United States
Environmental Protection
Agency
Office Of Air Quality
Planning And Standards
Research Triangle Part NC 27711
EPA-452/R-02-013
November 2002
FINAL REPORT
Air
Economic Impact Analysis
of the Proposed
Taconitk Iron Ore NESHAP
[Final Report
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Economid Impact Analysis
of tlfe Proposed
Taconite Iron Ore NESHAP
Environment?, 1 Protection Agency
3f Air and Radiation
Planning and Standards
gies and Standards Division
Triangle Park, N.C. 27711
U.S.
Office
: Office of Air Quality
Air Quality Stra:e
MD-15; Research
Final Report
November 2002
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jDisclaimer
This report is issued by the Air Quality Standards &Strategies
Division of the Office of Air Quality Planning and Standards of
the U.S. Environmental Protection Agency (EPA). It presents
technical data;on the National Emission Standard for Hazardous
i
Air Pollutants'(NESHAP)for Reciprocating Internal Combustion
Engines, which.is of interest to a limited number of readers. It
should be read in conjunction with the Background Information
Document (BID) for 'the NESHAP and other background material used
to develop the.rule, which are located in the public docket for
the NESHAP proposed rulemaking. Copies of these reports and
other material supporting the rule are in Docket A-95-35 at EPA's
Air and Radiation Docket and Information Center, 1200
Pennsylvania Avenue, N.W. ; Washington B.C.-. 20460. The EPA may
charge a reasonable fee forjcopying. Copies are also available
through the National Technical Information Services, 5285 Port
Royal Road, Springfield, VAJ 22161. Federal employees, current
contractors and grantees, and nonprofit organizations may obtain
copies from the Library Services Office_(MD-35), U.S.
Environmental Protection Agency, Research Triangle Park, N.C.
27711; phone (919) 541-2777J
v
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VI
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I CONTENTS
Section
I
Pap
Executive Summary ES-1
1 Introduction '. 1-1
2 Industry Profile 2-1
2.1 The Supply Side . j 2-3
2.1.1 Taconite Pellet Production Processes, Inputs and Outputs .... 2-3
2.1.1.1 Mining of Crude Ore .2-3
2.1.1.2 Bejieficiation 2-5
2.1.1.3 Aglglomeration 2-8
•2.1.2 Types of Products 2-8
2.1.3 Major By-Products, Co-Products, and Input Substitution
: Possibilities .• 2-10
2.1.4 Costs of Production and Worker Productivity 2-11
2.1.4.1 Costs of Production '. 2-11
2.1.4.2 Variations in Worker Productivity by
Establishment Size 2-12
i
2.2 The Demand Side [ 2-13
2.2.1 Uses and Consumers 2-13
: 2.2.1.1 Ustes 2-13
2.2.1.2 Consumer Characteristics 2-15
2.2.2 Product Characteristics '. 2-15
;2.2.3 Substitutio^t Possibilities in Consumption 2-15
i
2.3 Industry Organization 2-17
;2.3.1 Taconite Manufacturing Facility Characteristics ' 2-17
:2.3.2 Firm Characteristics ' 2-19
2.3,2.1 O^ership 2-20
2.3.2.2 Size Distribution : 2-20
2.3.2.3 Horizontal and Vertical Integration 2-20
2.3.3 Small Businesses in the Taconite Industry 2-24
2.3.4 Market Structure 2-24
2.3.4.1 Measures of Industry Concentration 2-25
2.3.4.2 Geographic Concentration 2-25
2.4 Markets - 2-25
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2.4.1 Historical Market Data 2-25
2.4.1.1 Domestic Production 2-26
2.4.1.2 Domestic Consumption 2-26
2.4.1.3 Domestic Prices 2-26
2.4.1.4 Foreign Trade 2-29
.2.4.2 Trends and Projections : 2-29
3 Engineering Cost Estimates 3-1
3.1 Description of Emissions Controls 3-1
3.2 Summary of Costs . 3-2
3.2 Plant-Specific Costs 3-3
4 Economic Impact Analysis: Methods and Results . . . 4-1
4.1 Conceptual Approach • 4-1
4.1.1 Baseline and With-Regulation Market Equilibrium 4-1
4.1.2 Approach for Modeling Impacts on Affected Markets 4-3
4.1.3 Supply 4-4
4.1.4 Demand 4-4
4.2 Economic Impact Results 4-5
4.2.1 Market-Level Impacts 4-5
4.2.2 Industry-Level Impacts , 4-6
4.2.3 Impacts at the Company Level 4-8
4.2.3.1 Review of Empirical Literature on Closure 4-8
4.2.3.2 With-Regulation Company Operating Income 4-9
4.2.3.3 Company Ability to Make Compliance Capital
Investments 4-10
4.2.4 Employment Impacts 4-10
4.2.5 Social Costs 4-11
4.2.6 Sensitivity Analysis 4-11
4.3 Regional Economic Impacts 4-12
4.3.1 IMPLAN Application in Regional Economic Impact
Analysis 4-13
4.3.2 Data for the Impacted Regions 4-15
4.3.3 Assessment of Regional Economic Impacts 4-15
4.3.3.1 Effect of Regulation on Local Economy 4-16
4.3.3.2 Impact of Regulation on Local Business Output ... 4-16
4.3.3.3 Change in Employment 4-18
»
References R-l
Appendixes
n
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A
B
Model Data Set and Specification
Sensitivity Analysis Results
A-l
B-l
in
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Number
2-1
2-2
2-3
2-4
2-5
LIST OF FIGURES
Page
Process Flow Diagram for Taconite Iron Ore Processing 2-4
Flow Sheet: Concentrating : 2-6
Flow Sheet: Pelletizing 2-9
Locations of Taconite Iron Ore Processing Facilities 2-19
Taconite Iron Ore Facility Operator and Ownership, 2000 2-22
4-1 Market Equilibrium without and with Regulation 4-2
IV
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LIST OF TABLES
Number
2-1 Iron Ore Mined and Pelletjized in the United States, 2000 (103 metric tons) ... 2-5
2-2 Crushing Stages Operated; at Eight Taconite Facilities in Michigan and Minnesota,
2000 |. ....... . . .......:... 2-7
2-3 Types of Indurating Furnaces Used at Eight Taconite Facilities, 2000 2-10
2-4 Production Costs for NAICS 21221—Iron Ore Mining, 1997 2-12
2-5 Worker Productivity by Plant Size for Facilities in NAICS 21221 —Iron
Ore Mining, 1997 \ 2-13
2-6 U.S. Consumption of Iron! Ore by End Use, 1995-2000 (103 metric tons) ... 2-14
2-7 Iron Making Capacity and| Facility Location of U.S. Integrated Iron and
Steel Companies (103 metric tons per year) . . 2-16
2-8 Taconite Iron Ore Facility! Capacity and Production, 2000 2-18
2-9 Taconite Iron Ore Facility! Operator and Ownership, 2000 ; ....... 2-21
2-10 Taconite Iron Ore Facility; Owner Company Sales and Employment, 2000 .. 2-23
2-11 Domestic Production and [Consumption of Iron Ore, 1990-2000
(103 metric tons) j ............. 2-27
2-12 Historical Prices of Iron O|re Products, 1990-2000 2-28
2-13 U.S. Imports for Consumption and Value of Imports of Iron Ore Products,
1990-2000 ($103) I 2-30
2-14 Value of Imports for Consumption and Exports of Iron Ore by Country,
2000 ($103) 1 2-31
2-15 Quantity of Imports and FJxports of Iron Ore by Type of Product, 2000
(103 metric tons) i 2-32
2-16 U.S. Domestic Exports an;d Value of Exports of Iron Ore Products,
1990-2000 ($103) ..... .1 2-33
i
3-1 Proposed MACT Standards for Existing Affected Sources 3-2
3-2 Summary of the Industry tost (106 $2000) 3-3
3-3 Plant-Specific Costs (106 ^2000) 3-4
i
4-1 Market-Level Impacts of ihe Taconite NESHAP, 2000 4-6
4-2 Industry-Level Impacts ofjthe Taconite NESHAP, 2000 ' 4-7
4-3 Social Costs of the Taconite NESHAP, 2000 4-12
4-4 Background of Impacted Counties in 1998 4-15
4-5 Direct Impact of Proposed Taconite NESHAP on Regions in Minnesota and
Michigan ($2000) | 4-17
4-6 Estimated Total Impacts of the Taconite NESHAP on Value of Output
(103 $2000) 4-18
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4-7 Estimated Total Change in Employment (Number of Employees) . . 4-19
VI
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EXECUTIVE SUMMARY
Under Section 112 of the Clean AJir Act (the Act), the U.S. Environmental Protection
Agency (EPA) is developing national emission standards for hazardous air pollutants (NESHAP)
for the taconite processing source category. Taconite processing involves separating and
concentrating iron ore; as well as creating and indurating (hardening) pellets. Taconite production
in the U.S. is concentrated in a few counties in Minnesota and Michigan.
To better control emissions of hazardous air pollutants (HAPs) during these processes,
EPA expects that additional emission control equipments will be installed for indurating furnaces
and other part of the operation, such as orjsite crushing and handling and pellet handling. See
Table ES-1 for detail. The Agency has estimated the total capital costs of complying with the
proposed rule to be approximately $47 million, and the total annualized cost (including the costs
of new capital equipment and new operation, maintenance, monitoring, recordkeeping, and
reporting activities) to be $7.09 million. The controls will increase the cost of producing taconite
pellets and the iron and steel made from those pellets. For this reason, the Agency examined the
economic impacts on the industry using an integrated mathematical model that simulates the
market response of taconite and iron and steel producers to the estimated costs of compliance.
The model predicts that the price of taconite will increase by approximately $0.01 .per metric ton
(0.02 percent of the current price) while Domestic taconite production is projected to decline by
three thousand metric tons (0.03 percent of the total production). Additional results are presented
in Table ES-2. ' j
Further, the Agency conducted a regional impact analysis using IMPLAN (an input-
output model) recognizing the fact that taconite production facilities are highly geographically
concentrated in Minnesota and Michigan.! However, these incremental regional impacts are
projected to be very small. The IMPLAN results reported in Table ES-3 indicate that the $2.7
million of direct costs that are imposed on the region cause the regional economy another $1.2
million loss via indirect and induced effects. Overall. EPA estimates that the proposed rule may
lead to approximately ,30 layoffs.
ES-1
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Table ES-1. Estimated Total Costs of the Taconite NESHAP (106 $2000)
Annualized
Total Capital
Capital Cost (106
Cost Component Cost ($106) $/yr)
O&M MRR
Cost (106 Labor Cost
$/yr) (106 $/yr)
Total
Annualized
Cost (106
S/yr)
Emission Control
Cost
Monitoring,
Recordkeeping
and Recording
Cost
44.5
3.19
3.82
0.27
2.86
0.1
0.029
6.68
0.41
Total Cost
47.7
4.1
2.96
0.029
7.09
Table ES-2. Social Costs: (106 S200Q)
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs
-$3.433
-$3.650
,-$0.686
-$4.888
$1.212
$0.711
-$7.084
ES-2'
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Table ES-3. Estimated Total Impacts of the Taconite NESHAP on Value of Output (106
$2000)a
Minnesota
Michigan
Direct effect
Indirect effect
Induced effect
-2.657
-0.769
-0.451
0.049
0.014
0.007
Total Impact
-3.877
0.070
a All amounts were inflated using the consumer price index available from the Bureau of Labor
Statistics ().
Source: MIG. 2002. IMPLAN impact report of output.
This economic impact analysis (EIA) is organized as follows. Section 1 provides an
introduction to the analysis. Section 2 describes the taconite industry and affected production •
processes. Section 3 reports the estimated national control costs. Section 4 and Appendix A
present the analytical methods used and the estimated economic impacts of the rule. Appendix B
provides a sensitivity analysis by varying [elasticities of demand and supply.
ES-3
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SECTION 1
INTRODUCTION
Under Section 112 of the Clean Air Act (the Act), the U.S. Environmental Protection
Agency (EPA) is developing national emission standards for hazardous air pollutants (NESHAP)
for the taconite processing source category. Taconite mining and processing fall under the North
American Industry Classification System (NAICS) 21221 Iron Ore Mining. According to the
1997 Economic Census of Manufacturing, in 1997, 32 establishments owned by 26 companies
produced products that are categorized in NAICS 21221 (U.S. Department of Commerce, Bureau
of the Census, 2000). In 1997, these firms employed 7,920 workers and shipped products valued
at $1.9 billion (U.S. Department of Commerce, Bureau of the Census, 2000).
Since 1997, however, the number of companies, plants, and employees in the industry has
declined. Demand for domestic iron ore is entirely dependent on the steel industry. Due to
massive imports of foreign semifinished steel and iron ore, as well as the adverse effect of the
1997 Asian financial crisis, approximately 20 domestic steel companies have filed for bankruptcy
since 1997 (Skillings Mining Review, 2000; Kirk, 2000a; Kirk, 2000b). Concurrently, the
domestic iron ore industry has experienced major structural changes through company mergers
and acquisitions. As reported in the 2002 U.S. Geological Survey Mineral Commodity
Summaries, in 2001, 13 iron ore companies owned 13 mining operations, 10 concentration
plants, and 10 pelletizing plants. During the same period, these firms employed approximately
6,000 workers and shipped products valued at $1.5 billion (Kirk, 2002).
Taconite, the principal iron ore mined in the United States, has a low (20 percent to 30
percent) iron (Fe) content and is found in hard, fine-grained, banded iron formations. The main
taconite iron ore deposits are located near Lake Superior in Minnesota (Mesabi Iron Range) and
Michigan (Marquette Iron Range). The taconite mining operations in Michigan and Minnesota
accounted for virtually all domestic iron ore production (Kirk,.2000a). The following taconite
ore production processes will be covered by the proposed rule (EPA, 2001):
• liberation of the iron ore by wet or dry crushing and grinding in gyratory crushers,
cone crushers, rod mills, and ball mills;
• concentrating of the iron ore by magnetic separation or flotation;
• pelletization by wet tumbling with a balling drum or balling disc; and
• indurating using a vertical shaft furnace, straight grate, or grate/kiln, and material
handling (transfer, pellet cooling) of the indurated pellets.
To better control emissions of HAPs during these processes, the proposed rule will
increase the cost of performing these operations. This, in turn will increase the cost of producing
taconite pellets and the iron and steel made from those pellets, affecting prices and quantities in
both the market for taconite and the markets for steel and iron products that taconite is used to
produce. Therefore, this economic impact analysis (EIA) analyzes the economic impacts of the
compliance costs on the industry, based on a conventional economic framework. Because the
economies of the regions where taconite is mined -are so dependent on taconite, we also analyze
the region-wide impacts of the proposed rule. The report is organized as follows:
• Section 2 provides background information on the taconite industry and describes the
affected production processes in great detail.
1-1
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Section 3 reports the estimated national control costs based on different emissions
control equipments for indurating furnaces, onsite crushing and handling facilities.
and pellet handling operations.
Section 4 presents an integrated mathematical model that simulates the market
response of taconite and iron and steel producers to the estimated costs of compliance.
Section 4 also presents the estimated impacts on the markets for taconite and steel,
companies in the taconite industry, and the regions where taconite production is
concentrated. j
Appendix A provides details about data and methodology, and Appendix B presents
the results of a sensitivity analysis of estimated demand and supply elasticities.
1-2
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• SECTION 2
INDUSTRY PROFILE
This industry profile provides information to support the economic impact analysis (EIA)
of a proposed National Emission Standard for Hazardous Air Pollutants (NESHAP) regarding
taconite iron ore processing. Taconite mining and processing fall under the North American
Industry Classification System (NAICS) 21221 Iron Ore Mining. Using the NAICS definition,
this industry comprises establishments primarily engaged in (1) developing mine sites, mining,
and/or beneficiating (i.e., preparing) iron ores and manganiferous ores valued chiefly for their
iron content and/or (2) producing sinter iron ore (except iron ore produced in iron and steel mills)
and other iron ore agglomerates (U.S. Department of Commerce, Bureau of the Census, 2001).
According to the Economic Census of Manufacturing, in 1997, 32 establishments owned
by 26 iron ore companies produced products that are categorized in NAICS 21221 (U.S.
Department of Commerce, Bureau of the Census, 2001). In 1997, these firms employed
7,920 workers and shipped products valued at $1.9 billion (U.S."Department of Commerce.
Bureau of the Census, 2001). Since 1997, however, the number of companies, plants, and
employees in the industry has declined. Demand for domestic iron ore is entirely dependent on
the steel industry. Due to massive imports of foreign semifinished steel and iron ore, as well as
the adverse effect of the 1997 Asian financial crisis, 18 domestic steel companies have filed for
bankruptcy since 1997 (Skillings Mining Review, 2000; Kirk, 2000a; Kirk, 2000b).
Concurrently, the domestic iron ore industry has experienced major structural changes through
company mergers and acquisitions. As reported in the 2002 U.S. Geological Survey .Mineral
Commodity Summaries, in 2001, 13 iron ore companies owned 13 mining operations, 10
concentration plants, and 10 pelletizing plants. During the same period, these firms employed
approximately 6.000 workers and shipped products valued at $1.5 billion (Kirk, 2002). By late
2002, only 8 plants owned by 8 companies produced taconite.
Taconite. the principal iron ore mined in the United States, has a low (20 percent to 30
percent) iron (Fe) content and is found in hard, fine-grained, banded iron formations. The main
taconite iron ore deposits are located near Lake Superior in Minnesota and Michigan. Of the 13
mining operations mentioned above,- seven were taconite facilities on the Mesabi Iron Range in
Northern Minnesota, and two were taconite facilities on the Marquette Iron Range in the Upper
Peninsula of Michigan. Virtually all domestic iron ore production was from the nine taconite
mining operations in Michigan and Minnesota (Kirk, 2000a). The base year for data included in
this analysis is 2000; however, where possible EPA has updated the data to reflect recent changes
in the industry. For example, many of the tables reflect operations at taconite facilities in 2000,
but LTV Steel Mining Company's Hoyt Lakes facility, which closed operations in early 2001,
has been removed from the tables.
The following taconite ore production processes will be covered by the proposed rule
(EPA, 2001):
• liberation of the iron ore by wet or dry crushing and grinding in gyratory crushers,
cone crushers, rod mills, and ball mills;
• concentrating of the iron ore by magnetic separation or flotation;
• pelletization by wet tumbling with a balling drum or balling disc; and
2-1
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• indurating using a vertical shaft furnace, straight grate, or grate/kiln, and material
handling (transfer, pellet cooling) of the indurated pellets.
The economic effects of the rule are conditional on the technology for producing taconite
iron ore and their costs of production, the-value of the taconite products to end users, and the
organization of the industries engaged in iron ore production and use. Due to the present
condition of the iron ore industry, some tables of information from government sources that
present data for prior years (e.g., 1997) may not reflect the current situation of the industry. To
the extent possible, we update ownership and operating characteristics to the year 2000. Overall,
this profile provides background informatjion on these topics organized within a conventional
economic framework: • i •
• Section 2.1 includes a detailed! description of the production process for the taconite
mining industry, with a brief discussion of the inputs to the production process and
costs of production. |
• Section 2.2 describes the characteristics, uses, and consumers of iron ore.pellets as
well as substitution possibilities.
• Section 2.3 discusses the organization of the industry and provides facility- and
company-level data. Usually, Small businesses are reported separately for use in
evaluating the impact on small businesses to meet the requirements of the Regulatory
Flexibility Act (RFA) as amenjded in 1996 by the Small Business Regulatory
Enforcement and Fairness Actj(SBREFA). Because the iron ore industry has no small
businesses, we do not address jany issues associated with them.
• Section 2.4 contains market-level data on prices and quantities and discusses trends
and projections for the industry. . .
2.1 The Supply Side
Domestic iron ore supply (production minus exports) satisfied 75 percent of domestic.
demand in 2000 (Kirk, 2000b). Low-gra4e taconite ores mined in Michigan and Minnesota
accounted for virtually all the useable ore]production. Minnesota produced 76 percent of the
national output of useable ore while Michigan accounted for about 24 percent (Kirk, 2000b).
The production process typically involves' four stages, and taconite iron ore is the primary input.
The production process, product characteristics, and the associated costs of production are the
focus of this section.
2.1.1 Taconite Pellet Production Processes, Inputs and Outputs
Low-grade taconite ore in Michigan and Minnesota is the source of primary iron for the
iron and steel industry in the United Statefe. Taconite iron ore processes are illustrated in
Figure 2-1. Figure 2-1 also demonstrates [the emission points from taconite ore production.
Three types of hazardous air pollutants (HAPs) are released from the processes: acidic gases
(hydrochloric and hydrofluoric acid), metallic particulate matters, and products of incomplete
combustion (PICs) (EPA, 2001).
2.1.1.1 Mining of Crude Ore
. Iron ore is a mineral substance tha|t, when heated in the presence of a reductant, yields
metallic iron (Fe). It almost always consists of iron oxides, the primary forms of which are
magnetite (Fe3O4—iron content 72.4 percent), hematite (Fe2O3—iron content 69.9 percent), and
goethite (Fe,O3H2O—iron content 62.9 percent) (McKetta, 1988). In the United States, iron ore
is mined and processed primarily on the Mesabi Iron Range of northern Minnesota and the
Marquette Iron Range ;of the Upper Peninsula of Michigan (see Table 2-1). Domestic taconite is
2-2
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Figure 2-1. Process Flow Diagram for Taconite Iron Ore Processing
2-3
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Table 2-1. Iron Ore Mined and Pelletized in the United States, 2000 (103 metric tons)
District and State
Lake Superior
Michigan
Minnesota
Other States i
Total i
Number of Mines Crude Ore
2
8
2
45,200
162,000
55
12 208,000
Usable Ore
15,000
48,000 •
60
63,100
Data are rounded and may >not add to total. j
Source: Kirk, W.S. 20QOb. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
.
mined from open pits because most comrmercial ore bodies lie close to the surface and their
lateral dimensions are large. Mining activities involve overburden removal., drilling, blasting,
and removal of waste rock and crude taconite from the open-pit (EPA, 2001).
Mining in open pits is mostly done with large powerful shovels and trucks. Shovels at
taconite mines are used to dig surface overburden as well as iron ore and waste rock. Rotary
drills with 12- to 17 '/2-inch bits are used to create holes about 16 inches in diameter to a depth of
45 to 55 feet into the taconite ore for explosives to be placed for blasting activities. The
commonly used blasting agent is a mixture of ammonium nitrate fertilizer and fuel oil (called
ANFO), which is pumped into the holes. (The quantity of taconite broken by individual blasts
usually ranges from about 0.4 to 1.5 millipn tons. Trucks then transport the'crude iron ore to the
primary or coarse crushers. In some mining operations, trains are used to haul ore to the crushers
(EPA, 2001; EPA, 1994; McKetta, 1988);
2.1,1.2 Beneficiation ; • , j
The mined taconite is beneficiated to increase its iron content, reduce the content of
impurities, and improve its physical structure, according to the needs of consumers.
Beneficiation processes typically involve (milling (crushing and grinding); screening; washing;
and processes that separate ore minerals from gangue (sand, rock, and other impurities
surrounding the iron) by differences in physical or chemical properties. Figure 2-2 illustrates the
general beneficiation processes. Table 2-J2 presents the crushing stages operating at the taconite
facilities located in Minnesota and Michigan (EPA, 2001).
2-4
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Figure 2-2. Flow Sheet: Concentrating
2-5
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Table 2-2. Crushing Stages Operated at Eight Taconite Facilities in Michigan and
Minnesota, 2000
State Company
Mine
Michigan Empire Iron Mining jPalmera
Partnership
Tilden Mining Co., LC
Minnesota EVTAC Mining,
Ribbing Taconite
Ispat-Inland Steel
Co.
LLC
Co.
Mining
Ishpeming3
Evelethb
Hibbingsb
Virginia11
National Steel Pellet Co. | Keewatin0
Northshore Mining Co.
U.S. Steel Group
Corp. (Minntac)
a Located in Marquette County
b Located in Saint Louis County
c Located in Itasca County
d Located in Lake County :
of USX
Babbittb
Mountain
Ironb
Pelletizing
Plant
Palmer
Ishpeming
Forbesb
Hibbing
Virginia
Keewatin
Silver Bayd
Mountain
Iron
Stages of
Crushing
Single
Single
Four
Single
Three
Single
Three
Three
Number of
Indurating
Furnaces
2
1
2
2.
2
2
2
">
• - • - . • • /
Source: U.S. Environmental Protection Agenc^ (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs)for Taconite Ir&n Ore Processing Plants—Background Information for Proposed'
Standards. Washington, DC: U.S. Environmental Protection Agency.
2-6
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After crushing, the ore is sent to rod mills for fine grinding, then sent to either ball or pebble
mills (McKetta. 1988). The taconite ore slurry discharged from the rod/ball mills is passed
through multiple stages of magnetic separation (EPA, 2001). Magnetic separation involves three
stages: cobbing, cleaning/roughing, and finishing. Each stage works on finer particles as a result
of removing oversized particles in earlier separations. Ore material not picked up by magnetic
separators is rejected as nonmagnetic gangue or tailings, which are re-ground to extract as much
iron as possible. Cleaners and finishers then work on ore particles in the range of 48 mesh and
less than 100 mesh, respectively (EPA, 2001; EPA, 1994).
The iron-bearing slurry flows into a hydraulic concentrator where excess water is
removed through gravity separation. Sediment collected at the bottom of the concentrator is
passed on to the chemical flotation unit (see EPA Technical Resource Document, 1994, for
details of these processes,). In the flotation process, three types of additives are used to upgrade
the iron ore concentrates by removing residual gangue (silica) from the iron-bearing slurry:
frothers, collectors/amines, and anifoams. Then the iron-rich concentrates become the raw
materials for producing taconite pellets in the agglomerating process (EPA, 1994).
2.1.1.3 Agglomeration
After beneficiation activities, agglomeration is used to combine the iron-rich concentrates
into pellets, sinter, briquettes, or nodules. This section focuses only on the pelletizing
(indurating) processes because pellets account for more than 95 percent of domestic iron ore
production. Figure 2-3 illustrates the typical pelletizing procedures. In the pelletizing processes,
the iron-rich concentrates are mixed with water and a binder, normally bentonite .(clay), hydrated
lime, or organic material (peridor). Then the concentrate is rolled into marble-sized balls (3/8 to
5/8 inch [9-15 mm] in diameter) inside large rotating cylinders. These green (rnoist and unfired)
balls are then dried and heated to 2,354 to 2,552°F. The induration or heating of the green balls
can be done in a vertical shaft furnace on a travel, grate or straight grate or by a combination of a
travel grate and a rotary kiln, or grate-kiln (see EPA Taconite MACT draft report for technical
details; EPA, 2001). The finished product is taconite pellets. As Table 2-3 shows, the travel
grate and grate-kiln are the 'most commonly used types of indurating furnaces in the pelletizing
processes in the United States (EPA, 2001; EPA, 1994).
2.L2 Types of Products
Ninety-nine percent of domestic iron ore production was pelletized before shipment
(Kirk, 2000b). Standard (acid) pellets and fluxed pellets (pellets with a basicity ratio of 0.6 or
greater [American Iron Ore Association, 2000]) are the two major types of pellet products. In
addition to iron, standard pellets can include silica, alumina, magnesia, manganese, phosphorus.
and sulfur. Fluxed pellets contain a certain amount of limestone (calcium carbonate, CaCO3)
and/or dolomite, in addition to all the constituents of standard pellets. Sometimes.fluxed pellets
are characterized by basicity ratio, which is a mass ratio of the sum of calcium oxide and
magnesium oxide divided by the sum of silicon oxide and aluminum oxide:
Basicity ratio = [(CaO + MgO)/(SiO2 + A12O3)]
2-7
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Figure 2-3. Flow Sheet: Pelletizing
-------
Table 2-3. Types of Indurating Furnaces Used at Eight Taconite Facilities, 2000
State
Michigan
Minnesota
Company
Empire Iron Mining
Partnership
Tilden Mining Co., LC
EVTAC Mining, LLC
Hibbing Taconite Co.
Ispat-Inland Steel
Mining Co.
National Steel Pellet Co.
Northshore Mining Co.
U.S. Steel Group of
USX Corp. (Minntac)
Mine
Palmer3'
Ishpeminga
Evelethb
Hibbingb
Virginia15
Keewatin0
Babbittb
Mountain Ironb
Pelletizing
Plant
Palmer
Ishpeming
Forbesb
Hibbing
Virginia
Keewatin
Silver Bayd
Mountain Iron
Type of
Indurating
Furnaces
Grate-kiln
Grate-kiln
Grate-kiln
Travel grate
Travel grate
Grate-kiln.
Travel grate
Grate-kiln
Number
of
Induratin
g
Furnaces
4
2
2
3
1
1
4
5
" Located in Marguette County
b Located in Saint Louis County
c Located in Itasca County
d Located in Lake County
Source: U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed Integrated
Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
Fluxed pellets of at least 1.0 basicity ratio are called fully fluxed pellets. Fluxed pellets
accounted for 60 percent of total pellet production in 2000, which was 62.4 million tons (Kirk.
2000b).
2.1.3 Major By-Products, Co-Products, and Input Substitution Possibilities
Manganese, phosphorus (apatite), cobalt, cppper, vanadium, and small quantities of silver
and gold are the by-products or co-products of U.S. iron ores. Manganese has a close association
with iron so that the oxides of both metals are usually smelted together. Cobalt was an important
by-product of iron ore mined in Pennsylvania until 1972. Both vanadium and cobalt are not
economically recoverable (McKetta, 1988).
Iron ore is the only source of primary iron. Hematite (jaspilite), magnetite (taconite),
goethite (limonite), siderite, ilmenite, and pyrite are the major types of iron ores mined.
Hematite, magnetite, and goethite are the most common ore types in the United States. Michigan
and Minnesota primarily produce magnetite and hematite with a small amount of goethite. Other
minor iron ore deposits located in Missouri and Utah are the possible substitutes for taconite.
Besides domestic iron ores, imported iron ore products, such as iron-rich concentrates, fine ores,
and pellets, are used as substitutes for taconite ore.
2-9
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2.1.4 Costs of Production and Worker productivity
This section examines the costs of production as reported in the 1997 Economic Census
of Mining for the iron; ore industry, historical costs for the industry, and worker productivity for
various plant sizes. These figures are repjorted for NAICS 21221, Iron Ore Mining.
2.1.4.1 Costs of Production j
The three primary types of production costs for the iron ore industry are capital
expenditures, labor expenses, and cost ofjinputs used. Each of these cost categories is discussed
below for the iron ore industry. Overall, labor and machinery accounted for the majority of
production costs in 1997 (U.S. Department of Commerce, Bureau of the Census, 1999).
• As shown in Table 2-4, capital costs in 1997 for the iron ore industry totaled
approximately $91 million, or 5 percent of total production costs. Buildings and other
structures accounted for $81 million (about 90 percent of capital costs), while $9
million (10 percent of these costs) can be attributed to mineral exploration and
' development. The expenditures for mineral land and rights, which depend on whether
the land contains sufficient quantity and grade of taconite ore to be economic for
further development (see the Minnesota Mining Tax Guide for more detail;
Minnesota Department of Revenue, 2001) amounted $0.1 million.
• The iron ore industry spent approximately $542 million in 1997.on labor for a total of
32 percent of total productionlcosts. Twenty-seven percent of labor costs were spent
on fringe benefits, and the remaining expenditures (about $394 million) went toward
the annual payroll. j
• Cost of inputs used for the iron'ore industry totaled $1 billion (62 percent of total
production costs) in 1997. Sujpplies used, minerals received, and purchased
machinery installation costs accounted for the most significant portion of this cost
(approximately 58 percent). Other material costs included $117 million for fuel
expenditures and about $259 million for purchased electricity.
2-10
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Table 2-4. Production Costs for NAICS 21221—Iron Ore Mining, 1997
1997 Percentage of Total Cost
($103) of Production
Total Cost of Production
Total Capital Expenditures
Buildings and other structures
Mineral exploration and development
Mineral land and rights
Total Labor Expenditures
Annual payroll
Fringe benefits
Total Cost of Supplies
Supplies used, minerals received, and
purchased machinery installed
Resales
Fuels
Purchased electricity
Contract work
$1,677,400
$90,963
$81,437
$9,420
$106
.$541,771
$393,921
$147,850
$1,044,666
$603,797
NA
$117,001
$258,971
NA
100.0%
5.4% \
4.9%
0.6%
0.0%
32.3%
23.5%
8.8%
62.3%
36.0%
NA
7.0%
15.4%
NA
NA = Not available.
Source: U.S. Department of Commerce, Bureau of the Census. 1999. 1997 Economic Census of Mining,
Industry Series—Mining. Washington, DC: Government Printing Office.
2.1.4.2 Variations in Worker Productivity by Establishment Size
Table 2-5 provides information on variations in the productivity of workers (measured by
value added per production worker) for facilities of varying size. Data are not'provided for
establishments with more than 20 employees, but value added per production worker is lower for
the industry as a whole than it is for the smaller establishments. Thus, there appears to be no
efficiency advantage to larger establishments.
2-11
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Table 2-5. Worker Productivity by Plaint Size for Facilities in NAICS 21221—Iron Ore
Mining, 1997 '
Employees
i Number of
i Value Added by Production
I Manufacturer Worker Hours
Establishments ($103) (103)
Value Added/
Production
Worker Hour
0 to 4 employees
5 to 9 employees
10 to 19 employees ;
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499
employees ' :
Total
9 1,382 '
3
8
1
1
1,930
8,313
NA
NA
2 NA
2
*•>
NA
NA
",
3 NA
j
32 983,940.
17
•22
124
NA
NA
NA
.NA
NA
NA
15,326
$81.29
$87.73
$67.04
'NA
.NA
NA
NA
NA
NA
$64.20
NA'= Not available. : j . : ,; , ; ' . ;
Source: U.S. Department of Commerce, Bureau of the Census. 1999. 1997 Economic Census of Mining,
Industjy Series—Mining. Washington], DC: Government Printing Office.
2-12
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Table 2-6. U.S. Consumption of Iron Ore by End Use, 1995-2000 (103 metric tons)
End Use/Year
Integrated Iron and Steel Plants
Blast furnaces
Steel furnaces
Sintering plants
Miscellaneous
Direct-reduced iron for
steelmaking
Nonsteel End Uses
Total
Note: Because of rounding, numbers
Source: Kirk, W.S. 1995. "Iron Ore
'2000
70,700
64,400
49
6,190
0
2,340
1,150
74,100
may not add up
1999
67,800
62,100
57
5,840
2
2,420
1,290
71,500
to the total.
." U.S. Geological Survey
1998
70,000
63,500
101
6,330
48
2,400
1,280
73,600
1997
71,800
64,900
86
6,660
'•146
752
1,280
73,800
1996
71,700
64,900
87
6,670
58
684
1,260
73,300
1995
74,200
67,600
60
6,490
29
675
931
75,800
Minerals Yearbook- 1995.
.
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
Kirk, W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey-Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
.
2.2
The Demand Side
In addition to the supply side, estimating the economic impacts of the regulation on the
taconite iron ore manufacturing industry requires characterizing various aspects of the demand
for taconite pellets. This section describes the product characteristics desired by end users and
possible substitutes for taconite pellets.
2.2.1 Uses and Consumers
2.2.1.1 Uses
Taconite pellets are primarily consumed by iron and steel producers. As Table 2-6
illustrates, almost all (99 percent) of the iron ore produced in the United States was used for
manufacturing iron and steel in 2000. During the same year, integrated iron and steel plants
consumed about 95 percent of domestic iron ore production. Table 2-6 also shows that the use of
iron ore in integrated iron and steel mills has been steadily decreasing since 1995 due"to the
increased use of direct reduced iron (DRI) (Kirk, 2000b). Integrated steelmakers used small
amounts of DRI in blast furnaces as a process coolant. Ori the other hand, minimills and
specialty mills with electric arc furnaces (EAFs) consumed greater quantities of DRI to improve
their steel quality (Fenton, 2000). Because EAFs represent a growing share of the steel industry,
2-13
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use of iron ore to produce DRI increased jsignificantly during the 1990s. In addition to the
taconite pellets consumed in the iron and| steel industry, the remaining 2 percent of taconite ore
production is used in manufacturing other commodities such as cement, heavy-medium
materials, ballast, iron oxide pigments, high-density concrete, ferrites, specialty chemicals, and
additives to animal feed (McKetta, 1988)j.
i '
2.2.1.2 Consumer Characteristics
As of 1999, 60 percent of taconite pellet production was produced for captive use (Kirk,
1999b). That is, taconite ore is mined, processed into pellets, and used in company-owned blast
furnaces to make iron and steel; the plantjs performing different steps in the process are owned by
a single company or by related companies. For example, Ispat-Inland International N.V., USX
.Corporation, and Rouge Industries Incorporated have ownership interests in mines to ensure
secure sources of irori ore for their integrated steel mills. Other steel mills acquire iron ore
pellets based on long-term contractual agreements with pellet producers. For instance. Geneva
Steel Company purchases iron ore pellets' from USX Corporation under a long-term pellet supply '
contract. j
In 1997, 14 companies owned 20ioperating integrated iron and steel facilities. All
facilities have iron making, steel making' and casting operations. Table 2-7 lists the companies
and their iron making operations. Five facilities are located in Ohio; four are in Indiana; two
each are in Illinois, Alabama, and Michigan; and one each is in Kentucky, Maryland, Utah,
Pennsylvania, and West Virginia. USX Corporation has the most production capacity for iron
making, while Acme Metals Incorporated has the least capacity of all companies owning
integrated facilities. • . j •
i - .
2,2.2 Product Characteristics j
Pellets are usually the most desirable form of iron ore because they contribute the most to
the productivity of the blast furnace. Pellets usually measure from 3/8 to 5/8 inch (9.55 to 16.0
millimeters) in diameter and contain 60 tp 66 percent iron. In addition to iron, standard pellets
can include silica, alumina, magnesia, manganese, phosphorus, sulfur, and moisture. Fluxed
pellets contain a certain amount of limestone (calcium carbonate, CaCO3), dolomite and/or lime
(CaO), in addition to all the constituents bf standard pellets.
i
2.2.3 Substitution Possibilities in Consumption
Domestic iron ore production hasj been steady since 1990 although the steel demand has
risen from 96 million'metric tons in 199(j to 133 million metric tons in 1999 (a 39 percent
increase). The need for domestic iron ore production in iron and steel making may decrease
because of the growth of minimills and imports of iron ore substitutes. Imported iron ore
substitutes for both integrated mills and minimills include .steel mill products, scrap, pig iron, and
direct reduced iron (DRI). Steel mill products are semifinished steel, such as blooms, billets, and
slabs, which must be finished before being shipped to consumers, and
2-14
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Table 2-7. Iron Making Capacity and Facility Location of U.S. Integrated Iron and Steel
Companies (103 metric tons per year)
Company Name
Acme Metals Incorporated
AK Steel Holdings Corporation
Bethlehem Steel Corporation
Geneva Steel Company
Ispat-Inland International N.V.
LTV Corporation
National Steel Corporation
Renco Group Incorporated
Rouge Industries Incorporated
Republic International LLC
USX Corporation
Weirton Steel Corporation
WHX Corporation
Total
Iron-Making Capacity
907
3,901
7,312
2,384
NA
6,886
5,384
1,325
2,662
2,029
10,641
2,449
1,953
48,831
Facility Locations
Riverdale, IL
Ashland, KY; Middletown, OH
Burns Harbor, IN; Sparrows Ft, MD
Orem, UT
East Chicago, IN
Cleveland, OH; East Chicago, IN
Granite City, IL; Ecorse, MI
Warren, OH
Dearborn, MI
Lorain, OH
Braddock, PA; Fairfield, AL; Gary,
IN
Weirton, WV
Mingo Junction, OH
NA = Not available.
Source: U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed Integrated
Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
Association of Iron and Steel Engineers (AISE). 1998. 1998 Directory Iron and Steel Plants.
Pittsburgh, PA: AISE.
U.S. Environmental Protection Agency (EPA). 1998. Update of Integrated Iron and Steel Industry
Responses to Information Collection Request (ICR) Survey. Database prepared for EPA's Office of Air
Quality Planning and Standards. Research Triangle Park, NC: U.S. Environmental Protection Agency.
2-15
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finished steel, which consumers may use
as is. Imports of cheap semifinished foreign steel are
projected to rise to 10.1 million tons per year by 2003. This increase would decrease the need for
iron ore pellets from Minnesota and Michigan (Skillings Mining Review, 2001). Pig iron is the
product of blast furnaces and is used by integrated mills and to some extent by minimills. DRI is
a product obtained by reducing iron ore to iron metal at temperatures below the melting point of
iron. DRI is used as a scrap substitute in OEAF steel making at minimills and specialty mills
(Kirk, 2000b). About 2.2 million tons ofjDRI were used domestically in 2001 as a substitute for
iron and steel scrap (Fenton, 2002). |
•I
2.3 Industry Organization i
This section identifies the characteristics of the taconite industry in the United States.
The issues affecting this industry's organization are addressed at both the company and facility
levels. I
I
j
2.3.1 Taconite Manufacturing Facility, Characteristics
Table 2-8 lists the eight taconite mining and pelletizing plants in the United States as of
2001. Six of these operations were on the Mesabi Iron Range in northeastern Minnesota:
EVTAC Mining LLC, Hibbing 1 aconite Company, Inland Steel Mining Company, National
Steel Pellet Company, Northshore Mining Company, and the U.S. Steel Group of USX
Corporation (Minntac). The other two operations, located on the Marquette Iron Range in the
Upper Peninsula of Michigan, were the Empire and Tilden Mines (Kirk, 2000a). Figure 2-4
illustrates the locations of taconite facilities.
Besides the plant locations. Table 2-8 also provides information on plant annual capacity,
year 2000 production,,and employment. The total U.S. pellet production in 2000 was about
63 million metric tons and the workforce (totaled 7,460 employees. These nine taconite mining
operations in Michigan and Minnesota accounted for virtually all domestic iron ore production.
The facilities operated by Cleveland-Cliffs produced a total of 35 million metric tons, which was
56 percent of the total U.S. pellet production. Except for EVTAC Mining LLC and Inland Steel
Mining Company, all the plants employee^ more than 500 people. Employment at these facilities
ranged from 368 employees at Ispat-Inland Steel Mining Company to 1,586 employees at USX's
Minntac operations. Data on plant locations and employment were obtained from the EPA
(2001), Skillings Mining Review (2001), and Kirk (2000b).
2-16
-------
o
>!
_o
"5.
E
5 S
en
ll
u
d.
O
sf
o
•o
u
c.
U
O
I
o
u
C3
H
oo
£
o
c.
o
Company
oo ts
— oo rn t-
E
2_ op .2 -j=
i
cL
L
o
O O
•§ -g
^SJ3
O
O
§
• cu
. 00
<
O
O o
^- I
* I
g '>
"2 m. IN vb
ts c/> ft m
U Q. n.
n o- Q-
c — o •
o o o o
T3
C
CU
tf-
O
•~» g O O CO Q
<3 S
-------
Figure 2-4. Locations of Taconite IronlOre Processing Facilities
2.3.2 Firm Characteristics j
Facilities comprise a site of land vyith a plant and equipment that combine inputs (taconite
iron ore) to produce output (taconite pellejts). Companies owning these facilities are legal
business entities that have the capacity to Iconduct transactions and make business decisions that
affect that facility. The terms establishment, facility, and plant are synonymous in this study and
refer to the physical location where produ'cts are manufactured. Likewise, the terms company
and firm are synonymous arid refer to the degal business entity that owns one or more facilities.
This section presents information on the parent companies that own the taconite mining and
pelletizing plants identified in the previous section.
i
2.3.2.1 Ownership \
As discussed in Section 2.3.1, ten companies operated nine mining and pelletizing
facilities in 2000. Table 2-9 lists companies that own and/or operate these facilities. With
five facilities, Cleveland-Cliffs operates more plants that produce taconite pellets than any other
domestic manufacturer. ; •
As Table 2-9 and Figure 2-5 show!, most iron ore mines are captive wholly owned
subsidiaries of one or more steel-producing companies. Some of the pellets are also produced for
commercial purposes. In 2000. 79 percent of domestic ore was produced for captive use and did
not reach the open market (Kirk, 2000b), because the ownership structure of taconite differs from
other industries. In many cases, a mine is; owned by multiple parent companies. The ore may be
2-18
-------
produced for these parent companies, and thus does not reach the open market. For example,
Ispat-Inland Steel Mining Company obtains iron ore pellets directly from the Empire Mine in
Michigan and Minorca Mine in Minnesota, in which it has ownership interests. Stelco
Incorporated has ownership interests in EVTAC Mining Company, Hibbing Taconite Company,
and Tilden Mine to ensure secure sources of iron ore for its integrated steel companies. Other
steel mills acquire iron ore pellets based on long-term contractual agreements with pellet
producers. For instance, Geneva Steel Company purchases iron ore pellets from USX
Corporation under a long-term pellet supply contract.
2.3.2.2 Size Distribution
Company sales and employment ranges are reported in Table 2-10. Most companies are
large, publicly owned integrated steel companies, such as AK Steel Corporation, Bethlehem Steel
Corporation, Ispat International N.V., LTV Corporation, and USX Corporation. Two companies
have sales volumes less than $1 billion, six between $1 and $5 billion, and two with more than
$5 billion. Five companies have fewer than 10,000 employees and the other five companies
employ 10.000 or more people. Sales and employment data were collected from Hoover's
Online (2001) and complemented with information from InfoUSA (2001).
2.3.2.3 Horizontal and Vertical Integration
Whether a firm in this industry is vertically or horizontally integrated, or not integrated.
depends on the nature of the primary business activity that the parent company does and on the
businesses the various facilities owned by the parent company engage in.
2-19
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Table 2-9. Taconite Iron Ore Facility Operator and Ownership, 2000
State Company
Operator
Minnesota EVTAC Mining, LLC Independent
1
Hibbing Taconite Co. Cleveland-Cliffs
:
Ispat-Inland. Steel Mining Co.
National Steel Pellet Co.
[spat Inland, Inc.
National Steel Corp.
Northshore Mining Co. Cleveland Cliffs
U.S. Steel Group of USX Corp. U.S. Steel
(Minntac)d
Michigan Empire Iron Mining Partnership Cleveland Cliffs
Tilden Mining Co., LC [Cleveland Cliffs
Ownership
Eveleth Taconite Co.a
Virginia Horn Taconite Co.B
Ontario Eveleth Taconite Co.c
Cleveland-Cliffs
Bethlehem Steel Corp.
Stelco Inc.
Ispat International N.V.
National Steel Corp.
Cleveland-Cliffs
USX Corporation
Cleveland-Cliffs
Ispat International N.V.
The LTV Corp.
Cleveland-Cliffs
Algoma Steel Inc.
Stelco Inc.
Share
(%)
45
40
15
15
70
15-
100
100
100
100
35
40
25-
40
45
15
a Owned by Rouge Steel Company
b Owned by AK Steel Holding Corporation
c Owned by Stelco Incorporated
d U.S. Steel Corp. is an independent company from USX Corp as/of the end of 2001
NA = Not available. I
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
' Pollutants (NESHAPs) for Taconite li-on Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
"Hibbing Taconite Resumes Operations." Shillings Minings Review August 4, 2001. pp. 7.
"US/Canadian Iron Ore Production 2o!oi." Shillings Mining Review July 28, 2001. pp. 19-32.
"US/Canadian Iron Ore Production 2000." Shillings Mining Review July 29, 2000. pp. 21-36.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
.
U,S. Securities;and Exchange Commission. Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) System. , , .
Hoover's Online. Electronic database . Obtained on August 28, 2001.
2-20
-------
Ontario
Eveleth Taconite/Stelco
(15%)
Virginia-Horn
Taconite/AK Steel
(40%)
LTV
"(25%)
Akjoma
(45%)'
Eveleth
Taconite/Rouge Steel
(45%)
Is pat
International
Cleveland
Cliffs
Stelco
(15%)
Bethlehem
Steel (70%)
Stelco
(15%)
National Steel
(100%)
U.S. Steel
(100%)
U.SJ Steel
(Minntac)
Figure 2-5. Taconite Iron Ore Facility Operator and Ownership, 2000
2-21
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Table 2-10. Taconite Iron Ore Facility
Owner Company Sales and Employment, 2000
Owner Company Legal Forni of Organization Sales (SI O6)
Algoma Steel Inc.
Bethlehem Steel Corp.
Cleveland-Cliffs
Eveleth Taconite Co.a
Ispat International N.V.
National Steel Corp. Pu
Stelco Inc. r
The LTV Corp.
US Steel Corp.b
Virginia Horn Taconite Co.c
a Owned by Rouge Steel Company
b Previously owned by USX Corporation
b Owned by AK Steel Holding Corporation
Public
Public
Public
Public
Public
blic subsidiary
NA •
Public
Public
Public
749
4,197
430
. 1,100
5,097
2,979
1,893
4,934
6,132
4,612
Employment
• 3,700
14,700
4,636
2,881
17,800
9,283
9,922
16,500
30,892
' 11,500
-
.
NA = Not available. j : . .
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs) for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U S. Environmental Protection Agency.
Shillings Mining Review. "US/Canadian Iron Ore Production 2001." July 28, 2001. pp. 19-32.
Stelco Inc. website, . Obtained on August 28, 2001. .
Hoover's Online. Electronic database.
. Obtained on August 28, 2001.
InfoUSA Incorporated. 2001. ReferenceUSA electronic database.
Vertically integrated firms may produce the inputs used in their production process or use the
product as an input into other production processes. These firms may own several plants and/or
operate many subsidiaries, each of which handles a different stage of production or directly or
indirectly produces an input or product. In the taconite industry, captive iron ore producers are
parts of vertically integrated iron and steel operations. Most of the companies in Table 2-9 are
vertically integrated. For example, Ispat-Inland Steel Mining Company, National Steel
Corporation, and USX Corporation use taconite pellets produced by taconite operations they own
in their integrated steel operations to produce iron and steel. However, USX Corporation spun
off its integrated steel operation (now callpd United States Steel Corporation) at the end of 2001
(U.S. Steel, 2002). : j •
Companies that are not integrated [either horizontally or vertically produce only one type
of product or set of closely related producjts. The smaller companies involved in manufacturing
taconite ore products are, for the most part, not integrated; they produce a sole product without
having forward or backward corporate linkages. These companies purchase inputs from outside
suppliers., not of their corporate tree. Then they manufacture the product and sell it either directly
to consumers or through wholesalers. j
2-22
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2.3.3 Small Businesses in the Taconite Industry
To determine the possible impacts of the proposed NESHAP on small businesses.
businesses producing taconite are categorized as small or large using the Small Business
Administration's (SBA's) general size standards definitions. For NAICS 21221, these guidelines
indicate a small business employs 500 or fewer workers (U.S. Small Business Administration,
2000). Based on the SBA definition and the company employment shown in Table 2-10, this
industry has no small businesses.
2.3.4 Market Structure
Market structure is of interest because it affects the behavior of producers and consumers
in the industry. If an industry is perfectly competitive, then individual producers are not able to
influence the price of the outputs they sell or the inputs they purchase. This condition is most
likely to hold if the industry has a large number of firms, the products sold are undifferentiated,
and entry and exit of firms are unrestricted. Product differentiation can occur both from
differences in product attributes and quality and from brand name recognition of products. Entry
and exit of firms are unrestricted for most industries except, for example, in cases when
government regulates who is able to produce, when one firm holds a patent on a'product, when
one firm owns the entire stock of a critical input, or when a single firm is able to supply the entire
market.
When compared across industries, firms in industries with fewer firms, more product
differentiation, and restricted entry are more likely to be able to influence the price they receive
for a product by reducing output below perfectly competitive levels. This ability to influence
price is referred to as exerting market power. At the extreme, a single monopolistic firm may
supply the entire market and hence set the price of the output.
2.3.4.1 Measures of 'Industry Concentration
To assess the competitiveness of a market, economists often estimate concentration ratios .
and the Herfindahl-Hirschmann Indexes (HHI) for the subject market or industry. Firms in -
less-concentrated industries are more likely to be price takers, while firms in more-concentrated
industries are more likely to' be able to influence market prices. Tables 2-8 and 2-9 provide data
on the market share that each company holds in terms of pellet production and company
ownership share. With fewer than a dozen owner companies, many of them vertically integrated,
and with significant barriers to entry, the taconite industry is likely to be fairly concentrated.
However, there are.no publicly available market concentration statistics available for the taconite
industry.
2.3.4.2 Geographic Concentration
As Table 2-8 and Figure 2-4 illustrate, the taconite mining and processing facilities are
located in'either Minnesota or Michigan. • In Minnesota, all of the iron ore production occurs in
the Mesabi Range, located in Cook (2000 population: 5,168), Itasca (43,992), Lake (11,058), and
Saint Louis (200,528) counties. In Michigan, the production is from the Empire and Tilden
Mines in Marquette County (2000 population: 64,634). The geographic location of the nine
taconite facilities indicates that the potential impact of the proposed rule will be concentrated in
the five counties mentioned above. Based on the information from Cleveland-Cliffs, the Empire
and Tilden Mines have a local economic impact of $390 million per year. The Hibbing Taconite
and Northshore Mining Companies have an economic impact of more than $400 million per year
on the local economy (Cleveland-Cliffs, 2001).
2-23
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2.4 Markets
This section examines the historical market statistics and future trends and projections for
the taconite pellet industry. Historical data for this industry are provided for domestic production
and consumption, domestic prices, and foreign trade in iron ore pellets. The future trends section
focuses on projected demand and employ: nent for the taconite pellet industry.
2.4.1 Historical Market Data
This section provides data on historical quantities of iron ore produced and consumed in
the United States, the quantities imported and exported, and prices.
i
2.4.1.1 Domestic Production
Table 2-11 presents the data on th; quantities of iron ore production from 1990 to 2000,
including crude ore, usable ore, and pellet productions. The domestic production of crude ore
ranged from a low of 180 million metric tons in 1993 to a high of 213 million metric tons in
1998. Of the crude ore mined, 30 percent could be processed into usable ore. The domestic
useable ore production in 2000, at 63 million metric tons, reached its highest level since 1990.
The domestic production of pellets ranged from a low of 54.2 million metric tons in 1992 to a
high of 62.4 million metric tons in 2000.
2.4.1.2 Domestic Consumption
Table 2-11 also shows the domestic consumption of iron ore products. In 2000, domestic
consumption was 76.5 million metric tons, including both iron ore and agglomerates (pellets and
sinter). During the same year, the integrated iron and steel producers consumed about 71 million
metric tons of iron ore products. Of the ore consumed, approximately 82 percent was of
domestic origin, 9 peicent was imported from Canada, and 9 percent came from other countries
(Kirk, 2000b). The domestic consumption of iron ore ranged from a low of 66.4 million metric
tons in 1991 to a high of 83.1 million metric tons in 1995. Iron ore consumption has declined
since 1995 by an average of 1 percent per, year.
i .
2.4.1.3 Domestic Prices !'•_--
One of the major structural changes in the domestic iron ore industry occurred in 1982
with the development of a U.S. spot market for pellets, which led to the beginning of price
competition. As a result of the spot market for pellets, domestic iron ore producers lowered
prices to make domestic ore competitive with imported material and also reduced production
costs by improving labor productivity, reducing wages, negotiating lower-cost power contracts
and royalty agreements, pressing suppliers to reduce prices for materials, lobbying legislators for
tax breaks, and paying off debt (Kirk, 1998b).
Most spot sales are individually negotiated one-time contacts made directly between
buyer and seller. The domestic prices of iron ore products from 1990 through 2000 are presented
in both current and 2000 dollars in Table 2-12. Adjusted prices in 2000 dollars for iron ore
products range from a low of $25.51 per metric ton in 1999 to a high of $31.61 per metric ton in
1992. Between 1993 and 1998, the adjusted price never went above $30 per metric ton. In
addition to vertically integrated productiojn and the spot market, long-term
2-24
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Table 2-11. Domestic Production and Consumption of Iron Ore, 1990-2000 (103 metric
tons)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Crude Ore
181,431
183,774
184,600
180,896
191,989
209,988
207,988
208,743
213,357
192,481
208,055'
Usable Ore
56,405
56,758
55,589
55,657
58,378
62,485
62,069
62,968
62,927
57,747
63,100
Pellet Production
54,817
54,777
54,196
54,497
57,579
61,397
61,096
62,075
62,128
57,512
62,400
Consumption"
76,900
66,400
75,100
76,800
80,200
83,100
79,600
79,500
78,200 .
75,100
76,500
* Includes iron ore and agglomerates (pellets and sinter)
NA = Not available.
Source: < American Iron Ore Association. 2000. Iron Ore: 1999 Statistical Report. Cleveland: American Iron
Ore Association.
Ski/lings Mining Review. "US/Canadian Iron Ore Production 2000." July 29,2000. pp. 21-36.
Kirk, W.S. 1994. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1994.
.
Kirk, W.S. 1995. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1995.
.
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998:
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
2-25
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Table 2-12. Historical Prices of Iron Ore Products, 1990-2000
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Shipments
(103 metric tons)
57,000
56,800
55,600
56,300
57,600
61,100
62,200
62,800
63,200
60,700
61,000
Value
1
of Shipments
($103)
570,000
1 {530,000
1
1
550,000
380,000
1J410,000
11700,000
1 750,000
11860,000
' 11970,000
1,550,000
j - - ' ' -
11560,000
Average Value
Current $
27.54
26.94
27.88
24.51
24.48 •
27.82
28.14 .
29.62
31.17
25.54
.25.57
per Metric Ton"
2000$
' 31.46
30.58
31.61
28.03
28.00
28.71
27.61
29.18
30.97
25.51
. 25.57
a Average value per metric ton = value of shipments/shipments • •
Source: Kirk, W.S. 1994. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1994.
.
Kirk. W.S. 1995. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1995.
. •
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
. Kirk. W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. GeQlogicalSurvey Minerals Yearbook-1999.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
^ttpy/minerals.usgs.gov/minerals/pu^s/coinmodity/iron^re/iomybOO.pdf^
Bureau of Labor Statistics. "ProducerjPrice Index Revision—Current Series: PCU1011#, Iron Ores:
1990-2000." .
2-26
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contracts (mentioned above) affect prices. The prices at which iron ore products change hands
under long-term contracts are frequently tied to movement in the spot market price or the world
price. The low spot market prices in both 1999 and 2000 coincided with increased imports of pig
iron, DRI, and semifinished steel, reducing the demand for domestic iron ore. Steel producers
increased their use of imports because it allowed them to increase steel production in response to
cyclical increases in steel demand without having to increase their blast furnace production,
reopen idled blast furnaces, and hire new personnel.
2.4.1.4 Foreign Trade
.Table 2-13 provides data on the quantities and dollar values of imported iron ore products
from 1990 through 2000. The average volume of imported iron ore products during that period
was slightly more than 16 million metric tons per year. The average dollar value of iron ore
imports between 1990 and 2000 was slightly more than $500 million per year in constant 2000
dollars. Because of declining quantity and price, 1999 imports were valued at less than $400
million. While the import price continued to fall in 2000, the quantity increased slightly so that
the value of imported iron ore products in 2000 was approximately $420 million. In 1999. the
value of imported iron ore products per metric ton was $27.95 in 2000 dollars. During the same
year, about 57 percent of the imports were from Canada, followed by 36 percent from Brazil (see
Table 2-14). Pellets and fine ores were the two major types of imported products, as shown in
Table 2-15.
Overall, the volume of exported iron ore products is much lower than the volume of
imported iron ore products, and the price per metric ton is higher. As Table 2-16 presents, the
average volume of exported iron ore products during that period was slightly more than 5 million
metric tons per year. The average dollar value of iron ore exports between 1990 and 2000 was
slightly more than $200 million dollars per year in constant 2000 dollar terms. During that
period, the quantities of exports increased by 7 percent. Table 2-14 indicates that in 2000. most
exported iron ore products went to Canada (99 percent). The major exported product was pellets
(see Table 2-15).
2.4.2 Trends and Projections
In 2000, iron ore was produced in 48 countries. The seven largest of these producing
countries accounted for about 82 percent of the world total (1 billion metric tons), and no other
country had as much as a 5 percent share (Kirk, 2000b). U.S. iron ore production in 2000 totaled
63.1 metric tons or 6 percent of the world total.
2-27
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,L
Table 2-13. U.S. Imports for Consumption and Value of Imports of Iron Ore Products,
1990-2000 (S103)
Year
1990
1991
1992
1993
1994.
1995
• 1996
1997
1998
1999
2000
Imports
(103 metric
tons)
18,082
13,331
12,501;
13,98i:
17,552
17,509'
18,382
18,599
17,009
14,244
15,677
Value
Current $
559,534
436,607
395,618
415,063
509,887
of Imports
2000 S
639,176
495,736
448,654
474,719
583,171
485,846 501,329
555,953 545,496
551,035 542,940
527,059 523,713
398,527
420,046
398,103
420,046
Value of Imports per Metric
Ton3
Current $
30.94
32.75
31.65
29.69
29.05
27.75
30.24 .
29.63
30.99
27.98
26.79
2000$
35.35
37.19
35.89
33.95
33.23
28.63
29.68
29.19
30.79
27.95
26.79
Source: U.S. Internationa] Trade Commission. "SIC-1011: FAS Value by FAS Value for All Countries."
. As obtained ply 5, 200la.
U.S. International Trade Commission. "SIC-1011: Customs Value by Customs Value for All Countries."
. As obtained jjuly 5, 2001 b.
Bureau of Labor Statistics. "Producer Price Indtx Revision—Current Series: PCU1011#, Iron Ores:
1990-2000." .
2-28
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Table 2-14. Value of Imports for Consumption and Exports of Iron Ore by Country7, 2000
(S103)
Imports from:
Australia
Brazil
Canada
Chile
Peru
Sweden
Venezuela
Others
Total
Exports to:
Canada
Others
Total
Value ($)
6,180
150,000
238,000
2,620
590
7,930 •
11,200
3,600
420,120
"
244,000
1,890
245,890
Share (%)
1.5 v
35.7
•56.7
0.6
0.1
1.9
2.7 .
0.9
loo.d
99.2
0.8
100.0
Source: Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
Domestic steel making accounted for about 98 percent of domestic iron ore consumption (Kirk,
2001a). From 1992 to 1997, the domestic production of usable iron ore trended upward from 56
million metric tons to about 63 million metric tons, an average growth rate of 2.6 percent (Kirk.
1999b). In 2000, domestic iron ore production reached its highest level (63 metric tons) since
1981, and domestic iron ore consumption has declined since 1995 by an average of 2.5 percent
per year (Kirk, 2000b; Kirk, 1999b).
The majority of U.S. iron ore trade involves Canada. Since 1990, about 52 percent of
U.S. imports were from Canada, and 99 percent of U.S. exports were shipped there. The iron ore
mines and most of the integrated steel industry are close to the Great Lakes, which offers low-
cost transportation and helps U.S. ore producers have a competitive advantage. However, each
iron ore producer is aware that it must reduce costs substantially to compete with foreign
producers (Kirk, 2000b).
The domestic pellet industry is experiencing a serious decline in demand for its products
and is projecting a tonnage decrease of at least 10 to 15 percent from the 2000 levels (Skillings
Mining Review, 2001). Due to the massive imports of cheap steel into the U.S. market, coupled
with world-wide overcapacity in.steel production (Hufbauer and Goodrich, 2002), the U.S. steel
industry has undergone a downsizing, which has accelerated since 1998 when the Asian
economic crisis weakened global demand for steel. For instance, in early 2001, the LTV Steel
Mining Company (LTVSMC) closed its taconite mining operation in Hoyt Lakes, which was
2-29
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metric tons)
1 •:•
Type of Product
Concentrates
Coarse ores
Fine ores
Pellets
Briquettes :
1
Other agglomerates
Roasted pyrites
Total
Imports Exports
.311 ' 51
3 <0
5,090 25
9,670 ' " 5,870
0 <0
611 201
6 ....'.. 3
15,700 ' 6,150
.5
.5
i
l -
Source: Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
later sold to Cleveland-Cliffs. (Cleveland-Cliffs, Inc., 2001). Then the LTV Corporation
decided to sell its Cleveland Works East and Indiana Harbor Works integrated steel assets under
an Asset Protection Plan (APP) issued bylthe U.S. Bankruptcy Court (LTV Corporation, 2002).
Domestic steelmakers are now experiencing structural changes in their markets that have the
potential to affect the domestic iron ore industry. For example, some of the integrated steel
makers use imported iron ore as feedstock to produce direct reduced iron. Further, the minimills'
share of the steel market has increased ste'adily, rising from 15 percent in 1970 to about 50
percent in 2000. Mimttiills use iron and steel scrap and direct reduced iron as feedstock, rather
than iron ore pellets made from taconite. iThis trend is expected to continue and will affect the
domestic iron ore industry negatively (McGraw-Hill, 2000).
Given the severe economic environment, domestic steel producers have asked the
International Trade Commission (ITC) to! impose substantial tariffs of up to 40 percent on all
imported steel products, and the ITC has found that there was injury from imports in most steel
markets. In June 2001, the Bush Administration requested a Section 201 investigation to
determine if the steel industry has been injured from imports. After the investigation, the U.S.
International Trade Commission found the imports were a substantial cause of serious injury or
. I
threat of injury and recommended a four-year program of tariffs and tariff-rate quotas to the
, i
President. In response, President Bush decided to impose tariffs on several key steel products for
a period of three years (Bush, 2002). Meanwhile, leading U.S. steelmakers are trying to develop
consolidation plans to protect their iron and steel interests in North America as well as to prevent
further bankruptcies. For example, the UiS. Steel Corporation has begun talks to acquire
2-30
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Table 2-16. U.S. Domestic Exports and Value of Exports of Iron Ore Products, 1990-2000
(S103)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Exports
(103 metric
tons)
3,181 -
4,045
5,055
5,060
4,972
5,267
6,256
6,336
5,994
6,120
6,146
Value of Exports
Current $
123,236
156,197
186,814
166,805
162,468
184,459
231,701
234,894
244,473
242,962
245,953
2000$
140,777 ;
177,351
211,858
190,779
185,819
190,338
227,343
231,443
242,921
242,704 •
245,953
Value of Exports per Metric
Ton3
Current $
38.75 -
38.62
36.95
32.97
32.67
35.02
37.04
• 37.07
40.79
39.70
40.02
2000$
44.26
43.85
41.91
37.71
37.37
36.14
36.34
36.53
40.53
39.66
40.02
Source: U.S. Internationa] Trade Commission. "SIC-IOIL: FAS Value by FAS Value for All Countries."
.. As obtained July 5, 200la.
U.S. International Trade Commission. "SIC-1011: Customs Value by Customs Value for All Countries."
. As obtained July 5, 200 Ib.
Bureau of Labor Statistics. "Producer Price Index Revision—Current Series: PCU1011#, Iron Ores:
1990-2000." .
National Steel of Japan, NKK, and has also considered merging with other steel companies,
including Bethlehem Steel and Wheeling-Pittsburgh Steel (BBC News, 2001). As to iron ore
supply, Cleveland-Cliffs, Inc. has taken several actions to consolidate its position as the largest
supplier of iron ore to the North American steel industry. In a recent press release, Cleveland-
Cliffs stated that it plans to increase its ownership of the Tilden Mine from 40 percent to 85
percent by acquiring 45 percent share from Algoma Steel, Inc., to reduce pellet production and
employment at the Empire Mine operation, and to invest (along with Kobe Steel, Steel
Dynamics, Inc., the Iron Range Resources and Rehabilitation Agency, and the State of
Minnesota) in the Mesabi Nuggets Project. Phase II of this project involves construction of a
pilot plant that applies Kobe Steel's ITmk3 iron-making technology for converting iron ore into
nearly pure iron nuggets that are substitutes for pig iron (Cleveland-Cliffs, Inc., 2002).
2-31
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2-32
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SECTION 3
ENGINEERING COST ESTIMATES
This chapter presents the estimated regulatory compliance costs resulting from the control
of HAP emissions under the proposed standards. The EPA estimated the emission control,
monitoring, recordkeeping and reporting costs necessary to bring each facility into compliance
with the proposed standards. Information in this section is drawn from Chapter 6.0 of EPA's
Background Information Document (BID). Section 3.1 provides a description of the emissions
controls for taconite facilities; Section 3.2 provides a summary of the overall costs anticipated to
be incurred by the industry; and Section 3.3 provides more detailed information about the costs.
3.1 Description of Emissions Controls
EPA identified several operations at taconite facilities that produce HAP emissions,
including ore crushing and handling operations (OCH), indurating furnaces, finished pellet
handling (PH), and ore dryers. Three types of hazardous air pollutants (HAPs) are released from
the processes: acidic gases (hydrochloric and hydrofluoric acid), metallic particulate matters, and
products of incomplete combustion (PICs) (EPA, 2001). Using data on baseline emissions and
emissions control performance of existing taconite facilities, EPA defined Maximum Achievable
Control Technology (MACT) emissions standards for each type of unit, as shown in Table 3-1.
EPA identified 393 emission units within the taconite industry that will be regulated by .
the proposed rule. All emission units subject to the proposed taconite rule are equipped with
some form of particulate emission control. Sixty-five percent of emissions units are controlled
by a venturi or impingement wet scrubber, a baghouse. or an ESP. EPA's test data indicates that
the majority of emission units controlled by these devices have demonstrated the ability to meet •
the proposed MACT standards shown in Table 3-1. However, some poorly-performing venturi
scrubbers are unable to meet the MACT standards.. The remaining 35 percent of emission units
are controlled by devices such as multiclones or low-energy wet scrubbers, which have generally
not shown an ability to meet the proposed MACT standards.
Table 3-1. Proposed MACT Standards for Existing Affected Sources
Affected Source
Proposed MACT limit (gr/dscf)
Ore crushing, and handling
Straight grate indurating furnaces processing magnetite
Grate kiln indurating furnaces processing magnetite
Grate kiln indurating furnaces processing hematite
Finished pellet handling
Ore dryers
0.008
0.010
0.011
0.025
0.008
0.052
Source: U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for Hazardous Air
Pollutants (NESHAPs)for Taconite Iron Ore Processing Plants—Background Information for Proposed
Standards. Washington, DC: U.S. Environmental Protection Agency.
5-1
-------
EPA estimated emission control costs based on replacement of existing non-compliant
emission control equipment with new wet] scrubber control equipment capable of meeting the
proposed MACT standards. EPA estimated that existing air pollution control equipment will
have to be replace by a new wet scrubber on 54 OCH emission units, 11 indurating furnace
emission units on four indurating furnaces, and 11 PH emission units. EPA estimated the costs
of purchasing, installing, operating and maintaining this capital equipment. In addition to
emission control costs, EPA estimates that taconite producers will install monitoring equipment
on 207 scrubbers, 24 ESPs and 52 baghou'ses, which will result in additional capital costs and
operating and maintenance costs. I • -
i
• j
3.2 Summary of Costs j
The incremental costs of complying with the proposed rule include the costs of.
purchasing and installing capital equipment to control emissions from various units and to
monitor the emissions from various units.! EPA then annualizes the capital costs over the life of
the equipment (25 years) using a 7 percent interest rate. The annualized capital costs are
combined with the operating and maintenance costs to estimate the total annualized costs of the
proposed rule. These costs include not only the costs of controlling emissions, but the costs of
conducting monitoring, record-keeping, and reporting (MRR) activities. Each of the affected
facilities already has some emissions control equipment in place, and thus has some baseline
level of operating and maintenance costs. \ EPA thus estimates the incremental costs of the
proposed rule as the difference between costs currently incurred and the costs that would be
incurred to comply with the proposed rule. Table 3-2 provides a summary of the emission
control costs and the monitoring, recordkeeping, and reporting costs for the taconite industry.
The EPA estimates that, for existing sources, the total capital cost of the proposed rule will be
• $47.7 million and total annualized costs, including monitoring, recordkeeping and recording
(MRR) costs, would be $7.09 million per
year. Approximately 80 percent of the total annualized
costs are associated with the emission control upgrades for the indurating furnaces. EPA
developed the cost estimates based on information gathered from industry representatives and
vendors of industry-specific control equipment, and using procedures.in the EPA's OAQPS
control cost manual. All costs are presented in fourth quarter. 2000 dollars.
]
Table 3-2. Summary of the Industry Cost (106 $2000)
Cost Component
Emission Control Cost
Monitoring, Recordkeeping
and Recording Cost
Total Cost
Total
Capital
Cost (S106)
44.5
. 3.19
47.7
1 Annualized
' Capital Cost
j (106S/yr)
i
| 3.82
j 0.27
1
! 4.1
O&M
Cost
•(106 S/yr)
. 2.86
0.1
2.96
MRR Labor
Cost
(106 S/yr)
0.029
0.029
Total
Annualized
Cost (106 S/yr)
6.68
0.41 '
7.09
3.3 Plant-Specific Costs j '
Table 3-3 shows the emission control costs and the MRR costs for each of the eight
taconite plants. Total annualized costs, including both emissions control costs and MRR costs,
range from $27,275 to more than $2.8 million. EPA estimates that six indurating furnaces at four
taconite plants (Minntac, EVTAC, Ribbing, and National) will incur emission control costs.
5-2
-------
Existing emissions control equipment at indurating furnaces at the remaining four plants is
estimated to achieve MACT standards, so these plants do not incur incremental emissions control
costs. Similarly, EPA estimates that three plants (National, Northshore, and Hibbing) will incur
emissions control costs for their pellet handling operations, while the remaining plants do not
incur incremental emission control costs. Over 98 percent of the costs are incurred by four
taconite plants. Three taconite plants are not projected to incur any incremental emission control
costs, although they do incur MRR costs. EPA estimates that these plants are achieving MACT
emissions control levels at baseline.
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SECTION 4
ECONOMIC IMPACT ANALYSIS: METHODS AND RESULTS
The underlying objective of the EIA is to evaluate the effect of the proposed regulation on
the welfare of affected stakeholders and society in general. The engineering cost analysis
presented in Section 3 represents an estimate of the resources required to comply with the
proposed rule under baseline economic conditions. This section augments the cost analysis with
an evaluation of how producers and consumers may react and respond to regulatory costs. For
instance, producers may elect to reduce production in response to increased costs, thereby
reducing market supply. Moreover, the control costs may be passed along to consumers through
price increases. The primary purpose of this section is to develop and apply an analytical
structure for measuring and tracking these effects as they are distributed across the stakeholders
tied together through economic linkages. The conceptual approach to this analysis is described
in detail in Section 4.1, followed by the economic impact results based on the operational model
in Section 4.2. In addition to a market based modeling, Section 4.3 presents the regional
economic impact analysis of the rule recognizing the fact that all affected taconite facilities are
concentrated in Minnesota and Michigan.
4.1 Conceptual Approach
To evaluate the impact on the iron ore and steel mill products markets, the Agency
developed two national competitive partial equilibrium models (taconite and steel mill products)
to estimate the economic impacts on society resulting from the proposed regulation. We assume
that within each industry, the commodities of interest are homogeneous (e.g., perfectly
substitutable) and that the number of buyers and sellers is large enough that no individual buyer
or seller has market power (i.e., influence on market prices). As a result of these conditions.
producers and consumers take the market price as a given when making their production and
consumption choices.
4.1.1 Baseline and With-Regulation Market Equilibrium
A graphical representation of the competitive model of price formation, as shown in
Figure 4-1 (a), posits that market prices and quantities are determined by the intersection of the
market supply and demand curves. Under the baseline scenario, a market price and
4-1
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+ p
qa
Affected Facilities
= p
D
M
Q
Unaffected Facilities
I
a) Baseline Equilibrium
Market
P'
P' -;--
+ P ->
P'
P
SM7 SM/
Q' Q
Affected Facilities
Unaffected Facilities
Market
b) With-Regulation Equilibrium
i
i
Figure 4-1. Market Equilibrium without and with Regulation
quantity (p,Q) are determined by the downward-sloping market demand curve (D) and the
upward-sloping market supply curve (S) tjiat reflects the sum of the (affected) domestic and
(unaffected) domestic and import supply Curves.
With the regulation, the costs of production increase for affected domestic suppliers. The
imposition of these regulatory control cosj:s is represented as an upward shift in the supply curve
for domestic supply. As a result of the upward shift in this supply curve, the market supply curve
for affected products Will also shift upwaiid as shown in Figure 4-l(b) to reflect the increased
costs of production for domestic supply, j
In baseline without the proposed standards, the industry produces total output, Q, at price,
p, with affected producers supplying the amount qa and unaffected domestic production and
imports accounting for Q minus qa, or qu.j With the regulation, the market price increases from p
to p', and market output (as determined frbm the market demand curve, D) declines from Q to
Q'. This reduction in market output is the net result of reductions in affected domestic supply
4-2
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and increases from unaffected supply. In this case, unaffected supply includes both unaffected
domestic producers and foreign producers. While the vast majority of the iron ore produced in
this country is affected, there are a few iron ore producers that are not part of the taconite
industry. In the steel industry, the growing sector of the industry that uses Electric Arc Furnace
technology is expected to be less affected or unaffected by the proposed rule, compared to
integrated iron and steel producers.
4.1.2 Approach for Modeling Impacts on Affected Markets
The Agency modeled the impacts of increased control costs using two standard partial
equilibrium models—one for iron ore sold on the market (i.e., merchant iron ore) and one for the
steel mill product market. The compliance costs are introduced into each model as follows:
• Iron ore—control cost induced-shifts affect the merchant mine supply curves for iron
ore sold in the market.
• Steel mill products—control cost affecting captive mines result in control
cost-induced shifts the owning steel plant supply curves in the steel market.
Conceptually, we could link these two standard partial equilibrium models by specifying the
interactions between supply and demand for products and then solving for changes in prices and
quantities across both markets simultaneously. For example, changes in the market price for iron
ore would result in higher production costs for steel plants that fulfill their iron ore requirement
through market purchases. Thus, these compliance costs would also indirectly affect the steel
market. However, the Agency utilized a simplified approach that does not explicitly model these
interactions for the following reasons. First, the market price increase in merchant iron ore is
projected to be very small. Second, the plant-specific data on captive/merchant iron ore
consumption shares is limited and uncertain.
4.1.3 Supply
After critical review, the Agency characterized supply at the mine/facility level. The
model incorporates some fixed factors of production on producers (e.g., plant and equipment)
that are augmented with variable factors inputs (e.g., materials, labor) to produce iron ore and
steel mill products. These fixed factors are the source of diminishing marginal returns, hence,
increasing marginal costs. Therefore, each producer's decision can be characterized by an.
upward-sloping supply curve.
An important measure of the magnitude of supply response is the price elasticity,
computed as the percentage change in quantity supplied divided by the percentage change in
price. In Section 2, we identified an estimate of iron ore supply elasticity (Slade, 1996). The
value is approximately 0.24, which means a 1 percent increase in price would only lead to a 0.24
percent increase in quantity supplied. We also identified empirical estimates of foreign supply
(ABARE, 1995). We used a value of 0.66,1 which is consistent with research that indicates that
import supply may be more responsive than domestic supply. For the second model of the steel
mill product market, EPA used midpoint values for flat-rolled products reported by the U.S.
International Trade Commission (USITC, 2002). The domestic supply elasticity value used in
this analysis is 3.5 and foreign supply elasticity is 15.
1 The U.S. primarily imports iron ore from Canada and Brazil. Overall, the North American import supply elasticity
of iron ore is 0.04 while the Brazilian is 0.66. EPA selected the highest of the 2 elasticity estimates reported by
ABARE.
4-3
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4.1.4 Demand \ •
Consumption choices are a functiqn of the price of the commodity, income, prices of
related goods, tastes, and expectations about the future. In this analysis, EPA considered how
these choices change in response to higher prices resulting from regulation, holding other
variables constant. The economic model includes both domestic and foreign demand and
assumes that the law of demand holds (i.ej., the quantity demanded falls when price rises).
For the domestic demand elasticity in the iron ore market, the Agency estimated the
elasticity using a method based on studieslby J.R. Hicks (1961, 1966) and R.G.D. Allen (1938)
on the elasticity of derived demand for intermediate goods. This method produced an estimated
value of -0.14,, which means a 1 percent increase in price would lead to a 0.14 percent decline in
quantity demanded. In contrast, literature] estimates for export demand indicate foreign
consumers are more responsive to changed in the market price. Ho and Jorgenson (1998) report
an export demand elasticity for metal mining of-0.92.
For the domestic demand elasticity in the steel mill product market, the Agency'utilized
an econometric estimate (-0.59) computed for the Integrated Iron and Steel NESHAP economic
impact analysis (EPA,: 2000). Ho and Jorgenson (1998) report export demand elasticities for
fabricated metal ranging from -1.1 to -1.9. We used an average value of-1.25.
4.2 Economic Impact Results |
To develop quantitative estimates 'of these impacts, we developed a computer model
using the conceptual approach described above.2 Using this model, EPA characterized supply
and demand of two affected commodities jfor the baseline year, 2000; introduced a policy
"shock" into the model by using control cJDSt-induced shifts in the affected domestic supply
functions of these markets; and used the rnarket model to determine a new with-regulation
equilibrium in each market. Although mo!st of the data collected are 2000, we have incorporated
up to date financial information from several publicly available sources to better characterize the
whole industry. In the following sections] we present the market, industry, and societal impacts
projected by the model. |
| .' •
4.2.1 Market-Level Impacts \
The increased cost of production due to the regulation is expected to slightly increase the
price of iron ore and steel mill products and reduce production/consumption from baseline levels.
As shown in Table 4-1, the price of iron ore increases 0.020 percent. Domestic production of
merchant iron ore declines by 3,000 metric tons (Mt), or 0.027 percent. Imports increase by '
2,000 Mt, or 0.013 percent, resulting in ahet decline of 1,000 Mt (0.003 percent). This means
that producers will not be able to recoup much of their compliance costs through a price increase.
The market as a whole (internationally) is' minimally affected with only slight movements in
price and output. I
The price of steel mill products increases minimally by 0.005 percent. Domestic
production declines by 22,000 metric tons| (Mt), or 0.023 percent. This is the net result of
declines of 30,000 Mt (0.06 percent) from integrated steel mills that use iron ore and increases in
production from unaffected electric arc fujrnaces of 8,000 Mt (about 0.02 percent). Imports
increase by 25,000 Mt, or 0.072 percent, resulting in a net decline in the
2Appendix A includes a description of the model's baseline data set and specification.
4-4
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Table 4-1. Market-Level Impacts of the Taconite NESHAP, 2000
Main Scenario
Taconite
Price (S/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price (S/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen
Process
Electric
Imports
Baseline
$55.13
26.812
11.135
15.677
$540.0:0
133.363
. 98.929
51.849
47.080
34.434
With
Regulations
$55.14
26.811
• 11.132
15.679
$540.00
133.365
98.906
51.818
47.088
34.459
Change
Absolute
$0.01
-0.001
-0.003
0.002
$0.03
-0.002
-0.022
-0.030
, 0.008
0.025
Relative
0.020%
-0.003%
-0.027%
0.013%
0.005%
-0.002%
-0.023%
-0.058%
0.017%
0.072%
market quantity of steel mill products of only 2,000 Mt (0.002 percent). Domestic integrated.
steel producers are projected to absorb nearly all compliance costs as prices rise only minimally.
Competition from EAFs and foreign producers is likely the reason; their increased production is
projected to replace almost all domestic production lost. However, lost domestic production of
integrated steel mills is a very small portion of their total output: 0.06 percent. Thus, the market
as a whole (internationally) shows almost no change resulting from this regulatory cost.
4.2.2 Industry-Level Impacts
Revenue, costs, and profitability of the domestic industry also change as prices and
production levels adjust to increased costs associated with.compliance. For domestic producers,
operating profits are projected to decrease by $4.4 million (see Table 4-2). These losses are the
net result of three effects:
• Decreased revenue ($9.572 million)—revenue decreases from output declines are
slightly mitigated by small increases in the prices of iron ore and steel mill products.
4-5
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Table 4-2. Industry-Level Impacts of the Taconite NESHAP, 2000
Change
Merchant Taconite
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106) .
Costs ($106) '
Production
Compliance
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
-$0.043
-$0.643
-$0.165
$0.808
-$0.686
-$9.529
-$5.854
-$11.844
$5.991
-$3.676
-$9.572
-$5.211
-$12.009
'$7.079
-$4.362
Reductions in production costs as output declines ($12.009 million)—variable
production costs fall as firms reduce their output.
Increased emissions control coasts ($7.079 million)—for plants/mines included in the
market model, we have assumed total annual compliance costs vary with the level of
output. Therefore, the compliance costs being incurred with regulation are slightly
smaller than the engineering compliance costs input into the model because output
declines due to regulatory costs.
4-6
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4.2.3 Impacts at the Company Level
This section examines the impact of reduced production and increased costs on
companies that own taconite facilities. One of the most sensitive issues to consider in the EIA is
the possibility that the regulation may induce a producer to shut down operations rather than
comply with the regulation. After critical review, the Agency determined the availability and
quality of plant-level data and the size of the compliance costs did not support formal modeling
of a plant closure decision within the market model.3 However, the Agency did examine the
closure issue using empirical literature and also examined other company impact issues using
financial statements.
4.2.3.1 Review of Empirical Literature on Closure
To our knowledge, there is no empirical work examining the conditions that contribute to
capacity reductions and closures of taconite mines. In contrast, the steel industry has been the
focus of several empirical papers regarding this question. Given that the proposed rule will likely
increase the costs associated with iron ore, we first identified literature that reported the impacts
of rising inputs costs on a firm's decision to close. Beeson and Giarratani (1998) found the
changes in iron ore costs did not have a statistically significant impact on either capacity or plant
closures. In addition, we reviewed findings regarding impacts of pollution abatement costs on
the probability of steel plant closure. Deily (1988) claims that little or no new investment occurs
in plants that will eventually be closed. She finds that firms' real investment per ton of capacity
declined with increases in pollution control costs during 1971-1981. Beeson and Giarratani
report that pollution control costs have a small but statistically significant impact on the
probability of steel plant closures. They estimate a 10 percent change in pollution abatement
costs increases the probability of closure by 1.79 percent. However, Deily and Gray (1991) find
that total compliance costs have a negative and marginally significant effect on the probability of
closure'. They qualify their conclusion suggesting that the use of total rather than incremental
costs, data quality, or technological coincidence may explain this unexpected result. Based on
the data collected and the size of the annual compliance costs, the Agency concludes this
regulation alone is unlikely to lead to mine closures or integrated steel plant closures. As
mentioned in Section 4.2.1,.integrated steel producers are projected to reduce output by 0.06
percent, whereas individual integrated mills are projected to reduce output by at most
0.19 percent. Consequently, these reductions in output are too small to result in any plant
closure. The rule may, however, add to existing financial stresses in the industry.
4.2.3.2 With-Regulation Company Operating Income
To evaluate if the regulation will add to current financial stresses in the industry, the
Agency obtained 2000 financial data for eight affected domestic companies from publicly
available financial statements. Although three of these firms (National Steel, U.S. Steel Group,
and Ispat Inland, Inc.) are owned by another parent company, we used 10-K data for these
companies to focus on impacts on the most directly-affected companies or parts of companies. A
review of these data shows that the affected firms are all large, with substantial resource's at their
disposal. However, only four of these companies reported positive operating income4 for 2000.
3A detailed description of the economic model is included in Appendix A.
""This measure equals sales less cost of goods sold, depreciation, and sales and administrative expenses. In the short
run, a plant would be presumed to continue to operate as long as variable profits are positive. The Agency
considered the owning company's operating margin as a reasonable approximation of plant-level variable profit
rate.
4-7
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The remaining firms are currently experiencing serious financial difficulties, and are vulnerable
to mergers and acquisitions as has been thje trend in recent years in this industry. In fact, three of
them (LTV, Bethlehem Steel, and National Steel) have filed voluntary petitions for relief under
Chapter 11 of the U.S. Bankruptcy Code sjinc£ December 2000. Although these filings do not
necessarily imply closure, one of the firms was authorized to shut down and sell all integrated
steel assets. j ......
EPA used two methods to gauge the impacts of the regulation for these eight firms. First,
we used changes in producer surplus projected by the economic model described above to
provide estimates in changes in operating jincome. The results are as follows:
• Four firms with positive operating income—Three of these firms are projected to
experience declines in operating income ranging from 0.1 to 2.3 percent. The fourth
is projected to experience a very small increase in operating income (less than 0.2
percent), because its costs increase less than some other firms.
• Four firms with negative operating incomes—Operating losses are projected to
increase by less than one percent for two firms. The other two firms' operating losses
were projected to decline very [slightly (about 0.1 percent), because their per-unit
compliance costs were lower relative to the rest of the industry.
4.2.3.3 Company Ability to Make Compliance Capital Investments • .
Although the economic model assjumes firms can make capital investments associated
with the rule, the ability to make these investments depends on a company's short-run financial
strength. The Agency acknowledges that (changes in financial conditions since 2000, may present
significant obstacles to making capital investments (e.g., three filed voluntary petitions for relief
under Chapter 11 of the U.S. 'Bankruptcy Code). Therefore, EPA examined each firm's financial
statement more closely, computing the Altaian Z-scoresto gauge their financial condition.3 We
found all but one of the domestic firms h4d Z-scores that suggest the companies may face
potential bankruptcy (i.e., had Z-scores lo,wer than 1.8). This also implies that companies in the
industry may have difficulty financing capital expenditures.
EPA also considered financial strength using the current ratio. The current ratio is the
ratio of current assets to current liabilities' and provides a measure of liquidity. Based on industry
data for 1997, the median current ratio fofthe iron and steel industry was 1.9 (D&B, 1998). Data
for 2000 show only two of the eight firms had current ratios exceeding this value. However, we
found that five firms still made environmental compliance capital investments comparable in size
to the proposed rule in 2000. In spite of their financial difficulties, iron and steel companies are
apparently able to make environmental investments. Therefore, giving consideration to this
evidence, we conclude that possibly 2 to S firms may close or sell some or all of their operations
when the costs of this rule are added to th'eir current financial stresses.
4.2.4 Employment Impacts j
Reduction in domestic production; leads to changes in industry employment. These
changes were estimated by multiplying the change in domestic production by census data on
industry employment: j
AE, = [AQ/Q] E0 (4.1)
5The Altman Z-Score model is used as a predictive model for corporate bankruptcy. For this analysis, EPA has not
used this model as a predictive model but has jused it to consider the short-run financial strength of the affected
firms. : I -'-.-. -~\ - ••-•-:•' -..-.,...;
. . I 4-8
-------
Domestic employment at taconite facilities is projected to decline by only one employee (full-
time equivalents [FTEs]) as a result of the proposed rule based on lost domestic production of
taconite.6 Taconite mining is known to be a highly capital intensive industry, as opposed to labor
intensive. Due to the nature of the industry, lost domestic production is not expected to lead to
substantial layoffs.
4.2.5 Social Costs
The value of a regulatory action is traditionally measured by the change in economic
welfare that it generates. The regulation's welfare impacts, or the social costs required to achieve
environmental improvements, will extend to consumers and producers alike. Consumers
experience welfare impacts due to changes in market prices and consumption levels associated
with the rule. Producers experience welfare impacts resulting from changes in profits
corresponding with the changes in production levels and market prices. However, it is important
to emphasize that this measure does not include benefits that occur outside the market, that is, the
value of reduced levels of air pollution with the regulation.
The economic analysis accounts for behavioral responses by producers and consumers to
the regulation (i.e., shifting costs to other economic agents). This approach provides insights on
how the regulatory burden is distributed across stakeholders. As shown in Table 4-3, the
economic model estimates the total social cost of the rule at $7.084 million. As a result of higher
prices and lower consumption levels, consumers (domestic and foreign) are projected to lose
$3.433 million, or 48 percent of the total social costs or the rule. Producer surplus declines by
$3.650 million, or 52 percent of the total social costs. This value consists of affected integrated
plants and merchant iron ore mines experience losses of $5.574 million, and unaffected domestic
supply and foreign producers who gain $ 1.923 in producer surplus as a result of the regulation. '
because they experience price increases and unchanged costs.
4.2.6 Sensitivity Analysis
EPA is confident that the elasticity estimates used in the model reflect the best estimates
available from the literature. However, EPA also conducted sensitivity analysis to explore the
effect of different elasticity values. EPA increased or decreased the elasticities of demand and
supply by 25 percent and re-evaluated the economic impacts. The results of this sensitivity
analysis are presented in Appendix B. Compared to the main scenario reported here, Simulation
1 (increase demand elasticities by 25 percent) and Simulation 4 (decrease
6The direct reduction in employment at taconite facilities resulting from the proposed rule may generate additional
job losses through induced or indirect impacts on the economy of the taconite region, as laid-off workers spend
less. These regional impacts are examined in Section 5.
4-9
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Table 4-3. Social Cojsts of the Taconite NESHAP, 2000
Value (S106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron arid Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs
-$3.433
-$3.650
-$0.686
-$4.888
$1.212
$0.711
-$7.084
supply elasticity by 25 percent) result in larger price adjustments and a greater share of the
burden being borne by consumers of tacoijiite and steel. Conversely, Simulation 2 (decrease
demand elasticities by 25 percent) and Simulation 3 (increase supply elasticities by 25 percent)
result in smaller price adjustments and a greater share of the burden being borne by the producers
of taconite and steel. Overall, changes are very small, variations of a few percentage points in
price and quantity, and variations of less than 3 percent in the shares of the social costs borne by
producers and consumers. See Appendix |B for the details.
i '
4.3 Regional Economic Impacts |
As mentioned in Section 2, the taconite industry affected by this rule is concentrated in
one county in Michigan and four counties; in Minnesota. As a result, the Agency decided to
conduct an analysis of the rule's impact on this region. Although the rule is national in scope,
affecting a product that is used throughout the nation and internationally, we expect that the
economic impacts of the rule on producer^ of taconite ore may be concentrated geographically in
this relatively small region. This section focuses-on determining the compliance burden for these
regions in Minnesota and Michigan, and tp what extent the regulation imposes significant
impacts on the regional economies beyond those imposed by the current condition of the taconite
industry. Section 4.3 .'1 provides a general discussion of IMPLAN, the economic model chosen
for this regional economic impact analysis. Section 4.3.2 provides general background
information on the most affected counties: in Minnesota arid Michigan. Section 4.3.3 describes
the estimated economic impacts of the proposed rule on the identified counties.
4.3.1 IMPLAN Application in Regional Economic Impact Analysis
Regional economic impact analyses is commonly used to investigate how a change in
economic activity in one part of the econo'my will affect economic activity in another part. This
type of analysis has been used to evaluate'the effects of changes in policies and regulations that
affect local businesses either directly or indirectly, such as stricter local air pollution standards,
changes in local taxes, or increased government spending on infrastructure. Regional economic
impact analysis has also been used to mea'sure the impacts of many different activities, such as
government projects; plant closings or downsizing; military base conversions; and recreation
activities (the presence of fishing, boating, and hunting in a particular area) that draw in visitors
4-10
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from outside the region. A regional economic impact analysis generally attempts to address the
following basic questions concerning an activity of interest:
• How much spending does this activity bring to the region?
• How much income does this activity generate for local households and
businesses?
• How many jobs does this activity support?
• How much tax revenue is generated by this activity?
• What portion of sales by local businesses is due to this activity?
Regional economic impact analyses are also frequently used to compare the impact expected
from alternative policies under consideration.
IMPLAN is a relatively standard type of input-output (I-O) model u'sed for regional
impact analysis. I-O models are mathematical models that quantify the supply and demand
relationships between sectors in a region's economy. For example, tax revenues from an industry
in the region may account for ten percent of a region's or county's total income. IMPLAN
models a change in that industry to also impact the tax revenue based on the relationship, or
factor, associated with that industry. A one percent drop in industry revenues would thus be
associated with a 0.1 percent drop in tax revenues (10%»1%). I-O models are tools that can be
used to estimate changes in production, income, employment, and local government expenditures
and revenues resulting from a change in economic activity. Unlike the partial equilibrium market
model used earlier in this section, I-O models do not estimate behavioral responses such as
changes in relative prices of inputs or outputs. Whereas the partial equilibrium model used in
Section 4.2 carefully estimates market responses in the most affected sectors, use of I-O models
permits estimation of both the direct impacts in the affected sector and the indirect impacts that
occur as the change in spending by the directly affected industry works its way through the
economy. Based on production functions estimating the inputs that each industry must purchase
from every other industry to produce its output, these models predict flows of money between
sectors. I-O models also determine the proportion of sales that endup as income and taxes.
Multipliers are estimated from I-O models based on the estimated re-circulation of spending
within the region. The higher the propensity for households and firms within the region to
purchase goods and services from local services, the higher the multipliers for the region will be.
IMPLAN is a nonsurvey-based regional I-O model including 528 sectors that can be
constructed for any county-defined region in the U.S. IMPLAN's database is built from the
National Income and Product Accounts (NIPA) published annually from the Bureau of Economic
Analysis (BEA) and the 1977 BEA input-output model for the U.S. Data are designed to be
internally consistent (i.e., county data sum to state totals and state data sum to nati'onal totals).
IMPLAN can generate regional accounts for single counties, groups of counties, single states,
groups of states, or the entire U.S. Data from numerous other sources are also used in building
these regional accounts in IMPLAN. .Most data entering IMPLAN's database do not represent
actual county or state magnitudes. Instead, they are based on national values. For example,
county employment in a given sector equals the NIP A-based state total for that sector multiplied
by the ratio of county employment in that sector to state employment in that sector. The ratio is
calculated directly from County Business Patterns (CBP), but the sector total for the state is not.
Consequently, IMPLAN values for counties and states do not necessarily equal actual values
reported in CBP or other data sources.
To analyze regional economic impacts using IMPLAN, an analyst must estimate-the
direct impacts of an economic activity or policy and provide them as input. A data file
containing information on the region of interest provides information such as ratios of jobs to
sales for each sector, the proportion of spending by individuals and firms located within the
4-11
-------
region that is spent within the region, and jthe amount that each sector purchases from each of the
other sectors within the region per unit of'output. The IMPLAN program uses these relationships
to estimate the total regional impacts resulting from a given direct impact. Impact estimates are
categorized as direct (exogenous impact resulting from policy or program), indirect (impacts
resulting from changes in local input purchases by directly impacted sectors), and induced
(impacts resulting from changes in household incomes due to changes in labor demand).
| -
4.3.2 Data for the Impacted Regions j
As mentioned in Section 2, the tacjonite mining and processing facilities are concentrated
in either Minnesota or Michigan. In Minnesota, all of the iron ore production occurs in Cook,
Itasca, Lake, and Saint Louis counties. InjMichigan. the production is primarily from the Empire
and Tilden Mines in Marquette County. Thus, these counties have been identified as the major
affected areas, where the majority of the economic impacts of the proposed rule would be felt.
Table 4-4 presents background informatiojn about the impacted regions. The counties range from
very small (Cook County, MN) to relatively large (St. Louis County, MM). Cook County has low
population, low employment, and a relatively small number of industries. St. Louis County, by
contrast, has nearly 200,000 residents, moire than 100,000 jobs, and a relatively diversified
economy. The counties have relatively high median household incomes, which exceed the
median household income of the state ($41,600) and the U.-S. ($37,000).
Table 4-4. Background of Impacted Counties in 1998
County, State Area (mile2
Marquette, MI
Cook, MN
Itasca, MN
Lake, MN
St. Louis, MN
1,821
1,451
2,665
2,099
6,226
j
| Employmen
) Population] t
61,757
4,886
44,715
10,773
197,214
31,918
|,. 4,010
i. 20,711
1
5,494
i 118,941
#of
Industries
139
78
135
101
222
#of
Households
23,843
1,888
17,348
4,239
77,511
Household
Income
($2000)a
57,938
67,196
53,758
57,299
67,581
a All amounts were inflated to 1998 using! the consumer price index available from the Bureau of
Labor Statistics ().
Source: MIG. 2001. IMPLAN county data.
4.3.3 Assessment of Regional Economic Impacts
The proposed rule may affect the ibcal economy in several ways, such as changes in sales
and profits of local businesses, local employment, and local and state sales tax revenue.
Generally, this rule is expected to have a mixed effect on local economy due to decreased
production of taconite and increased purchases of local labor and materials for implementing
controls and conducting monitoring, recordkeeping, and recording (MRR) activities. The
following sub-sections describe the estimated economic impacts of the proposed rule on the
Minnesota four-county region and Michigan one-county region.
4-12
-------
4.3.3.1 Effect of Regulation on Local Economy :
The total direct impact on each region is estimated as the change in local expenditures
resulting from the rule. The direct impact of the rule is estimated based on the results reported in
Section 4.2, and includes expenditures to comply with the regulation (positive) and adjustments
in output (which may be negative or positive). Generally, the direct impact includes the net
effect of the reduction in local'spending because output declines and the increase in local
spending to implement the controls. In each region, some mines are projected to reduce their
production of taconite, while other mines (those incurring costs of compliance that are relatively
small) are projected to increase their production. For the Minnesota region, any reduction in
taconite production will also result in a loss in government revenues because a portion of state
revenues comes from taxes on the total production from taconite iron ore. The impact of
decreased output and tax revenue is estimated to be a net reduction in local spending of $2.7
million. For Michigan, the reduction in spending because output falls at one plant is outweighed
by the increase in local spending to implement the controls and increasing production at another
plant, resulting in a net increase of approximately $0.05 million for the Michigan region.
Table 4-5 lists the direct impacts on both the industry and local and state government.
Although the direct impact of a change in iron pellet production is primarily felt in these sectors,
many additional sectors of the economy will be affected to some extent through secondaiy
(indirect and induced) impacts, as a result of the decreased or increased spending of the directly
affected sectors. To estimate secondary impacts, it is necessary to incorporate the direct
economic impacts estimates from Table 4-5 as inputs into-IMPLAN to obtain estimated changes
in other sectors, such as electric services, explosives, and motor freight transport and warehouses
industries.
4.3.3.2 Impact of Regulation on Local Business Output
The projected reduction in iron ore production is expected to result in a corresponding
change in the value of local business output, including direct, indirect, and induced impacts.
Table 4-6 summarizes the total impact of the rule on the value of output, based on multipliers
generated by IMPLAN for the four-county Minnesota region and the one.-county Michigan
region. For both regions analyzed, the total impact is estimated to be about 40 to 45 percent
larger than the direct effect. Because EPA's analysis focuses on these five counties, the only
indirect effects reported are the reductions in purchases of inputs from other businesses within
the two regions. There may be additional impacts an communities located outside of the regions,
but these effects are expected to be much smaller than those within the regions, and are not
included in the analysis. Similarly, the induced effect measures .only the reduction in goods and
services purchased from the regions' businesses as a result of a reduction in household income.
However, households are likely to make at least some purchases outside the local area. Again,
this means that there will be some additional induced impacts in other communities, but this
analysis concentrates on the regions most directly affected by the reduction in taconite pellet .
production and does not attempt to quantify the outside-the-region impacts, as they are expected
to be minimal.
4-13
-------
Table 4-5. Direct Impact of Proposed T[aconite NESHAP on Region's in Minnesota and
Michigan ($2000)a |
I * c: Economic Impacts (SIO3)
Minnesota j I
i
Compliance Costs and Output Loss |
EVTAC I 125
Hibbing j 91
Inland | . 20
MINNTAC ' 4 • •• • • • -"-:—2,609
National Steel Pellets | -186 .
Northshore j 115
Taconite Production Tax Reduction j
Education sector \ ' - 48 •
Noneducation sector | -164
Total Direct Impacts in Minnesota' I - 2,657
i
Michigan . |
Compliance Cost$ and Output Gain r Loss
Empire j . 55
Tilden j . ' -6
Total Direct Impacts in Michigan ] . 49
• i
i
a All amounts were inflated using the consumer price index available from the Bureau of Labor
Statistics ().
Source: EPA Costs Memo—Taconite Control and MRR Costs to 1999 8 26 02.xls.
Minnesota Department of Reveniu., 2000. Minnesota Mining Tax Guide 2000.
4-14
-------
Table 4-6. Estimated Total Impacts of the Taconite NESHAP on Value of Output (103
S2000)a
Minnesota
Michigan
Direct effect
Indirect effect
Induced effect
-2,657
-769
-451
49
14
7
Total Impact
-3,877
70
a All amounts were inflated using the consumer price index available from the Bureau of Labor
Statistics ().
Source: MIG. 2002. IMPLAN impact report of output.
4-15
-------
4.3.3.3 Change in Employment
Another regional economic impact is the change in employment within the sectors that
are affected by the rule. These changes are calculated by IMPLAN based on ratios of sales to
employment for the affected industries in jthe two regions. As a result of the decrease in taconite
production anticipated, mining facilities vyill need fewer employees. On the other hand, the
proposed rule requires more manpower in! MRR activities. The reduction in employment is
estimated to be 30 workers for the Minnesota region and none for Michigan. Table 4-7
summarizes the results of the employment analysis.
Table 4-7. Estimated Total Change in Employment (Number of Employees)
i Minnesota
Michigan
Direct effect
Indirect -effect
Induced effect
-15 '
Total Impact
i -30
<1
Source: MIG. 2002. IMPLAN impact report of employment.
4-16
-------
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Australian Bureau of Agricultural and Resource Economics (ABARE). 1995. China's Steel
Industry. Appendix: : Description of the world iron ore and steel trade model, pp. 37-57.
Allen, R.G.D. 1938. Mathematical Analysis for Economists. New York: St. Martin's Press.
American Iron and Steel Institute. 2001. "Year 2000 Selected Industry Data."
American Iron Ore Association. 2000. Iron Ore: 1999 Statistical Report. Cleveland:
American Iron Ore Association.
Association of Iron and Steel Engineers (AISE). 1998. "1998 Directory Iron and Steel Plants.
Pittsburgh, PA: AISE. ' - '
BBC News. December 10, 2001. "Steel Firms Mull Merger to Survive."
. As obtained
on January 15, 2002.
Beeson, P., and F. Giarratani. 1998. "Spatial Aspects of Capacity Change by U.S. Integrated
Steel Producers." Journal of Regional Science 38(3):425-444.
Bureau of Labor Statistics. "Producer Price Index Revision—Current Series: PCU1011#, Iron
Ores: 1990-2000," .
Bush. George W. 2002. March 5, 2002. "Fact Sheet: Regarding the Presidential Action on
Steel." http://www.whitehouse.gov/news/releases/2002/03/print/20020305-8.html. As
obtained on May 21, 2002.
Cleveland-Cliffs Inc. website, . As obtained on August 28.
2001.
Cleveland-Cliffs, Inc. April 4, 2002. "Cleveland-Cliffs Signs Mesabi Nugget Agreement."
.
Dun & Bradstreet (D&B). 1998. Industry Norms and Key Business Ratios.
Deily, Mary and Gray, Wayne B. 1991. "Enforcement of Pollution Regulations in a Declining
Industry." Journal of Environmental Economics and Management 21:260-274.
Deily, Mary. 1988. "Investment Activity and the Exit Decision. " Review of Economic Statistics
70:595-602.
Fenton, M.D. 2000. "Iron and Steel." U.S. Geological Survey Minerals Yearboqk-2000.
.
Fenton, M.D. 2002. "Iron and Steel Scrap." U.S. Geological Survey, Mineral Commodity
Summaries, .
Hicks, J.R. 1961. "Marshall's Third Rule: A Further Comment." Oxford Economic Papers.
. 13:262-65.
Hicks, J.R. 1966. The Theory of Wages. 2nd Ed. New York: St. Martin's Press. 247pp.
Ho, M., and D. Jorgenson. 1998. "Modeling Trade Policies and U.S. Growth: Some
Methodological Issues." Presented at USITC Conference on Evaluating APEC Trade
R-l
-------
Liberalization: Tariff and Nontariff Barriers. September 11-12, 1997.
. •
Hoover's Online. Electronic database, . Obtained on August 28.
2001. ' 'I..'- ;.,
Hufbauer, G.C., and B. Goodrich. Januar^ 2002. "Time for a Grand Bargain in Steel?" Institute
for International Economics Website, International Economics Policy Briefs No. 02-1.
. As obtained on March 7, 2002.
InfoUSA Incorporated. 2001. ReferenceUSA [computer file]. Omaha, NE: InfoUSA,
Incorporated. t'
Kirk, W.S. 1994. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1994.
.
Kirk, W.S. 1995. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1995.
.
Kirk, W.S. 1996b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1996.
.
Kirk, W.S. 1997b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1997.
.
Kirk, W.S. 1998b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1998.
.
Kirk, W.S. 1999a. "Iron Ore." U.S. Geological Survey, Mineral Commodity Summaries.
.
Kirk, W.S. 1999b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-1999.
.
Kirk, W.S. 2000a. "Iron Ore." U.S. Geological Survey, Mineral Commodity Summaries.
.
Kirk, W.S. 2000b. "Iron Ore." U.S. Geological Survey Minerals Yearbook-2000.
.
Kirk, W.S. 2001a. "Iron Ore." U.S. Geological Survey, Mineral Commodity Summaries.
.
Kirk, W.S. 2002. "Iron Ore." U.S. Geological Survey, Mineral Commodity Summaries.
.
Labson, B., P. Gooday, and A. Mason. 19,95. "China's Emerging Steel Industry and Its Impact
on the World Iron Ore and Steel Market." ABARE Research Report 95.4, Canberra,
Australia. |
LTV Corporation. 2002. "LTV Announces Sale Process for Integrated Steel Assets." Company
News On Call. . As obtained
January 14, 2002. i
McGraw-Hill. 2000. U.S. Industry & Trade Outlook. New York: McGraw-Hill.
McKetta, J.J., ed. 1988. Encyclopedia of\Chemical Processing and Design. 1988. Volume 27.
pp. 339-382. New York: Marcel Dekker, Inc.
Minnesota IMPLAN Group (MIG). 2001 \ IMPLAN county data for Minnesota and Michigan.
Minnesota IMPLAN Group (MIG). 20021 IMPLAN impact report of output.
Minnesota IMPLAN Group (MIG). 2002! IMPLAN impact report of employment.
Mine Cost. 2000. World Mine Cost Data Exchange Database and computer model.
Minnesota Department of Revenue. 2000-. Minnesota Mining Tax Guide 2000.
\ R-2
-------
''US/Canadian Iron Ore Production 2001:" July 28, 2001,
"Hibbing Taconite Resumes Operations." August 4, 2001,
Minnesota Department of Revenue. November 2001. Minnesota Mining Tax Guide 2001.
Skillings Mining Review. 2000. "US/Canadian Iron Ore Production 2000." July 29, 2000,
pp. 21-36.
Skillings Mining Review. 2001 a.
pp. 19-32.
Skillings Mining Review. 2001b.
pp. 7.
Slade, M. 2001. 1996. "Uniform Compliance Costs for Mineral Commodities: Who Gains and
Who Loses?" Land Economics 72 (I): 17-32.
Stelco Inc. website, . Obtained on August 28, 2CF01.
U.S. Department of Commerce, Bureau of the Census. 1999. 1997 Economic Census of Mining,
Industry Series—Mining. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2000. Steel Mill Products: MA331B(00)-
1. Washington, DC: Government Printing Office.
U.S. Department of Commerce, Bureau of the Census. 2001. 1997 Economic Census of Mining,
General Summary, Subject Series—Mining. Washington, DC: Government Printing
Office.
U.S. Environmental Protection Agency (EPA). August 1994. Technical Resource Document:
Extraction and Beneflciation of Ores and Minerals. Volume 3—Iron. Washington, DC:
U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 1998. Update of Integrated Iron and Steel
Industry Responses to Information Collection Request (ICR) Survey. Database prepared
for EPA's Office of Air Quality Planning and Standards. Research Triangle Park, NC:
U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed
'Integrated Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). 2001. National Emissions Standard for
Hazardous Air Pollutants (NESHAPs)for Taconite Iron Ore Processing
Plants—Background Information for Proposed Standards. Washington, DC: U.S.
Environmental Protection Agency.
U.S. Environmental Protection Agency (EPA). Costs Memo—Taconite Control and MRR Costs
to 199982602.xls.
U.S. International Trade Commission (USITC). 2001a. "SIC-1011: FAS Value by FAS Value
for All Countries." . As obtained July 5, 2001.
U.S. International Trade Commission (USITC). 2001b. "SIC-1011: Customs Value by Customs
Value for All Countries." . As obtained July 5, 2001.
U.S. International Trade Commission (USITC). 200 Ic. Memorandum to the Commission from
Craig Thomsen, John Giamalua, John Benedetto, Joshual Levy, International Economists.
Investigation No. TA-201 -73: STEEL—Remedy Memorandum. November 21, 2001.
U.S. Securities and Exchange Commission. Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) System.
U.S. Small Business Administration. 2000. "Small Business Size Regulations: Size Standards
and the North American Industry Classification System." 13 CFR Part 121.
R-:
-------
I
U.S. Steel. January 2, 2002. Press Releasfe: "United States Steel Corporation Begins New Year
As Independent Company With a Century of Experience."
. JAspbtained on January 14, 2002:
R-4
-------
APPENDIX A '
MODEL DATA SET AND SPECIFICATION
The primary purpose of the EIA for the proposed Taconite NESHAP is to describe and
quantify the economic-impacts associated with the rule. The Agency used a basic framework that
is consistent with economic theory and the analyses performed for other rules to develop
estimates of these impacts. This approach employs standard microeconomic concepts to model
behavioral responses expected to occur with regulation.; This appendix describes the spreadsheet
model in more detail and discusses how the Agency
• collected the baseline data set for the domestic iron ore and steel mill products
market,
• characterized market supply and demand for:each market,
• introduced a policy "shock" into the model by using control cost-induced shifts in the
domestic supply functions, and
• used a solution algorithm to determine a new with-regulation equilibrium for each
market.
A.1 Baseline Data Set
EPA collected the following data to characterize the baseline year, 2000:
Baseline Quantity—The Shillings Mining Review (2000) provided production data for
iron ore mines. The American Iron and Steel Institute reported market data for steel .
mill products (see Table A-l). Facility-level steel mill product production data were
estimated by the Agency using company 10-k reports (see Appendix B).
Baseline Prices—The Agency obtained software providing average total costs of
production for all iron producers in the world (Mine Cost, 2000). The Agency used •
the reported average total cost of the highest cost (marginal) rnine as an
approximation for the market price of iron ore. The 2000 average steel mill product
price was obtained from the Bureau of the Census (U.S. Department of Commerce,
2001) by dividing total f.o.b value of shipments by quantity.
A-5
-------
Table A-l.j Baseline Data Set, 2000
Market
Iron Ore
Steel Mill
Products
Domestic i Imports
Production
(106metric
(106 metric tons) ! tons)
11 .16
99
34
1
Exports
(106metric
tons)
6
6
Price
($/metric
ton)
$55
' $540
I
Source: U.S. International Trade Commission, "SIC-1011: FAS Value by FAS Value for
All Countries." . As obtained July 5, 200la.
U.S. International Trade Commissjion. "SIC-1011: Customs Value by Customs Value
for All Countries." . As obtained July 5, 200Ib.
U.S. Department of Commerce, Bureau of the Census. 2000. Steel Mill Products:
MA331B(00)-1. Washington, DC| Government Printing Office.
American Iron and Steel Institute.: 2001. "Year 2000 Selected Industry Data." . |
Iron ore supply and demand elasticities—Slade (1996) and ABARE (1995) report
domestic and/or foreign supply elasticity estimates for the iron ore markets (0.24 and
0.66, respectively). For the dohiestic demand elasticity the Agency estimated the
elasticity using a method based on studies by J. R. Hicks (1961, 1966) and R.G.D.
Allen (1938) on the elasticity of derived demand for intermediate goods. This method
produced an estimated value ojf-0.1-'1. Ho and Jorgenson (1998) report an export
demand elasticity for metal mihing of-0.92 (Table A-2).
Steel mill product supply and Demand elasticities—The U.S. International Trade
Commission (USITC, 200 Ic) reports supply elasticities for domestic and foreign flat-
rolled steel products. For this analysis, we used the midpoint values (domestic supply
elasticity = 3.5 and foreign supply elasticity = 15). For the domestic demand
elasticity, the Agency used an Econometric estimate (—0.59) computed for the
Integrated'iron and Steel NES^AP economic impact analysis (EPA, 2000). Ho and
Jorgenson (1998) report export demand elasticities for fabricated metal ranging from
-1.1 to -1.9. We used an average value of-1.25 (Table A-2).
A.2 Discussion of Modeling Approach
The agency modeled the impacts of increased control costs using two standard partial
equilibrium models—one for iron ore sol4 on the market (i.e., merchant iron ore) and one for the
steel mill product market. The compliance costs are introduced into each model as follows:
A-6
-------
Table A-2. Supply and Demand Elasticities Used for the Market Models
Market
Supply
Demand
Iron Ore
Domestic
Foreign
Steel Mill Products
Domestic
Foreign
0.24a
0.66b
3.5e ,
15e
-0.14C
-0.92d
-0.59C
-1.25d
* Slade, M. 1996. "Uniform Compliance Costs for Mineral Commodities: Who Gains and Who
Loses?" Land Economics 72(l):17-32.
b Labson, B., P. Gooday, and A. Mason. 1995. "China's Emerging Steel Industry and Its Impact
on the World Iron Ore and Steel Market." ABARE Research Report 95.4, Canberra, Australia.
0 U.S. Environmental Protection Agency (EPA). 2000. Economic Impact Analysis of Proposed
Integrated Iron and Steel. Washington, DC: U.S. Environmental Protection Agency.
d Ho, M., and D. Jorgenson. 1998. "Modeling Trade Policies and U.S. Growth: Some
Methodological Issues." Presented at USITC Conference on Evaluating APEC Trade
Liberalization: Tariff and Nontariff Barriers. September 11-12, 1997.
.
c U.S. International Trade Commission (USITC). November 21, 200Ic. Memorandum to the
Commission from Craig Thomsen, John Giamalua, John Benedetto, Joshua Levy, International
Economist. Investigation No. TA-201-73: STEEL—Remedy Memorandum.
• Iron ore—control costs affecting the merchant mines shift supply curves for iron ore
sold in the market.
• Steel mill products—control costs affecting captive mines result in control-cost
induced shifts in the owning steel plants' supply curves in the steel market.
Conceptually, we could link these two standard partial equilibrium models by specifying the
interactions between supply and demand for products and then solving for changes in prices and
quantities across both markets simultaneously. For example, changes in the market price for iron
ore would result in higher production for steel plants that fulfill their iron ore requirement
through market purchases. Thus, these compliance costs would also indirectly affect the steel
market. However, the Agency utilized a simplified approach that does not explicitly model these
interactions for the following reasons:
• the projected market price increase in merchant iron ore is projected to be very small,
and
• the plant-specific data on captive/merchant iron ore consumption shares is limited and
uncertain.
A-7
-------
The following section discusses how the ajgency characterized market supply and demand for
each market. j
i
A.3 Market Supply j
Market supply is composed of domestic production (d) and imports (m).
A.3.1 Domestic and Import Supply
4 q'
(A-l)
The change in quantity supplied by domestic producers can be approximated as follows:
(A.2)
. srt j sd sd Ap- c
Aq <" = qV d • g d • —±-—
| - Po
I
where n Sd is the baseline quantity, Psd is the domestic supply elasticity, the term Ap-c is the
4.0 b ] •
change in the producer's net price, and p0 jis the baseline price. The change in net price is
composed of the change in baseline price resulting from the regulation Ap and the shift in the
domestic supply function (c) resulting frorn the costs of compliance. Affected producer's supply
shift is calculated by dividing the annual Compliance cost estimate for each facility by baseline
output. (Unaffected domestic producers have no compliance costs, so c is zero and the change in
the net price facing them is just the changp in the price.)
The change in quantity supplied by foreign producers can be approximated as follows:
, s
Aq
s • Ap
• 8 m • —*--
Po
(A.3)
where n S"> is the baseline level of imports! gsm is the import supply elasticity, and p0 is the
40 ; ]
baseline price. Foreign producers do not face increased pollution control costs resulting from the
regulation, and therefore their net price crjange equals the gross increase in the market price. As
a result, foreign producers increase output in response to higher prices.
i
A.3.2 Producer Welfare Measurement \
For affected domestic supply, the phange in producer surplus (PS) can be approximated
with the following equation: j
APSd =
0,5-Aqd-(Ap-c)
(A.4)
where qdl is the with-regulation quantity demanded. Increased control costs and output declines
have a negative effect pri domestic producer surplus. However, these losses are mitigated to
some degree as a result of higher market prices. Note that since we are not explicitly modeling
the linkages of the iron ore markets and steel mill products, PS loss for the integrated iron and
steel producers also includes the consumer surplus (CS) loss in the iron ore market (see Section
A.4.2). i
A-8
-------
In contrast to domestic producers, foreign producers do not face additional pollution
controls and their change in producer surplus can be approximated as follows:
^m = qmi'AP + 0.5-Aqm-Ap (A.5)
With regulation, both price-and output increase for these producers leading to unambiguous
producer surplus gains.
A.4 Market Demand
Market demand is composed of domestic consumption (d) and expo'rts (x).
Qu< = qu' + qu* (A.6)
A.4.1 Domestic and Export Demand
The change in quantity demanded by domestic and foreign consumers can be
approximated as follows:
Aq°! = q0Di ' TlDi ' -j£ . (A.7)
where q® is baseline consumption, r)D is the demand elasticity of the respective consumer (i)
and Ap is the change in the market price.
A.4.2 Consumer Welfare Measurement
.The change in domestic and foreign consumer surplus is approximated as follows:
ACS; = - qn-Ap + 0.5-Aq^Ap
(A.8)
As shown, higher market prices and reduced consumption lead to welfare losses for both
domestic and foreign consumers. Note that since we are hot explicitly modeling the linkages of
the iron ore markets, the CS loss in the iron ore market is accounted for as a PS loss for the
integrated iron and steel producers.
A.5 With Regulation Market Equilibrium Solution
The new with-regulation equilibrium arises where change in total market supply equals
the change in market demand (i.e., A Qs = A QD). We used the model equations outlined above
and a solver application available in commercial spreadsheets to compute new equilibrium in
prices and quantities.
A-9-
-------
APPENDIX B
SENSITIVITJY ANALYSIS RESULTS
I
As noted in Section 4, EPA's analysis is based on the best estimates available of the
responsiveness of supply and demand for iaconite and steel to changes in their prices. This
appendix examines the impact of varying the parameters of interest: the elasticities of demand
and supply in both the taconite and steel markets. EPA performed four sensitivity analysis
simulations. In each simulation, one set of parameters (elasticities of supply or elasticities of
demand) is increased or decreased by 25 pjercent, relative to the estimates used in the main •
scenario. Table B-l presents the design of the sensitivity analysis and the parameter estimates
used in each simulation. Results of the simulations are shown in Tables B-2 through B-13. By
comparing the results in Section 4 with the results in Tables B-2 through B-l3, it can be
demonstrated that substantial variations inj the parameter estimates do not result in large changes
in the estimated impacts. j
B-10
-------
Table B-l. Sensitivity Analysis
Parameter
Estimates in
Main
Scenario,
Presented in
Section 4 1
Supply
Demand
Iron Ore
Domestic
Supply
Demand
Foreign
Supply
Demand
Steel Mill Products
Domestic
Supply
Demand
Foreign
Supply
Demand
Sensitivity Analysis Simulations
• 2
3
4
25% increase 25% decrease
25% increase 25% decrease
0.24
-0.14
0.66
-0.92
3.50
-0.59
15.00
-1.25
0.30
-0.14
0.83
-0.92
4.38
-0.59
18.75
-1.25
0.18
-0.14
0.50
-0.92
2.63
• -0.59
11.25
-1.25
0.24
-0.17
0.66
-1.14
3.50
-0.73
15.00
-1.55
0.24
-0.11
0.66
-0.69
3.50
-0.44
15.00
-0.94
B-ll
-------
Table B-2. Market-Lfevel Impacts: 2000—Simulation 1
I
!
Baseline
With
Regulations
Change
Absolute
Relative
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen
Process
Electric
Imports ;
$55.13
26.812
11.13)5
15.67J7
I
I
$540.00;
47.080
34.434
$55.14
26.811
11.131
15.680
$540.00
133.365
98.901
51.811
47.090
34.465
$0.01
-0.001
-0.004
0.003
$0.03
0.003
-0.028
-0.038
0.010
0.031
0.020%
-0.004%
-0.034%
0.016%
0.005%
0.002%
-0.028%
-0.073%
0.021%
0.090%
B-12
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Table B-3. Market-Level Impacts: 2000—Simulation 2
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen
Process
Electric
Imports
Baseline
$55.13
26.812
11.135
15.677
$540.00
133.363
98.929
51.849
47.080
34.434
With
Regulations
$55.14
26.811
11.133
15.679
$540.00
133.364
-98.912
51.826
47.086
34.453
Change
Absolute
$0.01
-0.001
-0.002
0.002
$0.03
' 0.002
-0.017
-0.023
0.006
0.018
Relative
•0.020%
-0.003%
-0.020%
0.010%
. 0.005%
0.001%
-0.017%
-0.044%
0.013%
0.054%
B-.13
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Table B-4. Market-Ljevel Impacts: 2000—Simulation 3
| With Change
Baseline Regulations Absolute
Relative
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen
Process
Electric
Imports
$55.13)
26.81J2
11.13J5
15.67:7
i
i
$540.00
133.36|3
98.929
51.849
i
47.08|0
34.434
$55.14
26.811
11.132
15:679
$540.00
133.365
98.906
51.818
47.088
34.459
$0.01
-0.001
-0.003
0.002
$0.03
0.002
-0.022
-0.030
0.008
0.025
0.020%
-0.003%
-0.027%
0.013%
0.005%
0.002%
-0.023%
-0.058%
0.017%
0.072%
B-14
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Table B-5. Market-Level Impacts: 2000—Simulation 4
Main Scenario
Taconite
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Imports
Steel Mill Products
Price ($/metric ton)
Quantity (106 metric tons)
Domestic
Basic Oxygen
Process
Electric
Imports
Baseline
$55.13
26.812
11.135
15.677
$540.00
133;.363
98.929
51.849
47.080
34,434
With
Regulations
$55.14
26.811
11.132
15.679
$540.00
133.365
98.906
51.818
47.088
34.459
Change
Absolute
$0.01
-0.001
-0.003
0.002
$0.03
0.002
-0.022
-0.030
0.008
0.025
Relative
0.020%
-0.003%
-0.027%
0.013%
0.005%
0.002%
-0.023%
-0.058%
0.017%
0.072%
B-15
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Table B-6. Industry-lievel Impacts: 2000—Simulation
Change
Merchant Taconite ;
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106)
costs ($io6) ;
Production
Compliance ,
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Ooeratina Profits
-$0.084
$0.602
-$0.206
$0.807
-$0.686
-$12.544
-$8.869
-$14.857
$5.988
-$3.675
-$12.628
-$8.267.
-$15.063
$7.076
-$4.360
B-16
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Table B-7. Industry-Level Impacts: 2000—Simulation 2
Change
Merchant Taconite
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
-$0.002
$0.684
-$0.123
S0..808
-$0.686
-$6.513
-$2.837
-$8.830
$5.993
-$3.677
-$6.515
-$2.152
^$8.953
$7.081
-$4.363
B-17
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Table B-8. Industry-L|evel Impacts: 2000—Simulation 3
Change
Merchant Taconite :'
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products •
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits'.
Total Domestic I
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
-$0.043
$0.643
-$0.165
$0.808
-$0.686
-$9.529
-$5.854
-$11.844
$5.991
-$3.676
-$9.572
-$5.211
-$12.009
$7.079
-$4.362
B-18
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Table B-9. Industry-Level Impacts: 2000—Simulation 4
Change
Merchant Taconite
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Steel Mill Products
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
Total Domestic
Revenue ($106)
Costs ($106)
Production
Compliance
Operating Profits
-$0.043
$0.643
-$0.165
$0.808
-$0.686
-$9.529
-$5.854
-$11.844
$5.991
-$3.676
-$9.572
-$5.211
-$12.009
$7.079
-$4.362
Table B-10. Social Costs: 2000—Simulation 1
Value ($106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs
-$3.433
-$3.649
-$0.686
-$4.887
$1.212
$0.711
-$7.082
B-.19
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Table B-ll. Social Costs: 2000—Simulation 2
Value (S106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs •
-$3.433
-$3.652
-$0.686
-$4.889
$1.212
$0.711
-$7.085
Table B-12. Social Costs: 2000—Simulations
Value (S106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs
-$3.433
-$3.650
-$0.686
-$4.888.
$1.212
$0.711
-$7.084
Table B-13. Social Costs: 2000—Simulation 4
Value (S106)
Consumer Surplus Loss (-)/Gain (+)
Producer Surplus Loss (-)/Gain (+)
Merchant Taconite Producers
Integrated Iron and Steel Plants
Nonintegrated Steel Plants
Foreign Producers
Total Social Costs -
-$3.433
-$3.650
-$0.686
-$4.888
$1.212
$0.711
-$7.084
B-20
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TECHNICAL REPORT DATA
(Please read Instructions on reverse before completing)
1. REPORT NO. 2.
EPA-452/R-02-013
4. TITLE AND SUBTITLE
Economic Impact Analysis of the Proposed Taconite Iron Ore
NESHAP
7. AUTHOR(S)
9, PERFORMING ORGANIZATION NAME AND ADDRESS
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Research Triangle Park, NC 27711
12. SPONSORING AGENCY NAME AND ADDRESS
Director
Office of Air Quality Planning and Standards
Office of Air and Radiation
U.S. Environmental Protection Agency
Research Triangle Park, NC 27711
3. RECIPIENT'S ACCESSION NO.'
5. REPORT DATE
November 2002
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
10. PROGRAM ELEMENT NO.
11. CONTRACT/GRANT NO.
None
13. TYPE OF REPORT AND PERIOD COVERED
Proposed regulation
14. SPONSORING AGENCY CODE
EPA/200/04
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report evaluates the economic impacts associated-with the National Emissions Standard for Hazardous Air Pollutants
(NESHAP) for the Taconite Iron Ore production source category. Taconite processing involves separating and concentrating iron ore as well
as creating and indurating (hardening) pellets. The U.S. taconite industry consists of 8 companies owning 8 mining operations in a few U S
counties in Minnesota and Michigan.
The proposed rule is estimated to cost approximately $7 million (in 2000 dollars). This cost is distributed among consumers (mainly
steel mills) who may buy less and/or spend more on taconite iron ore as a result of the NESHAP, and on producers, including: merchant
taconite producers that sell their output on the market, integrated iron and steel plants that produce and consume the taconite captively within
the plant, steel producers that use electric arc furnace (EAF) technology instead of taconite, and foreign producers. Consumers incur S3 4
million of the total social costs, merchant producers incur approximately $0.7 million incests, and integrated iron and steel producers incur
approximately S5 million in costs. The EAF producers and foreign producers enjoy a net gain in revenues of $1.2 million and $0 7 million
respectively. Prices and production levels'in the taconite iron ore market and the steel market (that uses iron ore) show minimal change. Steel
producers using EAF technology do not use taconite and are projected to increase their output by a small amount in response to the slight
increase in the price of steel mill products.
While the market overall shows minimal impacts, the financial stability of the firms operating in this market is very uncertain. In the
past few years more than 27 companies in the industry have declared bankruptcy, several facilities have closed! and EAF technology has
secured a growing share of the market. The costs of this regulation on taconite firms, however, represents less than one percent of baseline
sales revenues, and typically less than three percent of baseline profits.
Because the industry is highly geographically concentrated in Minnesota and Michigan, this report also presents an analysis of impacts
on the region using the IMPLAN model. We estimate that as the industries that interact with the taconite industry (such as construction and
earth moving equipment industries) react to the changes in the taconite market, and as household incomes are reduced as a result of changes in
all the various industries in the region, the impact of the regulation will add approximately $4 million in economic cost to the region This
represents approximately 2/10ths of one percent of total sales in those counties.
17- KEY WORDS AND DOCUMENT ANALYSIS
a. DESCRIPTORS
economic impacts
social costs
Clean Air Act
18. DISTRIBUTION STATEMENT
Release Unlimited
b. IDENTIFIERS/OPEN ENDED TERMS
air pollution control, environmental
. regulation, economic impact analysis,
maximum achievable control technology
19. SECURITY CLASS (Report)
Unclassified
20. SECURITY CLASS '(Page)
Unclassified
c. COSATI Field/Group
21. NO. OF PAGES
22. PRICE
EPA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE
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