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.
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.
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.