How will Mongolia's transition to coal auctions affect Chinese buyers?
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*Mongolia to sell 12 mnt via auctions by Jul'23
*Coal prices may decrease on reduced transportation costs
*Weak demand in China to impact auction prices
In a bid to ensure transparency and stop pilferage, the Mongolian government is moving to an auction system for coal sales which will replace the long-term contracts favoured by Chinese buyers.
China is the top buyer of Mongolian coal accounting for 94% of Mongolia's coal exports in 2022. Total export shipments came in at 31.69 million tonnes (mnt) in 2022, surging 101.72% or 15.98 mnt y-o-y, as per data maintain CoalMint.
In 2022, Mongolia had a share of 18% in China's coal imports, according to data maintain with CoalMint. China is by far the biggest buyer of Mongolian goods. Coking coal imports from its northern neighbor amounted to nearly 26 mnt last year-40% of total purchases.
Transition to auctions
Mongolia targets to sell 12 mnt via auctions by July this year. The country plans to trade 50-60% of its annual coal exports online through the MCE in 2024 and realise 100% online trading by 2025.
The country has passed a law for implementing online coal trading through exchange, which shall be established independently or under the MCE. The law will come into effect on 1 July.
Possible impact of transition
Sources fear that the new system of auctions through the Mongolian Coal Exchange (MCE) will impose additional transport costs on customers.
At present, the coal companies set their own prices, but after the law takes effect, prices will be set by the exchange, Mongolian government sources indicated.
Long-term contracts protect sellers from price fluctuations, and the prospects for China's steel industry are uncertain.
The new auction system also coincides with a rapprochement in China's relations with Australia, which has seen Australian coal shipments resume after being banned since late 2021.That presents a risk to Mongolian miners as Chinese buyers will now have more options.
Expert take
Explaining the near-term outlook on Mongolian coal auctions, Zoljargal Jargalsaikhan, Executive Director, Mongolian Coal Association, told CoalMint: "So far the auctions were successfully held, and the government of Mongolia will stick to its course. Coal produced by the state-owned mines, except the major long-term offtake agreements, will be sold on the exchange. However, in the short-term, there is no obligation for private companies to sell coal through the exchange. The situation will likely change in 2024."
On price outlook, he said the final coal cost for Chinese buyers consists of mainly two factors: coal price at mine mouth and delivery cost to China.
"Previously, the delivery cost increased significantly, resulting in high final cost. Now, the Mongolian side delivers coal to the Chinese border, and the price on the exchange includes all transport cost. So the total final cost for Chinese buyers is much lower than it was before. At least, thus far," he said.
Chinese domestic coke prices are declining because large steel mills in Tangshan are asking for a coke price decrease. This might affect the auction price, Jargalsaikhan said.
However, the main share in total cost is transport, not the mine mouth price, he explained. "With the improvement of transport infrastructure by the Mongolian government, coal sales will meet price expectations from coke and steelmakers," he said.
2nd Asia Coal Outlook and Trade Summit
To follow the discussion on Mongolian coal sales through auctions and impact on trade with China book your seat at the 2nd Asia Coal Outlook and Trade Summit to be held at Bangkok, Thailand on 24-25 April, 2023
