Mongolia Reloaded
March 2017
In 2016, as global metallurgical coal imports increased 3.7% and China’s imports increased 24%, Mongolia exported 23Mt of metallurgical coal—its largest ever annual volume. Market undersupply in the December Quarter led to the premium hard coking coal contract price of US$285/t for the March Quarter of 2017, and prompted the re-start of three idled mines. While future export volumes depend on China’s domestic production, AME forecasts Mongolian metallurgical coal exports to rise around 18% in 2017.



Stops and Starts

The Chinese central government strengthened its coal supply side reform program by restricting domestic mine operating hours to 276 days per year from April 2016, thereby tightening the Pacific metallurgical coal market. Flooding in Hebei province in July, and supply side issues in Australia in the second half of 2016, placed the market firmly in deficit. Increased imports from Mongolia began promptly once operating restrictions were imposed on Chinese mine operating hours, and accelerated as supply issues occurred in Australian mines. The rapid supply response was aided by some 4–6Mt stockpiled coal resulting from a sluggish market in 2015.



Mongolian exports increased over 80% year on year in 2016, with the December Quarter up 130% year on year. High spot prices for metallurgical coal export in the second half of 2016 spurred three idled Mongolian mines to recommence production. The Mongolian government’s Erdenes Tavan Tolgoi, that was idled in 2014, restarted in December 2016. TerraCom’s Baruun Noyon Uul, idled March Quarter of 2016, re-started January 2017 and Mongolian Energy Corp’s Baruun Naran, which halted production in 2013, restarted in the last few months of 2016. AME forecasts that Mongolian metallurgical coal exports will rise  around 18% in 2017, as the newly re-started mines ramp up their production. Future export volumes are dependent on Chinese domestic production and China’s supply side reform program.


Coal Quality

With a chronic lack of water in Mongolia, coal processing facilities and, therefore, coal quality, are an issue. Khushuut coal has been dry processed in Mongolia and then further processed in China since 2013. Ukhaa Khudag and Baruun Naran coal is washed on site. Thermal coal from these two mines was not exported, but placed on subsidiary stockpiles in 2016. Coal from Erdenes Tavan Tolgoi and Nariin Sukhait is sold unwashed. A small amount of Baruun Noyon Uul coal is washed at the Chinese border and the rest sold unwashed. In February 2012, SouthGobi Resources commissioned a dry coal-handling facility at the Ovoot Tolgoi mine, and made arrangements for the coal to be toll-washed in China; however, neither the facility nor the toll-washing arrangements have been used yet.

Furthermore, washed or unwashed, Mongolian metallurgical export coals often receive a discount to the market spot price because the country is captive to its market—China. The extra cost of processing is often not sufficiently recouped in a higher product price. In 2016, most mines exported raw semi-soft coking/thermal coal as higher ash coking coal to Chinese steel mills. AME estimates that Mongolia’s FOB costs are third cheapest among metallurgical coal countries in 2017, averaging US$41/t, but drop to sixth highest on an average FOB margin basis at US$26/t.