South Korea, reliant on China for its import supply chain, faces renewed concerns as China unexpectedly halted the customs clearance for exporting vehicle-use urea. This move has sparked panic buying in South Korea and raises questions about the role of political dynamics in this decision.
On Nov. 30, the Chinese Customs Administration abruptly suspended the export of vehicle-use urea solutions to major South Korean companies. This decision affected urea solutions that had already passed export reviews, but were halted during loading, impacting Chinese subsidiaries of South Korean firms.
The South Korean government, through various channels, asserts that this delay stems from domestic supply issues in China and is not politically motivated. Despite having a three-month domestic supply of vehicle-use urea, South Korea remains cautious. Past experiences, particularly the 2021 “urea shortage” triggered by similar export restrictions from China, prompt concerns about potential long-term implications and the need for countermeasures.
Vehicle-use urea, essential for reducing nitrogen oxide emissions in diesel vehicles, is a significant industrial product. South Korea, with around 10 million diesel vehicles, including two million trucks, heavily depends on this solution.
Persistent Dependency on China for Urea Imports Triggers Market Panic
Despite past disruptions, South Korea’s reliance on China for vehicle-use urea remains high, leading to market instability and wider societal impact.The 2021 export restrictions by China precipitated a significant urea shortage in South Korea, adversely affecting not just the logistics sector but also essential public services like firefighting, ambulance operations, environmental management, and even agriculture, thereby destabilizing agricultural product supplies.
From January to September 2021, a staggering 97.6 percent of South Korea’s industrial urea was imported from China, with company stocks lasting a mere two to four weeks.
After the 2021 “urea crisis,” efforts to decrease reliance on China have been modest. Korean Customs Service data reveal that while the proportion of industrial urea imported from China dropped to 71.7 percent in 2022, it climbed back to 91.8 percent in the first 10 months of 2023. From January to July 2023, South Korea imported 196,000 tons of urea from China, ranking as the second-largest urea importer globally, behind India.
In response to the 2021 shortage, South Korean corporations broadened their urea import sources to countries such as Qatar and Vietnam. However, the allure of China’s competitive pricing and quality saw a return to Chinese imports.
The Korean Ministry of Trade, Industry, and Energy acknowledges the challenges in diversifying import sources, especially as Chinese urea is cheaper and of higher quality compared to Southeast Asian alternatives. Smaller importing companies, in particular, face difficulties in diversifying due to cost and logistical considerations.
China, as the world’s largest urea producer and consumer, typically experiences a consumption off-season in the fourth quarter. However, the year 2023 saw a notable increase in domestic urea prices, leading to an atypical consumption pattern. On Nov. 17, major Chinese fertilizer groups and companies emphasized prioritizing domestic sales.
Implications on South Korea’s Economy and Trade Relations
The CCP’s decision to halt vehicle-use urea exports to South Korea raises serious concerns about long-term import limitations and the possibility of another “urea crisis.” This fear has triggered panic buying in South Korea, with instances of stock shortages and rationing measures being reported.For instance, Lotte Fine Chemical’s EUROX, a major player in South Korea’s vehicle-use urea market, has restricted purchases to one unit per person every 30 days on its official online store. In addition, Opinet, South Korea’s Oil Company website, reported that 91 gas stations nationwide had exhausted their vehicle-use urea supplies.
In response to the growing concern, the South Korean government, through the Ministry of Economy and Finance, has decided to double its public urea reserve and is considering support measures for companies importing from alternative sources. The government is also discussing purchase limits to prevent temporary shortages.
The South Korean government has expressed concern over the CCP’s actions, emphasizing the potential negative impact on supply-chain cooperation. It advocates for the activation of dialogue channels and timely information sharing on supply disruptions between the industrial sectors of both countries.
Despite the lessons from the previous “urea chaos,” South Korea’s response to its dependency on China for urea imports remains largely unchanged two years later. This has led to public criticism of the government’s ineffective diversification efforts and calls for expedited action to diversify the import supply chain.
South Korean media have also weighed in on this issue. An editorial from the Korea Daily News criticizes the CCP’s unilateral urea export restrictions, highlighting the resultant erosion of trust in the supply network.
The editorial points out the broader implications for South Korea, which depends on China for critical raw materials like semiconductors and secondary batteries. It emphasizes the need for China to strengthen its trade system to be predictable and reliable, in light of South Korea’s efforts to diversify its supply chain for economic security.
Strategic Industries Grapple with Dependency on China Amid Growing Supply-Chain Concerns
South Korea’s reliance on China extends far beyond urea, encompassing crucial sectors like semiconductors, batteries, and electric vehicles. This dependency has been brought into sharp focus as China, amid escalating tensions with the United States, started to control exports of vital materials.From early December, the CCP initiated export controls on graphite, a critical component in electric vehicle battery anode production. This follows earlier restrictions on exports of gallium and germanium-related products, essential in semiconductor manufacturing, which began in August. These moves have heightened South Korean apprehensions about China potentially expanding its export restrictions to other crucial minerals.
Data from Kim Sungwon, a member of South Korea’s ruling People Power Party, shows a stark dependence on China for essential imports. As of October, of the 393 “absolutely dependent” import items (each valued over $10 million) with over 90 percent reliance on specific countries, 216 items (55 percent) originate from China.
In the battery core mineral supply chain, South Korea’s reliance on China is particularly pronounced. It includes 93.3 percent dependence on synthetic graphite, 82.3 percent on lithium oxide and lithium hydroxide, 96.7 percent on lithium salts of nickel cobalt manganese oxide, and 96.6 percent on nickel cobalt manganese hydroxide.
For the first half of this year, China accounted for 79.4 percent of South Korea’s rare earth metal imports used in semiconductors, including yttrium and cesium. Similarly, China’s share in rare earth permanent magnets, vital for electric vehicle motors, was 85.8 percent. Furthermore, China’s contribution to semiconductor raw materials was significant, with 35 percent for silicon wafers, 81 percent for neon lights, 62 percent for hydrogen fluoride, 64 percent for xenon, and 43 percent for krypton.
Li Yuanhua, a China expert, views the urea incident as a crucial lesson for South Korea, suggesting that the CCP’s actions inadvertently push South Korea toward reducing its dependence. He believes that this situation is causing a shift in perception among those who were previously optimistic about the CCP, potentially leading to a broader societal awakening in South Korea.
“Only by fundamentally recognizing the CCP can we fundamentally adjust trade and economic policies to avoid being controlled by the CCP,” he emphasized.
