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Thursday, January 26, 2012

MONGOLIA TO BECOME THE SAUDI ARABIA OF COAL

Many people expect that Mongolia, with its vast reserves of high-quality coal and its close proximity to China, may become the Saudi Arabia of Coal. If in 2008, Mongolia exported merely 4 million tons of coal, in first 9 months of this year that number reached 15.7 million tons, constituting more than 40 percent of the value of total exports. But this is just the start. It is expected to grow even faster when Tavan Tolgoi, which has more than 6 billion tons of coal on site, starts production. The government estimates that next year a huge amount of revenue will be collected from coal sector. However, there could be large revenue shortfalls at a time the global economy is crumbling. Uncertainty in the macro economy will decelerate Chinese coal demand growth, experts predict.

The Top Export Earner
Mongolia was solely dependent upon the copper concentration export until 2009, when China, a net exporter of coal, suddenly became a net importer. Within 3 years the country`s coal sector has grown beyond recognition. Statistics show that coal, and not copper, is the top export earner for Mongolia today. In first 9 months of this year, Mongolia gained an income of USD 828 million from its copper concentration export, while income from coal export exceeded this amount by 2 times reaching USD 1.6 billion.
Moreover, Mongolian coal companies came into fashion, and some of them stepped on the international stock market. Mongolian Mining Corporation, also known as Energy Resources, had an IPO in Hong Kong in last year. And today we are talking about new giant player with the label “Mongolian Coal”, Erdenes Tavan Tolgoi, a daughter company of state-owned Erdenes MGL, which is preparing to list its shares in London, Hong Kong and Ulaanbaatar.
Furthermore, Mongolia overtook Australia as the biggest exporter of coking coal to China. Australia`s so called super tax of 30 percent on coal and iron-ore profits will likely to encourage this trend and Australians are scrambling to buy coal mines in Mongolia.
The Mongolian coal sector is expected to grow with the speed of light when Tavan Tolgoi becomes operational and coal starts to be transported via railway. A 270 km railway from Tavan Tolgoi to China and 1100 km railway to Russia will be built for coal transportation. According to Yo.Manlaibayar, the head of Finance and Investment Office of the Ministry of Road, Transportation and Urban Development, the railway is likely to be finished in 2014.
Overdependence on China
“Mongolia has rich untapped reserves and the location is very attractive for Chinese companies” said Huang Shengchu, president of the China Coal Information Institute, to the China Daily. In July Erdenes Tavan Tolgoi signed contracts with the Chinese firm Chalco (the daughter company of Chinalco) for coal supplies worth USD 250 million from deposits in the Eastern Tsankhi area of Tavan Tolgoi. Chinese state-owned steelmakers are eyeing private projects in Mongolia too. For example, Baosteel has expressed an interest in buying a stake in MEC's coking coal project in the Khovd province.
However, China remains the only destination for coal from Mongolia. This overdependence on China could in turn come to hurt Mongolia in the event of a Chinese slowdown. Coal in Asia is unlikely to recover in 2012 from its first decline in three years as electricity-price controls prompt Chinese utilities to limit purchases of the fuel. According to data from IHS McCloskey, thermal coal price at Newcastle fell 10 percent this year to USD 113.60 a ton, after climbing 46 percent in 2010. Furthermore, China may slow imports of the fuel next year, according to the China Coal Transport and Distribution Association.
The International Energy Agency estimates that for China, which relies on coal for about 70 percent of its energy needs, its demand for energy will increased by 75 percent by 2035. However, we should keep in mind that China, backed up by 115 billion tons of reserves, does not need that much of its coal from abroad. The annual output of China, the world`s largest coal producer, is estimated to exceed 3.5 billion tons this year, compared with about 3.3 billion tons last year. However, its coal imports are expected to hit 150 million tons, less than last year's 164.83 million tons, according to coalworld.net.
Much Needs to Be Done
It has been estimated that Mongolia`s coal resources approximate 162 billion tons, a quantity which allows it to rank 10th in the world. And as its close location to China, Mongolia can truly become the Saudi Arabia of Coal. However, if Mongolia is going to save its coal sector in a long term, much work has yet to be done as experts warn. At first, Mongolians need to diversify its coal export by targeting more markets like Japan and Republic of Korea, who both buy coal at high prices.
There is also a real need for a government policy on processing coal and manufacturing value added products. It is encouraging that business entities make initiative and start paying attention in it. This year Energy Resources, Mongolia's leading exporter of coal, introduced the first processing plant in Mongolia. Also Mongolia has even the opportunity to exit from petrol import dependence, using the coal to liquid technology. “Our scientists have studied this technology a long time ago, and now it is time to put it into practice” pointed Prof. S.Tserendorj, director of the Mining Project and Research Center.
And of course, at a time when the coal industry is facing a boom, the consequences of coal mining on the environment will become a critical issue. China extended a regional resource tax on its domestic coal production, billed as a way of conserving resources and limiting environmental damage. While Mongolian coal buyer pays attention in its environment, we continue to transport minerals by trucks, which is expensive businesswise and damaging to the environment. Therefore, starting from now, the government is demanded to set high requirements on environmental reclamation.

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