The town of Musan is home to iron ore mining like this one. Even as prices fall, Pyongyang has relied on minerals to bring in foreign currency, largely for its military. (Reuters)

The sharp fall in global commodity prices is starting to have an impact on North Korea, economists say, hurting a state that relies heavily on exports of minerals to keep its economy afloat — and its gargantuan military funded.

Combined with China’s economy coming off the boil, the recent slump in coal prices in particular could hurt leader Kim Jong Un’s “byungjin” policy: his stated desire to simultaneously develop North Korea’s economy and its nuclear weapons program.

“Commodity prices are dropping, so it’s becoming more and more difficult for North Korea to earn foreign currency,” said Choi Kyung-soo, president of the North Korea Resources Institute in Seoul. “I think last year, minerals trade decreased by about 10 percent by volume and about 15 percent by price.”

Mining makes up roughly 14 percent of the North Korean economy, which, although in a parlous state and under heavy financial sanctions, appears to have been growing modestly in recent years, when China was booming and commodity prices were surging.

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Mining comprises roughly 14 percent of the North Korean economy. (Reuters)

“North Korea is heavily reliant on commodities such as anthracite and iron ore for its export revenues, and just as it rode the resource boom to its apex in 2011, it is now the victim of a steady and steep decline in world prices,” said Kevin Stahler of the Peterson Institute for International Economics.

The overwhelming majority of North Korea’s trade is with China — which remains Pyongyang’s closest ally and economic patron, despite the political chill that has descended in the past three years after Kim succeeded his late father, Kim Jong Il. And more than 70 percent of North Korea’s exports to China are mining products, according to the Seoul-based Korea International Trade Association.

The prices that North Korea can get from China for anthracite coal and iron ore, its main mineral exports, fell by 26 percent and 35 percent, respectively, between their peak in 2011 and last year, Stahler said in a recent note on the institute’s NK Witness blog.

Furthermore, Beijing is trying to reduce China’s dependence on coal, and North Korea’s coal reportedly does not meet the new sulfur standards introduced to try to tackle China’s air pollution problems.

All this is bad news for Kim, who has made industry a priority. In his new year’s address, he said that improvements in a range of sectors, including coal mining, were “opening up bright prospects for the building of an economic giant and improvement of the people’s living standards.”

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Underlining the importance of mining in the North Korean economy, the Obama administration slapped restrictions this year on North Korean officials working at the Korea Mining Development Trading Corp., which Washington says is responsible for the country’s arms dealing and weapons export business, in the wake of the cyberattack on Sony Pictures. This is in addition to the heavy restrictions on North Korea’s financial activities, which make it difficult to receive payments for its exports.

But North Korea’s mining sector itself is not under sanctions; its trade in natural resources is legal.

“There are very limited ways for North Korea to make money: selling weapons, smuggling and mining,” said Choi of the North Korea Resources Institute. “Because of sanctions, it’s very hard for them to make weapons or to sell [narcotic] drugs, so the only legitimate way for North Korea to make money these days is from selling minerals.”

Selling mineral resources abroad doesn’t require any politically risky changes­ to the North Korean system, said Leonid Petrov, a Russian expert on North Korea who has been closely monitoring its mining activity.

“The North Koreans are following the Russian pattern of development,” he said. “They don’t want any structural or institutional reforms, so the export of natural resources­ is perfect. They don’t need to make any major changes­, and without changing anything they can exist for decades.”

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China is nevertheless investing heavily in the North Korean industry. Choi estimates that about 20 Chinese companies have invested in various North Korean mines, including a $500 million investment in the huge mining complex at Musan. “North Korea needs the infrastructure, and China needs the minerals,” he said.

Certainly, North Korea’s mining sector remains technologically backward. “The technology hasn’t changed since the 1960s,” said Cha Ji-song, who worked at a copper and zinc mine in North Korea for 14 years, until he defected to South Korea three years ago. “Almost everything is still done by manual labor.”

At the mine where Cha worked, in Hyesan on the Chinese border, white panels with red letters were fixed to the side of the mountain, blaring: “Long live General Kim Jong Il, the sun of the 21st century.”

Because of Chinese investment, copper production at the Hyesan mine, which fell to barely 700 pounds a year in the late 1990s, rose to 1,500 tons by the time Cha escaped from North Korea in 2012.

And although prices are not as good as they once were, experts say that North Korea is still sitting on a gold mine. It has significant deposits of more than 200 different minerals, including the second-largest magnesite reserves­ in the world, after China, and the sixth-largest tungsten deposits, according to the U.S. Geological Survey.

North Korea has dramatically stepped up its production of molybdenum, a rare mineral that can be used in high-tech industrial production, including as an alloying agent in steel and cast iron; for corrosion resistance; and for radiation shielding. It could also be used in North Korea’s nuclear and conventional weapons programs.

“They could use small quantities in high-tech weapons — but they are probably only using a small component for that,” said Joseph S. Bermudez Jr., an expert on North Korea’s weapons programs and chief analytical officer at AllSource Analysis, a consulting firm. “The primary objective is to earn foreign currency.”

North Korea, thought to have huge reserves of molybdenum amounting to about 54,000 metric tons, has opened a huge new plant near the Chinese border to process the mineral. Satellite pictures and photos from official North Korean news media show a huge open-pit mine surrounded by production facilities, including a covered conveyor belt and refurbished rock crusher.

North Korea also has huge stocks of rare-earth metals, minerals that are sometimes called “the vitamins of the high-tech industry” because they are needed to make semiconductors and smartphones, although they can also be used in building tanks and missiles. SRE Minerals, a mining company in a joint venture with a North Korean state business, said last year that it had discovered what is believed to be the largest deposit of rare-earth elements anywhere in the world.

All told, South Korea estimates the total value of the North’s mineral deposits at more than $6 trillion — more than enough, as one analyst puts it, to fund several more generations of leaders called Kim.

Yoonjung Seo contributed to this report