The Impact of Soaring Guar Gum Prices

This month US oil services company Halliburton issued a profit warning due to the increasing cost of guar gum, a key component of ‘fracking fluid'. With the company's second quarter 2012 North America profits now projected at 19.5% to 20% – compared to 25% at the outset of 2012 – consumers are increasingly asking whether guar gum alternatives are a viable option, and how they might mitigate future exposure more effectively. 

Unabated demand from the fracking industry is expected to sustain record guar gum prices through 2012, and will continue placing pressure on profit margins. Guar gum, a guar bean derivative, is a vital component of the fluid used in hydraulic fracturing – or fracking – whereby water, sand and chemicals are pumped into wells, fracturing underground seams and releasing natural gas. With the global fracking industry expected to expand from US$31bn in 2011 to US$37bn in 2012, market panic over potential shortages in late 2012 prompted guar gum prices to soar from INR8,750 (US$156) per 100kg in March 2011, to INR80,970 (US$1,448) in March 2012. 

India's rapidly increasing guar production will moderate prices in 2013, but the fracking industry's increasing demand for guar gum is likely to maintain relatively high prices, despite additional production. India accounts for over 80% of global guar production and exported 400,000 tonnes of guar derivatives – primarily guar gum – in FY2010/2011. High prices have led large numbers of farmers to switch to guar production, many prompted by India's largest guar producer – Vikas WSP – who distributed seeds with ‘guaranteed returns' to over 100,000 farmers. Increasing production will ease the market in 2013, but not enough to return fracking operators to previous profit estimates. 

With a permanent increase in guar gum prices likely, consumers are investigating the viability of synthetic alternatives and the potential of alternative guar supplies. Tim Probert, Halliburton's president of strategy and corporate development, stated that guar prices have reached a stage where synthetic substitutes are an attractive alternative. Halliburton has had success with ‘CleanStim' technology as a guar alternative, while US competitor Schlumberger is developing ‘HiWay' – which promises to eliminate reliance on guar gel and reduce the volume of water and sand used in fracking. However, neither one is sufficiently developed to alleviate the industry's current reliance on guar gum.

Viable synthetic alternatives will eventually establish a ceiling on guar gum prices, but in the interim, consumers will be subject to market pressures. Increasing Indian production will help satiate global demand, but as with all agro-commodities, supplies will be vulnerable to unpredictable weather patterns. Significant long-term development of existing small-scale guar bean production in the US, Australia and Africa – if commercially viable – could geographically diversify guar gum sources and mitigate supply chain risk. For the foreseeable future, seeking to better understand and mitigate supply chain risk may be the most effective course of action for guar gum consumers.

Sian Bradley is an analyst at Maplecroft. Maplecroft is currently producing an in-depth report on guar bean supply chain risks for shale oil and gas producers. For more information on this, please email us at info@maplecroft.com or call +44 (0)1225 420000.