A Myriad of Factors Affect the End Cost of DEF
In 2010, the EPA created a mandate that all medium and heavy duty vehicles were required to reduce emissions (most notably NOx) by incorporating diesel exhaust fluid, or DEF. DEF is a non-hazardous solution consisting of a 32.5% urea and 67.5% de-ionized water that is injected into the exhaust stream of diesel engines with model years 2010 and later. It breaks down harmful NOx emissions into harmless nitrogen and water vapor. As the prices for raw materials used in the manufacture of DEF – primarily urea – rise and fall, increases in cost are felt along the entirety of the supply chain, eventually absorbed by the end user. In this article we explore the various factors and circumstances that impact DEF pricing and the how fluctuations of these factors will ultimately impact your bottom line over the coming months.
What’s Behind Changes in DEF Pricing
Many factors contribute to the rise and fall of pricing for the various grades of urea. It is important to understand that worldwide, urea is primarily used as a fertilizer, which requires a much lower quality of urea than the manufacture of DEF, requiring urea in higher, cleaner, and more pure forms. Urea is recognized by grade – agricultural, technological, DEF and pharmaceutical, and as you go up the chain from ag to pharma, the slice gets thinner and thinner, becoming more of a boutique product that demands a higher price due to its level of purity. The overall urea market is driven by agricultural urea, and agricultural urea therefor controls the NOLA index, which impacts the price of DEF – a very small slice of the overall pie. Much like the Nasdaq, the S&P 500 and the Dow Jones Industrial Average, when it comes to urea, DEF manufacturers look to NOLA, an acronym for “New Orleans and Louisiana,” as one of the primary indexes for tracking the price of urea as a commodity. But the NOLA isn’t the be-all-end-all snapshot of the urea market.
Contributing Factors to the DEF Market Increase
Whether referencing such contributing factors as the increasing costs for global shipping, the impact of natural disasters, higher prices on packaging, or the pressures of trade tariffs, understanding current and future urea and DEF pricing is a complex issue. Below we have outlined the top contributing factors for why the market continues on an upward trajectory:
Supply and Demand
In the United States, the bulk of urea is manufactured on the east coast, and to a very limited degree on the west coast, which results in west coast markets having to rely heavily on imports from China and other countries. Ironically, the cost to ship overland from coast to coast is expensive and cost prohibitive, so China has traditionally been the largest manufacturer and exporter of urea to west coast markets. In response to recent environmentally motivated changes brought about by the global community that are now being enforced by the Chinese government, the country has decommissioned multiple high producing urea factories near heavily populated urban centers. The closing of these urea plants caused a ripple in the supply chain that impacted west coast markets by significantly decreasing the amount of urea being produced. At the end of 2016, China exported over 15 million metric tons of urea with a large percentage of that volume going to the US. At the end of 2018, it is estimated that China will have exported roughly only 3 million metric tons. With exports so drastically diminished, the global price of urea is steadily increasing, especially in regards to “boutique” urea grades, such as DEF grade urea. With China closing so many of its urea plants, other countries such as Russia, Nigeria and India have seen this as an opportunity to expand their own domestic production while snagging a piece of the global market share. Nigeria is in the process of developing two urea plants, and India one, all three of which are slated to come online at the end of 2019. When these costly new plants open, there will be more urea available on the market, but until then, prices will most likely continue to rise.
In September of 2018 President Trump hit China with $200 billion in tariffs. A first list of tariffed items did not initially include urea, but the second round did, which took everyone who relies on urea as a commodity by surprise, sending them scrambling to accommodate supply and demands needs. As a result of urea’s inclusion, there were both psychological and fiduciary impacts from the 10% tariff, which raised the price for a metric ton of urea significantly and caused dramatic spikes in NOLA. From the time of the tariff announcement, suppliers had very little time to alert customers as to the coming price increase, and adding insult to injury, 2 devastating typhoons locked up supply within crippled ports for weeks. When the supply was finally released, it was slapped with the new tariffs, all of which is now being felt by suppliers and end consumers.
Two class-5 super typhoons – Jebi in August and Mngkhut in September – both slammed into ports across southeast Asia, including Hong Kong and multiple Chinese sea ports, further impacting urea and DEF pricing. With the ports crippled, supply was not able to be transported in less than 30 days. Besides being delayed in general, all of the retained product was then hit with new tariffs, causing major problems for suppliers on the west coast, and moreover, raised urea prices globally.
When the rhetoric around pending tariffs began to circulate, shipping lines arbitrarily increased the cost of urea imports from China to the west coast for no apparent reason except to capitalize on the extremely high volume of cargo trying to beat the tariff implementation. In August of 2018, shipping containers filled with urea prills – the pelletized version of congealed urea into a solid substance – cost between $800-$900. With talk of pending tariffs, shipping rates jumped to $1,300 per container. When the typhoons hit and backlogged supply significantly, the price per container jumped again to $1,800. An unsavory pricing situation went from bad to worse as yet another factor completely unrelated to the urea market impacted DEF pricing.
Ironically, it costs less to ship urea via container vessel from China to the east and west coast, than it does to ship domestically over land due to the high price of diesel and handling. This may change, however, as supply from China continues to decrease, making the transcontinental shipment of urea if not viable, then at least comparable to overseas shipping. In general, the fewer points of handling in between manufacture and the end buyer, equates to lesser transport costs overall, which may eventually lead to more domestic urea production and shipping in the future.
A lesser-considered factor in the escalation of DEF pricing is the increasing cost of plastic for making jugs and drums. Although not directly tied to the manufacture of urea, this is another example of how an entirely separate product can indirectly impact the DEF market. The resin and plastics markets have been steadily rising and the price of jugs has gone up 10%. On the west coast, there are minimal plastic producing operations, with one of the largest manufacturers recently halting DEF jug production altogether. Other plastic jug manufacturers are struggling to sustain the supply gap left by the now closed factory, and they are faced with increased machine uptime, which carries its own associated costs. A lot of plastic jugs are now being made on the East Coast, but shipping is astronomical because a long haul truck will max out in space long before it will max out in weight when shipping hollow plastic jugs and drums. In essence, you are basically shipping air across the country, which costs money in fuel and driver time.
The Bottom Line
More pressures on the supply chain continue to escalate urea and DEF pricing globally, pushing manufacturers to pass this along to the end user because it’s impossible to continually absorb. Prices will continue to increase until they eventually stabilize again, which will most likely be as a result of new urea plants opening in countries like Nigeria and India. Currently, most urea plants are not equipped for manufacturing urea, so existing plants will have to undergo costly upgrades to adequately process high quality, DEF grade urea. This will also ultimately affect DEF pricing, but it is essential to maintain high standards of quality. Knowing that your DEF comes from a reputable source is important, where the product has been sufficiently processed as an import and adequately tested for optimal purity.
Contact an SCL Consultant Today
As a solutions and logistics provider for a wide range of industry sectors, we recognize that fluctuations in price for a critical product such as DEF will impact your business’s bottom line. As a result, we will make every possible effort to help mitigate the impact, as well as try to deliver an understanding as to why it’s happening. At SCL, we are committed to providing our customers with the highest quality products and outstanding customer service at competitive prices, so please don’t hesitate to call an SCL consultant for information on how we can support you in maneuvering a DEF price increase.