#Key Business Issue l 2021-11-15
The ongoing supply crunch of urea water solution is rattling South Korea. Fears are growing that the shortage of the material may cause disruptions in many areas ranging from logistics and the operation of public vehicles such as fire-fighting trucks and ambulances to agricultural fertilizer and foodstuff production. Concerns are mounting that the country may face a setback in thermal power plant operation and electricity supply to suffer a major power crisis in the coming winter. Any shortage of urea solution, which was easy to obtain in the past, could hit the industries and society overall.
Here is Kim Gwang-seok at the Institute for Korean Economy and Industry to discuss the background and significance of the urea shortages in Korea.
Of about 10 million diesel vehicles in South Korea, 4 million use urea solution. Among them, 2 million are trucks. That means the shortage problem may force those vehicles to stop operating, leading to transport paralysis. It could also hit other industries, such as gas, fertilizer, steel and automobiles. Unfortunately, all the local urea factories closed their operations about ten years ago. The shortage of urea solution is now causing an industrial standstill in Korea.
Urea solution is essential for diesel-powered vehicles, as it serves as a catalyst to reduce harmful gases emitted from diesel cars.
The problem is that South Korea relies 97 percent of urea and liquid urea on imports from China, which began to stop its urea exports from October 15. South Korea was panic-stricken with China’s decision to restrict its urea shipment.
The urea shortage did not erupt in a day, though. China announced its urea export restrictions last month. Previously, it warned of that possibility in the aftermath of the electricity shortage in the country. That is, the urea crisis was somewhat anticipated. Many point out that the situation deteriorated due to the lack of preparation.
Since the inauguration of the Biden government in the U.S., China has engaged in economic retaliation against the allies of the U.S., including South Korea. For example, China has imposed taxes on Australian wine of more than 200 percent and effectively ended coal imports from the country. China’s urea export restrictions can be regarded as part of its pursuit of global hegemony against the U.S.
This trend has been foreseen for years, and many experts have constantly warned of China’s economic retaliation. But the government has failed to predict the situation from a longer perspective but started working only when pressed for time. It’s a shame. South Korea’s belated response to the urea shortage led to Prime Minister Kim Boo-kyum’s apology.
Fortunately, South Korea will soon bring in about 19-thousand tons of urea that has been stuck in Chinese customs. The amount, along with urea the country has already secured, is enough to produce 57-thousand tons of urea water solution that can be used for vehicles for the next few months.
However, China has not resumed its urea exports, while Korea has yet to diversify its import sources. That means the nation has only gained some time without any fundamental solution. Some analysts say that the ongoing urea shortage revealed the supply chain risks faced by Korean industries.
In the case of some 3,900 items, South Korea depends on a particular country for more than 80 percent of their imports. Among them, 1,850 items are imported from China. They include lithium hydroxide, which is essential for electric vehicle battery production. Any snag in the supply of these materials or resources will be detrimental to Korean industries that serve as future growth engines. Therefore, it is important for South Korea to come up with measures to secure raw materials in a stable way.
For 31.3 percent of Korea’s import items, dependence on a specific country exceeds 80 percent. Korea relies entirely on China for the imports of magnesium ingots, which are used to produce vehicle frames and aircraft parts. China supplies 85 percent of the world’s magnesium, so it will not be easy for Korea to find alternative import sources. Any setback in magnesium imports may disrupt the production of Korea’s major export items such as autos, smartphones and batteries. The shortage of magnesium has already hit Europe, putting German automakers in trouble.
With the U.S.-China rivalry intensifying, China is showing signs of weaponizing critical natural resources. In other words, similar shortages of other materials may happen in Korea anytime.
China is reducing the provision of resources. Chinese state media outlets stress that the world must recognize China’s status in the global supply chains. Their aggressive remarks are increasing uncertainties, indicating that China has the intention of using resources as a diplomatic or trade weapon. To counteract China’s move, the U.S. is pushing to build alternative supply chains. Until last year, the two countries competed mostly in high-tech areas. Their superpower rivalry is likely to continue in the area of raw materials and resources down the road.
The supply issue of urea shows that the economy is closely related to security and diplomacy. One of the factors behind the urea issue is diplomatic conflict between China and Australia. A diplomatic concern that seemed to have little to do with Korea has a tremendous ripple effect, or the so-called “butterfly effect,” on the Korean economy. Many analysts are calling for Korea to devise mid-and long-term measures promptly.
I think it’s necessary to implement both short-term and long-term plans in tandem. In the short term, South Korea needs to take care of the most urgent issue. It should display its diplomatic abilities to ease the supply shortage of urea and prevent it from disrupting the domestic logistics network. Over the long term, the country will have to diversify its import destinations for resources and produce materials locally. By employing both short-term and long-term strategies, Korea should be able to stay firm even if a particular country threatens to suspend the provision of certain raw materials or parts.
Korea has learned that excessive reliance on a specific country for important resources could be dangerous.
Two years ago, Japan’s unilateral export restrictions against South Korea certainly came as a shock to Korean companies. Eventually, however, they turned the crisis into an opportunity to sharpen their competitiveness further. Similarly, Korea needs to devise a carefully planned strategy so the current urea shortage will be remembered as an example of turning the misfortune to the country’s own advantage.