For North Korea, this element matters, and it is not uranium

Coal imported from North Korea at Dandong port in the Chinese border city in Liaoning province in December 2010. For the Chinese government, purchases of iron ore provide a way to support the regime of Mr Kim Jong Un now that sanctions more strictly
Coal imported from North Korea at Dandong port in the Chinese border city in Liaoning province in December 2010. For the Chinese government, purchases of iron ore provide a way to support the regime of Mr Kim Jong Un now that sanctions more strictly cover North Korean coal.PHOTO: REUTERS

SEOUL (BLOOMBERG) - North Korea has little the world wants, but it does have iron.

Despite the international opprobrium over its nuclear ambitions, North Korea has managed to take advantage of a loophole in United Nations sanctions by increasing its exports of iron ore.

The key buyer, as usual, is China.

In global terms, the dollar figure is small: North Korea exported an estimated US$74 million (S$102 million) of iron ore and concentrates to China during the first five months of 2017.

Still, that is real money for the economically isolated country - which shares a land border with China - and represents a 212 per cent increase from the year before, according to data from the Korea International Trade Association.

North Korean iron tends to be of higher quality than the ore found in China, according to Ms Sabrin Chowdhury, a commodities analyst with BMI Research in Singapore.

That makes it attractive to some state-owned Chinese steelmakers looking to reduce costs, she said. "There is genuine demand for North Korean iron ore," she said added.

North Korea is a minor player compared with suppliers such as Australia and Brazil.

China imported about 445 million tonnes of iron ore in the first five months of 2017, according to Bloomberg Intelligence, of which just 1.1 million tonnes came from North Korea.

Still, Chinese purchases of North Korean iron ore are contributing to tensions between the United States and China following President Donald Trump's statement last week expressing annoyance about China-North Korea economic ties.

Two-way trade between China and North Korea rose 10.5 per cent to US$2.55 billion in the first half of 2017, according to data released by the Chinese government on Thursday (July 13).

China's exports to North Korea rose 29 per cent from the same period in 2016, General Administration of Customs spokesman Huang Songping said at a briefing in Beijing. Imports from North Korea fell 13 per cent.

China has seriously carried out United Nations sanctions on North Korea, said Mr Huang. Chinese exports to the North were mainly consumer goods such as textiles, which are not on the list of sanctioned items, the spokesman said.

For the Chinese government, purchases of iron ore provide a way to support the regime of Mr Kim Jong Un now that sanctions more strictly cover North Korean coal.

In 2016, sales of coal accounted for more than 50 per cent of North Korean exports to China and about a fifth of the country's total trade. However, in February 2017, China said it would halt purchases until the end of the year, in compliance with Security Council resolutions over the North's nuclear programme.

North Korean iron ore is not covered by the same sort of restrictions. The Security Council approved a resolution in November 2016 that exempted transactions in iron and iron ore intended "exclusively for livelihood purposes".

The volume of Chinese imports of North Korean iron ore nearly doubled in the first five months of 2017 compared with the same period last year, according to Bloomberg Intelligence.

Since North Korea relies on Chinese imports for many of its basic requirements, maintaining exports of iron ore and other commodities helps to keep the flow of essentials from drying up, said Mr Leonid Petrov, Korean Studies researcher at Australian National University's College of Asia and the Pacific.

"They need grain, they need fuel, they need consumer goods and that's what China provides," he said.

North Korea's biggest need is to pay for fuel, since the country does not come close to producing enough oil.

"North Korea is not self-sufficient," said international relations associate professor Robert Kelly at Pusan National University in the South Korean city of Busan. If China were to cut off supplies, "it would be economically disastrous", he said.

A spokesman for China's Foreign Ministry said the two countries "maintain normal trade relations" and that China's position on denuclearisation on the Korean Peninsular is "firm and clear".

"According to UN Security Council resolution 2321, iron and iron core imported from DPRK for the purpose of people's livelihood, and not for the purpose of generating profits for its nuclear programme, is not on the sanctions list," ministry spokesman Geng Shuang said in a briefing in Beijing, referring to North Korea's official name, the Democratic People's Republic of Korea.

"The Chinese side will continue to comprehensively, accurately, earnestly and strictly comply with UN Security Council resolutions."

In the 1980s and 1990s, North Korea was a major supplier of iron ore to Chinese steelmakers, according to Mr Philip Kirchlechner, director of Iron Ore Research in Perth.

Since then, the country has fallen far behind industry leaders. Exports to China have moved within a relatively narrow range, reaching three million tonnes in 2013 and falling to 1.6 million tons in 2016.

"There hasn't been a dramatic change in volume," said Mr Kirchlechner. "In terms of economic significance today, it's been reduced to nothing."

While a further tightening of UN sanctions could jeopardise that trade, for now, the North Koreans stand to benefit as Chinese state-owned enterprises saddled with debts look for inexpensive raw materials.

Given their proximity to that market, North Koreans can make money without having to be as efficient as industry leaders, said BMI's Ms Chowdhury.  "Even if their cost is double that of Australia's, they're still making a profit."