21 August 2012

China SignPost™ (洞察中国) #63: “North-Central China Offers Massive Market Opportunity for Mongolian Coal Miners”

Gabe Collins and Andrew Erickson, North-Central China Offers Massive Market Opportunity for Mongolian Coal Miners, China SignPost™ (洞察中国) 63 (21 August 2012).

China SignPost™ 洞察中国–“Clear, high-impact China analysis.”©

Mongolia’s massive and low-cost coal reserves are well-positioned to serve seven nearby Chinese provinces with more than one billion tonnes of annual coal demand

On 7 June 2012, Mongolian Mining Corporation (MMC) broke ground on a rail line that will link its Ukhaa Khudag (UHG) coking coal mine to the Chinese border crossing at Gashuun Sukhait (GS) and help move coal far more cheaply than the 400 trucks currently doing the job. MMC recognizes that China, which took 99% of Mongolia’s coking coal exports in 2011, is Mongolia’s best option for multi-million tonne per year thermal and coking coal exports. Low coal production costs can make Mongolian coal highly competitive in seven nearby Chinese provinces that consumed more than a billion tonnes of coal in 2010, according to official data.

The per capita steel demand levels in the populous and fast-growing provinces of Central and Western China are still only 40% of the levels seen on China’s East Coast. As the Chinese economy recovers, these regions—which are the most accessible to Mongolia’s landlocked coal producers—will provide growth markets able to absorb rising Mongolian coal exports. …

Mongolia’s coal export focus on China will have major risk implications in both coal and natural gas markets, as well as oil markets if investors also build China-facing CTL and CTC projects. Mongolia’s low cost and geographically captive thermal and metallurgical coal supplies will likely help undermine Beijing’s plans to reduce China’s dependency on coal and, in conjunction with new coalfields in Western China’s Xinjiang Province, could even jeopardize PetroChina and Sinopec’s ambitions to develop shale gas and other unconventional resources.

The Chinese seek secure, well-priced mineral supplies from their neighbor, not a re-enactment of the Qing Dynasty period of political domination. Russian transport infrastructure constraints, Russian companies’ antipathy toward competition from Mongolian coal, and the tyranny of distance will naturally direct mineral flows to China. To realize great economic opportunities in an otherwise somewhat sputtering China market in 2012, Mongolia must establish political and regulatory stability and recognize that China needs—and can absorb—large volumes of Mongolian coal exports. Meanwhile, to facilitate this development and profit in the process, investors in Mongolian coal should build rails south, run mines at full bore, and also consider opportunities in the coal-by-wire, coal-to-liquids, and coal-to-chemicals sectors.