China’s coal requirements are getting stricter

2019  |  December   |  025

We spoke with Ch. Munkhbat, President and CEO of Southgobi Sands LLC

-Your company has started from last year to wash and treat coal using the wet technique before export. Can you explain more about this industrial process?

-Our factory uses the flotation method. It uses less water. The flotation technology is slightly different from the ones at Energy Resources LLC and MAK LLC’s plants. In other words, we commenced the operation of a plant that cleans and recycles the water it used in September 2018. The plant operated at full capacity in 2019 and produced and exported 800 thousand tons of treated coal. Our plan for 2020 is to export over 800-900 thousand tons of treated coal. Coal from our Nariinsukhait deposit is not exactly pure coking coal. The quality is different than Tavantolgoi’s. Per one-ton coal we mine, 55% does not meet Chinese requirements. Therefore, we decided to open a treatment plant at Nariinsukhait mine to treat our coal for the more value-added products.   

-What’s the coal output from the treatment plant?

-We are treating rocks and earth and transforming them into coal. Basically, the output is 75%, which means we are still productive even at 50% output as the tailings are recycled. We treat the low-rank coal under WP classification into a B class coal. We are also doing technological research this year, especially on China’s water-efficient and higher-output technologies. There are many. As China’s patents become higher quality, there are more demands to use high cost coal treatment technologies. However, we estimate using our current technology in the next two years. Perhaps next year, we will take measures to improve our output. 

-You also use a dry treatment method. How effective is it?

In 2019, over 12.6 million tons of coal went from Nariinsukhait cluster deposits through Shiveekhuren-Ceke port

-The company first opened the dry treatment plant back in 2010. This method is considerably expensive. We use diesel fuel to generate power. At that time, the Chinese Government did not impose the five types of requirements on coal quality. The current plant which was established almost a decade ago no longer qualifies for this requirement. The technology has changed. Chinese consultant companies are visiting the plant to do more research. So, we are planning to upgrade the plant’s technology from next year. The results will be available from June.

-China’s coal requirements are tightening. How is your current coal performing?

-The opening of the new treatment plant means we are able to export our loose coking coal in the future. MAK, Usukh Zoos, and our company who all operate in the Nariinsukhait deposit have built a washing plant. Ours has been operating for over a year now. It’s great that we are already exporting coal that meets the requirement of Chinese buyers within this period. At the same time, we are raising the value of our products which were previously valued very low. Here lies the difference. Indeed, China’s requirements are becoming stricter. Especially by 2025, the bar on raw coal is expected to rise higher. For example, coal was previously shipped unsealed and loaded off at the southern border in the open. From last year, however, large hangars have been set up at Shiveekhuren-Ceke port. Mandatory measures are actively put in place, such as only storing sealed products at the warehouses. Gone are the days when coal is just extracted and shipped straight away. We have no other way to treat our coal if we want to maintain our position in the Chinese market. On top of that, there’s the mandatory requirement to ship products in sealed trucks. From last year, container-like trucks started moving through Gantsmod port.   

-Generally, treatment plants in the Gobi region carry major challenges regarding water issues. You mentioned that your wet method treatment plant uses less water. How do you manage water?

-Summer rainfall in the gobi washes off straight away. Therefore, we collect rainwater in special storage. In addition, we produce thousands of tons of seepage water during coal production. We suction them. Before the washing plant, we used this to water the mine roads. Our mine has the only washing plant in the area. Therefore, we use it to filter the water and use it for domestic purposes. The Ministry of Environment and Tourism conducts tests and the GASI takes samples every year before issuing a permit. This time, we are using this water at the washing plant. We set up reservoirs at 2-3 locations to increase our water reserves. We transport water to those locations and use them at the plant. We also established a water research team together with MAK and Usukh Zoos. In order to build additional washing plants and satisfy China’s coal requirements in the future, the team is conducting research to set up a reserve. The reason is that a lake named “Mongol us” was formed in Alsha province of Inner Mongolia, south of Shiveekhuren-Ceke port. Underground water from Mongolia flowed to this region and created this large, fish lake. It is merely 15-16 km from our border. 

There’s no reason why this water cannot stay within Mongolia. So, we have invited researchers on this matter, because the origin of the lake is in our territory. They will research opportunities to form our own lake. If the project is successful, a lake is formed here and the rest can flow externally. As such, we consider it an environmentally friendly endeavor. Inner Mongolians have asked whether we cannot collect this water ourselves. So, we are putting special focus to realize this work.  

-Power is another major challenge aside from water. You mentioned that you power your plant with diesel fuel. It must be costly?

-It means we are powering our plant with fuel. Naturally, it costs a lot. We made an agreement with Alsha province last year to establish a 35 mW sub-station. Currently, we finished setting up the power line. Unfortunately, the head of Alxa province energy agency has been replaced. So, the issue might be resolved after the Chinese New Year, which would allow us to get power. The cost should be brought down by 60 percent. Diesel is an expensive fuel because we need to transport it from Ulaanbaatar and use a generator. If we build a power station and a good quality transmission station at the Nariinsukhait deposit, we will have a higher volume of treated coal. We discuss power plants with other companies operating at the same deposit. Because MAK LLC has obtained its power station permit as of today, we aren’t able to bypass them, even though we already received our permit as well. In other words, we have to wait for them to complete their construction. It’s not appropriate for one Mongolian company to race with another. If we do get our electricity, there are many things to improve. 

-How much raw coal did you produce last year?

-Last year, we produced 3.6 million tons of raw coal, of which 800 thousand were treated and exported. We commenced production and export in 2010. So, it has been 10 years.

-For how much RMB are you selling raw and treated coal?

-We export our treated coal for 210 RMB. After taxes and other fees, the net price is around 120-130 RMB. On the other hand, the raw coal is priced at 280 RMB maximum. Net profit is approximately 150-160 RMB minus production costs.

-Do you think it’s more profitable to export raw or treated coal?

-At the moment, the raw coal is obviously more profitable, because electricity costs are quite high. However, we will have no choice but to comply with Chinese requirements. Good quality will help us maintain our position in the market. If we lose this position, where would Mongolia export its coal? Nowhere. Turkey, Korea, and Japan express their interest. But, we cannot handle the transportation aspect. 

-Shouldn’t it be more effective and profitable if all coal going out of Mongolia to be treated?

China set a quota of 13 million tons of coal through Shiveekhuren-Ceke port in 2019

-It should. However, China doesn’t need to buy treated coal all the time, because pure coking coal used at steel factories combine coal with various types and elements. For instance, they combine raw coal from MAK, Usukh Zoos and SGS, raw coal from Tavan Tolgoi, in addition to coal from China and Russia, and produce single-quality pure steel coal. Mongolians tend to have a misunderstanding, complaining that coal is only exported in its raw form where it should be treated instead. Treatment doesn’t mean, in my understanding, treating all coal including the higher grade ones. Chine has higher quality coal than in Tavan Tolgoi. They use advanced technology to combine different types of coal into high-quality coal before supplying it to final consumers. The price for the final consumer is supposedly around 300 USD. Australia’s coal straight from the mine costs 67 USD, same as Tavan Tolgoi’s. However, Australia is able to combine different types of coal and sell them at 300 USD.    

It’s essential to provide the public with accurate information on how coal is supplied and on their differences. Otherwise, they think coal is simply being extracted and shipped out.  

-There must be various requirements and pressure imposed on coal companies in addition to that. How are you overcoming these?

-Coal export is providing a major chunk of the country’s entire budget. This reality must be accepted by the public and politicians. We cannot politicize the issue by accusing companies that they are exporting coal only in raw form. What’s more, our environmental regulations are strict. If an annual plan is not approved, even a drilling permit is rejected. No drilling permit means no mining activities. The requirements are very tough and we are complying with them in order to continue. To operate a single coal mine, companies are required to obtain 102 permits from over 110 government authorities. In addition, we are providing over 500 jobs under our corporate responsibility. Therefore, the government needs to promote correct information to the public about coal production. Personally, I try my best to communicate our issues by maintaining a close relationships with the media. While some may have a good understanding, others may not.

Australia has been exporting its coal for hundreds of years, while Mongolia only started in 2008. We should be proud of how far we’ve come within this short period. We were able to become a key supplier at this major Chinese market. No one talks about this success. We must accept this fact. Look how coal price plummeted since 2012 – from 460 RMB to merely 80 RMB per ton. There’s no guarantee this won’t happen today. Therefore, we must use this window of opportunity.   

-China imposes a restriction on coal. So, they don’t buy as much as we want. If port capacity is upgraded and export volumes are boosted, would China buy?

-If Mongolia manages to export 60 million tons of coal, there’s no problem in increasing public servant salaries to two million MNT. There are many Chinese buyers out there who are interested. Unfortunately, we cannot even export five million tons through the border today, because China set a quota of 13 million tons of coal through Shiveekhuren-Ceke port in 2019. This number was gradually reduced until the port was closed at the end of the year. Last year, when we had our mining plan approved at a schedule of five million tons, China was still able to buy 10 million tons. They were ready to sign the contract, but it didn’t happen. Therefore, port capacity must be increased. Chinese port works eight hours per day, six days of the week. This simply needs to be increased to 10-12 hours per day. While Mongolia opens the border at 09 AM, China opens it at only 10 AM. On top of it, there’s the lunch hour and snack hour. So, it’s essentially six hours per day only.

-Does this mean we have to negotiate with China?

-The Government of Mongolia needs to negotiate with the Chinese Government to increase the workhour to 12 hours if they can’t manage 24 hours. This also means Mongolia would have to increase the number of customs and clearance officers, as well. If this goes through, there’s no problem exporting 30 million tons through our port and 40-70 million tons through the other port. We’ve all seen how our economy recovered thanks to coal. I say this to many ministers and authorities at meetings. While there’s still an opportunity available, there’s no reason to seek foreign loans.  

-How do the Mongolian customs and border work? Many say there’s considerable bureaucracy.

-Our side is fine. The reason is that we teamed up with MAK LLC and built eight customs gates. The gove­r­n­ment wasn’t involved. The roads and gates are all there. We don’t have queues, breakdown and inter-port problems as Tavan Tolgoi. In 2019, over 12.6 million tons of coal went from Nariinsukhait cluster deposits through Shiveekhuren-Ceke port. This means around 40 percent of total Mongolian coal export went through us. After exporting this 12 million ton coal from a combination of MAK, Usukh Zoos, and SGS, 14 million tons of poor-grade coal are leftover. We are recycling and exporting them after the treatment process.     

-Can you talk about your financial performance? How profitable was 2019? How much were you able to submit to the state budget?

-Our company has paid the state over 380 billion MNT since 2010. We pay ar­o­und 45-60 billion MNT annually. Profits jumped by eight percent from last year thanks to upgrading our zero-value coal. 


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