Mongolian Mining Corp. (0975.HK), Mongolia's top coal producer by volume, has cut its 2013-14 overall output target by over 13% due coking and thermal coal price differentials, logistical issues and weaker demand, Chief Executive Battsengel Gotov told Dow Jones Newswires.
The reduction comes at a time of slowing global economic activity, reduced coal demand in many countries and an expected fall in China's second-half 2012 steel output. The steel industry is a major user of coking coal, which is more expensive than thermal coal used for power generation.
"Coal demand is slowing, but supply remains strong particularly from North America and Australia. I think this pressure will continue in the second half," Mr. Gotov said.
The Ulan Bator-based company has decided to shelve plans to start producing thermal coal, and now won't do so until an export railway to China comes into service in 2015, although it will boost coking coal output next year.
It is targeting a 2013-14 coking coal output of 12 million-13 million metric tons, up from 10 million tons planned earlier, but now won't be producing an anticipated 5 million tons of thermal coal, he said.
"We revised the production plan as the profit margin of coking coal is higher than that of thermal coal. We are trying to maximize the benefit to the company," Mr. Gotov said. "Once the railway is in place, the transportation costs will be lower and the economic benefit of selling thermal coal will become appealing."
China's coking coal prices fell 5%-10% in the first half due to lower demand from steel mills in response to slowing orders from the construction, ship-building and machinery manufacturing sectors.
Mongolia is a preferred choice for Chinese coking coal importers given its lower transportation costs and quality levels comparable with Australian coal. Mongolia, which overtook Australia to become China's largest coking coal supplier in 2011, exported 10.3 million tons in the first half of this year, a rise of 34%, with the bulk of this extra supply going to China.
To reduce transportation costs, Mongolian Mining is building a 240-kilometer railway from its Ukhaa Khudag mine to the China-Mongolia border at Gashuun Sukhait, at a cost of some $700 million, which will be fully operational in 2015, Mr. Gotov said.
The company, which raised $650 million in Hong Kong in 2010, has sufficient capital to pay for the railway, as it had issued US$600 million notes in March this year, he said.
The Hong Kong-listed company, which reported a 56% rise in first-half net profit to US$31 million, currently sends all its China-bound coking coal by truck