Urea is primarily used as a fertilizer, but so-called technical grade urea (TGU) is also a feedstock to a range of industrial activities, including resins, animal feed and NOx reduction for diesel engines.
Join Will Talbot - Analyst, Fabricio Cardoso - Lead TGU Analyst, and Tim Cheyne - VP, Fertilizers, as they discuss the size of the TGU market and volumes across the industrial and automotive sectors. We also review global resin and automotive demand and the impact of Covid-19 as well as prospects for 2021. We move on to quantifying the impact on consumption, the key indices tracked and why demand in Europe dropped more significantly than North America. We finish with a discussion on the transition from diesel to electric powertrains, and its impact on future TGU demand.
Tim: Welcome to the latest issue of the Argus Inside Fertilizer Analytics podcast. This is where I get some of our market experts to join me to discuss the future of the markets they cover, and this gives me the opportunity to interrogate them on the work they've been doing and some of the key assumptions behind the forecasts they're putting together. My name is Tim Cheyne. I am VP Business Development for the Vehicle Emissions, AdBlue and DEF team here at Argus, and today I'm joined by Will Talbot and Fabricio Cardoso. Will Talbot is an analyst in our consulting team who covers areas to do with technical grade urea, and also issues that connect like electric vehicle forecasts, and some of the other applications of urea that are not fertilizers. And then Fabricio is a manager in our consulting team. He is the lead editor or the Technical Grade Urea Analytics Report and he is also joining me on the call today. Good to have you both on and a really opportune moment to be talking about the future of the technical grade urea markets. And so, how are you both doing today?
Fabricio: Hi Tim. Thanks for the introduction. Good to be in this podcast.
Will: Hi Tim. Yeah. Glad as well to be here. Thanks for inviting us.
Tim: Great. Well, first of all I think we need to discuss the report itself because this is a fertilizer analytics podcast but technical grade urea is not clearly a fertilizer. So, let's start by talking about the coverage of the report. It's unique, certainly. We know that the coverage of this report, the scope is not covered by anyone else and so the information is really interesting and valuable. But talk me through what exactly is covered. Of course we won't be covering in the report UAN and urea fertilizers, but what exactly is the scope of the report? Which segments do we cover? Fabricio, maybe you can take us through exactly what we look at when we analyze this TGU market.
Fabricio: Yeah, I can take this one, Tim. Thanks. The main segments we are looking in the report are industrial segments, particularly resins, melamine. We also look at feed grade urea, so urea used in animal feed for cattle. And then there's another big category of segments related to NOx emissions abatement, and that covers automotive, marine, stationary applications. And then, to complete the segments, we also look at all the smaller segments that are much less common and known of using urea like pool chemicals, cyanuric acids, foaming agent, bioethanol, just to mention, pharmaceuticals, another market we...another segment we look at. And you asked why we treat these separately from fertilizers, I think the simple answer is that the drivers for demand in these segments are very different from agriculture. And it's not just a supply and demand assessment based on demand. It's, some of these markets are still growing, particularly NOx abatement in the automotive segment, it's still growing, and that's always a recurring question we get from subscribers, how these markets could impact urea availability for fertilizers.
Tim: I just ran through that segment so I can certainly say that the NOx abatement side, so the AdBlue, DEF is something we've been covering for many, many years, going back to Integer Research days. And the other segments you described are segments that we've been adding more recently, and I know you've been very interested to talk to some new contacts and develop our knowledge and data to do with some of those segments that have been added to our TGU coverage more recently. But here's a question in terms of size of the market. How much urea is consumed in these segments outside of fertilizers, and which of these segments is the most important in terms of volume? Relate the scale to the overall fertilizer consumption.
Fabricio: If I can share a couple of numbers we have in the report. Our estimate was around 26 million tons in 2019, and it was growing year on year, but then it dropped to about 24 million tons in 2020 and that was primarily due to Covid-19 impacting all of these segments in different ways.
Will: Yeah. And in terms of the largest segment, resins is by far the biggest, probably about 10 million or 11 million tons of urea equivalent in 2020. These are things like urea-formaldehyde, melamine-urea-formaldehyde, mostly used in the wood board industry and about 80pc-ish, that demand is coming from Chinese production.
Tim: Thanks, Will. Given the nature of resin demand being so linked to, I guess, construction activity and general economic activity and the connection to the production in China, how was the global resin demand impacted by the Covid pandemic? And I'm sure it was. So to what extent do you think it will start bouncing back in 2021 as the pandemic eases?
Will: Yeah. As I just said, resin demand is very strongly linked to construction around the world. And so as construction declined and in some cases halted during the various lockdown periods, we saw a decline in global demand for those resins, something like 14pc, 15pc down on the year compared to 2019 levels. As I said, production of those resins is mostly concentrated in China but that's not just for domestic demand. That's also linked to global demand. So, even though China had a fairly swift economic recovery, the recovery in resin demand it was a bit slower than that owing to that reduced global figure. The other impact of course of the virus is the longer term economic impact, and the effect that that will have on resins demand over the next few years is probably such that it is less than what we had previously anticipated before 2020. I think this year we are forecasting a total demand slightly lower than what it was in 2019, but then I think we're looking at maybe 2pc or 3pc growth year-on-year over the next decade or so. So, fairly steady growth.
Tim: I'm always surprised at how resilient the global economy is. I know a 14pc decline is a big hit on consumption, but it's still not as severe as you might have expected at the time last year when the world was in lockdown and it felt like in some ways the world was coming to an end. But Fabricio, how about the automotive segment, how badly was the demand for AdBlue, DEF, ARLA around the world affected by the lockdown and by the reduced transportation activity?
Fabricio: Sure, Tim. As you can imagine, it did have an impact because as you have freight restrictions, you drive less your truck, your car and then you're going to consume less fuel and less AdBlue as well. AdBlue is the solution of urea used in automotive to reduce emissions. It's an interesting segment because demand had been growing 10pc, 15pc year on year on a global basis. Different markets develop at different paces. But last year, growth was around 3pc only. And in Europe, India, there was some decline compared to 2019. But as I said, it's a fast-growing market because new trucks that need to consume urea and AdBlue or DEF, they are typically going to replace an old truck that did not require it. We see another 10pc, 15pc growth for 2021 even if there are still quite a lot of restrictions in place in a range of countries. But the impact was a direct consequence of freight activity and longer term truck sales that declined in 2020 across most markets are not going to be compensated by higher sales in 2021. Sales are still lagging behind.
Tim: Incredible that even during the lockdown, yeah, the coronavirus year, we still saw global growth and consumption of AdBlue, DEF which is remarkable. I know from questions we've had from subscribers and from discussions with key people in the markets that a lot of people who are really trying to quantify the extent of the reduction in consumption in some markets, like you mentioned Europe, during the lockdown year and especially during the months with the lowest freight activity, talk us through some of the things you were doing during the course of last year and are doing now to quantify that impact on consumption. You know, what data did you look to? What are the key indices you tracked to keep a real close eye on what's going on with AdBlue, DEF consumption at the time so you can update our view and our forecast?
Fabricio: Well, you're probably touching our main headache during most of 2020, Tim. We had to re-invent what we were doing, and figured out different ways of estimating how much each truck or car would not be running as we would expect. We looked at our range of different available data that we could use as a proxy for freight activity, like there was Google activity insight movement, different data on people and freight movement, there were traffic closures at highways, tolls, information around key highways. But ultimately we figured out that the best proxy was diesel consumption, and that's mainly because for any given truck, the ratio between AdBlue, DEF consumption and diesel consumption stays the same throughout its useful life. But then in most countries there's a lag of two or three months to get the actual data. There was a mix of assumptions around how lockdowns were getting more or less strict in each country and those were all part of the calculations.
Tim: Yeah. I can imagine you had a new headache last year to try and quantify these things. I'm glad we found a way of getting our heads around good techniques to update our assumptions. Just tell me, why did demand in Europe drop more severely than other regions, for example, North America? What was the driver of the weakness in Europe which was notable?
Fabricio: Yes. Before answering that directly, one thing I forgot to mention in our assumptions and how we found ways to quantify the impact on demand, a key element was our regular interaction with market players. Ultimately we could validate what was happening in a given market by speaking to your producers, distributors and others and understand how much product they were effectively putting out and selling. And that was an important feedback we had in our provisional numbers and it allowed us to go back and adjust to match reality. But if you compare Europe and North America, the impact of coronavirus on European AdBlue demand was harder in Europe because, one, the first wave of lockdown restrictions cut movement quite harshly in Europe during the second quarter of last year and not only movement of people but also freight. The restrictions were much tougher than in North America during most of the year. And the second point that I'd like to raise is that in Europe the share of diesel cars is still around 30pc, 35pc, dropping now, but there are many more diesel cars consume AdBlue in Europe, and these have been taken off the road for a much longer period last year and beginning of this year due to Covid.
Tim: Yes, this is a very topical issue not just in the short term during the Covid period but in the longer term, the changing make-up of vehicle sales and the increasing share of electric vehicles is something that's all over the news, and in fact this week we just saw news that Audi is in the development of new internal combustion engines and there are regular announcements from manufacturers to do with changes in their powertrain plants towards electrification. So Will, can I ask you, what do you think is the trend here? Do you think this is going to have a dramatic impact on, particularly on AdBlue and DEF consumption? So what's going to be the impact on the TGU market in particular?
Will: Well, yeah. As you say, pretty much anywhere you look in the news, you will see stories about how diesel is dead or how EV sales are skyrocketing mostly in the European context but it's also happening in China as well. Yeah, diesel has really been squeezed on two fronts in Europe on a passenger car perspective. One is consumers generally moving away from diesel and towards gasoline, and that's a fairly well established trend we've seen really since the Dieselgate scandal, and the second pressure is the movement away from ICE entirely towards electric powertrains and that's something that we've seen growing really quite dramatically last year. I think in the last sort of quarter of 2020, the proportion of new car sales in Europe were electric powertrain either pure battery or plug-in hybrid was about 12pc, and we've forecasted that's probably going to rise to about 15pc this year, which doesn't sound like much but when you consider that it was maybe 1pc a few years ago, I think that really shows the drive that we're going to see towards EV powertrains. And, you know, as you said, that's not just coming from consumers or just coming from regulators anymore. That's really coming from within the industry. Like you said, Audi has said, it's not going to develop any new ICE powertrains, Volkswagen announced this week at its Power Day seminar a real focus on electric vehicles and how it wants to effectively have an electric vehicle for any customer type from entry level to mass market to really high end. So, you know, this transition towards electric powertrains is really well and underway. And I think it is safe to say that diesel sales are going to continue to decline in Europe quite significantly. But the thing you have to remember as well is that AdBlue consumption is not correlated directly to sales, it's correlated to the fleet, and the European diesel car fleet is still very large and still very strong, and the size of that fleet will allow a kind of buffer from this reduction in sales. So, you know, we really think that we won't see peak AdBlue demand from light vehicles in Europe until, you know, maybe mid to late 2020s. Of course it's a very different matter or a different story for the heavy duty side.
Fabricio: Yeah. And I can comment on that. Well, the...for heavy duties, it's a completely different story. The diesel is still the main powertrain across all major markets and the uptake of alternative powertrain has been very slow. There was data this week that 0.5pc of new trucks in Europe are not diesel. So we're talking about a market that is still overwhelmingly relying on diesel. This said, there is legislation in place and upcoming that are going to drive some electrification in the commercial vehicle segment, and truck manufacturers are being incentive to start from this year to bring alternative powertrain to the market, but it is still a much longer phasing period, and we would see diesel remain as the main powertrain for quite a few more years, let's say after 2025 when Euro 7 in Europe is likely to be enforced, it's not a legislation that would ban the use of diesel, but lower NOx limits will at least increase the costs of aftertreatment technologies in diesel trucks and that's going to make diesel trucks less competitive. But then, competitive against what, I think that's a big question mark. There will be some electrification, but we look at hydrogen as well as an option, but we don't think that would become mainstream until end of this decade or even early 2030s.
Tim: Excellent. So it really is a matter of thinking through the structure of the fleet and the structure of powertrain and the different segments to really understand how consumption of AdBlue will trend at the time. We've reached the end of the time we have available today. We haven't even got to some of the other segments that we could talk about like marine and stationary NOx abatements. And also I think we should probably, at some point in the next podcast, talk about future regulation. You've pointed to Euro 7 and the potentially new regulations which we expect to come in the U.S. with the new Biden administration. But, let's wrap it up for now, and thanks very much to Will and to Fabricio for joining me today to share those insights, and especially to you for listening. Thank you for listening to the TGU Analytics podcast today. If you are a subscriber to the products, to the service, please remember to log in to Argus Direct where you can download the latest report published by Fabricio and Will, which was published at the end of last month. This has got detailed information on the forecasts they've described plus the data in Excel. If you aren't a subscriber, of course more information is available on Argus Direct where you can find information on the scope and how to subscribe. I'd also urge you to, if you're interested in the issues to do with these, the AdBlue and DEF side of things, to look up the conference we're running virtually in the middle of June called Vehicle Emissions Live. That's going to give an update globally on the situation related to emissions regulation, OEM strategy and the AdBlue, DEF, ARLA business. That's the middle of June, and you'll be able to join that from your desk in different time zones. So, it will be a great way of catching up with information and even seeing some of the familiar faces that you are used to seeing speak at our conferences. That's a useful way of just getting an update beyond what you've heard today. So, thanks for joining us. We really appreciate your time. Please do like or subscribe to the podcast if you'd like to keep in touch with the next issue, and we'll see you next time.