Could you give us a brief background on the Mongolian Coal Association?

The Association was created in 1998 after the country transitioned from a centralized planning economy to a market economy. Our task is to serve our members’ lawful and common interests. Our 15 members account for about 95% of coking coal production, while other members also supply brown coal to the domestic power plants. The country’s coal industry includes about 50 companies, but many are small-scale operations focused on local supply for the different provinces. The industry is currently entirely open pit yet we anticipate that it will move underground in the next five to 10 years. With the transition into more sophisticated operations, we are also seeing a trend for the implementation of battery-powered equipment that helps improve efficiency and optimize costs. What are Mongolia’s domestic needs for coal?

Out of the total 40-50 million tons produced annually, Mongolia consumes 10 million tons, and the rest is exported. Of this, 8 million tons is used for power generation and the rest is burnt for households and industrial processes. Half of Ulaanbaatar’s households rely on coal for direct household heating, which contributes to significant pollution. There are also plans to convert coal to gases, which would reduce emissions and mitigate the impact on health. 2023 was a record year for coal exports. Can you comment on the industry’s performance and the competitiveness of Mongolian coal globally?

Mongolia’s coking coal exports started in 2002 and reached a historic high in 2023, surpassing 60 million tons, all of which goes to China. During the first year of the pandemic, coking coal exports halved, whereas Australian’ supply doubled. The following year, geopolitical tensions between Australia and China saw the former almost entirely halting exports to China, a gap that Russia filled. Meanwhile, Mongolia’s exports were still half the usual volume. However, lately, China has been reducing imports from Australia, the US, Canada, and Africa, prioritizing closer nations – Mongolia and Russia.

But our competitiveness goes beyond geopolitics. Mongolia can theoretically produce 100 million t/y, but the border connecting points and customs clearance limit this capacity. Landlocked, Mongolia has limitations compared to other producing nations. Until not long ago, all coal was being trucked but recent railway developments have improved the outflow of coal.

Finally, Mongolia’s competitiveness is decided by the buyer. There have been multiple high-level diplomatic engagements between China and Mongolia, resulting in cooperation trading agreements for extended periods.

What are the main concerns faced by your members today?

Operational challenges, like troubles with environmental protection organizations, are a common concern. The Association steps in on behalf of our members and requires the support of authorities. The other major concern is the royalty tax calculation, which is based on the price of coking coal in China – encompassing sales price plus transport costs plus the margin made by Chinese companies. Although the intended royalty rate should be 5%, companies end up paying up to 30% due to the disparity between sales prices and market prices. We are in the second year of a dispute with the government on this matter, and some changes have been made, such as estimating the royalty based on the price on the Mongolian Stock Exchange (MSE), for the coal traded on the MSE, but only 10% of all exported coal falls in this category, although this amount is being increased. How did your members respond to the compulsory trading on the MSE?

This change was primarily driven by the expectation that it would bring clarity to royalty estimations, but also by a need for more transparency, following a serious scandal that occurred last year, when billions of tugrits were stolen from coal sales. Thousands of people protested.

Most companies believe that having coal traded on the stock exchange will provide a more accurate reflection of market value, but there are also disadvantages that both buyers and sellers have raised. They point to the fact that auctions may not be practical since only a small number of buyers, predominantly from near the border (in North China), can participate in auctions due to logistical constraints since they don’t have facilities close to the border. Moving forward, we expect the amount of coal traded on the MSE to grow, but, of course, there will continue to be direct long term trade contracts too, which have been already signed before introduction of MSE trade.