Features | Economy | East Asia

North Korea’s Six Trillion Dollar Question

North Korea holds trillions of dollars in mineral resources. Unless it reforms its economy, it may never see much benefit.

By Scott Thomas Bruce for

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.

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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.

From the South Korean perspective, however, the Chinese are buying up a resource that belongs to the Korean people at far less than it is worth. South Korea’s mines are largely depleted and it would greatly benefit from access to the North’s mineral sector, particularly the rare earth metals. As an editorial in the Korea Times recently noted, the “near subordination [by China] is also economically disadvantageous [to North Korea], as seen by reports that China has already preempted nearly half of North Korea’s mineral resources worth $6 trillion, which should have gone to South Korea.” There were several inter-Korean mineral development projects during the Kim Dae-Jung and Roh Moo-hyun governments, but those projects died with the collapse of the sunshine policy and subsequent implosion of inter-Korean relations. As Kim Shin-jong, President of KORES, the Korea Resources Corporation, has noted, “We invested a lot of money, and now we cannot even find out the present status [of those projects].” To those in the ROK with an eye on the North Korean mineral market, China is making off with a Korean asset while the two Koreas bicker.

Other companies have attempted to enter the North Korean mineral market, often at their own peril. Mineral development is generally a multi-generational undertaking. Companies invest with a plan to develop a site, work it for many years, and then close down operations. This means that companies looking to invest in the North Korean mineral sector are wagering that the North Korean state will remain committed to that investment for the lifetime of the project, something that is far from certain given North Korea’s historical ambivalence toward foreign investments. There is also a risk that companies that partner with North Korea will find themselves subject to UN or state-level sanctions. One of the three companies sanctioned by the UN in May 2012, for instance, was Green Pine Associated Corporation, which, among other things, was involved in mineral development projects.

North Korea has a track record of demanding to renegotiate a contract repeatedly as it suits the regime. Although it may not be typical, the recent experience of the Xiyang Group shows that not even Chinese firms are immune from this treatment. The Xiyang Group’s experience also demonstrates the level of corruption and intimidation that an investor could possibly encounter when doing business with North Korea.

Investors will also have to deal with little to no transparency in the joint mineral development operation. In most cases investors will be working through North Korean intermediaries and access to the site will be limited. This raises concerns over the treatment of labor. North Korea is known to use prison labor from re-education camps in its mineral development operations. Just as Unocal was sued for human rights abuses related to its operations in Burma, a company investing in the North could be vulnerable to a lawsuit over the use of forced labor in North Korea.

Finally, if a company should invest in North Korean mining, it should expect to have to fund major infrastructure upgrades to make that development possible. Roads or rail tracks have to be rebuilt, diesel generations have to be imported to power mines, transport equipment needs to be provided, and the mines may have to be rehabilitated. Additionally, in the case of rare earth metals, as Marcus Noland notes, these elements will have to be shipped abroad to be processed, since North Korea lacks the equipment to do so. Although the North built a processing plant for these metals many years ago, energy shortages have prevented it from operating.

Although companies may find the North Korean mineral sector too risky to invest in, NGOs and aid organizations may take this as an opportunity for engagement. Sustainable development of the mineral sector and environmentally safe mining techniques are training opportunities to build scientific and technical collaboration with North Korea and lay the groundwork for positive outcomes in the future. Furthermore, training can play a role in acclimating the North Koreans to the expectations that foreign investors will have.

All of this is to say that unless North Korea addresses it governance issues, there is unlikely to be a rush of foreign investment into its mineral sector. Furthermore, unless it reforms its economy, the benefit of these projects is not likely to go to the North Korean population and be used to develop the state. It is not the availability of resources that determines a country’s prosperity; it is its ability to effectively leverage those resources in the international marketplace that is essential for economic success.

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Short of this sort of opening, it is likely that the North Korean economy will continue to stagnate, and North Korea will sell the few resources it can extract at a discount to the Chinese for foreign currency. In short, unless it reforms its economy, North Korea will sell off its most prized asset on the cheap in an attempt to tread water and avoid reforming its economic and political system.

As it is now, North Korea is sacrificing an opportunity to build a stronger and more prosperous future for immediate access to foreign currency.

Scott Thomas Bruce is the Project Manager for the Partnership for Nuclear Security at CRDF Global and an Associate at the Nautilus Institute and the East-West Center. He also is an analyst at Sino-NK.