Will Terra Industries Become a Leader in Clean Diesel Technology?

The following press release announces a distribution agreement between Terra Industries (TRA) and Brenntag North America for the exclusive distribution rights of Terra Industries’ Diesel Emission Fluid [DEF]. First, a little background on the use of DEF.

On January 1, 2010, EPA mandates that new on and off road Diesel powered vehicles will be required to comply with a new, lower level of emissions. To comply with the requirements vehicle manufacturers will be using a technology called selective catalytic reduction [SCR]. The SCR process requires a urea based substance be injected into the exhaust so the catalyst can capture nitrogen oxide [NOX]. DEF is the official urea based fluid that will be used in vehicles with SCR. NOX is the major pollution source from modern diesel engines (the 2007 emission rules eliminated the particulates) and SCR technology will remove over 90% of the NOX. All of the vehicle manufacturers offering Diesel engines will be using this technology.

Note: SCR technology has been used in European Diesel trucks for several years now with over 400,000 clean Diesel trucks currently on the road.

The new EPA rules will only apply to Diesel engines put in vehicles after 01/01/2001, so the initial use of DEF will be small and then grow as newer vehicles are purchased to replace older technology Diesels. Places like California will have mandates in place to force or encourage the retirement of older technology, higher polluting Diesel engines. Here are the projections for the amounts of DEF needed starting in 2010:

2010: 54 million gallons
2011: 172 million gallons
2012: 316 million gallons
2013: 463 million gallons
2014: 614 million gallons, and growing by 150 million gallons per year from there.
You can see the growth in demand will be there. What about supply? Terra Environmental Technologies is listed as one of the 5 manufacturers of DEF, along with Agrium Inc. (AGU), CF Industries (CF), Dyno Nobel, Potash Corp. (POT) and Yara North American, Inc. Brenntag is one of the 5 distributors of DEF I found listed. Brenntag is headquartered in Germany and is a global leader in the distribution of industrial and specialty chemicals.

Terra and Brenntag have a 2-way exclusive agreement for supply and distribution of DEF. It appears Terra’s penetration into this market depends on the depth of Brenntag’s sales connections. I know Terra management is high on this product as a growth market.

You probably noticed that the suppliers of DEF are all in the fertilizer business. DEF is a natural offshoot nitrogen based product from their nitrogen fertilizer production. Clean Diesel technology will be another growth area for some or all of these companies. I follow Terra Industries, but investors interested in this sector should get a warm fuzzy about another market for their product and start watching for DEF sales to determine which company will take the leadership in this product.

SCR and DEF information is from factsaboutscr.com.Tim Plaehn in seeking alpha