Uncertainty in the DEF Market
Historically, the price of diesel exhaust fluids (DEF) was relatively easy to understand. Prices were commonly indexed to the price of urea and DEF manufacturers have access to changes in urea prices by way of the New Orleans and Louisiana (NOLA) urea price index. But in 2022, prices started to decouple from the NOLA index and for this and other reasons, there is a high degree of uncertainty about what the DEF market will look like in 2023.
To understand the reason for uncertainty starts with a look at the rapid runup in urea prices in 2021 and the rollercoaster of price movements seen in 2022. Importantly, urea accounts for roughly 45% of the cost of goods for DEF.
While at the start of 2021 the price of industrial grade urea was roughly $295 a ton, it consistently ramped up over the year and by December reached a monthly average close to $800, representing a staggering increase of 171%. From there, however, urea prices took a sharp but short-term dive and tumbled to about $600 early in 2022 before spiking again to nearly $830 a ton by April. But this spike likewise did not last long and by June 2022 prices nosedived to about $480 a ton. This was followed by another milder spike and then on a downward trajectory from September to current.
The volatility in urea prices over the past two years is certainly cause for concern about what could be coming in 2023. How the year plays out is rife with uncertainty due to a number of factors. These include natural gas prices in Europe, the possibility of inflation leading to recession in the US and a global slowdown, Russia Ukraine war and its effects on tariffs/embargos of materials from that region, the Chinese economy and shutdowns that effect demand and production of urea, among other factors.
Another factor contributing to the uncertainty is that for much of 2022, DEF prices have been decoupling from movements in the NOLA index. This is seen by way of new and varied pricing strategies implemented by DEF producers with some producers limiting the volume available at indexed pricing. As an example, a producer might make 70% of a customer’s expected annual demand for DEF available at indexed pricing and floating the balance on the spot market.
It is thought that the change in pricing structure is a function of market conditions and the alternative value of urea in the agriculture fertilizer, and other markets. Urea producers have product options and can change the stream to produce UAN, DEF or other products based on their margin opportunity.
As a result of this and other changes in pricing models, DEF supply is expected to be snug and unstable, and prices volatile in 2023 due to producers selling spot volume where they can maximize profits.
Freight costs and delivery times also contribute to the uncertainties as we move into 2023. In the past two years, costs for trucks are up 10% or more, tanks and equipment are up by 10 to 20%, and labor rates have increased 20 to 40%. On top of that, lead times for customer tanks has gone from 4-6 weeks to as long as 12-18 weeks, and the cost of fuel remains relatively high from a historical perspective. In addition, there is still a significant shortage of drivers.
Although there is a great deal of uncertainty as to what the DEF market will look like in 2023, one thing for certain is that on January 1, 2023, all producers are moving base prices up to further decouple from NOLA. The increases range from $0.10 to $0.20 a gallon, regardless of what NOLA would suggest. For example, if the NOLA index suggests a decrease of $0.10 a gallon for January based on month-to-month averages, producers will likely pass along an increase in DEF prices, or the very least hold prices level from the previous month.
With that as a backdrop, although the DEF base price increase in January is certain, the outlook for DEF in 2023 remains clouded by uncertainty.