2019 | December | 025
Мongolia’s economy is built upon mining and it will undoubtedly remain this way in the next decade. If you think of it as a vehicle, the two driving wheels are coal and copper. All the data, of which I will cite only two, will indicate clearly. The taxes on coal and copper industries single-handedly made up about 21 percent, or MNT 2.3 trillion, of 2019 budget revenue. Therefore, Mongolia’s economy will vastly depend on the supply and demand of these two commodities in the upcoming years. We must listen in on China’s “pulse” to analyze the market situation. China’s market, on the other hand, will face multiple headwinds in the following years.
The commodity market, especially the minerals, growth was inseparable to China over the last two decades. It will most-certainly remain dependent on China for the next one or even two decades. Aside from a few minerals such as diamonds, China is making up half of all mineral consumption of the world. China’s consumption was taking up 31 percent of steel production, 23 percent of coal demand just 15 years ago, which has now grown into 50 and 49 percent respectively. The biggest factor in commodity consumption is the urbanization, as well as the construction of buildings and infrastructure that follows it. Tens of millions of people migrated to cities and settlements, due to which dozens of new cities have been established
But the “Belt and Road” initiative will be the center for China’s economy, especially the steel industry and commodity market in the next decade. This giant project that began in 2013 once had an initial cost of about USD 4 trillion. Although the project implementation is not progressing fast enough, it is not completely frozen. Suppliers, investors, and businesses are giving high hopes for the project, which has a high impact especially on the infrastructure of underdeveloped countries.
On the other hand, research institutes view that the project will only help in maintaining the current demand for commodities instead of creating growth. Strategic Dialogue on Sustainable Raw Materials for Europe (STRADE) wrote in its report “China’s commodity market and Belt & Road Initiative” that “China’s commodity market is reaching its limits. The Belt and Road initiative will help ensure the stability of commodity demand.” In other words, the country’s consumption will not change drastically until 2030. The production will not see any significant change. Which means the import will not shrink drastically. Research institutions that follow mineral markets, including steel, coal, and copper, are refraining from predicting demand growth in China, but remain hesitant to conclude a sudden drop in demand.
The biggest headwind for China’s market is the trade war with the U.S. The fact that the dispute has affected the overall velocity of the market indicates that it is the biggest risk for China. The trade war will have its resonance starting from China’s industrial growth, to coking coal import, and copper consumption. But with the dawn of the new year, the world’s leading two economies reached a negotiation and signed a deal, creating hope for many. But the hesitation over the possibility that it could be the beginning of a bigger conflict remains.
Even if these are overlooked, some point out the existing potential driven by the current consumption of China that is sufficient enough. On top of the giants such as BHP and Rio Tinto, Australian and South American countries seem to not doubt China’s consumption. The whole world was expecting a slowdown in China’s economy and a potential impact on steel production and the demand for related commodities caused by the Government’s policy on environmental and air pollution. But in reality, the statistics show that China’s consumption and production remain unaffected throughout the economic slowdown and closure of multiple mines and plants. The World Steel Association, two months ago, reported that the global demand for steel grew 3.9 percent to 1.77 billion tonnes last year. Out of which, China amounts to 900 million tonnes, which is not a shrink, but a 7.8 percent growth.
This outlines the fact that opportunity still exists for countries that supply minerals to China. It all falls to the supply capacity and how friendly they are to China, as well as their competitiveness to overcome commodity price swings. That is because compared to a decade ago when it was difficult to predict China’s consumption, it is more clear to measure the size of its market and further outlook. For instance, Bloomberg Intelligence estimated that China’s coking coal import would reach its peak in 2019 and lose its momentum afterward. Eventually, over 100 million tons of coking coal supply would compete in a market with less than 70 million tons of demand.
In contrast to the steel and coking coal market, copper is rather interesting. Copper demand may not grow in China’s development sector, it could potentially double in infrastructure, especially energy production, and transmission in the next 20 years. Also, the demand for copper in transportation and automotive is expected to be on the rise. Outside China, it could be said the consumption may hike in India. The copper consumption per capita in India that currently stands at 0.4 kg is estimated to double studied IEA.
Both the challenges and changes will appear at the gates of Mongolia that are tapping its tax and export revenue from coking coal and copper. Mining companies, specifically the coal mines have already started preparing for the inevitable. The fact that 13 coal washing and processing plants were established in Mongolia in the last 2-3 years is an exampleå that the mining firms are gearing up their competitiveness.
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