By: AccuVal Associates, Inc.
Guar gum is extracted from the seed of cyamopsis tetragonoloba, an annual leguminous plant originating from India and Pakistan. Guar gum has wide use in the textile, paper, explosive, pharmaceutical, cosmetics and toiletries industries. It's also used as thickener in toothpastes, conditioner in shampoos, oil and gas drilling, and hydraulic fracturing. Guar gum comes in two grades:
Guar gum has recently seen a significant spike in prices. Industry insiders are pointing to market manipulation, in the forms of price speculation by traders, hoarding by suppliers and increased demand from the fracking fluid industry as the primary reason for these increases. Currently, prices are at a 12-year high and have been rising at an extraordinary rate – making these figures, quite possibly, some of the fastest-moving commodity prices ever seen.
The beginning of the recent upward trend started in August 2010, and has continued throughout 2012. In March of this year, the market price average was approximately $2.38 per pound. By the end of May, the average price had spiked to between $9.00 and $12.00 per pound, depending on the grade. That marks a four-fold market price increase within a matter of months, whereas figures remained relatively stable from 2007 to early 2010. In March 2012, the National Commodity & Derivatives Exchange (NCDEX) suspended trading of guar gum due to market manipulation and other fraudulent activities. Due to the suspension, over the last several months guar gum has only been purchased on the spot market. The following chart shows the price of guar gum futures through early March, 2012, prior to the market being suspended.
India and Pakistan are the major producers of guar gum. India, which produces nearly 90 percent of the world's guar gum, is also the largest exporter of this product, as guar gum requires a unique climate of drought and monsoon weather for successful growth.
Farmers in India have reportedly replaced about 60,000 acres of cotton fields with guar in 2012, as a result of the surge in prices. Additionally, during the planting season that takes place at the onset of monsoon, typically June through August, India is expected to increase the overall area seeded for guar by as much as 20 percent, according to some analysts. That brings the total to more than 10 million acres. It appears the 2012 crop production might be adequate to support current demand, considering that the food-sector demand has decreased significantly over the past 12 months. To further boost supply, farmers in India planted a second crop in the irrigated sections of the country in March, meaning the crop can be harvested in June. India's attempt to cash in on the high prices will likely cause the price of guar gum to fall by the end of this year.
Guar gum is a rain-fed monsoon crop that requires 8 to 15 inches of precipitation in a 3- to 4-month period. For effective cultivation, guar needs at least two rainfalls before sowing. Then, it requires an adequate amount of sunshine and dry weather to develop. According to preliminary reports, exports from India could climb to as much as 700,000 metric tons next year, from about 400,000 tons for the year ended March 2012. As of this publication date, rainfall in India was noted to be approximately 40 percent below normal with no signs of significant rainfall, which could have a material negative effect on the crop yield. Since crops are harvested between September and November, only time will tell how much guar gum will be available to the market. Should crops meet expected yields, supply will significantly increase, likely driving down prices.
Some projections have raised concerns about the availability of guar seeds for sowing the next crop, anticipating the seeds to be in tight supply. However, Indian government officials have noted that supplies should be sufficient, stating that isn't unusual for more than 50 percent of farmers to set aside seeds for sowing, while the remaining procure seeds from private traders. According to D.S. Yadav, deputy director with the Rajasthan agriculture department, "It would be safe to say that there will be no guar seed shortage."
Horizontal hydraulic fracking has gained acceptance in the gas and oil-drilling industry because of technological advances. As the technique's popularity has risen, gas and oil-service companies have increased their need for guar gum, a key ingredient used in fracking fluid. Additionally, the U.S. has seen a large increase in the number of private companies allowed to drill for gas and oil. Almost all gas and oil-producing countries utilizing fracking have increased demand for guar gum, with the U.S. and China leading the way. The heightened demand has been driven by the gas and oil industries' need for this commodity. Current statistics show that 45 percent of guar gum is used industrially.
Many fracking-industry businesses that rely on guar gum have been hurt by its rising cost. Halliburton, which invented the fracking technique 70 years ago, relies heavily on guar gum in its operations. The increased costs have significantly lowered the company's profit margins. Halliburton shares are now down by approximately 50 percent from a year ago, with guar gum prices being a major factor for the decline. With the recent price surge, companies are seeking alternatives to guar gum. Major gas and oil companies have recently begun to develop non-guar-based fracking fluids and guar gum substitutes. New alternative fracking designs are also being created, which would lessen the need for the commodity.
Due to recent price spikes, a significant amount of economic pressure is affecting demand. Buyers have already pulled back significantly, due to cost increases. Many industry experts predict a potential 50-percent dip in market price, as part of this can be attributed to price-induced demand decreases, coupled with a likely increase in supply.
The last nine months have been unprecedented for guar. Oil-drilling companies engaged in fracking will undoubtedly be watching crop yields in India closely as they hope that a peak is in sight for this important commodity.
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