DPRK ECONOMY: THE CHINESE "GRAB" FOR MINERAL

C O N F I D E N T I A L SECTION 01 OF 03 SEOUL 003428 SIPDIS SIPDIS STATE FOR EEB AND EAP NSC FOR WILDER AND TONG PASS USAID FOR DCHA/PPM/BRAUSE MOSCOW HOLD FOR VLADIVOSTOK E.O. 12958: DECL: 11/28/2027 TAGS: ECON EMIN ETRD PREL PGOV KN KS CH SUBJECT: DPRK ECONOMY: THE CHINESE "GRAB" FOR MINERAL RESOURCES? REF: SEOUL 2286 Classified By: EMIN Drew Quinn for Reasons 1.4 (b,d) SUMMARY -------------- ¶1. (C) Generating significant press 'buzz' between the North/South Prime Ministerial and Defense Ministers meetings this November, the Korea Chamber of Commerce and Industry (KCCI) recently issued a report urging the ROKG to adopt new policies promoting natural resource development in the DPRK. This report played the China card by claiming the PRC is "moving fast to tap those resources, while the ROKG has no concrete plan" to move forward. Our discussions with local experts, foreign scholars, and Ministry of Unification (MOU) officials paint a more complex picture. PRC companies have indeed signaled their intent to pursue DPRK mining rights in iron, coal, copper, and other minerals. However, most of these plans have yet to be finalized and hinge on huge but uncertain outlays for transport and power plant infrastructure that PRC firms hope other foreign players will make first. ¶2. (C) On the ROK side, the MOU is actively pursuing infrastructural investments while expanding a barter program that trades light industrial inputs for DPRK mineral resources over the long term (reftel). MOU officials -- possibly along with some DPRK authorities -- are playing up the potential PRC/ROK "race" for mineral resources, in the hope of drumming up private sector interest, justifying additional ROKG assistance to the North, and consolidating the natural resources plank of the ROKG's engagement policy. In actuality, there is no reason to race. The North's considerable potential and daunting need permit the ROK and PRC to pursue complementary developmental courses there. Nonetheless, most experts grudgingly expect Chinese firms to continue leading the way at least over the near term. PRC companies appear more experienced in identifying accessible resources and coping with DPRK's stop-go policies, while ROK efforts still remain largely in the hands of the MOU and not private companies. END SUMMARY. THE KCCI REPORT -------------- ¶3. (SBU) On November 23, the KCCI released a major report on DPRK mineral resources calling for a "joint" North/South development strategy. The KCCI paper played a stark China card, noting: -- while the ROK has no concrete plan in place for developing natural resources in the North, the PRC is moving fact to tap those resources. -- in 2006, the PRC imported USD 274 million in DPRK minerals, while the ROK imported USD 59 million. This trade trend was underpinned by investment, with more than 70 percent of total PRC investment to the DPRK going to natural resources development that year. -- PRC firms recently secured rights to develop several mineral deposits in the North. These include tungsten, magnesium, molybdenum, copper, and iron mines. -- the ROK must act swiftly to secure the cooperation of the DPRK authorities to facilitate ROK company investments in the North's mining and energy sectors. PRESS REACTION: PLAYING UP THE CHINA THREAT -------------- ¶4. (SBU) Several major Korean press articles jumped on to the KCCI bandwagon, warning that the DPRK is likely to become "China's fourth northeastern province." In particular, the major conservative daily, Chosun Ilbo, compared Chinese firms seeking mineral rights in the North to Western powers wresting unfair mining and logging franchises from Korea in the nineteenth century. The respected Joong Ang Daily added that mining rights are being handed over to China, "openly and secretly," citing the example of the DPRK's Hyesan copper SEOUL 00003428 002 OF 003 mine going to a PRC firm last year in return for a half-share in profits. ¶5. (SBU) Other press commentators focused on the October 4th Summit Declaration, citing the point that the North/South "agreed to pursue ... natural resources development and give priority to each other in granting incentives and benefits in light of their unique characteristics..." Casting doubt on the ROKG's follow-through, they speculated that the ROK is likely to wait too long to forge a new policy, thereby permitting the PRC, U.K., Germany, Singapore, and even the U.S. to beat the ROK in the race to exploit the DPRK's natural resources. REALITY CHECK -------------- ¶6. (SBU) Our discussions with local experts, foreign scholars, and Ministry of Unification (MOU) officials paint a more complex picture. MYTH ONE: THE PRC JUGGERNAUT -------------- ¶7. (C) The Korea International Trade Association's (KITA) inter-Korean trade expert Lee Jhong-keun confirmed that since 2005, PRC companies have signed several memoranda of understanding to explore, develop, and market iron, coal, copper, and other minerals in the DPRK. However, the KCCI and local press "want to see what they want to see and not the reality." Many of these firms have yet to make requisite investments in roads, equipment, and power generation to ensure mineral deposits can be commercially exploited. Lee doubted most of the projects would be realized because the PRC is likely to play "a waiting game" to see if ROKG and other foreign donors will be first to pick up the heavy infrastructure costs needed to resuscitate the DPRK's moribund industrial mining sector. ¶8. (SBU) A Shanghai Academy of Social Sciences scholar, Liu Ming, partly collaborated Lee's views at a recent inter-Korean trade symposium in Seoul. Liu noted the PRC government is permitting private enterprises to pursue cooperative ventures with the North but has not extended any special incentives since PRC President Hu Jin-tao's visit to the DPRK in October 2005. The PRC's "going out" strategy, Liu maintained, involves mostly big corporations motivated by a Hong Kong businessman, Qian Hao-min, who was appointed as an overseas "Investment Promotion Delegate" by the DPRK's Deputy Prime Minister in 2005. Lee's paper stresses that the DPRK's investment environment is not benign and its legal system unreliable. As a result, it is not the PRC government's intent to push Chinese firms "to go all out" in the DPRK but rather to seek "reciprocal cooperation." ¶9. (C) While predicting a carefully limited PRC move into the DPRK mining sector, KITA and KCCI experts grudgingly admit that many PRC firms seem to be able to drive hard bargains with DPRK authorities, and to bring joint ventures on line in short time periods. Lee attributed this to greater PRC experience in (1) identifying relatively accessible resources, (2) managing the DPRK's stop-go policies, (3) exploiting positive government-to-government ties, and (4) coping with difficult operational conditions. Among the "hard lessons" learned in the North: --in 1997, several PRC firms went bankrupt as a result of loan defaults brought on by the DPRK's suspension of scrap iron exports. --in 2004, the DPRK's decrepit railway system withheld 2,000 PRC rail cars, without prior agreement, to keep the DPRK system in operation. Absorbing these "lessons," PRC firms are now better accustomed to hammering out pragmatic, flexible solutions to enforce their contracts, Lee said. MYTH TWO: NO ROKG STRATEGY? -------------- ¶10. (C) Responding to the KCCI report, senior MOU officials SEOUL 00003428 003 OF 003 we interviewed were uniformly and defensively insistent that the MOU is ahead of the curve in promoting natural resource development in the North. They argued that the Summit's long-term proposals to expand the DPRK's Haeju port on the west coast and modernize rail lines between Kaesong and Pyongyang and Shinuiju (up to the DPRK's Chinese border) will significantly help to improve the accessibility and exploitation of the DPRK's mineral resources. Once these projects are in place, the ROKG's fledgling program to exchange light industrial inputs in return for mineral resources (reftel) will be well underway, enabling ROK companies to formulate their investment strategies in the DPRK. Former MOU official (and now chief of the ROKG's quasi-governmental South-North Korean Exchanges and Cooperation Support Association - SONOSA) Bahk Heung-yuel noted that site surveys for three DPRK zinc and magnesite mines are proceeding on track and the resulting data will soon be conveyed to interested ROK firms. Bahk added that Korea Resources Corporation's 2006 investment in a DPRK graphite mine is now paying off, with the first shipment of 200 tons of graphite arrving on November 24. ¶11. (C) On the other hand, junior SONOSA officials seemed stung by the KCCI report. They admitted the ROK side has yet to make any significant inroads into the DPRK's natural resources sector. SONOSA Mineral Resources Cooperative Team Director General Kang Sung-hoon felt the KCCI report was largely on target and could help spur the ROKG to introduce new incentives to encourage ROK firms to take the costly steps to reopen and modernize the DPRK's antiquated mining sector. Kang added the ROKG has yet to attract any major ROK chaebols because of the lack of low-interest loans and indemnification for potential losses in the DPRK. MYTH THREE: NO ROOM FOR BOTH? -------------- ¶12. (C) At a recent northeast Asia economic conference in Seoul, University of Vienna Economist Ruediger Frank scoffed at the claim that the PRC would "beat" other players to the DPRK's mineral resources. He stressed that the DPRK's infrastructure needs were so huge that it will take a "Marshall-plan operation" involving several countries and international financial institutions to bring the isolated country back on line to exploit its comparative advantage in mineral resources. The cost of modernizing mines, equipment, roads, and shipping facilities alone could approach USD 75 billion. In addition, Frank suggested the DPRK's mineral resources were equally large, easily accommodating several foreign players acting in tandem in the DPRK. He observed that the DPRK holds the world's largest deposit of magnesite, a critical resource for industrial processes, and could supply the ROK's domestic need for magnesium "for a few centuries," assuming current rates of utilization. The DPRK also has deposits of iron, zinc, tungsten, molybdenum, graphite, barite, and fluorite, all ranking within the top ten largest deposits of those minerals in the world. The PRC economy is growing fast, but not fast enough to consume all these. It also has no compelling market-determined rationale to bring these major resources on line quickly or single-handedly, Frank said. COMMENT -------------- ¶13. (C) The KCCI report has been a lightning rod for South Korean fears that China's burgeoning economic growth coupled with its special relationship with the Kim Jong-il regime will suck out the North's mineral resources and shut out the South. Experts here, however, believe both the DPRK's resource base and developmental needs can accommodate several foreign players over the long term. The KCCI report recommends that ROK companies adopt a more long-term vision. Ironically, it seems that PRC firms are less risk-averse and thus leading the way. The contrast between the PRC's company-driven approach and the ROK's government-led one may attract greater attention here, as the South's new leadership prepares to assume office in February 2008. VERSHBOW