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DEF Prices Go Sky High

As with the price of lubricants since the start of the year, the price of Diesel Exhaust Fluid (DEF) has also increased significantly in 2021. In just the last two months alone, DEF prices have gone up over 40 cents a gallon. Higher transportation, packaging and distribution costs, and the skyrocketing price of urea (one of two components in DEF), are all contributing to increased pricing.
As shown in the graphic below, although there were ups and downs in the price of urea in 2019 and 2020, these fluctuations pale in comparison to the sharp increases seen in 2021. 
The year started with urea prices in the area of roughly $295 a ton, by the end of October prices reached close to $680, representing an increase of 130%. The biggest spike in prices came in September and October when the price of urea shot up by close to $100 and $162 a ton, respectively. 
To understand why urea prices took off on such a sharp trajectory starts with a basic understanding of how DEF is produced, and the chemical intermediates involved in the process. 
To break it down, DEF is formulated by combining urea and water. Urea is produced by reacting anhydrous ammonia and carbon dioxide. The ammonia used in the reaction is synthetized by way of the Haber-Bosch process. The process produces ammonia by reacting nitrogen with hydrogen and the primary source for the hydrogen is natural gas which, it is important to understand, is the main cost driver for urea. In fact, natural gas represents roughly 70% of the cost to produce urea. Because of this, the price of DEF is, in a large part, driven by the price of natural gas. Importantly, urea prices are also influenced significantly by demand coming from the agricultural sector since fertilizer accounts for close to 90% of urea demand. The price of natural gas in the US has nearly doubled since the start of 2021.
DEF increases, are also in part, attributed to demand outpacing supply as the economy recovers from the pandemic. The supply and demand imbalance in 2021 was exacerbated by scheduled maintenance at seven domestic urea plants in 2021, and CF Industries Holdings, the world’s largest nitrogen plant, declaring Force Majeure in the wake of Hurricane Ida in September. The hurricane impacted logistics at the company’s Donaldson, Louisiana plant. Since nitrogen is a primary feed used to synthetize ammonia, this too affected urea supply.
In addition to these factors, however, it is important to consider that the US is an exporter of natural gas and as such, its prices are influenced by global supply and demand dynamics as well as prices in other parts of the world. The impact of global prices is notable in 2021 due to the unprecedented surge in prices seen in Asia, Europe and the United Kingdom as a result of very tight supply. As seen in a recent Bloomberg article. “European natural gas rates have surged more than 1,000% from a record low in May 2020 due to the pandemic, while Asian LNG rates have jumped about six-fold in the last year.”[1]
Due to the unprecedented increase in natural gas prices in Europe, a number of urea plants have slowed or stopped production of DEF. As a result, DEF prices are skyrocketing and at least one urea supplier has imposed temporary surcharges on DEF and other products in an effort to cover the increase cost of gas. These surcharges took effect in September. Further, word on the street is that allocation is likely at the start of 2022 and there are already reports of hoarding.
So, in summary, the soaring price of natural gas, imbalances in supply, urea demand and rising operational costs are pushing DEF prices up at a rapid rate. And with growing demand for natural gas as we enter the peak season of winter and limited global supply of urea, DEF prices will likely continue to climb into the first quarter of 2022. 
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