Is China Subsidizing the DPRK: The Pricing of North Korean Exports
In two previous posts, we asked whether China appeared to be subsidizing or providing aid to North Korea through the pricing of food and fuel. Our method was simple: to track the unit prices of Chinese commodity exports—backed out of the volume and value data provided by Chinese customs via South Korea’s KITA—and to compare them to trends in benchmark world market prices. The basic story: that price movements are very strongly correlated and price levels are too; if anything, from 2011 or so, China seems to even be charging a premium for food and fuel.
Here we look at the other side of the coin: how North Korea’s exports are priced. This exercise is also fraught because we need to find benchmark prices for two important commodities—iron ore and anthracite—that are somewhat less straightforward. The solutions are not perfect, but they appear to make the same point; if anything, China is exploiting its proximity and market power to secure commodities at advantageous prices.
We start with anthracite. Anthracite is not widely traded; indeed, DPRK is one of the top exporters and the second largest exporter to China in 2012. China is obviously the biggest importer of anthracite from the DPRK. In 2012, North Korea exported 11.8 million tons of anthracite valued at $1.2 billion. Since there is no world benchmark price that we could find, we simply consider export prices earned by Vietnam and Russia (Figure 1). The first point to note is the strong correlation of the series (0.82 to be exact). Second, the price difference between the DPRK export price and these two benchmarks is small. The average price difference between the DPRK and Vietnam is $0.01/KG while it is $0.04/KG between the DPRK and Russia. These differences could reflect differential transport costs or quality differences; we cannot be certain. But the point is that these imports appear to be governed largely by market forces.
Iron ore is more complicated; there are world benchmark prices that vary depending on iron ore content and granularity and the grading of ore is complex (for example, “granular size below 10mm for at least 90% of the cargo, with maximum of 40% below 150 micron.”) The trade data we have—going to 8 digits—makes a distinction in North Korean iron ore exports between average granularity of iron ore smaller than 0.8mm and larger than 6.3mm, but does not specify ore content. We use two benchmarks. The first figure tracks the price of iron ore with granularity larger than 6.3mm against a China import price (at Tianjin) and Australian prices; Australia is included because it is the top exporter. The China benchmark seems reasonable on at least one dimension: North Korean ore—at 65% Fe—is comparable to the China import benchmark which is 60-68% Fe normalized to 62%. The second table shows North Korean exports with granularity smaller than 0.8mm against Brazil, the largest exporter in that category.
Again, in both categories price series are highly correlated, and we emphasize that as our main finding: the fundamentally commercial nature of the trade. But it is hard to avoid the observation that North Korea appears to be receiving lower prices for its ore exports than its competitors. There are a number of possible explanations. First, the North Korean iron ore comes from the well-known Musan mine in the Northeast. Transport costs may matter. According to a report posted on SinoNK by Alan Ferrie (Link), the Musan mine has a massive deposit of 1.5 to 2.0 billion tons of magnetite containing 23% to 30% grade iron. Although low grade, the open pit/strip mine offers iron ore production at low cost. Yet a third possibility takes a more political economy route: that Chinese investment in the mine effectively repatriates dividends through a kind of transfer pricing. Or perhaps the Chinese are just lowballing their JV partners because the North Koreans do not really have the transport infrastructure to offer the ore to anyone else.
In any case, the main point is that in the relatively undifferentiated commodities for which we can find at least some world benchmark prices, it looks to us like business is business. Prices track world market prices, and if anything, China is exploiting its market power on both the export and import side.