MONGOLIA THE SLEEPING GIANT OF COKING COAL SUPPLY

Mongolia, sitting on vast resources of mineral wealth, is at last beginning to realise the potential that has been talked about for many years as more of its resources come to market. The country’s coal resources are considered some of the last untapped quality deposits anywhere in the world and their development could significantly impact international supply dynamics.

Although coal can be found spread across this vast country it is one particular deposit in the middle of the Gobi desert at Tavan Tolgoi that has governments and mining companies scrambling to get a piece of the action.

The Tavan Tolgoi deposit, located just 220km from the Chinese border, is a massive deposit of some six billion tonnes of coal, 1.6bn tonnes of which are high-calorific coking coal making it ideally situated to feed China’s growing industrial appetite. However it is Mongolia’s very location, landlocked and sandwiched between its two giant neighbours of China and Russia, with no direct access to seaports that has begun an intriguing geopolitical scrap over access to and the future supply of the coal at Tavan Tolgoi.

Mongolian Coking Coal Exports

The majority of the Tavan Tolgoi deposit is owned by the Mongolian government through a state company called Erdenes that was due to list in London, Hong Kong and Ulan Bator earlier in the year but that listing has been postponed several times because of regulatory hurdles and political deadlock. It is the western half of the Tavan Tolgoi block however, not part of the Erdenes listing, which has seen the real political contention as it becomes the first part of Mongolia’s coal reserves to be opened up to foreign investment.

Last year, the Mongolian government announced that Peabody of the US, China’s state-controlled Shenhua Group and a group of companies led by Russian Railways would be part of a consortium to develop this western block, which contains 1.8 billion tonnes of coal, 65 per cent of which is high grade coking coal. However, the bidding process was quickly branded as unfair by participants from Japan and South Korea and rejected by supervising authorities in Mongolia. In recent months the process has again been thrown open for tender and another wave of political pressure has been coming from all sides to win favour for the respective companies involved.

Further complicating the process is a protectionist impulse coming from Mongolia’s nationalists, who have grown increasingly powerful in the two decades since the country broke free from Soviet influence. Old hostilities against both Russia and China make the current Mongolian government reluctant to cede too much power to companies from these countries. Meanwhile, the US appears more than happy to step in as the moderating force against these rival powers that should see Peabody leading the consortium of foreign companies developing the deposit at Tavan Tolgoi.

Such political manoeuvring has exposed the finely balanced position Mongolia, and its relatively tiny population of just three million people, now finds itself as the growing rivalry between Washington, Beijing and Moscow threatens to delay the development of the country’s vast resources.

China Coking Coal Imports by Source

Despite these complications, Mongolia’s ability to seriously disrupt the traditional supply chains in the Asia/Pacific coal markets is already evident. The country has gone from exporting 2.2 million tonnes of coking coal in 2006 to expected total exports of 20 million tonnes this year, almost all being sent to China. The country has advantages over traditional seaborne supplies to China since, being a landlocked country, it is essentially forced to accept lower prices in comparison to the seaborne market. Mongolia also has a freight advantage delivering into China due to being a neighbour, adding to its cost competitiveness.

These export advantages to China have largely been at the expense of Australian coking coal supply with future Mongolian output representing a real threat to the dominant position of Australian exports to China and the region at large. The floods in Queensland in 2011 compounded this position for Australia when Chinese steel producers switched to Mongolian suppliers for their coking coal requirements. Once Australian production recovered at the beginning of 2012, Chinese customers who made the switch to Mongolian coals, had little incentive to switch back to Australian coking coal, where the Mongolian coal was of sufficient quality. In the longer term, Mongolia will be well placed to meet the predicted booming demand of Chinese and Asian steel industries given its geographical location and high quality coals.

Stephen Hough

Market Analyst, New World Resources

shough@nwrgroup.eu