What is urea and AdBlue, and why does a worldwide shortage threaten Australia’s supply chain?

You may have never heard of urea, but the worldwide shortage 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 the diesel ­exhaust fluid AdBlue and a large component in fertiliser. The main reason for the shortage is that China, which previously supplied 80% of Australia’s urea supplies, has banned export of the product. That’s because the cost of fertiliser has skyrocketed and China wants to slow that 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 could also lead to higher food prices at the register. So what is urea and how badly could the shortage impact Australia’s supply chain?

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What is it?

Urea is a handy, naturally occurring chemical compound – CO(NH2)2, also known as carbamide – that is found in mammalian urine, among other places.

Since 1828, when the German chemist Friedrich Wohler developed a process to synthesise the compound, urea has also been produced in bulk for human uses.

These include as an agricultural fertiliser, but also to reduce nitrous oxides produced in combustion engines.

What is it made from?

The main feedstock for the world’s urea production is gas, which is first converted to ammonia under high temperatures and pressure, and then into liquid urea.

Global urea production is about 220m tonnes a year. According to Volker Hessel, a professor at the University of Adelaide, Australia’s largest producer, Incitec Pivot, has a capacity of about 290,000 tonnes a year, or one-800th of the total.

That company told the stock exchange last month it plans to close its main urea plant in Brisbane’s Gibson Island by the end of next year. The facility had been unable to secure “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 determine the viability of making so-called green ammonia using hydrogen at scale as the substitute feedstock for fossil gas.

What’s the problem?

Demand and supply shifts have contrived to push up fertiliser prices by about threefold in a year, according to the World Bank.

“High fertiliser prices could exert inflationary pressures on food prices, compounding 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 agriculture analyst at RaboResearch, says if anything the fertiliser prices were responding at first to a surge in demand for wheat, soya beans and corn.

Farmers eyeing high prices for those crops see it as a good bet to toss on more fertiliser to glean higher returns.

Economies juiced up for Covid also pushed up demand for gas, while Hurricane Ida – the second-strongest tropical storm on record to come ashore at Louisiana in the US – last August triggered the suspension of key refineries, adding to fertiliser shortages.

Big fertiliser producers have also been responding by curbing trade. China, which accounts for about one-10th of urea and one-third of another important farm input of diammonium phosphate, closed off exports until next June to ensure local farmers have enough supply. And Russia has curbed fertiliser exports for six months.

Road transport concerns

It’s not just a worry on the farm.

Urea supplies also disrupt the availability of a diesel exhaust fluid – AdBlue is its trade name – a refined additive caught up in the China trade block.

The National Road Transport Association is among the groups trying to get action from the Morrison government to secure supplies.

The association’s head, Warren Clark, has called for the creation of a taskforce of industry groups to obtain alternatives. While the use of the fluid is meant to reduce production of nitrous oxides, newer diesel engines don’t function well without it.

“In most of the modern diesels, there’s a chemical added to the system called AdBlue,” Clark told the ABC.

“A lot of the AdBlue, or the chemical that goes into making it, is imported from China.

“The supply of that chemical urea has dried up from China. And hence, there’s now a massive shortage of AdBlue In this country.”

“Our industry isn’t the only one that will be affected, but we will be hit first and hardest,” Clark said. “These issues go beyond NatRoad and the trucking industry.”

What happens next?

RaboResearch’s Lefroy says Australia imports about 90% of its urea-based fertilisers, and of that about two-thirds comes in between March and July, before they are used on winter crops.

“There’s very little urea being traded in Australia at the moment just because we’re in summer,” he said, adding that the pinch, if there is one, won’t be felt until next year.

Depending on the soil health, farmers can also turn to other fertiliser if urea is not available or plant crops such as legumes that require less fertiliser to start with.

Rabobank’s global research points to fertiliser shortages as just one of several factors pointing to high prices for many farm commodities into 2022.

“The prices of grains and oilseeds like wheat and corn, food staples coffee and sugar, and key inputs such as palm oil, will all continue at high prices,” it said in a report last week.

“The bank expects many food processors to support any significant drop in prices by extending commercial hedges to historical averages and by stockpiling more, enabling them to weather some of the broader global volatility.”

Hessel from the University of Adelaide says the problem underscores the tight interconnections, with the shortage of just one key ingredient affecting the whole supply chain.

Eventually, hydrogen offers an alternative to gas as the fuel stock, taking out a significant source of greenhouse gases in the process.

“Those plants will take five, six, seven years until they are operational – those plants will be investments of billions [of dollars],” Hessel said. “That is not something you build overnight.”

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