Podcast: Covid-19 and its impact on global AdBlue, DEF and ARLA 32 markets

Author Argus

The latest update on how Covid-19 has impacted AdBlue, DEF and ARLA 32 markets across the globe

Listen in as Tim Cheyne, VP, Business Development for Emissions & Fertilizers discusses the impact of Covid-19 on the global AdBlue, DEF and ARLA32 markets with Fabricio Cardoso, Research Manager and Will Talbot, Analyst.


Tim: Welcome, everybody, to this first podcast from Argus covering AdBlue and DEF markets, and we hope to be doing more of these in the future. Of course, now is a particularly important time to be doing a podcast given all the recent changes coming as a result of COVID-19. So, I'd like to welcome, firstly, to this podcast the two experts at Argus covering these markets, Fabricio Cardoso and Will Talbot. They'll be talking to us about our view of how coronavirus will affect future AdBlue, ARLA, and DEF consumption. But, firstly, just to say, what is AdBlue, or DEF, or ARLA 32? It's a urea solution used to reduce and destroy NOx emissions, particularly in diesel engines, so very widely used around the world, especially in countries that have had regulations for many years like Europe, parts of Asia, North America, and Brazil. So, that the formality is over, let's start the discussion.

We've had huge disruption globally with COVID-19, which has seen consumption of diesel collapse, movement of goods drastically reduced, people in lockdown mode, retail, transport, hospitality industries all really suffering. But the question, of course, for someone who's involved in AdBlue and DEF is what does that mean for volumes, for the future of the market? So, Fabricio, how are we trying to get our heads around potential impact given it's only really a few weeks into the most severe parts of this impact in different markets? Tell us what kind of things you're thinking about when you look at the future impacts, the kind of reduction in volumes that we can see?

Fabricio: Yep. Hi Tim. Thanks for this first question. So, yeah, coronavirus has definitely had an impact on the global AdBlue markets. As you explained, AdBlue is consumed when vehicles are running. So, less freight activity will mean lower diesel consumption and then lower AdBlue consumption. And for our models, we have been looking at ways to reduce freight activity on a very short-term basis to then understand the impact this sharp reduction in demand has had on AdBlue volumes. There's very little data available yet on diesel consumption across several countries. So, we started looking at Chinese data to see how that market was affected earlier this year. And then, we had an exercise of understanding how that could be replicated to other regions, where the lockdowns came a few months later. We haven't got a global figure yet, but we had originally expected a 15% growth year-on-year for AdBlue on a global basis. Now, we expect either stagnantion or some small decline in volumes depending on the region. So, it's a much gloomier outlook for this year.

Tim: Thanks, Fabricio. I can imagine that we do expect to see quite...some reduction in consumption. Let's start by looking at key markets because many of our listeners will be involved in the agri-supply chain in some way in Europe. So, Will, could you tell us what is our early conclusion about the impacts of COVID-19 for the European agribusiness, for trucks, for cars, for non-road equipment? What are we thinking is going to happen, especially in these next few months, and what's the impact for 2020?

Will: Our current assessments of this is that there will be reduction in freight activity both of trucks, and to a much greater extent, the cars. And, of course, in Europe, where there are many more diesel cars than in other regions, that will have a bigger impact. We expect an impact of something like a 50% decrease compared to the base case, i.e., if there were no virus or no lockdowns in April and May, generally. In Italy, we've extended that a little bit earlier because Italy went on lockdown in parts in late February and throughout the country in early March whereas most of the rest of Europe didn't go into full lockdown until mid-to-late March. We do think that after May or so, the impact on freight activity will return to that normal baseline level. So, we expect around September 2020 or so, we will return to effectively our previous forecast. And the total impact of that is something like a 5% decline in AdBlue consumption on the year. And that doesn't sound like a lot, but we initially expected a 12% increase in AdBlue demand, so that's a 17 percentage point change to our forecast as a result of this virus and the lockdown measures.

Tim: Yeah. Thanks, Will. Let's move across to what's happening in Latin America, particularly in Brazil. Fabricio, you track...you cover ARLA 32. The market there has been...is well established, and I guess the impacts of coronavirus are different. What are you seeing the impacts of corona on ARLA 32?

Fabricio: Sure. Sure, Brazilians have been quite different in their response to coronavirus, if I may say, and that's mainly because lockdowns have been implemented on a state level and not nationally. If you're tracking news on Brazil, the federal government still doesn't recognize COVID-19 as a serious pandemic and that has led to uneven measures across states. So, it's a market...the impact on the ARLA 32 market is still quite unpredictable. Unfortunately, I think Brazil is still far from reaching the peak of the epidemic. And I would expect stricter lockdown measures will have to be put in place over the next couple of months. So, May, June, July might be more severe over there than in Europe, where measures began to be lifted. And for the ARLA market, we originally expected the markets to grow by 18% this year, but now, we think it's going to be much more modest, something between 0% and 2%, or even some slight decline if stricter measures are put in place.

And the adjustment we have to do for Brazil was a combination of different factors, lower freight activity as for the other regions, but also lower trucks...we had to reduce our truck sales forecasts. And we had to increase the...we tend to see an increase in the use of defeat devices, those systems...those kind of emulators to cheat the system and bypass the use of ARLA, AdBlue and that's because there have been police checks on highways to prevent drivers from doing that. But if those checks stop during the lockdowns, then drivers will be prompted to cheat again and that is going to have a negative impact on AdBlue consumption.

Tim: Very interesting. Great, thank you. Moving across to North America, we know that North America has really been a big feature of reporting of COVID-19 developments, especially the U.S., where there are some states in the U.S, which have been really hard hit by the developments there with coronavirus, especially New York State and some other areas, but many states across the country, we know, are in lockdown. So, Will, how do you think...how do we see the impact on DEF volumes? And do we see the impact being as severe as in Europe and Brazil? Or where do we see things being affected most in the U.S. impact, kind of?

Will: We don't expect the impact certainly in the U.S. to be as severe as in Europe. In fact, we've got, I think, flat growth forecasts for 2020 compared to the slight decline that we have for Europe, although, again, that is compared to, I think, a 13% growth forecast, which we had beforehand. So, it's still a relatively big impact. In fact, it's equivalent to 90 million fewer U.S. gallons of DEF on the market. So, you know, it is a significant impact. In terms of our methodology, we've effectively applied something very similar to what we've done to Europe to the U.S., which is to make an estimate as to when the impact of the lockdowns will hit and to assess when the...to what extent that will decrease consumption. For both, you know, U.S. and in Europe as well, we are validating these estimates with people in the market. And so, we're fairly comfortable with the assessments we've made so far.

And it is certainly more difficult in the States because, like in Brazil, the lockdowns are all done at the state level rather than at a federal level. So, New York is one of the...among the first states to lock down, because it's so severely affected. And as in Europe, there is potentially a supply impact as well. Obviously, the supply chain seems to be holding up at the moment, but whether, you know, in two months, three months, whether there's going to be some impact on smaller producers due to falling demand, you know, there may be an impact there. Another thing about the U.S. I just want to point out is that fertilizer demand for urea is relatively unaffected by the COVID-19 outbreak compared to DEF. You know, people still need to plant crops. So, what we may see is a shift by producers from DEF production towards fertilizer-grade urea production and that will just reinforce any supply issues.

Tim: Yeah, great point. I guess, coming into the spring season, it's the peak season for urea producers in terms of their sales of granular urea, UAN, and even direct-application ammonia. So there's room to, I guess, reallocate volumes to fertilizers if there's surplus available from DEF as a way of supporting agriculture, and many people are still expecting a strong ag season this year, so it could be that the timing has been suitable, I guess, in terms of soaking up some extra volumes, extra gallons into fertilizers. Another thing to mention that hasn't come up is, we're seeing some interesting developments on packaged products. We're seeing even increased volumes of jugs and cans in the U.S. and Europe, I guess, perhaps, due to customers looking to get some extra supply, kind of, stockpiling or get some backup supply in case they feel like they can't get access to products in the future. But many players have reported to us that their sales of packaged products have actually gone up. So, there's some really unpredictable impacts of COVID-19. We've got to the end of the podcast.

I think the key thing to say from all of us is, we're tracking very closely the markets as new data becomes available on freight movements, diesel consumption, truck sales, and all the other impacts on AdBlue and DEF consumption. And we'll be releasing updates to our forecast as soon as new information becomes available. We have really good AdBlue, DEF, and ARLA information available every month in our AdBlue and DEF Monitor. We have weekly updates on market developments, which come through the DEF Weekly, a part of that same subscription product. And then, the bigger picture, the longer term fundamentals data is a strong feature of our Technical Grade Urea Analytics, which is very focused on AdBlue, DEF, and ARLA consumption globally and looking forward into the medium and long-term prospects for those products.

So, if you, as a listener, need any information in any of those areas, please get in touch with us, and we'll be glad to help with further information. We'll be circling back to do another podcast once we have some fresh information, so please keep an eye out. But I hope this was useful for you. And wherever you're busy in the supply chain for these products, stay safe, and good luck with surviving this current crisis. Thank you.