North Korea’s mining industry is collapsing, and steel may be next

OVER THE LAST YEAR, THE BRAVE COVERT CORRESPONDENTS of the Daily NK and Rimjin-gang have reported from inside North Korea on the effects of sanctions on North Korean industry. It’s now clear that those effects have been severe. That’s good news, because North Korea’s mining and steel industries are closely linked to its military and its WMD programs. It’s also terrible news, because a lot of people who depended on those industries are now living through some very hard times.

In Musan in far north Ryanggang Province, a UN ban on iron exports had largely shut down North Korea’s largest iron ore mine by July. Unfortunately, the central government in Pyongyang — the same government that just announced plans to build Asia’s largest water park — has also stopped issuing rations to miners and their families.

Musan used to bring in $100 million a year for Pyongyang’s baby formula yacht fund. Then, 15 months ago, the U.N. approved UNSCR 2371, paragraph 9 of which bans Pyongyang’s iron ore exports. The U.S. imposed a dollar transaction ban on most North Korean mineral exports in February 2016, in section 104(a) of the NKSPEA, and has since amended that law to keep up with UN sanctions. The U.S. hasn’t designated any sellers or buyers of North Korean iron ore yet, but it began to block North Korean coal exporters — who are directly linked to its military and WMD programs — in December 2016. In August, the Treasury Department blocked the assets of a major Chinese coal importer — allegedly the largest of them — and filed a civil forfeiture action against $4 million in proceeds of its sanctions violations. It later amended the complaint to forfeit an additional $500,000.

In Korea’s far northeast, at the Songjin Steel Complex in Kimchaek, the head of engineering was just fired and sent off to the mines at Musan for failing to meet production quotas for any of the past three years. Regrettably for him and his family, his professional reputation exceeded his political connections; these were not enough to save him from becoming the scapegoat. The Daily NK says that the production decline is “likely” due to a shortage of iron ore due to declining production at Musan, but as we’ll see, this may be just one of several reasons for that. Songjin, while not North Korea’s largest steel plant, is one of its largest and a propaganda showpiece. The purged manager had even met Kim Jong-un. When Kim Jong-il visited the complex in 2011, he said, “The completion of steelmaking process of Juche steel with our own technology is a greater victory than the success of a third nuclear test.” Songjin makes steel wire and pig iron for “the domestic machinery and military sectors.” It also exports its products to China for hard currency.

Separately, the Daily NK also reports “signs of an economic crisis” in the Rason Special Economic Zone, and quotes a local source who says that “most of the factories have stopped operating” there. Radio Free Asia also reports that the Chongsu Chemical Plant in Sinuiju, which had recently been refurbished and reactivated, shut down last year. Although it’s not clear that the plant made or relied on sanctioned materials, it is thought to be linked to North Korea’s chemical weapons program. A drought and consequent power shortage may also have contributed to its closure.

If these reports are accurate, we’d expect them to represent the continuation of a long-term trend, and there is evidence that this is indeed the case. Let’s begin with the evidence of impacts on cross-border trade overall, and then focus on how sanctions are said to have affected specific North Korean industries.

Cross-Border Trade Generally

This blog first reviewed the evidence that sanctions were having a significant impact on China-North Korea trade in December of 2017. A Rimjin-gang journalist who visited the border region between July and October 2017 saw strict border enforcement and evidence that Chinese investors were withdrawing from the mining and fisheries industries. Cross-border smuggling continued, but at a scale “not big enough to hinder the sanctions so much.” If you trust China’s official trade statistics, by April, it had reduced imports from North Korea by roughly 80 percent. Most of those imports consist of mineral products, so it makes sense that we’d see the effects of this on the mines.

If you don’t trust China’s official statistics, the Daily NK reported in February that the decline of cross-border trade, and a regime crackdown on imported goods, had caused between 30 and 40 percent of businesses in Sinuiju to close, including a textile factory. In March, the Wall Street Journal said trade volume was down 80 percent at Dandong, and that some Chinese textile and seafood businesses had shut down. Satellite imagery and accounts from truckers confirmed that cross-border trade had fallen off significantly. The same held true of trade with Russia.

Coincidentally, this was right about when Kim Jong-un decided to break his self-imposed isolation and meet Moon Jae-in, Xi Jinping, and Donald Trump. It may be a step too far to conclude that sanctions were the cause of this, but let no one ever say that sanctions are bad for diplomacy with North Korea again. By April, there were signs that China was loosening its enforcement, and satellite images showed evidence of coal smuggling, but the evidence of relaxation was not enough to change “the assessment that North Korea is experiencing significant pressure from the sanctions,” according to Benjamin Katzeff Silberstein.

C

As early as June of 2017, the Daily NK reported that sanctions had put hundreds of coal miners out of work in South Pyongan, and that people were blaming Kim Jong-un’s missile tests for instigating the sanctions that cost them their jobs. There were also spillover effects on local markets. By March, a state trading company anticipated that the Kim-Moon summit would get sanctions lifted and imported conveyer belts, hard hats, and headlamps to restart shuttered coal mines.

But China’s enforcement did not ease significantly, even after Kim Jong-un met Xi Jinping. By March, the children of unpaid miners were skipping school and hauling heavy sacks of unsold coal to make ends meet. By August, the Daily NK reported that the coal export ban had driven the price per ton from $16 to $6, and that the mines could only pay a few of their workers. At least one man in his 50s starved to death. There was rice for sale in the markets, but most people couldn’t afford it. Many food stalls were empty for lack of customers. People were taking their children and moving away. Amid an abundance of unsold coal, there were power shortages as the electricity was diverted to Pyongyang. Rimjin-gang could not report from the South Pyongan coal mines, but found evidence that the nearby markets were suffering a loss of business. 

Fe

By February, the iron export ban hit the Musan mine so hard that authorities begged local residents, who were down to two meals a day due in part to the 2016 floods, to contribute money to keep it running. Starting in the spring, miners began smuggling ore or finding other work. By August, Rimjin-gang reported that the mine only produced a small amount of ore for domestic steel mills. Rations stopped and absenteeism was rife. Miners punched in and left early to collect wild plants in the mountains. Others drifted away to find other jobs. Security forces threatened to send AWOL workers to labor camps, but they couldn’t keep the mines running.

Cu

The Hyesan Youth Copper Mine, North Korea’s largest, looks to have shut down in the first half of 2017. That would coincide with the November 2016 approval of UNSCR 2321, paragraph 28 of which banned North Korea’s copper exports. Chinese investors had just sunk millions of dollars into refurbishing the mine. A Chinese conglomerate, the Wanxiang Group, had invested in Musan in 2011 but sold out in 2015 for fear of legal risks from sanctions. By March of this year, Hyesan had high unemployment and a serious meth addiction problem, but food was still coming in from China. By August, times were still hard, and miners who had relied on the food rations supplied by the Chinese investors increasingly depended on home businesses run by their family members.

Seafood

The seafood export business in Rason is said to be particularly hard hit. The U.N. Security Council voted to ban seafood exports in August of 2017, almost simultaneously with Congress’s passage of section 311 of the CAATSA. I’ve previously laid out evidence of a possible causal connection between Pyongyang’s sale of fishing rights to Chinese trawlers and the “ghost ships,” the North Korean fishing boats drifting into Japanese waters with dead or missing crews. I’ve also cited evidence that when China enforced the export ban (though it has done so briefly and imperfectly), it reduced seafood prices in North Korean markets. When it does, protein-starved North Koreans can afford delicacies that had long been out of their reach. As of March, the export ban was intact but leaky, and smuggling was lucrative. Whatever seafood the Chinese buyers rejected was dumped on North Korean markets, and seafood remained relatively affordable and available. One source observed, “This is not a very common thing in North Korea. Only well-off households can afford to pack seafood for lunch.”

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Still, sanctions aren’t a complete explanation for the decline of those industries. As Joseph Bermudez and Andy Dinville wrote in June 2016 — more than a year before the Security Council approved Resolution 2371 — North Korea’s largest steel mill, the Kim Chaek Iron and Steel Complex, was running at a greatly reduced capacity, and shut down intermittently in the 1990s, in 2011, 2014, and 2015, when our sanctions against North Korea were arguably weaker than those against Belarus or Zimbabwe. Congress did not pass the NKSPEA until February 2016; President Obama did not begin implementing it through Executive Order 13722 until March or cut off Pyongyang’s access to the financial system until November. President Trump did not begin Medium Pressure until June 2017. Even without sanctions, steel mills that don’t innovate and can’t compete go under. Just ask anyone in Youngstown or Bethlehem.

Like the steel industry, North Korea’s mining industry also showed significant strain in 2014, before sanctions were a serious threat. Then, as now, the Daily NK reported that iron miners were going unpaid, and then, as now, problems at Musan shut down the steel mills. At the time, the Daily NK offered two explanations for this: commodity price disputes with the mine’s Chinese customers; and power shortages caused by lack of rainfall upstream from the mine’s hydroelectric power sources. (It could not have helped feed the grid that upon its completion in 2012, the massive Heechon Dam project north of Pyongyang didn’t hold water because in haste, someone decided to replace its high-strength concrete with Play-Doh. Three years later, the new Mount Paektu Hero Youth Power Station No. 3 Dam in Ryanggang Province began to crack and leak as its reservoir filled, just 10 days after its completion. You’d think a country that has a hydroelectric dam on its national seal could, you know, build a dam, dammit, but if so, you’d think wrong. But then, my own hometown knows all about the catastrophic potential of building dams with subpar concrete.)

[Yonhap]

Not all of the effects of sanctions have been negative, either. In May, for example, the Daily NK reported that because Pyongyang can no longer export coal, the domestic market price of coal fell and farmers buy it to run greenhouses and grow vegetables. I see scant evidence for the claim that 80 percent of people in Tokchon are operating greenhouse businesses that sell produce to other parts of the country, but I can believe that enough people learned this resourceful adaptation to help keep food prices down. A glut of cheap Chinese vegetables, probably imported by state trading companies that have shifted from sanctioned industries to a non-sanctioned one, threatens to undercut the greenhouse growers, although state restrictions on transporting food mean that prices are uneven. Clearly, the times are very hard for North Korean miners and their families.

Overall, the evidence suggests that North Korean industry was inefficient, uncompetitive, and marginal before the sanctions hit. The sanctions shocks of this year may have been too much for them to withstand. The mining and steel industries are linked to North Korea’s WMD programs and the financing of those programs. As such, both are legitimate sanctions targets. But that doesn’t mean we shouldn’t celebrate the resilience of North Korea’s poor or look for ways to mitigate their needless suffering. With them, we share an interest in making their country a humane and peaceful one. To kill the cancer, you have to endure the chemo. 

For all of Pyongyang’s sanctions-never-work bluster, the collapse of its mining industry means it just lost most of its income. If it’s now surviving on laundered cybercrime proceeds and burning through its cash reserves, it knows it needs a better coping strategy, and soon. A year ago, it “convened an extended plenary session of the Cabinet” to find one, and settled on “self-sufficiency and science technology,” whatever that means. Having a South Korean president willing to stake his presidency on the violation of U.N. sanctions might have been a good one in different times. It worked perfectly in 2003 when practically speaking, there were no sanctions. But those were different times.

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Update: Here’s another report suggesting that Pyongyang is diverting coal it can no longer export to domestic use, by processing it into briquettes to heat homes. That has obvious benefits for the people, although coal can be a dangerous way to heat a home. Traditional Korean construction uses under-the-floor heating systems called ondol. If the floor cracks, carbon monoxide can seep into the home.