North Korean Economy Watch

An advanced copy of the 2007 US Geological Survey of North Korea has been published. 

Here is the outlook from the author, John C. Wu:

For the next 3 to 4 years, the North Korean mining sector is likely to continue to be dominated by the production of coal, iron ore, limestone, magnesite, and zinc. Because of the continuing strong demand for minerals by China, its investments in North Korea’s mining sector are expected to continue to increase beyond its current investments in coal, copper, gold, iron ore, and molybdenum into other mineral commodities, such as nickel, crude petroleum, steel, and zinc. North Korea’s economy is expected to recover slowly but its real GDP is expected to grow at less than 1% during the next 2 years.

The whole report is fairly brief and worth reading in full.  You can download it here: usgs-dprk.pdf or read it on line here.

In the last several months the Daily NK has reported on North Korea’s anti-corruption campaigns, particularly in Sinuiju and Hyesan, major DPRK/China trade hubs. Additionally, we have seen stories of how the Chinese are making life harder for resident North Koreans in the run up to the Olympics.

These measures, both of which should have an adverse impact on trade volume between the two coutries—and thus on tax revenues—made this recent report in the Daily NK all the more surprising. China’s Yanji Customs House (along the North Korean border) has reportedly seen a 226% increase in tax revenue this year from trade with North Korea.

How can China and the DPRK make life difficult for traders/entrepreneurs and still see an increase in the value of traded goods and corresponding tax revenue?  According to the article:

Jilin Newspaper in China reported on the 4th that “[…]For the first half of this year, tax revenues vis a vis North Korea totaled 34.22 million Yuan, up 226.2 percent from the year before.

The newspaper continued, “During this period, entrepreneurs in Yanji imported 64 thousand tons of iron ore from North Korea; that is a 2.3 percent increase from the same period a year ago. Accordingly, the tax amount of collected was 29.13 million Yuan, which is 66.1 percent of the total tax revenue derived from North Korea.”

The Yanji Custom House covers seven border gateways with North Korea, such as Juanhe-Wonjeongri, Shazi-Saebyul, Tumen-Namyang, Sanhe-Hoiryeong, Kaishantun-Sambong, Naping-Musan, and Guchengli-Samjangri.

According to the Yanji Custom House statistics, the Naping-Musan border gateway, where iron ore collected from the Musan mine enters China, is the first ranked for commercial traffic, and Guchengli-Samjangri, the gateway for North Korean timber, is second.

Tonghua Steel Group, Yanbian Tianchi Trade Incorporated Compay, and Zhonggang Group purchased 50-year mining rights for North Korea’s Musan mine in 2005. Since late 2007 they had been discussing a seven billion Yuan additional investment in it but that failed due to conflicting views on cooperative investment rate proportions, methods of withdrawing invested funds and other issues. As a consequence of the stalled investment, the Musan mine’s exports to China have not grown relative to last year’s figures.

So most of the trade that goes through Yanji is in raw natural resources, particularly iron ore and timber, and trade in these resources seems to be carried out by Chinese companies and is probably supported (protected) by senior policy makers on both sides of the border.  Rather than looking at politics as an explanation, it might simply be another result of rising global commodities prices.

The tax windfall could come from one of two sources: A volume (unit) import tax (ex: $1 for each ton of iron) or an ad valorem import tax (ex: tax on the monetary value of the goods).  It is not likely they impose much of an export tax to make a difference.

If China imposed a unit tax, the revenue gains would have to come from surging imports.  In this case, it would be likely that the Chinese companies had fixed-price contracts with their North Korean suppliers, and that  the increase in global commodity prices simply made DPRK iron ore comparatively very cheap.  When (if?) global iron prices fell, we would expect to see China decrease imports from North Korea.  But according to the article, iron imports are up only 2.3%—not enough to explain the surge in revenue.

It is more likely that China imposes an ad valorem tax on North Korean imports and the contracts between the Chinese companies and North Korean suppliers are set at (near) market prices.  Simply put, taxing the monetary value of increasingly valuable imports has been beneficial for the Chinese government.  Even though production at the Musan Mine has not increased much, revenues are probably way up.

Given the status of the Musan Mine as the DPRK’s largest, it is likely that funds raised from this mine are firmly under control.  It would be interesting to know the customs receipts in Dandong, Laioning Province, across the river from North Korea’s Sinuiju.  Sinuiju seems to have suffered the brunt of the DPRK’s anti-corruption drive, and it is the main railway and trade artery between North Korea China.  Most of the companies targeted for inspection were in Sinuiju.  Have Chinese tax collections/trade rebounded there?

Read the full story here:
226% Rise in Tax Revenues at Yanji Custom House
Daily NK
Lee Sung Jin
8/6/2008

Michael Rank, a China/North Korea specialist based in London reports:

A Chinese company has opened a joint venture iron mine in North Korea with registered capital of €36 million ($57 million), a Chinese website specialising in North Korea reports (link here).

The Chinese partner is S Group, whose main aim includes developing magnesite mines in North Korea, but for some reason it switched from magnesite to iron mining.

The mine in Ongjin-gun (gun=county), Hwanghaenam-do (South Hwanghae, do=province), south of Pyongyang, has been in operation since the second half of last year, and the company running it is the Xihai/Seohae (West Sea) Joint Enterprise, the website says, but gives no further details.

The Chinese report erroneously places Ongjin-gun in Hwanghaebuk-do (North Hwanghae) but it is confirmed as being in Hwanghaenam-do by  조선지도첩 (Joseon Jidocheop, Atlas of Korea, Pyongyang, 1997), p. 45. I have not been able to find any other reference to a Chinese mining company called S Group.

Chinese steel company Tonggang (Tonghua Steel), based in the northeastern province of Jilin, was reported by a Chinese newspaper in January 2006 to be spending four billion yuan ($506 million) to develop the Musan iron mine in Hamgyeongbuk-do (North Hamgyong province), said to be North Korea’s largest iron deposit – and the biggest in Asia, according to some estimates.

Magnesite (magnesium carbonate) is used in protecting the linings of steel furnaces, in the production of synthetic rubber and in making fertilisers.

Kim Dong-Jin, head of South Korean steel company POSCO’s China branch, visited Pyongyang Tuesday for talks on purchasing more of the DPRK’s coal, iron ore, and other raw materials.

According to the AFP: 

POSCO, the world’s fourth largest steelmaker, has imported 200,000 tons of coal from North Korea every year.

South Korea’s investment in the North’s rich mineral resources has been sluggish due to the standoff over the North’s nuclear programme and mixed views on whether such investment can be profitable.

North Korea has promoted raw material exports as a means of generating much needed hard currency for some time.  Unfortunately, this development strategy will bring the fewest benefits to the North Korea people. Look at any oil-exporting country for comparison.  Raw materials exports generally enrich the politically connected—and workers, who in North Korea are unable to leave their jobs or negotiate their wages, generally (pun alert) get the shaft.

South Korean firms operating in the North, however, do tend to offer better working conditions than North Korean or Chinese firms.  If POSCO launches operations in North Korea, hopefully public pressure and the profit motive will see an increase in productivity, wages, and working conditions for the DPRK’s miners.

South Korea apparently also operates a graphite mine in North Korea.  If anyone has any information on this, please send it my way.

Read the full story here:
POSCO eyes NKorea raw materials
AFP
6/25/2008

From the Nautilus Institute (presentations at bottom):

Background
Energy insecurity is a critical dimension of the North Korean (DPRK) nuclear challenge, both in its making, and in its reversal. One of the Six-Party Talks working groups, the Economy and Energy Working Group, is largely devoted to this topic, and energy assistance will play an important role in the process of denuclearization of the DPRK. Nautilus Institute maintains a unique database and set of quantitative and qualitative analytic tools to evaluate and track the DPRK’s energy economy, and has maintained working relations with North Korean scientists and technical personnel from the energy sector for more than a decade. With this capacity, Nautilus has provided a stream of policy analyses and briefings at their request to US, ROK and other officials on the DPRK’s energy needs, its likely negotiating postures and demands, and possible negotiable options. The need for such expertise in support of the Six-Party Talks is increasing.

This project ensures that the underlying data and technical analysis available at Nautilus is as up-to-date as possible, and that analysis and policy advice are available when needed by US and other officials.
The Second DPRK Energy Experts’ Working Group (2008) served to provide information and views from key experts in the field to inform the Nautilus DPRK energy sector analysis update. Experts in attendance at the meeting provided both pertinent, recent data and special insights that are being used to help to make the database as reflective as possible of actual conditions in the DPRK. This in turn provides crucial input to the analysis needed to help to inform the parties to the 6-Party talks regarding possible approaches to DPRK energy sector redevelopment.

In addition, the DPRK Energy Experts Study Group Meeting served, as did the first Meeting, as an opportunity for experts on the DPRK to exchange views on the appropriate “next steps” in DPRK energy sector redevelopment. Key outcomes of this discussion are being reflected in the updated DPRK Energy Sector Analysis. In the process of discussions, the experts in attendance helped to further develop and elaborate-as well as providing input on the prospects for-the activities and means by which the various parties concerned with Korean peninsula affairs might engage and work with the DPRK to help resolve both the DPRK’s energy problems, and, in so doing, begin to address and ameliorate the regional and global insecurities of which the DPRK’s energy problems are a key part. In particular, through the focus of the second day of the meeting on Building Energy Efficiency, progress was made on consideration of possible benefits from and approaches to improving the effectiveness of energy use in the crucial DPRK buildings sector.

The Second DPRK Energy Experts Study Group Meeting convened by Nautilus and its partners will was attended by experts in a variety of areas related to energy supply and demand in the DPRK-including electricity, coal and other minerals, the DPRK economy as a whole, trade into and from the DPRK, and the DPRK’s rural household and agricultural sectors, and energy use in buildings in general in the DPRK and elsewhere (the primary topic of the second day of the Meeting)-to review and discuss the results of existing and newly-commissioned research, and to provide insights from their own experience and their own research. A total of approximately 15 experts on the DPRK and on matters related to DPRK issues attended the Meeting, not including an additional 15 experts, representatives from the organizations partnering to fund and organize the meeting (Nautilus, Tsinghua University, USDOE), including observers from bilateral aid agencies associated with a number of countries, from international organizations, from the business sector, and others, who also lent their expertise to the workshop. On the second day of the workshop, supported by funding from a private foundation, a five-member delegation from the DPRK also attended the meeting, providing presentations and insights of their own on energy use in DPRK buildings, and on related energy sector problems and plans in the DPRK.

Presentations:
Presentation: North Korea’s Mineral Resources and Inter-Korean Cooperation
By Woo-jin Chung

Presentation: Nautilus Institute’s Analysis of the DPRK Energy Sector and DPRK Energy Paths: Update
By David von Hippel

Presentation: Analysis on DPRK Power Sector Data & Interconnection Option
By Yoon Jae-young

Presentation: DPRK Energy and Energy-Related Trade with China: Trends Since 2005
By Nate Aden

Summary: For the next 4 to 5 years, the North Korean mining sector is likely to continue to be dominated by the production of coal, iron ore, limestone, magnesite, and zinc. Because of growing demand for minerals by China and the Republic of Korea, their investment in North Korea’s mining sector is expected to increase and to extend beyond their current investments in apatite, coal, copper, and iron ore into other minerals, such as gold, magnesite, molybdenum, nickel, and zinc. North Korea’s real GDP is expected to grow at between 1% and 2% during the next 2 years.

Other highlights:

• North Korea ranked third in production of magnesiate in the world.  Its value-added product–magnesia clinker, which is used as a refractory metal–was marketed world wide. 
• According to Corporate social Responsibility Asia (CSR Asia), North Kroea ranked virtually last in environmental sustainability in the world, despite the country’s enactment of major laws for environmental protection, such as the Land Law of 1977, the Environmental Protection Law of 1986, the Forrestry Law in 1982, and the Law on Protection of Useful Animals in 1998.
• On the basis of North Korea’s industrial structure in 2004 (the last year in which data is available), the mining sector accounted for about 8.7% of North Korea’s gross domestic product.
• Recoverable coal reserves in North Korea were estimated to total about 8 billion metric tons in 2006.  Coal production reportedly dropped to about 23 Mt/yr in 2006 from 37.5 Mt/yr in 1985 mainly because of outdated mining equipment and technology.

Download the full version here: USGS.pdf

Hankyoreh (h/t Tim Beal)
9/13/2007

Deal would see such shipments cross the DMZ for the first time

For the first time in the more than 50 years since the Korean War, minerals produced jointly by the two Koreas will be sold in South Korea. The two countries will also start to work on developing new mine projects and will launch drilling as early as next month, Lee Han-ho, head of the Korea Resources Corp. (KORES) told the Hankyoreh in a recent exclusive interview.

Lee is one of the group of business leaders and government officials that will accompany President Roh Moo-hyun during the second-ever inter-Korean summit slated for Oct. 2-4.

“On September 5, I met with Chung Un-up, North Korean head of the Inter-Korean Economic Cooperation Association in Pyongyang, and signed a deal to sell black lead products that two Koreas jointly produced at a mine in Hwanghae Province,” Lee said. “We also agreed to work together in developing a limestone mine in Shinwon of the same province and start drilling for black lead in the Pungcheon region.”

So far, minerals produced in the North have been sold in South Korea through a third country, such as China. Every year, US$10 million to $100 million worth of originally North Korean-produced non-metals were shipped to the South. This new project will be the first time such materials produced by the two Koreas will directly cross the line that has divided the peninsula since the 1950-53 Korean War.

The cross-border shipments would also come at a time when China is working on joint ventures with the North to develop resources in the communist country. Experts see the first-ever joint production and shipment of minerals as providing a boost for inter-Korean cooperation in the resources field.

Lee was invited to the North by the Inter-Korean Economic Cooperation Association. The first shipment, amounting to 200 tons will be on the South Korean market earlier next month, with 800-1,000 tons of black lead to follow. Wonjin Co. will be responsible for the sale of the black lead, which will be used in making fire-resistant materials and carbonized steel. Eight hundred tons of black lead would be priced at around $150,000.

KORES opened a 50-50 joint venture with a North Korean firm in April last year, but its full-blown operation has been delayed until recently due to electricity shortages in the North.

Institute for Far Easter Studies
NK Brief No. 07-8-14-1

The second inter-Korean summit meeting is coming up soon, scheduled to open on August 28 in Pyongyang, and interest is building regarding discussion on economic cooperation. It is true that the North is prioritizing political and military issues in order to shore up its government by normalizing relations with the United States. However, considering its serious economic woes, the ability of South Korea to offer a ‘gift package’ can significantly influence the success or failure of this summit.

It is not yet clear how economic cooperation will fit into the agenda, but Seoul and Pyongyang have been constantly discussing this issue, so some insight has been given. In particular, the ‘consumer’ North has been referring to domestic and international cooperation, and through Pyongyang’s requests, some clarity has been added to what goals could unfold during the upcoming meeting.

Energy Sector

The North Korean economy is saddled with severe shortages of electricity and fuel oil, causing production to slow and therefore stagnating consumption, putting the country into an ongoing vicious circle of economic depression. North Korea possesses facilities to produce 7.7 million kW of steam- and hydro-electric power, but in reality is incapable of operating these facilities at more than 30%.

The opinion that expansion of North Korea’s electrical infrastructure is necessary, not only for the North, but also for South Korea, is gaining strength. South Korean projects to develop North Korean mines and import its coal have been delayed due to a lack of electrical power. In the future, enterprises looking to set up in North Korea will also require a steady supply of electricity.

In what way the two Koreas will cooperate on energy is not yet known, but North Korea is sticking to its demand for light-water nuclear reactors. If construction were restarted on the reactors begun by the now-defunct Korean Peninsula Energy Development Organization (KEDO), North Korea could quickly have not only the energy production amount currently available, but an additional 2 million kW, as well.

North Korea’s power facilities are in a state of deterioration, but the number of facilities in the North are adequate for the current state of the economy, so a plan for the restoration of generation and transmission facilities, or the 2 million kW of electrical power offered by the South Korean government two years ago could be considered sufficient.

Natural Resource and Infrastructure Development

One other highly probable agenda item on inter-Korean economic cooperation will be development of natural resources. This is because a model in which North Korea’s relatively abundant underground natural resources are developed, and in which these resources being used by South Korean businesses, would create a ‘win-win’ result for both Seoul and Pyongyang.

According to a report given by the Korea Resources Corporation at a conference last year, North Korea possesses upward of forty different valuable minerals, including iron-ore. Analysis of these North Korean resources shows that a considerable amount of South Korea’s 40 trillion won (430 billion USD) worth of mineral imports per year could be brought in from North Korea instead.

As development projects in North Korea’s graphite mines are already underway, and the import of North Korean anthracite is being considered in order to meet quickly growing demand for charcoal in the South, cooperation in the natural resource sector appears to be one of the core points to inter-Korean economic cooperation.

As for North Korea’s railways, the heart of the country’s distribution infrastructure, completion of the section of track on the Kyungui Line between Kaesong Station and Moonsan Station, as well as the section of the East Sea Line between Mt. Kumgang Station and Jejin Station, means that the infrastructure for regular service between the two countries is now in place, although talks regarding the details of such regular service are not being held.

If regular service on these two lines between North and South Korea can be achieved, expensive transportation costs can be reduced, and of course, in the future, connection of the railway with continental rail networks such as the Trans-Siberian Rail and the Trans-China Rail would help to enable the Korean Peninsula to emerge as the hub of North East Asian distribution.

Furthermore, considering the fact that North Korea’s mining facilities and technology, as well as its ports, loading facilities, and other transportation infrastructure, are severely lacking, a plan linking development of natural resources to projects developing infrastructure also appears viable. It is also already known, to some extent, the nature of North Korean needs in its infrastructure sector, and if this upcoming summit closes successfully, it is expected that an inventory of these needs will become more concrete.

Vitalizing Kaesong Industrial Complex

The Kaesong Industrial Complex (KIC) is also an important undertaking. At the moment, a problem has arisen concerning the construction of a second KIC, but even if only the originally planned 26.4 million square-meter complex is built, the fact is that currently the first 3.3 million square-meter stage is complete, and considering that it employs North Korean labor, this is no easy feat. Companies moving into the KIC are asking that easy communication with South Korea and simplified import procedures be prioritized.

Choson Ilbo
4/12/2007

Last year a Chinese company took a 51-percent stake in Hyesan Youth Cooper Mine in Yanggang Province, North Korea. Hebei-based Luanhe Industrial Group now has the right to develop the mine for the next 15 years.

North Korea also sold a 50-year development claim to the Musan iron mines, Asia’s largest open-air mine, to China’s Tonghua Iron & Steel Group. Since 2006, North Korea has sold the rights to develop more than 10 mines to Chinese firms.

KDB Research Institute, an affiliate of Korea Development Bank, has raised concerns with a report released Wednesday that details China’s intensive investment in North Korean natural resources. According to the report, since 2002 China has invested US$13 million (US$1=W932), more than 70 percent of its total investment in North Korea, in iron, copper and molybdenum mines.

The major investors come from the three northeast provinces of Heilongjiang, Jilin and Liaoning. They have moved the focus of their investment from small-scale, commercial opportunities to strategic deals to secure energy resources, the report said.

According to the report, China’s Wukang Group bought the rights to dig the Yongdeung mine, North Korea’s largest hard coal mine, and another Chinese company invested in a North Korean project to develop an oil field in the West Sea. The North has also allowed Chinese fishermen to fish off the coast of Wonsan, a North Korean port city on the east coast, in return for 25 percent of the catch.

Since North Korea lacks funds while China suffers from a shortage of natural resources the two are forming joint development projects, said KDB Research Institute researcher Chung Eui-jun, the writer of the report.

Andrei Lankov, a North Korea expert at Kookmin University in Seoul, said in the Wall Street Journal last July that the Chinese government seems to have made a strategic decision to encourage Chinese firms to invest in North Korea as a way to maintain its influence with its long-time ally in the post-Kim Jong-il era.

KCNA
3/27/2007

The Central Physical Prospecting Group under the State Bureau of Natural Resources Development is successfully carrying on the survey of underground resources by advanced physical prospecting methods, thus greatly contributing to the economic progress of the country and the land construction. Recently, the prospecting group has introduced the advanced methods in the geological survey and developed modern facilities to explore a new phase for surveying the underground resources. 

The prospecting group, founded in January Juche 46 (1957), has already registered great achievements in the survey of underground resources and the land development. 

Over the last five decades, it has powerfully propelled the development of the national economy with its successful survey of valuable raw materials and fuel resources and greatly contributed to the geological development and the land development in the country with scientific geological survey and the confirmation of the geological foundation. 

It has found out many geological layers and systematized their formation periods and geological composition in a well-arranged way.

They, on the basis of their success, have discovered the law on the distribution of valuable minerals and surveyed and registered scores kinds of minerals, several hundreds of mineral deposits, thousands of mineral bodies and outcrops, and a thousand and several hundreds of heavy mineral streams and metal diffusion zones.

They have achieved many successes not only in the prospecting of abundant iron ore, coal resources and the new graphite deposits but also in the confirmation of the amounts for nonferrous metals, rare metallic mineral resources, nonmetallic mineral resources and magnesite mineral resources. 

The survey of groundwater, hot springs, subterranean heat and the foundations of many construction projects including the Kumsong dam and the Samsu Power Station dam are associated with the efforts of the Central Physical Prospecting Group.