North Korean Economy Watch

Pictured Above (2012-12-13): Tanchon Port

UPDATE 2 (2013-4-25): Yonhap reports on the DPRK’s plans for the Tanchon Port:

North Korea is scurrying to develop the resources-rich city of Tanchon on the east coast as part of the country’s efforts to make it a source of foreign currency income, recent news reports from the North showed.

Tanchon will become a key transit point in shipping goods to and from Russia’s Siberia, the northeastern part of China and Mongolia, said the Wednesday issue of the Choson Sinbo, a Korean language newspaper published by North Korean nationals in Japan.

The newspaper, a mouthpiece of North Korea, said the port city of Tanchon should become the source of finance for the country’s broader policy line of pursuing both economic development and nuclear capacities.
In a bid to boost exports, the country completed the construction of a port in May last year in the city with rich reserves of magnesite, zinc and other mineral resources, which sits about in the middle of the country’s east coast line. the Choson Sinbo said the city has about 5.4 billion tons of magnesite deposit, possibly the third biggest reserve in the world.

The news outlet also highlighted the country’s planned ways to increase earnings in the resources-rich city from which the country used to export mineral resources to China for meager profits.

“North Korea will move to manufacture processed magnesite goods in order to make high-value added goods,” the Choson Sinbo noted. “To that end, many plants will be built in the Tanchon region and the areas will become a new industrial zone.”

North Korean leader Kim Jong-un has also underlined the country’s plan to boost profits from the Tanchon development, saying in a national meeting of light industrial workers last month that profits from Tanchon development should be exclusively used to prop up the livelihood of North Korean people.

UPDATE 1 (2012-5-3): KCNA announces the completion of  the Tanchon Port:

A modern trading port made its appearance in the area of Tanchon in South Hamgyong Province on the occasion of the 100th anniversary of President Kim Il Sung’s birth.

The construction of the port with a cargo traffic capacity of millions of tons provides a guarantee for greatly contributing to developing the nation’s foreign trade and improving the people’s living standard.

A ceremony for the completion of the construction was held on the spot Thursday.

Present there were Choe Yong Rim, Kwak Pom Gi, Ro Tu Chol and other officials concerned, officials of the Ministry of Land and Marine Transport, builders and working people of industrial establishments in Tanchon City.

Read out there was a joint congratulatory message sent by the Central Committee of the Workers’ Party of Korea and the Cabinet of the DPRK to the officials and members of shock brigades who performed labor feats in the construction of the port.

The message highly praised them for successfully building another giant structure in the era of Songun greatly conducive to building an economic power true to the life-time desires and last instructions of President Kim Il Sung and leader Kim Jong Il.

It expressed belief that they would perform greater feats in the efforts for the country’s prosperity united close around the WPK Central Committee headed by the dear respected Kim Jong Un.

Minister of Land and Marine Transport Kang Jong Gwan, in his speech made for the occasion, said the construction of the port was a brilliant fruition of the wise leadership of Kim Jong Il who initiated the construction of the port and worked heart and soul to translate the desire of the President into a reality till the last moments of his revolutionary life and the clear-sighted guidance and meticulous care of Kim Jong Un.

Speakers at the ceremony pledged themselves to carry out their tasks including dredging in a short span of time in the same spirit as displayed in the construction of the port.

At the end of the ceremony the participants looked round different places of the port.

You can see video of the port inauguration here. (KCNA)

Just a few days ago, the Choson Sinbo reported the following (via Yonhap):

The North is estimated to have 15 billion tons of anthracite coal, a key mineral Pyongyang uses to produce steel, the Choson Sinbo newspaper said.

The North also has an estimated 5.4 billion tons of magnesite in Tanchon, a home to mines in South Hamgyong province, and other areas, according to the newspaper.

North Korea is set to open Tanchon as a modern trade port, the newspaper said, without giving any specific time frame for the opening.

ORIGINAL POST (2010-12-9): On December 2, KCNA announced that Kim Jong-il visited the port in Tanchon County, South Hamgyong County (40.412522°, 128.917731°) where he gave guidance on the port’s reconstruction.

Judging by the satellite imagery of the area on Google Earth, it appears that the project had already begun by May 13, 2009, where we can see concrete blocks ready to be used to extend the jettys (breakwaters).  I have outlined the proposed port project on Google Earth imagery below and provided a picture of the completed project from KCTV:

After the jettys are extended, the major construction work and dredging can begin.  Below are images of the port’s main construction site as it appears on Google Earth and a prediction of the project’s conclusion from KCNA:

It appears from the picture that the port will be connected to the railway system—likely via the nearby Tanchon Smeltery and Magnesia Plant (both recently renovated) whose products will probably be exported from the port.

Tanchon is also home to the DPRK’s Komdok and Taehung Youth Hero Mines (among others).  As is well known to readers, raw materials exports are the DPRK’s most significant (legal and transparent) source of hard currency.  According to Yonhap’s North Korea Handbook 2002:

Geomdeok [Komdok] Mine is a special company in Bonsan-dong, Dancheon, South Hamgyeon Province, and is very famous for about 300 million tons of deposited leads and zincs. This mine annually produces 52,000 tons of lead, 124,000 tons of zinc, both of which account for 47% of total production in North Korea, and more than twice as much as the production of Eunpa Mine, North Korea’s second largest mine, in Eunpa-gun North Hwanghae Province. Concentrates of lead and zinc produced from Geomdeok Mine are processed into electric zinc at Dancheon refinery. Opened in 1932, this mine produces 14,200 tons of raw ore annually with three ore dressing plants. Annual production capacity can reach up to 11 million tons. The first dressing plant was completed in July 1953, near the end of the Korean War. It now processes a million tons of ore a year. The second dressing plant was opened with a production capacity of 3,200 tons of ore. The third one constructed in September 1983 can process 10 million tons of ore.

The Wall Street Journal offers an interesting story on American investor Jim Rogers. Here is an excerpt from the article:

By Sunday, Pyongyang-based Korea Pugang Coins Corp. had sold its entire stock of coins, which included 20 one-ounce gold coins featuring mostly century-old generals as well as several hundred silver coins featuring North Korean sports achievements, cultural landmarks and national animals.

Most of the coins were purchased by Mr. Rogers, an American commodities investor now based in Singapore, said a Korea Pugang Coins representative, who didn’t give her name. The company knows Mr. Rogers from last year’s fair, when he bought the entire lot of North Korean coins offered.

Mr. Rogers, who started the Quantum Fund with George Soros in the 1970s, couldn’t be reached for comment, but had said in a previous interview: “Coins and stamps are the only way I can invest in North Korea.”

By invest in, Mr. Rogers means he wants to wager against the long-term prospects for the isolated, economically struggling country. He views his purchase as a bet on the collapse of North Korea.

“At some point down the line, North Korea will cease existing as a country. Then the value of the coins will go up,” Mr. Rogers said.

According to North Korea’s state-controlled news agency, a special series of gold coins were minted last year to commemorate Kim Jong Il, the country’s leader who died in late-2011. The inscription: “The Great Leader Comrade Kim Jong Il Will Always Be Alive.” However, none of those coins were put up for sale at the Singapore fair.

Mr. Kim was succeeded by his son, Kim Jong Eun.

Situated next to the American Numismatic Association, the North Korean stand drew immediate attention from many visitors, when the Singapore International Coin Fair opened its doors Friday morning. By lunchtime, the sales team, wearing Kim Jong Il pins on their jackets, hardly found time to finish their sandwiches and cans of Coca-Cola KO -0.59% .

Thirteen of the gold coins were purchased by an assistant of Mr. Rogers, said a representative of state-owned Korea Pugang Coins. “He wanted to buy more, but we only had 13 left,” she said. The company offered the gold coins for 2,500 Singapore dollars, or $2,014—well above Friday’s closing gold price of $1,598.25 an ounce.

Mr. Rogers is a fervent believer that the commodities bull-run will continue and that China and other Asian nations will set the global economic agenda for this century. He advocates investing in frontier markets such as Myanmar and Cambodia, and in 2007, sold his New York mansion and moved to Singapore, in part because he thinks it is crucial for his children to learn Mandarin.

…

Korea Pugang Coins has minted coins in Pyongyang since 1987, but the mintage is only around 2,000 each year, as North Korea’s own gold resources are limited.

The coins draw only a limited amount of buyers within North Korea and are mainly sold to international investors and collectors at fairs in Hong Kong, Beijing and Singapore, the company said.

Estonia-based Tavex Group, a company that specializes in gold and currencies, made a deal with Pyongyang in 2008 to sell North Korean gold coins.

But the North Koreans ended it after the first shipment of coins from a 2007 series featuring elephants, rhinos, owls, lions and buffalos.

“We sold them at a relatively high price to collectors, but demand was not big,” says Tomas Pavelson, who works in sales at Tavex Group.

“Actually, we still have one left.”

See some examples of DPRK coins here and here.

Read the full story here:
Executing a North Korean Coin Flip
Wall Street Journal
Jacob Gronholt-Pedersen
2012-3-29

According to Yonhap:

North Korea imported an unusually massive amount of silver from China in January, possibly in relation to leader Kim Jong-un’s birthday that month, sources and China’s customs office said Thursday.

Data from China’s customs office showed that North Korea imported 661.71 kilograms of Chinese silver for US$653,128 in January.

The monthly import is unusually enormous given that the North took in only $77,593 worth of precious metal and other jewels for the whole of 2012. The corresponding amount for 2011 was $57,000.

Before January this year, the North had hardly spent more than $10,000 on monthly imports of such goods, according to the data.

Given the leader’s birthday on Jan. 8, North Korea watchers said the massive amount of imported silver may have been used to produce silverware souvenirs to celebrate the leader’s birthday.

“It’s difficult to assume the exact purpose of the silver imports,” a source said. Given that late leader Kim Jong-il used to bring in foreign brand luxury sedans and expensive watches to treat the country’s top echelon on major holidays, the bulk of silver imported in January may have been used for similar purposes, the source said.

Backing this assumption, the customs data also showed that the North imported an unusually large amount of costume jewelry worth $10,447 in the same month.

A reader points out this Daily NK story hypothesizing that the silver could have been used in batteries:

As such, there are suspicions that the recent North Korean decision to import more than 600kg of silver through China was done to facilitate the production of batteries for submersible production.

A North Korean military source told Daily NK on the 4th, “The [North Korean] Navy has been producing submersibles at every shipyard on their east and west coasts ever since the attack on the Cheonan in 2010.”

According to the inside source, prior to the Cheonan sinking such vessels were produced at one shipyard, the disguised ‘Bongdae Boiler Factory’ in Sinpo, South Hamkyung Province, at a rate of five per year. However, following the sinking of the Cheonan that rate went up four times to 16 per year, as the vessels started being produced across multiple shipyards including Yongampo, Chongjin and Rajin.

The source explained, “The reason why the North Korean authorities are increasing production of this kind of submersible that can fire torpedoes is to maximize their underwater attack capacity. The subs can take 12 to 15 soldiers yet still sink destroyers weighing thousands of tons with their twin torpedoes.”

“The engines noise on the submersibles is very quiet, making them able to approach their targets underwater in secret, while it is impossible to trace crimes such as the Cheonan incident,” the source went on, adding that during North Korean military training exercises they also emphasize the essential nature of the subs.

The rising production is pushing up demand for batteries, the source then went on to add, saying that this required the bulk production of both silver and zinc. “All the silver produced in North Korea is supplied to the shipyards,” he claimed.

The source admitted to being confused, therefore, at North Korea’s recent decision to import 660kg of silver from China, declaring, “There is lots of silver being produced in North Korea, so it’s hard to say why they are importing it from China…I suppose it may have been just that more batteries were being produced so they needed more silver.”

Read the full stories here:
N. Korea imports massive amount of Chinese silver in Jan.: data
Yonhap
2013-3-28

NK Producing More Silvery Subs
Daily NK
2013-4-5

Pictured Above: New hotel under construction. See more here. I am still not sure about the gold mine.

By Michael Rank

A Chinese company has announced plans to invest $20 million in a gold mine in North Korea as well as in the country’s first five-star hotel, a Chinese-language website reports.

The mine, with deposits of 50 tonnes of gold, is in Unsan county 운산군 in North Phyongan province 평안북도 in northwestern North Korea near the Chinese border.

The report said Weijin Investment Group is the first Chinese company from Hunan province to invest in North Korea.

It quoted Weijin chairman Xia Juhua as saying, “North Korea is backward in infrastructure construction, so we can fulfill the requirements of mineral resources exploitation by offering technology and management support to the country’s key projects like highways and hotels”.

He said Wejin plans to construct a 30-storey, five-star hotel to be completed this year but did not give a location. Xia also mentioned plans to invest in the rare earth sector in North Korea but gave no details.

The report said about 200 Chinese companies were investing in North Korea and that over 70% were focusing on the mining sector. But at least one of these ventures went spectacularly sour last year, when the Chinese partner launched an extraordinarily bitter attack on its North Korean counterpart, accusing the North Koreans of tearing up a multi-million-dollar deal, intimidating its staff, imposing outrageous extra charges and cutting off its power and water, as well as of corruption and demanding prostitutes whenever their North Korean colleagues visited China.

UPDATE (2013-3-13): NK News has published that the hotel will be named “Yonggwang Hotel (영광호텔)”…which is the name of the closest metro stop.

The DPRK’s Naenara web page posts PDF copies of the DPRK magazine, International Trade. No updates have been made for 2013, however, Choson Exchange points an interesting article from the Q4 2012 issue which contains interesting information on the DPRK mining sector.

Choson Exchange posted a high resolution .jpg from the most recent issue of International Trade and you can see it here.

The article, “Abundant Underground Resources and the Policy for Their Development,” provides information on the “DPRK Law on Underground Resources” which was allegedly adopted by Decree No. 14 at the fifth session of the ninth Supreme Peoples’ Assembly (1993-4-8: during the Arduous March).

The text of the law is not given, and most of the article is “fluff” language, but here are some interesting tidbits:

Institutions, enterprises and organizations can develop underground resources.  They are obliged not only to make mining equipment large, modern, and high-speed, and diversify transportation but to give priority to tunneling and introduce efficient mining methods to boost mineral output.

Development of underground resources is subject to the approval of the state organ of deliberation of underground resources development .

Institutions, enterprises and organizations engaged in underground resource development shall ensure high efficiency of investment pursuant to the design of underground resource development.

They shall ensure rational organization of mining to excavate ore bodies that conform to mining criterion and standard of calculating deposits of underground resources. But the practices of digging out only high-grade and thick ore bodies in good condition to excavate are prohibited.

Abandoning of ore and coal mines and their pits should be subject to the approval of the state organ of deliberation of underground resource development.

Institutions, enterprises, and organizations, concerned should actively tap the resources of geotherm, underground water and mineral water for the economic development and improvement of people’s [sic] life [sic].

The living environment of inhabitants and ecological environment of animals and plants, including land, resources and landscapes should not be damaged in the course of their development.

The DPRK policy of underground resources development makes a tangible contribution to protection and development of underground resources to fully meet the increasing demands of the national economy for raw materials and fuel, and thus gives the impetus to the building of a thriving socialist country.

The Daily NK reports that coal prices in the DPRK have surged this winter (150,000w/ton in 2011 vs. 300,000w/ton in 2012) . They also report the price in hard currency:

At the time of writing, this coal can be bought at source for $150-$200 per ton. Wholesalers then sell it on in regional centers like Chongjin for up to $300. However, according to Daily NK’s source, “They even say that $300 leaves them with little profit, given the cost of transportation.”

This implies the exchange rate is approaching 10,000 w / 1US$. Exchange rate data shows this trend as well.

The Daily NK gives the following reasons for the price increase:

1. Inflation (2011-11 exchange rate with USD was between 2,9oow – 5,000w. 2012-11 exchange rate 4,000-8,000w)

2. Decreased supply from exhausted mines

3. Exports to China (According to statistics published by the Korean Trade Association in late 2011, coal exports from North Korea to China in the nine months to September that year were worth USD$830 million, double the 2010)

If we had the economic data it would be a fairly straightforward regression to determine the contributions of each of these variables on the price of coal. But we do not have the data.

Read the full article here:
Coal Prices Fuelling Chilly Times
Daily NK
Choi Song Min
2012-12-5

These are all interesting data points. Do you think they offer reasonable journalistic evidence that the DPRK is practicing inflationary public finance?

First, Yonhap reports on DPRK food imports from China (2012-9-29):

North Korea’s grain imports from China slipped 16.3 percent on year in the first eight months of this year, in an apparent sign that the North may diversify its supply channels of grain, a Seoul researcher said Saturday.

North Korea imported 181,264 tons of rice, flour, corn and other grains from China in the eight-month period, compared with 216,535 tons for the same period last year, said Kwon Tae-jin of the state-run Korea Rural Economic Institute.

The decline in grain imports from China may be attributed to a rise in food aid from China and purchases from non-China markets such as Europe and South America, Kwon said.

“Including imports from non-China markets, North Korea’s total grain imports appeared to rise this year,” Kwon said in a report posted on his Web site, adding Pyongyang may “diversify its import channels.”

At the same time the Daily NK reports that food prices continue to rise (2012-10-2):

Internal sources informed Daily NK over the holiday that on September 29th the price of rice was 6,700 won/kg in Pyongyang, 7,000 won/kg in Onsung, North Hamkyung Province and 6,500 won/kg further west in Hyesan, Yangkang Province.

Not only do these prices far exceed those of Chuseok 2011, they even far exceed those of earlier this year.

The Hyesan source explained that on the day before the Chuseok holiday (Saturday) the atmosphere in the market was thus rather uncomfortable. “It was very slack,” she said. “People couldn’t buy anything easily, so most just seemed to be looking.”

Secondly, Yonhap reports that despite situations like those experienced by Xiyang or in Musan, mineral exports to China are up (2012-10-2):

North Korea’s exports of mineral resources recorded a 33-fold jump over the past decade with China remaining the biggest importer of the North’s iron ore and coal, a report showed Tuesday.

North Korea’s mineral exports stood at a meager US$50 million in 2001, accounting for 7.8 percent of its total exports, according to the report by Seoul’s Korea Trade and Investment Promotion Agency.

The mineral exports soared to $243 million in 2005 and $1.65 billion in 2011, accounting for 59.4 percent of the North’s total exports last year, the report said.

South Korea has estimated the total values of mineral deposits in North Korea at some $6.3 trillion.

Last year, North Korea exported $1.17 billion worth of anthracite coal and $405 million worth of iron ore, with China importing almost 100 percent of anthracite coal and iron ore, it said.

UPDATE 2 (2013-1-17):  The latest issue of Digital Globe’s World View magazine contains information on the Musan Mine (page 7):

[...]In a New Year’s message, North Korea’s leader, Kim Jong-un, urged North Korea to become an economic powerhouse by improving productivity. He specifically mentioned the Musan Mine, as it is one of the largest iron ore mines in the region with a reserve of approximately three billion tonnes of ore.  This announcement comes after a Chinese investment firm, Tianchi Industry and Trade, pulled out of the mine in the early fall of 2012.  North Korea demanded a price increase of 20%, on top of the 50-year lease that had been in place since 2005.  With the price increase, Tianchi did not feel the location could remain profitable, and North Korea refused to renegotiate.  As a result, the associated smelter in China was shut down in September 2012.  The presents a loss for the Jilin provincial government in China, which had extended a rail line 42 kilometers to the border to transport ore north after it was processed at the smelter.  With the departure of the Chinese investment firm, the Musan Iron Ore Mine is currently operated by North Korea’s Ministry of Mines. The mine has the potential to produce 1.5 million tonnes of ore a year if the North Koreans can operate it at its former capacity under Tainchi.

UPDATE 1 (2012-10-17):  The Choson Ilbo has picked up on this story first reported in the Hankyoreh last month, yet they have a different English name for the Chinese company. According to the  article:

The Chinese apparently baulked at a price increase of more than 20 percent demanded by the North, although international iron ore prices are plummeting in the wake of the global recession. They won 50-year extraction rights for the mine in 2005.

A smelter in the Chinese province of Jilin near the border with North Korea and operated by Tianchi Industry and Trade, the Chinese partner to the Musan Mine, closed down in September, according to a source in Yanbian on Tuesday. The smelter used to process iron ore extracted at the mine.

The source added, “There’s been no progress in the implementation of plans to lay a railway line and a slurry pipeline between Nanping and Musan.”

Tianchi Industry and Trade turned down the North’s demand, saying it makes hardly any profit as is given wages for North Korean workers and transportation costs.

Tianchi, a private trading company based in Yanbian, has served as a conduit for iron ore produced at the Musan Mine to the Chinese market since the early 1990s. It obtained the extraction rights to the mine in 2005 after concluding a trilateral joint-venture contract with Tonghua Iron and Steel, a Chinese state-run iron and steel mill, and [North] Korea Ferrous Metals Export and Import Corporation.

Tianchi hired North Korean workers and extracted 1 to 1.5 million tons of iron ore at Musan every year, which it supplied to Tonghua and other companies.

But the first cracks in the deal appeared in 2009, and iron ore production had been intermittent since then and stopped completely this year.

The Jilin provincial government has also been hit because it already laid a 41.68 km railway line leading to the border town of Nanping since November last year.

ORIGINAL POST (2012-9-13): We have already heard about Xiyang. Today the Hankyoreh tells us about problems with the Musan Mine…

Pictured Above (Google Earth): Musan Mine

According to the article:

However, not all business between North Korea and China is rosy. An iron-smelting factory in Helong City, Jilin, that was visited on Sept. 5, had to close its doors. It used to be a place where iron from across the Yalu River was brought from North Korea‘s Musan iron mine and processed. A railroad was expected to run from the two cities by October of last year in order to increase the amount of iron brought into China. But the construction was never completed. A Chinese company called the Yanbian Cheon-ji Industry Trading Company had rights to the Musan mine for fifty years starting in 2005.

There are many guesses as to why this happened: “North Korea was asking for a price increase of 20% while the price of iron has declined in the rest of the world;” “There was trouble between the Chinese government and the new Kim Jong-un regime on negotiating development rights;” “There was a downfall of development due to differences with foreign investors about investing in electrical power.” No one knows clearly what the reason was, and there are still busy trying to figure out what is the real situation.

Here is the original story:
China adjusts to influx of cheap North Korean labor
Hankyoreh
Song Kyung-hwa
2012-9-13

The title of this blog poast comes from a recent study by the North Korea Resource Institute (NKRI). As far as I can tell they do not have a web page (in English anyhow), so I have been unable to obtain the actual report. The results, however, were reported in Yonhap:

The potential value of North Korea’s underground mineral resources is estimated at more than 11 quadrillion won (US$9.7 trillion) as of this year, a report by a private think tank showed Sunday.

The findings are based on the potential value and commercial prices of 18 key minerals in the communist country, the Seoul-based North Korea Resource Institute (NKRI) said.

The figure is much higher than a 7 quadrillion won estimate released by state-run Korea Resources Corp. in 2010, which calculated the value of resources based on 2008 market prices.

“The 4 quadrillion won gap is mainly due to a sharp rise in global prices for raw materials,” Choi Kyung-soo, head of the institute said.

Based on the latest estimates, he said, the value of North Korea’s mineral resources is roughly 21 times larger than those of South Korea, which stand at $456.3 billion for this year.

Choi said the North Korea’s abundance can be attributed to its large reserves of iron ore, coal, limestone and magnesite.

Choi Kyung-soo wote this paper for the Nautilus Institute. Here is my response (or companion piece, rather) to it.

Here are previous posts on mining.

Read the full Yonhap story here:
N. Korea’s mineral resources potentially worth $9.7 tln: report
Yonhap
2012-8-26

Pictured above: the signing of the contract between Xiyang Group and Ri Seong-kyu (리성교). Image source here.

UPDATE 6 (2012-9-17): Andrei Lankov writes a good summary of events.

UPDATE 5 (2012-9-7): The Global Times (PR China) reports on the Xiyang affair:

Wu Xisheng, vice general manager of the Xiyang Group, told the Global Times Thursday that the company’s partner in North Korea was an enterprise affiliated with the Korean Workers’ Party, instead of what the country called a private entity.

Wu also said Xiyang is one of dozens of Chinese companies who have been cheated by North Korea.

Hu Chenpei, a diplomat with the business section of the Chinese embassy in Pyongyang, told the Global Times that it is “an isolated case of business disputes,” adding that both sides of the story are true.

“We have been in contact with related departments in North Korea, hoping the two sides could iron out their disputes through rational discussions,” said Hu.

However, Wu insisted that the North should repay their losses or the group will reveal further details about “how Pyongyang cheated it.”

When contacted by the Global Times, a diplomat with North Korea’s embassy in Beijing said he had never heard of the Xiyang Group and refused to comment.

The North Korean spokesperson also said his government will continue improving its investment environment to further draw international investment, and protect the legitimate rights and interests of international investors who follow the principles of mutual respect, equality and mutual benefit as well as observing laws.

Liu Ming, a researcher with the Shanghai Academy of Social Sciences, said the disputes have dealt a blow to Chinese enterprises’ confidence in North Korea.

UPDATE 4 (2012-9-5): In a Reuters article, Xiyang responds to the KCNA statement:

Xiyang told Reuters in an interview after the North’s statement that it had been “cheated” and it lambasted Beijing’s policy of propping up North Korea’s unreformed regime which it said that it was done for geo-political reasons.

“It (Xiyang) has carried out only 50 percent of its investment obligations though almost four years have passed since the contract took effect,” KCNA quoted a spokesman for North Korea’s Commission for Joint Venture and Investment as saying.

Xiyang refused to curb its criticism of North Korea when it spoke to Reuters, suggesting that Beijing was doing little to help companies that ran afoul of what it viewed as arbitrary rulings by North Korean officials.

“This isn’t just about us – it is about all companies investing in North Korea,” Wu Xisheng, vice general manager of Xiyang told Reuters.

“They just don’t have the conditions for foreigners to invest. They say they welcome investment but they don’t have the legal or social foundations.”

UPDATE 3 (2012-9-5): KCNA has issued an official comment on the xian affair:

Media Should Maintain Impartiality in Report about DPRK

Pyongyang, September 5 (KCNA) — A spokesman for the DPRK Commission for Joint Venture and Investment on September 5 issued the following statement:

The Xiyang Group of the Haicheng City, Liaoning Province of China on August 2 posted on its Internet website an article criticizing the DPRK over the disputes that cropped up between the Group and the Korean Ryongbong Corporation in the course of implementing a joint venture contract for the development of magnetite concentrated ore.

After the article was published, some media echoed it before and after the report about the results of the third meeting of the DPRK-China Guidance Committee for developing two economic zones was made public.

They added their own analyses to the article posted by the Group. They even aired what the anti-DPRK hostile forces reported in the past to malignantly slander the inviolable social system and policy of the DPRK.

Generally, it is international usage and commercial ethics to settle disputes that occurred in the course of economic relations in line with the relevant arbitration item of the contract.

But the media have kicked off massive propaganda campaign, defying international usage and commercial order. This cannot be interpreted otherwise than an act of fanning up the dishonest forces in their moves to drive a wedge between the two countries in their economic cooperation and chill the atmosphere for investment.

As far as the procedures for the signing and implementation of the contract between the DPRK Ryongbong Corporation and the Steel Co. Ltd., of the Group and the bilateral disputes are concerned, the Group is also to blame for the abrogation of the contract. In the light of the process of implementing the obligations under the contract, the Group is chiefly to blame from the legal point of view.

It has carried out only 50 percent of its investment obligations though almost four years have past since the contract took effect.

So the two contracting parties again sat together only in vain over the timeline for the completion of the first-phase investment and commissioning.

As for 16 provisions which the Group set forth as the major issue of the disputes, it is the legal obligation of the Group related to the contract to implement them according to the mutual contract in which both sides agreed on the article that “two sides sign it on the basis of the DPRK Law on Joint Venture”.

As regards the dealing of sales price of trial products, the Group insisted on its self-opinionated proposal for settling its debts within the boundary of China, in disregard of the procedures in price dealing pursuant to the relevant financial management norms.

Media should comply with the standards for fairness and objectivity, create an atmosphere helpful to settling the disputes between the two contracting parties and refrain from an act that can be misused by the hostile forces for their vicious propaganda.

We will in the future, too, improve and round off the investment environment to further expand the international investment relations to meet the demand of the developing times and the lawful requirement of the international investment relations under the condition that the security of the country is guaranteed by dint of Songun. We will also ensure the legitimate rights and interests of all investors willing to develop international investment relations on the principles of mutual respects, equality, reciprocity and law-observance.

UPDATE 2 (2012-8-17): Michael Rank sent over the photos below which the Xiyang Group published (source here). I had a Korean friend (thx Angela) look over these and give me an idea of what they say:

This appears to be the DPRK business license or registration. It claims that the Korea Ryongbong Ryonhap Company (조선령봉련합회사) and the Chinese Soyang Jipdan Corporation (중국서양집단공사사) “merged” to form the Yangbong Hapyong Company (양봉합영회사). The new firm is made up of 1,000 local employees and two foreigners. The investment terms also appear to be denominated in Euros.

This image appears to be the cover sheet to the agreement between the two firms.  The cover sheet states that this agreement has been approved at the highest levels and that both firms agree to be bound by its terms.

UPDATE 1 (2012-8-15): Michael Rank has followed up on the Xiyang Group story in the Asia Times:

China likes to claim that its relations with North Korea are “as close and lips and teeth” but those teeth are infected with a poisonous abscess so far as one Chinese company is concerned.

In an extraordinary attack, a Chinese mining company has accused the North Koreans of tearing up a multi-million-dollar deal, intimidating its staff, imposing outrageous extra charges and cutting off its power and water, as well as of corruption and demanding prostitutes whenever their North Korean counterparts visited China.

“Xiyang Group’s investment in North Korea was a nightmare, and we were taking our lives in our hands when we entered the tiger’s lair,” the company says.

Xiyang Group, based in the northeastern province of Liaoning, says it was the biggest single Chinese investor in North Korea, having in 2011 signed a 240 million yuan (US$38 million) deal to form a joint venture iron mine that was to produce 500,000 tonnes of iron powder a year.

A few months after the contract was signed, the North Koreans made a series of extraordinary demands that led to the Chinese walking out in fury and to launching what must surely be the fiercest public attack they have ever made on their supposed close ally. [1]

The company aims much of its invective at a particular North Korean official, who, it says, is “the leader of the criminal gang who deceived Xiyang, this great plotter and fraudster …” The official, Ri Seong-kyu, was the North Korean side’s faren, or legal representative, in the deal and he is blamed for everything that went wrong.

When negotiations began in 2006 the plan was for the Chinese company to take a 75% stake in the venture, but it turned out that North Korean policy stipulated that a foreign firm could own no more than a 70% stake in a natural resources company such as a mine.

Xiyang says Ri, “violating the North Korean national investment law”, nevertheless signed a joint venture contract in which the Chinese side took a 75% stake, “forging an investment certification document in order to gain Xiyang’s confidence”.

He later told the Chinese company that the document was null and void because of the stipulation that the North Korean side must have at least a 30% stake, but Xiyang did not realise his deception until September 2011.

Xiyang says it first became interested in investing in North Korea in 2005 in response to the Chinese government’s call for Chinese companies to “venture out” and invest abroad, “but we had heard that North Koreans do not keep to their word, national laws are not strong and it is easy to be cheated, so we were extremely cautious in our investigations.”

It also notes the secrecy that pervades business dealings in North Korea, which prevented Xiyang from sending ore samples back to China for testing, but despite all this the company “took the great risk of investing”.

“North Korea’s system of doing business is [based on] government departments’ secrecy in relation to foreigners, and they do not allow foreigners to visit government departments to do business,” the online report complains.

It says there were “all kinds of unimaginable serious problems” in reaching an agreement, but after years of negotiations production finally began in April 2011. However, the North Koreans unilaterally annulled the agreement last February, when they “used violent methods” against Xiyang staff, cutting off their water, electricity and communications and smashing the windows of their living quarters.

At 2am on March 3, a group of 20 armed police and security officials led by a North Korean company official woke up the sleeping Chinese and told them the North Korean premier had annulled the deal and they were to leave the country immediately.

Ten senior Xiyang employees, who seem to have been the only ones remaining in North Korea out of over 100 originally sent, were “treated as enemies”, put on a bus and deported via the border city of Sinuiju.

The statement includes a highly personal attack on Ri, who, it says, has a huge paunch and is “North Korea’s number one fat man”, weighing 108 kilograms. “Everybody knows North Korea is suffering grain shortages and ordinary people do not have enough to eat, so North Koreans are quite thin but Ri Seong-kyu’s unusual fatness fully reveals what a luxurious life he leads … When people like Ri Seong-kyu go to China they let down their country and themselves and make all kinds of demands, for money, gifts, food, drink, girls …”

Xiyang said it had paid over US$800,000 in kickbacks to corrupt North Korean officials, including $80,0000 for a Hummer for Ri in 2008 and $100,000 in 2009 for a construction project in which he was involved in South Hwanghae province. In addition, Ri and his cronies would demand gifts of laptops, cellphones and vast amounts of booze, and to be provided with masseuses.

“Sometimes the Chinese would not provide any girls, so they would get them themselves and put it on their room bill,” expecting Xiyang to pay for all their personal expenses, bringing the bill to over 200,000 yuan per person.

This was not all – they would demand a receipt for their expenses that had been paid for by Xiyang, so they could claim the same costs when they returned to North Korea, according to the Xiyang statement.

Xiyang officials, on the other hand, had to pay all their own expenses in North Korea, were only allowed to eat in certain restaurants and were followed 24 hours a day by security officials. Even when Ri invited the president of Xiyang to his home, his host charged $2,000 for the privilege.

The report says the crunch came in September 2011 when the North Koreans made 16 demands that violated the terms of the contract, including a 4-10% sales levy, a one euro (US$0.17) per square metre per year rent charge, a hike in electricity prices and a charge of one euro per cubic metre of sea water consumed.

They also banned the company from releasing waste water, or even clean water, into the sea, which “amounted to the North Koreans forcibly halting production”.

The most serious act by the North Koreans was a ban on sales, the document states, which was clearly aimed at ensuring an end to the joint venture. “Ri Seong-kyu claimed all these [regulations] were included in North Korea’s national joint venture law, and we could not sell the 30,000 tonnes of iron powder that had been produced. In these circumstances, if Xiyang had carried on investing and manufacturing [in North Korea], we would have been the biggest fools in the world.”

Many of Xiyang’s complaints will sound all too familiar to anyone who has visited North Korea. The document tells how Xiyang staff were at first banned from buying food in so-called free markets. After much pleading the authorities finally agreed to this, but each person had to be accompanied by two minders and the route had to be approved by the security police.

Although the mine was only 500 meters from the sea, staff were banned from taking strolls along the shore.

Quite why the North Koreans acted with such prejudice against Xiyang isn’t clear, but part of the reason may lie in the location of the mine. It is in Ongjin county on the west coast, a highly sensitive area ever since this small peninsula ended up in North Korea after the Korean war even though it lies below the 38th Parallel. (It is also close to the port of Haeju, from where the iron was to have been exported).

The Chinese government may wish to dismiss this as a spat between a little known Chinese company and a single corrupt North Korean official, but it has brought into the open the deep suspicion that exists between the two countries.

The Chinese have long felt unable to trust the North Koreans with their xenophobic, quasi-Maoist personality cult, while the North Koreans are equally suspicious of the emerging superpower on their doorstep eagerly eyeing the smaller country’s natural resources.

Change may now be in the air, and the more open leadership style of North Korea’s young Kim Jong-eun has sparked speculation of economic reform and a fresh approach to foreign investment in his country, but horror stories such as this may indicate Kim’s style may be just that – all style and no substance.

ORIGINAL POST (2012-8-10): JVIC is the DPRK’s Joint Venture Investment Committee. You can read previous posts about the JVIC here.

According to Yonhap:

North Korea has recently signed a deal with China to jointly develop three mines in the North, a North Korean investment firm said Thursday, as the cash-strapped country steps up attempts to earn hard currency from overseas.

A Beijing unit of North Korea’s Committee of Investment and Joint Venture struck the joint development deal with a Chinese international trading company in Beijing on June 9, according to the unit’s Chinese-language Web site.

“The China firm’s president and his parties conducted field inspections into one (North Korean) gold mine and two iron ore mines and confirmed the investment and development scheme,” the Web site said. “Facility building is now well underway for the project,” it said.

Details on the terms of the deal were not provided.

Experts said the deal is the first foreign investment deal announced by the Beijing unit, which is run by the Committee of Investment and Joint Venture in charge of luring overseas capital and investment into the North.

The joint North-China mining venture also illustrates growing exports of underground resources from the North to China, its closest ally and a major source of foreign currency.

Exports of mineral resources to China reached 8,420,000 tons during the first nine months of 2011, growing sharply from the annual volume of 4,799,000 tons in 2010 and 2,480,000 tons for the whole of 2008.

Although Yonhap does not report the Chinese company’s identity, the IBTimes reports that it is named “Baoyuanhengchang”. According to the article:

Baoyuanhengchang confirmed the plans to develop the mines, as per its pronouncement, noting both parties had conducted field inspections.

“Facility building is already underway and everything is going as planned,” it said. No details of the terms, however, were provided.

The pronouncement has been considered a milestone as this was the first time that North Korea publicly announced its efforts in enlisting foreign investors to help develop its potentially vast mineral wealth, Arirang News reported.

I have yet to determine in which specific projects Baoyuanhengchang is investing.

The two most high-profile Chinese mining investments in the DPRK remain the Hyesan Youth Copper Mine (US$860 million, it now holds a 51% ownership) and the Musan Mine (50year lease). The original Musan deal may have fallen through, however, and could possibly be one of the deals included in the Baoyuanhengchang agreement.

However, a warning to the Chinese investors can be found below. According to the Donga Ilbo:

A Chinese conglomerate that tried to advance into the North Korean mining industry has been forced out of the Stalinist country due to contract cancellations.

Calling its past five-year investment in the North “a nightmare,” Xiyang Group has filed for arbitration with the Chinese government.

Based in Liaoning, China, the group said Wednesday that it had set up a joint venture with North Korea in March 2007 to build a plant there that extracts iron from ore. Of the paid-in capital of 47.52 million U.S. dollars, the company put up 75 percent of the amount in cash and North Korea 25 percent for land and mine exploration and also managerial rights for 30 years.

Xiyang company invested 37.14 million dollars, the biggest investment for a Chinese private company in North Korea. Pyongyang approved the incorporation in April 2007.

With a target of 500,000 tons of ore dressing per year, Xiyang sent about 100 workers to North Korea and produced 30,000 tons in April last year. In September last year, however, Pyongyang requested modification of 16 items on the contract including a demand of 4-10 percent of sales of products for using raw materials; 1.24 dollars for every square meter of land leased, and 17 cents per cubic meter of sea water for industrial use.

Xiyang said the demands were not included in the original contract, which was ratified by the North Korean parliament in October 2009.

The conglomerate refused modification of the contract, prompting Pyongyang to suspend the effectuation of the contract and cancel corporate establishment Feb. 7. North Korea also suspended power, water and communication supply at the plant.

Xiyang said that on March 3, North Korean police and 20 security guards went to where the Chinese workers were staying and forced them to ride a bus to deport them outside the Chinese border.

The group said the North requested modification of the contract to steal the ore dressing facility that the country lacked in capital and technology to introduce.

A Xiyang source said, “When our company was established in 2007, North Korea had a law restricting a foreign company`s stake in a joint venture to now more than 70 percent. But the North said the law will be revised soon and requested a 75-percent stake. Eventually, this was a drag.”

“Not only North Korean authorities but also the North Korean company we established ties with had a high-end attitude, including a request for money in U.S. dollars.”

Xiyang Group explained the violation of the contract and put it on the Internet to complain of the injustice. Its complaint is titled “Nightmare in North Korea Investment.”

So the North Koreans are violating a contract which was ratified by the Supreme Peoples’ Assembly? That does not inspire confidence.

Via Choson Exchange, here is a link to Xiyang’s official statement. You can read it in English via Google Translate here.  In case the web site is taken down, I have created a PDF of it which you can see here.

It is not really worth the time speculating on the politics behind the scenes. The Daily NK, however, points out that the KPA’s privileges with respect to mineral exports are being curtailed.

In 2007 Xiyang set up the Sohae Joint Venture Company to work the Ongjin Iron Mine (Google Earth coordinates:  37.960294°, 125.368651°)  and the Xiyang Paekgumsan Joint Venture (aka Soyang Paekgumsan Joint Venture Co.) to work in haevy industry and construction. Although the story does not mention it, I believe the problems are at the Ongjin Mine. I am unsure of the status of the Paekgumsan Joint Venture.