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Let us kick-start our coal policy

The 4th global coking coal summit was held in Taiyuan (Shanxi Province, China) last week. Besides coal mining enterprises, the summit was attended by coal, iron, and steel industry associations, buyers, suppliers, research institutions, and delegates from international stock exchanges. It is clear that this summit would help Mongolia to accurately align its coal policy with the coal market.

NEW TREND IN CHINA’S MARKET

Having the United States and Russia ahead of them, China is ranked third by its proven coal reserves of 2.2 trillion tons. However, China leads the world in coal production. They produced 3.6 billion tons of coal last year and their total coal consumption reached 3.65 billion tons. It is projected that China will increase its coal production by 2.5 percent to reach 3.8 billion tons in 2014.
Depending on the properties, there are different types of coal: thermal coal and coking (metallurgical) coal. In 2013, China produced a total of 476 million tons of coke, 75 million tons of which were imported. Almost half of its coking coal imports were supplied by Australia while 20 percent came from Mongolia. In 2014, China’s coking coal production is expected to increase by three percent to reach 490 million tons, which will account for 70 percent of global coking coal production. China uses 80 percent of its coking call for production of steel and the rest to produce chemicals.
Production of steel and iron has replaced production of crops as the main economic pillar of China. Half of the total steel production of the world came from China in 2013. They used 50 percent of their steel for the construction of buildings and the other half for building infrastructure.
China is expected to have an average economic growth of 7.2 percent for the next ten years. The key to reaching such growth is urbanization. It is projected that China’s population will increase by 100 million in the next six years and 60 percent of the total population will be residing in urban areas by 2020. The current percentage of China’s population living in urban areas is 53.7 percent. This great migration from rural areas to urban settlement in China will increase the demand for steel and expand the production of coke. A representative from China Iron and Steel Association said that China’s coking coal production was to reach its peak in 2018 and stop growing in 2020. There has recently been constant market demand for coking coal, which is partly because of the increased efficiency of steel production as well as the reduction in excess capacity. Furthermore, China has more scrap iron every year, which is increasing the amount of iron that will be reworked. It would further lead to a decrease in the processing of iron ore to produce iron.
As Mongolia exports coking coal only, we need to constantly do analyses on the market and be able to quickly detect what changes are occurring when, and for what reasons.

DIMINISHING ADVANTAGE OF MONGOLIA’S COAL

Our first export of TavanTolgoi’s coal was in 2004. In 2013, 3.2 million tons of coal was exported by the locally-owned TavanTolgoi company, 2.08 million tons by Erdenes Tavan Tolgoi and 5.75 million tons by Energy Resources. The total coking coal exports that year was 10.8 million tons. Gashuun Sukhait-Gants Mod port was the border point where these exports took place. A total of 3.2 million tons of coal was exported by MAK in 2013 from Nariin Sukhait coal mine located 370 kilometers to the west of Tavan Tolgoi. Also, South Gobi Sands exported 2.71 million tons of coal, one-third of which was coking coal. In the same year. Mongolia exported a total of 21.1 million tons of coal in 2011, 20.5 million tons in 2012, and 18.2 million tons in 2013.
Coal is transported by trucks on the 220 kilometer long road to the south of Tavan Tolgoi. The trucks are unloaded at the Tsagaan Khad customs area, where Chinese buyers come and transport the coal over the border using their trucks. After crossing the border, those trucks are again unloaded in a designated area, which causes the quality of coal to decrease due to getting mixed with excessive dust. Inner Mongolian companies blend low sulfur coal imported from Mongolia with their coal that has twice as much sulfur as Mongolian coal, and sends it to steel mills, the end users.
Mongolian companies today are competing with each other and lowering their coal prices. This situation favors the middlemen. Some of those intermediary companies are recommending that Mongolian companies keep reducing the price and are proposing to handle the mining process at low cost themselves instead of expensive Western companies. Commercial Inner Mongolian companies stated that there were many difficulties associated with bureaucracy at the Mongolian border and it was hard to distinguish between formal and informal payments (“grey payment”) and processes.
Ever since its establishment, state-owned Erdenes Tavan Tolgoi has been reducing profits generated by Mongolia’s coal, making bad deals and agreements, having other companies run deficits, and creating more debt for the nation. This company is still selling the best quality coal we have for the cheapest price.

REFRESHING OUR MIND

Coal is a resource that will have a very significant role in the development of Mongolia for the next 20 years. Therefore, we should be selling our coal in the most profitable way. Coking coal is used to produce coke, which is then used for the production of crude iron. It is time for us to introduce specific standards to the high quality coal from Tavan Tolgoi, create a “TT brand” by blending coal from several mines, and start selling our products on the international market. There should be a flexible exports policy that allows us to supply this branded coal for the most profitable amount in the most favorable time.
A 360 kilometer long railroad from Bugat to Gants Mod was commissioned last year. Shenhua company is going to extend this railroad by 16 kilometers over the border and build a narrow gauge railway. There will be structural changes in our coal supply chain upon its completion, which will consequently reduce costs and allow our products to compete with coal from Australia in the eastern coast of China.
Before building a railway, the Gashuun Sukhait-Gants Mod port should be made international and have its issues resolved at a much higher level; by governments of the two countries, rather than the provincial government of Bayannuur of Inner Mongolia. It will exclude the current, numerous local taxes. Also, an agreement to allow railway transit needs to be established with China. The most beneficial step that our government can take in order to increase our coking coal exports is to establish these two agreements.
Our experiences over the last few years clearly demonstrate that the government acquiring loans and getting involved in the coal industry is extremely risky. Nevertheless, despite their existing debt of 400 million USD, state-owned Erdenes Tavan Tolgoi is about to acquire more debt to build a coal washing facility and a power plant. This decision needs to be reconsidered.
Only the private sector can build the infrastructure required for selling coal while controlling the risks. If a state-owned company fails to sell the products after making an investment in infrastructure, those billions of dollars will be repaid by ordinary Mongolian citizens.
In the future, we should implement larger projects and have private companies build power plants at mines, allow them to export electricity, and supply gas to Ulaanbaatar, which will help us get rid of smog.
When creating a unique coal brand and entering the international market, it would be the right step for the government to take part through developing and implementing good policy rather than actually doing business in the industry.
It is time for Mongolia to kick-start its coal policy.

Translated by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=8544

Posted by on Mar 30 2014. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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