Crude oil crash hits guar gum exporters

Leading edible oil company Ruchi Soya spotted an opportunity in guar gum exports and invested Rs 125 crore in a new processing unit near Kandla in March 2013.

The boom continued with the rise in shale exploration in the US, and Ruchi clocked an annual turnover of Rs 500 crore from the plant.

The sudden crash in crude oil prices in late 2014, however, spoiled the party for Ruchi and the Rs 12,000-crore export-oriented guar processing industry. (Guar gum is used in hydraulic fracturing, a method of extracting shale gas.)

A statement from Birla Corporation's guar company, Hindustan Gum, said the industry is in panic as demand is very low from overseas due to the continuous fall in guar prices.

"Our plant was operating at full capacity till December (2014). The buyers, mainly in the fracking industry, are cautious today. This has put a pressure on prices. Demand is also subdued," says A P Dadoo, CEO, Natural Polymers (Guar Gum) Division at Ruchi Soya. Shipments to the US have witnessed a decline from January.

Indian guar gum exports, mostly in powder form, rose to prominence in the past three to four years driven by the shale oil and gas boom in the US, the biggest buyer of guar gum.

India, the largest producer with 90 per cent share, is also the biggest player in the exports market. Nearly 80 per cent of exports cater to exploration companies, while the rest is consumed by the food processing and personal care industries.

The 60 per cent drop in crude oil prices has changed the economies of shale exploration in countries including the US, Canada and Russia, adversely impacting the demand for guar gum, grown mainly in Rajasthan.

Manufacturers say there has been a steady decline in orders following the sharp downturn in crude oil. At least two shale gas companies in the US are reported to have declared bankruptcy since December.

The dynamics of shale exploration have changed after crude went below the $100 a barrel level - shale exploration companies have been struggling to operate since then.

Aamer A. Sarfraz, CEO of Houston-based United Guar, said the decline in oil prices has had the obvious ripple effects across the entire ecosystem. "Oilfield service providers are doing their best to serve their customers in the new pricing environment." United Guar has manufacturing facilities in Pakistan and caters to demand from key US oil services firms.

Crude oil has slipped from $107 a barrel in June 2014 to about $50 now. Oil services companies have responded by trimming expenditure, and the ripples are being felt across the ecosystem. Leading oil services firm Schlumberger, which operates in over 85 countries, said last month that it would reduce spending by one-fourth and lay off 9,000 workers worldwide.

The layoff impacts 7 per cent of the company's workforce.

Oil service firms are seeking as much as 30 per cent cut in prices from guar gum companies. "Buyers are cautious. There may be a slowdown in demand during the first half of the fiscal year," says Dadoo.

Drillers in countries where shale production had witnessed a boom used gum derived from guar in hydraulic fracturing. Being the largest producer of guar, India hit a sweet spot and was a direct beneficiary of this trend.

Large number of farmers in states such as Rajasthan, Gujarat and Haryana took to guar seed production, which more than doubled to 2.2 million tonnes between 2011 and 2013. The kharif crop is sown during June-August every year and harvested in October-December.

A crash in crude oil prices is usually considered benevolent for the Indian agriculture segment that benefits from lower diesel and fertiliser prices. However, guar-producing regions in the country have had a negative fallout of the oil price crash. More than one million farmers are said to be associated with guar cultivation.

Between 2012 and 2013, demand was at its peak and guar seeds fetched Rs 300 per kg for a farmer. But over the past four months, it has crashed from Rs 100 to Rs 40. "Production is good this year too and farmers are struggling to sell. There is stock with the farmers, the middlemen and at plants. A large number of farmers have to shift to alternate crops this year," says BD Agarwal, Chairman and Managing Director of BSE-listed Vikas WSP, a leading guar gum player with revenues of Rs 1,000 crore.

Reflecting the mood in the global crude oil market, the company's stock price has crashed by over 40 per cent since November 2014. It caters to food majors, including Nestle and Kraft, and energy companies such as Gazprom, among others.

Reckless expansion by old players and the entry of new businesses to cash in on the boom is also responsible to a degree for the current situation. For example, realisation on exports jumped manifold from Rs 2.33 lakh per tonne in FY12 to Rs 5.23 lakh in FY13.

But overcapacity, rising guar seed production and aggressive quotes for order brought down realisation to Rs 1.94 lakh per tonne in FY14, in spite of the fact that shipments rose 48 per cent. In dollar terms, the drop in realisation is even steeper considering the rupee had depreciated during the period.

"This is an effect of the boom. Nobody imagined that there will be a brake on the oil bull run," says Dadoo. According to industry estimates, India's guar gum processing capacity doubled in 2013-14 to about one million tonnes.

"People thought guar gum was the next gold and rushed to this business. Many are in the middle of an expansion or are setting up new units. About Rs 2,500 crore worth of investment is underway to create additional capacities. As things stand, the new capacities may not be able to start operations anytime soon. Money raised from banks will get stuck," said Agarwal, who undertook an expansion in 2011-12. Today, he is struggling to operate half of his unit that can produce 80,000 tonnes. "We are bound to keep capacity utilisation at a certain level to just break even," he says.

In Jodhpur, the biggest single location for guar gum processing, two-thirds of the 150 units have shut shop over the past two months.

Agarwal says that old exploration leases in the US are still managing to survive as their cost breaks even at the $40 per barrel level for crude. "They no longer have a windfall. It is the new leases that are struggling to operate and their breakeven point is much higher at $60 a barrel. Their business will stabilise only if crude settles in a range of $65-70 a barrel."

While most experts point to a bearish trend in crude oil prices, guar processors remain hopeful. "This is the nature of the oil industry. There are ups and downs, and it's been this way for decades. But oil prices are likely to rebound, maybe even before the end of this year. Guar is an incredible crop and the future for guar is great," said Sarfraz.