J. ZOLJARGAL: DISCOUNTED COAL PRICES FOR MONGOLIA POSSIBLE WITH REDUCED DEPENDENCE ON SINGLE BUYER

R. Renchindulam

Mongolia's primary export is coal, with the country achieving a historic milestone by exporting 83.7 million tons last year. We discussed the successes, challenges, key issues, and future trends in the coal sector with Member of Parliament J. Zoljargal.

As an expert with extensive experience in the coal industry, how would you assess the achievements and challenges faced by the sector over the past year?

Mongolia's exports saw a rise last year, which can be considered a success. At the same time, domestic coal consumption for energy production is increasing, and new energy sources are being developed.

For instance, last year saw the commissioning of the first 150 MW unit at the Buuruljuut power plant. Meanwhile, the construction of several other thermal power plants is underway, including a 30 MW plant in Tosontsengel soum, Zavkhan aimag, a 50 MW plant in Sukhbaatar soum, Selenge aimag, and a 660 MW plant in Bayan soum, Tuv aimag. If these projects continue at this pace, Mongolia's economy and industrial sector are expected to grow in parallel. 

However, both the energy and coal sectors must operate on sound business principles aligned with market prices and tariffs. The gradual resolution of these issues since last year can also be considered a success. In other words, the increase in coal exports alongside rising  domestic consumption is  a  positive outcome.

The state-owned company is legally required to trade coal on the exchange and according to border terms. This regulation has been successfully implemented over the past two years. In 2024, Erdenes Tavan Tolgoi JSC traded approximately 50% of its total coal exports on the exchange, while the remaining 50% was traded through previously concluded offtake agreements. This, too, can be considered a success.

Recently, coal trading on the exchange has been suspended for an uncertain period due to a decline in market activity. However, I do not believe that the trading on the exchange itself faced any major obstacles. Since Mongolia has Exchange, it will be essential to monitor its implementation closely. Additionally, it is important to continue with the major strategic agreements that have already been concluded.

One more thing to note is that the government is expected to follow the guidelines set by Parliament and work on signing a large-scale contract with China Energy, under which direct purchases will be made. However, even if this agreement is finalized, trading on the exchange must continue. It is crucial to ensure the regular operation of the exchange to maintain a balanced and transparent market.

On the one hand, in this era of geopolitical uncertainty, securing large, stable, long-term buyers is essential for ensuring stable export revenues. On the other hand, relying solely on such buyers exposes the market to the risk of price deflation on the exchange. However, we cannot afford to depend solely on these big buyers; it is crucial to keep the door open for new buyers to enter the market. I believe that both large direct purchase contracts and exchange-based purchase contracts should be available in the market.

We must leave room for additional profits if market demand increases and coal prices rise. In other words, we need to keep the opportunity open for new buyers to enter the market through the exchange and purchase coal. Therefore, I believe that both large direct purchase agreements and large purchase contracts should be available in the market.

Signing a long-term contract with China Energy would provide Mongolia with a stable long-term buyer for coal. However, there is the issue of pricing. How profitable is this contract for Mongolia, and are there any aspects that could be improved?

Having a long-term, stable buyer is in our best interest. However, while we respect the interests of the Chinese side, we must also maintain our own position. If we are told that in order to connect the border by rail, we must sign a coal contract, accept their price, and agree to a mine-mouth price-essentially, if we are left with no room for negotiation-then no agreement will be successful. At the very least, I believe that coal can be supplied at a discounted price, provided that not only coking coal but three types of coal sre selected for export. Also, the amount of discounted coal sold outside the exchange should not account for the majority of Mongolia's total coal exports.

In 2025, it is projected that 83.3 million tons of coal will be exported at a price of $129 per tonne. How realistic is this projection?

Based on my calculations, the actual market price is likely to be lower than the projected $129 per tonne.

If the price is lower than projected, what steps can be taken to ensure stable state budget revenues?

We can export approximately 83.3 million tons, but the price will largely depend on demand from China.

The Gashuunsukhait-Gantsmod cross-border railway has been a topic of intense debate, with much discussion surrounding the potential benefits and risks once the railway is completed. You've mentioned the risk of a possible decrease in the overall price of Mongolian coal-could you elaborate on why you believe this could happen?

There is a clear need to connect across the borders by railway. However, China Energy has insisted that this connection not be considered separately from the coal trade, but rather be tied to the coal purchase agreement. We understand this position, and we recognize that connecting our borders by railway and facilitating large-scale coal exports would undoubtedly benefit our economy. At the same time, there are potential risks and important considerations to take into account. As a result, several proposals with fundamental differences were presented to Parliament, and one of these proposals was ultimately supported.

First, the Chinese proposal, as outlined in their official letter, calls for the purchase of 20 million tons of coking coal per year. However, the Tavan Tolgoi deposit exports three types of coal: coking, soft coking, and thermal. With a production of 20 million tons of coking coal annually, there is a risk that the Chinese side might choose to purchase only one type of coal, leaving the other types underutilized. This could lead to a shortage of coking coal for other buyers. Therefore, it is essential to negotiate a contract that includes all three types of coal, in line with the types and volumes available at the deposit. This proposal was supported during the joint session of Parliament.

Secondly, 'Erdenes Tavan Tolgoi JSC mined over 30 million tons of coal for the first time this year. If this number rises to 40 million tons, it would mean that half of the coal must be sold to China Energy at a discounted price. We have received a request to follow the coal pricing policy of the 'Chalco' company when calculating this discounted price.

So, if Mongolia exports 80 million, 100 million, or even 120 million tons of coal, this large company will receive coal at a discounted price. However, if China's overall coal imports decrease and Mongolia ends up supplying 20 million of its 50 million tons of coal exports at a discounted price, there is a risk that coal prices at all our borders and mines could fall.

   According to the Prime Minister, the Government Working Group, and the sectoral minister, connecting our borders by railway will undoubtedly facilitate the connection of other border crossings with our southern neighbor. This would enable Mongolia's coal exports to reach 120-160 million tons. If both countries are pursuing something very important, it would be essential to include in the cooperation agreement that coal exports will reach 120 million tons.

   China has a planned economy, so once a commitment is made, they can effectively plan and determine where and how much coal to purchase. However, if we agree to supply 20 million tons of coking coal at a discounted price without a formal agreement, the price of coal could drop, and the exchange may cease to function. This scenario would not benefit Mongolia. We need to carefully consider this and focus on addressing the issue.

In other words, if 20 million tons of coal were to make up a significant portion of total exports, it could drive down the price of coal. However, if total exports exceed 100 million tons, the impact on prices would be less significant.

So, you believe it's necessary to mine more than the 83.3 million tons projected in the state budget. But how would you set the overall price for that coal?

The contract with Chalco was signed in 2011, and its production volume is smaller compared to that of China Energy. Therefore, using the Chalco pricing method may not be fully applicable. For Chalco, the price is calculated based on the prices from five domestic sources in China. However, since the exchange in Mongolia has been established and operating for several years, it is more appropriate to calculate the price by considering three sources: the Mongolian exchange's pricing, the Chinese side's pricing, and the international market benchmark.

I would like to ask about your stance on the mining royalty. Is the issue of the government setting the benchmark price and the price used for tax calculations still a concern? Are there any plans for changes in this regard?

The contract with China Energy will be concluded on mine-mouth terms, rather than exchange or border terms. As a result, the contracts negotiated directly at the mine-mouth are expected to be larger than those made under exchange terms. After purchasing the coal at the mine-mouth price, royalties will still be calculated based on the border price, and the royalties will be collected at the mine, not from the buyer. In other words, the mine will sell the coal at $70 per ton (the mine-mouth price) but will be required to pay royalties based on a $150 per ton price (the border price when it enters China). This system is unfair.

A few years ago, an index was created to calculate and add transportation and border- crossing costs to the mine-mouth price, but it has not been used. If royalties are to be calculated based on the Chinese market price, rather than the mine-mouth price, then coal should be sold on border price terms. In this case, we would only deliver the coal to the border, and the transportation costs would remain our responsibility.

Russia has decided to abolish its coal export tax starting this year. What impact, if any, will this have on Mongolia's coal industry?

We view this decision as an effort by Russia to boost its exports. However, we don't anticipate it will have a direct impact on us, as our primary coal market is in northern China, while Russia's coal primarily targets northeastern and southeastern China. Moreover, our coal differs from Russia's in quality-specifically, our coking coal tends to have a slight edge in terms of quality.

Globally, coal consumption is projected to decrease, and investment in the sector is expected to decline due to concerns over greenhouse gas emissions. Do you agree that investment is declining? And what do you see as the future of Mongolian coal in this context?

Due to the international geopolitical situation and prevailing political trends, investment in coal projects is expected to decline. However, we must approach this matter realistically. Coal remains our primary raw material. It's encouraging that coal-fired power plants are being built, but it's also crucial to establish small and medium-sized coal-fired thermal power plants across the country at least in key regions, if not in every aimag. Additionally, we must explore methods to reduce emissions by extracting gas and liquid fuels from coal. This technology has been proven and used for over 100 years. To create opportunities for economic competition, however, tax incentives and government support are essential. This support is crucial to the sector's future.