COKING COAL MARKET GAINS MOMENTUM BUT FUTURE UNCERTAINTIES REMAIN

By B. Tugsbilegt

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The coking coal market has shown clear signs of recovery over the past three months, with prices strengthening and overall market conditions improving. The main driver has been expectations of stronger import demand from China.

Mongolia exported 59.2 million tonnes of coal in the first half of this year, generating $4.02 billion in revenue, according to the Mongolian Customs General Administration. The figures represent a 50–56% increase in both export volume and value compared with the same period last year.

Given the government's target of exporting 90 million tonnes of coal this year, the country's export performance is now on track by year-end to exceed that goal by a considerable margin.

Mongolia's coal exports have maintained an upward trajectory since the beginning of the year. In April, monthly coal exports reached a record 11.5 million tonnes. Export values, however, did not increase significantly on a per-tonne basis.

Prices began to show signs of recovery in May and have continued to edge higher since then. Even so, while coal prices are rising, it should be noted that higher diesel fuel prices and increases in the cost of other supplies are also pushing up mining and transportation costs.

The conflict between the United States and Iran has driven up oil prices, providing clear upward support for coal prices. Meanwhile, a serious accident at a coal mine in Shanxi Province—China's largest coal-producing region—late in May reinforced market expectations of tighter domestic coal supply.

China's coal production fell 9.7% year-on-year to 381 million tonnes in June, marking the steepest decline since 2016.

On May 22, a methane gas explosion at the Liushenyu coal mine in southern Shanxi Province, which has an annual production capacity of 1.2 million tonnes, killed 82 miners and injured more than 120. At the time of the explosion, 247 miners were working underground at the mine.

In response, the Chinese government launched large-scale safety inspections at coal mines, significantly disrupting mining operations and reducing output. In Shanxi Province alone, 155 coal mines were temporarily shut down for safety inspections.

As a result, daily coal production in the province declined by an average of 300,000 tonnes. Production, however, is gradually recovering.

In the first half of this year, China's total coal output fell 1.7% year-on-year to 2.37 billion tonnes. Although production has trended lower in recent months, Trading Economics forecasts that China's coal output will reach a record 4.87 billion tonnes by the end of the year, supported by growing energy demand and higher prices for imported coal.

International media described the Liushenyu mine accident as China's most serious since 2009. At that time, 17 years ago, several serious coal mining accidents had occurred at across the country, claiming thousands of lives. Most of them were attributed to ground collapses triggered by underground gas leaks and explosions. The latest accident was no exception. As a result, the Chinese government has begun tightening safety regulations for all coal mines.

A similar pattern was observed in late 2016, when major accidents at Chinese coal mines prompted extensive workplace safety inspections, contributing to higher coal prices. At that time, a series of accidents in China's main coal-producing regions led the authorities to carry out large-scale safety inspections and reduce the numbers of operating days. As a result, coal prices rose on the global market, enabling Erdenes Tavan Tolgoi to fully repay the $350 million prepayment loan it had received from Chalco in the first quarter of 2017.

In the current situation, however, the intensified safety inspections at Chinese coal mines have increased import demand, reinforcing expectations that Mongolia's coal exports will remain relatively stable this year. Coal prices have also begun to recover gradually. However, judging from the developments at the end of 2016, such price increases may last for less than six months. Even so, analysts say that stricter safety standards at coal mines could support higher coal prices in the global market over the longer term.

In the short term, however, coal prices are indeed on an upward trend. According to Kallanish, the price of premium hard coking coal in Shanxi Province, one of China's major coal-producing regions, rose from $240/tonne (EXW Anze) in mid-May to $302/tonne by mid-June.

In July, however, mining operations resumed and production began to recover. Even so, analysts noted that domestic coal supply in China is expected to remain constrained. As of July 10, the price of premium hard coking coal in Shanxi Province had eased slightly to $297.2/tonne.

Meanwhile, Australian premium hard coking coal, traded on an FOB basis, remained relatively stable at around $240/tonne over the same period.

China's coal imports rose to 42.78 million tonnes in June this year as domestic coal supplies tightened. This represented increases of 29.5% year on year and 28.6% from the previous month, according to China's General Administration of Customs. Indonesia, Mongolia, Australia, Russia and the Philippines are the five leading suppliers of coal to China.

The total value of China's coal imports reached $3.86 billion in June, while the average import price rose to $90.29 per tonne. This was up by $4.01 per tonne compared with the same month last year and by as much as $17.53 per tonne from the previous month.

According to Fenwei Energy, statistical data suggest that the coal mine accident in Shanxi Province significantly reduced domestic coking coal supply, which may have contributed to an increase in coal shipments from Indonesia. Specifically, China's coal imports from Indonesia rose 43.9% year-on-year to 16.73 million tonnes in June, accounting for 39% of the country's total coal imports.

Indonesia, the world's largest exporter of thermal coal, initially signaled that its coal exports would decline this year after the government reduced the country's coal production quota. However, in mid-June, the Indonesian government announced plans to increase coal production. Meanwhile, new regulations on export taxes for coal are expected to take effect on September 1 this year.

Mongolia accounted for 25% of China's total coal imports in June. Specifically, China imported 10.56 million tonnes of coal from Mongolia during the month, up 61.7% year-on-year, according to the General Administration of Customs of China. The value of those imports reached $760 million, while the average import price stood at $71.8 per tonne, an increase of $11 per tonne from the same month last year.

According to the National Statistics Office, Mongolia's average coal export price has exceeded $80 per tonne since the beginning of July, marking a notable increase. However, some analysts noted that it remains unclear whether the upward price trend will continue. If prices continue to rise and export volumes remain high, coal export revenue could surpass that of copper by the end of the year.

Australia exported 7.71 million tonnes of coal to China in June, an increase of 46.3% from the same month last year. Meanwhile, China's coal imports from Russia reached 6.8 million tonnes. Although this was down 15% year-on-year, it represented a 24.5% increase from the previous month.

China imported a total of 225.4 million tonnes of coal in the first half of this year, up 1.7% from the same period last year. The total value of those imports reached $18.11 billion, representing a 6.2% year-on-year increase.

China has clearly stepped up its coal imports since June. In Russia, however, most coal mining companies continue to operate at a loss, limiting their ability to increase supply. The appreciation of the rouble, coupled with rising transportation costs, has been the primary factor behind this trend.

Australia, meanwhile, continues to face challenges from its relatively high production costs, rising diesel prices, and increasing ocean freight rates. Mongolia, by contrast, has been able to steadily supply relatively high-quality coking coal at competitive prices, creating an opportunity to further strengthen its position in the Chinese market.

Compared with other major suppliers, Mongolia recorded the strongest growth in coal exports to China in June, with shipments increasing by more than 60%. If coal prices continue to strengthen, not only copper concentrate revenue but also rising coal export revenue will undoubtedly provide a significant boost to Mongolia's fiscal position by the end of the year.

That said, geopolitical risks, a potential slowdown in China's economy and the resulting weakening of demand, as well as continued volatility in fuel prices, remain important downside risks that could create unforeseen challenges.