Riding on shale oil, guar is dragged down by crude

Falling prices of crude oil have resulted in turmoil in agricultural commodities market as well. The monthly average price of a barrel of crude oil has declined to $54.79 in February from $104.83 during the same period last year. The price slump has made crude oil much cheaper than the shale oil which, otherwise, a year ago was the favourite choice.

At present, the average cost of producing shale oil is higher than the price of crude oil by around $16-35 a barrel, making it difficult for shale industry to sustain in the market. As on March 20, 1,069 oil rigs were working in the US, 40.7 per cent less than the number a year ago.

Though the falling price of crude oil may have brought some happiness to Indian consumers in terms of reduced petroleum prices and fiscal deficit on account of petroleum subsidy, the guargum industry is facing another slowdown after recovering from the 2012-13 happenings.

The journey of guar from being a fodder crop to one of the most lucrative industrial crops has been remarkable. Such a phenomenal change in the nature of trade and the attention to the crop has been attributed more tothe developments in the shale industry. Prior to the emergence of use of guargum in fracking, the crop was mainly grown for fodder. Limited number of firms werein the market to process the seed to extract gum which at that time was used mainly by food industry. With technology advancement, shale industry flourished and guar became one of the important constituents of fracking fluid. This resulted in huge demand for guar from the US and thus many players entered this market.

Guar is, normally, a freely traded commodity. But due to high speculation in the market during 2012, regulators banned the future trade of guar on commodity exchanges. Though the ban was lifted in May 2013, the focus of the industry was to stabilise the market and to prevent extreme speculation. Till 2014, the exports of guargum were considerable and the demand was growing. Till that time, the only threat faced by the industry was its replacement with some substitute in shale industry.

During the first two months of 2015, the exports of guar have been falling. The total exports to US were limited to 17,000 tonnesduring February 2015 – 26 per cent less than the exports during the same period a year ago. The trouble has multiplied with falling prices as well.

The average price earned by exporters in the US market has come down to $2.5/kg during February from $3.3 in September 2014. The fall in price is natural as the demand is slowing down while the supply is constant. One can expect that market fundamentals will work and the prices of crude will rise again, leading to demand for shale exploration, which will result in increased demand for guar. But this may take a longer time, and till then guar industry has to keep its fingers crossed.

Though the incidence of falling crude prices which may impact guar industry was not much expected, it has exposed how vulnerable an industry may be in absence of alternative users.

Once more, the need for creating demand from untapped user industry of guargum has to be given a serious thought. So far, guargum is known to be used in food and shale industry. The other industries where guargum is used are textile printing, paper, explosives, fire-fighting, coal mining, tobacco, water treatment, photography, pharmaceuticals, cosmetics, etc. These have to be given consideration so as to substitute demand from these sectors. Guargum processors have to understand and deliver specific need of different user industries.

To serve the needs of specific users, industrial units must actively engage in R&D activities. The industry-institution linkage may also be a desirable move for bringing prosperity. Some of the institutes which can play lead role are the National Institute of Agricultural Marketing, Jaipur (for marketing), Central Institute of Agricultural Engineering (R&D in machinery), Indian Institute of Chemical Technology, Hyderabad (in development of specific derivatives), etc. Such linkages may help guar industry in diversifying the product and market, stabilising prices as well as reducing risk arising out of turmoil in user industries.

The writer is associated with National Institute of Agricultural Marketing, Jaipur. Views are personal.