Mongolia Bets Big on 2025: Can Coal Fuel Growth Amidst China's Slowdown?

Mongolia's government is stepping into 2025 with ambitious plans for economic growth. The proposed budget, presented to Parliament last month, outlines record spending on infrastructure, supported by optimistic projections for the mining sector. Central to this strategy is the nation’s goal of boosting coal exports by 20% to 83 million tonnes.

Alongside increased production of copper, gold, and iron ore, this surge in coal exports forms the backbone of the government's revenue plan.

However, these bold targets hinge on Mongolia’s ability to navigate the complexities of external markets, particularly China's economic deceleration. As China, Mongolia’s primary trading partner, faces slower growth and reduced demand for raw materials, questions arise over the feasibility of Ulaanbaatar’s ambitious growth goals. Some private coal miners are reportedly struggling to sell coal via open bids, as Chinese buyers adopt a cautious approach amidst potential price declines.

Despite these concerns, it is important to note that China’s commodity stockpiling efforts may help sustain Mongolia's coal exports in the near term. Although China's overall economic growth may be slowing, its strategic reserve-building indicates that demand for Mongolia’s key exports—particularly steel-making coal, which is crucial for China’s industrial sectors—might not shrink as drastically as feared. Research also suggests that China's GDP is a significant predictor of Mongolia’s economic performance, underscoring the importance of maintaining stable trade relations with its larger neighbor.

Mongolia's Economy Mirroring China’s

The 2025 budget reveals a government eager to press ahead with development. A total of 6.9 trillion MNT ($2 billion) is earmarked for investment, the largest in Mongolia’s history. A significant portion of this funding—24%—is allocated to transportation infrastructure, with energy projects receiving 8%. Plans for 2,200 kilometers of new roads and hydroelectric power plants are central to unlocking Mongolia’s resource potential and driving broader economic growth.

However, Mongolia’s reliance on coal exports leaves it vulnerable to external shocks, particularly global commodity price fluctuations. This is where the dependence on China poses both opportunities and risks. While long-term contracts provide some security, the hesitation of Chinese buyers to engage in spot bidding on platforms like the Mongolian Stock Exchange signals uncertainties for 2025 and beyond.

Moreover, India has expressed interest in purchasing Mongolian coal and other raw materials, offering potential diversification for Mongolia's export markets. However, logistical challenges—most notably Mongolia’s lack of direct sea access—complicate this opportunity. On top of that, Russia, already a major supplier of coal to India, may view Mongolia as a competitor and be reluctant to support this new trade route. These complexities underscore the challenges Mongolia faces as it seeks to expand its market reach beyond China.

Despite the focus on the mining sector, the government is also emphasizing the importance of diversifying its economy. The 2025 budget includes tax incentives for processing industries and investments in "soft" infrastructure, such as education and cultural facilities. This indicates a broader recognition that Mongolia must move beyond raw material exports to build a more resilient and sustainable economic future.

Yet, significant challenges remain. The Ministry of Finance has forecasted a rise in inflation to 6.5% by the end of 2024, partly due to planned energy reforms (i.e. increase in electricity tariff). In addition, the vulnerability of Mongolia’s agricultural sector to climate change poses a risk to food security and adds further inflationary pressures. These issues, coupled with external market risks, highlight the precarious balancing act Mongolia must manage in the coming years.

Ultimately, Mongolia’s ability to meet its ambitious growth targets will depend on its capacity to adapt to shifting global market conditions and reduce its reliance on a single trading partner. Diversification, both in terms of export markets and economic sectors, will be crucial for long-term stability. With China still stockpiling key commodities and India showing interest, Mongolia has opportunities to capitalize on its rich natural resources. However, careful diplomacy and strategic planning will be essential to turning these opportunities into sustained growth.

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