Resource Curse: Rare Earths bankroll North Korea’s Despotism

Abundance of natural resources can serve as deterrent to economic development, a phenomenon which has widely been known as the resource curse.

That’s because plentiful resources provides the wherewithal to the political class to thrive on a politically repressive system without the need for economic liberalization reforms.

Thus the tendency for resource rich nations has been concentrate wealth on the politicians and their cronies at the expense of the nation.

Apparently rare earth exports may have bankrolled North Korea’s isolated economy which has so far allowed the regime to survive.

From the Asia Times Online,

In fact, North Korea is sitting on the goldmine. The northern side of the Korean peninsula is well known for its rocky terrain, with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals, of which deposits of coal, iron ore, magnesite, gold ore, zinc ore, copper ore, limestone, molybdenum, and graphite are the largest and have the potential for the development of large-scale mines.

After China, North Korea's magnesite reserves are the second-largest in the world, and its tungsten deposits are almost the world's sixth-largest. Still the value of all these resources pales in comparison to prospects that promise the exploration and export of rare earth metals.

Rare earth metals are a group of 17 elements found in the earth's crust. They are essential in the manufacture of high-tech products and in green technologies, such as wind turbines, solar panels or hybrid cars.

Known as "the vitamins of high-tech industries," REMs are minerals necessary for making everything that we use on a daily basis, such as smartphones, flat-screen TVs, and notebook computers. Some rare earth metals, such as cerium and neodymium, are crucial elements in semiconductors, cars, computers and other advanced technological areas. Other types of REMs can be used to build tanks and airplanes, missiles and lasers.

South Korea estimates the total value of the North's mineral deposits at more than US$6 trillion. Not surprisingly, despite high political and security tensions, Seoul is showing a growing interest in developing REMs together with Pyongyang.

In 2011, after receiving permission from the Ministry of Unification, officials from the Korea Resources Corp visited North Korea twice to study the condition of a graphite mine. Together with their counterparts from the DPRK's National Economic Cooperation Federation they had working-level talks at the Kaesong Industrial Complex on jointly digging up REMs in North Korea. An analysis of samples obtained in North Korea showed that the type of rare earth metals could be useful in the manufacture of liquid crystal display (LCD) panels and optical lenses.

The joint report also revealed that there are large deposits of high-grade REMs in the western and eastern parts of North Korea, where prospecting work and mining have already begun. It also reported that a number of the rare earth elements are being studied in scientific institutes, while some of the research findings have already been introduced in economic sectors. The North built a REM reprocessing plant in Hamhung in the 1990s but has been unable to put the plant into full operation due to power and supply bottlenecks.
Rare earth minerals are becoming increasingly expensive, as China, the world's largest rare earth supplier, puts limits on its output and exports. In February, China's exports of rare earth metals exceeded the price of $1 million per ton, a nearly 900% increase in prices from the preceding year.

China, which controls more than 95% of global production of rare earth metals, has an estimated 55 million tons in REM deposits. North Korea has up to 20 million tons of REM deposits but does not have the technology to explore its reserves or to produce goods for the high-tech industry. Nevertheless, in 2009 the DPRK's exports of rare metals to China stood at $16 million, and as long as someone invests, exports will continue to expand.

This growing rise in REM prices and strong demand gives the young leader Kim Jong-Un a good chance to improve the economic standing of North Korea without actually reforming its economy.

Any “improvements of North Korea’s economic standing” “without reforming its economy” will likely reflect on statistically chicanery rather than from real economic growth.

Real productivity gains through trade and capital accumulation, and not from overdependence on finite resources and redistribution, are the way to lasting economic progress.

The idea that resources will function as a wealth equalizing elixir will be exposed as a socialist’s dogmatic fantasy as it has always been.

How Foreign Trade Restrictions Obstructs Economic Growth

In discussing the official complaint filed by the US at the World Trade Organization (WTO) against China’s rare earth export restrictions, Cato’s Dan Ikenson explains the adverse implications of trade restrictions. Mr. Ikenson writes, (bold emphasis mine)

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions). In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Feel good protectionist policies does the opposite of what they intend to accomplish

Yet such policies have been imposed by vested interest groups, who uses the law (in cahoots with vote seeking politicians) to protect their economic standings at the expense of consumers and of the society. This is known as Rent Seeking.

Trade restrictions has significant direct and indirect (unseen spillover) impact to the economy.

Huge Rare Earth Metals Discovery in the Pacific Seabed

For the many who believe in various “Peak” theories—seen as the shrinking of “finite” supplies of specific natural resources/commodities (e.g. oil, copper etc…)—their fundamental error has been to ignore the laws of economics and human ingenuity.

This also applies to entities who operate under such premises and think that they can monopolize or control supply of natural resources by restricting trade. This applies particularly to rare earth metals.

The BBC.co.uk reports,

Japanese researchers say they have discovered vast deposits of rare earth minerals, used in many hi-tech appliances, in the seabed.

The geologists estimate that there are about a 100bn tons of the rare elements in the mud of the Pacific Ocean floor.

At present, China produces 97% of the world's rare earth metals.

Analysts say the Pacific discovery could challenge China's dominance, if recovering the minerals from the seabed proves commercially viable.

The British journal Nature Geoscience reported that a team of scientists led by Yasuhiro Kato, an associate professor of earth science at the University of Tokyo, found the minerals in sea mud at 78 locations.

"The deposits have a heavy concentration of rare earths. Just one square kilometre (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption," said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

The minerals were found at depths of 3,500 to 6,000 metres (11,500-20,000 ft) below the ocean surface.

My comments

One, China’s apparent monopoly on rare earth metals will be challenged by such findings.

Two, the laws of economics work: High prices translates to profitable opportunities for the market to discover alternative sources of supply

Three, innovative technology trends help underpin such supply sourcing. Yes, the above development points to seabed mining as the next major frontier in resource exploration.

Fourth, prices founded on current (‘peak’ and monopolists) premises will likely be affected.

So far, the REMX (Market Vectors Rare Earth ETF) have been on a downswing, along with a major US rare earth producer Molycorp [MCP] even before the news was released (maybe the market has anticipated this).

Yet aside from the above the dynamics of supply-demand balances, there is also monetary factor to always consider. So while prices of rare earth may be pressured by supply side discoveries, continuation of policies of inflationism may partly offset such declines.

Like any endeavor, there will always be naysayers or detractors (or perhaps defenders of the current monopolists)

From the same article,

The prospect of deep sea mining for precious metals - and the damage that could do to marine ecosystems - is worrying environmentalists.

Are these environmentalists really working to “save” the environment? Or are they there to promote vested interest groups or simply advancing the cause of etatism?

China Flexing Muscles Over Rare Earth Minerals For Strategic Reasons

China is tightening up on its near stranglehold over rare earth mineral exports in order to secure strategic advantages.

According to the New York Times, (all bold highlights mine)

``China currently accounts for 93 percent of production of so-called rare earth elements — and more than 99 percent of the output for two of these elements, dysprosium and terbium, vital for a wide range of green energy technologies and military applications like missiles.

``Deng Xiaopeng once observed that the Mideast had oil, but China had rare earth elements. As the Organization of the Petroleum Exporting Countries has done with oil, China is now starting to flex its muscle.

``Even tighter limits on production and exports, part of a plan from the Ministry of Industry and Information Technology, would ensure China has the supply for its own technological and economic needs, and force more manufacturers to make their wares here in order to have access to the minerals.

``In each of the last three years, China has reduced the amount of rare earths that can be exported. This year’s export quotas are on track to be the smallest yet. But what is really starting to alarm Western governments and multinationals alike is the possibility that exports will be further restricted."

``Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China. “Rare earth usage in China will be increasingly greater than exports,” said Zhang Peichen, the deputy director of the government-linked Baotou Rare Earth Research Institute..."

``China produces over 99 percent of dysprosium and terbium and 95 percent of neodymium. These are vital to many green energy technologies, including high-strength, lightweight magnets used in wind turbines, as well as military applications...

``The Ministry of Industry and Information Technology has cut the country’s target output from rare earth mines by 8.1 percent this year and is forcing mergers of mining companies in a bid to improve technical standards, according to the government-controlled China Mining Association, a government-led trade group.

``General Motors and the United States Air Force played leading roles in the development of rare-earth magnets. The magnets are still used in the electric motors that control the guidance vanes on the sides of missiles, said Jack Lifton, a chemist who helped develop some of the early magnets.

``But demand is surging now because of wind turbines and hybrid vehicles....

Additional commentary from Telegraph's Ambrose Evans Pritchard, (emphasis added)

``New technologies have since increased the value and strategic importance of these metals, but it will take years for fresh supply to come on stream from deposits in Australia, North America, and South Africa. The rare earth family are hard to find, and harder to extract...

``No replacement has been found for neodymium that enhances the power of magnets at high heat and is crucial for hard-disk drives, wind turbines, and the electric motors of hybrid cars. Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers.

``Blackberries, iPods, mobile phones, plams TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

``Arafura, Mountain Pass, and Lynas Corp in Australia, will be able to produce some 50,000 tonnes of rare earth metals by the mid-decade but that is not enough to meet surging world demand.

``New uses are emerging all the time, and some promise quantum leaps in efficiency. The Tokyo Institute of Technology has made a breakthrough in superconductivity using rare earth metals that lower the friction on power lines and could slash electricity leakage."

``The Japanese government has drawn up a “Strategy for Ensuring Stable Supplies of Rare Metals”. It calls for `stockpiling’ and plans for “securing overseas resources’. The West has yet to stir."

My comments:

1. Forcing high tech companies dependent on rare earth resources to invest in China could be a ploy to "pad" statistical economic growth in today's highly turbulent times.

2. Another reason could be to use such resources to extract technology or knowledge transfer concessions.

This applies most especially to "green" technology and importantly for security (military) reasons.

Since the US Air Force has been instrumental to the development of rare earth for its use, then it would be forced to negotiate or compromise for continued access to these.

3. Prices of rare earth metals would surge as supply is constrained as demand increases.

4. Investments in scouring for alternative sources for such exotic metals will likewise explode.

5. Technological advances could materially slow, especially for those companies unwilling to shift to China, on high prices as access to these rare metals will be severely limited.

6. Another sign of creeping protectionism which could provoke heightened geopolitical tensions.