Vikas WSP Ltd. (VWSP) plans to more than double capacity to produce guar gum in India after surging demand for the product from Halliburton Co. to extract gas trapped in shale drove prices to a record.
The company will invest more than $36 million to set up two plants to make guar gum products in Rajasthan state that will increase capacity to 145,000 metric tons by April, Managing Director B.D. Agarwal said in a phone interview yesterday. Vikas, which has more than tripled in Mumbai this year, will use its own cash to fund the expansion.
Prices of guar gum, a thickening agent used in ice creams, drugs and in extracting crude oil, rallied more than nine-fold, forcing the Indian commodity market regulator to suspend futures trading in March. Record prices are boosting costs for Halliburton (HAL), the world’s largest provider of hydraulic- fracturing services, Chief Executive Officer Dave Lesar said in a conference call on April 18.
“We have not seen much decline in prices of guar gum even after futures trading was banned because of the demand” from the fracking industry, Krishna Reddy, an analyst at industry consultant Beroe Consulting (I) Pvt., said in a phone interview.
Vikas, the second-best performer in the 535-member BSE Small-Cap Index this year, climbed 1.2 percent to 58.35 rupees at 9:44 a.m. in Mumbai today. The company is India’s only publicly traded guar gum producer.
Halliburton and Baker Hughes Inc. (BHI) help companies drill and complete oil and gas wells using a pressure-pumping technique known as fracking, which blasts water mixed with sand and chemicals underground to free trapped hydrocarbons from shale formations. Guar is made into a thickening gel used to carry sand down a well and into the cracks created from fracturing.
The cost to drill and complete a well climbed 6 percent in 2010, a further 25 percent last year and is projected to grow 20 percent this year, according to a January presentation from Tulsa, Oklahoma-based industry consultant Spears & Associates.
“There is no alternative available at this point of time and we don’t see there will be any substitute in time to come,” Vikas’ Agarwal said. The company, based in Sri Ganganagar in Rajasthan state, adjacent to the Pakistan border, aims to sell 60 percent of its production to drillers next year from 50 percent, he said.
India accounts for more than 70 percent of the global production of guar, which means “cow food” in Hindi, according to the Multi Commodity Exchange of India Ltd. The seed is also grown in Pakistan and the U.S.
Record prices may prompt farmers in India to boost the area under guar by as much as 50 percent next year, Beroe’s Reddy said. The crop was planted over 8.6 million acres this year, according to Jai Bharat Gum & Chemicals Ltd., India’s second-biggest exporter.
Guar gum prices rallied to a record $1,711 per 100 kilograms on the National Commodity & Derivatives Exchange Ltd. in Mumbai on March 21, extending gains into a fourth year.
Prices may drop as much as 50 percent as normal monsoon rain boosts planting, Mitul Shah, managing director of Rama Industries, the third-largest shipper, said last month.
Vikas expects net income in the year that began on April 1 to climb to 5 billion rupees, Agarwal said. It posted profit of 1.22 billion rupees in the nine months ended Dec. 31, according to the company’s website.
India exported 403,675 tons of guar gum worth $617 million in the year ended March 31, 2011, according to the Agricultural & Processed Food Product Export Development Authority.