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Urea crisis not over; battery, chip supply chains at mercy of China

Seoul struggles to find alternative source of diesel exhaust fluid, but no immediate solution in sight

A truck is being refilled with diesel exhaust fuel. (Yonhap)
A truck is being refilled with diesel exhaust fuel. (Yonhap)


While desperately searching for alternative sources of urea, a key ingredient for a liquid solution essential for diesel vehicles, South Korea is forced to reexamine its reliance on China for other materials and realize the need to preemptively respond to supply chain risks.

The country’s supplies of diesel exhaust fluid are currently at dangerously low levels after Chinese authorities last month imposed a de facto export ban on DEF, an emissions control solution without which diesel cars cannot run. Korea imports 97 percent of the product from China.

To address the shortage, Finance Minister Hong Nam-ki on Sunday held a meeting on external economy and security to discuss various options such as importing DEF from other countries or using industrial DEF for cars.

While no immediate solution appears to be in sight, industry officials and experts are already pointing to similar risks lurking in the supply chains of key raw materials such as lithium and magnesium.

Among 12,586 items Korea imported between January to September, 3,941 products were from a single country, data from the Korea International Trade Association showed. In the same period, 100 percent of magnesium imported here, 94.7 percent of tungsten oxide, and 83.5 percent of lithium hydroxide came from China.

Upon Korea’s fragile single-source supply chain, domestic auto, electronics, retail and construction industries have expressed concerns, fearing that what Korea is now experiencing with diesel exhaust fuel could happen with magnesium or other materials at any time.

China has tightened its grip on DEF exports because the world’s No. 2 economy is struggling to meet its own demand.

Urea, a key raw material of DEF, is made with ammonia extracted from coal. However, China is currently suffering an unprecedented coal shortage, after the country stopped coal trade with Australia in the aftermath of recent trade disputes. As a result, China, in a massive power crunch, doesn’t have coal for other purposes. To reduce coal consumption, China wants to produce just enough DEF to satisfy its domestic needs.

Already, China is limiting the production of magnesium, and Korea is taking a direct hit, an industry source said.

“The price of magnesium, which stood at around 3,000 won ($2.5) earlier this year, soared to 12,000 won recently. We are watching closely whether China would include magnesium in its export ban to meet domestic demand,” said a domestic aluminum manufacturer who declined to be named.

China accounts for 90 percent of the world’s magnesium supplies and Korea imports 100 percent of the metal from the country. Magnesium can increase the tensile strength of metal products while reducing their weight. It’s a key raw material that goes inside steel plates for cars, construction materials, consumer electronics and IT gadgets.

Korea’s electric vehicle battery industry, which controlled almost 35 percent of the global market in the January-September period, is also caught in the crosshairs of China’s supply chain control.

In the first nine months this year, Korea imported 83.5 percent of lithium hydroxide from China. Lithium hydroxide is a type of lithium that goes inside lithium-ion batteries for premium EVs that travel long distances. As Korea’s battery trio -- LG Energy Solution, Samsung SDI and SK On -- focuses primarily on high-performance lithium-ion batteries, China’s grip on lithium hydroxide comes as a pressure, sources say.

“Though lithium hydroxide is supplied via long-term contracts, should China suddenly stop exports like DEF, complications in production are inevitable,” a battery industry source said.

The semiconductor industry remains vulnerable as well. Korea imports 81.2 percent of photoresist -- a liquid solution used to draw patterns on chips -- from Japan. Also, 94.7 percent of tungsten oxide, a material for making chips, is imported from China.

“Diversifying sources is the basics of supply chain management in case of emergency, but Korea relied too much on its neighbor China,” Ahn Duk-geun, a professor at Seoul National University, said.

“As global supply chains remain fragile due to the US-China trade conflicts, unexpected supply chain crisis, as witnessed by DEF, will occur more frequently.”

By Kim Byung-wook (kbw@heraldcorp.com)
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