As China continues to restrict supply of rare earth materials, the prices are likely to only increase in short term. The first round of price increases has just beginning to surface with most manufacturers implementing their price increases in staggered manner. Economic Times has recently reported that various brands have increased prices of Compact Fluorescent Lamps (“CFLs”) by 5-15% in Nov ‘11. For example, a branded CFL bulb, which was selling at Rs 80 a few weeks ago, now costs Rs 90 in the domestic market.

1. December 22, 2011
bulbtiger.com
admin
Going green become costlier as CFL prices
soars
1. Shortage of raw materials – The China
C
onsumer good companies have managed to
held or improved margins and reported nomi- angle
nal growth during Q3, 2011 as the consump-
tion demand remains strong even in a high infla- China is currently a producer of ~95% of the world’s
tionary environment. However, the volume growth rare earth materials which are vital for green-energy
has cooled down and could see a further slowdown products including giant wind turbines, hybrid ga-
if interest rates continues to remain high. Import soline-electric cars and compact fluorescent bulbs.
oriented industries have particularly suffered [...] The increase in prices of CFL is largely attributed to
rising prices of rare earth elements which are used
Consumer good companies have managed to held for a coating called Phosphor on the inner surface
or improved margins and reported nominal growth of the fluorescent lamps that absorbs the ultraviolet
during Q3, 2011 as the consumption demand re- light and converts it into fluorescent light, mostly
mains strong even in a high inflationary environ- in the visible spectral region. The high cost of rare
ment. However, the volume growth has cooled down earths is having a significant effect on cost of wind
and could see a further slowdown if interest rates turbine and electric motor production as well in
continues to remain high. Import oriented industries spite of offsetting government subsidies for green
have particularly suffered in this downturn due to tech products.
depreciation of the rupee and rising input costs.
China, the only producer of rare earth minerals in
http://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/
Economic Times has recently reported that various the world has been cutting on its exports citing envi-
brands have increased prices of Compact Fluorescent ronmental reasons. China has closed or nationalized
Lamps (“CFLs”) by 5-15% in Nov ‘11. For example, a dozens of the producers of rare earth metals over
branded CFL bulb, which was selling at Rs 80 a few last few months in order to limit radioactive residues
weeks ago, now costs Rs 90 in the domestic market. from the rare earth industry. China is currently ex-
CFL bulb price rise has not been confined to India porting about 30,000 tons a year – only one-fourth of
as the prices have also soared in developed nations the world’s demand. The problem with the supply
as well. The average price for fluorescent bulbs has of rare earth elements is that China sees them as
risen 37 percent this year in US. General Electric, of long term strategic importance for their future
facing complaints in the United States about rising economy (similar to how other commodities and
prices for its CFL bulbs, highlighted that the prices raw materials are controlled around the world like
of the rare earth element europium oxide has risen OPEC controls oil).
by 12 times in one year. Wal-Mart has also raised
prices on some brands lately. Figure 1: Global rare earth materials production
trends (1950-2010)
The price rise is due to combination of various fac-
tors, some of which are discussed as follows:
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2. December 22, 2011
bulbtiger.com
Going green become costlier as CFL prices soars
• There is also a clear preference towards CFL
bulbs among middle and upper class due to
rising income levels, increasing electricity
prices and awareness about environmen-
tal concerns. CFLs are also very popular in
small towns facing severe shortage of elec-
tricity as they can run on battery invertors
for long time.
Figure 2: Annual CFL sales (million units) in India
(2005-10)
Source: U.S. Geological Survey (USGS)
2. Rising Demand – The Government push and
increasing awareness
CFL is estimated to be a Rs 2,500 crore/ US$ 500
million industry. The industry has grown at CAGR
of ~35% over 2005-10. CFL is approximately 30%
http://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/
of total lighting market in the country pegged at Rs
8,000 crore/ US$ 1.5 billion which is still dominated Source: Elcom India
by incandescent lamps. The demand for CFL lamps
is expected to grow at ~20% over next 5 years after 3. Rising cost of import (raw materials, taxes,
which it may slow down to 10-15% as LEDs are likely currency depreciation etc)
to become preferred source of lighting by that time.
In October 2010, the Chinese announced plans to not
• India’s CFL market is catching up fast with only cut their production, but also to reduce exports
the rest of the world. Bachat Lamp Yojana, by one-third. This has led to whopping 800% rise in
announced in Jul ’07 and launched in Feb Phosphor prices from over just five months. Pphos-
’09, is the flagship program of Indian go- phor once represented roughly 10% to 15% of the
vernment to ensure nationwide access to cost of a typical CFL, it now exceeds 50% (or more
efficient lighting to all at an affordable price in some models) of the total lamps production cost.
and to phase out incandescent bulbs from Glass tubes are another significant component of
homes across India and replace them with CFL products, constituting ~45% of CFL component
CFLs. The government plans to completely costs. In addition, Indian companies have to pay a
phase out ~400 million incandescent bulbs hefty tax of ~22% on imports of rare earth material.
by 2020. This would result in saving ~6,000 As rupee has depreciated by ~15% in 2011, the cost
MW of electricity per annum. of import has also gone up several times. The indus-
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3. December 22, 2011
bulbtiger.com
Going green become costlier as CFL prices soars
try has been lobbying hard to the government to difficult due to long distances and high transport
remove taxes on rare earth imports to keep prices expenses. Currently, CFL manufacturers provide a
of the energy-efficient bulbs under check. product warranty varying from 6-12 months from
the date of purchase. This has been a major concern
Figure 3: Phosphor Price rise in 2011 (RMB/ Kg) for CFL makers in India because market malprac-
tices have led to significant claims for returns. For
example, in 2007-08, Havells return rate was 12.7%
of its CFL sales. To rectify the situation, the company
withdrew its products from certain states where
malpractices were rampant. As market stabilizes
in other states, it re-gains the market share lost
and significantly improved its return rate to 1.9%
in 2009-10. In contrast, return rate for local non-
branded CFLs is still as high as ~10%.
5. Pricing strategy – high profit margins, a cash
cow for manufacturers
Various incentives by Indian Government to bulb
Source: TCP Bulletin manufacturers and rising electricity cost has resul-
ted in soaring demand for energy efficient bulbs.
4. High return rates – increase effective However, the profit mongers, retailers and manufac-
cost of production and distribution turers, continue to charge super premium on these
bulbs. A recent news article has discussed the profit
http://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/
The CFL market in India is complex, comprising of margins CFL suppliers are charging from helpless
12 major brands and hundreds of small players. consumers in the name of saving energy. CFL bulbs
About 40-50% of the market is dominated by the are generally priced so high to extract maximum
unorganized sector. The industry depends on large profit from elite and environment conscious rich
amounts of imports, with even branded products clientele who are willing to pay an exorbitant price.
using large amounts of imported components. It is However, with a rising inequality in incomes, poor
the unorganized and import-based nature of the India can barely afford a meal and Rs 10/- light bulb,
industry which makes the regulatory and quality let alone a Rs 100/- CFL. It is pertinent to note that
control challenge difficult but critical. To improve
the production quality, the Bureau of Indian Stan- • The maximum cost of production of a
dards had revised the standards for CFLs (increased standard 20 Lm CFL is only ~ Rs 40/ US$ 0.8,
the power factor, an indicator of lamp efficiency, computed with the concessional duty on
from 0.5 to 0.85 and fixed 6,000 hours as the mini- import. If all costs, such as banking, clea-
mum life for all CFLs. ring, forwarding, inward transportation,
labor, other overheads, selling, distribution,
CFLs have a high failure rate in India due to high and marketing – including a profit margin
fluctuations in electricity supply and lack of adhe- of 15% are included, the price of the CFL
rence to product specifications, especially in the bulb will not exceed Rs. 54/ US$ 1. Please
rural areas. Replacement of the bulbs is particularly note that these are conservative estimates
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4. December 22, 2011
bulbtiger.com
Going green become costlier as CFL prices soars
and the actual cost of production is likely
to be just Rs. 20/ US$ 0.5 – considering the
benefit of economies of scale.
• CFL is a manufacturer’s dreams come true
as they are charged almost four times the
production cost. Interestingly the average
discount offered to the retailers across all
states is >40% on the MRP in addition to
several volume linked performance incen-
tives.
• There is vast difference in pricing of
branded and non-branded bulbs. Non-
branded CFLs, primarily catering to price
sensitive rural populace sell the products at
~75% discount to corresponding branded
CFL. The idea is to churn CFLs in high vo-
lume and give shorter warranty (6 months
vs 12 months for branded) to make up for
high return rates.
Outlook
As China continues to restrict supply of rare earth
materials, the prices are likely to only increase in
http://bulbtiger.com/blog/2011/12/22/going-green-become-costlier-as-cfl-prices-soars/
short term. The first round of price increases has
just beginning to surface with most manufacturers
implementing their price increases in staggered
manner. The timing of the latest price increases is
politically awkward for the lighting industry and
for environmentalists who backed a shift to energy-
efficient lighting. Going forward, the CFL industry
is expected to increasingly consolidate away from
the unorganized sector as the shift towards higher
quality gains further momentum and the benefits
of scale accrue to the larger players. Also, the price
differential between branded and non-branded will
further reduce due to economy of scale in produc-
tion and increase in demand for newer technologies
like LED.
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