The price for coal has exceeded 200 USD on the Chinese market, yet coal from the Tavan Tolgoi (TT) deposit is being sold for 27 USD per ton. Erdenes TT JSC is selling coal 10 times below global market prices, so who is profiting from this massive price gap? The spot price of high-quality Australian coking coal is around 200 USD per ton in Tangshan, a city in northeast China. However, this price includes mining and processing costs, costs for transportation from Australian deposits to Chinese steel plants, export and import taxes, and other costs. It’s important to know how much is being offered for a ton of coal in certain regions and plants. Most Mongolian coal is exported and sold to steel plants in Baotou, Inner Mongolia Autonomous Region. It’s inappropriate to compare prices for coal of different quality being supplied to different regions, not to mention comparing Mongolian coal to Australian coal, which is more expensive due to additional costs. We’ll need to know the total cost of transporting coal from the TT deposit to Baotou to accurately determine the price of Mongolian coal. A 2014 estimate calculated by the Mongolian National Mining Association states that coal transportation costs amount to 53.5 USD per ton and is 96 USD per ton after adding processing costs. Back then, coal was traded for 100 USD per ton in Baotou. Now it has dropped to 560 CNY, approximately 83 USD. Currently, it costs a total of 105 USD to supply coal to Baotou from Mongolia, reports Erdenes TT. When there’s a difference of 18 USD per ton of coal, how are Mongolian coal producers and traders profiting? An Erdenes TT employee says that some 50 percent of the plant’s coal is produced from processing raw Chinese coal, but mixing it with TT coal increases the output to 80 percent. Erdenes TT is able to make a profit at this stage. It’s impossible to trade TT coal for 50 USD per ton close to the deposit considering the current market. Moreover, there is a gap of 100 USD between coal prices in Baotou and Tangshan. Mongolian traders can sell coal in Tangshan, where the spot price has reached 200 USD, but the transportation costs would rise to 173 USD, and various costs would be added. Transporting coal to Tangshan wouldn’t be profitable unless prices there reached 220 to 230 USD, says one expert. Former CEO of Erdenes TT B.Batbileg was asked about coal transportation and prices. He is well acquainted with the process of setting prices, as he worked as the Deputy CEO in Charge of Sales and Marketing before rising to the position of CEO. “It costs a lot to transport a ton of coal over distances ranging between 600 and 700 kilometers across two countries,” says B.Batbileg. “It’s common to face bureaucracy while traveling across China. It all becomes additional cost.” It costs around 15 USD to transport coal by truck from the TT deposit to the Gashuun Sukhait border checkpoint, where Mongolian export tax, customs duties, and Chinese inspection and quarantine costs are imposed. One percent waste is produced during transportation, according to an expert. The Chinese side charges 17 percent VAT, a three percent import tax, and another 40 USD is spent on washing the coal. Another 20 to 25 percent of waste is produced with each ton of washed coal. After these procedures, the cost of a ton of coal equals over 80 USD. On top of this, transportation costs to Baotou are added. The final price of TT coal supplied to Baotou is approximately 105 USD per ton according to this basic estimate. This estimate shows that Erdenes TT is following global market prices and is selling coal for a reasonable price near the point of departure. Australian coal sells for 35 USD per ton near local deposits when the overall cost is subtracted. In other words, Mongolia isn’t the only country selling coal for cheap prices. PRICES EXPECTED TO INCREASE BY 22 PERCENT NEXT QUARTER Erdenes TT updates coal prices every quarter according to four indexes, as specified in the agreement between Erdenes TT and Aluminum Corporation of China Limited (CHALCO). Due to this, other companies are reportedly unable to benefit from price spikes. Economists say that it’s good to establish long-term agreements, as prices for raw materials frequently fluctuate, meaning that companies are bound to a set prices for a whole quarter, as no one can determine future changes in the raw materials market. This either brings about a loss or gain for the company. Most importantly, stable prices assist long-term business planning. Coal prices have been continuously falling since the CHALCO agreement was signed. Compared to 2012, the price of coal dropped by a whopping 40 percent in 2013, and it has been falling since. Chinese government leaders reduced the working days of local miners from 330 to 276 days a year, boosting coal consumption and increasing coal prices. The CR China Coking Coal Price Index reported that at the start of 2016, coal prices increased by 38 percent. The Australian spot price has reportedly risen by over 100 percent since the second quarter of this year. International media outlets highlighted that neither Mongolian nor Australian companies were able to benefit from this price spike. On Tuesday, the price of processed Australian coking coal exceeded 200 USD per ton, but the Aus tralian agreement with China specifies selling coal for 92 USD per ton. This means that the majority of coal supplied to China is being purchased at a 50 percent lower price, approximately 90 USD less. Currently, Erdenes TT is selling one ton of coal for 27 USD at the East Tsankhi Block of the TT deposit. In the final quarter, starting on October 1, the company will increase the price to around 33 USD per ton according to the CHALCO agreement. Some economists believe that increasing the agreement price by 22 percent in a quarter is an excellent sign for Mongolia’s coal market.