Recently, Mongolia, which shares borders with China and Russia, unilaterally tore up its coal contract with our country due to domestic coal corruption, and now Mongolia has increased the coal price by 80% and is reselling it to India. According to a report by India's BUSINESSLINE, India, in order to expand its coal import sources, wants to import coking coal from Mongolia, and the two countries are currently discussing the possibility of cooperation. Why does Mongolia insist on going out of its way to export coal to India? How will our country deal with Mongolia's behavior?

Mongolia Breaches Contract with Our Country and Resells Coal to India

Mongolia tore up its coal contract with our country and wants to sell it at a high price to India, but there is a lack of effective transportation between Mongolia and India, and they want to use our country's railway for transportation.

Mongolia has always pursued a "third neighbor" policy, constantly seeking to maximize its own interests and reduce dependence on neighboring countries. In terms of coal exports, Mongolia wants to cooperate with India.

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According to a report by India's Business Line on March 31, 2023, India wants to import coking coal from Mongolia to expand its import sources, as India is the world's second-largest steel producer and has a large demand for coking coal. From April last year to February 2023, India imported 52 million tons of coking coal.

In theory, Mongolia and India's coal cooperation is a normal transaction between the two countries, but the transportation cost between the two countries is too high. Therefore, in order to reach a cooperation, Mongolia wants to use our country's railway line.

However, Mongolia seems to have forgotten the previous contradictions with our country. Mongolia unilaterally tore up the coal contract with our country due to domestic coal corruption, which severely damaged our country's interests and also led to a reduction in Mongolia's coal exports to our country.

According to a report in May last year, there was a large-scale demonstration by the Mongolian people, and several domestic officials were involved in coal corruption, involving about more than 200 people, with the total amount of corrupt coal reaching 1.8 billion US dollars.

Among them, Mongolia's largest state-owned coal company, Erdenes Tavan Tolgoi, also has a large amount of corruption. The coal that should have been transported to our country was also corrupted.Originally, it was said that the existence of coal corruption within Mongolia had nothing to do with our country, but Mongolia unilaterally tore up the coal agreement with our country. Even Mongolia announced that from February, coal exports would no longer be sold at the pithead price, but at the border price, which is equivalent to raising the unit price of coal by 80%, making it very unprofitable for our country's coal imports.

This time, Mongolia has abandoned cooperation with our country in favor of coal cooperation with India, mainly for the following reasons:

Firstly, after the failure of the coal contract with our country, Mongolia wants to seek new markets to increase revenue. Currently, our country's coal import sources are continuously expanding, and the importing countries are not limited to Mongolia alone. According to reports in May, since our country resumed the import of Australian coal, the import volume of Australian coal has increased since March this year, with a year-on-year increase of 125.4%.

At the same time, most of the coal exported by Mongolia to our country is coking coal needed for the operation of steel enterprises. With our country's expansion of high-quality coal imports from Australia, the cost-effectiveness of Mongolian coking coal has been continuously declining.

In addition, during the previous visit of Russia to our country, discussions were also held on coal trade, and the Russian Deputy Prime Minister even put forward substantive suggestions for coal transportation between the two countries, such as building a China-Russia cross-border bridge and coal ports to achieve coal transportation.

Therefore, the market for Mongolian coal in our country has shrunk. Previously, Mongolia, in order to increase revenue, implemented auction pricing for coal exports to our country, trying to sell at high prices. However, this auction of coal is doomed to fail.

According to relevant data from the Mongolian Customs General Administration, in the first quarter of this year and in April, Mongolia exported 585.43 tons of coal to our country, a year-on-year increase of 377.47%, but the coal sold in the form of auction only accounted for 7.84% of the total export volume.

Therefore, a large amount of Mongolian coking coal urgently needs to seek new markets to sell at high prices.Secondly, the reason why Mongolia exports coal to India is also due to India's demand, and the two countries are making a two-way choice.

As a steel-producing country, India has a large demand for coking coal. According to reports from India's Business Online, India imported about 52 million tons of coking coal from April 2022 to February of this year, and even imported a large amount from countries such as the United States and Russia to ensure supply.

Therefore, Mongolia can just meet India's demand. India has also been discussing the import of coking coal with Mongolia recently, increasing Mongolia's coal production in Mozambique for export to India.

However, there is still a problem to be solved, which is the coal transportation issue between Mongolia and India. Mongolia is a country sandwiched between China and Russia, and it is too far and costly to realize coal trade with India.

At present, the main railways involved in Mongolia's coal export are three, all of which pass through China. Previously, due to the lack of railways, Mongolia's coal transportation cost was too high and relatively troublesome.

According to reports from Huanqiu.com, Mongolia established the second railway between China and Mongolia last year for mineral exports. The completion of this railway is expected to increase Mongolia's coal export volume to 20 million tons.

Therefore, this time Mongolia's cooperation with India in coal needs to rely on China's railway to achieve transportation.

What is the impact of Mongolia's actions?

Mongolia gives up cooperation with China in coal and turns its attention to the Indian market. This is somewhat beneficial to Mongolia, but at the same time, it has adverse effects on China-Mongolia relations.Mongolia, as a country rich in coal resources, shares a border with China, making it China's largest coal importing country. Consequently, China maintains a good relationship with Mongolia in terms of energy resources.

Firstly, Mongolia's unilateral termination of its coal contract with China in favor of cooperation with India will reduce the export volume of coal to the Chinese market, gradually leading to the loss of the Chinese market. According to data from Jinshi Futures, as of May 2023, Mongolia exported 12.0859 million tons of coal to China. This year, Mongolia's export target is to complete 22 million tons, and nearly half has been achieved.

However, a closer analysis behind these figures reveals that in April, the coal stock clearance at the Mongolian port of Ganqimaodu decreased by 19.02%, resulting in a reduction of nearly 630,900 tons of coal exports to China.

The main reason is that after seemingly breaking the coal treaty with China, Mongolia adopted an online auction format to try to earn high profits from China. At the same time, Mongolia attempted to increase revenue by using a price inversion strategy on coal prices, but ultimately, the result was a failure.

China has established friendly cooperation with Mongolia in various fields, and the two countries have maintained a good relationship for a long time. Mongolia's act of tearing up the treaty severely damages China's interests and its own credibility.

How can China cooperate with a country that lacks integrity?

Secondly, Mongolian coking coal does not have much competitiveness in the international market. India, as a major steel producer, has a large demand for coking coal. Besides Mongolia, there are other countries such as Russia, Indonesia, and Mozambique.

At the same time, to increase revenue and compensate for domestic debt, Mongolia has set high prices for coal, which makes its coal competitive in the Indian market.

Previously, India cooperated with Russia on coking coal, importing at a 20-30% discount from the international market. However, Mongolia has now increased the coal price by 80% for border sales, which means that the original selling price per ton of coal was $71, and it has now been raised to $129.The increase in coal prices will also lead to a rise in the import prices for steel mills.

In fact, the reason why Mongolia keeps raising coal prices is due to the relatively serious domestic debt issues, and it wants to rely on coal exports to achieve an increase in revenue and budget.

According to relevant data from our country's Ministry of Commerce, Mongolia's current credit rating will remain at B level. In 2023, Mongolia has repaid more than 150 million in foreign debt, but the domestic fiscal deficit is still serious. It is expected that the fiscal deficit from 2023 to 2024 will be below 1% of GDP.

Therefore, Mongolia faces great pressure in trying to resolve the fiscal crisis by exporting coal. So how should our country respond to Mongolia's desire to cooperate with India in coal and use our country's railway?

How should we deal with Mongolia's request?

Mongolia, as a country that pursues the "third neighbor" policy, poses unfavorable factors to our country. This time, it is acceptable for Mongolia to export coal to India through our country, but our country should also look far into the future and be vigilant against Mongolia.

The current international situation is relatively complex, and Sino-US relations are still in a tense state. At the Shangri-La Summit in June, there was a fierce dialogue between the finance ministers of China and the United States.

For Mongolia, there has been a recent trend of leaning towards Western countries such as Europe and America. According to a report by Reference News on May 21, after the G7 summit, Mongolia cooperated with French President Macron.

It is important to note that Macron had previously made many unfavorable remarks about China at the G7 summit, and now he is interacting with Mongolia. Mongolia is unclear about its own position and always seeks our country's help, which is really uncomfortable for our country.

This time, Mongolia wants to use our country's railway to cooperate with India in coal, and our country should also put forward its own conditions.Firstly, regarding Mongolia's stance, our country has no right to interfere with Mongolia's "third neighbor" policy. It is acceptable for Mongolia to cooperate with other Western countries for mutual benefits. However, Mongolia should also recognize the importance of China.

In terms of issues involving our country's interests, Mongolia should not be influenced by other countries to exhibit "fair-weather friend" behavior. For example, during our trade cooperation with Russia, we cannot harm the interests of both China and Russia.

At the same time, in the current context of the Russia-Ukraine conflict, Mongolia's frequent "pro-American" actions require our vigilance. For instance, the recent visit of Poland to Mongolia could affect Mongolia's attitude towards China and Russia, as Poland is a country that is closely aligned with the United States.

Secondly, if Mongolia wants to use our country's railway, from an interest perspective, our country can demand a certain transit fee from Mongolia. This can be considered an additional benefit for our country from the Sino-Mongolian railway cooperation.

In summary, our country needs to maintain a certain level of vigilance towards Mongolia, especially since the United States' "Indo-Pacific Strategy" has some alignment with Mongolia, which could be detrimental to our country's interests. In response to the recent coal cooperation between Mongolia and India, our country should also propose its own preconditions.