L.Davaatsedev: Stopping coal export until coal prices rise is bad policy

Below is an interview with the Director of the administrative board of the Mongolian Coal Association, L.Davaatsedev, about Mongolian coal export.

-Mongolia is expected to export over 30 million tons of coal this year. However, coal export companies have been operating at a deficit and have closed temporarily because of coal’s low market price. What’s the current state of coal export?

-Mongolia exported 20 million tons of coal in 2011. Mongolia entered China’s coal market without any difficulty. In the other words, fortunately China’s economic growth sped up in 2009 and China’s largest coal supplier, Australian mining companies, were closed due to floods. That’s why Mongolian coal export increased dramatically in a very short time. On the basis of this scenario, we saw many negative consequences, even though coal export became the largest part of the Mongolian economy. Mongolian coal export decreased owing to China’s economic crisis in 2012. Even though China’s coal import rose again, Mongolian exports didn’t increase. China’s coal import has risen by 40 percent since April, 2012. But Mongolian exports keep dropping.

The main reason Mongolian exports aren’t increasing in compliance with the Chinese coal market is supply price. Considering that, mining company operations have been suspended. Domestic and state-owned mining companies supply coal to power plants at any price. Sometimes Shivee-Ovoo and Nalaikh coal mines are required to operate under all conditions. But private mining companies can’t handle the situation like state-owned companies. Hence, coal mining companies become stagnant and operate without a profit. Energy Resource company’s operation has been suspended since last spring. Its plans to export 30 million tons of coal won’t be fulfilled. Fulfilling half of its projected output is a problem too.

-We have a lot of competitors. If exporting coal at low prices is unprofitable, should we wait until there’s a price increase? Will power and coking coal prices go up? Is there a tendency for coal’s price to rise?

- There’s very little tendency for metallurgy coal prices to rise in the next two to three years. Although China’s growing economy is slowing down, the situation will become better someday. But stopping coal export until coal prices rise is bad policy. It’s time to research recent situations and decide how to operate when coal’s selling price is low. I mentioned before that Mongolia became a big coal supplier “fortunately”. From the beginning, coal export wasn’t well planned. There was no long-term contract on coal export between our two countries. The amount of coal export wasn’t estimated. Mongolia faced a lot of bad consequences because we didn’t plan any infrastructure in accord with the amount of coal to be exported. The biggest problem is transportation costs. A high cost is required to transport that bulky commodity. Policy for rail transport, which has the lowest cost, was completely forgotten. Nearly 10 years have passed since coal export was intensified. If transportation and infrastructure were planned in 2003, the export cost would’ve been lower today. Besides, private companies’ projects to construct railway have stopped due to government policy. If this work has stopped, the government should immediately implement another project for railway.

We should export coal for permanently, for the long term. In other words, it’s time to conclude an agreement with both China and Russia within the framework of strategic partnership. It is not about negotiating coal prices. Whereas, it should be decided to maintain stability for the coal market at the level of international contract negotiation.

- Coal is a bulky but rather cheap commodity. The cost of mining and transportation should be low in order to increase coal export. Is there any opportunity to decrease its cost before export?

- It’s impossible to decrease the cost of machinery, salary, fuel and spares. However, private companies are trying to decrease costs. Other costs contributing to the cost of export are high. Therefore, coal’s mining and export cost is higher than coal’s market price. Firstly, transportation cost. Secondly, the customs fees of Mongolia and China. Decreased tax can be negotiated between the two countries. As well as royalty tax, which is determined by mining standard prices. The method of setting standard prices is completely in contrast with real business environments. It should be revised and scaled down. If export is running, taxes on coal mining will be centralized inland revenue. In other words, base tax will be unchanged. Raising revenue from royalty leads to lost revenue from base taxes. If mining company operations were normal, they would’ve paid company income tax and personal income tax, not only mineral resource rental tax. If the government revises those tax policies, improves the methods of setting taxes, fees and standard prices; and lightens taxes, it will reduce the expenses of coal. The Mongolian Coal Association has been working on this issue with related organizations and ministries for six months, but we haven’t achieved any results.

- Mongolia became the number one coal exporter to China in 2011. Today, which position does Mongolia take in China’s coal import market.

- Even if we don’t export our coal, China won’t be ruined and run out of coal, because there are so many competitors exporting coal to China. We placed second or third as China’s top coal exporter three years ago. But today, we aren’t even included in the top six. Other countries have already taken over our place in China’s coal market. Australia has placed first again. After Australia, Russia is striving to become its top exporter. Russia is competing with its Tuva coal mines. Canada and African countries are also working hard. We’ve lost our position in this market because of trying to export coal at higher prices. Mongolia accounted for about 40 percent of China’s coal import at our peak period. Now, we account for only 17 percent. It’s hard to take back our lost position. Since Mongolia has opened two or three coal mines with high quality coal, it needs effective operations. Mongolia spent a lot of money on discovering coal fields. Therefore we should use these coal mines effectively.

- It is said that China will ban low-calorific coal import in order to boost its domestic mining corporations. If this project adopted, will it affect Mongolian coal export?

- China doesn’t import low-calorific and brown coal from Mongolia. This project might affect Indonesian coal exporters, but not us.

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