Coal Decline Signals Mongolia's Economic Wake-Up Call

Mongolia's coal-driven economy is facing significant challenges. The downturn of early 2025, marked by declining coal revenues and a widening trade deficit, signals deeper structural issues within Mongolia and its primary export market, China. Understanding these dynamics is crucial for navigating the current economic landscape.

The economic indicators are clear. GDP growth, which stood at a robust 7% in 2023, slowed to 4.9% in 2024, reaching MNT 32.1 trillion (~ US$20 billion in 2025 prices). While the mining and services sectors provided some support, the impact of the dzud disaster on agriculture and the softening of global coal prices dragged down overall performance.

By January 2025, this deceleration had become more pronounced. Government revenues decreased by 36.7% year-on-year, with mineral royalty taxes, a critical component of the state budget, falling by 86.1%.

This fiscal strain resulted in a budget deficit of MNT 492.7 billion (US$142.9 million). Inflation rose to 9.6%, driven by rising utility costs and cash handouts from Erdenes Tavan Tolgoi coal mine dividends, which offered short-term relief but with potential inflationary consequences.

The coal sector, traditionally the backbone of Mongolia’s economy, is at the center of these challenges. Despite record export volumes of 83.7 million tons in 2024, the value of these exports decreased by US$230 million due to falling prices.

This trend worsened in January 2025, with coking coal export values dropping 44% year-on-year. The primary cause is a structural shift in demand from China, Mongolia's main coal consumer.

China’s struggling real estate sector, grappling with oversupply and weak demand, has reduced steel production, thereby decreasing the need for coking coal—the type Mongolia predominantly exports. Additionally, Mongolian coal, transported overland, primarily serves inland Chinese plants and lacks the flexibility to compete with seaborne coal imports from Indonesia or Australia, further limiting its market access.

Exacerbating this external demand shift is a policy issue: Mongolia’s Mineral Exchange system. Intended to promote transparency, the system’s rigid requirement for upfront payments has deterred buyers amid heightened price volatility.

This inflexibility has effectively stalled the market, as evidenced by the 90% year-on-year collapse in coal trading on the Mongolian Stock Exchange in January 2025, from US$184 million to a mere US$18.6 million. This policy issue, coupled with China’s structural slowdown, presents a significant challenge for Mongolia’s coal sector.

The economic reverberations seem to be widespread. The 19.5% drop in total exports in January 2025 and the concurrent contraction of the trade surplus have eroded currency exchange rates.

Paradoxically, household data from Q4 2024 presents a contrasting picture. Real household income rose by 5.9% year-on-year, driven by wage and pension increases. However, income from agriculture and non-agricultural production declined, foreshadowing the looming impact of the commodity downturn.

Looking ahead, several key trends warrant close monitoring. The trajectory of China’s real estate and steel sectors will be crucial. A prolonged slump could exacerbate Mongolia’s coal challenges, while any signs of recovery could offer respite. Reforming the Mineral Exchange to introduce greater flexibility, such as deferred payment options, could help reviving coal exports.

More broadly, diversifying the Mongolian economy away from its dependence on raw commodity exports continues to be essential for long-term resilience.