The DPRK is quite literally sitting on a goldmine, and is endowed with considerable mineral resources. The successful exploitation of this mineral wealth has not yet been realized, but a number of international firms–including Chinese and South Korean–are actively courting the North Korean government. Alan Ferrie, an international economics analyst based in Puget Sound, Washington, provides a very detailed analysis of the North Korean minerals sector and assesses the obstacles and opportunities for developing this sector going forward. — Charles Kraus, Managing Editor
Strategy for the Successful Development of the North Korean Minerals Sector
by Alan Ferrie
Based upon the experience of South Korean companies, the government of North Korea seems to be focused on three main factors when assessing foreign direct investment in the country’s mineral sector. North Korea is promoting large scale investments involving the transfer of mining technologies to North Korea and support for infrastructure development. These goals are rational and would result in many benefits for the DPRK. Many policy changes, however, are still required to enable North Korea to successfully attain its development goals.
The fact that the only successful projects involving foreign companies in the mining sector have all been associated Chinese companies leaves North Korea in a very vulnerable position. China is essentially acting as a monopsony with respect to North Korean minerals production. By limiting themselves to only one buyer, North Korea has no chance of ever selling its minerals at world market prices. About 70 percent of Chinese investments in North Korea are comprised of energy and mineral resources. The Chinese are buying North Korea’s coal at much lower prices than the international market price. It is not difficult to determine why, then, that China imported 816,700 tons of North Korean anthracites between January and July of 2011, nine times more than the previous year. Anthracites comprised 46.3 percent of all of the exports to China. With the international price of coal on the rise and the operation of hydroelectric power plants in decline, China’s dependence upon thermoelectricity is growing.
As a result of international sanctions and a freeze on trade with South Korea, North Korea has engaged in natural resource trading with China to bring in hard currency. As a result of the massive amounts of coal exported to China to earn foreign currency, North Korea has been burdened with a serious energy shortage affecting the operations of factories and mining operations including, ironically, North Korea’s coal mining industry.
For the same reason, iron ore exports to China were 2.1 million tons in 2010. This was an increase of 86.7 percent over 2009. It can be assured that the iron ore was also sold at prices far lower than the world market price.
Selling valuable minerals at prices far below world market prices is not the road to prosperity. North Korea will need to change its policies in order to attain its goals. North Korea desperately needs to expand the market for its products. There are many companies throughout the world that would jump at the opportunity to invest in the North Korean minerals sector under the correct circumstances.
Holding an international auction for one of North Korea’s mines under conditions similar to that which exist in Australia, for example, would be a good starting point for North Korea. The development of infrastructure could be incorporated into the project plan. In order to obtain the best possible deal for North Korea, it would be prudent to invite all potential buyers to the auction. If South Korean companies were to be excluded from the auction, it is unlikely that North Korea would receive the optimal offer since South Korean companies would likely be the highest bidders. Once a contract is signed, it would be critical for North Korea to honor the contract terms to the letter in order to establish a precedent for future mining contracts.
If North Korea does honor the contract and the mining operation is successful, it is probable that the foreign mining company will earn profits higher than industry norms–due to the fact that considerable risk and uncertainty will have been incorporated into their bid. The North Korean government must understand that allowing the foreign mining company to earn an above average profit should not be regarded as exploitation. On the contrary, it will send a signal to mining companies around the world that North Korea is now open for business. Just as Western corporations are currently falling over one another to invest in China, the same scenario could develop in the North Korean mining industry.
Kim Jung Un has the opportunity to transform North Korea into a prosperous nation just as Deng Xiaoping lifted China out of Mao Zedong’s dark ages. To execute a successful transition, the North Korean government must adhere to international standards and honor all of its contracts for the development of North Korea’s mining industry. Otherwise, the government of North Korea will not be leaving the economic “critical care ward.”