Mongolia making most of Chinese met coal demand

06 Sep 2017 Marian Hookham

Increased demand for metallurgical (met) coal from China and higher prices has provided Mongolia's financially troubled coal miners some relief. Mongolia has secured almost 50% of China's 10 mt year on year import growth in the first six month of 2017 as seaborne supply tightened following the effects of Cyclone Debbie on Australian production.

IHS Markit data shows Mongolia exported 11.87 mt of met coal to China in the five months to May, a 72% increase on the 6.91 mt exported in the corresponding period last year.

But as 'captive' suppliers to the Chinese market, prices achieved by the Mongolian miners for their products remain substantially below those of the seaborne market.

Mongolia's largest coal producer, state-owned Erdenes Tavan Tolgoi (ETT), had planned to construct a 267 km long railway between 7.4 mt Tavan Tolgoi coking coal deposit to the Chinese border at Gashuunsukhait primarily for easier access to seaborne markets in order to take advantage of high prices.

However, following the collapse in foreign investment and a downturn in commodity prices, the cash-strapped Mongolian government was forced to seek support from the International Monetary Fund and construction of the railway was suspended. Lack of finance has also prevented the construction of coal handling and preparation plants at Taven Tolgoi to wash coal to a higher value.

In March this year, ETT announced it had completed the repayment of a US$350m debt owed to Aluminum Corporation of China Limited (Chalco), allowing the company to double the selling price of coal mined from Tavan Tolgoi. ETT had been selling unwashed coal at heavily discounted prices to service the debt.

ETT reportedly produced 5.9 mt of coal in the first seven months of 2017, 4.6 times more than in the corresponding period last year, and is on target to meet its goal of 11.5 mt for the full year.

In its June quarterly report released last week, Mongolian met coal miner, SouthGobi Resources, said it had received an average realized selling price of US$45.67/t for its premium semi-soft coking coal for the three month ending 30 June 2017, a marginal increase on the first quarter 2017 price of $45.61/t. In the seaborne market, the benchmark price for semi-soft coking coal in the June quarter was almost three times higher at $126/t FOB.

For its standard semi-soft coking coal, SouthGobi achieved an average realized selling price of $26.69/t, compared with $23.36/t in Q1 2017, and substantially higher than $16.27/t of the corresponding quarter last year.

However, on the positive side, the production costs of Mongolian miners are much lower than producers supplying into the seaborne market, but margins are also substantially lower. SouthGobi's unit cost of sales of product sold from its Ovoot Tolgoi coal mine decreased to $18.50/t in the second quarter of 2017 from $28.01/t in Q2 2016, and lower than $19.75/t cost in Q1 2017.

This was driven mainly by economies of scale resulting from increased production and sales, SouthGobi said. ROM coal production in Q2 2017 was 1.89 mt, up from 0.67 mt in Q2 2016, while sales totaled 1.48 mt, up from 0.82 mt in the corresponding quarter last year.

SouthGobi was able to improve the value of its product mix during the June quarter by washing certain grades of coal to produce about 12% premium semi-soft coking coal, 53% standard semi-soft coking coal and 35% thermal coal, compared with about 63% standard semi soft coking coal and 37% thermal coal in Q2 2016. The company expects to commission a new wash plant by the end of 2017 to increase the volume of higher grade products.

The improved market conditions enabled the miner to record a profit from operations of $0.9m in Q2 2017 compared with a $13.8m loss in Q2 2016. However, in order to produce more premium semi-soft coking coal and to increase production overall, SouthGobi said it will need to seek additional financing in the form of finance leases, debt or equity.

"Unless the company acquires additional sources of financing and/or funding in the short term, the ability of the company to continue as a going concern is threatened," SouthGobi said, echoing the warning of its previous quarterly report.

Mongolian Mining Corporation (MMC), the country's largest producer and exporter of washed coking coal, has also benefited from higher volumes and prices this year. Earlier this month, MMC announced an expected consolidated profit of between $250m and $375m for the six months ended 30 June 2017, compared with a loss of $61.7m over the same period last year, just two months after the company was discharged from provisional liquidation.

In the June quarter, MMC's ROM coal production increased 428% year on year from 0.48 mt in Q2 2016 to 2.56mt. The company sold 1.09 mt of hard coking coal during the quarter, a 187% increase on 0.38 mt sold in the corresponding period last year.

In the first half of 2017, the company mined about 4.2 mt of ROM coal and sold about 1.9 mt of washed hard coking coal.

Australian listed Mongolian coking coal miner, TerraCom, has also ramped up production this year after securing a 7.5 mt hard coking coal supply contract over 5.5 years with the Kingho Group, one of China's largest private coal companies. TerraCom's met coal exports in Q2 2017 totaled 0.29 mt, up from 0.10 mt in the first quarter.

TerraCom plans to raise production to an annualised rate of 1.5 mt by the end of 2017 with mining beginning in Pit 3 late in Q2.

However, the volume of Mongolian coal exports to China may be capped after Chinese authorities implemented tougher trace element tests last month. Exports through the two major border crossings of Ganqmod and Ceke in July almost halved from the previous month to 1.81 mt, according to local statistics.

Learn more about our metallurgical coal market news.

Marian Hookham is a Senior Manager at IHS Markit.
Posted 6 September 2017


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