject it deep into the ground. C + О2 = CO2 will be produced only by burning it with oxygen. Currently, plants use traditional air-burning technology. 76% of the air is nitrogen. Exhaust gases consist of nitrogen and other gases. It wouldn’t be wise to collect and inject them all deep into the ground. To do this, the gas must be cleaned and cooled, and only CO2 separated and pumped deep into the ground. That process uses a lot of electricity. And production of electricity generates a lot of CO2. If we plan to use CCS, then the power plant should be designed to run on oxygen at the beginning.
The Tavan Tolgoi power plant that will supply electricity to the Oyu Tolgoi project does not currently have this kind of design. If the financing terms allow to use traditional coal plant technology, it is better to apply the old technology. If the financing terms require an “oxyfuel” technology, it will cost more to build. So, it is better to solve the problem without complicating it for now.
Do you think mining companies, especially coal companies, can reduce greenhouse gas emissions to zero?
It is not possible. Coal mining companies cannot reach net zero emissions. But it is possible at the national level to mitigate that. Zero levels do not mean no carbon emissions. It means emission levels are equal to absorption levels. Greenhouse gas emissions will be balanced by absorption or green spaces, CCS and other technologies. For Mongolia, reaching zero level is several times more difficult than for a European country. The main reason is our extreme continental climate. Also, our green area is not large. “Vision - 2050” states that by 2050 Mongolia will reach zero emission.
Mongolia has not yet determined how to do this. There are a few studies conducted by foreign organizations about switching to hydrogen. This is a job that Mongolians should do, not foreign organizations. Plants that we plan to establish - mineral processing, metal smelting, copper smelting, steel plant, coke plant, and oil refineries - are all large plants that generate the largest volumes of carbon dioxide. And it is not clear how to reduce such a large volume of greenhouse gas emissions to zero. One option is to stop these projects. Another option is to do completely different calculations. Of course, abandoning these large projects will have a very negative effect on Mongolia’s development. Without basic industry, no development is possible for any country supporting only IT. The CCS should be conducted by the state ministries and the NGS. Our country needs to do its own research on how to achieve carbon neutral status.
To achieve these goals, a roadmap must be developed jointly by experts from the heavy industry, energy, environmental and transportation sectors. Most importantly, heavy industry experts must be involved in this process. Otherwise, international environmental organizations will not do this job. We need to understand that. Instead of doing it ourselves, we always try to pass it on to international projects. Since our country has made a commitment to the United Nations and the international community, our government is obliged to do it. Therefore, the organizations of this particular industry must take a lead in reducing greenhouse gas emissions to zero.
Will the “danger” of green hydrogen continue affecting our exports of coking coal? How much time is left for the coal industry?
Hydrogen fuel is expensive and technology costs are not expected to decrease significantly in the future. Recent developments suggest that for the first time in the UK, the cost of green hydrogen dropped below the cost of conventional hydrogen due to high natural gas prices. From a climatic point of view, rising energy prices are good. This means that the competitiveness of renewable energy will increase and more opportunities for green hydrogen will emerge.
But until 2050, we don’t have to worry about coking coal. We have a big market in China. We are located very close to each other. In general, there is a study that the coal market will not be affected over the next ten years. Even if hydrogen comes, it will not be able to compete with coking coal until there is a transition to a $100 carbon tax system, according to a McKinsey study. While some customers will switch to this high-cost product, others will still keep using the coking coal and pay carbon taxes. Again, the mandatory introduction of a carbon tax and the use of hydrogen could be achieved only if the whole world adopts this system in a unified manner under the auspices of the United Nations. Meanwhile, if the Russia-Ukraine war continues longer, it will be difficult to reach an agreement. In my opinion that would help the coking coal market to last longer.