Key View
- Mongolia's coal output growth will be underpinned by improving prices, the country's vast coal reserves, a solid project pipeline and steady Chinese demand for high-grade coal.
- The government's drive to attract foreign investment into the sector will also be a boon.
- Despite our strong outlook for the sector, a major impediment to growth remains the lack of sufficient supportive infrastructure.
Mongolia's coal sector will see robust production growth over the coming years driven by rising prices, a solid project pipeline and competitive operating costs. We forecast the country's production to increase to 107mnt by 2027 from a mere 30mnt in 2018. Growth in Mongolia's coal sector will be largely driven by coking coal projects as the country boasts high quality reserves of the steel-making ingredient. As an example,in H118, revenues of the state-owned Erdenes Tavan Tolgoi (ETT) surged due to higher coal prices and a big jump in coal exports, raising prospects for a planned initial public offering (IPO). The project exported 6.9mnt of coal in H118, up 28% compared to H117, while net profits increased 31% y-o-y to reach USD152mn. The government plans to list 30% of ETT through a combined domestic and overseas offering, the proposal of which is now under debate in parliament. If the Parliament approves the bill by the end of September 2018, the preparatory works of the IPO are set to be completed within 180 days.
Along with the overseas IPO of ETT, the government is also aiming to attract more foreign investment into the coal sector, according to the Mongolian Minister of Mining and Heavy Industry, Dolgorsuren Sumiyabaza, during the 8th Coal Mongolia International Conference. To this effect the government is looking to introduce more advanced technology to coal mining operations in order to improve the competitiveness of Mongolian coal exports.
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Column 1 |
| 0 |
Steady Expansion |
| 1 |
Mongolia - Coal Mine Production & Growth |
| 2 |
 |
| 3 |
e/f = Fitch Solutions estimate/forecast. Source: USGS, Fitch Solutions |
A number of expansion and exploration projects will continue to boost Mongolia's coal production over the coming years. For instance in August, Australian miner Aspire Mining Limited announced the Ovoot Early Development Plan for its coking coal project, along with a USD15mn financing package intended to give the project a kick start. The development plan involves mining a low ash and high-yielding coal from a starter pit that lies within the previously defined Ovoot orebody, plus the construction of a new private haul road to run parallel to the proposed rail path of the Erdenet to Ovoot railway. The road would be used temporarily until the railway is commissioned. In February 2018, Aspire also reported plans to begin production at the Nuurstei coking coal project by constructing a 1.0mnt per annum wash plant, facilitating the production of washed hard coking coal by early 2019. Previously, the firm raised USD16.5mn in December 2017 to develop the Nuurstei project. Additionally in FY2017, South Gobi Resources' coal production approximately doubled y-o-y to 6.38mnt. The firm operates the Ovoot Tolgoi coal mine, which produces both thermal and coking coal.
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Column 1 |
Column 2 |
Column 3 |
Column 4 |
| 0 |
{caption}Mongolia - Key Coal Projects{/caption} |
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| 1 |
Source: Fitch Solutions Mines Database |
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| 2 |
Commodities |
Mine |
Primary Company |
Notes |
| 3 |
Coal - Thermal |
Khar Tarvaga |
Government of Mongolia |
2013 - Xanadu Mines has relinquished the project; Resources: 327mnt |
| 4 |
Coal - Thermal |
Galshar |
Government of Mongolia |
2013 - Xanadu Mines has relinquished the project; Indicated Resources: 70mnt |
| 5 |
Coal - Thermal |
Chandgana |
Prophecy Development Corp (100%) |
Measured Resources: 633mnt; The project consists of Chandgana Tal and Khavtgai Uul deposits |
| 6 |
Coal - Coking |
Ovoot |
Aspire Mining (100%) |
Estimated Production: 10mnt/yr; Mine Life: 21years; Reserves: 255mnt; Estimated start year: 2019 |
| 7 |
Coal - Coking |
Ovoot Tolgoi |
SouthGobi Resources (100%) |
March 2017 - SouthGobi Resources has updated mineral reserves and resources estimates for the project; Reserves: 114.2mnt |
| 8 |
Coal - Coking |
Soumber |
SouthGobi Resources (100%) |
Measured Resources: 62.4mnt |
| 9 |
Coal - Coking |
Zag Suuj |
SouthGobi Resources (100%) |
Indicated Resources: 21.5mnt |
| 10 |
Coal - Coking |
Nuurstei |
Aspire Mining (90%) |
March 2018 - Aspire Mining has started a drilling programme at the project; Indicated Resources: 4.7mnt |
| 11 |
Coal - Thermal |
Nuurst |
Tian Poh Resources (100%) |
August 2015 - Tian Poh Resources has completed the acquisition of the project; Measured Resources: 326.1mnt; Mine Life: 30years; Estimated Production: 4.9mnt/yr |
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Column 1 |
| 0 |
Mongolian Coal Exports To China To Remain Strong |
| 1 |
China - Coal Imports From Mongolia & Share Of Total |
| 2 |
 |
| 3 |
Source: China Customs, Fitch Solutions |
We believe proximity and the high-quality grade of Mongolia's coal make the country ideally placed to cement its position of one of the leading suppliers of coking coal to the Chinese market over the next few years. The high grade of Mongolian coking coal means suppliers are able to circumvent the ban on 'dirty' coal introduced by China's government. A number of independent studies have confirmed that the blend, with its medium ash, low sulphur and high G value (caking index that is measure of the magnitude of the binding strength between coal particles or between coal particles and inert particles after coal is heated), to be better than primary coking coals imported from Australia, the US and Canada. Mongolia's coal exports to China increased from 16.5mnt in 2010 to 26.3mnt by 2017, and account for nearly all of Mongolia's total coal exports. We expect this trend to continue as other global producers fall victim to more stringent constraints on imports into the Chinese market.
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Column 1 |
| 0 |
Sustainable Reserves & Favourable Regulations To Boost Growth |
| 1 |
Asia - Risk/Reward Indices of Top Mining Countries |
| 2 |
 |
| 3 |
Note: Risk scores out of 100, higher score = more attractive market. Source: Fitch Solutions Mining Risk/Reward Index |
Despite our favourable outlook, a lack of sufficient supportive infrastructure will continue to be a major impediment to mining sector growth in the country. In particular, our growth outlook is dampened by Mongolia's failed development of sufficient rail infrastructure, which would increase cost-efficiencies and enhance producer margins. In October 2015, Mongolia signed a Memorandum of Understanding with Japan to cooperate in the Tavan Tolgoi eastern railway project, for which the main investors were China's Shenhua Energy and Japan's Sumitomo Corp, but the project fell through eventually. The project involved a 1,300-km rail line eastward from the mine to markets in Japan and the US. The decision of ETT's IPO by Mongolian lawmakers was initially taken in June 2018 to raise funds for this much needed railway project that fell through. In addition to the transportation routes, the lawmakers also called for the construction of a power plant at the site, which had been part of Rio Tinto Group's plans to develop the Oyu Tolgoi copper-gold mine. So far, approval has been secured for construction of a 267km rail line from the Tavan Tolgoi coal mine to Gashuun Sukhait on the border with China. The line will allow coal from the mine to be transported directly by rail to markets in China, rather than by truck, achieving significant cost savings.
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{caption}Mongolia Coal Forecasts (2018-2027){/caption} |
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| 1 |
Indicator |
2018f |
2019f |
2020f |
2021f |
2022f |
2023f |
2024f |
2025f |
2026f |
2027f |
| 2 |
f = Fitch Solutions forecast. Source: USGS, Fitch Solutions |
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| 3 |
Coal Mine Production, mn tonnes |
29.82 |
33.86 |
39.62 |
47.73 |
57.76 |
69.89 |
80.39 |
88.45 |
97.30 |
107.02 |
| 4 |
Coal Mine Production Volumes, % y-o-y |
10.01 |
13.52 |
17.03 |
20.47 |
21.01 |
21.01 |
15.02 |
10.02 |
10.01 |
9.99 |
| 5 |
Coking coal production, mn tonnes |
15.64 |
17.83 |
20.96 |
25.15 |
30.68 |
37.40 |
43.38 |
48.59 |
54.37 |
60.79 |
| 6 |
Coking coal production, % y-o-y |
11.90 |
14.00 |
17.50 |
20.00 |
22.00 |
21.90 |
16.00 |
12.00 |
11.90 |
11.80 |
| 7 |
Thermal coal production, mn tonnes |
14.18 |
16.02 |
18.66 |
22.58 |
27.08 |
32.49 |
37.01 |
39.86 |
42.93 |
46.23 |
| 8 |
Thermal coal production, % y-o-y |
8.00 |
13.00 |
16.50 |
21.00 |
19.90 |
20.00 |
13.90 |
7.70 |
7.70 |
7.70 |
This report from Fitch Solutions Macro Research is the product of Business Monitor International Ltd, UK Company registration number 01763490 ('BMI'), and/or Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). BMI and FSG are both affiliates of Fitch Ratings Inc. ('Fitch'). BMI and/or FSG is/are solely responsible for the content of this report,without any input from Fitch. Copyright © 2018 Business Monitor International Ltd and/or Fitch Solutions Group Ltd.
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