What is the scope of Mongolian coking coal exports to India?

*Govt to work out logistical details of different coal import routes

*Mongolia ramping up coal transportation infra to 100 mnt/year

*India may become top market for Mongolia as Chinese demand weakens

Morning Brief: India's near-total dependence on imports for meeting its coking coal requirements has prompted the government to seek to diversify imports in order to avoid over-reliance on certain countries. Of late, the government has taken active interest in importing coking coal from Mongolia. Coking coal is being imported by some leading domestic steel mills on a trial basis, with the government working out the logistical details for seamless imports from landlocked Mongolia in the near future.

JSW Steel is expected to receive around 30,000 tonnes (t) of coking coal from Mongolia and SAIL is likely to get 3,000-5,000 t as part of the trial run. For JSW Steel, this would be the second such shipment after 2021, when the company bought 8,000 t. Low-ash Mongolian coal is also low in sulphur and phosphorous making it a perfect choice for steelmakers.

Logistical options

The government has to work out the routes that would ensure regular supplies of coking coal from Mongolia. A team comprising officials from the Ministry of Steel and industry representatives will soon visit the Central Asian nation to work out the logistical details and examine if additional investments are required.

Mongolia is a landlocked nation and shares borders with China and Russia. India will be seeking alternative routes to China, including tapping the Vladivostok-Chennai route, to secure coal. In May, Indian steel mills were exploring the possibilities of identifying a logistics company with the help of the Indian embassy in Mongolia to bring a trial cargo of hard coking coal to Russia's Vladivostok port. There might be options of dividing the cargo between end-users.

Even domestic companies are reportedly interested in acquiring mining concessions in Mongolia, especially for coking coal and copper.

Recently, Russia achieved a major milestone of transporting coal to India through the North-South International Corridor through Iran.

Coking coal imports

India's imports of coking coal reached over 31 million tonnes (mnt) in H1CY'24, an increase of 17% y-o-y. Imports have a share of over 90% of the country's coking coal consumption. Total shipments of met coal (including PCI) in CY'23 stood at over 70 mnt and the outlook for 2024 is over 75 mnt. Imports are projected to rise to around 110-120 mnt by 2030 on surging steel and hot metal production.

Rampant volatility in the seaborne market since 2022 and other geopolitical factors have led to the Indian government prioritising a transparent and representative pricing mechanism. Imports from Australia have remained stable while Russia, the US and Canada have ramped up exports to India.

Going forward, exploring options of importing hard coking coal from Mongolia is essential because of the need to reduce over-reliance on Australia and the uncertainty shrouding continued Russian supplies amid sanctions, bottlenecks in logistics infrastructure and export tariffs in that country.

Mongolia's export potential

After recovering from the pandemic-induced slump, Mongolia's coal production has increased. Notably, China imported over 100 mnt of coking coal last year half of which were through land routes from Mongolia. Mongolia's coking coal exports surged 37% y-o-y to 38.27 mnt in H1CY'24 against 27.93 mnt in H1CY'23, as per BigMint data.

In a bid to ensure transparency and stop pilferage, the Mongolian government introduced an electronic auction system via the Mongolian Coal Exchange (MCE) last year for coal sales in place of the long-term contracts favoured by Chinese buyers. 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.

Four companies, namely China Coal, Datang, Jiayou International and Northern International, have their pricing adjusted quarterly. Under the bidding mode, Mongolian miners are responsible for delivering coal to Ganqimaodu Port, and the price competition is fierce, said Zoljargal Zolo Jargalsaikhan, Executive Director of Mongolian Coal Association.

"Mongolia's exports may rise by 10 mnt in 2024. The regulatory storage capacity of Ganqimaodu Port has increased from 2 mnt to 3.7 mnt. The daily customs clearance volume is 4,200 t and is expected to reach 3 mnt by the end of this year. The railway at Ceke Port was completed in October last year and adopts Chinese standard gauge, "he told BigMint.

"The proportion of electronic bidding in the Mongolian coal market will gradually increase and the proportion of long-term contracts may decrease in the future. The focus is on offering washed coal to customers instead of raw materials. We are currently building infrastructure at Mandula Port and plan to increase customs clearance volume to more than 10 mnt for customers in eastern China. Mongolia's coal logistics capacity is expected to reach 100 mnt in the next few years," Jargalsaikhan said.

Outlook

"In the third quarter of 2024, the main coking coal price of the large mines in Mongolia is set at $82/t, which is higher than in the second quarter," he informed. Until not long ago, all coal was being trucked but recent railway developments have improved the outflow of coal. However, Mongolia's competitiveness is decided by the lone buyer - China. Downturn in the Chinese economy can deal a lethal blow to Mongolian coal prices which are dissociated from global prices. Even Mongolian coal royalties are fixed as per movements of Chinese coking coal prices.

Mongolian exports have been supported by China's steady steel output and reduced Chinese domestic coal production (linked to tightened mine inspections and safety regulations) in H1CY'24. These drivers are likely to ease over the year and through the latter half of this decade, with Mongolian coal exports expected to fall in line with China's steel production.

Notably, there is a direct threat to Mongolia's targets of higher coking coal exports from China's stated aim of boosting scrap-based steel production in the mid to long term. This might prompt Mongolian miners to seek out major coal buyers beyond the country's immediate neighbourhood. And if the commodity in question is coking coal, India, undisputedly, will remain the biggest market for a long time.

Sign in for BigMint's flagship 4th India Coal Outlook Conference to be held over 22-23 August 2024 at Gurugram, Haryana, to catch up on the latest in the Indian government's efforts to commence coking coal imports from Mongolia, quality and grades of coal available, price shifts in the market, emerging logistical corridors and the strategic interventions of the major Indian steel mills in this regard.