You may have never heard of urea, but the worldwide lack of the chemical compound could bring Australia’s supply chain to its knees in a matter of weeks.
The world is facing a major shortage of the compound, a key ingredient found in diesel exhaust and a major component in fertilizers.
The main reason for the shortage is that China, which previously supplied 80% of Australia’s urea supplies, has banned exports of the product. This is because the price of fertilizer has risen and China wants to slow down this price growth.
But this could inadvertently force many of Australia’s trucks off the road as urea is injected into the exhaust systems of modern diesel vehicles to reduce emissions, which is a requirement for trucks, private vehicles and tractors.
The shortage can also lead to higher food prices on the land register.
So what is urea and how much can the shortage affect Australia’s supply chain?
What is it?
Urea is a practical, naturally occurring chemical compound – CO (NH2)2, also known as carbamide – which is found in the urine of mammals, among other things.
Since 1828, when the German chemist Friedrich Wohler developed a process for synthesizing the compound, urea has also been produced in bulk for human use.
These include as agricultural fertilizers but also to reduce nitrous oxide produced in internal combustion engines.
What is it made of?
The most important raw material for the world’s urea production is gas, which is first converted to ammonia under high temperatures and pressures and then to liquid urea.
Global urea production is around 220 million. tons per year. According to Volker Hessel, a professor at the University of Adelaide, Australia’s largest producer, Incitec Pivot, has a capacity of around 290,000 tonnes a year, or 800 per cent of the total.
This company told the stock exchange last month that it plans to close its main urea plant on Brisbane’s Gibson Island by the end of next year. The plant had not been able to ensure “an economically viable long-term gas supply”.
Instead, it will rely on its international supply chains to replace the manufactured product, at least until it can establish the viability of producing so-called green ammonia using large-scale hydrogen as a substitute for fossil gas.
What’s the problem?
According to the World Bank, shifts in demand and supply have helped push up fertilizer prices by about three times in a year.
“High fertilizer prices could put inflationary pressures on food prices, exacerbating food security concerns at a time when the Covid pandemic and climate change are making access to food more difficult,” the bank said in a post.
Wes Lefroy, a senior agricultural analyst at RaboResearch, says about something that fertilizer prices first responded to an increase in demand for wheat, soybeans and corn.
Farmers who see high prices for these crops see it as a good bet to throw more fertilizer on to achieve higher yields.
Economies boosted by Covid also pushed up demand for gas, while Hurricane Ida – the second-largest tropical storm ever to land off Louisiana in the United States – triggered the suspension of major refineries in August last year. increased shortage of fertilizer.
Large fertilizer producers have also reacted by restricting trade. China, which accounts for about a tenth of urea and a third of another major agricultural input of diammonium phosphate, closed off exports until next June to ensure local farmers have adequate supplies. And Russia has slowed fertilizer exports for six months.
Concerns about road transport
It’s not just a concern on the farm.
Urea supplies are also disrupting the availability of a diesel exhaust fluid – AdBlue is its trade name – a refined additive trapped in the Chinese trading bloc.
The National Road Transport Association is among the groups trying to get action from the Morrison government to secure supplies.
The association’s leader, Warren Clark, has called for the creation of a task force of industry groups to provide alternatives. While the use of the fluid is intended to reduce the production of nitrous oxides, newer diesel engines do not work well without it.
“In most modern diesel engines, a chemical called AdBlue has been added to the system,” Clark told ABC.
“Much of the AdBlue, or the chemical involved in the manufacture, is imported from China.
“The supply of the chemical urea has dried up from China. And therefore there is now a massive shortage of AdBlue in this country.”
“Our industry is not the only one that will be affected, but we will be hit first and hardest,” Clark said. “These problems are affecting NatRoad and the truck industry.”
What happens next?
RaboResearch’s Lefroy says Australia imports about 90% of its urea-based fertilizers, of which about two-thirds come in between March and July before being used for winter crops.
“There is very little urea being traded in Australia at the moment just because we are in the summer,” he said, adding that the squeeze, if any, will not be felt until next year.
Depending on the health of the soil, farmers may also turn to other fertilizers if urea is not available, or plant crops such as legumes that require less fertilizer to begin with.
Rabobank’s global research points to fertilizer shortages as just one of several factors pointing to high prices for many agricultural products into 2022.
“Prices of cereals and oilseeds such as wheat and maize, raw materials for coffee and sugar and important raw materials such as palm oil will all continue at high prices,” a report said last week.
“The bank expects many food producers to support any significant price drop by expanding commercial hedges to historical averages and by storing more, enabling them to cope with some of the broader global volatility.”
Hessel from the University of Adelaide says the problem underscores the close links where the lack of just one key ingredient affects the entire supply chain.
Ultimately, hydrogen offers an alternative to gas as fuel storage, eliminating a significant source of greenhouse gases in the process.
“The plants will take five, six, seven years before they become operational – those plants will be investments for billions [of dollars]said Hessel. “It’s not something you build overnight.”