Korea needs to urgently diversify urea imports: Experts

Urea Solution [Photo by Yonhap]

Just two years after the global urea supply chain’s ‘urea crisis’ in 2021, China has again blocked urea exports to South Korea, triggering concerns about another supply shortage in the Korean market. Despite the Korean government’s pledge to reduce the country’s dependence on China for urea imports, its dependence on Chinese urea has actually grown over the past two years. Experts are calling for fundamental measures to be taken to reduce dependence on China, particularly as the supply chain crisis deepens.

China’s latest blockage of shipments of urea coming to Korea during the customs clearance process in late November 2023 is allegedly due to internal issues with urea supply in the country. Analysis suggests that China reduced its export volumes to other countries as India, a major player in the urea market, snapped up urea from major supplier countries worldwide.

Korean urea water solution companies heavily rely on Chinese urea. These companies import urea from China and other countries to produce urea water solution, which is mainly used to reduce nitrogen oxides emitted by diesel vehicles.

After the urea crisis in 2021, Korean companies tried to diversify their urea import sources, but turned to Chinese supplies again in 2023. According to the Korea Customs Service, China accounted for 91 percent of the country’s entire urea imports in 2023 to date. The share had dropped to 67 percent in 2022 but has increased sharply again due to the price competitiveness of Chinese urea compared to that of other countries including Vietnam and Australia.

The Korean government confirmed that the country currently has enough urea raw materials to produce urea water solution for about three months. Urea is only stockpiled for about three months because it loses its marketability after that period. In addition to private inventories, the country’s Public Procurement Service is also considering increasing its urea reserves.

Major Korean urea water solution companies, including LOTTE Fine Chemical Co. and KG Chemical Corp., are closely monitoring the developments in China. “Since last week, the Chinese government has taken measures to forcibly cancel shipments that were confirmed or even reserved for ships,” a KG Chemicals official said.

KG Chemical is in a precarious position as it is now unable to bring as much as 90 percent of its already purchased volume into Korea. Industry leader Lotte Chemical is also working hard to diversify its urea supply sources to include Russia and countries in Southeast Asia and the Middle East.

The Korean government is considering offering incentives to companies to encourage the diversification of urea supply sources. “After the last urea crisis, the government secured a channel to buy urea from countries excluding China, but as it turned out to be more expensive, companies are again relying on China,” a government official said. “We are considering structural solutions, including offering incentives.”

Experts also emphasize the need for fundamental measures to diversify urea import sources, including supporting the logistics costs incurred when companies import from other urea-producing countries such as Vietnam and Australia. “It is necessary to explore trade channels with urea producers other than China and consider supporting small and medium-sized enterprises by covering some of their costs when they import urea,” Kim Sang-bong, a professor of economics at Hansung University, said. “This way, Korea can avoid the recurring threat of China suspending urea exports.”

Concerns that China will increasingly use resources as a “weapon” are also growing, as there have already been several attempts by China to disrupt global supply chains centered on urea and graphite. “There is a high possibility that protectionist trends related to rare resources will continue,” noted Kim Jeong-sik, professor emeritus of economics at Yonsei University. “Especially as the trade relationship between Korea and China has shifted from complementary to competitive, Korea needs to develop countermeasures to manage trade risks with China.”