Incorporated in 1982, Pakistan Gums and Chemicals (PakChem) is among the largest producers of guar gum in Pakistan and the only public limited company in Pakistan's guar industry listed on PSX. It is an export based company with customers located in North America, Europe, China and Middle East among other places. PakChem has a manufacturing facility that converts guar seed into finished guar gum.
Guar is a natural additive with different applications in industry due to its unique properties. It can be used as a thickening agent, gelling agent, fracturing agent, stabilizer and fat replacer. The by-product guar meal is used as a nutritional supplement for animal, poultry, and cattle feed.
Guar gum is used in a range of industries from food, adhesives, cosmetics, and textiles to the paper industry and mining and oil and gas exploration.
Global guar industry
The international market for guar has been growing rapidly primarily due to increasing demand from oil, food and pharmaceutical industries. The multi-functional nature of guar powder is the driving force behind its high demand.
About 65 percent of guar gum production is consumed by oil and gas industries globally. 30 percent is consumed by the food sector and allied industries such as toothpaste, and the remainder is used by the pharmaceutical industry. The main importers of guar are the US, Germany, and China.
In recent years, there has been a huge global supply of guar. The crash in oil prices and emergence of oil energy substitutes have resulted in a decline in demand. Excess supply and decrease in demand have resulted in lower prices of guar and its by-products.
India is the top exporter of guar gum, contributing about 80 percent of the world's total production. Despite the fall in prices, its exports have been increasing on average by 20 percent per annum. Other than India, guar is grown in Pakistan, USA and some parts of Africa and Australia. Globally, the guar gum powder market is growing and is expected to increase from about 1.2 million tonnes globally to 2.2 million tonnes by 2022.
Financial history
Since PakChem is an export based company, its profit margins are strongly influenced by international trends. North America is among the top consumers of guar gum. A spike in US demand and decrease in global production in 2009 resulted in higher guar prices globally, which led to an increase in turnover and profitability for PakChem.
However, in response to the increase in demand, India increased production. New production sites were set and processing factories established in Rajasthan. Meanwhile, the higher prices led China and Australia to seek local production and to explore cheaper substitutes.
As a result, PakChem faced increased competition in its markets, which drove down its gross profit margins. Since 2013, PakChem's turnover and profitability has been declining. Other than low international prices, frequent outages in electricity and gas supply also posed challenges.
The downward slide of its net profit margins was halted somewhat in 2014 by a decrease in the main raw material of guar gum, ie guar seeds. In 2015, seed suppliers started hoarding their stocks to maintain prices at a higher level. On the other hand, the value of guar gum continued to fall to unprecedented levels. Guar market in India crashed with Indian producers making distressed sales at very low prices, which adversely impacted PakChem's sales. The situation was exacerbated with oversea customers holding back on their orders in anticipation of a further reduction in prices. This led to PakChem sustaining losses in 2015 and 2016.
3QCY17 Performance
The first 2 quarters of CY17 saw an increase in guar seed prices and continued losses. But there seems to be a glimmer of hope in the third quarter of this year as net profit was booked at Rs 1 million. Though the volatility in the market is expected to continue, PakChem has consumed most of its inventory and is booking new orders at break even or a modest profit.
The management has also been trying to watch seed prices and purchase cautiously, which seems to be paying off. In the latest results posted by PakChem, the gross profit has been in the black for the first time since 2014. Though sales increased marginally, cost of sales decreased significantly, which allowed PakChem to cover all its overheads.
Despite the improvement, the approach remains cautious as volatility in seed prices and sluggish demand trends are expected to continue globally.
Future outlook
Despite forecasts of an increase in demand, there is no indication that price of guar gum will rise since there is also excess supply in the market. A silver lining is the increasing awareness and trends towards consumption of organic foods, which bodes well for demand of guar gum powder. Increase in per capita income in developing countries is also likely to boost the demand by the food industry.
However, the increase in demand by the food industry will not make up for the decrease in demand for industrial grade products for hydraulic fracturing industry. Furthermore, guar production is also subject to seasonal changes and the hoarding and black marketing of its seeds. As things stand, it is unlikely that PakChem's fortunes will reverse for the better in the near future.
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Pakistan Gums & Chemicals Limited
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Rs. mn 3QCY17 3QCY16 YoY%
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Net sales 145 140 4%
Cost of sales (127) (158) -20%
Gross loss/profit 17 (17) N/A
Shipping expense (4) (4) 0%
Administrative expenses (13) (11) 18%
Other operating expenses (0.4) (0.1) 233%
Other income 2 2 0%
Operating profit/loss before finance costs 3 (30) N/A
Finace costs (1) (0.4) 150%
Net profit/loss before taxation 2 (30) N/A
Tax (1) (2) -50%
Net profit/loss for the year 1 (32) N/A
EPS - Rs. 0.23 (7.52) N/A
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Source: Company accounts
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Pattern of shareholding
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No. of %
shares held
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Individuals 684,755 16
Joint stock companies 6,750 0.16
Directors, CEO, their spouses and minor children 716333 17
Associated companies & related parties 2,680,498 63
Banks, DFIs, NBFIs, Insurance Companies, 152,056 4
Investment Cos, Modarbas & Mutual Fund
Charitable trust 7,260 0.17
Shareholders holding 5% or more voting interest
East West Group Holdings Inc. 2,549,131 60
Shipwell (Pvt.) Limited 131,367 3
Mr. Shuaib Ahmed 452,934 11
Mrs. Zakia Hana 398,310 9
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