CRU: There is a potential to supply Chinese demand in Mongolia

19th of 9, 2013

John Johnson, CEO for the CRU China, is explaining on Mongolian future opportunities for mineral export. And he gives MMJ the long term outlook for iron
ore and met coal.

 We’ll talk about met coal and iron ore.  I guess we look at those two commodities in slightly different ways to copper where we look at it in terms of surpluses and deficits because you can store copper in a warehouse.  It’s not quite the same in iron ore and coal, although one can try to look at stocks when looking at these commodities as well to understand short term changes. Iron ore stocks have been relatively low recently.  Otherwise, the story in iron ore and coal is all about the availability of low cost production from outside of China.  Also, China dominates these markets and steel production has been pretty strong this year.  In fact, it’s been stronger than expected –probably 6% growth in steel production this year as a result of a relatively good market in China, which has been picking up in recent months.  That’s helped support the price of iron ore, but it’s not really helped much to support the price of coal.  That’s because we’ve got an abundance of coal coming in from all over the world from the U.S. Australia, and so on.  And also domestic Chinese coal has increased its own production pretty significantly.  So I guess we’re pretty down on metal coal at the moment though prices do appear to have turned a corner recently.  Iron ore has been surprisingly strong due to supply issues from preventing India and Brazil being able to supply sufficient quantities to the Chinese market and the very high cost of domestic production of iron ore in China.  We think that prices may decline from recent peaks still decline, but not very much.  It’s about $135 a ton at the moment.  It may end the year around $130 or a little less.  

However, longer-term the situation is quite different.  There’s a lot of projects in iron ore just as there are in copper.  We’re expecting surpluses after 2015 in copper, and in iron ore we have prices gradually falling over a period of time towards $100 a ton due to new supplies.  In contrast, there appears not as much high quality coking coal projects in the world.  There are issues in Mozambique and possibly in Mongolia.  It’s not coming out as quickly as it should have been.  In Australia, there are declining grades and they’re digging deeper.  If you’re optimistic about China in terms of its growth even though growth will be slower it still adds up to significant extra volumes to be required.  You saw in my presentation yesterday maybe another 200 million tons of steel maybe required over the next 5 years or so from 2012.  That’s a huge amount of coking coal.  We can expect that will help to support the market going forward as I said because you haven’t got the availability.  From a Mongolian perspective, a lot of that hard coking coal will be required on the coast of China and not so much in land because they’ve got their own coal and use less hard coking coal.  So the issue is getting it down to the mills that need the coal competitively. That really is the issue for Mongolia.  And that’s why sorting out infrastructure is so important.

Mongolia  is planning on exporting 50 million tons of met coal in the near future, but China wants to import just 50 million tons of met coal in total per year.  Can we export so much coal?

I guess it depends on how competitive it is and if it’s low enough cost and price then they’ll import it.  But we’re forecasting they may need about 100 million tons of metallurgical coal: hard, soft, and PCI coal.  Our forecast is for 30 million tons from Mongolia for the next 5 years.  I’m sure if Mongolia is able to produce it and ship it competitively then they’ll be able to sell it, but it’s competing with domestic Chinese and imported materials.  Labor costs will rise in China.  On the other hand, you’ll get improvements in productivity so if Mongolia can overcome it’s rail problem then I think the market is there because there are higher cost mines in China that may not be able to compete with Mongolian mines.  And as I indicated there maybe insufficient supplies from other parts of the world.  It depends on your view of these other projects that are going on.  Speed is the essence.  We talked about the window of opportunity.  Some people thought that window had already closed, but I’m not so sure.  It all comes down to how competitive Mongolian coal can be.  If you’ve got wash plants, rail, and so on that would help a lot.  So there will be a market there.  
The Mongolian government and analysts are always talking about having to process raw material.  Some say China just wants to import raw material.

You need the technology and the skill sets and the population and the labor which Mongolia does not have in abundance.  I’m a little bit skeptical whether that’s the right policy to pursue.  Other countries have succeeded on the basis of exporting what you might consider relatively low value raw materials.  Chile and Australia are countries that don’t have huge populations.  Why add huge value when you’re not competitive in those areas.  China is a net exporter of steel.  It doesn’t want to import steel.  So it doesn’t necessarily make sense.  It’s best to focus on the infrastructure and the big projects and benefit from that rather than attempting to build industrial parks, nuclear power stations, and so on.  I think it’s a good idea to wash the coal.  There ways of adding some value reasonably easily.  Where do you draw the line?  Maybe you say we should be building cars in Mongolia.  Does that make any sense?  You should focus on areas where you have competitive advantage and not to be obsessed with adding value.

Do you have anything to say about the Mongolian commodity export market?

It’s not quite as good as it was a few years ago.  I know someone referred to it as a “cold shower.”  So it may not be such a bad thing in the long run.  Good projects should survive low prices.  And then you get bad projects that are incentivized by high prices.  Hopefully, all the good projects will survive and support the Mongolian economy going forward.  The point is that the commodity market will improve in the next few years as the world economy gets a little bit better and some supply shortage come back in, maybe.  But we may not go back to the super cycle where we have a combination of unique factors that led to huge price increases.  That may not come back again.  I’m sure Mongolia will continue to have opportunities if they focus on those projects that are competitive.  

On the copper front, Mongolia’s two major mines are reasonably competitive so they’ve got a large market in China.  Even in a tough environment, they can maintain their export share. 

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