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Supply chain

Deepening diesel exhaust fluid crisis puts Korea’s key industries at risk

Disruption in local logistics sector to hurt exports; government tries to convince China to resume supply

By Nov 05, 2021 (Gmt+09:00)

Cargo trucks parked at a parking lot in Seoul amid the diesel exhaust fluid shortage
Cargo trucks parked at a parking lot in Seoul amid the diesel exhaust fluid shortage

The diesel exhaust fluid (DEF) shortage in South Korea stemming from China's suspension of China’s is getting worse, as local DEF inventories are rapidly dwindling. The lack of the liquid used to cut pollution from diesel engines is feared to soon jeopardize major industries including the electronics, automobiles, refining and steel sectors, core growth engines of Asia’s fourth-largest economy.

All diesel cargo trucks across the country could be halted in about a month as the country has yet to take significant actions to increase supply. Such a crisis could shut down all local factories.

ONE WEEK'S WORTH OF SUPPLY

South Korea’s major logistics companies such as LX Pantos only have enough DEF supply to last about another week, according to industry sources on Nov. 4.

“The inventory will be completely exhausted from the middle of this month but for now we don’t have any way to secure the stock,” said one of the sources.

The shortage is expected to disrupt operations of the country’s major manufacturers such as Samsung Electronics Co., LG Electronics Inc. and Hyundai Motor Co. since they rely on those logistics companies for domestic cargo transportation.

“We are closely watching the situation since it could cause a logistics crisis when year-end demand is growing, especially during the Korea Sale Festa,” said an LG Electronics source, referring to the largest shopping event in the country from Nov. 1 to Nov. 15.

The petroleum industry is also on alert since four refiners in the country were down to just about one month of DEF supply. About 2,000 tank lorries of those refiners may stop next month and gas stations across the country will not be able to supply fuels in the worst-case scenario.

Steelmakers are not free from the shortage since large trucks carry products for domestic customers. Some steelmakers are known to be considering supplying products in advance, before it's too late and those trucks are unable to move.

Potential disruption in container transportation on land is predicted to add to pressure on the shipping industry, which has been suffering from a shipping cargo crisis.

“If the DEF shortage lasts more than a month, exports will be affected since the crisis will interrupt operations of container trucks,” said a shipping industry source.
A truck stops at a gas station in South Korea to replenish diesel exhaust fluid, but a lubricator for the liquid has been turned off due to the supply shortage
A truck stops at a gas station in South Korea to replenish diesel exhaust fluid, but a lubricator for the liquid has been turned off due to the supply shortage

TIME IS NOT OUR FRIEND

The retail and e-commerce sectors are facing more imminent threats than other industries.

“It is hard to withstand the situation even for a week,” said a source at a major online shopping mall operator as the sector heavily relies on individual truckers who have much less DEF stock than logistics firms.

Another industrial source expected deliveries to customers to be disrupted in a week or ten days if DEF supplies cannot come through.

Hypermarkets such as E-Mart Inc. shared such a dismal prediction.

“Display stands could be empty in about the next ten days,” said a logistics manager at a large retailer. “It is not an issue for individual companies to solve, so the government needs to immediately take action. Time is not our friend.”

Since the European emission regulations have been tightened, diesel engines vehicles in South Korea produced and imported since 2016 must be equipped with selective catalytic reduction (SCR) systems that require DEF. Diesel-powered vehicles emit nitrogen oxide when they run without DEF. So, carmakers design cars not to start when the aqueous urea solution is insufficient. In South Korea, 2 million cargo trucks use diesel, which is much cheaper than gasoline.

DEF is made with urea and deionized water. South Korea’s DEF producers such as Lotte Fine Chemical, Hu-Chems Co. and KG Chemical import urea, mostly from China, and mix it with the water. South Korea relies on imports for all of its urea needs, importing about 66% from China. But those DEF producers were not able to procure urea as China blocked its overseas shipments by mandating export inspection of urea since Oct. 15.

“We signed an import deal with a Chinese producer, but it was blocked by the Chinese government’s export ban,” said an industry source. “The (South Korean) government must take direct action to solve the issue.”

South Korea ceased production of urea in 2011. It does not require complex technology to manufacture urea since it is made by adding carbon dioxide to ammonia. But from a price-competitive perspective, it hadn't made sense to produce urea in South Korea, compared to China and Russia where they produce coal or natural gas to extract ammonia.

Some argue that South Korea needs to build urea production facilities for stable supply in the longer term, but the local petrochemical industry does not agree.

“Given weaker price competitiveness than China, companies that set up urea factories will suffer massive losses if urea prices fall again,” said an industry source said.

DEF prices in South Korea surged as not only logistics companies and their contractors but also diesel cars drivers scrambled for the liquid.

Its prices, which had been about 10,000 won ($8.4) per 10 liters before, soared to around 100,000 won at some online shopping sites.

“Some individual truckers started avoiding long-distance routes,” said a logistics company source. “Even major logistics firms do not have enough DEF supply, so its impact is expected to widen to other industries pretty soon.”
Cargo trucks line up to replenish diesel exhaust fluid at a gas station in South Korea
Cargo trucks line up to replenish diesel exhaust fluid at a gas station in South Korea

GOVERNMENT MEASURES

The government is seeking measures to ease the DEF shortage, including diversification of its supply sources to include other countries such as Russia. But the supply crisis is likely to continue unless China resumes its exports, industry sources said.

South Korea is trying to deal with the Chinese government.

“Through various diplomatic channels between Korea and China, we continue to express our requests to China, such as faster inspection process for urea exports,” said Choi Young-sam, spokesperson for the Ministry of Foreign Affairs. “The diplomatic missions in China, including the embassy, are supporting our requests for smooth urea inspections and rapid shipments of contracted products.”

Another foreign ministry official also said the government conveyed the concerns of South Korean companies to the Chinese government.

Last year, South Korea bought 552,420 tons of urea from China, 66.1% of its total urea imports, according to the customs data.

The Ministry of Trade, Industry and Energy plans to use urea earmarked for industries such as steel and cement and convert it for use in the transportation sector. The Ministry of Environment is also reviewing technology for the conversion.

Plants for steel and cement, as well as power plants, use DEF to reduce nitrogen oxide.

Those sectors, however, said the measure is a mere stopgap. DEF is currently insufficient for the logistics industry, but the lack of the liquid in other sectors could lead to more serious troubles such as emissions from plants.

“We have stocks of DEF for industrial use, but they are not sufficient,” said a source at a power plant. “It won’t have an immediate impact on us if we convert it to DEF for vehicle use, but we may have problems in the long run.”

Write to Kyung-Min Kang, Jeong Min Nam, Dong-Hui Park, Eu-Jin Jeong and Young Chan Song at kkm1026@hankyung.com

Jongwoo Cheon edited this article.

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