The Mongolian Mining Journal /Aug.2019/
J. Zoljargal, CEO of Mongolian Coal Association, is not too enthusiastic about expensive infrastructure development projects as, to him, what exporters need most is better facilities to take their coal to the buyer in China faster and freely. In a wide-ranging conversation he tells B.Tugsbilegt that coal prices would not always stay high, but in a positive development Chinese state policy is bringing buyers geographically closer to Mongolian coal mines.
What is the current coal export situation?
Export volume in the first half of the year was 1.5 percent less YoY, down from 19 million tonnes in 2018 to 18.6 million tonnes, but this is a marginal drop and our goal for the full year is to achieve 42 million tonnes. July figures are not so good because of slower customs clearance and other technical problems. The daily number of trucks passing through Gashuunsukhait-Gantsmod dropped from 1,500 to even 500 on some days.
The situation varies between ports and companies. In the western port, MEC’s export from its Khushuut mine is relatively good. Companies operating at Tavantolgoi are also doing well. But companies exporting through Shiveekhuren port are not so happy. One reason for this is the Road and Transport Ministry’s decision that only trucks with a C permission can be used to carry coal for export. This was actually meant to ease the long wait at Gashuunsukhait but has been implemented nationwide. There was some delay as there were not enough of such eligible trucks for the users of Shiveekhuren but things are getting better.
Coking coal prices are relatively good this year, but what lies ahead?
The long-term prospects are not so good. Market observers feel the present good prices will be there for a few more months but will start falling from the second half of 2020, by around 30 percent, according to Platts of Singapore. Coking coal prices will move according to how the Chinese economy grows. If more construction work is taken up in China, the demand for steel and coking coal will rise. An added factor now is the US-China trade war. Our economists and strategists should carefully observe its progress.
We cannot plan our huge infrastructure development projects by just thinking that coal prices will continue to be high. We should carefully consider the overall general picture. Prices are always volatile. Basically, this year we are in the comfort zone but from the middle of next year there would be hard times, I fear.
Do you think the Erdenes Tavan Tolgoi IPO will bring more competitiveness to the Mongolian coal industry?
We have until now lost much as we had no railway. It is undeniable that lack of infrastructure impedes our potential, but so do inefficient customs management services. I would even say border crossing is more problematic for us in the coal trade than lack of infrastructure. The border slowdown is generally caused by the Chinese. Sometimes, they blame technical reasons, but we always feel these are actually pre-planned. Not really to do with bilateral politics, but more related to their trading policy. However, even if underdeveloped infrastructure is not the main culprit here, there is no overlooking its harmful impact on the environment and human health. Apart from the cost of transport by road, it is unfortunate that in the 21st century we have to carry such huge volumes of coal along haul roads and then cause 100-km-long queues at the border.
But our priority is faster and easier border crossing. That is essential if we are to export more. We are told big buildings will come up, with many gates, modern facilities. We would rather see a strategy of working with the Chinese side in a more coordinated manner. It does not cost much money to decide on how much coal needs to cross the border in a month and in a full year, and then to ensure its free and fast movement. This is not a matter for companies; such negotiations should be held at higher official levels.
You asked about the IPO. In terms of long-term sustainable development, a coal handling plant is needed for Tavan Tolgoi. Such a plant needs much water, and much will have to be done to solve that problem. Non-saleable byproducts and various kinds of waste from extraction are accumulating and these millions and millions tonnes of waste can be processed only at a coal-chemical plant. Big money is needed for this. I hear they are about to raise finance for these. That is good news, but I repeat the first thing to do to raise our competitiveness in the market is to arrange for more border crossing capacity. Then comes transport infrastructure. A successful IPO needs transparency, capacity to take risk, good track record, good governance, sound finances, and management independent of political interference.
Railways are being built in two directions, and parallel roads are also being considered. Do we have enough export capacity to justify these expenses, especially in the face of China importing less over time?
If China were to buy all that we can produce, all this transport infrastructure would be useful, but in recent years, only half of the 60 million to 70 million tonnes of coking coal China has been importing per annum from various countries goes from Mongolia. In China, the coal trade is run under government guidelines, so will they ever buy more from Mongolia by reducing imports from Australia and Russia? If they buy more from us, we shall need to use more exit points, but otherwise, it might be risky to spend large amounts on them. We cannot say what China would do. The future is unpredictable, more so as it is a country where the government, and not the market, takes decisions, and all important trade negotiations are held at the government level.
As for the railways, it is obviously necessary to build the Tavantolgoi-Gashuunsukhait railway, where the investment would be recouped quickly, but it has to be run on commercial principles and be environmentally sound. I am not so sure about the Tavantolgoi-Zuunbayan route, but it could turn out to be a good project if it succeeds in encouraging regional economic growth. The area along the route has many mineral deposits, not just coal, but there has been no investment there. I understand that the government expects a surge of new interest in developing these deposits once the transport facilities are available.
Erdenes Tavan Tolgoi hopes to export 18 million tonnes of coal this year. Nariinsukhait also has a big target. What this means is that many companies in both China and Mongolia are ready to do business, without government support, which is as it should be. However, such large trade agreements should take into account mines planning and customs conditions.
The problem is that the border crossing is very much under the control of the Chinese government and the total amount of coal that companies can buy is also determined by it. The long queues at the border is because of this, but our exporters have to compete with one another so that they do not default on their commitment to the buyer. The bigger purchasers in China and the bigger exporters here want to have more gates and related infrastructure, but that does not necessarily increase our export volume. We have to carefully consider our border crossing infrastructure policy.
A positive development has been that the Chinese market is coming closer to us. Steel and coking plants in eastern and southern China would gradually be closed down and these industries would be centralized in the northern region, bordering on Mongolia. We need better infrastructure to take advantage of this, but things have to be done in an orderly way. Before anything else, we have to resolve issues of customs and border crossing. Then come the two railways and then the other projects.
The largest part of our export revenue now comes from coal. So is the state showing any special interest in this sector?
A coal programme has been under discussion for over ten year and is still to be taken up. Given that coal accounts for 40 percent of the export earning, there should certainly be a long-term policy and careful planning. All the money is earned by companies selling coal to buyers who seek out each other but it would help greatly to have government support and input on international relations and economic development trends. Another area where we need government help is in processing of by-products from coal processing plants and waste material from every stage of mining. The rubbish dumps of fly ash, hard coal and lignite are getting wider and higher. Some of it can be used in a power plant, but not all. We need a coal-chemical plant which will produce polypropylene. It is the Government’s responsibility, beyond the resources of individual miners. All this should form part of a coal policy or programme.
Let’s say we produce 30 million tonnes of coking coal per annum from the Tavantolgoi mines. That would result in between 4 million and 8 million tonnes of by-products and waste material or simply low-grade coal. The proposed Tavan Tolgoi power plant could use up to just one million tonnes of non-coking coal per annum. What about the rest? If, as I said, there is a plant to use the fly ash to produce polypropylene, that can be sold for $1,600-$1,800 per tonne at a third market. This might be a possible solution now but what happens when extraction increases radically? Research organizations and we in the Coal Association have talked about this to policymakers.
You talked about a third market for the polypropylene, but we have been seeking third markets for our coal for long. We hear that our two neighbours are offering better transit transport terms, but no real work is seen. In any case, is it viable to export coal over such long distances?
Of course, a third market is important for us but its viability is still very much a theoretical question as we do not have any final commercial agreement with either neighbour on transit transport. China’s railways are overstretched and if they make any room for us at the cost of their own needs, that would be only on political considerations. As for Russia, its own producers find transport to sea ports difficult. Here again we do not know what special terms it might offer us purely as a political gesture. Solely on commercial terms, the long haul may not be worth it.
What are the present and future activities of the Mongolian Coal Association?
Mongolians have got used to cheap energy and so we are forced to keep thermal coal prices low. This is bad economics. Baganuur and ShiveeOvoo sell coal to the state at a price that is actually lower than their production cost. They are thus eternally in the red, so they have to borrow money to survive. Their debts are increasing and so is interest payment. One day, they will hit the rock bottom. Maybe then the government would pay off all their debts. We are constantly asking the government to change its policy and shall be continuing to do so. For your information electricity costs in Mongolia are half of what they are in Russia and China, and about a quarter of prices in Europe and Asian developed countries.
Nowadays, people talk about green development, which is about saving energy and producing less carbon emission. The renewable energy sector will get a boost only if our electricity prices are raised. Hopefully coal prices would also be increased at the same time. The present practice of keeping coal prices ridiculously low to keep electricity costs artificially low is actually impeding the growth of the renewable energy sector, stopping green development on its path.
The first and foremost job for our association is to protect our members’ interests. Our major members are coal exporter companies and they must clearly understand issues governing Chinese coking coal import. We are planning a series of meetings between them and Chinese research organizations, purchaser companies, and end users to improve this understanding.
We are also concerned with long-term development of the coal sector. For this, among other things, we have to decide on what to do with the brown coal that cannot be sold in the market, and how to enrich coking coal without using too much water. We can use or develop a dry processing technology or a wet processing technology with less water use. This can be jointly financed by research organizations and private entities. We plan to cooperate with both domestic and foreign entities in this work.
What would be on the agenda of this year’s Coal Mongolia?
The motto of Coal Mongolia 2019 is “Lead the market”. The international coking coal trade is becoming more competitive, with our major market – China -- importing its coal from various sources. This year’s discussions will focus on how to acquire more competitive skills to finally become the market leader. Participants will talk about customs clearance practices, logistics, coal quality, coal handling plants, infrastructure development, improving mutual understanding between buyer and seller, coal processing technologies, and whatever else concerns them. We shall disseminate information about these discussions to the government and the public.