Coal
Greater expectations
Mongolia’s mining industry was born with coal more than 100 years ago. Even though copper, gold, uranium, and battery metals receive the most international attention today, the country’s economy remains very much anchored in coal. Up to half of the country’s total export proceeds come from coal; in 2023, Mongolia exported 60 million tons of coal to China, a record feat that helped it recover its foreign reserves and stabilize the foreign exchange rate.
With a third of the coal produced being high-quality metallurgical coal used in steel alloys that China is hungry for, there is no doubt about the long-term demand for Mongolia’s coal. Nor are there questions over supply availability, with Mongolia sitting on approximately 34.6 billion t in proven reserves, according to the Mongolian Coal Association. There are, however, doubts about the industry’s long-term accountability, financeability, and competitiveness. These, in turn, hinge on its ability to improve governance, productivity, and logistics.
The Mongolian coal industry is not only highly concentrated, with 15 companies responsible for over 95% of the coking coal output, but it also has a high degree of state ownership. The largest company, which alone accounted for half of 2023’s exports and presides over one of the largest coking coal reserves in the world (estimated at 7 billion t), is the stateowned Erdenes Tavan Tolgoi (ETT). In 2022, ETT became the subject of a serious corruption case involving its CEO and other high-level officials accused of embezzling billions of dollars out of coal sales to China. Coal worth billions of Tugriks was smuggled out of the country. Thousands of Mongolians went to the streets in protest, their outcry directed not only at the ETT but at endemic corruption that plagued the country, especially in the coal industry. Mongolia scores poorly in the corruption perception index, placed as the 116 out of 180 countries most perceivably corrupt countries monitored by Transparency International.
17 people alleged to have taken part in the illegal misappropriations of coal were arrested after the scandal. As owners of ETT, the government was directly implicated and felt urged to take broader measures to both placate public outrage and prevent such large-scale thefts from repeating. A solution was found by decreeing that state-owned mining companies, beginning with the coal ones, must sell a percentage of the product via auctions on the Mongolian Stock Exchange (MSE). The contracts would apply to the coal exported through the Gashuunsukhait border post, the largest export point in the country, located next to the Chinese border.
The Mineral Commodities Exchange was established in early 2023, and, by November of the same year, 9.4 million tons of coal were traded, according to Altai Khangai, the CEO of the MSE. The new system is meant to increase transparency and reduce bureaucracy, as buyers and sellers can close spot, futures, options, and forwards contracts via an auction system, therefore reducing the occurrence of agreements behind closed doors. “The trading of mining products on the stock exchange has facilitated the establishment of appropriate conditions for the accurate calculation of tax fees. This, in turn, will lead to an increase in revenue for the state budget, ensure the fulfillment of contractual obligations related to the supply of mining products, and mitigate risks for the parties involved in the trade. Furthermore, the settlements for exchange trading are conducted via Mongolian banking and financial institutions, resulting in an increase in foreign currency income and strength of exchange rates,” explained Khangai.
The compulsory trading on the MSE has also helped with royalty tax estimations, which are calculated based on the price of coal in China. Companies end up paying up to 30% in royalties instead of the standard rate of 5% because the final selling price in China reflects the sale price, transportation costs, and the profit margin added by the Chinese end-seller. The Mongolian Coal Association has been in dispute with the government for two years over the matter, and sees the MSE update as a good step, providing a more accurate reflection of the market value of coal. However, only 10% of exported coal falls within this category, leaving the rest of sales still reliant on a system that does not benefit the Mongolian companies, its people, or even the government, said Zoljargal Jargalsaikhan, executive director at the association: “When coking coal prices in China surged to US$400/t during the pandemic, transportation costs across the border from Mongolia to China, across a mere 30km line, reached US$300/t, with the transportation companies absorbing most of the profit.”
The government has set a goal for 30% of Mongolia’s commodities to be traded on the Exchange. This will extend to copper, iron, and fluorspar, starting with state-owned companies (SOEs). For now, private companies can participate on a voluntary basis. On the buyers’ end, the auctioned coal remains available for only a number of buyers, typically those closest to the border (in North China), logistics preventing those further south from participating, explained Jargalsaikhan.
Since Mongolia’s border with China stretches 4,677 km, one would think logistics would be easy enough to send things over the fence. Yet logistical deficiencies, including the insufficient development of railways, have constricted Mongolian capacities for years; the country can produce 100 million t/y of coal, yet for the past 10 years, it has produced between 40 and 60 million t/y, most of which had been trucked to China. Over the 239 km between the Tavan Tolgoi site to the Gashuunsukhait border crossing, traffic lines of up to 25 km made of 12,000 coal truck drivers can be found at a given time, wrote NPR, an American NGO. Drivers can wait even a week before crossing. Road accidents are also frequent, reported multiple media.
Bodi International was the EPC contractor for the megaproject. Dolgormaa Bukhbat, the CEO of Bodi International, told GBR that the railway will reduce coal transportation costs by 3.8 times, helping boost the country’s overall export capacity, while increasing safety and reducing dust, soil, and air pollution associated with trucking. “Transport by rail is much more environmentally friendly and safer than by trucks, and the development of the railway also greatly contributes to the nation’s socio-economic development as over 2,000 workers, most of which are expected to be local residents, will be employed on a long-term basis when the TT-GS railway operates at its full capacity,” said Bukhbat.
"The Tavantolgoi Gashuunsukhait (TT-GS) railway is a mega project with a total mainline alignment of 233.6 km. The main purpose of the rail will be to transport export coal from the mine to China, hauling 30-50 million t/y of freight and increasing the export capacity of Mongolia."
Dolgormaa Bukhbat, CEO, Bodi International
Besides the railway, ETT currently has 11 investment projects under its belt. These are primarily focused on increasing coal extraction through investments in new technology, a coal conveying system, building a coal handling and preparation plant, as well as a thermal power plant and transmission lines. So far, the company has spent US$1.8 billion out of a US$5.2 billion allocated budget. The country’s first coking coal blending and storing facility is also underway at the Tavantolgoi Coal Terminal Stock project, promising to facilitate throughputs.
Munkhjargal Kh., the acting CEO who took over the helms at ETT following the scandal, has a banking and finance background, which he applies in his leadership. The new management, he said, managed to increase both coal sales and transportation levels by over 3.5% since taking over more than a year ago. Exploration efforts were also tripled during this period, he told GBR. ETT has only mined 2% of its current resource, with two out of six coal fields being currently in operation and one more in development at the feasibility stage. Munkhjargal is optimistic when he looks at demand, though he acknowledges that, with China being the main buyer, the industry is vulnerable to China’s wants. Also, he admits: “As a state-owned entity, political risk is always a challenge, especially as cabinet changes often result in policy changes impacting our work. We expect the upcoming elections in 2024 to create some instability.”
In the private coal sector, ASX-listed Aspire Mining has a different vision for the company, wanting to see itself become a reference point for responsible coal mining, comparable to what one would find in New South Wales or British Columbia where environments are as sensitive as Khuvsgul Aimag, a picturesque region in the north that locals call ‘the Switzerland of Mongolia’ and which hosts Aspire’s Ovoot coking coal. “The people living in Khuvsgul are concerned about the potential impact of coal mining on their environment. This is understandable given that public perceptions have been shaped by examples of negative impact from some irresponsible mine operators in Mongolia. The public has had little exposure to responsible mining operations," said Sam Bowles, Aspire’s CEO.
After listening to the concerns of the locals, Aspire Mining updated its development plan, originally devised in 2012-2013, and decided to opt for a smaller operation, amenable to road haulage. “The Ovoot Early Development Plan (OEDP) forecasted an initially smaller scale mine and truck haulage across a road to be constructed that could also be used by the community. Following appointment of new management in 2019-20, the OEDP has been refined further to address remaining community concerns about environmental protection and local development," said Bowles.
A project with strong ESG credentials is also more likely to get funded. Global investors, including banks, are increasingly averse to financing coal. In Mongolia, the main commercial banks are also adopting a stronger environmental stance, with internal goals to increase their green finance portfolios. Golomt Bank, for instance, wants green loans to represent 5% of its portfolio by 2025, and 10% by 2030. That does not mean it will no longer finance coal: “Golomt Bank is supporting coal companies, while other international banks have stopped lending to coal-related businesses. In most developed countries, coal reserves have already been depleted so this may not be much of an issue, but in developing countries, it is not the case. There is a prevalent misconception that mining emits the most greenhouse gas (GHG), yet 80% of our exports go to China and the majority is actually coking coal, a raw material for steelmaking. That means, most of our coal is burnt in China, becoming part of China’s GHG emission rather than Mongolia’s, under the Paris Agreement definition. This is the same as Norway exporting oil, which is burnt in other parts of the world, whereas Norway remains one of the greenest countries.”
The problem that coal projects face is that all coal is put in the same boat. Yet not all coal is the same. About a third of Mongolia’s coal is coking coal, while the rest is thermal coal, mostly brown coal or lignite. Ovoot, for instance, has recently been proven to be an FM36 in Chinese standard, or ‘fat’ coal, which is quite scarce. Chinese producers mix this premium coal with lower-quality domestic coal to produce coke, used in steelmaking. “Recently, debt financing of coal projects has become challenging, however, there remain institutions with appetite to invest in coal projects. These are generally those that can distinguish between coking and thermal coals. Use of coking coal is the only commercially viable method to produce new steel, and steel is an essential material required to achieve the United Nations Sustainable Development Goals," said Bowles.
Both coking coal and thermal coal prices are expected to drop in 2024, though coking coal remains volatile because it depends on a narrow supply base. Various analysts also warn of shortages of coking coal in the early 2030s under a scenario whereby the steel industry decarbonizes slower than expected or demand grows. Mongolia is the fifth largest seaborne metallurgical coal supplier, after Australia, which leads by a large margin. However, given that Mongolia can realistically only supply to China, its main competitors are Australia, Indo- nesia and Mozambique. Ultimately, China has the power to decide whose coal it buys.
Mongolia exports most of its coal, keeping only 10 million t/y for domestic use, and exports 50-60 million t/y. The industry has also come under scrutiny in relation to high pollution levels, especially in the capital city, Ulaanbaatar, one of the most polluted cities in the world, with air pollution levels up to 27 times the level recommended by WHO. The colder it gets, the worse the air quality and the smog that forms above the city’s otherwise sunny skylines. As part of a project funded by the Asian Development Bank, UB banned raw coal burning and replaced it with briquettes.
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