South Korea could potentially see a large number of diesel-fueled vehicles become non-operational within the next two-three months due to a severe shortage of diesel exhaust fluid, after China drastically reduced its production and exports in an effort to save coal for power usage.
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The world's ninth biggest energy consumer has been grappling with a lack of diesel exhaust fluid, also known as urea water solution, for the past few weeks after Chinese authorities banned exports of the product as they try to reduce coal consumption amid a power crisis, industry sources with direct knowledge of the matter told S&P Global Platts.
The South Korean government is currently in close discussions with China and other DEF producer countries to swiftly bring in more supplies, a senior official at the foreign ministry said.
However, industry sources have said that China may struggle to supply adequate volumes of DEF as it wants to produce less of the liquid solution, which uses ammonia extracted from coal as a raw material.
"The trade tensions between China and Australia have had an adverse effect on South Korea ... with China suffering from a severe shortage of coal [due to the cutoff in Australian coal trades], it may not be able to supply as much DEF as before," said a market research analyst at the Korea Oil Station Association.
DEF is used to reduce emissions in diesel engines. Diesel-powered vehicles in South Korea are required to refill it every 300-400 km, and the country currently has roughly two-three months of stocks available at best, according to sources at Korea Oil Station Association and middle distillate marketers at major refiners, including S-Oil Corp.
South Korea stopped producing DEF around a decade ago as it was seen as a low value product and as it became much cheaper to import DEF than producing it, industry sources said.
South Korea has been relying on China for more than 90% of its DEF requirements. Seoul must step up its diplomatic efforts to secure adequate supply from China, as well as other supply sources including Russia, Qatar and Japan, said the sources at Korea Oil Station Association and major refiners.
The presidential office Cheong Wa Dae has launched a task force to tackle supply shortages of urea water solution, The Korea Times reported.
"We will establish a comprehensive response system like we have for material, components and equipment sectors so that we can utilize various channels to check cooperation in industrial and logistics communities, and diplomatic efforts with urea production countries, like China," Park Soo-hyun, senior Cheong Wa Dae secretary for public communication, was quoted as saying by the newspaper.
South Korea's refinery runs and transportation fuel demand were on course to a full recovery to prepandemic levels, with the government aiming to shift to a phase of living with COVID-19 starting Nov. 9.
However, in a worst-case scenario when the country fails to secure enough DEF before the end of the year, diesel demand could tumble at least 30% year on year in the first quarter of 2022, according to middle distillate distributors and marketers at three major South Korean refiners surveyed by Platts.
South Korea consumed 13.85 million barrels of diesel/gasoil in September, a tad higher from 13.78 million barrels in the same month a year earlier and up 4.2% from 13.29 million barrels in August, showed latest data from state-run Korea National Oil Corp.
The country's diesel demand in the third quarter rose 1.6% year on year to 41 million barrels, the KNOC data showed.
South Korea currently has more than 4.13 million passenger cars and industrial cargo trucks equipped with DEF systems that need the liquid to be regularly refilled, according to sources and analysts at Korea Oil Station Association and Korea Petroleum Association based in Seoul.