Rare earth metals can be a game changing bonanza for North Korea, but, without reform, their claim is likely to pinch out. In the end, the North Korean government must determine if the minerals will be a lever to shift political relations in the region, or if it will continue to sell its most valuable asset at a discount.
If North Korea is willing to create conditions for investment, its supply of rare earth metals and its rich mineral sector have tremendous transformative potential. As Leonid Petrov notes, rare earth metals are highly attractive to Taiwan and Japan, and could override some of the political issues blocking the development of relations between the states. This could change the regional power dynamic in Northeast Asia as North Korea becomes a hub for investment from China, Japan, South Korea and elsewhere. However, for this to happen, the value of the resources, including the cost of extracting the minerals from North Korea, must outweigh the risks of doing business there.
The value of rare earth metals and their relatively limited supply would seem to work in North Korea’s favor. Rare earth metals are used in the construction of everything from iPods to precision guided missiles. China currently produces more than 95% of the world’s output of these metals. China’s control over these minerals has regional implications for Northeast Asia. For example, in 2010 Japan alleged that China suspended its export of the minerals to Tokyo in response to a territorial dispute between the two countries. The EU, U.S., and Japan also recently brought a case against China at the WTO for unfairly inflating the prices of these minerals.
Amidst these disputes, the South Korean government believes that North Korea may have as much as $6 trillion USD in rare earth elements. Beyond the metals, North Korea is known to be a rich source of many minerals including gold, zinc, magnesite, and others. North Korea is dependent on these minerals to support its economy; in previous years as much as 58% of North Korea’s exports were from the mineral sector. The North is particularly interested in selling these minerals as they have limited domestic utility. North Korea needs to carefully balance the amount of anthracite coal it exports for foreign currency with the amount it needs to keep its factories functioning, but it is not dependent on gold for any domestic development goal.
Although these resources represent significant potential export wealth, North Korea’s mineral sector is underdeveloped, and what is produced is sold at a discount. It is estimated that, on average, North Korean mines operate at less than 30% of their capacity. Many mines need to be rehabilitated and lack a reliable power supply. Much of the equipment dates back to the cold war, and is no longer made, let alone used, outside of the North. Other mines were damaged during the environmental collapse of the 1990, and have not yet been reclaimed. North Korea lacks the resources to redevelop these mines domestically; it is dependent on foreign investment to increase mineral production.
China is currently the biggest player in the North Korean mineral market, and the costs it pays for these resources reflect this lack of competition. Most of this investment comes from small and medium sized enterprises in China’s Northeast that are looking to maximize their economic position by investing in North Korea. This investment would be almost impossible without the special relationship between China and North Korea, and the role of Korean speaking Chinese middle-men that have connections on both sides of the Yalu River, and who can make the arrangements necessary for these business deals.
It is important to note that China pays far less for mineral imports from North Korea than it does, on average, from other states. Exports from China to North Korea, likewise, are priced much higher than Chinese exports elsewhere. These costs reflect the true cost of doing business in North Korea given the necessary investments into mine rehabilitation and transportation infrastructure, as well as the risk that comes with dealing with North Korea. In short, this is a surprisingly market-oriented trade between two ostensibly communist states.