King coal

By Andrei Lankov

Recent UN sanctions that have put so much emphasis on mineral exports from North Korea have unavoidably attracted much attention to exports of North Korean coal to China.

Indeed, coal shipments to China which were almost unnoticeable as late as 2000, currently constitute roughly 40% of all North Korean exports as reconstructed through the statistics of North Korea's trade partners (actual share is liable to be somewhat lower, since not all North Korean trade deals are counted). Because prices have been falling on international markets, the share of exports also began to slide in recent years, but still remain high.

However, the measure of commotion that followed China's decision to enforce a partial ban (for the time being, at least) on North Korean coal attracted attention to something that many observers had speculated about: the essentially private nature of some mining enterprises that sell their coal to China.

Indeed, the growth of the semi-legal private economy began in North Korea in the early 1990s and by the early 2000s it reached a point where many rich North Koreans had investable capital counted in the tens of thousands of US dollars. Such capital had to be invested somehow in order to produce profit. And in their search for yield, many North Korean capitalists began to look at the coal industry.

Of course, private mining remains illegal in North Korea. However, it helped that in the late 1990s, with the encouragement and approval of the central government, a number of foreign trade companies were established by North Korean bureaucratic agencies, military units and larger industrial enterprises. These companies were expected to make money selling everything that could be sold on international markets. They usually could secure export licenses (those much coveted "wakku") to sell coal or other resources. However, most of these companies, often technically established by the Korean People's Army or Korean Workers' Party, had neither the technical expertise nor operational capital to start digging for coal.

Thus, around 2000, it became possible to make a perfect match between a private entrepreneur who had plenty of money, but badly needed official protection and export licenses, and a state-controlled autonomous trade company with all the necessary paperwork, but without investment capital or right experience. In most cases, the private owners locate the abandoned old small mines which ceased operations during the Arduous March, and then pump out water and restarted production.

It did help that the Chinese economy was growing fast, thus generating a great demand for coal and, broadly speaking, mineral resources which came to lead North Korean exports in the early 2000s (in the 1990s, it was seafood which was the largest items in North Korea' exports list). The demand for coal began to dwindle after 2012, partially due to a slowdown of the Chinese economy (China's GDP annual growth, according to the World bank, was 11.3% in 2005, but merely 7.3% in 2014), but largely due to the growing environmental concerns and switch to cleaner sources of energy in China. Nonetheless, the period from the mid-1990s to the early 2010s was a golden time for the coal exporters dealing with the Chinese market.

So, in the early 2000s, North Korean private investors operating under cover of the state agencies, began to purchase mining equipment, hire workers and look for profitable export deals (many of them had Chinese partners since the 1990s). At the same time, their bureaucratic and military supervisors/protectors received generous payments. Since the bureaucrats, who allow the private entrepreneurs to use the name of their state companies to do mining, have little actual control over operations and seldom even know what is going on at the mines their company technically manages, they usually agree on a fixed sum to be paid by the private subcontractor monthly or annually. Part of the payments ends up in the state budget, while another part goes to the pockets of the officials who manage the state company.

There were good reasons why aspiring private investors piled into coal mining rather than, say, the extraction of iron ore or rare earth minerals. The major attraction was the low barriers to entry ― coal mines were (and are) relatively cheap to start. If a business person wanted to start mining, say, iron ore, it would require rather sophisticated equipment and, as a result, a significant level of investment, while North Korean coal can be easily mined with the use of very primitive equipment by teams of unskilled workers.

The largest of the private mines now employs about 100 miners, but the majority are smaller-scale operations with just a few dozen workers being involved, and tiny mines with merely five to six workers are not unheard of.

Compared to other mineral resources, coal is also easy to sell domestically, since it is widely used for heating and in small-scale production. A majority of private mines sell high-quality coal to China, while lower quality coal is being sold at home. This would not be case with iron ore, hardly needed inside North Korea.

While the share of private mines to total nationwide coal production might remain relatively modest, their share of coal exports is significantly higher. Private investors operate under the cover of foreign trade companies that were created with the single purpose of exporting coal overseas. Thus the majority of what is produced by such companies ends up on the Chinese market. Conversely, big state enterprises have strict limits on how much of their coal they are allowed to export. As a rule of thumb, a state-owned mine is now allowed to send about 10% of production overseas, largely on the assumption that earnings will be used to finance continuing operations.

The transportation of coal is another challenge where private capital is important. North Koreans are fortunate that there are substantial coal deposits located near major seaports or on the Sino-North Korean border. This makes North Korean coal highly competitive because it costs on average 70 percent of Chinese coal of the same quality.

Nonetheless, even if transportation is relatively easy, it still has to be done. They usually use trucks rather than trains to move coal to seaports or China. In some cases, these trucks are owned by private mining companies, but often, mining companies make a deal with a semi-legal truck company (same scheme: using a government agency or state-owned enterprise in order to register trucks that are bought and operated by a private business). An interesting sub-branch of business is large storage facilities for coal that have been developed by entrepreneurs in recent years.

Storage facilities have made it possible to compensate for occasional fluctuation in coal prices on the market. It seems that storage facilities are independent from mines, thus their relationships are similar to that of truck operators: they work on a contractual basis.

The new system has led to competition for skilled workers. While miners are paid a tiny salary of $30-$50 a month, a skilled worker who can operate some piece of machinery, can easily make $100-$140 a month. This makes a job at the mines a much coveted occupation for those with the necessary skills. However, it is engineers and geologists who have benefited most from the coal mining boom. According to rumor, a good mining engineer can make upward of $500 a month when working for a private company.

Of course, one can only guess what will happen to this entire business structure with the advent of international sanctions (assuming, of course, that these sanctions are going to be implemented thoroughly enough). A lot will lose out, but as a few believe in the initiative, greed and the ruthlessness of capitalism and capitalists, I think that a significant part of the industry will survive both the collapse of prices and sanctions.

Andrei Lankov was born in St. Petersburg, Russia, and teaches at Kookmin University in Seoul.Reach him at anlankov@yahoo.com.