Market experts explain price rally for guar gum in terms of its inelastic demand

The January contract of guar gum futures traded at Rs 31,783/100 kg on Friday up more than 25 per cent in just a month. At Rs 9,604/100 kg, guar seed too was at its life-time high.

What is driving this frenzied momentum in the guar complex? Is there strength in the commodity's fundamentals? What are the risks of trading in the commodity at the current levels?

Driven by demand

From around Rs 6,000/100 kg in the beginning of 2011, guar gum prices have shot up to Rs 23,000/100 kg by end of the year. Guar seeds have trebled in price.

The increase in export demand for guar gum — a derivative from guar seed which is used in petroleum refining, food processing and pharmaceutical industry fuelled the price rally.

In 2010-11, India exported 4.03 lakh tonnes of guar gum, an 85 per cent jump over 2009-10.

Anticipating a similar demand in the following year and eyeing higher realisations on the depreciating rupee, the domestic guar gum exporters started procuring additional quantities of the crop from the market.

This created a tight supply situation in the market stoking prices.

Market experts explain the price rally for guar gum in terms of its inelastic demand. There are no identified substitutes for it, say experts.

Any spurt in global demand for guar gum will see prices hardening in India as the country is the key exporter of the commodity. India produces 80 per cent of the world's total guar gum output in a year.

Exports firm, output drops

We can't, however, completely rule out the speculative hand in price rally in guar gum and seed futures. While the country's total guar gum production for a year is only around 11 lakh tonnes, the National Commodity exchange has already recorded a volume double of this in three months.

While demand has jumped compared to last year, a drop in guar production in the current year, low carry over stocks from last year also support prices.

The Agriculture and Processed Foods Export Development Authority has reported that the exports of guar gum rose 68 per cent to 2.85 lakh MT in the April- September 2011 over the previous year. But, if this demand sustains, it is likely that there will be a supply shortage of guar gum in the country.

The production of guar seed in 2011-12 season has been estimated at around 11.4 lakh tonnes against 15.5 lakh tonnes last year, a 25 per cent drop, on a below normal rainfall in Rajasthan.

Seasonal Cooling off

Prices in the futures market over the last three years suggests a seasonal cooling off for guar seed and guar gum between February and April every year.

Prices move sideways in this period as new arrivals trickle down. This year again, we may find the trend repeating.

Giving his outlook on the guar complex, Mr D.K. Aggarwal, CMD, SMC Investments and Advisors said, “The rally in guar complex is overstretched now; hence upside is restricted in near- to mid-term. One should, however, not expect vertical decline in this counter as fundamentals will remain supportive in 2012.”

In the short-term, the Forward Market Commission's action may have some negative impact on prices.

The margin on futures contracts of guar gum and seed have been raised recently to 41.88 per cent and 40.77 per cent respectively from less than 10 per cent.

At current prices, a buyer of one futures contract in guar gum will pay a total margin of around Rs 6 lakh (Rs 1.4 lakh earlier) and Rs 3.5 lakh on guar seed futures.

But as this didn't help cool prices, the market regulator is now considering putting the guar complex in trade-to-trade segment.

Commodities in the trade-to-trade segment are not open for intra-day trades, meaning traders can't square off their intraday position.

There is also concern that if guar prices continue to rise, the watchdog may increase the export duty on guar gum.

(This article was published on January 14, 2012)
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