B. BYAMBADAGVA: POLICY SUPPORT CRUCIAL FOR INCREASING MONGOLIA'S THERMAL COAL EXPORTS

Although rising fuel prices are putting some pressure on coal exports, market prices continue to trend upward. MMJ journalist B. Tugsbilegt spoke with B. Byambadagva, President of the Mongolian Coal Association, about the key challenges facing Mongolia's coal sector, opportunities to increase exports, trends in China's coal market, and related issues.

- You attended the International Conference on China's Coal Imports in March, where you also delivered a presentation. In your view, can Mongolia's coal exports remain stable and sustainable in the future? Chinese President Xi Jinping recently stated that coal will continue to play a key role as a pillar of China's energy sector. At the same time, what changes are currently emerging in China's coal import trends?

Global coal consumption has not yet peaked. According to projections by the International Energy Agency, coal use is expected to peak in 2029. Among the major contributors, China's coal consumption-which makes up a significant share of global coal demand-is also continuing to rise. The International Energy Agency projects that global coal consumption may gradually decline starting from 2029 if the use of renewable energy and nuclear power plants increases.

In March, an international conference of coal suppliers to the Chinese market was held in Guangzhou, China. China's 15th Five-Year Plan was presented there. This does not indicate either a sharp decline or a significant increase in coal consumption. China's policy is focused on expanding the development and use of rare earth resources, while also prioritizing high-tech manufacturing and innovation, with substantial investment directed into these sectors. At the same time, coal consumption remains closely linked to steel production, which is driven by construction and broader industrial activity.

No announcement was made regarding an increase in steel production. Instead, the plan outlined a policy direction focused on maintaining stable consumption levels.

Looking at the structure of China's coal market, the country is both a major producer and a major consumer of coal., China imports around 110-120 million tonnes of coking coal from abroad, with Mongolia one of its key suppliers. Mongolia supplied 63 million tonnes of coking coal to China last year. The remaining imports consisted mainly of thermal and other types of coal. At the conference, countries supplying coal to China - including Indonesia, Russia, Australia, Mongolia, and others - presented their reports. For example, Indonesia mainly exports large volumes of thermal coal to China. At the end of last year and the beginning of this year, Indonesia reinstated a 3-8% tax on thermal coal exports. This policy appears to be aimed at managing market prices and limiting sharp price declines to some extent. As a result, any disruptions in the supply chain of China's roughly 200 million tonnes of imported thermal coal have led to increased demand for this type of coal in the market.

Russia is also a major supplier of coking coal and a key competitor to Mongolia. Russian mining companies transport coal from large coal basins over distances of around 6,000 kilometers, routing it north of Mongolia to reach China. As a result, transportation costs are very high, which limits their ability to remain fully competitive in the market.

Australia also supplies coal but with relatively high production costs. In terms of infrastructure, it has adopted rotary (continuous) mining technology and made significant investments in rail and maritime transport systems. However, this year there have been announcements that operations at two mines will be temporarily suspended due to high production costs. Earlier in the year, flooding in Australia's coal-producing regions also disrupted mining activities, preventing mines from operating at stable and consistent levels. Therefore, Australia is also facing challenges in maintaining stable large-volume supply and Australian coal remains relatively more costly.

Through its seaports, Australia supplies not only China but also major consumer countries such as Japan, South Korea, and India. Because of this diversified demand base, it has been able to maintain coal prices at relatively high levels.

Overall, this reflects the general state of the market at the beginning of the year.

RISING DIESEL PRICES PUT PRESSURE ON MONGOLIA'S COAL MINES

- Although the physical volume of Mongolia's coal exports has increased in recent years, mining companies have continued to face challenging conditions due to falling market prices. With the Strait of Hormuz potentially at risk of closure, diesel prices are expected to continue rising.

Although negotiations are currently underway with Russia, fuel prices have already increased to some extent. In this situation, how much pressure will companies face, and by how much are production costs expected to increase per ton of coal extracted?

Minister of Economy and Development J. Enkhbayar recently met with government agencies, industry associations, and coal mining companies to discuss specific issues arising from the current situation.

According to the Ministry's projections, inflation could reach 16-17% this year. In response to the economic pressures from rising diesel fuel prices, the participants discussed possible countermeasures. These included steps aimed at increasing mining output, industrial production, and exports, as well as strengthening foreign exchange reserves. They also discussed directing relevant government agencies to take necessary measures to address these issues. Internationally, coal mines and coal-producing companies are commonly developed by building power plants near the mine site. Since mining companies are effectively located at the energy source itself, they often construct power plants fueled by thermal coal extracted from the mine. This provides a continuous and uninterrupted electricity supply for powering and charging mining machinery and equipment.

In Mongolia's case, however, the country has not yet been able to implement these technological solutions. Because such systems require relatively high upfront investment, most mining fleets and excavation and loading equipment continue to operate on diesel engines. Moreover, mines that are not connected to the central power grid rely entirely on diesel generators to meet their own energy needs.

Thus, rising diesel prices could deal a significant blow to Mongolia's coal mining sector. Current estimates suggest that costs could increase by at least 20%.

If fuel prices reach the level currently being discussed at the government level exceeding 6,000 MNT per liter there is a risk that some mines may no longer break even. More broadly, Mongolia's fuel supply operates under agreements with Russia, while price stabilization issues are typically addressed through intergovernmental arrangements.

Chinese coal mines, by contrast, often supply their electricity from coal-fired power plants located near the mine site. Mines operating under such a system are largely shielded from the impact of rising fuel prices and are able to maintain stable operations. Most large mines have secured their energy supply in this way.

In Mongolia's case, however, the situation is more challenging. External mining transport, particularly the transportation of coal to border crossings, depends entirely on diesel fuel. As a result, there will be an inevitable economic impact to some extent.

On the other hand, following disruptions in oil and gas supplies through the Strait of Hormuz, China's coal imports have been accelerating. It is observed that, in the first three to four months of the year, coal stockpiles typically accumulate at the border, after which import activity slows down. This is because downstream consumers in China usually build up sufficient inventories in advance, allowing them to reduce subsequent procurement.

However, this year the situation appears to be different. "Erdenes Tavan Tolgoi" has already exported 9 million tons of coal, while Mongolian mines overall continue to maintain steady exports. Unlike in previous years, no significant stockpiles have been observed at the border, and coal offtake and transportation on the Chinese side have remained stable and uninterrupted.

This is because downstream coal-consuming factories on the other side are not only building up inventories but also rapidly drawing down coal stockpiles at the border. As a result, conditions in the coal market have become more favorable, with prices rising by around 10-20%.

The forecast issued earlier this year by the Mongolian Coal Association has largely proven accurate. However, the main concern now lies in the final three months of the year, when export performance may come under pressure.

This is because end-user factories have relatively fixed coal consumption levels. If they build up large inventories early in the year, there is a risk that in the final three months they may significantly reduce, or even halt, the drawdown of coal stockpiles accumulated at border crossings. If such a slowdown in purchases occurs, it could have significant negative implications for Mongolia's economy.

A study by China's Sxcoal notes that if Mongolia is able to maintain a relatively stable supply level, coal prices may continue to rise in the market. On the other hand, excessive supply could create downward pressure on prices.

Secondly, long-term coal offtake agreements involving large-volume contracts are also having a noticeable impact on pricing.

The report suggests that if supply continues to increase significantly, there are clear indications that market prices could decline by year end.

It is unclear how long current geopolitical tensions will persist. If they ease and the issue is fully resolved, prices are likely to decline. However, if tensions continue to escalate, countries may step up efforts to build strategic reserves, potentially driving prices even higher.

THE NEED TO STRENGTHEN THE COMPETITIVENESS OF RAIL TRANSPORT AGAINST ROAD FREIGHT

In the coal transportation sector, freight operators have been warning for months that profit margins remain extremely low. Now, with diesel prices rising, there are growing concerns that conditions could deteriorate even further. In your view, can coal transportation continue to operate sustainably amid this increase in diesel prices?

In the transportation sector, private companies generally operate under pricing adjustment mechanisms, meaning contract rates are revised in line with rising costs. As fuel prices increase, transportation rates are typically adjusted to some extent as well. 

The main issue, however, concerns state-owned enterprises that purchase transportation services on a large scale. Naturally, with fuel prices rising, there are likely ways to amend existing contracts accordingly. Ultimately, coal exports will continue as long as transportation costs do not exceed the sale price of coal per tonne.

Therefore, in relation to transportation, the Law on Procurement of Goods, Works, and Services with State and Local Government Funds provides various mechanisms for concluding supplementary agreements and adjusting contract prices with successful bidders. As a result, it is unlikely that significant delays or disruptions will arise in this regard.

Naturally, a certain increase in fuel prices will impact transportation operations. However, if conditions worsen, Mongolia has the option of increasing freight transport through the Mongolian Railway. Government agencies are already implementing measures aimed at boosting the volume of cargo transported by rail.

Accordingly, it is necessary to increase the utilization of rail transport to make it more competitive with road transport, while also accelerating the development of cross-border railway links.

The rise in coal prices on the market is certainly a positive development. However, can higher coal prices sufficiently offset the adverse impact of rising diesel fuel costs? Although coal prices are rising, the increase remains relatively limited. They have not yet reached the exceptionally high levels seen in 2022 and 2023 during the post-pandemic recovery period. Fundamentally, the conditions are not in place for economic growth comparable to that period. Therefore, the modest rise in coal prices is insufficient to offset the impact of rising diesel fuel costs.

In general, regardless of the scale of an open-pit mining operation, transportation accounts for approximately 60-70% of total operating costs. Within in-mine transport operations, diesel fuel represents the largest cost component.

Similarly, in external transport - particularly the delivery of coal to border points - diesel-related expenses remain the dominant cost factor.

For mining companies, a 10-20% increase in fuel costs, which already account for a substantial share of operating expenses, has a significant impact on overall operations. As a result, rising fuel prices directly affect the production costs of virtually all mines. If fuel prices increase further, there is considerable risk that some mining operations could temporarily suspend activity.

There was a period several years ago when the supply of explosives was disrupted. This year, the Government is focusing on maintaining a stable supply of explosives. What is your view on the supply situation for explosives? Are there any risks involved?

Mongolia imports explosives such as ammonium nitrate from Russia. In 2023, the Russian government imposed a ban that halted exports. During the three- to four-month ban, Mongolia faced significant difficulties and growing concern as it was unable to secure supplies.

This year, rather than direct export bans, the main challenge has been the sharp rise in the price of explosives both globally and in Russia. These increasing costs are likely to have a noticeable impact on operating costs in the mining sector.

At present, Mongolia is not facing any specific supply restrictions, and deliveries are continuing normally. However, costs have increased significantly. Therefore, particular attention should also be paid to securing supplies from China and negotiating agreements with manufacturers.

Earlier, you spoke about how mining operations in other countries are increasingly shifting toward electrification. In general, mining companies in Mongolia have also begun placing greater emphasis on technological modernization. Based on your observations, what is the current level of electrification, technological innovation, and adoption of green technologies in Mongolia's coal mining sector?

In terms of electrification, coal mines are naturally situated close to energy resources, which makes the construction of coal-fired power plants the most practical and readily available technological solution.

Secondly, the use of green technologies-particularly the use of renewable energy for mine electrification-has been developing rapidly in recent years. While this has not yet been widely adopted at coal mines specifically, it is being implemented in other mining operations. For example, the MAK company has used renewable energy to support its mining operations.

In relation to electrification and green technologies, the Mongolian Coal Association recently submitted an official letter to the Prime Minister of Mongolia. This called for policy and legal support, particularly in relation to taxation and regulatory measures concerning the import of renewable energy equipment and mining machinery.

Looking ahead, proposals have also been made to support the import of battery electric vehicles, hybrid vehicles, and other green transport solutions, as well as excavation, loading, and other mining equipment, through exemptions from customs duties and VAT. This would serve as one of the key measures to reduce dependence on diesel fuel.

On the other hand, the payload capacity of battery-electric haul trucks is currently limited to around 90-100 tons. At present, larger ultra-heavy electric mining trucks have not yet been widely deployed globally. However, trials and testing in this area are underway-for example, in Australia's Pilbara mining region, fully battery-electric equipment from Komatsu and Caterpillar is being tested in real mining operations.

In terms of alternatives to diesel fuel, hydrogen-powered vehicles appear to have a promising future. For my part, I hold a doctoral degree in mining transportation, with a particular focus on energy consumption in in-mine haulage systems.

Based on current studies, the future use of battery-electric vehicles and renewable energy has certain capacity limitations. It is also likely that the use of rare earth elements will face constraints, as these resources are finite and may eventually be depleted after a certain level of exploitation.

Therefore, alternative future energy sources are being discussed, including nuclear power plants and hydrogen-powered vehicles. At present, however, the cost of producing hydrogen fuel remains relatively high, which is a significant drawback. In this context, while battery-electric vehicles powered by renewable energy will continue to play an important role in reducing greenhouse gas emissions, hydrogen-fueled vehicles are also expected to become a significant contributor in the future.

HOW CAN THE COMPETITIVENESS OF MONGOLIAN COAL BE IMPROVED?

Mongolia is preparing to send coal samples to India for trial testing and transportation. Earlier this year, India designated coking coal as a strategic raw material. For many years, Mongolia has discussed diversifying its coal export markets, and India is considered a highly promising destination. In your opinion, what are the prospects for exporting Mongolian coal to India in the future?

At the recent meeting in Guangzhou, it was noted that India, which once supplied coal to China, has become a major coal consumer since last year.

Today, India imports and consumes large volumes of coal from abroad. In 2024, India and the relevant Mongolian government agencies jointly explored the possibility of conducting a trial import, but no concrete results were achieved. Naturally, transportation and logistics costs remain high. Coal is a mineral resource with high extraction costs and large transportation volumes. At the same time, its unit sales value is relatively low compared to commodities such as gold and copper.

Therefore, transportation costs have a significant impact, making this a challenging sector. India has expressed interest in importing high-quality coking coal from Mongolia. However, exporting from Mongolia involves several challenges, including infrastructure limitations, transit through third countries, and various taxes and fees.

We have previously seen from the experience of "Energy Resources" that attempts to supply coal to Japan via Russia were not feasible. Even transporting coal to Chinese border ports and then shipping it onward to nearby Japan remains difficult today. Therefore, exporting to India would likely involve even higher transportation costs.

A significant share of Mongolia's coal exports consists of thermal coal. Until recently, exporting thermal coal was considered unprofitable. However, export volumes have now reached a remarkably high level. Looking ahead, it appears that Mongolia has the potential to turn thermal coal exports into a major source of revenue. What is your view on this?

Of the total 90 million tons of coal exported last year, 63 million tons were coking coal, while the remainder consisted of other types of coal. The coking coal category includes both high-quality coking coal and semi-soft coking coal. Among the other types of coal, thermal coal accounts for only a portion. Therefore, it would not be accurate to classify all of it simply as thermal coal or lignite.

According to coal classification standards and guidelines, coal is generally divided into around 28 to 32 categories.

These classifications include many different grades of coal, such as anthracite, long-flame coal, and coal used for liquefaction and gasification processes. Because the Chinese market has a wide range of consumers with different needs, there is strong interest in importing coal from Mongolia.

One important point to clarify is that when any coal deposit is mined, it yields not only coking coal but also thermal coal and other types of coal. Since coal deposits consist of multiple layers and seams, different grades of coal are extracted together. Rather than leaving this coal in waste piles or allowing it to oxidize and self-heat, it is better to export and turn it into marketable products.

In previous years, when border crossing capacity was limited, Mongolia prioritized exporting its highest-value, premium-grade coal. In addition, lower-grade coal prices were often too low to cover transportation and other related costs.

This year, Indonesia has begun imposing export taxes on thermal coal, including lignite, which is creating more room to meet China's demand. As a result, Mongolia now has an opportunity to increase its exports of non-coking coal to the market. Prices for these types of coal have also risen somewhat.

However, profit margins for these types of coal remain relatively lower than those for coking coal. Therefore, Mongolia should consider introducing supportive policies and tax incentives for thermal coal exports to China. This would help increase export volumes.

Secondly, China normally imposes import tariffs on coal, although these tariffs were reduced to zero during the COVID-19 pandemic. At present, this zero-tariff policy applies to thermal coal imported from Indonesia.

The tariffs applied to Mongolian coal are 3% for thermal coal and 6% for coking coal. It would be advisable for the Government of Mongolia to take a proactive approach and negotiate with the Government of China to reduce these tariffs. Doing so would enhance the competitiveness of Mongolian exports of both thermal and coking coal.

In this case, there is much more potential to export Mongolia's lignite and other types of coal. Since any mining operation produces multiple types of coal, making full use of these natural resources is an important objective for mining companies.

As just one example, the reserves of high-quality coking coal at the Erdenes Tavan Tolgoi mine are expected to be depleted around 2029-2030. After that, what will remain in large quantities are semi-soft coking coal (1/3 coking coal) and thermal coal. Whether we want it or not, in the future we will have to focus on beneficiating, processing, and marketing these lower-grade coals. Therefore, the depletion of high-quality coking coal reserves is, in fact, very bad news for us.

This type of coal is used in China by blending it with other coals to balance and optimize quality characteristics for industrial use. The idea of using high-grade coking coal directly on its own does not exist. For this reason, our coal has long been regarded as a valuable and highly prized resource. Now that the coal preparation plant at Erdenes Tavan Tolgoi has been commissioned, the capability for blending has been established. Therefore, the key priority is to ensure the long-term utilization of the deposit through blending and processing all its coal resources.

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Thank you for the conversation!