Crude oil normally affects the price of most commodity markets globally: the cost of oil goes up, the cost of production increases, packaging material prices strengthen and then the cost of delivering your goods goes up. This week it is worth exploring something that is topical and has been affected by our desire for oil in a different way: Guar gum.
What is guar gum?
Guar gum is a white to yellowish-white powder extracted from the guar seed. It is used as an emulsifier, thickener, and stabilizer in a wide range of foods, cosmetics, and pharmaceuticals. In the food industry it completes with a number of other gums, for example, xanthan gum and locust bean gum. Guar gum typically is used at 0.3% in applications. Use may vary depending on the application, but it may be as high as 1% and as low as 0.1%.
The major producers in the world are India (96% of world trade around 0.4mmt of gum) and Pakistan. Up until recently it has been traded on the NCDEX commodity exchange in India.
Current market movements
Over the past two years, the market for guar gum has boomed. Demand has been significantly up, as has speculation on the market itself. Anything that sees a price increase from $1 kg to $18 kg is in trouble.
Last year, the production of guar seed was set around 1.5 mmt and in 2012 the guar seed crop is set to decrease by around 0.25 mmt to 1.25 mmt. Stocks have been depleted. Planting acreage is down and the guar seed deficit is presently estimated at 20%. The fall in acreage primarily came down to farmers switching to highly priced cotton and poor rains in the major growing regions.
Demand from the oil industry
The oil industry always has used guar gum, and started using a much larger volume in 2010 when the demand for crude increase and new technologies allowed the guar gum to be used in horizontal drilling in shale gas and oil formations. Guar gum basically thickens the mud!
As the oil industry is cash rich, various oil producers have simply been buying up all the guar gum stocks regardless of price. The situation has gotten so speculative and stocks are not there the NCDEX has called a halt to trading. The press release read as follows:
"As per the directives of the Forward Markets Commission it is hereby informed that all
futures contracts in Guar Gum (GARGUMJDR) and Guar Seed (GARSEDJDR) currently
being traded on the Exchange are closed out in the following manner:
(i) The Sellers intending to give delivery will be allowed to do so and the delivery
intentions so received will be allocated to the Buyers as per normal process.
(ii) The delivery settlement will be as per the revised settlement calendar which
will be communicated to the Members.
(iii) The remaining outstanding positions as at the close of trading day on March
27, 2012 will be closed out at the Daily Settlement Prices (closing prices) of
March 27, 2012."
Recent press articles highlighted the "crisis in the vanilla market," -- vanilla is simply a finely balanced market with a potential to move. This, however, is the worst-ever shortage of guar seed and gum in India. In 2012, India will run out of guar gum, which is a true crisis for this unheard-of raw material.