Big Picture. Is guar gum’s future really bleak?

Over the last three years, guar has slowly lost its lustre due to oversupply, reduced demand on account of oil price crash, and emergence of substitutes that further reduced its demand. Guar products enjoyed their dream run for two successive years, 2011-12 and 2012-13, becoming India’s largest agricultural export item, surpassing the famed basmati rice. In 2012-13, export of guar products reached a record high of $4 billion but declined to $1.5 billion in FY2014-15. That fell further to $0.47 billion in FY2015-16 (till January). However, a careful analysis of the data shows that guar exports volume remained more or less stable (except in 2015-16), though prices fell substantially.

India accounts for 80 per cent of the world’s production of guar, followed by Pakistan. Rajasthan is the leading producer, contributing 70 per cent of India’s production. India mainly produces guar gum, or guar splits made from guar seed that are further processed into guar gum powder. The other guar products are korma and churi, which are used by the cattle feed industry.

Over 80 per cent of India’s guar products are exported, mainly to the US, Germany and China. The top consuming industry is oil & gas, accounting for 60-65 per cent, followed by food (25-30 per cent) and the rest by pharma. The textile printing industry is the major consumer of guar domestically.

Guar gum started to play a key role in the extraction of shale oil and gas through the fracking process, post-2009. It helped the US to increase shale gas production to 11.3 trillion cubic ft in 2013, almost nine times that in 2005. The shale revolution and speculation of drought in India, together with expectation of production shortfall, led to panic stocking by the US. As a result, the US became the top importer of guar, accounting for 73 per cent of global imports in 2012. However, its share fell to 57 per cent in 2015.

An unprecedented rise in prices, especially after 2009, saw Indian farmers preferring guar over competing kharif crops, such as cotton, moong, soyabean and bajri. As a result, India’s guar production has risen to 2.45 million tonnes (MT) in 2015-16 from 0.9 MT in 2005-06. New guar processing facilities were built in Rajasthan. Cultivation was extended to non-guar producing States. However, sharp rise in the prices of guar products prompted importing countries, such as China and Australia, to encourage indigenous guar cultivation and processing. Also, the food industry’s demand for guar gum was adversely impacted by extreme volatility and sharp rise in prices, especially during 2011-12. Higher prices also prompted guar consuming industries to explore and shift to cheaper substitutes.

All these developments substantially reduced the demand for gaur with implications for prices, which fell from ₹30,000 a quintal in April 2013 to 7,000 a quintal in December 2013. Crude oil price declined from $115/barrel in August 2014 to $30/barrel in January 2016.

That gave a big jolt to guar exports in the form of reduced demand from US shale oil and gas producers. As a result, guar prices dropped to ₹4,000 a quintal in 2015 from the high of ₹30,000 a quintal in 2012. Current prices stand at ₹6,000 a quintal. Even if crude oil price hovers around $40/barrel, US shale oil and gas production will continue to grow, though at a slower rate. China has set a production target of 300 billion cubic meters of gas by 2020. That would mean steady demand for guar gum.

Guar gum is used to modify water properties and acts as a thickener in the food industry. The European food industry accounts for over 10 per cent of India’s guar gum exports, and is expected to continue importing from India. Growing awareness towards natural or organic food and further rise in per capita incomes of developing countries could likely boost the demand for guar gum from the food industry. All these developments mean steady demand for guar and make guar an attractive investment option in the long run.

Crude oil price holds the key to demand for guar products. Crude oil prices seem to have bottomed out now. However, Iran seeking to capture its old market share may cause a further fall in crude prices. If that happens, it may pressurise guar.

Guar price shocks in the past have prompted international buyers to look for cheaper alternatives, such as tara gum, locust bean gum and xanthan gum, which are being used in the food industry. Synthetic polymers are used in the shale oil and gas industry. But nothing has come out as effective as guar. Nevertheless, guar substitutes will keep guar prices from shooting up unreasonably.

The writer is VP and Head, Agriculture, Food and Retail at Biznomics Consulting

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