September 2021
Mongolia’s metallurgical coal production skyrocketed in 2016 with output of 25.6Mt, rising more than 103% from the previous year. Since then, Mongolia has become an important player in the export market, benefitting from its close location to China that allows truck transportation. However, the country's production dropped to 19.5Mtpa last year, on the impact of the pandemic.

Despite this, Mongolia confirmed its position as the key supplier of the steelmaking material to China after the Chinese government unofficially banned Australian coking coal amid political tensions in late 2020. But the ongoing impact of Covid-19 has resulted in the intermittent closure of the two main truck border crossings with China.



Uncertainty Prevails at Mongolian Chinese Borders 

When the pandemic blazed up last year, Mongolia closed its borders and stopped exports, but in recent months, the country has actively tried to boost metallurgical coal exports to make up for losses. However, China has stopped importing coal from Mongolia, believing that the country cannot control the risk of COVID-19 sufficiently. Chinese authorities warned that the loading points at the Tsagaan Khad settlement were inadequately organised, leaving about 10Mt of coal piled up in Tsagaan Khad when disruptions started.



Similarly, China has restricted truck transportation of Mongolia’s metallurgical coal to Ceke, the transhipment station where coal produced at mines such as Ovoot Tolgoi are trucked and then shipped by rail to customers in China. The restrictions on the second largest coal trade checkpoint along the China-Mongolia border inevitably slowed down Mongolian coal exports.

SouthGobi, the company developing the met coal business in the country, indicated the irregularity of production is due to transportation by truck having been fully banned several times, halting exports. As a result, SouthGobi reduced its coal production and has begun to adjust coal stock. Transportation by truck to Ceke had already been banned in 2020 as a measure to control the spread of Covid-19, which led to the suspension of operations in Ovoot Tolgoi from February to August 2020, decreasing the annual production at the mine by more than 70%.

As a result, Mongolian supply, which once accounted for approximately 40% of China’s coal imports, has stalled for over four months, drastically affecting the country’s export goals in 2021. Without the benefit of predictable supply from Australia to China, and with price-setting added to Covid restrictions frequently shutting down the border between China and its key supplier Mongolia, steelmakers are scrapping for the product everywhere and pushing metallurgical coal prices in China to record highs.


Mongolia’s ‘Green Channel’

Early in 2021, Mongolia’s government announced a plan to set up a ‘green channel’ at the border crossing of Gashuunsukhait to accelerate coal exports to China. The express gateway is expected to support truck transport through the border. Gashuunsukhait is close to Ganqimaodu on the China side and is the main border crossing for Mongolia’s coal exports into China. The border has been shut down on repeated occasions due to Covid-19 cases found in coal truck drivers.

China imported 0.5Mt of metallurgical coal in July, down 41.2% month on month and 77.3% year on year due to China’s anti-pandemic measures at major border crossings. For the first seven months of 2021, Mongolian exports to China stayed at 8.9Mt, well below the Mongolian government’s expectations to become the largest metallurgical coal supplier to China, given the continuation of China’s ban on both Australian metallurgical and thermal coal in October 2020.


Mongolia’s Future

Mongolian coal exports decreased about 50% in 2020 and are expected to continue declining this year due to infrastructure and inadequate border operations with China. Although coal shipments have restarted at the Gashuunsukhait port, only 100 drivers were reportedly tested, which is a small number compared to the 1500 trucks that exported coal every day at Gashuun Sukhait and Gants Mod ports. Meanwhile, US coal shipments to China keep reporting record highs, and Russia has become the largest metallurgical coal supplier to China.

In the short term, Mongolian exports will certainly recover once the country manages to contain the Covid-19 pandemic at the border. Exports should also be supported by recent tariff cuts in China under the Asia-Pacific Trade Agreement, and by the completion of the ‘Green Channel’ connecting mines in Mongolia with buyers in China.

State-owned Erdenes Tavan Tolgoi (ETT) has announced that it will construct a coal preparation plant at its Tavan Tolgoi operation in Mongolia in the September quarter. The planned coal preparation plant will consist of three parts with a total production capacity of 30Mtpa. It is estimated investment in the project will be US$915.3m with a return expected within seven years.

ETT has also planned to raise US$700m to construct railway infrastructure between its coal deposits and the China border, in order to become the largest metallurgical coal supplier to China. ETT expects the railway will be brought into operation in July 2022, with a transportation capacity of 30Mtpa. ETT is also aiming to increase coal output to 45Mtpa by 2025.



In the long term, AME anticipates Mongolia will rank fourth in the metallurgical coal global market, outpacing Canada and US with a production of 49Mt in 2040. This production volume will position Mongolia with an 8.4% global participation, only after Australia, Russia and Mozambique.