The North American DEF market is expanding rapidly; it is now almost unrecognizable from the market that emerged four years ago. Business models have evolved, the supply network is developing quickly and legislation is making increasingly stringent demands on the U.S. and the wider North American market. Fabricio Cardoso, Editor of Integer research’s new ‘DEF Market Dynamics Report’ discusses the DEF market and the reasons behind its continuing growth.
By Fabricio Cardoso
Back in 2007, it became possible for medium and heavy-duty vehicles in the United States and Canada to be equipped with Selective Catalytic Reduction (SCR), a technology that would reduce harmful NOx emissions. This technology requires the use of Diesel Exhaust Fluid (DEF), a 32.5 wt% urea solution. In 2010, the Environment Protection Agency (EPA) introduced even more stringent requirements, which prompted widespread application of SCR throughout the truck market, with most manufacturers immediately implementing this technology into their product portfolio. Navistar was the only OEM that decided against adopting SCR at the time, but eventually converted before 2013 year-end. As of August 2014, almost all new medium and heavy-duty trucks and buses in North America are SCR-equipped.
With the wide adoption of SCR comes increased demand for DEF. Typically, DEF dosage requirements range between 3% and 5% of diesel consumption in trucks, with the exact rate varying according to the engine calibration, the after-treatment strategy, and the vehicle size and weight. With diesel consumption rising in the U.S. by 30% between 2007 and 2013 according to data from the Energy Information Administration (EIA), DEF consumption has been growing, but at a much faster pace as the share of vehicles requiring the urea solution is also increasing. Integer estimates that 15 to 20% of the current truck fleet in the United States meets EPA 2010 standards and is therefore equipped with SCR.
However, CO2 and fuel economy requirements will lead diesel and DEF to take different directions. Phase 1 of the fleet-wide CO2 compliance, already in place, and voluntary fuel economy standards, are already imposing engines to operate at optimal levels, requiring less diesel and producing less CO2. These operating conditions will have to be even more optimised when the fuel economy standards become mandatory in 2016 and when Phase 2 of the fleet-wide CO2 compliance is implemented by 2018.
Under these conditions, diesel consumption is likely to stabilize or even to decline over the next few years. But higher combustion temperatures and air intake in order to ensure better fuel combustion will result in higher NOx emissions, and therefore SCR will have to work harder to achieve the required emissions levels, which will result in increased DEF usage.
Even though heavier trucks are the main drivers for DEF consumption, pickup trucks, SUV models and other diesel passenger cars and light-duty commercial vehicles are increasingly taking up SCR, meaning that DEF requirements for these sectors are also rising. The diesel vehicle market for passenger cars in North America is marginal but expanding, as diesel cars allow better fuel savings than gasoline and as public opinion towards diesel turns more positive.
Another important sector consuming DEF is off-highway equipment, which consists of machinery used in the agricultural, construction, forestry and mining industries. Strict emission requirements for these machines have led to OEMs taking a similar approach to the truck market and making SCR the after treatment technology of choice. This has been particularly noticeable since 2013 when Tier 4 Final standards came into force in the region. DEF consumption from off-highway equipment is also likely to increase rapidly in 2017, when flexibility rules run out and total equipment production will have to meet Tier 4 Final standards.
DEF is subject to quality requirements that are stricter than for urea used in agriculture. Urea is mainly supplied from nitrogen plants located in the U.S. and Canada. The fact that two thirds of the product is made of water implies logistics has a strong influence on the final cost, which prompts the development of solutionizing facilities next to the main consumption markets. These facilities can produce DEF from concentrated urea solution coming from the same nitrogen plants or from domestically sourced or imported urea prills.
DEF supply formats have also been evolving since the product’s inception in 2010, when it was primarily available in jugs and drums and sold in OEM dealerships and truck stops, as well as in totes, small bulk storage containers of 275 or 330 gallons, which tend to become less important as the market progresses and bulk deliveries become more widespread. DEF is also now available from dispensing pumps at truck stops. Even if the pump network takes some time to develop because of the high investment required, the number of DEF pump locations tripled in two years, from 550 in mid-2012 to over 1,700 in June 2014, and is likely to continue growing as this number has not yet reached 5% of the total number of diesel filling stations in the region.
These supply formats have been following diverse pricing patterns. DEF prices from truck stops have remained stable over the last two years in region, with average state prices in the U.S. ranging between $2.60/gal and $2.95/gal during most of 2013 and most of the Canadian pumps selling DEF at CA$0.80/litre ($2.77/gal at August 2014 currency). On the other hand, bulk sales are much more volatile and dependent on urea prices and on the level of competition in a specific area.
The DEF supply chain is constantly evolving and is yet to reach maturity. Prices are still looking for direction in an environment that is heavily influenced by other markets including automotive, energy and agriculture. Finally, the regulatory framework set by the government for the different categories of vehicles and equipment is likely to ensure that for the foreseeable future, in North America, SCR and DEF are here to stay.
The information above is based on findings from ‘DEF Market Dynamics Report.’ This is a brand new report from Integer Research developed to bring industry players fully up-to-speed with DEF market developments that have occurred over the last four years. Covering legislation, DEF demand, supply and pricing, this report provides all the information market players need to make the most profitable business decisions and succeed in this fast-paced market. To find out more please email: [email protected]. or visit: www.integer-research.com/market-analysis/def-market-dynamics-report/.
Article written by Fabricio Cardoso, Senior Analyst at Integer Research and Editor of ‘DEF Market Dynamics Report’. Fabricio has several years’ work experience in fuels and biofuels quality, engines and emissions standards. He holds a degree in Chemical Engineering, an MSc in Transport and Sustainable Development and an MBA in Agribusiness.
