Business opportunity : Natural gums and Resins

Introduction

Natural gums are plant products, formed by the disintegration of plant cellulose. These are typically extracted from seeds of plants like Guar, Tamarind, Cassia tora, etc. These are polysaccharides that increase the viscosity of solutions even when added in very small quantities. Natural gums are preferred over synthetic gums in food applications.

The natural resins, gums, gum-resins (NRG) and balsam’s global market are estimated to be about 1358.44 million USD. India is the second largest supplier of natural resins & gums in international market, with a share of 16.8%, next to France, which has a market share of 26%[1]. In India, the Guar gum has a lion’s share in total NRG production as well as in exports. Therefore, the focus of this blog is on guar gum.

Guar gum-Industry at a Glance

India enjoys monopoly in the Guar gum industry with a market share of over 80%, as it has the most suitable climate for Guar gum cultivation. The Guar industry is driven by the export market, as more than 70% of domestic production is exported. The major export destinations are USA, China, Canada, Germany & Russia. Rajasthan is the largest guar producing state followed by Gujarat, Haryana and Punjab. Rajasthan alone accounts for 70% of the total production in India.

Guar Seed Cross – section and Process flow

The guar seed has 3 parts – Germ (40-45% of the weight), Endosperm (38-45%) and Husk (14-16%), as shown in figure – 1. The gum powder is produced from endosperm in a two stage process. In the first stage, the guar splits are produced and the by-product is Guar Meal (67%) (Korma – 37% & Churi – 30%). The splits are then pulverized into gum powder, and the powder is further processed into various derivatives.

Figure 1: Guar gum seed break up

Derivatives of Guar Gum & Industry specific application

Guar gum has wide range of applications in Food Industry, Textiles, Oil well drilling, Cosmetics & Pharmaceuticals, Paper, Mining, Construction and Explosives. The derivatives of guar gum powder are grouped into Non-ionic, Anionic and Cationic.

Figure 2: Derivatives of Guar gum

The applications in various industries are listed in Table1.

Table 1: Applications of Guar Gum
IndustryUses
FoodThickening, gelling, emulsifying agent and stabilizer
TextileSizing & Finishing agent
Oil well drillingFluid loss controlling agent, additives in fracturing fluids. Fast Hydration Grade is used
Pharmaceuticalstablet binders, disintegrants, emulsifier, suspending agent, gelling agent, stabilizing agent, thickening agent, film forming agent, sustaining agent and coating agent
CosmeticsConditioner and viscosifier, thickener in toothpastes & shampoos
PaperTo get better finish, improved sheet formation, increased bursting & fold strength and denser surface for printing

Demand & Supply

Guar consumption was been around 22.7 lakh tonnes in the year 2016-17. The consumption is volatile and varies depending on the export market, which accounts for more than 70% of the domestic production. The graph depicts the trends in consumption of guar seed in the past decade.

Chart 1: Consumption of Guar seed in export and domestic markets from India

Globally, oil and gas industry is the biggest user and domestically food industry is the largest consumer of Guar gum. (See chart 2&3). The sector wise demand of guar gum powder in international & domestic market is shown below in Chart 2 & 3.

Chart 2 & 3: % application across industries in Domestic & International markets

On the supply side, there are more than 600 guar processing units in India with an installed capacity of around 10 lakh tonnes. The present capacity utilization of the industry is less than 50%, due to weak demand from the export markets. However, the demand is expected to increase due to increasing oil prices, which result in higher capital expenditure on oil exploration related activities.

Price Volatility of Guar Gum

The prices of guar gum powder is highly volatile (see chart 4) and are a function of factors such as crop cultivation, shale oil and gas exploration, availability and price of substitutes, etc. The users shift to the substitutes based on price competitiveness. But guar gum has its own advantages, for example: Guar gum is soluble in both hot and cold water as against Tamarind Kernel Powder (TKP), which is soluble only in hot water. The various substitutes to guar gum are discussed in Table 2,

Table 2: Substitutes to Guar gum
IndustryUses
TextileCMS (Carboxy Methyl Starch), CMTKP (Carboxy Methyl Tamarind Kernel Powder) and Sodium Alginate
PaperTKP, Potato Starch, etc
FoodXanthan Gum, Agar , CMC (Carboxy Methyl Cellouse)
CosmeticsTKP
Shale Oil& Gas ExplorationSynthetic Polymers

Chart No.4: Per kg [2] variation of Guar gum prices over a period of years

 

Guar Gum v/s TKP

Among natural gum, Guar gum faces competition from TKP. TKP is derived from the tamarind seed. It has excellent water absorption property and high viscosity as well. The application includes, thickening agent in sizing process of textile & printing industry and binding agent in pharmaceutical industry. The detailed comparison of Guar Gum & TKP is shown in Table No.3,

Investment

The minimum viable capacity is 6TPD (6 tonne per day) and the investment required to setup guar gum powder from Guar splits is INR 4 Cr, including the civil structure, machinery and working capital. The capital cost would increase by INR 2-3 Cr, if one is manufacturing the powder directly from the seed due to the additional investment in plant & machinery and working capital. The Breakeven period is more than 5 years.

Profitability & Governing factors

The profitability depends on the conversion margins, or the spread[3] between the guar gum and guar seed price. The spread has been volatile and has ranged between 1.4 times to 3 times over the past decade.  The profit margin can be increased by having control over the seed price, by engaging with farmers in contract farming. The profits/high returns can also be improved by making value added products for specific industry such as dairy/oil.

Why Guar Gum is an interesting opportunity?

The international demand for Guar Gum from oil and gas sector is likely to increase following higher oil prices.  The demand from food sector from both domestic and international markets is likely to remain strong.

Given the availability of idle domestic capacity, one could look at purchasing or leasing existing units, thereby reducing the initial capital investment. Instead, the investment could be made towards research and development to develop new derivatives for food and other applications.

How Can We Help?

If you are interested in starting up natural gum manufacturing unit, we can assist you in the following:

  • Identifying potential markets including domestic as well as international.
  • Detailed project report preparation – Financial analysis, Profit & Loss statements for a period of 7 years, calculation of ROI, etc.
  • Identifying existing units that are available for sale and in valuation of such units

[1]As per ICAR – Indian Institute of Natural Resins & Gums report

[2] In the year 2012-13, the price of guar gum hit all time high, this is due to the huge demand from the oil exploration companies.

[3] Spread is the ratio of guar gum to guar seed prices

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Plastic Products export:Opportunities for SMEs

Introduction

Plastics are the 6th largest traded products, globally.  Indian plastic exports are estimated to be around $ 7.6 billion[1] (Rs. 45,000 crores), accounting for around 3 per cent of our total exports. Top destinations for Indian plastics include USA, China, UAE and United Kingdom. There are over 2300 exporters[2] in India, largely located in Maharashtra and Gujarat. The exporters include both large manufacturers such as Garware-Wall Ropes Ltd, Supreme industries Limited and a number of small and medium enterprises.

Figure 1: Plastic exports-product wise and country wise breakup

Source : Plastics Export Promotion Council

[1] In FY 16

[2] There are around 2300 exporters registered with the Plastics Export Promotion Council

Raw materials (polymers) account for around 30 per cent of our plastics export and value added products for the remaining 70 per cent. Among value added products, plastic sheets, woven sacks, table and kitchenware are the key products.  The exports of these products have increased at a CAGR of around 12-20 per in the past decade (Table 1)

Table 1.  Growth in key categories  of Plastics (INR crs.)
HS codeItem2006-072016-17CAGR (%)
39269099Miscellaneous plastic products315.822,093.4120.82
39232990Plastic sacks bags439.731,964.3116.15
39269080PP articles such as woven sacks226.711,191.7318.05
39239090Plastic articles for conveyance and packaging such as crates160.16615.8114.42
39219099Plastic sheets, films, foils strips, plates, etc.30.33575.6934.22
39241090Tableware Kitchenware55.58505.7824.71
39219096Laminated Flexible packaging items (plates, sheets, films, foils, strips. Etc.)58.93393.8420.92
3917Tube , Pipes and Hoses and fittings284.99947.1912.76
39241010Plastic insulated Tableware Kitchenware89.81386.2415.71
Source : Directorate General of Foreign trade

How To Tap The Export Market

Entering the foreign requires a lot of preparation towards market research and product development, as the products have to meet the requirements of new customers, who may have different standards of quality, design and product packaging.  Also, diversifying into exports entails extensive documentation of company’s processes related to quality, purchase and sales, thus requiring a few dedicated resources. As such, venturing into export market comprises following steps:

Select The Market

Markets can be selected based on size of the opportunity, ease of entry and company’s competitiveness vis a vis other suppliers. The below given graph highlights key markets for various plastic products.

Table 2. Top  export markets  for key Plastics products
HS codeItemCountryCountry’s share in Indian plastics  exports
39269099Miscellaneous plastic productsU. S.21%
Canada6%
UAE4%
39232990Plastic sacks & bagsU.K13%
U.S.A8%
Canada6%
39239090Plastic articles for conveyance and packaging such as plastic cratesU K12%
U A E10%
U S A9%
39269080PP articlesU S A61%
Spain5%
Brazil5%
Source : Directorate General of Foreign trade

As can be seen, the key markets are different for each category of product, for example in FY16, UK accounted for the highest share in exports for plastic bags and sacks, whereas USA was the largest buyer for polypropylene (PP) products.  One can do a detailed market analysis to understand the key consumer countries as well as other suppliers that are supplying to the same market and the competitiveness of your goods vis a vis other suppliers.The competitiveness of the product also gets impacted by the trade and non-trade barriers as explained below.

Trade Barriers

These refers to custom related tariffs, anti-dumping duties that are imposed on the imported products by the countries so as to protect their domestic industry. For example, recently Govt of USA announced its plans to levy a tariff of 25% on imported steel and a 10% of Tariff on imported Aluminium products from a number of countries except Canada, Mexico.

However, the import tariffs are typically lower among trading partners who are party to different agreements such as Free Trade agreements (FTA), Comprehensive Economic Agreement (CEA) etc.   For example, India has trade agreementswith a number of countries including ASEAN, whereby the tariff on a number of products among the ASEAN countries is gradually being brought down to zero. Many of ASEAN members are importers of plastics (HS code 39) and India currently has very limited share in these markets (see Table 4), thereby presenting an opportunity.

Table 3. Plastic imports by ASEAN countries , 2016
CountryCountry wise Plastic imports from the world ($ mn)Country wise plastics imports from India ($ mn)Share of India  in plastic  imports
Indonesia6999.8096.801.40%
Malaysia6827.6032.100.50%
Myanmar582.608.301.40%
Philippines3061.6014.000.50%
Singapore6687.3049.300.70%
Thailand8034.2081.001.00%
Vietnam9614.6087.800.90%
Source : Strengthening ASEAN-India Partnerships: Trends and Future prospects, a report by Export-Import bank of India
Non Trade Barriers

These refers to legislations/other technical requirements that make it very expensive for Indian products to access a particular market. For example the cost of certifications of food grade plastics products in US and Europe are high at around $ 4000-5000 per product per year[1], thus making it very difficult for Indian SMEs to target these markets.

As such it may be easier for a new exporters to start with Asian markets, where the customers’ preferences are similar to India. However a detailed analysis of market size and competitiveness of our products vis a vis other suppliers is a must.

Market Entry Strategy

Having selected the market, a company can choose to enter the market by directly contacting the buyer, selling to a local distributor or participating in a joint venture with a local partner.The trade fairsand buyer’s sellers meet are commonly used by SMEs to identify the buyers as well as test market their products. Some of the trade fairs related to plastics industry include National Plastics Exhibition (NPE), USA, Chinaplas (a plastics and rubber trade fare in China) and Plastindia (Plastic trade fare in India).

The ministry of MSME offers a number of schemes to exporters for market development assistance including exposure visits to foreign markets and concessions in stall charges and air fare to participate in exhibition. These schemes are administrated by Plastics Export Promotion Council (PLEXCONCIL) or Federation of Indian exporters (FIEO), who also organise trade fares in India and facilitate meeting with international buyers.

Meet The Technical Requirements

The exporters need to comply with the technical requirements of the destination country and obtain relevant product certifications. These certifications can be broadly divided into two parts: certifications related to process and safety such as ISO and product related certifications.In general, product certifications required for US and Europe markets are more stringent than those needed for Asian, African and other markets. A summary of important certifications across plastic products is provided below.

Table 4. Technical Certifications  for plastics products
CountryCertifications
Injection moulded productsISO  and product certification based on applications
Pipes and fittingsWater Regulation Advisory Scheme (WARS) for UK, NSF for USA, DVGW for Germany
Food grade plasticsUS FDA guidelines, European Commission (EC ) guidelines
ToysConsumer product safety improvement act (CPSIA) in USA,  EU Toy Safety Directive in Europe
Woven sacksLabour data certificate for FIBC (Flexible intermediate bulk container)
Source : Discussion with NSF officials  and FineTrain research

Estimate The Capital Investment And Profitability Of Export Market

The costs can be divided into two categories:  fixed cost and variable costs. The fixed cost or capital investment required for the export market would depend on the product adaptations/customisations, certification costs and working capital requirements.The working capital cycle can be up to 3 months including the time realised in getting the payment from the buyers as well as for claiming refunds/incentives from the government.

The price of the product in foreign markets should factor the costs such as   commercial costs (shipping, packaging, and duties, insurance), marketing costs over and above the product cost.The marketing expenses such as cost of catalog, samples and visits to the destination country can add up to a significant chunk.

Some of the common costs that are incurred by the exporters include transport cost from factory to port of departure, import duty and taxes, custom clearance, ground transportation from port to customer’s warehouse and marketing agent’s commission.

As such the exporter needs to factor in both fixed and variable before quoting the price and also estimate the minimum volumes they need to sell to recover their costs.

Secure The Order And Finalise Trade Terms

Once the buyer is interested in your product, the next steps would be to finalise the trade terms also known as Incoterms. These typically define the responsibilities of buyers and sellers and costs and risks undertaken by each party.  Some of the commonly used terms include EXW (pricing is ex-factory and buyer is responsible for the transport/insurance), FOB (Free on Board, pricing includes cost of transport till the port of origin) and CIF (Cost insurance and freight, the pricing includes the freight costs and insurance required for transporting the goods to destination).

How Can We Help?

If you are interested in exporting your plastics products, we can assist you in the following

  • Identifying potential markets for your products
  • Viability study for entering a particular market
  • Assistance in generating a list of potential buyers and in scheduling meetings

[1] Based on discussions with NSF International’s office in India

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