B. Altsukh, Director of the Coal Department at the Mining Agency since 2012, started his career in the Baganuur mine as a mining engineer, rising to become its Deputy Director, before moving on to work as a senior expert at the Ministry of Fuel and Energy and then at the Ministry of Mineral Resources and Energy. His experience thus covers both work and administration on site and formulating policy on a wider scale. This gives a special dimension to his conversation with N.Ariuntuya on issues pertaining to the coal sector.
What are some of the significant achievements in the 90 year history of the coal sector in Mongolia?The formal history of the Mongolian energy and fuel sector begins with the nationalisation of the Nalaikh deposit in 1922. Other major coal deposits were opened later -- Sharyn Gol in the 1960s, Baganuur in the 1980s and Shivee Ovoo in the 1990s. Total annual output was between 4 million and 6 million tons and all of it was used to meet domestic needs. The regulatory body was the Coal Industry Union under a deputy minister. This organisation had the size and structure of an agency. Finally, the Coal Authority was established as an Implementing Agency of the Government in 1996 and it operated until 2003.
The spurt came in 2005. Both domestic consumption and the export volume have been rising. Last year, 31 million tons of coal was mined, and 20.5 million tons of this was exported. Coal accounted for 10 per cent of total industrial production and 50 per cent of exports. Both the present size and range of the coal sector command our attention, including those of a large number of investors.
The primary responsibility for this sector is with the Coal Department at the Minerals Authority, where I am. Our department has two divisions: Industrial Technology and Coal Processing. We have some 20 graduates from national and foreign universities working on methods of adapting new coal exploration and processing technologies to our needs. Our other activities include standardising operations in the coal industry throughout the country, collating reports, ensuring that standards are met, and reviewing and approving Technical and Economic Feasibility Studies. We are also responsible for registering a new deposit as well as mine closures, mining work plans, ensuring that work follows provisions laid down in the Feasibility Study, and on-site monitoring. At times we feel we are understaffed but we strive to do the best with what resources we have.
People tend to think that work in the coal sector is quite simple. Is this true?
It is only outsiders who think coal prospecting, exploration and extraction are simple matters. The reality is very different, given the several unique characteristics that coal as an industrial product has. The price per unit is comparatively low, so only large deposits are commercially viable. These in turn require more investment. Arrangements have to be made to transport hundreds of thousands or even millions of tons a year. In other words, the sector is greatly dependent on well-developed infrastructure. It also requires different kinds of professionals and highly advanced technologies. Miscalculating the quality or the quantity of the reserve or using an inappropriate operational system can prove to be very costly. Hiring skilled manpower in various areas of work, and use of modern and proper technology call for large investments, but this is essential for long-term and sustainable operation.
In the former USSR, mining engineers were trained in two different categories. Those dealing with base metals had to use equipment smaller in size than those used in coal. Coal mining requires more extensive digging and thus affects the environment more.
How many active coal mines do we have now and will their number increase in the near future? And what about Mongolia’s current coal reserve amount and extraction capacity?
The public and the media are always curious to know how much investment was made in the coal sector, how much reserve has been discovered and how much more is likely to follow.
Mongolia has an estimated 173.3 billion tons of coal reserve of which 21.5 billion tons have been confirmed by detailed exploration. This means, if 100 million tons are extracted each year, it will take 200 years to exhaust the coal. As of today, there are 60 coal deposits operating, including small mines and pits in Nalaikh. Among them, 40 are active and half of them engage in coking coal export. Some 100 more deposits are ready to start mining, having obtained a mining licence and completed their Technical and Economic Feasibility Studies.According to studies made in 2010 by the Ministry of Mineral Resources and Energy and the Minerals Authority, by 2025, Mongolia will be extracting nearly 100 million tons a year, exporting 80 per cent of it and using the rest within the country.
Since 2012, the Ministry of Mining has been cooperating with Japan’s JICA to formulate a master plan for the sector, focusing on usage and processing. The plan is almost ready for release, with a recent meeting discussing the final report.
The report has studied the steel and coke industry worldwide and concluded that China’s coking coal consumption will not be growing very much, from the peak reached in 2011 and 2012. At present China imports 48 million tons of coal every year, of which 20 million tons or 40 percent are from Mongolia. These figures are not likely to change significantly. The report projects that by 2025, China’s coking coal import could go up to 55 million tons and Mongolia could be supplying 70 per cent of this, or 40 million tons. This is half of what our own study in 2010 had estimated.
As I said, we have the capacity to extract 150 million tons of coal, but if the export market does not expand and proper infrastructure is not developed, new investments could be unprofitable. It is high time to seriously discuss these projections.With less investment, or with increased supply bringing down the price of coal, there will be less money for environmental rehabilitation.
So you think new investments will be unprofitable?
Yes, if, as the study by the Japanese says, our export is limited to 40 million tons of coking coal. You see, Erdenes Tavan Tolgoi’s Baruun and Zuun Tsankhi each can produce 20 million tons and Ukhaakhudag can produce 15 million tons. So output fromTavan Tolgoi coalfield alone would be 55 million tons. The 2-3 deposits on Narynsukhait coalfield can produce a further 30 million tons. So these two coalfields alone have the capacity to supply over 80 million tons. The question now for the 100 more deposits waiting in the wings is if they can compete with the two producers, which already have an advantage in terms of infrastructure, location and support from the Government. I don’t like the chances for the other deposits to compete with these two in the export market. It is my opinion as an unbiased professional that any new investment in any of these 100 deposits should come only after a thorough and careful study of trends and projections.
The Minerals Law passed in 1997 was intended to attract investments. And it did so. Now we need to filter the investments that came in, which include both good ones, proposing adoption of advanced technology, and bad ones that don’t meet even the basic technological requirements.
Let me give you examples. First, the last few years have seen China shutting down small mines and lumping them with ger ones. The equipment and machinery used in those small mines have found their way into our country. They are old, not energy efficient and highly polluting. But we encourage such investment, even though they have such negative effects. It is time to enforce strict norms on choice of technology appropriate to the characteristics and location of the mineral, and thickness and geological features of the soil. If the investment already made cannot be wasted, we at least should enforce all possible upgrading of the equipment. This is by no means an ideal solution.It is always bad to adjust operations at a deposit to the equipment in use, resulting in inefficiency, cost increases, production loss and unnecessary waste. That is why it is important to distinguish good investment from bad.
Second, we need to steer the investment to the best possible purpose. Discovering new coal deposits should give way to improving the quality of the output and to processing, and also to developing infrastructure.
We have created a mess by issuing separate licences for one coalfield, which usually has a compound and not homogeneous structure. For example, Narynsukhait coalfield is divided into 25 parts and they all have different names such as Narynsukhait, Ovoo Tolgoi, Khuren Tolgoi, Sumber, Banzat Khairkhan, Uvuljuu Uul, Zangat Uul, Khuvguun, Gashuu Tolgoi, Khairkhan Tolgoi, Tovon Uul, Baruun Noyon Uul and Galyn Ovoo. All these separate licences merely mean loss of economic and technological efficiency. That is why the Government’s Action Plan proposes operating such large coalfields as one whole complex. Only when this policy is put to practice can we expect to bring some order into the present chaos.
You mention projections that see China as our only market. What about exporting to third markets such as Japan and South Korea?
It will be difficult to compete with their present main supplier, Australia. Russia, too, is getting ready to enter these markets and has the advantage of its own sea ports. Our competitiveness is severely limited by having to transport coal through our neighbours if we wish to reach beyond them.
Transport costs to take our coal to any third market will be prohibitive, and exporting beyond our neighbours will be profitable, and just marginally so, only when coking coal is sold for $200. At present, the world price is $120-$150. The nearest usable Russian seaport is 5,500 km away, and that in China 1,400 km. Viable transit facilities depend on not just if our neighbours allow or encourage them, but also on whether they really have the capacity to bear all this extra load on their railway systems. I am just being realistic when I talk about China as our only export market.
Even there, it is wishful thinking that because China is a market they will buy everything we sell. It is clear that China is not able to buy more than 50 million-60 million tons.
How did the study decide on the price? Why should we not expect coking coal prices to rise?
Many new countries are getting ready to come into the coking coal market. Right now, the mineral is expensive and in demand. A recently announced deposit called Elgain Yakutia, Russia, has as good grade coal as Tavan Tolgoi and rich reserves. Another deposit is in Mozambique. So we have new competitors plus the old ones such as Australia, the USA, Canada, New Zealand and Indonesia.
China itself produces 504 million tons of coking coal every year and will seek to raise its own output. Prices cannot be expected to rise if the number of suppliers goes up while demand does not keep pace. It will be the same even if we discover a third market. Yes, extraordinary situations can change this order of things. Mongolia was able to capture 40 percent of China’s coking coal market only after floods in Australia severely affected production there.
Why should we place so much reliance on a JICA study, when it is not really a professional organisation?
In the early 1990s, when Mongolia transitioned into the market economy, the fuel and energy sector found itself in a very difficult situation. Electricity outage was common in Ulaanbaatar. At that critical time, the USA and Japan came to our help. Actually, our first master plan for the coal sector was prepared in 1996 with funds from JICA. The Japanese Government and the World Bank gave us loans to implement recommendations made in that plan. These helped us take up modernisation programmes at Baganuur and Shivee Ovoo deposits which have enabled the fuel and energy sector to be what it is today.
When the term for this master plan ended in 2010, the Ministry of Mining requested JICA to do a fresh study on the coal sector. JICA floated a tender to select a Japanese research organisation for the job and its choice fell upon JCoal (Japan Coal Energy Centre) to study trends of the world coal market and to recommend measures to improve our competitiveness.
You said there are 100 more deposits ready to begin operation. Would you please name some of them?
Let me only mention deposits that are very close to the border. SouthGobi Coal Trans, Baruunnaran, BoldFoarda, Junhaowei, Khunnu Coal in Umnugovi aimag, Ail Bayan, Ikh Gobi Energy in Dornogovi aimag, and Bayantsogt and Khuut deposits in Sukhbaatar aimag are those that have completed their preparatory work. Gobi Coal Energy LLC in Bayankhongor has spent money on making transport arrangements from Khotgor coalfield to China through Narynsukhait. They are about to transport their coal from Shinejinst to Narynsukhait by dirt road. Aspire Mining has a large deposit in Khuvsgul aimag, and plans to build a railway from Erdenet to Murun and export the coal to the north. Another large, new, and ready-to-open deposit is at Ulaan-Ovoo coalfield. There is a similar one at Khotgor Shanaga coalfield in Bukhmurun soum, Uvs aimag where the investment has come from South Korea.
I could also mention the Khushuut deposit which belongs to Monenco. They have already spent a huge amount on building a road but the mine has not seen much progress. Opposition from local residents is seen as the reason for this, but the real reason why the company is not making progress is that current market conditions are not good for them. If it felt it would be profitable to start exporting, the company would certainly have found a way to go ahead.
As for brown coal, deposits that have between 1 billion and 4 billion tons of reserve include Tugrug Nuur, Tsaidam Nuur, Chandgana, Tugalgatai, Erdenetsogt and Khashaat, all located in the central area.
What about all the companies holding exploration licences? Surely their work will come up with more deposits? It’s difficult to predict the results of exploration work. According to the current Minerals Law, once exploration is over and a deposit ascertained, the licence changes into a mining licence after 9 years, and a Technical and Economic Feasibility Study Report should be submitted within 60 days of the change. The revised draft proposes State reimbursement of exploration expenses on a deposit taken into State ownership, but how this will be done is not very clear.
We need to take a policy decision on whether to dig every deposit that is discovered or to operate only deposits with substantial social and economic significance, and on exploiting large deposits gradually in phases.
Are new coal deposits running efficiently? It seems there is no professionalism in Mongolia. Anybody can try for a mining licence, and once it is in hand, it goes to China and finds some source of funds. Relatives and acquaintances are put to work at the deposit, with only one or two mining professionals among a staff of 40-50 people. That’s how it is with most small mines. When a mine is run unprofessionally with poor technology, both the economy and the environment suffer.
It is important to issue licences only to professional organisations. The mineral sector is unique in that it needs people skilled in many basic sciences as well as in economics, technology and social relations. Only a professional management and technically qualified staff can apply new scientific developments in a mine’s work.
Is it right to insist on value addition at a time like the present? It is true that value-added coal commands a higher price but there is another side to this. Adding value needs investment, so if the final product doesn’t meet the standards, it will be a total loss. Let’s say Dorj has a market for his cow’s milk. Even if he cannot sell all the milk, he does not lose much. He wants to add value and makes dried curd (aaruul). But if the aaruul doesn’t taste good, nobody will buy it, even after he has spent money to make it. So he ends up with a double loss. It will be the same when adding value to minerals. There is no guarantee of sales if we don’t pay attention to the technology and quality of the product.
The most important thing is to know the customer’s preference and purpose. For instance, if China wants raw coal, it will buy raw coal and not care for our coal with added value. So we need to find out what is it the customer wants, then agree on the price, and then seek a long-term and sustainable contract. Only when and if there is a clear demand for a value added product at a price that is fair to us as a producer, should we go in for it.
There is a need to consider the likely negative effect on the environment. How much water is necessary to wash and process coal? What should we do with the waste? Remember what Mongolian Mining Corporation Executive Director G. Battsengel has said. They sell raw coal at the border for $95 per ton. The price is $50-$60 higher for washed and processed coal. But MMC spent nearly MNT600 billion to build the processing plant. Taking that into the calculation, the added value may be seen to bring in only $5 more per ton. That is the actual net profit, and this without considering the costs to the environment.
It is also seen that countries with economic and other constraints buy raw minerals, and add value in their own country so as to create jobs for its people. This changes when their economic strength increases, for then they will not waste their water resources and stock up a pile of dirt in their own backyard. If Japan and South Korea buy from us, it will be the final product.This may be the case with China also at some time in the future, but at the moment it is more interested in buying raw coal from us.
Australia seems to follow a policy to sell only raw coal in an effort to protect its environment. What we need is thorough research on how much we shall have to invest in order to make value added products and how much the actual profit will be. We can’t just make a decision based on our emotion. The end result could do us more harm than good.
What shall we do now with our enormous resources if sales avenues are as restricted as you make them out to be?We have to find a way to new markets, without losing our share in existing markets. We have a vast territory, so much mineral reserves, especially coal. We can ask developed countries like Germany, Japan and Korea to build their metal processing plants in our country. These metallurgy plants can use our ferrous metals, and it will be a win-win solution for both sides.
The overwhelming need is for a policy that is transparent and clear. Uncertainty creates confusion among investors. Before we exploit our vast coal reserves and allow more investment we need to bring order to the sector. The President has already wondered aloud if 2,200 exploration and 1,200 mining licences are not enough for 2.7 million people.Why do we have to dig out all our resources in a hurry, causing enormous damage to the land? I personally favour operating a few deposits that will lead our economy forward, and stop at that.
As China shows, properly exploiting deposits calls for use of sophisticated technology and a comprehensive policy. We need strict regulations under the Minerals Law to bring order to a sector that has grown haphazardly and give it a long-term direction. Companies will be allowed to start their operation only after building the required infrastructure. We allowed coal to be carried from Narynsukhait and Tavan Tolgoi along dirt roads only to draw foreign investment and to somehow begin exporting coal. The situation is different now, and we should insist that coal trucks will be allowed only on paved roads.
Coal miners are critical of the price fixation by the Ministry, not accepting that without this some companies will sell their coal for $100 while others will get no more than $20-$30. When there is cutthroat competition to bring prices down, the State has to intervene to ensure some fairness.
Many people fault the revised draft of the Minerals Law, for what they see as encouraging the State to play a ger role and discouraging investment. It seems to me that professional associations are more worried about this than investors themselves, who have kept quiet about what others perceive as threats to investment. I think international investors are not protesting because they know the Minerals Laws of Russia, China, Canada and Australia are much stricter than our draft. Those who are so loud in their criticism are only seeking to create confusion among the people.
Many analysts feel the future will see more demand for energy coal than for coking coal. Since most of our reserve is of brown coal which is used as energy coal, what does this mean for us?I agree that energy coal demand will rise drastically. But its price is much lower than that of coking coal and because it is heavier its transport cost is higher. We do need to have a clear policy to support use of brown coal, and its processing. Export of coking coal has hogged the limelight, taking people’s attention away from the necessity to exploit our brown coal resource wisely and well. We need regulations on who can buy it at what price to produce energy.
There is talk about building a energy plant based on Shivee Ovoo coal and exporting the energy to China. Now, China has a fixed price for energy, but shall we follow this price or the market price? We also have to choose the most suitable technology for the plant, one that would not emit lots of ash and smoke. It makes no sense to generate only a small amount of energy using up so much coal and water, and then sell it at a low price. Again, we need a comprehensive policy to get the best results.
We talk about coking and coal liquefaction. Liquefaction technology is talked about in many countries but as of now, it is not being actually used anywhere. A South African company called Sasol claims to have a liquefaction plant but not much is known about it. If the method was really profitable, then countries that are more developed than us would have already started using it. In 2006, we said by 2012 liquid fuel from coal would be used to meet all the energy needs of Mongolia. I think it has turned out to be just wishful thinking.
But private companies have been spending lots of funds on developing the technology, havent they?I suppose they have progressed enough to justify more investment, but altogether we are nowhere near developing an acceptable and viable technology. Coal liquefaction claims are not new. It is said that Germany did it during WWII, but nobody knows just how good that fuel was. Then, with the discovery of abundant oil sources, the motivation was lost. As petroleum sources dry up, liquefaction is again in the news. But as of today, it is much cheaper and profitable to liquefy oil shale than coal, so countries are going for that.