Late last year there seemed to be an opportunity for Mongolia. Australian coal was languishing off the Chinese coast, banned from import as part of a wider diplomatic dispute, and Mongolian coal exports had been rising to compensate.
The opportunity was widely noted. A report in the South China Morning Post suggested that Mongolia would replace Australia as China's top supplier; this was confirmed by the Global Times, a mouthpiece for China's leadership; and shares in companies with Mongolian coking coal assets saw sharp increases.
"Coal from Mongolia, which borders China to the north, is the most obvious replacement for Australian coal," the SCMP wrote.
In December, data scientist Robert Ritz wrote for Mongolia Weekly: "There is a big opportunity in front of Mongolia, and we will see early in 2021 if it can take advantage of it."
Three months later, it's time to find out.
Exports drop as Covid hits
The chart below contains the most recent data available from Mongolian Customs. It shows that exports of coal plummeted from almost 30k thousand tons in December 2020, to just 2.5k tons in January.
Volume recovered slightly in February and in March to 6825 thous.t but nowhere close to December, according to the Ministry of Mining and Heavy Industry. The number of coal trucks crossing at Gashuunsukhait was still limited to 50 per day at the end of March, well below the normal pre-pandemic volume of 2000 or more.
This drop resulted from the outbreak of Covid-19 in Mongolia, which has prompted lockdowns and export halts as well as stringent Chinese requirements for drivers to take PCR tests at the border crossings. Cases are once again surging in Mongolia and a 15-day lockdown is beginning this weekend, meaning low export volumes are likely to continue.
According to market intelligence firm SPGlobal, the price of Mongolian coal is also unlikely to rise thanks to 'looming' environmental regulations in northern China and a 'weakness' in China's domestic prices.
So in a nutshell, Mongolia's ongoing Covid-19 outbreak and domestic factors in China combined to shoot down the country's ability to take advantage of the market opportunity available towards the end of 2020.
Whilst this is undoubtedly bad news for Mongolia's finances, it pales in comparison to the human impact of the outbreak in UB and across the country: any measures to improve coal export volumes should come a distant second to controlling the outbreak itself.
Other countries filled the gap
One interesting insight from China's ban on Australian coal and the subsequent fall in Mongolian exports was which countries stepped up to fill the shortfall.
The US was one winner. Imports more than doubled in two months, from 135k tons in December to 296k in February, spurred on by a trade deal signed in January last year that commits China to buy more energy products from the US. One analyst from Argus Media told the SCMP that the increase in US coal wouldn't have been possible without the ban on Australia.
Indonesia also took the mantle of the largest thermal coal exporter to China with a record 15 million tons shipped in December after signing a $1.5 billion deal with Beijing. The move was publicized by Chinese state media in early January (before the impact of Covid-19 on Mongolian exports had become clear) as part of an effort to rely more on Indonesia, Russia, and Mongolia.
China's leadership was also keen to publicise an increase in imports from Africa, namely through resuming imports from South Africa and establishing shipments from the Kingho New Tonkolili project in Sierra Leone.
Low freight costs have also given South American miners a leg up in the Chinese market, negating the downside of long transit times. Colombia has been the main winner.
What's the main takeaway?
Essentially, the moral of this story is that Mongolian commodity exports to China, and the health of the wider economy, depend on the country's ability to vaccinate its population and manage Covid outbreaks. This is the conclusion reached by the central bank.
And this is where the news gets better. The Mongolian vaccine rollout is progressing far faster than many other countries. Already, half a million people have been vaccinated – about 15 percent of the population – and the government is aiming to vaccinate all adults by July 1.
Compare that to Australia, whose rollout has been called a 'farce' by its own doctors and is failing to meet not only its first goal of vaccinating about 15 percent of the population by the end of March but also isn't even halfway towards meeting its 'revised' goal of roughly 7 percent.
One critical difference, however, is that Covid-19 is spreading quickly through the Mongolian population. The government's main concern will be to reduce those numbers through the upcoming lockdown and keeping the vaccination program on track.
The opportunity to improve coal exports may have been scuppered so far but a post-Covid rebound in H2 2021 could be strong as Chinese premier Li Keqiang said to Prime Minister Oyun-Erdene this week over the phone that China would strive to accelerate the restoration of the volume of cargo through border ports from Mongolia.
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