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Supply chain

Urea crisis lays bare South Korea’s heavy dependence on China

Intensifying China-US rivalry, climate challenges and other global uncertainties could derail Korea's economic recovery, experts warn

By Nov 14, 2021 (Gmt+09:00)

Cargo trucks line up to replenish diesel exhaust fluid amid the DEF shortage crisis in Korea.
Cargo trucks line up to replenish diesel exhaust fluid amid the DEF shortage crisis in Korea.

The diesel exhaust fluid crisis hitting South Korea across various industries lays bare the supply chain vulnerability of the country, which has heavily relied on its neighbor, China, for key industrial raw materials.

According to the Korea International Trade Association on Sunday, Korea’s imports of tungsten oxide, calcium hydroxide and manganese hydroxide, base materials used to make precursors, a battery component, totaled about $2 billion in the first nine months of the year. Of the imports, about 92.8% came from China.

Over the same period, Korea imported 63.9% of its cobalt oxide, another raw material used to make a battery component called cathode, from China, while China accounted for 67% of Korea’s imports of synthetic graphite, a raw material for anode, another battery material.

“Producing such raw materials for rechargeable batteries is quite labor-intensive and generates pollutants such as wastewater in the process. It’s much cheaper to import them from China rather than making them in Korea,” said a battery industry official.

“The problem is that if and when China cuts off its export line, battery material makers in Korea have no other choice but to stop all their plants, which in turn affects battery companies.”

The situation isn’t much different for other Korean industries such as steel, automobiles, semiconductors and petrochemicals.

Korea’s overall imports of silicon carbide, a raw material used to make a semiconductor material called oxide film, reached $486.1 billion in the first nine months of the year, of which 72.2% came from China.

Korea’s dependence on China for the import of chip wafer-producing raw materials such as gallium, germanium and beryllium reached 60.9% in the same period.

China also accounts for nearly half of Korea’s imports of ethylene, a base stock widely used in the chemical and petrochemical industries.

“It’s the price. Chinese ethylene is much cheaper than buying that made in Korea. It’s that simple,” said an official at a Korean petrochemical company.

The urea crisis affects other industries such as autos, steel and semiconductors.
The urea crisis affects other industries such as autos, steel and semiconductors.


KOREA’S GROWTH STRATEGY

Kim Bong-man, head of the international affairs department at the Federation of Korean Industries, a lobbying group for Korea’s big conglomerates, said the Korean economy’s growth strategy has long been based on value-added, high-end products, taking advantage of China’s cheap labor and readily available raw materials.

“The recent urea crisis shows how vulnerable Korea’s raw material supply chain is, given its heavy reliance on China,” he said.

Since mid-October, China has imposed restrictions on exports of urea solution, normally a cheap and easy-to-purchase substance used to reduce carbon emissions in diesel vehicles such as trucks.

The ban has created chaos among diesel car owners, including truck drivers, who have been desperate to secure the diesel exhaust fluid (DEF) amid rapid price gains.

Korea imports almost all its DEF needs from China.

Amid depleting supplies, the Korean government has taken measures, striving to buy the material from other countries, as the shortage of the liquid is feared to hurt growth in Asia’s fourth-largest economy.

Local DEF inventories have rapidly dwindled, stoking fears that it could disrupt not only the supply chain but also major industries, including the electronics, automobiles, refining and steel sectors, the core growth engines of the economy.

Last year, South Korea imported 80,000 tons of urea, an amount sufficient to produce around 240 million liters of urea solution for diesel cars. The country requies 600,000 liters of urea solution per day.

The government is urged to better manage its procurement of raw materials.
The government is urged to better manage its procurement of raw materials.


SUPPLY CRUNCH MAY DERAIL ECONOMY FROM RECOVERY

Experts warn that the urea supply crunch not only deals a blow to Korea’s logistics industry but has far-reaching implications on the nation's economic recovery from the pandemic.

“The supply chain crisis is not just limited to urea solution. The supply network for raw materials and components in most domestic industries has been unstable since last year amid the pandemic,” said Lee Jun, a research fellow at the Korea Institute for Industrial Economics and Trade.

He urged the government to expand communication channels with companies for effective management of not just strategic materials such as rare earth but also base raw materials widely used across industries.

Experts have also called on the government to seek measures to help Korean firms produce key materials domestically, such as giving subsidies, rather than focusing only on price competitiveness.

The intensifying rivalry between China and the US, climate challenges and other global uncertainties could easily derail the Korean economy from its recovery path, they said.

Write to Kyung-Min Kang, Jeong-Min Nam and Su-Bin Lee at Kkm1026@hankyung.com

In-Soo Nam edited this article.

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