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Origo comments on Reuters: Mongolia struggles to find coal buyers other than ChinaOrigo comments on Reuters: Mongolia struggles to find coal buyers other than China

 

ANALYSIS-Mongolia struggles to find coal buyers other than China

* Mongolia hopes to sell coal into Asia through Pacific ports

* Government shuns closer transport links to China, fearing dependence

* Coal prices at sharp discount to China domestic, import supplies

By David Stanway

BEIJING, June 10 (Reuters) – Landlocked Mongolia’s plans to use its vast coal reserves to pay for the roads and railways required to ease its dependence on the Chinese market could be undermined by political fears about its dominant southern neighbour.

Mongolia’s coal deposits are coveted not only by China, but also by some of the world’s biggest investment banks and mining firms, with much attention now focused on the six-billion tonne Tavan Tolgoi mine in the South Gobi region.

But while investors are lured by Mongolia’s ability to tap soaring Chinese demand, Mongolia is wary of being too dependent. Its strategy is to build transport routes to export coal through the Russian port of Vladivostok and wrest pricing power away from China.

“They are looking at spreading their consumer base because there is always a risk of buyer collusion — buyers artificially driving down prices,” said Rudi Vann, Wood Mackenzie’s lead analyst for northeast Asia.

Pricing is a sensitive issue for Mongolia. For the whole of last year, China’s total coal imports amounted to 164.8 million tonnes, bought at an average price of $103 per tonne.

Imports from Mongolia stood at 16.6 million tonnes, most of which was higher-end coking coal used in the steel sector, but it sold at a much lower price of $61 per tonne.

With such big discounts, China could have saved nearly $6.9 billion last year if it imported all its coal from its northern neighbour.

Mongolia’s untapped deposits, which some estimate to be around 60 billion tonnes, could be enough to meet China’s import requirements for more than a century.

China’s coal imports were 13.84 million tonnes in May, 20.7 percent higher than the previous month, with domestic prices rising faster than those in Asia, gaining for a 12th week to reach more than $130 a tonne, a 30-month high.

Prices at Australia’s Newcastle port, an Asian benchmark, stood at $118.43 a tonne in the week to Tuesday, according to the globalCOAL index.

Neither of these prices include freight and charges but in the past a gap of $15 a tonne or more has led to increasing shipments from Asian producers to southeast China.

LANDLOCKED OUT

Instead of sitting back and selling what it can, Mongolia, sandwiched between Russia and China, has vetoed vital infrastructure in its southern mining regions, worried that a dedicated rail link to China would deprive the country of the finance required to build a preferred route running from west to east and connecting up to Russia’s rail network.

Mongolia’s long-term plan is to gain access to Vladivostok and other ports on the Pacific coast, allowing it to reach to even bigger markets in Japan, South Korea and even India.

“Mongolia will become one of the price-setting producers in the region,” mining minister Dashdorj Zorigt told Reuters in February.

The dilemma, however, is clear. The only way its cash-strapped government can raise the funds and foreign investment needed to build the processing plants and rail infrastructure that will ease its reliance on China is — by selling to China.

“They are talking about an industrial park (in Sainshand) costing $15-16 billion, three times their GDP last year. Where are they going to get the financing?” said Oscar Mendoza, chief operating officer with the Ulan Bator-based Frontier Securities.

“If they had allowed a railroad in South Gobi delivering directly to China, three or four years of fiscal revenues from a quadrupled amount of exports would have given you sufficient revenues to partially finance and build it.”

Analysts regard Mongolia’s long-term plans to improve its options as laudable but economically unviable. They say the distance to the Pacific is immense, the delivery costs are too high and cargoes have even been known to disappear en route.

“We believe China is going to be the only market for Mongolian coal at this stage,” said Wood Mackenzie’s Vann.

TRADER MAYHEM

In the Chinese region of Inner Mongolia last month, the death of a herder at the wheels of a coal truck sparked protests.

But similar unease has been felt across the border in Mongolia, where fleets of run-down Chinese lorries race along congested dirt roads to buy coal and take it home.

In April, Ulan Bator shut an unpaved road connecting a mine owned by the Mongolian Mining Corp <0975.HK> to the border, citing a spate of fatal accidents caused by Chinese trucks.

While the safety concerns were genuine, prices were clearly the ultimate source of the dispute. Drivers are far more likely to overload trucks, break speed limits or take dangerous shortcuts when they can earn mark-ups of $50 per tonne or more.

Analysts suggest much of the blame for the chaos and low value of Mongolia’s coal market lies with the government and the solution will come from industry players.

Mongolia has not allowed miners to build the rail lines needed to move cargoes to China, and local firms are instead trying to cut Chinese traders out of the market by slowly improving roads and signing direct supply deals with end-users.

“Both South Gobi Resources and the Mongolian Mining Corp, two of the big producers of coal, are both selling more to end-users,” said Luke Leslie, head of mining at Origo Partners , a private equity group with interests in Mongolia.

“They are pushing the Chinese back and they are able to sell at the border, or take it into China and sell it to the end-user — and they are seeing better prices.”

(Editing by Ed Lane)

Keywords: MONGOLIA COAL/CHINA ANALYSIS-Mongolia struggles to find coal buyers other than China

* Mongolia hopes to sell coal into Asia through Pacific ports

* Government shuns closer transport links to China, fearing dependence

* Coal prices at sharp discount to China domestic, import supplies

By David Stanway

BEIJING, June 10 (Reuters) – Landlocked Mongolia’s plans to use its vast coal reserves to pay for the roads and railways required to ease its dependence on the Chinese market could be undermined by political fears about its dominant southern neighbour.

Mongolia’s coal deposits are coveted not only by China, but also by some of the world’s biggest investment banks and mining firms, with much attention now focused on the six-billion tonne Tavan Tolgoi mine in the South Gobi region.

But while investors are lured by Mongolia’s ability to tap soaring Chinese demand, Mongolia is wary of being too dependent. Its strategy is to build transport routes to export coal through the Russian port of Vladivostok and wrest pricing power away from China.

“They are looking at spreading their consumer base because there is always a risk of buyer collusion — buyers artificially driving down prices,” said Rudi Vann, Wood Mackenzie’s lead analyst for northeast Asia.

Pricing is a sensitive issue for Mongolia. For the whole of last year, China’s total coal imports amounted to 164.8 million tonnes, bought at an average price of $103 per tonne.

Imports from Mongolia stood at 16.6 million tonnes, most of which was higher-end coking coal used in the steel sector, but it sold at a much lower price of $61 per tonne.

With such big discounts, China could have saved nearly $6.9 billion last year if it imported all its coal from its northern neighbour.

Mongolia’s untapped deposits, which some estimate to be around 60 billion tonnes, could be enough to meet China’s import requirements for more than a century.

China’s coal imports were 13.84 million tonnes in May, 20.7 percent higher than the previous month, with domestic prices rising faster than those in Asia, gaining for a 12th week to reach more than $130 a tonne, a 30-month high.

Prices at Australia’s Newcastle port, an Asian benchmark, stood at $118.43 a tonne in the week to Tuesday, according to the globalCOAL index.

Neither of these prices include freight and charges but in the past a gap of $15 a tonne or more has led to increasing shipments from Asian producers to southeast China.

LANDLOCKED OUT

Instead of sitting back and selling what it can, Mongolia, sandwiched between Russia and China, has vetoed vital infrastructure in its southern mining regions, worried that a dedicated rail link to China would deprive the country of the finance required to build a preferred route running from west to east and connecting up to Russia’s rail network.

Mongolia’s long-term plan is to gain access to Vladivostok and other ports on the Pacific coast, allowing it to reach to even bigger markets in Japan, South Korea and even India.

“Mongolia will become one of the price-setting producers in the region,” mining minister Dashdorj Zorigt told Reuters in February.

The dilemma, however, is clear. The only way its cash-strapped government can raise the funds and foreign investment needed to build the processing plants and rail infrastructure that will ease its reliance on China is — by selling to China.

“They are talking about an industrial park (in Sainshand) costing $15-16 billion, three times their GDP last year. Where are they going to get the financing?” said Oscar Mendoza, chief operating officer with the Ulan Bator-based Frontier Securities.

“If they had allowed a railroad in South Gobi delivering directly to China, three or four years of fiscal revenues from a quadrupled amount of exports would have given you sufficient revenues to partially finance and build it.”

Analysts regard Mongolia’s long-term plans to improve its options as laudable but economically unviable. They say the distance to the Pacific is immense, the delivery costs are too high and cargoes have even been known to disappear en route.

“We believe China is going to be the only market for Mongolian coal at this stage,” said Wood Mackenzie’s Vann.

TRADER MAYHEM

In the Chinese region of Inner Mongolia last month, the death of a herder at the wheels of a coal truck sparked protests.

But similar unease has been felt across the border in Mongolia, where fleets of run-down Chinese lorries race along congested dirt roads to buy coal and take it home.

In April, Ulan Bator shut an unpaved road connecting a mine owned by the Mongolian Mining Corp <0975.HK> to the border, citing a spate of fatal accidents caused by Chinese trucks.

While the safety concerns were genuine, prices were clearly the ultimate source of the dispute. Drivers are far more likely to overload trucks, break speed limits or take dangerous shortcuts when they can earn mark-ups of $50 per tonne or more.

Analysts suggest much of the blame for the chaos and low value of Mongolia’s coal market lies with the government and the solution will come from industry players.

Mongolia has not allowed miners to build the rail lines needed to move cargoes to China, and local firms are instead trying to cut Chinese traders out of the market by slowly improving roads and signing direct supply deals with end-users.

“Both South Gobi Resources and the Mongolian Mining Corp, two of the big producers of coal, are both selling more to end-users,” said Luke Leslie, head of mining at Origo Partners , a private equity group with interests in Mongolia.

“They are pushing the Chinese back and they are able to sell at the border, or take it into China and sell it to the end-user — and they are seeing better prices.”

(Editing by Ed Lane)

Keywords: MONGOLIA COAL/CHINA