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Guar market update

The last 5 months have been phenomenal in terms of the sheer price increase and volatility for Guar Splits! Since the end of Aug-10 the price for Guar Splits has gone up 85%!!

In our last Guar Market Update dated 26-Aug-10 (given below) we had clearly outlined our case for it being a good buying opportunity. Some of our customers, who trust our judgement, covered their requirements for about 2 to 3 months and today they are very appreciative for the advice they received from our end.

The price for Guar Splits today is at a 12 year high!! The only time that the price for Guar Splits crossed the present level was in Aug/Sep 1998.

Now let us examine the reasons behind this fantastic rise in prices.

Towards the end of Aug-10, it became quite apparent that the new Guar crop, expected to start arriving in Nov-10, was going to be a good one. As a result spot-futures arbitrageurs (who purchase Guar Splits in the physical market and sell Guar Splits futures on the commodity exchange in order to earn the carry) started squaring off their positions on the commodity exchange and unloading their Guar Splits holdings in the market. At this time a consortia of commodity traders, started buying the Guar Splits which were then available at USD 200 PMT cheaper (see graph in the email below) then that in Jul-10 and accumulated around 25000~30000 MT from Sep-10 to Dec-10. As a result of this continuous buying of Guar Splits a lot of carryover from the previous year was sucked out of the system.

At around the same time, i.e. in Sep/Oct 2010, major Guar Gum exporters based in Jodhpur, started selling Guar Gum forward for deliveries in Q1 2011 without covering their raw material requirements, anticipating a fall in raw material prices. However due to the sustained buying of Guar Splits, as mentioned above, prices kept on increasing even when the arrivals from the new crop touched their peak in Dec/Jan 2011. Hence Guar Gum exporters who had been caught short did not have any option but to enter into the markets and cut short their losses by buying Guar Splits at market prices. This provided the much needed support to the long position of the “bulls” and Guar Splits prices have not looked back since.

On the demand side, the situation today is very different from that at the end of 1998. After crossing an all time high in Sep-98, the price for Guar Splits started declining and by the beginning of Dec-98, it was 40% below its peak levels. We do not see that happening this time around, as today the demand for Guar Gum is far higher than what it was in 1998. Guar Gum demand is used in sectors such as food, petfood, mining, textile printing, explosives, etc. and there has been demand growth in all these sectors over the last 12 years. However the biggest consumption of Guar Gum is in the oil well drilling and fracturing industry and today the demand from this sector seems to have gone up exponentially in the last couple of years especially because of the advances in horizontal drilling and fracturing (as opposed to the traditional vertical drilling and fracturing). As a manufacturer and exporter of Guar Gum, we are constantly receiving inquiries from this sector for large quantities of Guar Gum at the prevailing prices.

The arrivals of the 2010 crop, from the farmers, will end in the next fortnight. Going forward we now have at least 8 months to go before the new crop of 2011 comes into the market. In case there is any issue with the onset and progress of the monsoon this year, prices will sky-rocket. Even at present, everyone involved in the chain, right from the farmer to the Guar Splits manufacturer is not willing to commit to any large orders as they believe that prices have a strong possibility of going up further and hence do not want to short-change themselves.

Under such circumstances, we believe that Guar Gum prices will not decline significantly in the near future and might go up still further. There can be a sharp correction in the Guar Splits prices only if the consortia of traders that has built up the big position in Guar Splits starts dumping stock in the market and/or commodity traders start unwinding their long position on the commodity exchange NCDEX (at present the Total Open Interest in Guar Splits futures, across all expiries, is around 60000 MT and it has remained at these levels for the last 2~3 months).

 
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