Potentially strong profit centers regularly move in and out of the industry space. For every one that takes hold, many others fall by the wayside. The concept might be potentially strong, but few things are certain in life or inexpensive relative to the risk. This can lead to a fitful development process as customers hold back watching and waiting until their peers climb on board in numbers that validate the concept. And sometimes the ball never really gets rolling strong enough for that to happen.
Working to provide customers using low emission Selective Catalytic Reduction Diesel engines (what the marketplace has determined to be the solution of choice for the USEPA Tier 4 mandates) generally follows that pattern, but with one big exception. The market is guaranteed to develop. The major questions remaining for diesel and lubricant marketers and retailers are how soon to get on board and what commitment needs to be made.
A truck will typically consume DEF at a rate of approximately 3 percent of its diesel consumption. Current DEF solutions include 1 or 2.5 gallon jugs, totes that offer hundreds of gallons and aboveground or below ground storage tank/dispenser solutions offering thousands of gallons. Jugs provide a convenient entry-level solution for just about any business model short of large, high-volume truck stops. And long-term they certainly should be a staple on convenience store shelves for consumers that drive diesel automobiles and smaller commercial truck operators without more formal supply and service arrangements and for "emergency" use by any SCR engine operator. Totes are generally serving moderate DEF needs often with home-fueled fleets. The travel plaza operators have already jumped on board in a big way, generally going from jugs to larger bulk above or underground tank solutions and bypassing mid-range tote solutions.
The Marketer Market
Just where should a marketer be today if they do diesel business, but not at travel plaza volumes? An aggressive Midwest marketer (speaking anonymously) that is heavily committed to DEF noted that generally for most marketers, it's probably still too early in the game to have considered a serious investment in DEF.
“Volumes are growing – and they're growing rapidly – but you have to remember that you started from zero,” he said. “We have truck stops of our own, and we’re hauling for other truck stops and we're selling to other truck stops and we're selling into the commercial market and we have a significant number of jobbers buying from us in bulk and packaged. I wouldn't call it profitable—let's put it that way. I think the problem’s going to come down with most marketers to how much money they want to put into the commercial distributions side of it. It's not inexpensive to outfit the stainless steel equipment that you need in order to distribute.”
As diesel fleets rollover, engines requiring this fluid will continue to build in numbers and profits should grow. “In our view it is still in the infancy stage,” said F. Scott Jackson, product manager – Americas, for Grand Rapids, Mich.–based DEF pump manufacturer Blackmer. “It's growing and we are selling solutions for bulk storage. You have some areas of the country where it seems to have taken off. A lot of truck stops already have equipment and have built up an infrastructure. A lot of others, such as commercial truck operators, are still taking a wait-and-see attitude where they may only have two trucks needing DEF and they are going to rely on jugs for now. We have seen where people have said they're not going to spend the extra money just yet – they're going to run their trucks another year. So a lot of companies have stretched things further and further, but eventually when you get so many miles on the equipment you have to replace it.”
While the recovery is weak – to be generous – some rebound is occurring in new truck sales particularly among the larger fleets using class 8 trucks.
The article “U.S. Truck Market Posts Biggest Gain of Year” by David E. Zoia in the May 11, 2012, issue of WardsAuto noted that the manufacturers of medium- and heavy-duty trucks enjoyed a 38.9 percent rise in sales from 2011. The Class 8 sector led the way with a 56.2 percent jump to 16,905 trucks. Following that were classes 4-7 with Class 7 sales coming in second at 45.4 percent or 4,257 units. While this is good news, it should still be noted that sales are considerably depressed compared to pre-recession levels.
With prices at record lows for DEF and the volume increasing, but still slight compared to the entire diesel market, the primary argument for lower-volume diesel marketers to carry DEF is not necessarily strong profits, but simply to protect against customer loss.
“If you are a diesel marketer, you will make sure that you are offering some type of DEF service to your customers because if you don't have it, you could potentially lose some diesel volume to the guy down the street,” said Chad Wenzel, senior vice president for DEF and specialty products at Gainesville, Ga.–based DEF solution provider Mansfield Oil. “Your customers do not want to make multiple stops. The customer may not have an immediate need, but as the fleets turn this will become an issue.”
Wenzel also noted that DEF sales can help offset losses in a marketer’s total diesel fuel volume that will arise since the SCR technology increases fuel economy anywhere from 5 percent to claims of 12 percent or more. While the exchange might not be 1-to-1, the potential extra profit from DEF will help.
The choice of DEF solutions to offer will vary with each operation depending upon its business demographics. In general, Wenzel recommends a more broad approach.
“We feel you have to have a full product line with everything from a 1 gallon jug on the way to bulk because if you’re just going to go in and try to sell 2.5-gallon jugs, you are going to be hard-pressed to get the volume or the scalability. You have to plan to be able to buy in bulk. Truckload quantity is particularly the best way to do that because if you are just doing totes and the smaller delivery jobs, you're not going to get the full benefits and margins a higher volume user, like a travel plaza, is going to get. Most home fleets can be serviced by tote volumes delivered by jobbers. With our model, we would supply our jobbers with bulk who would then package in totes for delivery to their customers.”
Where card lock operations and mobile fueling are concerned, Wenzel noted that DEF programs have been somewhat slow to develop largely because that type of fueling doesn’t necessarily have the full diesel volume of a travel plaza and that they typically involve smaller or midsize fleets that have been lagging behind on their purchases of vehicles with new engines. That also applies to construction-related mobile fueling where off-road engines have been delayed with USEPA Tier 4 emission requirements compared to on-road diesel engines.
“I think now is a very good time for a card lock facility to start getting into this business because if they don't have it their customers are going to have to go somewhere else, probably one of the larger travel centers in order to get that DEF or pay for more expensive packaging,” said Wenzel.
Future Market Drivers
Diesel-powered automobiles are not exceedingly common today in the United States although they are quite common in Europe. However, in the future they could very well provide a major solution for automakers looking to meet stringent CAFE mileage standards.
Other future markets are even more certain. In January 2011, USEPA off-road Tier 4 interim regulations took effect with engines over 175 hp which required a nitrogen-oxide emissions reduction of 50 percent and particulate reduction of 90 percent. In 2014-2015 the Tier 4 final requirements come into play requiring a further significant NOx reduction; however, a variety of “flexibility” options could delay final implementation among all manufacturers until 2021. In 2016, USEPA Marine Tier 4 regulations go into effect requiring a reduction in NOx and HC emissions of up to 75 percent and a reduction in particulate matter of 80 percent compared to current Tier 2 requirements.
“DEF is now being mandated for off-road equipment and marine equipment that is where you're starting to see new trends and new market opportunities open up,” said Brandon Grote, district manager and product specialist with Hamilton, Ohio-based OPW Fueling Components. “Anyone who is making equipment into those arenas should have a pretty good year for DEF systems this year next year and the following year. As long as the diesel engine market stays strong and new vehicle are being sold, this will turn into a profit center for everyone in the long-term. But if we see a slowdown in the economy and people stop buying trucks like they did a few years back, there will be money lost in DEF.”