EPA-230/1-73-016
OCTOBER, 1973
            ECONOMIC ANALYSIS
                        OF
    PROPOSED EFFLUENT GUIDELINES

    Leather Tanning and  Finishing Industry
                       QUANTITY
       U.S. ENVIRONMENTAL PROTECTION AGENCY
            Office of Planning and Evaluation
                Washington, D.C. 20460
                            \
                            LU


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This report has been reviewed by the Office of Planning
and TC valuation, EPA,  and approved for publication.
Approval docs  not signify that the contents necessarily
reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or
commercial products constitute endorsement or recom-
mi-ndat ion  for use .

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EPA - 230/1-73-016
                      ECONOMIC ANALYSIS OF

                 PROPOSED EFFLUENT GUIDELINES

            LEATHER TANNING AND FINISHING INDUSTRY
                         Donald J. Wissman
                           October,  1973
                            Prepared for
                   Office of Planning and Evaluation
                   Environmental Protection Agency
                      Washington, D. C.  20460
                        IJ.S, Environmental Protection Agency
                        srr Lsri-et'
                        Chicago,  JL   60604

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             This document is available in limited
quantities through the U.S.  Environmental Protection Agency,
      Information Center, Room W-3Z7 Waterside Mall,
                 Washington, B.C.  20460
        The document will subsequently be available
     through the National Technical Information Service,
                Springfield, Virginia 22151

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                             PREFACE
The attached document is a contractor's study prepared for the Office
of Planning and Evaluation of the Environmental Protection Agency
("EPA").  The purpose of the  study is to analyze the economic impact
which could result from the application of  alternative effluent limitation
guidelines and standards of performance to be established under sections
304(b) and 306 of the Federal Water Pollution Control Act, as amended.

The study supplements the technical study ("EPA Development Document")
supporting the issuance of oroposed regulations  under sections  304(b) and
306.  The Development Document surveys existing and potential waste
treatment control methods and technology  within particular industrial
source categories and supports promulgation of  certain effluent limitation
guidelines and standards of performance based upon an analysis of the
feasibility of these guidelines  and standards in accordance with the require-
ments of sections 304(b)  and 306 of the Act.  Presented in the Development
Document are the investment and operating costs associated with  various
alternative control and treatment technologies.  The attached document
supplements this analysis by estimating the broader economic effects
which might result from  the required application of various control
methods and technologies. This study investigates  the effect of alter-
native approaches in terms of product price increases, effects upon em-
ployment and  the continued viability of affected plants,  effects upon
foreign trade  and other competitive effects.

The study has been prepared with the  supervision and  review of the Office
of Planning and Evaluation of EPA.  This  report was  submitted in fulfill-
ment of  Contract No.  WA-73X-42&,  Task Order  No. 8 by  Development
Planning and Research Associates, Inc.  Work was completed as  of
October,  1973.

This report is being  released and circulated at approximately the same
time as  publication in the Federal Register of a  notice of  proposed rule
making  under sections  304(b) and 306 of the Act  for the subject  point
source category.  The  study has not been  reviewed by EPA and is not
an official EPA publication.  The study will be considered along with the
information contained in the Development  Document and any comments
received by EPA on either document before or during  proposed rule making
proceedings necessary to establish final regulations.   Prior to  final promul-
gation of regulations, the accompanying study shall have  standing in any
EPA proceeding or court  proceeding only  to the  extent that it represents
the views of the contractor who studied the subject  industry.  It cannot be
cited, referenced, or represented  in any respect in any such proceeding
as a statement of EPA's  views regarding the subject industry.

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                          CONTENTS
  I.    INTRODUCTION                                         1-1
           A.  Data Sources                                   1-1

 II.    INDUSTRY SEGMENTS                                  II-1
           A.  Characteristics of Firms in the Leather
               Tanning  and Finishing Industry                  II-2
                    1.   Number of Firms                       II-2
                    2.   Size of the Firms                       II-4
                    3.   Age of Plant and Level of
                        Technology                            II-5
                    4.   Location                               II-7
                    5.   Number of Products                    II-7
                    6.   Level of Integration                    11-11
                    7.   Level of Diversification                11-11
                    8.   Efficiency                             11-12

           B.  Industry Segments                               11-12
                    1.   Conventional Industry Segments         11-12
                    2.   Categorization of Plants by Type
                        of Manufacturing Process               11-14

           C.  Ability to Finance New Investment               11-19
                    1.   General Industry Situation              11-20
                    2.   Expenditures for Plant and
                        Equipment                             11-21

III.    FINANCIAL PROFILE                                   III-l
           A.  Plants by Segment                               III-l

           B.  Annual Profit Before Taxes                      III-3

           C.  Distribution  of "Model" Plant Financial Data     III-5

IV.    PRICING
           A.  Price Determination                            IV-1
                    1.   Demand for Leather                    IV-1
                   2.   Supply of Raw Hides                    IV-2
                   3.   Pricing in the Leather Industry         IV-4

           B.  International Trade                             IV-8

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                     CONTENTS (continued)

                                                                Page

 V.    ECONOMIC IMPACT ANALYSIS METHODOLOGY        V-l
            A.  Fundamental Methodology                       V-l
                     1.   Benefits                               V-6
                     2.   Investment                             V-7
                     3.   Cost of Capital - After Tax             V-7
                     4.   Construction of the Cash Flow          V-8

            B.  Price Effects                                   V-9

            C.  Financial Effects                               V-10

            D.  Production Effects                              V-ll

            E.  Employment Effects                             V-12

            F.  Community Effects                              V-12

            G.  Other Effects                                   V-12

 VI.    POLLUTION  CONTROL REQUIREMENTS AND COSTS    VI-1
            A.  Categories of Leather Tanning and Finishing
                Plants                                          VI-1

            B.  Effluent Limitation Guidelines                  VI-2

            C.  Pollution Control Requirements                 VI-5

VII.    IMPACT ANALYSIS                                      VII-1
            A.  Price Effects                                   VII-1

            B.  Financial Effects                               VII-4

            C.  Production Effects                              VII- 10
                     1.   Baseline Closures                      VII- 10
                     2.   Capital Availability                    VII- 12
                     3.   Plant Shutdowns Resulting from
                         Pollution Control Guidelines            VII- 14
                     4.   Total Production Lost Due to
                         Guidelines                             VII- 17

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                      CONTENTS (continued)

                                                                 Page

 VII.    IMPACT ANALYSIS (continued)
             D.  Employment Effect                              VII-18

             E.  Community Effects                              VII-21

             F.  International Trade                             VII-22

 VIII.    LIMITS OF THE ANALYSIS                              VIII-1
             A.   Accuracy                                      VIII-1

             B.  Range of Error                                 VIII-1

             C.  Critical Assumptions                           VIII-2

             D.  Remaining Issues                               VIII-3

 APPENDIX

SELECTED REFERENCES

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                       I.  INTRODUCTION
The purpose of this study is to analyze the economic  impact of the cost
of proposed effluent control guidelines on the leather tanning and finishing
industry.  These requirements  are being developed by EPA pursuant
to the Federal Water Pollution Control Amendments of 1972.

The initial impact study for the leather tanning and finishing industry,
completed by Urban Systems Research and Engineering, Inc. in
December,  1971,  included  part of the requirements of the basic scope
of work for the current study.  This study will concentrate on updating,
improving,  expanding upon and adding detail to the earlier study and
on expanding the financial analysis and economic impact evaluations.

The three levels of  treatment plus pretreatment for plants disposing of
water into municipal systems are as follows:

        1.   Best practicable  control technology currently  available
            (BPT)  - to be met by industrial dischargers by  1977.

        2.   Best available technology economically achievable
            (BAT)  - to be met by 1983.

        3.   New source performance standards (NSPS) - to be applied
            to all new facilities (that discharge directly  to navigable
            waters) constructed after the promulgation of  these guide-
            lines (approximately January 1, 1974).

        4.   Pretreatment standards  - in this case to  be  applied to all
            facilities that use municipal  systems.
                         A.  Data Sources

The most commonly used and in many cases the most readily available
source of industry information including employment, location, value of
shipment and product data is the Census of Manufactures.  In addition to
the Census, other sources were used where applicable.   Much of the  de-
tailed statistical information on the industry was drawn from the  compi-
lation and tabulation of the Tanners'  Council of America, Inc. Generally,
the Census information is in agreement with data compiled by the Tanners'
Council.

                                1-1

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There is a dearth of published information regarding the tanning industry,
particularly regarding industry structure,  pricing, import-export impli-
cations  and other economic analyses.   The USDA has published over the
years a few brief definative reports but compared with other industries
in the agriculture processing areas,  study of the industry has been
neglected. We have used the sources described where applicable but
have relied on personal discussions with knowledgeable individuals to
provide the needed insight to  the industry.

Financial data for the industry is particularly limited and was drawn
largely from information made available on a  confidential basis to the
staff of the Tanners'  Council. In addition, information taken from Troy's
Almanac of Business and Industrial Financial  Ratios and other sources
were used where applicable.

In addition to the present study there have  been earlier studies completed
on the tanning industry with regard to the impact of pollution control
facilities. Relevant  data from the following studies are included herein.
        1.   USDI Federal Water Pollution Control Administration, The
            Cost of Clean Water,'Volume III,  Industrial Waste Profile
            No. 7 -  Leather Tanning and Finishing."  September,  1967.

        2.   The President's Council on Environmental Quality,  The
            Leather Industry - A Study of the  Impact of Pollution Control
            Costs.  Prepared by Urban Systems Research and Engineering,
            Inc.  December,  1971.

        3.   U. S. Environmental Protection Agency, Development Document
            for Effluent Limitation Guidelines and Standard of Performance
            - Draft.  Prepared by Stanley Consultants, Inc., June, 1973.
            (Hereafter referred to as Development Document).
                                1-2

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                    II.   INDUSTRY SEGMENTS
The Census of Manufacturers classifies the leather tanning and finishing
industry (SIC  3111) into three types of establishments.  These are es-
tablishments that are primarily engaged in the tanning,  curing and
finishing hides and skins into leather.   The three types  of classifications
that are used  include:

        1.   "Regular tanneries" - the  regular tannery purchases raw
            materials, employs production workers in the plant  to tan,
            curry and finish hides and skins,  and sells the finished
            product.  In effect,  this type of establishment performs all
            of the usual manufacturing functions within one organization.

        2.   Converter  - the converter typically performs only the
            entrepreneural functions of the manufacturing concern
            such as buying raw materials, and arranging processing with
            outside factories,  i.e. contract tanneries for the production
            of the finished leathers.  The actual tanning and finishing
            of hides and skins is done  on contract by the contract
            tanneries.

        3.   Contract tanneries  - the contract tanner employs production
            workers  in his own establishment to process materials
            owned by converters, makes  products to specification
            but does  not become involved in the sale of the finished
            product.

It should be noted, however, that the above classification is not  mutually
exclusive since some  firms in the industry act as both regular tanners,
and leather converters or as regular tanners and contract tanners.

The Census has used the primary plant operation as the delineating classi-
fication criteria.  If the direct wage and salary payments for one category
were less than the payments for the second,  the plant was classified
according to the category  in which the  highest amount of wage and salary
payments were made.
                                II-1

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       A.   Characteristics of Firms in the Leather Tanning
                      and Finishing Industry

The leather tanning and finishing industry consists of a wide diversity
of types of firms. Firm ownership ranges from family-owned com-
panies and closely held corporations to divisions of large conglomerates.
As a result, information regarding  operating characteristics is
closely held or else  combined with operation statements of large
corporations where meaningful segregation is  not possible.

Information regarding this industry must out of necessity be derived from
traditional sources of information such as the  Census of Manufactures
and the published reports of the Internal Revenue Service.  These two
sources have their limitations as frequently results  are aggregated into
the SIC 31  Leather and Leather Products Major Group.

For convenience  purposes and because the industry consists largely of
single firm plants, the characteristics of firms and characteristics of
plants will be discussed in conjunction in the following  sections.  Relevant
distinctions will be made  as  required.
 1.  Number of Firms
The Census of Manufactures lists the number of companies and number
of establishments as follows:

       Year            No. of Companies     No. of Establishments

       1958                   521                      578
       1963                   482                      525
       1967                   474                      519

Table II-l shows the total  number of establishments in the leather tanning
and finishing industry  by classification.  In  1967,  60% of the establish-
ments were classified as tanneries which was an increase from 54% in
1963.  The number of  converters increased slightly from 1963 to  1967
accounting for 13% of the plants in 1967.  Contract tanneries on the other
hand declined from 180 or 34% of the total number of plants in 1963 to
26% of the plants in 1967.
                               II-2

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         Table II-1.  Total number of establishments in the leather tanning
                       and finishing industry by classification
                                    Total
         Tanneries
           Converter
           Contract
          Tanneries
No. of Establishments
With 1-19 employees
With 20-99 employees
With 100 employees or more
                                                         1963
525
269
166
 90
284
133
 81
 70
61
50
10
 1
180
 36
 75
 19
                                                         1967
No. of Establishments
With 1-19 employees
With 20 - 99 employees
With 100 employees or more
519
261
171
 87
314
163
 91
 60
70
52
13
 5
135
 46
 67
 22
Source: Census of Manufacturers, 1967.
                                      II-3

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A tabulation by the Tanners' Council of America indicates a total ofi399
companies with 431 plants (including converters) in the industry as of
30 June, 1973.  Their records also indicate a total of 33 plants
(establishments)  have ceased operations between the period of
1 January  1968 and 30 June 1973.  This would, in effect, reduce the 519
firms to 486 as of the present date.  This leaves a difference between
the Census figures and the  Tanners' Council list of 55  plants.  It is
believed that this number reflects miscellaneous small operators, many
of which would be classified as taxidermists  by the Tanners' Council rather
than tanners or finishers.

A further breakdown of plant numbers would include approximately 70
"establishments" that are converters and handle  only entrepreneural
functions.  This leaves a total of 361 manufacturing plants.  Of this  number,
185 are dry process finishers only which do not use water  in the
manufacturing process.  According to the data supplied by Tanners'
Council, this leaves a total of 176 plants that must be considered herein.

2.  Size of the Firms

Based on number of employees,  an  indication of size of plant  is avail-
able from the Census of Manufacturers (Table II-1). Plant size appears to
have remained relatively constant between the period of 1963  and 1967.  In
1963, 51%  of the  total plants had less than 19 employees.  This had  decreased
to 50% by 1967.  Thirty-two percent of the plants in 1963 and in 1967 em-
ployed between 20 and 99 employees and 17% had 100 employees or more.

When number of employees and type of operation are compared, we  find
that little change has occurred in size structure during the period '63 to
'67. Approximately 52% of the tanneries had less than 10 employees in
1967.  Twenty-nine percent had between  20 and 99 employees and 19%
had more than 100 employees in 1967.  This is basically the same as the
size structure in 1963; however, in the tannery classification, the number
of plants with 100 employees or more amounted to 24% of the total tanneries.
The size structure of the converters also remains essentially the same
with a  slightly larger percentage of the plants falling into the 100 employee
category in 1967  than in '63.  For contract tanneries we see a slight shift
toward higher number of employees than in the other two classifications.
Only 34% of the plants have less than 19 employees in  1967 as compared
with 47% in 1963.  Plants with more than  100 employees amounted to 16%
of the total in '67 as compared with 1 1% in 1963.
                                II-4

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A further indication of size of firms can be obtained from Table II-2.  In
1970 the four largest companies accounted for 21 percent of the value of
industry shipments.  This is approximately the same percentage as
existed in 1935.  The eight largest companies account for 31 percent of
shipments and the largest 50 companies about 71  percent of the total.
Using the total number of companies in 1967 as reported by Census,
i.e.,  47,  the largest 10 percent of the companies control 70 percent of
the  shipments.

Data for the most recent year,  1972,  reflects a similar size structure
for  the industry.  According to data obtained from the Tanners' Council.
41 firms or 10. 3 percent of the total accounted for 69 percent of sales.
This included companies ranging in size from $5  to $50 million (Table II-3).
The medium .sized companies ranging in size from $1 to $5 million in
sales account for 28 percent of the companies and 15 percent of sales while
the  small companies with less than $1  million of  sales account for 64
percent of the companies but only 16 percent of the sales.

3.  Age of Plant and Level  of Technology

The leather tanning and finishing industry can be  described as  having
basically old plants in terms of actual  brick and mortar with slightly
over 70 percent of the plants 50 years  of age or older.  From the member-
ship records of the Tanners' Council,  the age of  plants, tanning and/or
finishing leather,  converter excluded,  is as follows:

                                               Plant Units
              Less than 10 years                     3
               10-15 years                           5
               15-20 years                          11
              20-30 years                          17
              30-50 years                          68
              over 50 years                        257
              Total                                361

Although the majority of industry units are in old buildings, a  substantial
number of plants have been rebuilt, modernized and re-equipped at a
cumulative cost approaching the capital investment required for new  plants.
The Urban Systems and Engineering report (2 ) categorizes the level  of
technology for existing plants as older, prevalent, and new, i.e.,  1950,
1963 and 1967 vintaj :  respectively.
                               II-5

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   Table II-2.  Percent of value of shipments accounted for by the
        largest companies in the leather tanning and finishing
                        industry,  1935-1970
                Year
Conomts1
(IHMIM)
VUvtofinftBUyUnpmnts'
Tom
(mtlita
toll*!)
Pvctnt accounted for By-1
4
larftSt
companies
1
Iviesl
companies
20
lettest
companies
SO
Hips!
companies
PrMary
product
special-
nation
iltn'
(percent)
Cowate
rail*
fpucenl)
                  954..
                  1947...
                  1915...
                         ,M) i
                         474
sao
323
500
 '93
 870.
 94O.
 7SS.
 732.
 706.
1,070.
  HA,
100
100
100
too
         Source:  Annual Survey of Manufactures.
Table II-3.  Distribution of companies and plants by dollar volume,  1972
Company Size
($ 000,000)
5 - 50
1 - 5
Under 1
Total
Volume
$ %
545
116
127
788
69.2
14.7
16. 1
100.0
Companies
No. %
41
110
256
399
10. 3
27.6
64.2

Source:  Tanners' Council of America, Inc.
                                 II-6

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Using this classification sheme, 20 percent of the plants were placed in
the older category and the remainder of the plants were classified in the
prevalent and newer category.  Level of technology by size of plant is
defined as follows:

                      Percent     Percent of plants this size in
Plant     Hides       plants of       technology level	
size      No. /day     this size    Older	Newer fc  Prevalent

Small       300          10         55              45
Medium  300-800        50         30              70
Large       800          40          5              95
Source:  Urban Systems and Engineering,  "The Leather Industry -
         A Study of the Impact of Pollution Control Costs. "

4.   Location
 Leather tanning and finishing establishments tend to be concentrated in
 the Northeastern region of'the country.  As shown in Table II-4, nearly
 50 percent of the  total number of establishments  are located in Massa-
 chusetts and New York,  28 and 21 percent  respectively.  New  Jersey
 reported 9 percent  of the plants in 1967.

 The second area  of concentration is the East North Central region with
 Wisconsin reporting 30 plants or 5.8 percent of the total.  Other states
 of importance in  this  region include Ohio,  Illinois and Michigan.  The
 remaining plants  are  scattered widely throughout the United States.

 Historically,  tanneries were  located throughout the country  near the
 source of hides.  A concentration did develop in  the early 1900's in the
 East and North Central region .around Chicago and Milwaukee, but the
 recent trend again would be to locate in and around the sources of hides.
 With the relatively  recent spatial dispersion of slaughter facilities away
 from the traditional centers such as  Kansas City and Chicago, we can
 expect to  see new tanneries follow the same trend.

 5.  Number of Products
 Six major categories of animal skins are used today in addition to imported
 rars skins such as alligator, crocodile, etc.  They are as follows:  cattle-
 hides,  kipskins and  calfskins;  sheep and lamb skins;  goat and kidskins;
 pigskins; horsehides; and deer and elk skins.

 The products of the  industry can be identified in traditional terms based
 upon primary raw materials employed and end use.
                                II-7

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                Table H-4.   Location of leather tanning and finishing establishments by primary  state
                                                  and region, 1967
1967
Region
New England Region
Maine
New Hampshire
Vermont
Massachusetts
Middle Atlantic Region
New York
New Jersey
H-, Pennsylvania
i
00
East North Central Region
Chio
Indiana
Illinois
Michigan
Wisconsin
West North Central Region
Minnesota
Mis souri
South
Delaware
Tennessee
West
California
Total
Total
Number
183
16
18
1
146
176
108
48
20


74
12
3
19
10
30
13
2
6
47
6
9
26
15
519
Industry
Percent
35.2
3.0
3.4
.2
28. 1
33.9
20. 8
9.2
3.9


14.3
2.3
.6
3.6
1.9
5.8
2.5
.4
1.2
9-1
1.2
1.7
5.0
2.9
100.0
Establishment with
20 or More Employees
Numbe r
93
14
15
1
62
68
30
25
13


51
7
3
12
5
24
7
1
5
30
6
7
9
8
258
Percent
36.0
5.4
5.8
0.4
24.0
26.3
11.6
9.7
5.0


19-8
2.7
1.1
4.6
K9
9-3
2.7
0.3
1.9
11.6
2.3
2.7
3.4
3.1
100.0
Total Industry
Numbe r
195
I/
17
II
162
188
109
53
26


67
I/
I/
20
7
27
9
I/
j_/
42
7
10
24
17
525
Percent
37. 1
-
3. 2
-
30.8
35. 8
20. 8
10. 1
5. 0


12. 8
_
-
3. 8
1.3
5. 1
1.7
-
-
2. 0
1.3
1.9
4.6
3. 2
100. 0
1963

Establishment with
20 or More Employees
Number
89
I/
15
I/
60
76
30
26
20


48
I/
I/
13
5
22
4
I/
\l
30
7
7
9
8
256
Percent
34.8
.
5.8
_
23.4
29.7
11.7
10.2
7. 8


18.7
-
-
5. 0
1.9
8.6
1.5
-
-
11.7
2.7
2.7
3.5
3. 1
100.0
I/ Included in division total
Source:  Census of Manufacturers

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CATTLEHIDES:
       CATTLE SIDE LEATHER.   This is the principal product of the
       industry which accounts for approximately 64% of total industry
       sales.  End use includes--shoe uppers, linings,  garments,
       gloves, sporting goods, handbags, small leather goods, and
       waist belts.  Side leather is primarily chrome tanned.

       CATTLE SIDE SPLIT LEATHER.  Cattle  side split leather is
       a by-product of hides which is not processed in full thickness.
       Used for shoe uppers,  linings,  insoles, work gloves,  small
       leather goods,  handbags, protective industrial clothing.  Chrome
       tanned; processed by side leather tanners or sold to "split
       tanners" for finishing into specialized products.

       SOLE LEATHER.  Almost  entirely vegetable  tanned.  Major use
       is for shoe soles.  Secondary uses include welting, counters,
       box toes, waist belts.

       CATTLE SIDE PATENT LEATHER.  Sub-class of chrome tanned
       cattle sides finished with special compounds (polyurethanes) for
       glossy surface.

       KIP SIDE LEATHER.   Leather  tanned from kips  which are  small
       hides, intermediate between calfskins and cattlehides.   Used almost
       entirely for shoe uppers.

       UPHOLSTERY LEATHER.   Mainly vegetable  tanned; some  chrome
       retannage.  End use includes automotive and furniture  upholstery.

       HARNESS AND SADDLERY  LEATHER. Composite group of the
       same plants but possessing  different characteristics useful for
       various parts of equine equipage or related uses.   (Collar,
       harness, skirting,  latigo,  bridle,  etc.) Also used for  holsters,
       gun cases, etc.

       SPORTING GOODS LEATHER.   Combination tannages of chrome,
       vegetable,  alum, glutaraldehyde used for  footballs, baseballs,
       baseball gloves and  ces.

       BAG, CASE &. STRAP LEATHER.   Trade description for special-
       ized  group of leathers which are vegetable, chrome and combina-
       tion tanned.  End use includes luggage, briefcases, small leather
       goods, decorative items, equipment cases, straps, and heavy
       bookbinding.

                                    II-9

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       MECHANICAL LEATHER.   Vegetable, chrome and impregnated
       leather for industrial uses including belting,  gaskets, washers,
       seals for equipment.

       CALFSKINS:  Chrome tanned leather from skins of immature cattle
       used for shoe uppers and handbags. Volume is in sharp decline due
       to shrinkage of raw material supply.

SHEEP AND LAMB SKINS: .Second  largest raw material category.  Chrome
alum,  oil and combination tannages for garments,  gloves,  shoe uppers and
linings, handbags and wallets, bookbinding and chamois.

GOAT AND KID LEATHER SKINS:  Chrome tanned in smooth or suede
finish used for  shoe uppers and linings.

PIGSKIN:  Vegetable  or chrome tanned shoe uppers,  gloves, garments,
and small leather goods.

HORSE HIDES:  Chrome and vegetable processed for shoe  uppers,  gar-
ments, baseballs.  Cordovan is  included in this  group.

DEER AND ELK HIDES:  Chrome and vegetable  tanned for  gloves, garments,
and to minor degree for shoe uppers (buckskin).
                 •
MISCELLANEOUS AND EXOTIC LEATHERS;  Aggregate volume is minor
and the number of producers in the  U. S.  is less than 10.  Products in-
clude Kangaroo for athletic shoe uppers,  reptile for shoe uppers, belts,
and small leather goods,  Peccary and Carpincho for gloves.
                                  II- 10

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In summary,  cattlehides are the dominant raw material of the industry
with the major products of Cattle Side leather, Sole leather, Upholstery,
Garment and Bag, Case & Strap leathers.  Sheep and Lamb skins are
the second and much smaller raw material base yielding mainly garment
and glove leather, lining and shoe stock, chamois and leather for small
leather goods.

6.  Level of Integration

The industry is not characterized by any appreciable integration either
back to the raw material supply or forward to finished and fabricated leather
products.  There is, in fact,  less integration in 1973 than several years
ago when two major packers owned tanning facilities and four leading
shoe manufacturers operated tanning plants.   In 1973 the only firm that has
integrated toward the raw material is the A.  C. Lawrence Leather Co.
(Swift).  Armour and Company, which had operated the Armour Leather
Company for two generations, recently  sold its leather subsidiary and liqui-
dated all leather operations.  The Brown group (Brown Shoe) still operates a
cattle  side upper leather plant as does Genesco.  However, Endicott Johnson
and Interco have sold or liquidated all tanning enterpr: ses.  It is  estimated
that the  sales volume of tanning or finishing units integrated with raw
material producers is  less than 6% of gross annual volume.   Leather
tanning facilities owned or operated by manufacturing companies account
for an even smaller percentage of leather sales or  value.

7.  Level of Diversification
 The annual survey of manufacturers  shows the leather tanning and finishing
 industry with a very high specialization ratio of 98 pencent for  1967.  This
 indicates that 98 percent of sales  are in the primary SIC code.  The
 typical production unit of the industry is not diversified for two main
 reasons.  First,  tanning equipment and processes are specialized and
non inter-changeable in terms of raw material or end product.  For
 example, equipment suitable for tanning and finishing skins  cannot  be
 used for hides, and per contra.  Hence, most plants have  confined  pro-
 duction to a very limited range of product.  Second, shoe manufacturing
 has been and still is the principal consuming industry.  In 1962 shoes
 accounted for 83% of all leather used.  By 1972 this ratio had declined to
 74%, and tanneries  were seeking to diversify output. Cattle side leather
 plants entered the garment leather market and sought outlets in waist
 belts,  handbags  or  small leather goods.  However,  this  trend does  not
 reflect diversification  of basic product line.  It indicates,  rather, an effort
 to adapt available plant and equipment to moderately different needs of end
 uses other than shoes.

                                II- 11

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A further observation is pertinent.  Tanning machinery and equipment
cannot be adapted for any purpose other than treating hides and skins.
It is fixed capital which must be written off at scrap value  in the absence
of demand for used machines.

8.  Efficiency

By the historic  standards of the industry, productivity is high.  Value
added per production worker has increased from $4. 84 in  I960 to $8. 00
in 1970 representing an average annual increase  of 5.2 percent.  Stated
in physical terms, production per man hour in cattle side upper leathers
has increased 40% in the past decade according to records of  the Tanners
Council.  Side leather tanners are now exceeding 60 sq.ft.  per hour in the
most efficient plants  when 42 sq.ft. per hour was considered very good
ten years ago.
                      B.  Industry Segments

The leather tanning and finishing industry has traditionally been segmented
by type of leather manufactured such as cattlehide leathers,  sheep and
lamb skins, goat etc.  Most of the industry production data are given in
these  terms.  The Development Pocument, however, categorizes the industry by
manufacturing processes.   This is more appropriate for evaluating the
imposition  of pollution control on the industry since a major factor affecting
the waste production in the leather  industry is  the type of manufacturing
process  used to convert the various types of animal skins to finished leathers.

The following  material discusses industry segments using two taxonomies
(1)    conventional industry segments and (2) categorization of plants by
manufacturing process.                              .


1.  Conventional Industry Segments

Cattlehide leathers account for 81. 3 percent of the total production in the
leather tanning and finishing industry.  The major use of cattle hide
leathers  is  side and patent leather used for shoe uppers.  This accounts
for 48 percent of total leather or 59 percent of  the cattleskin processed.
Sheep and lamb  skins are the second most important with approximately
10 percent of  production (Table II-5).   Further discussion on  recent trends
in conventional segments is contained in Chapter  III.
                                11-12

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 Table II-5.  Percent of production and employment by conventional
                         industry segment
Industry Segment
Cattlehide Leathers
Side and Patent
Sole and Belt
Upholstery
Split Leather
Harness
Bag, Case & Strap
Other i'
Calf Leather
Goat and Cabretta
Sheep and Lamb
Pig
All Other U
Converters

Percent
of industry
production
81.3
47.8
9.4
4.7
10.9
0.1 )
1.8 )
6.6 )
1. 1
2. 3
10.3
4.6
0.4
n. a.
100.0
Percent
of industry
employment
80.7
52.6
11.4
6.9
5. 3

4.5

2.0
1.8
7.7
4.5
3. 3
n. a.
100.0
—  Includes sporting goods and mechanical
2/
—  Includes horse, kangaroo,  deer,  reptile and exotic types.
   Source:  Tanners' Council  of America, Inc.
                                II-  13

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2.  Categorization of Plants by Type of Manufacturing Process

For the purposes of establishing effluent limitation guidelines and standards
of performance', the leather tanning and finishing industry has been
divided into seven major categories.   These categories have been de-
veloped by Standley Consultants principally by similarities in process and
waste loads.  The industry categories are:

                               Primary Processes
                                                              Leather
Category          Beamhouse                Tanning          Finishing

   1         Pulp hair                    Chrome                 Yes
   2         Save hair                    Chrome                 Yes
   3         Save hair                    Vegetable               Yes
   4         Hair previously  removed    Previously tanned       Yes
   5         Hair previously  retained     Chrome                 Yes
   6         Pulp hair                    Chrome                 No
   7         Hide curing                 No tanning              No

A brief description of the major process is given here.  Further, more
detailed descriptions are available in  earlier EPA  reports  or in published
technical description of the tanning and finishing processes
The major processes are:

        1.  BEAMHOUSE.  This is a generic for  all the initial stages of
                          process after raw hides and skins are re-
ceived at the tannery.  The beamhouse entails large use of water and is
a major source of tannery waste loads.

        2.  TANYARD.  The series of steps by which putrescible hides
                       and skins  are converted  into stable, non-
putrescible leather through aqueous solution containing various chemical
agents. Also marked by substantial water use and waste discharge.

        3.  RETANNING,  FAT LIQUORING AND  COLORING. In these
                                                           process
stages the  specified physical properties of leather  are adjusted and set
prior to surface treatment.  Water usage and waste loads  are substantially
reduced from the previous steps and processes.

        4.  FINISHING.  Devoted largely to surface appeal and Char-
                       acteristics.   Unimportant  with respect to use of
water and waste loads.

                               11-14

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Two qualifications must be entered with respect to the  data compiled
for these categories.  First, converters have been eliminated since they
do not perform a production function implicit in the definition.  Second,
addition of dollar volume for the first six categories  will exceed total
industry sales by virtue of intra-industry transactions  such as sales of
crust leather by tanners to other tanners  or to finishers.

It will be obvious that the  plants maintaining the full  cycle of operations
-- from beamhouse  through finishing  -- will be most seriously impacted.
Such plants comprise the largest single portion of the tanning industry.
Table II-6  indicates that the full cycle tanneries in categories 1,  2
and 3 account for 78 percent of the employment and 81  percent of the
annual industry volume.  Plants in Category 5  do not maintain beamhouses
but must be concerned with effluent problems of their lanyards.   In cate-
gory 6, only the finishing  operation is obviated.

The plants in category 4 are engaged only in finishing  operations  on leather
that was tanned elsewhere  (essentially dry process).   Water  is not used  in
the production  process and for this reason this category is not considered
further in  the analysis.  There are a  total of 185 plants in this  segment
and of this number 94 percent have less than 50 employees which places them
in the  small category.  The remaining 6 percent fall  into the medium size
category.  Although this group contains 51 percent of the plant,  it accounts
for only 7  percent of the total volume.

Category 7 is engaged in the treatment of hides or skins by packers or pro-
cessors prior to movement of such raw material to tanners.

Table II-6  gives the number of plants, employees and annual volume by
segment.   A brief recap of plant numbers from the Census and the Tanners'
Council is  as follows:

                                    Census      Tanners' Council
       Total in SIC 3111 (1967)        519
       Converters                     70
       Processing Plants             449

       Closures since 1967            33                33

       Plants in existence today      416               361

             Dry Process                               185
             Wet Process                               176

                                II- 15

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         Table II-6.  Distribution of plants,  employment and annual sales by industry segment
Category _'

1.
2.
3^
4.
5.
6.
7.-2/
Total Plants

Beamhouse

Pulp hair
Save hair
Save hair
Hair previously
removed
Hair previously re
moved or retained
Pulp
Hide curing
Description
Tanning

Chrome
Chrome
Vegetable
Previously
tanned
Chrome
Chrome
No tanning

Finishing

Yes
Yes
Yes
Yes
Yes
No
No
No. of
plants

140
7
15
185
8
6

361
No. of
employees

11,750
2, 100
3,050
1,630
1,835
1, 115

21,480
Annual
$million
$470
84
122
62
68
29

$835
volume
Pet.
57
10
15
7
8
3

100
J./
2/
Categories adapted from the Development Document.
— 900 Principal packers; 24 hide processors other than packers.
                    •
Source:  Tanners' Council of America, Inc.

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It is believed the discrepancy of 55 plants between the Census records
and Tanners' records may be accounted for by the exclusion of very
small plants, i.e.,  1  - 10 hides per day from the Tanners' records.
Also, the Census records may  contain certain plants engaged in taxi-
dermy.

Table II-7 stratifies the number of wet  process plants by size in the
approximate categorization of the  model plants.  Because the
only size categorization that was available was employment,  it was
possible only to approximate the size category in terms of "hides per
day."

Category 1,  pulp hair-chrome tan with  a finishing operation is  the most
prevalent type  of tauning and finishing operation  with 140 plants of the
total 176 wet process  plants.  This category accounts for 61  percent of
the wet processed volume and is summarized as follows:

                                  No. of Plants    Percent of Volume

        X Small                         5                0. 4
        Small                          59               13.1
        Medium                        39               20. 1
        Large                          29               42.8
        X Large                       	8               23.6
                                      140              100.0

The remaining wet process segments have a total of  36  plants and account
for the remaining 39 percent of wet process  volume.  The  size distri-
bution places only 10  percent of the plants (6) in the small  and X small
category with the remaining plants in the medium and large categories.
Thus,  the volume breakdown for all wet processing plants  is estimated
as follows:

                                  No. of  Plants     Percent of Volume
        X Small                         6                  . 3
        Small                          64                 9.6
        Medium                        48                16.9
        Large                          43                43.1
        X Large                        15                30. 1
                                      176               100.0
                                II- 17

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       Table II-7.  Size distribution of wet process tanning and finishing plants by category,
                                  approximate size group - hides per day
Category
(1)
(2)
(3)
(5)
(6)
50-180 180-540
X Small Small
5 59
1
1 3
1

6 64
540-1200
Medium
39
2
3
4

48
1200-2600
Large
29
2
8
2
2
43
> 2600
X Large
8
2

1
4
15
Total
plants
140
7
15
8
6
176
—  Based upon employment records of Tanners' Council, Inc.  assumed production per man hour of
   44 sq. ft. for plants with employment of 200 or more and 36 sq. ft.  for plants with less than
   200 for Categories 1, 2, and 3.  Assume 105 ft, /man hour for Category 5 and 6.

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                   Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement
is a function of several critical financial and economic factors.   In
general terms, new capita] must come from one or more of the following
sources:  (1) funds borrowed from outside  sources: (2) equity capital
through the sale of common or preferred stock; (3)  internally generated
funds-- retained earnings and  the stream of funds attributed to depreciation
of fixed assets .

For each of the three major sources of new investment,  the most c ritical
set of factors is the financial  condition of the individual firm.  For debt
financing, the  firm's  credit rating, earnings  record over a period of year-,
stability of earnings,  existing debt-equity  ratio and !he  It-ride r-,'  < oiilideme
in management will be major  considerations.  Now  equity funds through the
sale of securities will depend upon the firm's future earnings as anticipated
by investors, which in turn will reflect pa st ea rnings records.  The firm's
record,  compared to  others in its  own industry and to firms  in other similar
industries, will be a major determinant of the ease \vith whu h ne\v equitv
capital can be  acquired. In the comparisons, the investor will probably
look at the trend of earnings for the past five or so  years.

Internally generated funds  depend  upon the. margin of p rotitabih ty and
the cash flow from operations.  Also,  in publicly held corporations,
stockholders must be willing  to forego dividends in order to make
earnings  available for reinvestment.

The  condition  of the firm's industry and general economic conditions are also
major considerations in attracting new  capital.   The industry will be
compared to other similar industries (i.e. ,  other processing industries)
in terms  of net profits on  sales and on net worth, supply-demand relation-
ships, trends  in production and consumption, the state  of technology, im-
pact of government regulation,  foreign  trade and other  signfleant variables.
Declining or depressed industries  are not  good prospects for attracting
new capital.  At the  same  time, the overall  condition of the domestic and
international economy can influence capital markets. A firm is  more
likely to attract new capital during a boom period than during a recession.
On the other hand, the cost of new capital will usually be higher during an
expansionary period.  Furthermore,  the money markets  play a determining
role in new financing .

These general guidelines can be applied to the leather tanning and finishing
industry by looking at general economic data and industry performance
over the  recent past.

                                  II-  19

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1.  General Industry Situation

The leather tanning and finishing industry has maintained a pre-tax profit
on sales of approximately 4-5 percent over the recent past few years
(Table III-l).  An important consideration here is that the margin appears
to be  relatively stable during this period (1968-1972) in spite of a general
downward trend in total volume of finished leather produced.

Return on investment as reported by the Tanners' Council as percent  of
profits on investment averaged 12 percent for the total industry and 14.7
percent for cattle side leather for 1972  (III-B).  Information is not avail-
able for a time series on return on  investment but considering the consist-
ency of pre-tax profit on sales, it may be concluded that  return on invest-
ment  has been relatively stable also.

An attempt was made to determine the total assets and liabilities of the
industry by using two separate data sources.  The IRS-based data con-
tained in Troy's  Almanac-i' was taken from year  ending 1969, the most
current available. It contain the financial ratios for all firms in SIC  31
or approximately 1,890  firms.  The second source was obtained from
Urban Systems Report as taken from an accounting statement of 35 firms
by Robert Morris Associates.—'

By applying the various  ratios contained in the respective reports to the
estimated industry sales for 1972 of $788 million, two very similar
patterns emerge:

             Assets              IRS-Based              RM-Based
                                $ million    Pet.       $ million   Pet.

     Current assets                308       70         319       69
     Fixed assets                  129       30         144       31
     Total assets                  437      100         463      100
        Liabilities and Equity

     Long term debt                 69       16           75       16
     Current liabilities             125       29       '   125       27
     Net worth                     242       56          264       57
     Total                         432      100          463      100
 —  Troy,  Leo,  Almanac of Business and Industrial Financial Ratios, 1972
    and 1 973 editions, Prentice-Hall Inc ., Englewood Cliff s,  New Jersey.
 2/
 —  Statement by Robert Morris Associates,  Philadelphia,  Pa.  as contained
    in Urban Svstems Research and  Engineering,  Inc., The Leather Industry,
    A Study of the Impact of Pollution '-onlrol Costs, Vol. II, Distributed by
    NTIS,  Dec.  <  -7i.

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2.  Expenditures for  Plant and Equipment

New expenditures as reported by the Annual Survey of Manufactures
and the Census fluctuated between $4.7 and $7. Z million from I960
through 1964, then increased sharply in 1965 and 1966 to $17.3 million.
Expenditures have remained at about that level  since  with slight declines
in 1967 and 1970 (Table III-3).  A closer look at the $17.7 million spent
in 1971 shows $3.5 million or ZO percent used for new structures  and
plant additions and 80 percent for new machinery and equipment.  Total
expenditures amount to approximately 13 percent of the estimated fixed
assets of the industry or 4 percent of total assets.

In addition to the new plant and equipment expenditures,  Census re-
ported purchases of used equipment of $. 5 and $. 9 million for years
1963  and  1967 respectively.

Capital Availability

In summary, it would appear that the industry has been able to maintain
a profitable position in spite of a severely declining volume.  During the
past five  years the total physical volume of the  domestic leather tanning
and finishing industry has declined by approximately  33 percent due pri-
marily to severe international competition.

The industry has a large number of family-owned and operated plants
especially among the  small and medium size categories.  A number of
the larger plants are  divisions of major corporations.  The family-owned
plants are largely financed with internal capital and maintain a low  level
of long term debt.  New expenditures have been modest  -- mainly for
equipment and consequently over 70 percent of the physical plants are over
50 years  old.  There  has been an apparent reluctance of outside capital sources
to invest  in or lend money to the industry.  From January 1,  1968 through
June,  1973 a total of 33 plants were closed and/or liquidated.  This in-
cluded large plants as well as small ones.

Problems of the remaining leather tanning and  finishing industry have
been intensified by their ability to acquire working capital req 'r  rr ints
at current raw material price levels (July,  1973).—    Industry sources, in-
cluding the Tanners' Council, report very critical scrutiny of industry
prospects by banks and fiduciaries and reluctance to  increase lending
commitments to tanners. Another gauge in the  situation confronting the
industry  is the complete lack  of any market for  existing facilities.  Not
the slightest investment interest could be found  in plants closed in 1973 such
such as Griess-Pfleger (Waukegan),  Superior (Chicago), or Modern
(Peabody, Mass.).  These plants had to be liquidated and equipment sold
at scrap  value.
—  Raw material prices more than doubled from 1971 to  1973.  See Table A-6.

                                 11-21

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    Table III-3.  Expenditures for new plant and new equipment in the leather
                    tanning and finishing industry ($ million)
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Total new New structures
expenditures and plant additions
6.1
4.7
7.2
6.5 .8
7.8
11.3
17.3
16.7 5.2
16.6
14.4 .3.0
12.7 1.9
17.7 3.5
New machinery
and equipment



6.2


'
12.5

11.4
10.6
14.3
Used plant
and equipment



.5



.9




Source: Census of Manufactures and Annual Survey of Manufactures.
                                      II- 2?.

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                    III.  FINANCIAL PROFILE
Financial information regarding the tanning and finishing industry is
particularly difficult to obtain.  The industry is largely family-owned
businesses.  Only one  firm is listed on the stock exchange (Seton
Company) for which leather and leather products make up 72  percent of
sales and 31 percent of pre-tax profits.  Six leather enterprises are
subsidiaries or operating divisions of conglomerates (Allied Kid-General
Host; Armour  Leather-Ahzona; Gorden State-Walter Kid; Irving Tanney-
Seagrove Corp.; Pfister &; Vogel-Beatrice Food and A. C.  Lawrence-
Swift & Company).  The remainder of the industry almost without exep-
tion,  is held by family groups.  As a result, profit and loss statements
are not available to the public or if reported, the information is con-
solidated with  other divisions to the point where a financial analysis of
leather tanning and finishing operation is next to impossible to obtain.

Financial information obtained from IRS  data published in Troy's Almanac
of Business and Industrial Financial Ratios  is  consolidated for all firms in
SIC 31.  This amounts to  approximately  1, 800 firms.  Information used to
develop this chapter  on the Financial Profile of the industry draws upon
the above named sources  where applicable.  Additional financial informa-
tion was obtained from  the Tanners' Council, recent USDA reports regard-
ing the cost of tanning  as  well as discussions with persons knowledgeable
of the  Tanning and Finishing industry.
                        A.  Plants by Segment
Sufficient information was obtained to develop representative plants for
the major segment of the  wet processing industry--pulp hair-chrome tan
with finishing.  This accounts for 140 out of 176 of the wet processing
plants recorded with the Tanners' Council.  This category along with
category 2 would correspond roughly to the conventional cattle side leather
segment is discussed in more detail  in the following segments.

Insufficient data  are available from the smaller segments to adequately
define their performance.  However,  relevant observations can be drawn
from facts submitted by companies representative of the remaining con-
ventional segments to the Tanners' Council.
                                III-l

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     Table III- 1.  Comparison of net profits as a percent of sales before tax  -
                          model plant and industry data
Source X Small Small
Model Plant Data:
1972 -.7 3.0
IRS Data: -
1967-68 (.5) 2.5
1968-69 <0 2.1
Tanners' Council Survey:— Industry
1970 3.9
1971 5.1
1972 3.7
Industry
Medium Large average

6.6 7.4

4.0 5.8 4.3
3.2 5.2 4.2
Cattle side industry
4.8
5.9
4.6
—  Taken from Troy Almanac of Business and Financial Ratios and includes industry
   (SIC 31) of approximately 1890 firms.

—  Tanners' Council of America, Inc.
                                      Ill-2

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Sole Leather

Net losses have been incurred by the segment during the past three years.
Adverse profit levels and huge  increase in working capital requirements led to
the liquidation of the Elkland Tannery (June  1973), which was the largest
sole leather plant in the world.  Estimated pretax return on  sales ranged
from losses by a majority of respondents to 1. 9% in one concern.
Sheep and Lamb Leather

In total, the firms in this group were also in a loss position during the
years 1970-1972 inclusive.  Volume of the group continued the decline
which had begun in 1969.  By  1972 input of skins fell to 18. 6 million
from 29.7 million in 1968.  Only three companies of 16 queried stayed
in the black for the period.  Estimated capital loss for the entire group
exceeded $3.5 million.  Current problems,  1973,  are  even more acute
because dollar devaluation severely handicaps U.  S. sheepskin
tanners in their attempts to purchase skins from New Zealand,  the major
world source.

                       B.  Annual Profit Before Taxes
Net Profit on Sales

A comparison of net profits as a iiercent of sales before tax for the model
plant segments,  IRS data and information obtained from the Tanners
Council Survey is shown in Table III-1.   Given the differences  in sources
and time period, the data  from the three sources is roughly compatible.
Net  profits before tax as a percent of sales has averaged about 4 to 5
percent over the recent past,  with generally the larger firms  showing a
higher level of profit according to IRS data.  IRS data indicates the small
plants are operating at a loss.   Most likely these consist  of old plants
largely depreciated  out  or operating on their depreciation.  This, in fact,
suggests that  the extra small and small  plant would not be replaced when
fully depreciated out or'no longer  operative.  This conforms with the
generally accepted view, however, that  these plants without additional
costs for pollution abatement equipment would most likely remain in
business for a considerable length of time as indicated by the  relatively
low closure-rate over the past decade and the age of existing plants.
Return on Investment
Information from the Tanners Council shows pretax profits on investment
of 12 percent for the total industry and 14.7 for cattle side leather for  1972.

                                Ill-3

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The model plant data is as follows:  X small, <0; small, 8.8 percent;
medium,  20. 5 percent; and large,  24 percent.  Casual observation
suggests the model plant data may be slightly high however since the
greatest percentage of plants would cluster around the small and medium
size plants.  The two averages appear to be relatively close (the higher
industry figure of 14.7 is the segment most applicable to the model plant
data).

Annual Cash Flow

Two key facts are not definitively known and can  only be estimated for
the entire industry, namely,  net income after tax and depreciation.
The estimates given here are derived from data submitted to the Tanners
Council by an extensive sample of representative companies and are aver-
ages for the years  1970-1971-1972.

                   Net After Tax          $18,461,000
                   Depreciation             7,300,000
                   Industry Cash Flow     $25, 761, 000

A similar estimate  for the  cattle side leather segment,  the major  industry
group, yields the following:

                   Net After Tax          $10,422,000
                   Depreciation             5,800,000
                   Cash Flow             $16,222,000

These data suggest an annual cash flow of as a percent of investment of
8. 8 percent for the  industry and 11.8 percent for the cattle side segment.

Model plant data yield an annual cash flow of 4. 5 percent for the X small
plant,  11.1 percent for the small plant, 16. 1 percent for the medium and
17.8 percent for the large plant.  Again, the model plant data reflects
a  slightly higher annual cash flow than industry figures from the Tanners
Council.

Market (Salvage Value of Assets)

Tanning machinery and equipment is uniquely immobile. With the exep-
tion of motors,  controls, or maintenance items generally used in  industry,
tanning machines can be used for no other purpose.  Vats and pits used
in vegetable tanneries have no conceivable application and, in the  event
of plant  liquidation, must either be bulldozed or  filled in.  Tanning drums
or hide processors (concrete mixers) have residual value only as  scrap.
Similarly,  splitting machines,  fleshers, stakers, finishing equipment
cannot be adapted to any other industrial purpose.   Embossing presses

                                III-4

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may conceivably be employed for other material but the tanning industry
has been the major user of presses specifically designed for handling
leather.  In short, in the absence of any demand for used tannery equip-
ment the market value of the entire range of machine installations in a
tannery can only be described as scrap.  Land and building, of course,
have value subject to  general market conditions and location.

As with other agriculture processing industries with little or no market
value for wornout facilities  such as the dairy processing industry, a
salvage value of equal to 10 percent of the replacement cost was used
as an indication of the scrap value  and value of the land.
Cost Structure

Leather tanning and finishing is a raw material oriented industry because
hides and skins are the major components of cost.  Information obtained
from the Tanners Council indicates the following general cost structure.

Dependent on type  of leather produced and raw material required, the
hide and skin represents 40-60 percent of the cost of finished leather.

Fixed costs  include the conventional elements in every manufacturing
or processing industry, i.e., maintenance,  administration,  supervision,
local taxes,  long term interest charges,  depreciation and amortization.
The sum of such fixed charges in ratio to total costs  per  unit of sale
differ considerably with types of leather  produced or the  number of
stages  conducted in the full tanning and finishing process.  Sales costs
are for the most part variable but a varied proportion is  fixed as sales
administration.  Assuming  a normal and average level of operation in
ratio to capacity (75%-85%), fixed costs would range  from 9% to  12%
of total cost.

Variable costs begin with raw material and  cover processing labor,
sales expense,  the bulk of power and fuel charges, chemical, tanning
and finishing materials, water and sewage discharge, inbound freight,
raw material brokerage commissions, social security and other employ-
ment taxes,  fringe benefits for employees such as vacations  and holiday
pay.  The  composite of these costs amounts to 88% to 91% of the total.
               C.  Distribution of "Model" Plant Financial Data
In the absence of actual industry data for the respective industry segments
model plant data were  developed for  the predominate category of plants by

                                 III-5

-------
respective size  groupings.  These data should be interpreted as being
indicative of the real industry situation.  The estimated cash flow for
representative plants in the leather  tanning and finishing industry is
shown in Table III-2.  The basic source of information came from a
USDA study by Fred Poats "Cattle Hides and Shoe Price" published in
the Marketing Transportation Situation,  August, 1972.  This was supple-
mented from information contained in the 1967 Cost of Clean Water,
Vol. Ill, Industrial Waste Profile, No. 7,  Leather Tanning and Finishing,
IRS data,  and personal discussions with industry specialists.

Variable Costs
Raw hide cost consisted of 52 percent of the finished leather price and is
based on the average 1972 price of 32 cents per pound for a green salted
hide.   It was estimated that the average green salted hide weighed 61.5
pounds and equalled a brine cured hide of 48 pounds at 41 cents per pound.
Although the published prices reflect the green salted hide in reality 80
percent o'f the hides purchased from packers are the brine cured variety.

 Beam house operations accounted for 3. 5 to 4 percent of the sale price
 of finished  leather.  Labor, tanning  materials, and brokerage and freight
 was estimated to range from 29.5  percent of sales for the large plant to
 a high of 32.6 percent  for the X small plant.  Because of the relatively
 low level of automation available in the tanning industry, the economies
 of scale do not appear  to be as great as in some industries.  To achieve
 greater throughput larger tanneries duplicate  production lines  similar to
 those found in smaller  plants.
 Fixed Cost
 Fixed costs are defined as those which do not vary directly as functions
 of throughput.  These include:

                   Sales, general and administrative
                   Plant and labor overhead
                   Taxes and insurance
                   Maintenance and repair

 Separate cost estimates were not available for each of the above mentioned
 cost components,  therefore,  fixed costs were grouped.  Fixed cost ranged
 from a high of 13.1 percent for the x  small  plant to a low of 8. 8 percent
 of sales for the large.

 Interest was considered a fixed cost and was estimated as . 7  percent of
 sales.  This was taken as the industry average from the IRS data.


                               Ill-6

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Depreciation was estimated at 6. 6 percent of replacement cost and
amounted to 1. 4 to 2. 4 percent of sales.   Data from the IRS records in-
dicate an industry average of 1. 2  ranging from a low of . 8 in the small
plant to a high of 2. 7.   This also suggests the small plants may be largely
depreciated out.

Replacement cost was taken from "Cost of Clean Water" updated to 1972
with Department  of Commerce's Composite Construction Index and adjusted
based on industry discussion.

Gross Working Capital - was derived from IRS data and calculated at 37
percent of sales similar to the 1967-1969 industry average.

Current Liabilities - were also derived from IRS data and calculated at
17 percent of  sales.
                              Ill-7

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Table III-2.   Estimated cash flow for representative plants hi the leather tanning and finishing industry

Plant utilization
Hours per day
Days per week
Days per year
Utilization rate (percent)
Raw hides U
Salt cured 61.5 Ib. @ $0.32/lb. or
Brine cured 48 Ib. @ $0.41/lb.
64% raw hide (000 Ibs. )
Output ?_/
TR leather gds. 1,2 & 3, upper shoe
(000 sq.ft. )
Split 8 Ib. /hide (000 Ib. )
Sales _' Shoe upper 83.9£/sq.ft.
Split
Total sales
4/
Cost of raw hides - 70 Ib. @ 26. 4=18. 45
Beann house: Curing & flecking
Tannery: Labor
Tanning materials
Brokerage & freight
Total Variable Cost
Total Fixed Cost
Cash Earnings
X- Small
Per hide








40

8
33.56
2.00
18.45
1.44
4.43
4.61
1.07



100 hides /day
Percent
Total of sales

8
5
250
75
18,750


900
750

112
629.3
37.5
666.8 100.0
345.9 Si. 9
27.0 4.0
83.1 12.4
86.4 13.0
21.4 3.2
217.1 32.6
87.4 13.1
16.4 2.5
Small 300 hides /day
Percent
Per hide Total of sales

8
5
250
80
60, 000


2,880
2,400

480
33.56 2,013.6
2.00 120.0
2,133.6 100.0
18.45 1,107.0 51.9
1.37 82.2 3.8
4.08 244.8 11.5
4.61 276.6 13.0
1.07 64.2 3.0
667.8 31.3
236.4 11.1
122.4 5.7
Medium 700 hides /^ay
Percent
Per hide Total of sales

8
5
250
80
140,000


6,720
5,600

1, 120
33.56 4,689.4
2.00 280.0
4,969.4 100.0
18.45 2,583.0 52.0
1.25 175.0 3.5
3.55 496.8 10.0
4.61 645.9 13.0
1.07 149.1 3.0
1,466.8 29.5
477.0 9.6
442.6 8.9
Large 2, 000 hides /day
Percent
Per hide Total of sales

8
5
250
85
425,000


20,400
17,000

3,400
33.56 14,263.0
2.00 850.0
15,113.0 100.0
18.45 7,891.3 52.2
1.25 534.2 3.5
1,511.3 10.0
1,964.7 13.0
453.4 3.0
4,463.6 29.5
1,330.0 8.8
1,428.1 9.5

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Table III-2.   (continued)
X- small
Per hide
Depreciation: Plant
Equipment
Total Depreciation 6. 6% replacement value
Interest . 7% sales —
Pre-Tax Income
Income Tax
After-Tax Income
Replacement Values
Land & Building
Equipment
Total Replacement Values —
Average Fixed Assets (1/2 replacement cost)
Total Working Capital-' (37% of sales)
8 /
Current Liabilities - (17% of sales)
Net Working Capital
Average Fixed Investment
100 hides /day
Percent
Total of sales


16.1 2.4
4.7 .7
(4.4) .7
_
(4. 4) . 7



Z45
123
247
114
133
256
Small 300 hides /day
Percent
Per hide Total of sales


41.9 2.0
14.9 .7
65.6 3.0
25. 1
40.5 1.9



635,
318
789
362
427
745
Medium 700 hides /day
Percent
Per hide Total of sales


79.2 1.6
34.8 .7
328.6 6.6
150.9
177.7 3.5



1,200
600
1,839
844
995
1,595
Large 2,000
hides /day
Percent
Per hide Total of sales


205.
105.
1, 116.
553.
613.



3, 115
1,557
5,591
2,569
3,022
4,579


6 1.4
8 .7
7 7.4
2
5 4. 1










-------
Footnotes for Table III-2.
—  Assume 70 pounds per raw hide in would yield 48 Ibs of brine cured hide.
_' Assume output of TR leather - tannery run mixture of grade 1,  2, and 3
   side upper shoe leather.
_' Assume cost of cured hide (brine cured) equals 58  percent of finished
   leather price (TR leather) or cost of brine cured hide equal to raw
   hide price $18.45 plus $1.25 for brine curing.

   Finished price = 19-70  x  -^-   =  $33.97
                     x        100
   Brine cured hide weighs 48 pounds and equal to  40 sq. ft. of finished
   hide (1.2 lb -  1 sqft)

   Finished leather equal to 70.76 cents per pound or 84.9  cents per sq ft.

4/
—  Raw hide price based on average charge packer hide  (salt cured)
   price for HNS and LNC for 1972

   Fresh hide 70  lbs@26.3£ per  lb             =   $18.43
   Processing cost                                $ 1.25
   Salted hide 61.5 Ibs @ 32.0£ per lb           =   $19.68
     or Brined Hidge 48.0 Ibs @  41.0£  per lb    =   $19.68

—  Taken from IRS data from Troy "Almanac of Business and Industrial -
   Financial Ratios                       "                    "

£' Replacement cost taken from "Cost of Clean Water Volume III Industrial
   Waste Profiles No.  7 Leather Tanning and Finishing" and updated to
   1972 with Dept. of Commerce's Composite Construction Index.
Z' Working capital derived from IRS data in Troy Almanac  - Calculated at
   37 percent of sales as average over  1967-1969
g /
—  Current liabilities derived from IRS data  in Troy Almanac - Calculated at
   17 percent of sales as average over  1967-1969.

   Basic data taken from Poats "Cattle Hide and  Shoe Price" MTS  186,
   August, 1972.
                         111-10

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                          IV.   PRICING
The price for hides (and skins)  is based primarily on the derived demand
resulting from the demand for finished leather used in the manufacture
of shoes. Supply is based on the number of cattle slaughtered both
domestically and in other hide exporting countries such as Argentina,
Brazil and Australia but the number of cattle slaughtered is in no way
related to the demand  for hides. Continued strong  demand for hides
on the world market,  a sharp drop in Argentina's exports and discon-
tinued U. S.  production of two major synthetic substitutes in  1971 caused
prices of cattle hides to more than double between August, 1971 and June,
1972
                     A.   Price Determination
1.  Demand for Leather

The demand for leather is strongly influenced by the number of shoes pro-
duced in the United States.  Table IV-1 indicates that 78 percent of the
cattle hides produced in the U. S. in 197U was used for the production of
shoes.  However,  to obtain a clearer picture of total demand,  several
other factors must be  considered.

First,  there has been  a market substitution of synthetics for leather.
In 1971  the  Bureau of Census reported that 66. 9 percent of all shoes
domestically manufactured had all leather uppers.  The comparable  ratio
for May,  1973 is 56.5 percent.  This substitution appears to have been
related to the increase in prices of hides which occurred during that time.
According to the Tanners' Council this change was the primary result of
rigid price  grooves  existing in the shoe  manufacturing and retailing
structure rather than a shift in consumer preference.   Both the manu-
facturers and the retailers are reluctant to alter price  levels once a
seasons style showings have been made.

Change  in components of the shoe is  the most generally used method of
holding  the  price line -- and in the recent case an increased use in syn-
thetics.  This occurred in spite of the fact that two major U.  S. producers
of synthetics discontinued  production.  This argument can be  strengthened
by observing the historic  factory value per pair of shoes (Appendix
Table A-3).  Prices for shoes has been  increasing at a steady rate of
                                IV-1

-------
about 5 percent per year.  In 1969 the average factory value for a pair of
shoes was $4. 94,  by  1972 the price had increased to $5. 56, an increase
of 12.5 percent.  During the same time cattle hide prices more than
doubled.  This would tend to slightly overstate the case; however, recognizing the
time lag involved between hide and leather price changes and leather
price and finished shoe construction.

The progress made in synthetic technology during the recent years pre-
sents a particular dangerous threat to further erosion of the domestic
leather market.

U.  S. shoe manufacturers have also felt the impact of imported shoes.
Domestic shoe production reached a peak in 1968 when 642 million pairs
were produced. This has since declined to 526 million pairs in 1972
with a  corresponding increase in the  imports of shoes from 175 million
in 1967 to 296 million pairs in 1972 or  36 percent of the total shoes sold
in the U. S. (see Appendix Table A-4).

The market for raw hides is greatly influenced by international trends.
Europe and Japan are the traditional importers  of raw hides, but Eastern
Block countries such  as Rumania'and Czechoslovakia have  recently increased
hide imports from the U.S.  (Appendix Table A-10).  The Argentine has
traditionally been a large exporter of hides with an average of 8-8. 5 million
hides from 1966 through 1969.  Exports began to decline slightly in 1970
then sharply in 1971 and amounted to only  1.3 million in 1972.  This has been
caused by their internal production problems and also an attempt to com-
pletely internalize their hide industry a.nd eventually only export finish
leather products.  Brazil also internalized the hide tanning industry and
banned exports of  raw hides further reducing world supply  by two million
hides.   This year Brazil has become an importer of raw hides and is now
competing for raw hides on an international basis.


2.  Supply of Raw Hides

Cattle numbers in the U. S. and throughout the world are in an upward
trend.  According to  the Foreign Agricultural Service of the U. S. Depart-
ment of Agriculture,  world cattle inventory for 1973 is estimated at
1, 299  million, with a comparable figure for  1964-1968. given as  1,184.6
million.  Greater cattle numbers can be equated with greater annual
slaughter and therefore hide supply (Appendix Table A-6).  It appears
however that the rate of growth in cattle inventories and potential slaughter
does not match the growth in human population plus  the elevation of living
standards.
                                IV-2

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                       Table IV-1.  Apparent U.S.  equivalent cattle hide disappearance by major use
Hides used for shoes
Year

I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Number
1,000
25,142
25,422
24,991
23,838
24,929
25,351
25,131
23,894
24,151
21,568
19,551


Percent

80.9
77.0
79-2
74.0
68.7
65.2
62.1
62.0
62.4
55.2
51.9


Hides used for gloves
and garments
Number
1,000
3,484
3,778
3,459
4,026
3,772
3,855
3,881
3,940
4,566
3,825
3,790


Percent

11.2
11.4
10. 9
12. 5
10.4
9-9
9.6
10. 2
11. 8
9.8
10. 1


Hides for other
leather uses
Number
1,000
2,001
1,930
1,961
2,177
2,195
2,246
2,153
1,982
2,111
2,096
1,833


Percent

6. 5
5. 8
6.2
6.8
6. 1
5. 8
5. 3
5. 2
5. 5
5.4
4.9


Net hide
Number
1,000
440
1,909
1,155
2,160
5,388
7,419
9,316
8,700
7,842
11,580
12,462


exports Total dis-
appearance
Percent

1.4
5.8
3.7
6.7
14.8
19- 1
23.0
22.6
20.3
29-6
33. 1


Number
1,000
31,067
33,039
31,566
32,201
36,284
38,871
40,481
38,516
38,670
39,069
37,636


Source:  Livestock Marketing Situation - 182, November, 1971.
         Data on leather production from cattle hides, calf skins, sheep skins and goat skins and net exports of
         raw skins from Tanners Council of America converted to equivalent cattle hides.

-------
Table IV-2 presents breakdown of cattle slaughter in the United States
from 1955 through 1972.  The sharp increase in cattle numbers can be
attributed to the feedlot system of producing beef and the increased
diversion of calves slaughtered for veal to the feedlots.  Even dairy calves
are now used for beef production instead of being retained for milk herds
or slaughtered as veal.  This is reflected in Table IV-3.  Calfskins and
kipskins tanned in the U.  S. have decreased from 10 million in 1955 to
about 1.5  million in 1972.

The spectacular growth of U. S. cattle slaughter in the past two decades
will not be duplicated in the future, many experts believe.   This is be-
cause many ranges used for the production of feeder calves are oper-
ating at close  to capacity and further expansion of herds must come
from technological innovations and expansion of marginal production
areas heretofore not fully utilized.  Future growth in the cattle industry
will come at a  slower rate.

Supplies of other types  of leather making raw material do not show the
same trend as  cattlehides.  Calfskin supplies have and are shrinking
drastically throughout the world.  Goatskin supplies are limited and de-
clining because more intensive and modern agriculture is inimical to
the maintenance of goat herds.  India,  of course, is the great exception
to the latter trend for religious reasons. However,  the Indian supply of
goatskins has  increasingly been sequestered for domestic use by govern-
ment restriction and regulation so that supply available to the U. S.
tanners has become negligible. Sheep and  lambskin supply is influenced
by price  developments in meat and in wool.  Although  flocks in the U. S.
have steadily declined for 22 years, world  numbers have incresised
slightly due to growth in Australia and New Zealand.   Competition from
other countries for the  available supply
In summary, the tanning industry of the United States is increasingly based
on cattlehides as its raw material.  International competition will most
likely continue to place severe pressure on the industry as world demand
for U. S, produced hides increases and as the production of other leather
continues to decline.

3.   Pricing in the Leather Industry

The price basis for  tanned and finished leather is the price of raw  (salt
or brine cured) hides at the packing house.  The raw hide price (for cattle
hides) is a published price and commonly known throughout the trade on a
day to day basis.  Tanners -- both  domestic and foreign -- purchase the

                                IV-4

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         Table IV-2. Cattle slaughter in the United States,  1955-1972
                                     (1, 000 head)

Breakdown of Federal Insoected Slaughter
Cows &
Heifers
7.
Total
Steers
%
Total
Bulls 6c]^ 1
Stags 1 Total
Total
F.I.S.
Total
Commercial
Slaughter
                            ANNUAL TOTALS
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
9,330
9,460
9,031
7,509
7,538
8,567
8,554
8,670
8,964
10,452
12,712
13,055
12,710
13,771
14,284
13,677
13,856
13,932
48.9
46.9
46.4
42.6
43.2
44.2
42.8
42.6
41.4
41.6
47.8
47.8
45.8
46.5
46.8
44.4
44.1
43.2
9,299
10,311
10,018
9,840
9,681
10,557
11,164
11,447
12,496
14,395
13,488
13,846
14,676
15,361
15,754
16,608
17,003
17,737
48.8
51.1
51.5
55.8
55.4
54.4
55.9
56.3
57.7
57.3
50.7
50.7
52.8
51.9
51.6
53.9
54.1
55.0
427
415
404
293
241
272
250
222
202
286
413
418
384
460
499
508
560
581
2.3
2.0
2.1
1.6
1.4
1.4
1.3
1.1
0.9
1.1
1.5
1.5
1.4
1.6
1.6
1.7
1.8
1.8
19,056
20,186
19,453
17,642
17,460
19,396
19,968
20,339
21,662
25,133
26,613
27,319
27,780
29,592
30,537
30,793
31,419
32,250
25,723
26,862
26,232
23,555
22,931
25,224
25,635
26,083
27,231
30,818
32,347
33,725
33,869
35,026
35,237
35,025
35,585
35,774
Source:  Tanners' Council of America, Inc.

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Table IV-3.   Total hides and skins tanned in the  United States,  1955-1972 (000)
Year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Cattlehides
25,537
' 26,441
24,924
23,690
22,606
22,044
22,271
22,585
21,815
22,799
23,241
23,572
23,607
23,617
21,096
20, 199
20., 189
19,218
Calfskins
and kipskins
10,234
8,346
9,074
7,648
6,394
6,407
6,488
5,757
5,851
6,663
5,745
4,275
4,059
3,854
3,390
2,425
1,120
1,491
Sheep and
lamb skins
24,006
24,713
23,527
25,550
29,753
28,321
29,627
27,697
21,292
28,908
27,786
26,897
26, 180
29,328
23,297
21,868
19,895
18,781
Goat and Total
kid skins ' hides and skins
26, 109
25, 103
22,336
19,992
22,797
18,835
14,865
14,213
14, 182
12,874
14,557
13,372
8,456
6,764
5,856
3,979
3, 148
3,522
85,886
84,603
79,861
76,880
81,550
75,607
73,251
70,252
63, 140
71,244
71,326
68, 116
62,302
63,563
53,639
48,471
44, 352
43,012
Cattlehide
equivalent






31,818
31,414
31,342
32,003
32,364
31,749
30,771
31,740
27,633
25,520
24,993
23,964
Source:  Tanners Council of America, Int.

-------
available supply of hides from packers in a relatively open and competitive
market.  The one basic price (with exception of course for grade and type)
prevails throughout the industry and is established on the basis of supply
and demand.

A unique feature  of this market is  that it is strictly a by-product market.
The demand for hides in no way affects the supply of cattle moving to
market.  For example, the value of a hide  represents approximately
5 percent of the current value  of a  1, 000 pound market  steer.  Ten years
ago when hide prices were considerably lower, it  represented approxi-
mately 4.4 percent of the value. Even with the present high hide prices
the demand for hides has a negligible  effect on the  supply of  cattle.

The finished leather price -- with  a constant  margin for tanning and
finishing -- follows the course  of hide  and skin prices.   There is a
frictional lag on finished leather when  hide prices move up and a lag of
shorter duration  as hide prices move  down as knowledgeable customers
immediately request the benefit of lower raw material costs.  The price
for finished leather is not  published, however, due to the many types of
finishing that can be applied.  Further, approximately 60 percent of  the
finished leather is sold under contract.

Although there are no definitive studies available  regarding  pricing in
the leather tanning industry, some general conclusions can be drawn.

       1.   Hide  and skin prices are widely quoted and well-known to
            the industry -- both domestic and international.

       2.   Leather tanning and finishing is a chemical processing
            industry in which continuity of operation is  desirable and
            interruption is costly in terms  of overhead or  fixed costs
            as well as start up time.

       3.   Very few operations can be automated to any significant
            degree.  Tanning is a batch processing industry  in which
            the hides must be handled individually at various key stages.
            Therefore, a large tannery consists of multiples of a smaller
            plant without major economies  of scale in production.
                               IV-7

-------
       4.  Standard costs for leather tanning and finishing in the in-
           dustry are well-known.  Therefore; the market value of
           finished product follows the price  of raw material with
           a relatively uniform margin for processing.

       5.  The industry is very competitive and is underutilizing its
           present  capacity.

       6.  In an industry that is predominantly family-owned, financial
           considerations are frequently less important in operating or
           management motivation than the perquisites of ownership,
           obligation to associates, employees and community.
                     B.   International Trade
Forces arising from international trade have continued to play an im-
portant role in the operations of the domestic leather tanning and finishing
industry and its prices.  Reference is made here to (1) the tremendous
increase in the imports of shoes into the United States during the past
ten years,  and (2) the  parallel sharp rise in the exports of cattlehides
from the United States.  The following comparison  indicates the  magnitude
of the change  that has occurred in the past decade.


                          U.S.              U.  S. Net
                       Shoe Imports         Hide Exports
                         (OOP Pairs)           (OOP Hides)

          1962          55,057               6,708
          1972         296,665              17,303


In terms of dollar value,  Table IV-4 shows the  great disparity in the value
of hides exported in 1971  compared with the value of leather manufacturers
and footwear -- $156 versus $873 million.  In 1972 the value of imported
shoes and leather manufacturers amounted to nearly 1. 2 billion dollars.
Apparently much of the raw material exported from the United States is
the exact equivalent of the finished goods, shoes and other leather products
returning to the United States, from low wage countries.
                                IV-8

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          Table IV-4.  Summary of value of imports and exports for hides and skins, fur skin, leather
                       manufacturer and dressed fur and footwear  I960 - 1972 (million dollars)


Hides and skins except furs
Fur skins, undressed
Leather manufacturer
dressed furs
Footwear
Total leather and footwear

Hides and skins, except
fur skin
1960

70
96
52
148
200

76
1965

80
113
87
160
247

109
1966

89
126
103
190
293

155
1967

61
92
89
263
352

128
1968
Imports
78
103
114
388
502
Exports
122
1969

62
94
123
488
611

152
1970

51
59
118
629
747

145
1971

52
53
115
758
873

156
1972


334
835
1169


Source:  Statistical Abstract of the United States,  1972; 1972 data from Tanners'  Council of America.

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It is believed the primary reason for the huge exports of raw material
and importation of finished product --a characteristic of developing
nations --is the differential in labor base.  Discussions with knowledge-
able individuals indicate that the level of technology in the production of
shoes is universally-based with no country enjoying a competitive edge.
Thus,  labor costs appear to be the key factor.
                                IV-10

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        V.  ECONOMIC IMPACT ANALYSIS METHODOLOGY
The following economic impact analysis utilizes the basic industry infor-
mation developed in Chapters I-III plus the pollution abatement technology
and costs provided by Environmental Protection Agency.  The impacts
examined include:

               Price effects
               Financial effects
               Production effects
               Employment effects
               Community effects
               Other effects

Due to the crucial nature of potential plant shutdowns  (financial and
production effects) to the other impacts, a disproportionate amount of
time will be devoted to the financial and plant closure analysis.

In general, the approach taken in the impact analysis  is the same as that
normally done for any feasibility capital budgeting study of new invest-
ments.  In the simplest of terms,  it is the problem of deciding whether
a commitment of time or money to  a project is  worthwhile in  terms of
the expected benefits  derived.  This decision process is complicated by
the fact that benefits will accrue over  a period  of time and that in prac-
tice the analyst is not sufficiently clairvoyant nor physically able to re-
flect all  of the required information, which by definition must deal with
projections of the future, in the cost and benefit analysis.  In the face
of imperfect and incomplete information and time constraints, the industry
segments were reduced to money relationships  insofar as possible and the
key non-quantifiable factors were incorporated  into the  analytical thought
process  to modify the quantified data.   The latter process is particularly
important in view of the use of model plants in  the financial analysis.  In
practice, actual plants will deviate from the model and  these  variances
will be considered in interpreting financial results based on model plants.
                   A.   Fundamental Methodology
Much of the underlying analysis regarding prices,  financial and produc-
tion effects is common to each kind of impact.  Consequently,  this case
methodology is  described here as a unit with the specific impact interpre-
tations being discussed under the  appropriate heading following this
section.

                                 V-l

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The core analysis for this inquiry was based upon synthesizing physical
and financial characteristics of the various industry segments through
model or representative plants.  The estimated cash flows for these
model plants are summarized in Chapter II.  The primary factors involved
in assessing the financial and production impact of pollution control are
profitability changes, which are a function of the  cost of pollution control
and the ability to pass along these costs in higher prices.  Admittedly,
in reality,  closure decisions are seldom made  on a set of well defined
common economic  rules, but also include a  wide  range of personal values, and
external forces  such as the ability to obtain  financing or considering the
production unit as an integrated part of a larger cost center where total
profit  must be considered.

Such circumstances include but are  not limited to the following factors:

        1.   There is a lack of knowledge on  the part of the owner-
            operator concerning the actual financial condition of the
            operation due to faulty or inadequate accounting systems
            or procedures.  This  is especially  likely to occur among
            small,  independent operators who do not have effective
            cost accounting systems.

        2.   Plant and equipment are old and fully depreciated and the
            owner has no intention of replacing or modernizing them.
            He can continue in production as long as he can cover labor
            and  materials  costs and/or until the equipment deteriorates
            to an irrepairable and inoperative condition.

        3.   Opportunities  for changes in the ownership structure of
            the  plants (or  firms) exist through  acquisition by con-'
            glomerates, large diversified firms, or through other
            acquisition circumstances which would permit re-
            evaluation of assets or in situations where new owner-
            ship may be willing to accept temporary low returns
            with the expectation that operations can be returned
            to profitable levels.

        4.   Personal values and goals associated with business owner-
            ship that override or ameliorate rational economic rules
            is a complex of factors  commonly referred to as a value
            of psychic income.
                                 v-;

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       5.   The plant is a part of a larger integrated entity and it either
            uses raw materials being produced profitably in another of
            the firm's operating units wherein an assured market is
            critical or,  alternatively,  it supplies raw materials to
            another of the firm's operations wherein the source of supply
            is critical.  When the profitability of the second operation
            offsets the  losses in the first plant,  the  unprofitable oper-
            ation may continue indefinitely because the total enterprise
            is profitable.

       6.   The owner-opera tor expects that losses are temporary and
            that adverse conditions will dissipate in the future.  His
            ability to absorb short-term losses  depends upon his access
            to funds, through credit or personal resources  not presently
            utilized in this particular operation.

       7.   There are very low (approaching zero) opportunity costs for
            the fixed assets and  for the owner-operator's managerial
            skills and/or labor.   As long as the operator can meet  labor
            and materials costs,  he will continue to operate.  He may
            even operate with gross revenues below variable costs  until
            he  has exhausted his working capital and credit.

       8.   The value of the land on which the plant is located is appreci-
            ating at a rate sufficient to offset  short-term losses, funds
            are available to meet operating needs  and opportunity costs
            of the owner-operator's managerial skills are low.

The above factors, which may be at variance with common economic
decision rules,  are generally associated with proprietorships and
closely held enterprises  rather than publicly held corporations.

While the-above factors are present in and relevant to business decisions,
it is argued that common economic rules are  sufficiently universal to
provide a useful and reliable insight into potential business  responses
to new investment decisions,  as represented by required investment in
pollution control facilities.  Thuc ,  "onomic analysis will be used as the
core analytical procedure. Given the  pricing conditions, the impact on
profitability (and possible closure)  can be determined by simply computing
the ROI (or  any other profitability measure) under conditions of the new
price and incremental investment in pollution control.  The primary con-
sequence of profitability changes is the impact on the plant regarding
plant shutdown rather than making the required  investment in meeting
pollution control requirements.
                                  V-3

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In the most fundamental case, a plant will be closed when variable ex-
penses (Vc) are greater than revenues (R) since by closing the plant,
losses can be avoided.  However, in practice plants continue to operate
       •  lack of cost accounting detail to determine when Vc > R.

          opportunity cost of labor or some other resource is less
          than market values.   This would be particularly prevalent
          in proprietorships where the owner considers his labor as
          fixed.

          other personal and external financial factors.

          expectations that revenues will shortly increase to cover
          variable  expenses.

A more probable situation is the case where Vc 4. R but revenues are
less than variable costs  plus cash overhead expenses  (TCc) which are
fixed in the short run.  In this  situation a plant would  likely continue
to operate  as contributions are being made toward covering a portion of
these fixed cash overhead expenses.  The  firm  cannot operate indefinitely
under this  condition,  but the length of this period is uncertain.  Basic  to
this strategy of continuing operations is the firm's expectation that re-
venues will increase  to cover cash outlay.  Factors involved in closure
decisions include:

          extent of capital resources.  If the owner has other business
          interests or debt sources that will supply capital input,  the
          plant will continue.

          lack of cost accounting detail or procedures to know that TCc>R,
          particularly in multiplant or business situation.

          labor or other resources may be considered fixed  and the
          opportunity cost for  these items  is less than market value.

Identification of plants where TCc > R, but Vc  < R  leads to an estimate
of plants that should be closed  over some period of  time if revenues do
not increase.   However, the timing of  such closures is difficult to predict.

The next level of analysis, where TCc  ^, R, involves  estimating the
earnings before and after investment in pollution abatement.
If TCc  R it seems likely that investment in pollution control will be
made and plant operations continued  so long as  the capitalized value
                                V-4

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of earnings (CV),  at the firms (industry) cost of capital,  is greater
than the scrap or  salvage value (S) of the sunk plant investment.  If
S > CV, the firm  could realize S  in cash and reinvest and be financially
better off.  This presumes reinvesting at least at the firms (industry)
cost of capital.

Computation of CV involves discounting the  future earnings flow to
present worth through the  general discounting function:
                                         A  (l+i)'n
                                 —,        n
                                n=l

                      where

                      V    =    present value
                      An   =    a future value in n*" year
                      i     =    discount rate as target ROI rate
                      n    =    number of conversion products,  i.e.,
                                1 year, 2 years, etc.

It should be noted that a more  common measure  of rate of return is
the book rate, which measures the after-tax profits as a  ratio of in-
vested capital, net worth, or sales.   These ratios should not be
viewed as a different estimate of profitability, as  opposed to DCF
measures (discounted cash flow) but rather an entirely different
profitability concept.  The  reader is cautioned not to directly compare
the DCF rates with book rates.  Although both measures  will be reported
in the analyses, the book rate  is  reported for informational purposes only.

The two primary types of DCF measures of profitability are used.  One
is  called the  internal rate of return or yield and  is the computed discount
rate (yield) which produces a zero present value  of the cash flow.   The
yield is the highest rate of  interest the  investor could pay if all funds
were borrowed and the loan was returned from ca'sh proceeds of the
investment.  The  second DCF  measure  is the net present value concept.
Rather than solve for the yield, a discount rate equivalent to the firms
cost of capital is used.  Independent investments with net present values
of above zero are accepted; those below zero are rejected.  The concept
of comparing capitalized earnings with the sunk investment value is
a variation of the  net present value method.
                                V-5

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The data input requirements for book and DCF measures are derived,
to a large extent, from the same basic information although the final
inputs are handled differently for each.

1.  Benefits
For purposes of this analysis,  benefits for the book analysis have been
called after-tax income and for the DCF analysis after-tax cash proceeds
The computation of each is shown below:
       After tax income    =     (l-T)x(R-E-I-D)


       After tax cash proceeds   =   (1 - T)x(R - E - D)  + D

       where

              T   =    tax rate

              R   =    revenues'

              E   =    expenses other than depreciation and interest

              I =   =    interest expense

              D   =    depreciation charges

Interest in the cash proceeds computation is omitted since it is reflected
in the discount rate, which is the after-tax cost of capital, and will be
described below.  Depreciation is included in the DCF measure only in
terms of its tax effect and is then added back so that a cash flow over
time is obtained.

A tax rate  of 48 percent was  used throughout the analysis.  Accelerated
depreciation methods, investment credits,  carry forward and carry back
provisions were not used due to their  complexity and special limitations.
It is recognized that in some instances the effective tax rate may be lower
in a single plant situation, but the firm's tax rate will be dote to the
48 percent rate.

Revenue,  expenses, interest and depreciation charges used were those
discussed in Chapter II and Chapter V for pollution control facilities.
These items were assumed to
                                V-6

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 2.   Investment

 Investment is normally thought of as outlays for fixed assets and working
 capital.  However,  in evaluating closure of an on-going plant where the
 basic investment is sunk, the value of that investment must be made in
 terms of its liquidation or salvage value,  that is its  opportunity cost or
 shadow price. —' For purposes of this analysis, sunk investment was taken
 as the sum of equipment salvage value plus land at current market value
 plus the value of the net working capital (current assets less current
 liabilities) tied up by the plant (see  Chapter II for values).  This same
 amount was  taken as a negative  investment in the terminal year.  Replacement
 investment for plant maintenance was taken as equal to annual depreciation,
 which corresponds to operating  policies of some managements and serves
 as a good proxy for replacement in  an on going business.

Investment in pollution control facilities  was taken as the estimates
provided by EPA and shown in Chapter V.  The value of the involved
land was taken as a negative investment in the terminal year.
 The above discussion refers primarily to the DCF analysis.  Investment
 used in estimating book rates was taken as invested capital - book value
 of assets plus net working capital.  In the  case of new investment, its
 book rate was estimated as 50 percent of the original value.

 3.   Cost of Capital - After Tax

 Return on invested capital is a fundamental notion in U.S.  business.
 It provides both a measure of actual performance of a firm as well
 expected performance.  In this latter  case,  it is also called the cost
 of capital.  The cost of capital is  defined as the weighted average of
 the cost of each type of capital employed by the firm, in general terms
 equities and interest bearing liabilities.  There is no methodology that
 yields the precise  cost of capital, but it can be approximated  within
 reasonable bounds.
—  This should not be  confused with a simple buy sell situation which
   merely involves a transfer of ownership from one firm to another.
   In this instance, the opportunity cost (shadow  price) of the investment
   may take on a different value,
                                  V-7

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The cost of capital was determined for purposes of this study by examining
Troy's Financial Almanac and industry provided data.  The weights of the
two respective types capital were estimated at 60 percent debt and 40 percent
equity.  The cost of debt was assumed to be 8 percent.  The cost of equity
was determined  from the  ratio of before tax income to net worth and esti-
mated at 2 1. 6 percent.

To determine  the weighted average cost of capital, it  is necessary to
adjust the before tax costs to after tax costs.   This  is done by multiplying
the  costs by one minus the tax rate (assumed to be 48 percent, the mar-
ginal  federal income tax rate).
                 Weighted Average Cost of Capital
                     Before tax                 Aftertax     Weighted
Item     Weight         cost         Tax Rate      cost           cost

Debt     '.60           .08          .48          .0416

Equity    .40           .216         .48        .1123
As  shown in the above computation, the estimated after tax cost of
capital is 7.0 percent.  (The before tax costs were compiled from
several sources and are assumed to be representative of the industry.)

It was assumed that,  for the leather tanning industry, a pre-tax cost
of capital of 7 percent was used for evaluating new projects.

4.   Construction of the Cash Flow

A twenty-two period cash flow •was used in this analysis and was con-
structed as follows:

        1.  Sunk investment (salvage market value of fixed assets plus
           net working capital) taken in year to.

        2.  After tax cash proceeds taken for years ti to ^20'

        3.  Annual replacement investment, equal to annual current
           depreciation taken for years tj  to
        4.   Terminal value equal to sunk investment taken in year
                                  V-8

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         5.   Incremental pollution control investment taken in year t
              for 1977 standards and year t,  for 1983  standards.

         6.   Incremental pollution expenses taken for years tj to t^Q
              for 1977 standards and years tf to t2Q for  1983 standards.

         7.   No replacement investment taken  on baseline pollution in-
              vestment on assumption of 20-year useful  life.

         8.   Terminal value of pollution facilities are assumed equal
              to zero in year i^l'
                         B.   Price Effects

 At the outset, it must be  recognized that price effects and production
 effects are intertwined with one effect having an impact  upon the other.
 In fact,  the very basis  of price analysis is the  premise that prices and
 supplies  (production) are functionally related variables which are simul-
 taneously resolved.

 Solution of this requires knowledge of demand growth, price  elasticities,
 supply elasticities, the decree to which ruqional markets exist,  the deare
of dominance  experienced by large firms  in the industry, market concen-
tration exhibited by both the industry's suppliers of inputs and purchasers
of outputs, organization and coordination  within the industry,  relation-
ship of domestic output with the world market,  existence and  nature of
complementary goods, cyclical trends in  the industry, current utilization
of capacity and, exogenous influences upon price determination (e. g. ,
governmental regulation).

In view of the complexity and diversity of factors involved in determin-
ation of the market price, a purely quantitative approach to the problem
of price effects is not feasible.  Hence, the simultaneous considerations
suggested above will  be made.  The judgment factor will  be heavily em-
ployed in determining the  supply response to a price change ana altern-
ative  price changes to be employed.
                                 V-9

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As a guide to the analysis of price effects, the estimated price required
to leave the model plant segment as well off will be  computed.  The  re-
quired price increase at the firm level will be evaluated in light of the
relationship of the model plant to the industry and the understanding of
the  competitive position of the industry.   The required price increase
can be readily computed such that net income remains constant by using the
following formula:
                              APC + ID
       whe re:
                      X   =    required percentage increase in price

                   APC   =    annual operating cost for the pollution
                               control facility

                     ID   =    Incremental depreciation for pollution
                               control facility (based on straight line
                               20 year  depreciation)
                        C.   Financial Effects
 In Chapter II, the financial characteristics of model plants were presented.
 These data v/ill serve as the base point for the analysis of financial effects
 of pollution control.  The primary focus of analysis will be  upon profit-
 ability in the industry and the ability of the firms to  secure  external
 capital.  Hence, it is obvious that this portion of the analysis cannot
 be divorced from production effects since profit levels and  the ability
 to finance pollution abatement facilities will have .a direct influence on
 supply responses --  utilization of capacity and plant closures.

 The measures  of profitability utilized will include after-tax book rate
 of return on invested capital and cash flow (after-tax profit plus deprec-
 iation) will be measured.  After-tax profit as a percent of sales will
 also be reported to assist in comparing financial data with standard
 industrial measures.
                                 •-10

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                      D.   Production Effects
Potential production effects include  reductions of capacity utilization
rates, plant closures and stagnation of industry  growth.   It is antici-
pated that reductions  in capacity utilization will  be estimated via quali-
tative techniques given the analysts' knowledge of the industry.   The
same is  true for assessing the extent to which plant  closures may be
offset by increases  in capacity utilization on the  part of plants  remaining
in operation.  Data  limitations and time constraints  are expected to re-
quire that the impact of pollution control standards upon future  growth
of the industry also be estimated via quauta^L\c  method?.

The  remaining effect, plant closures,  is very difficult to  measure
realistically as discussed above in Section A.  As  a  starting point
in the plant closure analysis,  a shutdown model  will be employed
to indicate which model plants should be closed, the marginal oper-
ations and the sound operations.  These conclusions will be based upon
the decision rule that a  plant will be closed when the net present value
of the cash  flow is  less  than zero.

The  above analysis  will be done under a without  pollution control condi-
tion  and  a with pollution control condition.  The  former (and including
historical trends) will establish a baseline against which  total closures
after pollution control will be compared, to arrive at an estirmte of
closures  due to pollution control.
                                 V-ll

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                     E.   Employment Effects
Given the production effects of estimated production curtailments, plant
closings and changes in industry growth, a. major consideration arises
in the implications of these factors upon employment in the industry.
The employment effects stemming from each of these production impacts
will be estimated.  To  the extent possible, the major  employee classifi-
cations involved will be examined as will the potential for re-employment.
                     F.   Community Effects
The direct impacts of job losses upon a community are immediately ap-
parent.  However, in many cases, plant closures and cutbacks have a
far greater impact than just the employment loss.  Multiplier effects
may result in even more unemployment.  Badly needed taxes for vital
community services may dwindle.  Community pride and spirit may be
dampened.  However, in some cases, the negative community aspects
of production effects may be very short-term in nature with the total
impact barely visible from the .viewpoint of the overall community. In
a few cases,  the closure of a plant may actually be viewed as a positive
net community effect (e.g.,  a small plant with a  high effluent load in an
area with a labor shortage).

These impact factors will be qualitatively analyzed as appropriate.
                        G.   Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis.'  This too will involve qualitative analyses.
                                   V-12

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       VI.   POLLUTION CONTROL REQUIREMENTS AND COSTS


 Water pollution control requirements and costs used in this analysis were
 furnished by the Effluent Guidelines Division of the Environmental Protec-
 tion Agency from materials developed by Stanley Consultants, Inc. —'
 These basic data covered seven categories of plants  in the leather tanning
 and finishing industry, and this  information was adapted to the types and
 sizes  of tanning plants specified in this analysis.

 Four effluent control levels were considered in the information provided:

        (I)  BPT       -   Best  Practicable Control Technology Currently
                          Available, to be achieved by July 1,  1977

        (II)  BAT      -   Best  Available Pollution Control Technology
                          Economically Achievable, to be achieved by
                          July  1, 1983

        (III) NSPS     -   New Source Performance  Standards, apply to
                          any source for which construction starts after
                          the publication of the proposed regulations for
                          the Standards

        (IV) Pre-     -   Pretreatment Requirements, pretreatment of
            treatment    effluent required for discharge in publicly-
                          owned wastewater treatment plants.

      A.   Categories of Leather Tanning and Finishing Plants
The information furnished by EPA in the Development Document provided
a categorization system to classify plants  into major categories.   Seven
major categories of plants were proposed  for the purposes of evaluating
control and treatment technology.  Each category represents a common
manufacturing procedure  in terms of three primary processes:  beamhouse,
tanning and finishing.  These seven categories of plants, in terms of the
types  of primary processes used, are as follows:
 i' Development Document for Effluent Limitations Guidelines and
    Standards of Performance -- Leather Tanning and Finishing In-
    dustry,  Draft Report,  Stanley Consultants,  Inc.,  June,  1973.
                               VI-1

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                       Industry Categories
                                Primary Processes
Category     Beamhouse               Tanning        Finishing

   1          Pulp Hair                 Chrome           Yes
   2          Save Hair                 Chrome           Yes
   3          Save Hair                 Vegetable         Yes
  , 4          Hair Previously Removed  Previously
                                          Tanned         Yes
   5          Hair Previously Removed
                or Retained              Chrome           Yes
   6          Pulp Hair                 Chrome           No
   7          Hide Curing               No Tanning        No


The above categories of plants were evaluated separately from the stand-
point of establishing effluent limitation guidelines which are described
next.

                B.   Effluent Limitation Guidelines
Based upon information received, a determination was made of the de-
gree of effluent reduction which was attainable through application of
the best practicable control technology currently available.   The BPT
effluent limitations guidelines  derived are shown in Table VI-1.  As in-
dicated,  the proposed guidelines vary by category.

As is later discussed, the proposed treatment practices  required to
achieve the effluent limitation  levels are essentially the same for cate-
gories 1 to 6.  Thus, the effluent limitations are varied because  of
different wasteflow characteristics of various processes rather than
differences in treatment strategy. Category 7 (hide curing) has very
little wasteflows and  either evaporation techniques or primary  settling
prior to  municipal discharge is recommended to achieve zero discharge.

The BAT guidelines, based on the best available technology econ-
omically achievable,  for the leather tanning and finishing industry are
as indicated in Table V-2.  These guidelines indicate major removal
of all nitrogen forms in addition to removal of constituents as established
for  BPT.    Again, the treatment required is essentially the same for
plant categories  1 to  6,  although the limitation guidelines differ among
categories.
                               VI-2

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 Table VI-1.  Best Practicable Control Technology (BPT) effluent
          guidelines  - July 1,  1977 (complete treatment)
Parameter —
BOD5
Total Chromium
Oil and Grease
Suspended Solids
Category
kg/ 1,000 kg hide (lb/ 1,000 Ib hide)
1
2.7
0.05
0.53
3.0
2
3.2
0.06
• 0.63 .
3.5
3 4
2.5 1.0
0.05 0.02
0.50 0.24
2.8 1.1
5
3.2
0.06
0.63
3.5
6
1.4
0.03
0.34
1.5
±' For all categories pH should range between 6.0 and 9.0 at any time.

Source:  EPA,  Revised Development Document.
                             VI-3

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  Table VI-2.  Best Available Control Technology (BAT) effluent
     limitations guidelines - July 1,  1983 (complete treatment)
Parameters —
BODg
Total Chromium
Oil and Grease
Gate go ry
kg/ 1 , 000 kg hide ( lb/ 1 , 000 Ib hide)
1
1.35
0.05
0.53
2
1.60
0.06
0.63
3
1.25
0.05
0.50
4
0.50
0.02
0.24
5
1.60
0.06
0.63
6
0.70
0.03
0.34
Sulfide              0.005   0.006   0.005    0.002   0.006   0.003

Suspended Solids     1.5      1.8     1.4      0.6      1.8     0.8

Total Kjeldahl       0.27     0.32    0.25     0.10     0.31    0.14
 Nitrogen
—' For all categories pH should range between 6.0 and 9.0 at any time.

Source:  EPA, Revised Development Document
                                 VI-4

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The new source standards (NSPS) are said to be the same as BPT and
BAT for 1977 and  1983,  respectively.  Also, separate pretreatment
standards were proposed for this  industry for selected pollutants (e. g. ,
chromium, oil and grease, sulfide, and, also ph control).   These guide-
lines are not repeated herein, but the proposed control methods and con-
trol costs are evaluated  subsequently.
                C.  Pollution Control Requirements
To achieve the effluent limitations proposed above,  the leather tanning
and finishing industry will be  required to apply rather extensive waste
treatment practices.  A summary of treatment practices expected to be
necessary to achieve both the BPT and BAT guidelines are presented
below.
                               VI-5

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     (I)  BPT  -  Best Practicable Control Technology Currently Available
A series of treatment steps are generally expected to be required in the
leather tanning industry to meet the proposed BPT guidelines.  Based
upon the best practicable control technology currently available, the
following principal control and treatment operations are generally
needed to meet the BPT limitations:

        1.   Recycle of chrome and vegetable tan solutions  (not in
            categories 3 and 4).

       2.   Fine screening.

       3.   Equalization to dampen quality and quantity fluctuations
            which will impair subsequent processes, particularly
            biological units.

       4.   Primary settling to provide oil and grease separation,
            precipitate chromium from rinse waters, and partially
            remove BOD5, COD, a~nd suspended solids.

       5.   Aeration and secondary settling to further reduce BODg,
            COD, and suspended solids.

       6.   Sludge handling (holding tank + on-site disposal).

This summary of treatment steps generally applies to Categories 1
through 6 as presented in the Development Document.   Category 7
(hide  curing) generally involves very low waste flows.  Thus, this
segment will not be considered further in this analysis.

An  outline  description of the treatment strategy proposed to meet the
BPT guidelines  is as follows:
                               VI-6

-------
     BPT: Pret reatment and Activated Sludge

          This  strategy includes pumping,  screening, equalization,  and
          primary clarification.  This is followed with an aeration basin,
          secondary clarifier, graded media filter and chlorination.  Com-
          bined sludge handling includes holding tanks, thickening units,
          dewatering and landfill disposal.
      (II) BAT   -   Best Available Technology Economically Achievable
The best available technology economically achievable for the leather
tanning industry includes major removal of all nitrogen forms in addition
to removal of those constituents accounted for in BPT.  A general
summary of the major steps  required to achieve the BAT complete
treatment guidelines is as follows:
       1.   Recycle of chrome and vegetable tanning solutions  (where
            applicable).

       2.   Collection of beamhouse wastes containing sulfide; oxidation
            of sulfide using a catalyst such as manganous sulfate (not in
            categories 4 and  5).

       3.   Fine screening.

       4.   Equalization to dampen variations in quality and quantity
            which will impair subsequent processes, particularly biologic-
            al units.

       5.   Aeration and clarification of solids to remove carbonaceous
            BOD^, COD, and suspended solids.

       6.   Aeration to nitrify organic and ammonia nitrogen followed
            by settling.

       7.   Mixing with a carbon source to cause denitrification; an
            aeration flume to assist nitrogen gas removal; and a final
            settling tank.
                                 VI-7

-------
        8.   Filtration of the final effluent using deep-bed,  mixed-media
            filters  or similar devices for final suspended solids removal.

        9.   Sludge  handling (holding tank and on-site disposal).
The treatment steps are again generally applicable for Category 1 to 6
types of plants as defined above.  As indicated,  selected in-plant modifica-
tions  to reduce wasteflows and recycle process waters or solutions are
regarded as essential.

An outline description of the treatment strategy proposed to meet the
BAT  guidelines is as follows:

       BAT:  Pretreatment, Activated Sludge with Nitrification, and
       Denitrification

            This  strategy includes the treatment indicated above for
            BPT, plus the addition of a  nitrification basin,  settling
            tanks, covered denitrification basin, and aeration flume.

The proposed NSPS  treatment requirements are said to be the same as
BPT  for 1977 and BAT for  1983.  Pretreatment, if required,  will gen-
erally involve major steps.  In brief, items 1 to 4 and 6  of the BPT
practices above are expected to be required, plus adjustment of pH
prior to discharge of the municipal system.

The estimated costs to perform these waste treatment practices for
various types and sizes  of plants are discussed  next.
                              VI-8

-------
                      Pollution Control Costs
Pollution control costs estimates were provided by EPA for represen-
tative model plants in each of the seven leather tanning and finishing
categories defined above.  Also,  \vithin each category a series of alter-
native treatment practices were assessed  (corresponding  to the pre-
treatment, BPT, BAT,  etc.  requirements).

Based upon data available in Appendix A of the Development Document,
DPRA generated additional investment and operating cost  data as re-
quired for this study.  In ps.rticular,  data  corresponding to different
sizes of plants within  category  1 were needed.  A summary of estimated
pollution control costs for various sizes of plants as  used  in this study
are as shown in Table VI-3.

The method used to develop the cost data in Table VI-3 is  partially
illustrated by the curves or plotted graphs presented in Figure VI-1.
These graphs reflect capital and O&M cost relationships for a particular
type of tannery (Pulp hair - Chrome tan-Finish) and for a  particular level
of treatment (BAT).  Similar relationships were derived from data pro-
vided for other major types of plants  and alternative  treatment levels.
Data required for this study were taken from the graphs so developed.

It is noted that definite economies of  scale in waste treatment were
indicated in the data provided.  Also, the cost functions for other types
of plants and levels of treatment appeared  similar in form to those illus-
trated in Figure VI-1.
                               VI-9

-------
          Table VI-3.  Estimated pretreatment,  BPT and BAT wastewater effluent treatment
                  costs for selected types of plants in the leather tanning and finishing
                                 industry.!/ (Pollution Control Costs 1972)
Type of Plant
(w/ finishing)

Pulp Hair -
Chrome tan


Plant
Plant Data
Pretreatment
Size Hides /Day MGD±' Capitald'OfaM -'

X Small
Small
Medium
Large

100
300
700
2,000
— ' Estimates based upon data provided by
DPRA were used to generate estimates
21
— \jrvn i-»a oo,
rl nnnn Hip follow
'in a averages

.02
.06
.14
.40
($000)
242
291
377
581
($000)
28
33
43
67
EPA and Stanley Consultants,
for alternative sized plants.
i for i
orocesses involv
ed: Pult
BPT
BAT
Capital O&M Capital
($000) ($000) ($000)
366
473
667
1, 162
Inc. Cost
>-hair - Ch
42
54
77
134
functions
rome, 4.1
527
721
1,065
1,797
O&M
($000)
61
83
122
207
constructed by
3 gal/lb,
. of hide;
3/
Save hair - Chrome, 6.0 gal/lb.; and Save hair - Vegetable, 5.0 gal/lb.  The estimated average hide
weight was  50 Ibs.  for purposes of calculating wasteflows.

Capital costs are the sum of individual component costs from EPA and Stanley Consultants, Inc. for the
various sizes based on DPRA cost functions.  The costs as given were for  1971.  A factor of 1.076 was
used to estimate  1972 costs.  The costs include 14% for yardwork, 10% for engineering, and 5% for continencies.
—' Operating and maintenance costs are determined as 10% of capital costs for dirett O&M, and  1.5% uf
   capital costs for taxes and insurance.

-------
o
o
o

o
o
to
O

O
rt

U
o
o
o

o*
o
20


16



12




 8
2.0


1.6


1.2
m    .8

O

O



*    . 4
         Capital Cost
Operating & Maintenance Cost
        0.02  .06   .10   .14     .20            .30


                       Effluent,  Million Gallons per Day
                                                            .40
        Figure VI-1.  Estimated capital and operating and maintenance

                      costs for BAT wastewater treatment.   Pulp hair,

                      chrome tan, finish leather tanning industry plants.
                               VI-11

-------
             Status of Wastewater Treatment in the Industry
There are a declining number of plants in the leather tanning and finishing
industry.  There are 176 tanneries (wet process) in operation at the
present time.  In addition, there are estimated 180 plants (essentially dry
process) involving leather finishing operations only.  These latter plants
do not have significant wastewater effluent problems and are therefore
excluded from further analysis in this study.

Waste treatment practices in the leather tanning and finishing (wet process)
industry vary widely,  ranging from no treatment (or only simple screening)
to activated sludge  systems.  For those plants discharging directly into rivers
or streams,  waste  treatment facilities are said to be severely lacking in the
industry.  No exemplary waste treatment plants handling only tannery wastes
presently exist.

Based upon a partial survey (140 plants)  of the industry, it is  estimated that
approximately 60 percent of the tanneries discharge into municipal systems.
Further information from EPA indicates that approximately 70 percent of
the X-small and small plants are on municipal systems.  This portion of
the industry is  also reported to represent about  60 percent of the productive
capacity of the  industry.  Of those plants discharging to municipal  sewers,
both no treatment and pretreatment practices exist.   There is a trend,
however,  toward at least some pretreatment by all tanneries following
increased effluent restrictions imposed by municipal systems.

It is reported that only few (about 21 as indicated in the Development Document)
of the tanners and finishers have viable secondary waste treatment facilities
at the plant site. Three have activated  sludge plants;  15 have either aerobic
or aerobic-anaerobic lagoons; and 3 have treatment systems with trickling
filters. More advanced treatment facilities do not yet exist, although pilot
studies have  been made  of reverse osmosis  and  activated carbon techniques.

Based on the total number of plants surveyed (140), then the 21 plants with
secondary treatment systems would represent about 15% of the plants in the
industry.  Presumably,  most of the plants with secondary treatment facilities
are presently discharging directly into rivers and streams.   Hence, a higher
percentage of those plants which discharge directly would have  some  secondary
treatment facilities,  e. g.  the ratio of 15% with treatment to 40% directly
discharging would represent over one-third (about 37%) of those which dis-
charge  directly.
                                 VI-12

-------
In order to meet the proposed guidelines*, mi .-t tanners will be required -.o
provide additional treatment facilities, including pretreatment for those
discharging into municipal systems.  The following factors contributed to
this cone lusion:_/

        1.  The strength of treated tannery waste with respect to most parameters
           i.s higher than that .tor most municipalities and other industries.

        2.  Consistent removal of waste constitutents by treatment facilities
           expressed as a percent of influent quantities is less than that
           of most municipalities and industries.

        3.  Tanneries now having treatment facilities which produce an effluent
           approaching the quality desired could make necessary modifications
           to meet quality standards at a  reasonable capital investment.
—  Development Document, p.  87.
                                 VI-13

-------
                     VII.  IMP A C T A NA LYSIS
The impacts of direct discharge effluent guidelines on the leather tanning
and finishing industry are expected to be generally severe--especially for
the X-small and small sized plants. Approximately 40 percent of the
tanneries currently discharge  directly into surface waters and only about
one-third of these are estimated to have some  secondary waste treatment
facilities.  Even these facilities must be upgraded to meet the proposed
BPT and BAT guidelines.  The balance of the plants discharging directly
will need extensive waste treatment improvements.

For the 60 percent which discharge into municipal systems, more stringent
pretreatment practices are generally expected to become necessary.  This
is expected due to the difficult treatability of particular waste constituents
such as chromium and sulfides. Estimated pretreatment costs are typically
high for various types of plants, e. g. , approximately 60 percent of the
estimated  BPT costs.  Thus,  if most plants  discharging into municipal
systems  must provide pretreatment, then pollution control impacts will
affect all segments of the leather tanning  (wet process) industry.

In this section, the estimated impacts  of pretreatment, BPT, BAT
and NSPS standards,  as proposed, are discussed.  The NSPS standards
are equal to the BPT and BAT cases beginning  in  1977 and 1983,
respectively.  Estimated impacts are based primarily on expected financial
effects of the pollution control costs on representive model plants  in the
industry.

The impacts considered in this analysis include the following:
                 Price effects
                • Financial effects
                 Production effects
                 Employment effects
                 Community effects
                 Other effects, e.g., balance of payments
                        A.  Price Effects
Three sizes of model plants which are categorized as "Pulp Hair-Chrome
Tan-With Finishing" have been evaluated.  The sizes studied were 300, 700,

                               VII-1

-------
and Z, 000 hides per day capacities. In addition , an X small plant with
an average capacity of 100 hides per day was included.  One analysis was
to estimate the percentage price increase that would be required to cover
the estimated cost of pollution control.  For the three sizes of plants,
the estimated price increases required to cover costs for pretreatment,
BPT and BAT standards are summarized as follows with detailed
analysis + 30 percent for  various levels of control contained in Table VII-1.
                          Percent Change in Price Needed J./
       Plant Size        Pretreatment      BPT        BAT
       100 hd/day           6.0%            9.0%         13.5%
       300 hd/day          2.2%            3.6%         5.8%
       700 hd/day          1.2%            2.2%         3.7%
      2,000 hd/day          0»6%            1.3%         2.0%
      I/ Such that the Net Income of the firm remains constant.
 These effects would be applicable at the plant level assuming each plant
 could pass-through cost increases.  However, only the larger plants would
 likely recover all levels determined by dominant, larger firms in the
 industry.

 An analysis of the industry structure and pricing mechanisms suggest
 that  in an extremely price competitive industry such as  leather tanning
 and finishing,  only the large firms may be expected to pass through the
 entire effects.  This argument is strengthened by the fact that the large
 firms produce approximately 65-75 percent of the total volume.   The
 target BPT projected increase in price is approximately 1. 3 percent
 with a  range of 0.9 - 1.7  representing a  range of _+ 30 percent in control
 costs to meet the BPT standards.  This approximates the required price
 increase by large plants to maintain the same level of-profit as before
 treatment.  An additional incremental price  increase of .7 percent is
 included to cover the BAT guidelines.
                                                                   t

 Another factor affecting expected price changes is that approximately
 60 percent of the tanneries are linked to municipal treatment systems.
 In these cases, only pretreatment costs are  expected to be incurred.
 It is noted that pretreatment costs  are  expected to change from  1977
 to 1983 due to an added sulfide removal requirement as  summarized
 in Table VII-1.  In summary, the projected "actual" industry-wide
                                VII-2

-------
Table VII-1.  Percent increase in prices to keep net income constant






(— 1
(Jj
Pretreatment
Plant Size -30 -- +30
100 head/day 4.2 6.0 7.8
300 head /day 1.6 2.2 2.9
700 head /day 0.9 1.2 1.6
2,000 head/day 0.4 0.6 0.8


BPT BAT
-30 -- +30 -30 -- +30
6.3 9.0 11.8 9.5 13.5 17.6
2.5 3.6 4.7 4.0 5.8 7.5
1.6 2.2 2.9 2.6 3.7 4.8
0.9 1.3 1.7 1.4 2.0 2.6



-------
price increases (based on the factors described) are as follows:
                                        Percent      Percent    Weighted
  Period                                Plants        Price     Average
Beginning     Type of Treatment      Requiring     Increase—/ Increase

1977          Pretreatment              60%         0.6)          q(-
              BPT                      40%         1.3)            /0

1983          Pretreatment              60%         0.7 )        j 2%
              BAT                      40%         Z.O )

*/
—  Target price increase by large firms only.


It is understood that the tanning margin remains generally constant despite
rather marked changes in raw product prices.  This suggests that price
increases (due to cost changes) which affect the entire industry would be
possible.  However, this assumption does not address the aspect of
foreign competition.  Most likely,  competitive tanneries in other countries
will not be faced with increase cost due to pollution controls  in the fore-
seeable future.  Since tanneries obviously have been losing volume to
international competition on the basis of higher labor costs,  any increase
in the industry processing costs will only tend to  aggravate an already
serious problem.   International competition might therefore  result in
less price increases than would otherwise be expected.  Further data is
needed to make a more definitive assessment of this factor.

                       B.   Financial Effects
Net Profits as a percent of sales are summarized for the various sized
plants in Table VII-2.  For the baseline projection,  net profits for the  X-
small plants are  (4.4) representing a -.7 percent of sales.  Net profits
for the small - large firms are all positive with a high of 3.9 percent
for the large plant.

The imposition of pollution controls impacts all firms substantially
reducing net income before consideration of any price increases.  Net
income is  decreased for X-small firms from (4.4) at baseline to  (45) for
pretreatment and as high as (94.4) for BAT control.  Small firms are
projected to have negative net incomes with BPT and BAT controls if no
price increases occur.  Net income for the 700 hide per day plant is re-
duced from $177 thousand to $145 thousand for pretreatment costs and $83
thousand or 1. 7 percent of sales with the imposition of the full BAT standards,
                               VII-4

-------
                 Table VII-E.  Net profits and return on investment for pulp hair-chrome tan with finishing plants before and after controls
Plant Size
X Small
100 hides/day
Net income
Net as % of
income sales

Before Price Increase
Base Line
P ret reatment
(1 to 5 years)
(5 to 20 years)
BPT Control
BAT Control
After Price Increase — '
Pretreatment
(1 to 5 yrs)
(5 to 20 yrs)
BPT Control
BAT Control
J$000)

( 4.4)

( 44.5)
( 52.2)
( 64.7)
( 94.4)


( 38.5)
( 36.5)
( 58.7)
( 86.4)
Small
300 hides /day
Net income
After tax Net as % of After tax
ROI income sales ROI
(%) (%) ($000) (%) (%)

< 0

< 0
< 0
< 0
* 0


< 0
< 0
< 0
< 0

<0 40.

<0 14.
<0 6.
<0 (12.
<0 ( 57.


^0 25.
<0 29.
<0 25.
<0 ( 31.

6 1.9

1 .7
6 .3
0) < 0
5) < 0


9 1.2
2 1.3
6 0.2
9) <0

5.4

1.6
.7
< 0
< 0


2.9
3. 1
0.6
•=0
Medium
700 hides /day
2
Net income
Net as % of After tax Net
income sales ROI income
($000)

177.4

145.2
139.4
120.0
82.8


167.9
176.2
143.2
113.8
(%)

3.6

2.9
2.8
2.4
1.7


3.3
3.5
2.8
2.2
(%)

11. 1

8.1
7.8
6.2
3.9


9.4
9.9
7.4
5.3
($000)

587.2

537.3
530.0
487.3
427.4


608.0
631.6
558.0
521.7
Large
, 000 hides/day
Net income
as % of After tax
sales ROI
(%)

3.9

3.6
3.5
3.2
2.8


4.0
4. 1
3.6
3.4
(%)

12.8

11.0
10.8
9.4
7.8


12.4
13.0
10.8
9.5
_' For years  1 to 5,  . 9% increase over base; and for years 5 to 20, 1.2% over base.
                                                     VII-5

-------
  The impact on large firms is not as  severe as for smaller firms and
 net income as a percent of sales is reduced to 2. 8 percent with BAT
 control from the baseline condition of 3.9 percent.

 With the projected increases in price (. 9) percent for BPT and an
 additional (. 3) percent for BAT, some recovery toward a profitable situation
 is made by the small and medium sized plants.  By design profits for large
 plants with pretreatment facilities is slightly higher than baseline conditions
 and slightly less for BPT and BAT standards.

X-small plants  still are severely impacted  and show no possibility to  •
operate  on a profitable basis  after the imposition of BPT or BAT
standards.

After tax return on investment is also shown in Table VII-2.  A pattern
similar  to the net profit picture emerges from the imposition of controls.
Profit potential on investment in small plants is  generally eliminated.
For medium sized plants, the baseline estimate  of 11 percent after tax
ROI is reduced to 8.0 with pretreatment facilities and  3. 9 percent
following the imposition of BAT standards.   Some recovery can be
expected via projected price increases for the industry on ROI  of 5. 3 percent
following the BAT price increases.  Large  plants' ROI is reduced from
12. 8 percent to 11.0 with pretreatment facilities and down to 9. 4 and
7. 8 with BPT and BAT standards.


Assuming a . 9 percent increase by 1977 and an additional . 3  percent to
cover the 1983 Standards, small plants with pretreatment facilities will
achieve  a 1. 3 percent ROI after 1983 but are unable to achieve  a positive
return if required to install their own BAT  facilities.   The low profit-
ability with BPT controls in small plants, combined with negative incomes
with BAT, suggests that small firms  will not meet BPT standards only to
be aubject to closure 5 years hence.  Medium size plants are somewhat
better off and expect to achieve a 5. 3 percent after tax ROI assuming the
maximum price increase that can be expected.  With the maximum price
increase large plants should be able to keep after tax ROI at about 10
percent.


Net Present Value (NPV) - Another measure of the financial capacity
of a plant is the Net Present Value (NPV) of its future streams  of costs
and revenues.  By discounting at the cost of capital rate,  then positive
NPV's would indicate the likelihood of continued plant operation versus
closure.  To complete this analysis,  the following assumptions  were
made:
                               VII-6

-------
       1.  The existing plants have sunk investments but they could
           be disposed of today for a salvage value and reinvested
           elsewhere if the tanning and finishing operations were
           discontinued.  However,  only 10 percent of the  estimated
           replacement cost is assumed recoverable  for this industry.
           This relatively low  value represents the fact that manu-
           facturing equipment has little value outside the  leather
           industry and is seldom used for replacement within the
           industry.  Buildings '3 re very old and would have little
           or no alternative uses.
       2.  Revenues and expenses are assumed to remain  constant over
           time,  i.e., 20  vears  of operation.
       3.   The estimated cost of capital for the  industry is 7.0 percent
            after tax (see V-8).

The net present values were calculated for  model plants both with and
without pollution controls.  Also a sensitivity analysis was  performed
with a change of _+  30 percent in the proposed control  cost.  The results
are shown in Table VII-3.


Assuming no price increases after the imposition of controls,  then the
target NPV's of X-small and small plants are calculated at less than  0
for both  BPT and BAT levels.   This  indicates these plants are likely
to shut down.   However, small plants which require pretreatment  only
are expected to continue operation.   (X-small plants are expected  to
close regardless of type of treatment,  including a range in  pollution
control costs of + 30 percent).

Medium  and large plants are expected  to continue  operation based  on
positive  NPV's even •without price increases.

A further analysis  was  made assuming price increases as indicated
previously. That is, an increase of  0.9% was made for 1977-83, cor-
responding to the change required by large firms; and an increase of
1.2%  was made for 15 years beginning in 1983.  These changes reflect
Pretreatment - BPT and Pretreatment - BAT price increases required
beginning in 1977 and 1983,  respectively.

The NPV's as shown in Table VII-3 are well above zero for medium and
large plants and thus no closures are expected.  X-small plants still
have negative  NPV's under all treatment alternatives and, thus, the
X-small plants are clearly expected to be forced to shutdown.
                                VII-7

-------
     Table VII-3.  Net present value of model plant cash flows ($000) before and after projected price increases —
                                                                                                            I/
X-Small

Before
With
Price
Increase
Before Pollution Control Costs (116)
Pretreatment
+ 30% Target Cost
Target Cost
-30% Target Cost
BPT Control
<; +30% Target Cost
S Target Cost
oo -30% Target Cost
BAT Control
+ 30% Target Cost
Target Cost
-30% Target Cost
(547)
(448)
(349)
(695)
(561)
(428)
(855)
(685)
(514)
(471).
(372)
(272)
(631)
(498)
(364)
(779)
(608)
(438)
Small
Before
214
( 36)
57
130
(265)
( 94)
51
(510)
(282)
( 64)
Medium
With
Price
Increase Before
167
220
256
( 62)
93
195
'(265)
( 44)
151
1,402
1, 199
1,245
1,293
1,077
1, 148
1,224
984
1,079
1, 176
With
Price
Increase
1,495
1,542
1,589
1,318
1,394
1,470
1,278
1,375
1,472
Large
Before
4,813
4,457
4,530
4,601
4,238
4,370
4,504
4,089
4,256
4,423
With
Price
Increase
5,333
5,405
5,478
4,918
5,051
5, 184
4,422
5,090
5,257
—  Price increases include  .9% for years 1 to 5 and 1.2% for 5 to 20,  except BPT control which includes only .9%
   increase for 20 years.

-------
Small plants are expected to be most sensitive to continued operation
on a marginal basis, i.e. , at low profitability if they remain open.
Based  on the NPV analysis it is  estimated that small plants  linked
with municipal systems can pretreat and continue operation.   The
estimated price increases (.9% in 1977 and 1.2% in 1983) help sustain
these operations.

Also, it is noted that small plants might meet the target BPT standards
(if operable for 20  years) assuming that no additional costs were to be
subsequently incurred.  However, small plants cannot meet the BAT
treatment requirements, and therefore these plants are expected to
shutdown in 1977.  NPV's for small plants operating BPT controls
for only 5 years (1977-83) are negative.
                                VII-9

-------
                      C.  Production Effects
The leather tanning and processing industry can be accurately described
as a declining industry.  After reaching a peak physical volume in 1967
of 32.4 million cattle hide equivalents, volume has dropped sharply each
year.  In 1972 volume had declined to 24.0 million cattle hide equivalents
or a decrease of 25 percent from the peak year.

Two major factors have contributed to the decline in the industry:

        1.   Increased international competition.
        2.   Increased competition from synthetic leathers  both in
            terms of physical product and price.

In addition, certain segments of the industry have declined because of
decreasing supply of skins.  This is true for certain species  such as
reptile, kid, sheep and calf.  Cattlehides,  however, which accounted
for 81 percent of total volume in 1972, have been increasing in total
domestic supply, but exports of raw hides exparfded from 5.4 million
in 1965 to 12.5 million in  1972.

There are  presently  176 wet processing plants in the industry today.
Thirty-three percent of the plants are  categorized as large (or extra
large) and  handle approximately 73 percent of the total volume.  Twenty-
seven percent of the plants are  categorized as medium and process an
estimated 17 percent of the volume.  The remainder or 70 plants are
small or X-small and produce only 10  percent of the total  volume.

 1.  Baseline Closures
 According to the records of the Tanners' Council of America,  33 plants
 have shutdown or ceased operation between  1968 and June of this year.
 A distribution of these shutdowns was obtained for 3 1 of the 33 plants
 and is  contained in Table VII-4.  When converted to cattlehide  capacity
 basis this represents capacity to tan approximately  5. 3 million hides.

Of the 31 plants for which descriptive data are available, 9 plants pro-
cessed special type of hides such as reptile, kid,  sheep and calf for which
the basic raw material has declined sharply.  Seven of the plants pro-
cessed sole leather for which  substitutes have made major inroads. For
example, 20 years ago 76 percent of the shoe soles  were leather,  in 1972
this had declined to 18  percent with no reversal of the trend foreseen.
Fifteen of the plants processed cattle side  leathers primarily for shoe
                                VII-10

-------
 Table VII-4.  Distribution of historical tanning plant closures by
                     size and type,  1968-19'V3
Size
Small
Medium
Large
Total
Special -1
4
4
1
9
Sole Leather
1
4
2
7
Cattle side
5
2
8
15
Total
10
10
11
31
—  Includes reptile, kid,  sheep and calf.
Notes:  1.   Five of the above have been reopened with a modified
            product line.
        2.   A total of 33 plants closed,  two of which are unidentified.

Source:  Tanners' Council of America.
                               VII-H

-------
uppers.  Although there has been an abundance of domestically-produced
cattle hides, this group has been subjected to severe pressure from
international competition and the increasing trend for the domestic shoe
industry to use leather substitutes.  It is significant to note that slightly
over half of the closures  in this  category were large  plants.

Although it is normally a series  of factors that finally force a plant to close
its doors, the general trends of  the industry as noted above appear to
have been primary causes.  In addition, two of the 31 firms indicated they
were unable to meet the financial requirements resulting from strict local
pollution control  regulations.

Because of the problems  that beset the industry today,  it is clear that
plants will continue to shut down for the following reasons:


           increased international competition
           increased strides in  the production of synthetic leather
           higher per unit cost  of production in some plants--
               especially the smaller size
           lower per unit profit
         .  difficulty in meeting  (physically and financially)
               occupational safety requirements
           plants becoming physically worn out
         .  inadequate owner income
           present owner reaching retirement age
We are estimating closures to continue at the same rate as over the past
five years and will amount to approximately 28 plants through 1977.  By
size category this amounts to:

                    Small       9 plants
                    Medium      9 plants
                    Large      10 plants

2.   Capital Availability

The ability of a firm to finance new investment for pollution abatement is
a function of several critical financial and economic factors. In general
terms,  new capital must come from one or more of the following sources,
(1)  funds borrowed from outside  sources, (2) equity capital through
the sale of common or preferred stock, (3) internally generated funds --
retained earnings and the stream of funds attributed to depreciation of
fixed assets.

                             VII-12

-------
It appears that capital availability will be a  severe problem the industry
will encounter when investing in pollution control tacilities.   To place
this problem in its proper setting, some of  the relevant conclusions as
discussed in Chapter II-C are  summarized below:

         1.   The industry has a large number of family-owned and
             operated plants especially among the  small and  medium
             size categories.

         2.   The family owned plants are largely financed with internal
             capital and maintain a low level of long-term debt.  The
             large firms are likely to possess capital structures sub-
             stantially different from those exhibited by the small
             companies.

         3.   New expenditures have been modest and have averaged
             about 17 million per year--mainly for equipment.

         4.   Over 70 percent of the  physical plants are over  50 years
             old.

         5.   The  industry has had difficulty  obtaining capital  to cover
             their operating requirements because of raw material
             price increases since August,  1971.

         6.   Leather tanning and finishing is a declining industry and
             subject to severe  international pressure.

         7.   There has been an apparent reluctance of outside capital
             sources to invest in or lend money to the  industry.


 According to the Development Document the BPT  total investment required
 in pollution control equipment to meet the BPT guidelines amounts to $28
 million and  an additional investment of $14.5 million to meet BAT guide-
 lines .

 Total fixed investment in the industry is estimated at  roughly $130 to $140
 million. Therefore the estimated investment cost required  to meet BPT
 and BAT Standards amounts to approximately one-third of the present
 total fixed investment in the industry.
                               VII-13

-------
A further indication of the financing problems the industry will face
can be obtained by comparing the estimated capital investment for  con-
trol facilities to meet the  1977  guidelines with the  estimated replacement
value for the respective plants.  These data are for Category 1 --  pulp
hair with chrome  tanning -- with finishing.
                                    BPT Level    Plant Replacement Value
                                    $ Thousand           $ Thousand

                   X-small                366                   245
                   Small                   473                   635
                   Medium                667                 1,200
                   Large                 1,162                 3,115

It is clear from these illustrations and the general condition of the industry
that the leather tanning and finishing industry will have difficulty obtaining
capital to finance the facilities to meet the proposed guidelines.

3.   Plant Shutdowns Resulting From Pollution Control Guidelines

The plants' ability  to finance and install new pollution control equipment
was viewed primarily from two analyses.  Net profit as a percent of sales
and as a percent of investment with and without pollution control equipment
was viewed as a  firm's ability to recover capital  expenditure in pollution
control equipment and operation.  The NPV analysis was  used to view the
future earnings of the company with the imposition of controls compared
to  salvage value  of the firm.

Without Municipal Exemption

The imposition of the proposed BPT and BAT Standards will impact
X-small and small plants very severely to the point of shutdown.  Although
small plants disposing into municipal systems will be impacted,  they
should be in a position to recover substantially as a  result of the projected
price increase.  This will  include 40 of the small plants  that are reported
by EPA to be  on municipal treatment systems.  Small plants not on munici-
pal treatment systems presently number 17.  We are projecting all 17 of
these plants will be forced to close.  Although these 17 plants show a slight
positive  NPV  with the projected  price increase in Table VII-3, the NPV
for the BPT level of control was  calculated using a  20 year cash flow.
If BAT costs are applied in the proper sequence (1983) or if the NPV for
BPT  level of  control is run for 5 years only,  the  result is a negative NPV.
On  this basis  we are projecting the plants will shut  down with the imposition
of  BPT Standards.

                                 VII-14

-------
 There are 48 medium sized plants  of which 9 are expected to close for
 baseline reasons.  Of the remaining group, 20 are assumed to be on
 municipal treatment system.  Although these may be some  of the medium
 size plants not on municipal treatment system unable to develop sufficient
 capital to install BPT and BAT control facilities, we are  not projecting any
 shutdowns from this group.

 Likewise, there may be some of the large plants  unable to develop the
 capital necessary to install pollution control facilities,  however,  we
 are not projecting any closures from this group.

 In summary, we are projecting a total of Z 1 plants will close due to the
 proposed guideline assuming no exemption for plants disposing in munici-
 pal systems. This  includes 4 X-small plants and 17 small  plants.  These
 numbers are summarized in  Table VII-5.

 With Municipal Exemption

According to information received'from  EPA,  any plant with less than
 50, 000 gallons of water  flow per  day that does not constitute more than
5 percent of total effluent going into the municipal system, provides no
toxic materials and/or the  aggregate of all small  plants is not significant,
is exempt from the pretreatment requirements.

At the  present time  chromium is  not classified as a toxic  material.   Thus,
under  present regulations certain leather tanning  plants would be  exempted
from pretreatment requirements.  The impact on the leather industry was
then assessed assuming the present pretreatment requirements.  However,
it is well to note that chromium may be added to the  list of toxic materials
in the  future.
                                 VII-15

-------
Table V1I-5. Estimated plant closures in the wet process leather tanning industry resulting from pollution
                                           control guidelines
Without municipal exemption
Size
X- small
Small
Medium
Large
X-large
Total
Current
plant no.
6
64
48
43
15
176
Baseline
closures
2
7
9
8
2
28
Plants
remaining
before controls
4
57
39
35
13
148
Closures
from
guidelines
4
17
0
0
0
31
Plants
remaining
after controls
0
40
39
35
13
127
With municipal exemption
Closures
from
guide line s
1
17
0
0
0
18
Plants
remaining
after controls
3
40
39
35
13
130

-------
The X-small and small plants would generally meet the present pre-
treatment exemption requirements or with some internal production re-
quirements  can reduce their waste water flow to less than 50,000 gallons
per day.  EPA estimates that 70 percent of the X-small and small plants
now dump into municipal systems.  On this basis the only reduction in
shutdown would be the three X-small plants now assumed to be hooked
up to municipal systems.  Therefore shutdown would be reduced from
21 with no municipal exemptions to 18 if the municipal  exemption
clause  should remain in effect.


4.  Total Production Lost Due to Guidelines

The estimated production lost from the 2 1  plant shutdowns,  assuming no
municipal exemption, from the imposition of control standards is estim-
ated at 2.8  percent of the present physical volume of  the industry or 3.4
percent of the  projected volume of 1976.  (Based on recent trends,  the  pro-
jected volume  of the industry can be expected to decline by 16 percent by
1976 resulting'from baseline closures.)  Total capacity lost from pollution
control closures is  relatively low compared with number of plants closing
(12 percent) because of the size structure of the plants involved.

The estimated production lost from the 17 plant shutdowns,  assuming the
municipal exemption holds true, is estimated at 2. 6 percent of the  present
physical volume of the industry or 3.2  percent of the projected volume  of
1976.  Again,  total  capacity lost from  pollution control closures is rela-
tively  low compared with number of plants closing  (10  percent).

In 1972,  total leather production in the U.  S.  amounted to the  equivalent of
24.7 million cattle hide  units (equivalents).  This leather was used in the
production of 527 million pair of shoes.  However, not all shoes are made
of leather.  In 1972, 67  percent or 353 million pair of  shoes produced
domestically were constructed of leather or part leather uppers.  On this
basis,  a loss  of  2. 8 percent of present  production would eliminate  the
leather required for 10.0  million pair  of shoes and commensurate quantities
of leather garments, upholstery, small  leather goods,  etc.  The 2. 6 per-
cent  of production loss resulting from the municipal exemptions would
eliminate the  leather required for 9.2  million pair of shoes.

The question then arises regarding what percent of production lost  due  to
pollution related closures would be absorbed by the remaining firms in
the industry vs the percent lost to overseas competitors.  Unfortunately,
the economic  data necessary to accurately assess this  question are  simply
not available.  Basically,  we are in  a demand pull  situation for raw hides.
                                VII-17

-------
Foreign demand for our raw hides which now take 52 percent of total
U.S. produced cattlehides will continue.  In fact, it most likely will
increase as the two leading nations (second and third to the U.S.) in
the export of raw hides, Argentina and Brazil,  are in the process or
have prohibited the exporting of raw hides as rapidly as their industries
can be developed to process them. Brazil has now already switched
from a major exporter to an importer and have imported  200 thousand
hides this year.  Japan's imports of hides from the U.S.  have nearly
doubled from 1965 to 1972 increasing from 3. 8 million to 7. 3 in  1972.
Communist Bloc countries such as Poland, Yugoslavia, Rumania and
Czechoslovakia have more than doubled their imports of raw hides since
1965.  As a result,  we see increasing international competition for our
raw hides.

On the other hand,  the demand for shoes  is basically a derived demand
resulting  from the demand for shoes.   Thus, historically the domestic
demand for shoes has  tended to control the number of hides tanned in
the U. S.   However, because of the increased international competition
and expected  drop in the production of tanned leather in  1977, we
expect to  see a reversal of this historical trend.  In fact, we are arguing
that the closing of tanneries in 1977 will  cause a  shortfall of tanned
leather required by the shoe industry.

The U.  S.  shoe industry has also been losing out to foreign competition.
Shoe imports have increased from 14 percent of total shoes sold in the
U. S. in 1965 to 36 percent in 1972.  In addition, the shoe industry is
utilizing more leather substitutes --  particularly for women and children's
shoes.

In summary,  we are estimating that approximately 50 percent of the pro-
duction loss from Guideline closures will be lost to overseas competition
and the remaining lost production will be picked up by other U.  S.  tanneries.
A net loss of  1.4 percent of total hide production will result in a loss of
raw material for the manufacture of 5.0  million pair of  shoes and com-
mensurate quantities of leather garments, upholstery, small leather goods,
etc.  Likewise, if the  loss amounts to  1. 3 percent because of the municipal
exemption, the reduction in leather shoes produced would amount to
4. 6 million pair.
                                 VII-18

-------
                      D.  Employment Effect
The estimated number of employees in the leather tanning and finishing
industry is estimated at 23. 7 thousand in  1972 down from 30.7 thousand
in 1967.  Baseline closures over the next  five years are estimated to
eliminate jobs directly for 3, 700 employees in the industry.

Closures resulting from pollution control  guidelines are estimated to
eliminate   950 jobs by 1977, or if the municipal exemption still
exists,   875.  This considers  only direct employees, many of which
are from minority groups whose economic integration is sociologically
important in the United States.  Because of the declining nature of the
industry, it is doubtful if they could obtain employment in  other tanneries.

Based on information obtained from the Tanners' Council, minority em-
ployees compose approximately 35-40 percent of the 23.7  thousand
workers in 1973.  This can be broken down by region as follows:


                                           Approximate  Percent
              Region                        Minority  Employees

         New England                                16
         Mid Atlantic                                62
         Chicago area                               70
         Milwaukee area                            60
         St.  Louis area                             60
         West Coast                                 30
         Other                                      30

In 1967 there were 328,700 employed in the leather tanning and
leather products industry (SIC 31)  (rubber footware and miscellaneous
plastic products not included).  This number declined  to 273,800 by 1971
largely reflecting a decline in leather tanning and finishing and footwear.
Further  examination indicates that for each person employed in tanning
and finishing, approximately 10 are employed in the leather consuming end
of the industry (Table  VII-6).
                               VII-19

-------
   Table VII-6. Number of employees in leather and leather products industry
                              (SIC  31) 1963-1971
                                          1963
                                            1967
                     1970
                      1971
31
Leather & Leather Products
3111    Leather Tanning 8t Finishing
            Wet Process
            Dry Process
        Industrial Leather Belting
        Footwear Cut Stock
        Footwear,  Except Rubber
        House Slippers
        Leather Gloves & Mittens
        Luggage
        Women's Handbags
        Personal Leather Goods
        Leather Goods n.e.c.

        Total
327.3
                                  31.4
328.7
           30.7
295.8
            24. 1
273.8
            24.5


2.9
14.3
201.7
11.0
7.7
16.4
24.5
12.4
5.0


2.7
13.7
198.5
12.5
6.3
21.4
24.1
12.7
6. 1


2. 1
12.6
180.5
11. 3
5.5
16.6
21.4
15.0
6.7
22.6
1.9
2.0
11. 0
166.5
10.9
4.9
14.8
19.6
12.8
6.8
                                 327.3
          328.7
           295.8
           273.8
                                 VII-20

-------
It is difficult to predict the loss of employment in the leather manufacturing
segments, but using the direct ratio of  1:10, a loss  of 950 in the tanning
industry would lead to a loss  of 9, 500 jobs in the leather consuming industry
(manufacturing only).  However,  not all of the employment in the leather
manufacturing industry is dependent upon leather as a basic raw material.
For example,  in 1972,  67 percent of the shoes manufactured in the U. S.
had leather or part leather uppers.   Using this percentage as an indication
of the dependence of the leather consuming industry on the tanning industry
and our earlier estimate that 50 percent of lost production will be  absorbed
by the remaining industry, a  loss of 950 jobs in the  tanning industry could
lead to an additional loss of 3, 182 jobs  in the leather consuming industry.
If you assumed leather substitutes will  increase in usage and be used in 40
percent of the  shoes (uppers) rather than the current 33 percent,  the  loss
of employment would amount  to 2, 850.

Considering the case with municipal exemption and the same set of
assumptions as used in the above, we would expect a loss of 875 jobs
in the tanning industry.   This would subsequently lead to a loss of 2,932
jobs in the leather consuming industry or 2, 625 if you assumed leather
substitutes  to be used in  40 percent of the shoes.
                      E.  Community Effects
The exact location of the tanning plants subject to closure is not known
at this time.  With the exception of Chicago, Boston, Milwaukee, Newark
and San Francisco,  leather production is located primarily in small com-
munities.  Appendix Table A-12 gives the distribution of wet process plants
by size and location. Both Massachusetts and New York have heavy con-
centrations of small to medium size plants with 34 and 23 respectively.
Wisconsin has  12, New Jersey  10 and New Hampshire 7.  The remaining
small to medium size plants are scattered over a wide area.  In many
instances tanning plants are the principal employers  or payroll sources.
Consequently, the closing of a number of small  plants •would directly
impact a number of small communities.

 The multiplier effect resulting from the loss of raw  material would impact
 a number  of finishers and manufacturers of shoes, handbags, etc.   This
 impact would be more widespread but fall the heaviest on the same states.
                                 VII-21

-------
                      F.   International Trade
The impact of pollution controls will have a direct impact on the balance
of payments.  As discussed in earlier sections, the tanning industry has
been rapidly losing volume to international competition.  It can be ex-
pected that if production capacity is lost due to pollution control guidelines,
an increase in the exports of raw hides will result—at least in the short
run.  It is doubtful if U.S.  shoe manufacturers would  import tanned hides,
but most likely the present trends will continue in that the U.S. would
increase its purchases of foreign manufactured shoes  and other leather
goods.

In 1972,  1.2 billion dollars worth of shoes (296,000,000 pairs) and
leather goods were imported (Table IV-4).  A projected loss of 1.4
percent of domestic capacity would amount to 5.0 million pair of shoes
and related leather goods or approximately $30 million dollars worth
of finished leather products.  Raw hides constitute approximately 20
percent of the finished price of shoes.  Therefore, we could expect to
export an additional 6 million dollars worth of hides for a net balance
of payments loss of $24 million.

Using the lower production resulting from the municipal exemptions,  a
projected loss of 1.3 percent of domestic capacity would amount to 4.6
million pairs of shoes and related leather goods or approximately $27.2
million dollars worth of finished leather products.  With an increase  in
raw hide exports of $5.4 million, the net balance  of payments loss would
amount to $21.8 million.
                               VII-22

-------
                VIII.   LIMITS OF THE ANALYSIS
There is little  published information regarding the structure,  pricing,
and economic data regarding the leather tanning and finishing  industry.
Much of the descriptive data used in this report was compiled by the
Tanners' Council and is considered to be the most complete and accurate
source available.  Nevertheless,  much of the information required to
develop this  report did not exist in quantifiable form but was derived
from personal discussion  with individuals knowledgeable of the industry.
This chapter discusses the general accuracy of the  report and some of
the key assumptions  involved.
                          A.   Accuracy
The analysis was done under very tight time constraints (two months)
and time did not permit the development of all aspects of the project in
the detail that would be desirable.  As a basis for the model plants, we
depended upon brief reports published by the USDA and a number of in-
formal discussions (telephone and personal) with knowledgeable individuals
in the industry.   Data relating to the industry, particularly  to size  of
plant, were fragmentary and numerous assumptions and extrapolations
were required.  Financial information on the  industry is  particularly
difficult to obtain for reasons explained in the  report.  In all cases an
attempt was made to evaluate available information with second sources
to help insure that data and information used were as  reliable and repre-
sentative as possible.

It is believed that the results as presented earlier are generally correct
and indicate  the proper order of magnitude for the economic impacts of
mandatory pollution abatement standards on the leather tanning and
finishing industry.   Data limitations prohibit a precise quantitative
assessment of the impacts of pollution abatement standards.
                     B.  Range of Error
Different data series and different sections of the analysis will have
different error ranges.  Estimated ranges of error are as follows:
                               VIII-1

-------
                                                  Error Range
       Number of facilities                           _+  5
       Size of operating plants                        _+20
       Projection number of facilities                jt ^
       Employment                                  i^O
       Price information for  products and
            raw materials                            +_10
       Processing cost                               ±10
       Replacement costs for facilities               jt^O
       Plant closures due to water pollution
            control costs                             + 30
                     C   Critical Assumptions
In order to establish model plants representative of the industry,
several key assumptions had to be made.

1.   Profitability

Industry statistics indicate that generally large plants are more profit-
able than small and  this assumption was used.  However,  specific plants
may not follow this  generalization. For example,  small plants may handle
specialty products which would not be in competition with  large plants.
The resulting effect would be a more profitable operation than if they were
competing directly with large tanneries.

2.   Products

There are many different types of leather products produced through
various processes.   We constructed the model plants around the production
of Tannery Run upper shoe leather which is the most prevalent form.

3.   Other Types of  Leather

Only cattlehides were considered in the model plant  data.  Because of a
lack of information,  pigskins, goatskins and sheepshins and others were
not considered.  Results of the model plant analysis  were generalized for
the entire industry.   Indications  are that the other segments  of the in-
dustry may be less  profitable.
                               VIII-2

-------
4.   Leather Conversion Rate

Conversion from raw hide to finished leather was based on generally
accepted conversion ratios.

5.   Complex Plants

The assumption was made that the model plants produced only one basic
product.  This would seldom be  true.  However, the average operation
should not be greatly different than is  reflected in the model plants.

6.   Prices

Published prices for cattlehides were  used,  but published prices do not
exist for finished leather.  These had  to be estimated.
                       D.   Remaining Issues
Forecasts of industry performance were based on historical trends  and
expected occurrences.  The decline of the industry as  seen most vividly
over the past five years is  projected to continue.  This situation could
be greatly altered with changes in our international trading regulations.
In turn, this would greatly alter the balance of payments impact that can
be expected under present trading regulations.

Very little is known with regard to foreign competition with the exception
that  they have, obviously, lower labor cost.  It is not known if they  have
or are considering similar pollution control regulations or  similar  occu-
pational safety requirements.   Since they obviously have made great
strides in capturing the U. S.  market,  it is  expected they will continue
to do so.

 There  has been  some discussion of internal production alterations which
 would reduce and/or  change the composition of the waste flow effluent.
 This may,  in fact,  represent a more desirable alternative  than investing
 tremendous capital resources in end-of-pipe facilities which have no
 productive value to the plant.   Since investment in end-of-pipe treatment
 ranges from one third to over 100 percent of the replacement value of
 the  plants-depending  on the specific plant size-this is certainly an alter-
 native which plants must consider.  This whole area was not considered
 within the scope of work for this report.
                                VIII-3

-------
APPENDIX

-------
                         Table A-1.  General statistics for the leather tanning and finishing industry
All Employees
Year


1958 Census
1959 ASM
I960 ASM
1961 ASM
1962 ASM
1963 Census
1964 ASM
1965 ASM
1966 ASM
1967 Census
1968 ASM
1969 ASM
1970 ASM
1971
1972
Number
(1,000)

37. 1
37. 1
34. 5
33.2
31.7
31.4
31. 2
32. 0
32.7
30.7
31. 1
28.8
23.7


Payroll
(million
dollars)
165. 5
173. 6
163. 9
157.9
157. 2
163. 3
169- 0
180. 0
189- 2
186.4
196.0
188. 1
169.2


Production Workers
Number
(1,000)
Value
added by
Man-hours Wages Manufacture
(millions)
(million
dollars)
32. 5
32.4
30. 0
28. 7
27. 3
27. 3
27. 1
27.9
28. 2
26.4
26.7
24.4
20. 1


63.4
62.6
57. 6
55. 0
53. 3
54.6
54. 6
56.9
57. 5
52. 8
53.0
47.4
39.8


133.
137.
128.
124.
123.
129-
131.
139-
. 144.
142.
151.
142.
128.


2
1
9
0
1
8
5
0
4
5
2
8
2


(million
dollars)
275.
337.
278.
267.
263.
273.
300.
327.
326.
319-
349.
331.
318.


8
5
5
5
6
1
2
0
4
4
5
2
4


Cost of
materials
(million
dollars)
464.
558.
508.
486.
491.
480.
481.
535.
614.
547.
524.
514.
466.


9
9
5
7
0
5
3
6
1
0
5
9
9


Value of
shipments
(million
dollars)
743. 1
886. 9
790. 7
761. 1
765.9
758.4
783. 6
856. 7
940. 5
870. 1
877.9
853.9
793.3


New Capital
Expenditures
(million
dollars)
7.
7.
6.
4.
7.
6.
7.
11.
17.
16.
16.
14.
12.


9
6
1
7
2
5
8
3
3
7
6
4
6


Source: Census of Manufactures and annual Survey of Manufacture.

-------
                       Table A-2.  Value of shipments byproduct class 1969-1971
1969

3111-
31111*
31112*
31113*
31114*
31115*

31110
31119


Item
Tanned and finished leather
Finished cattle hide and kip side leathers
Finished calf and whole kip leathers
Finished sheep and lamb leathers
Other finished leathers, n.e.c
Rough, russet, and crust leather (not
finished in this establishment)
Tanned and finished leather, n. s.k.
Contract and commission receipts for
tanning and finishing leather owned
by others
Total
802.6
524.7
34.5
57.9
48. 1

29.9
29.1


78.4
Percent
100
65
4
7
6

4
4


10
1970
Total
765.9
481.0
40.3 '
55.1
51.2

31.6
(29.8)


76.9
Percent
100
63
5
7
7

4
4


10
1971
Total
830.8
503.9
33.0
70.6
73.2

31.2
27.2.


91.7
Percent
100
62
4
8
9

4
3


10
Source: Annual Survey of Manufacturers.

-------
    Table A-3.  Shoe prices -- estimated average factory value per pair

1955
1956
1957
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Jan.
3.49
3.55
3.67
3.57
3.61
3.74
3.82
3.83
4.00
4.02
4.03
4.37
4.57
4.75
4.80
5.11
5.39
5.45
Feb.
3.54
3.55
3.57
3.58
3.55
3.82
3.74
3.79
3.85
3.97
3.Q9
4.35
4.52
4.66
4.86
5.18
5.37
5.48
Mar.
3.46
3.58
3.57
3.50
3.57
3.73
3.69
3.72
3.83
3.90
3.91
4.26
4.57
4.70
4.89
5.36
5.41
5.54
Apr.
3.39
3.59
3.55
3.46
3.57
3.70
3.66
3.73
3,84
3.89
3.95
4.23
4.64
4.66
5.04
5.20
5.40
5.67
May
3.26
3.47
3.37
3.30
3.46
3.58
3.65
3.57
3.80
3.91
3.93
4.30
4.57
4,68
4.84
4.97
5.18
5.48
June
3.32
3.50
3.45
3.38
3.59
3.59
3.63
3.70
3.82
3.89
3.88
4,22
4.51
4.64
4.91
5.02
5.21
5.52
July
3.39
3.72
3.69
3.59
3.82
3.81
3.81
3.91
3.90
4.00
3.99
4.28
4.61
4.81
4.90
5.10
5.38
5.75
Aug.
3.53
3.74
3.69
3.69
3.88
3.89
3.85
3.69
3,88
4.04
4.06
4.41
4.58
4.77
4.99
5.23
5.21
5.59
Sep.
3.46
3.65
3.57
3.62
3.77
3.80
3.78
3.85
3.84
3.98
4.02
4.40
4.57
4.78
5..06
5.15
5.16
5.55
Oct.
3.40
3.56
3.51
3.52
3.73
3.67
3.65
3.81
3.79
3.83
3.94
4.31
4.53
4.61
4.94
5.09
5.17
5.41
Nov.
3.33
3.54
3.52
3.54
3.75
3.65
3.63
3.81
3.79
3.93
3o98
4.36
4.54
4.58
4.93
5.11
5.13
5.39
Dec.
3.56
3.71
3.70
3.77
3.92
3.88
3.91
4.09
4.01
4.10
4.16
4,65
4.73
4.88
5.22
5.54
5.45
b.OO
Aver.
3.43
3.60
3.57
3.55
3.69
3.74
3.73
3.80
3.86
3.99
3.99
4.34
4.58
4.71
4.94
5.17
5.29
5.56
Source:  Tanners' Council of America, Inc.

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                           Table A-4.   The shoe market'
                                (1.000 Patrs^

1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
U. S. Production
Men's
103,336
112,729
110,703
119,859
118,195
126,903
123,720
126,259
117,563
119,738
117,672
126,562
Women s &
Misses'
312,613
325,021
310,725
308,137
316,420
320,082
285,583
316,680
265,525
253,387
232,447
218,391
Juvenile
91,687
95,032
88,294
88,658
91,575
90,696
86,077
83,641
79,143
78,691
75,756
72,651
Slippers
& Misc.
85,271
100,456
94,606
96,136
100,039
104,015
104,584
115,847
114,731
110,502
109,902
109,051
Mili-
tary//
4,500
5,900
5,200
6,500
7,690
15,784
14,800
9,900
6,551
4,770
4,614
3,800
Total
592,907
633,238
604,328
612,790
626,229
641,696
599,964
642,427
576,961
'562,313
535,777
526,655
Total*
Imports
36,668
55,057
62,820
75,372
87,632
96,135
129,137
175,292
202,040
241,560
268,569
296,665
7. Imports
of U. S.
Production
6.2
8.7
10.4
12.3
14.0
15.0
21.5
27.3
35.0
43.0
50.1
56.3
   Non-rubber footwear.
jU
w  Included in men's shoe production.
Source:  Tanners' Council of American, Inc.

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                 Table A-5.  World cattle numbers (1,000  head)

Canada
United States
Mexico
Total No. America
Argentina
Brazil
Colombia
Total So. America
West Europe
East Europe
U.S.S.R.
(Europe & Asia)
Africa
Asia
Oceania
TOTAL WORLD
1961-1965
Average
11,332
103,892
20,210
151,551
43,341
78,718
15,780
168,937
83,538
32,964
83,493
124,453
405,650
25,338
1,075,924
1969
11,475
109,885
24,876
165,661
48,298
92,845
19,576
193,505
88,895
34,675
95,735
135,296
446,235
29,622
1,189,624
1970
11,828
112,303
25,123
169,084
48,440
95,268
20,359
197,123
88,443
34,054
95,162
135,801
447,507
31,354
1,198,528
1
1971(1) 1972(2)
12,217
114,578
26,081
173,185
47,786
96,576
21,173
200,815
87,122
34,688
99,225
137,618
448,632
33,616
1,214,901
12,633
117,862
26,830
178,204
n.a.
n.a.
21,798
202,263
86,911
35,270
102,500
139,057
449,404
36,135
1,229,744
Sourc_.  Foreign Agricultural Service,  U.  S.  Department of Agriculture.

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              Table  A-6.  Packer hide and skin prices: Average per pound, Chicago,
1959 to date!/
Steers
Year

1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
Heavy
native
Cents
19- 16
13. 72
14. 91
15. 19
11. 23
10. 32
13. 93
17. 42
11. 73
11. 84
14. 38
12. 85
14. 53
29.70
31.60

Heavy
Texas
Cents
16.97
11. 36
12.73
13. 56
9-76
8. 18
12.07
16. 17

--
--
--
--
—
--

Butt
branded
Cents
17. 22
11. 77
13. 00
13. 64
9- 74
8. 47
12. 39
16. 33
10. 31
9- 51
12.48
11. 80
11. 95
27.20
29.36

Colo-
rados
Cents
16. 28
10.62
11.95
12.69
8.86
7.59
11. 58
15.64
9-60
8.51
11.59
9-95
10. 80
	
--

Heavy
native
Cents
21. 60
15. 13
16. 02
15. 80
11. 80
11. 20
14. 00
18. 12
12. 43
11.75
14. 85
13.44
14. 17
	
--

Cows
Light
native
Cents
25. 61
18. 81
19- 54
18. 50
12. 83
13. 23
15. 60
20. 21
16. 34
15. 73
18. 35
16. 98
17. 03
34.40
46.30

Bulls
Branded
Cents
20.45
13. 58
14.78
14.85
10. 54
8. 95
12. 57
16.65
10. 80
9- 64
12. 95
11. 35
11.63
	
--

Native
Cents
15. 20
10. 88
11. 09
11. 07
8. 00
7.44
9- 17
12. 28


--
--
--
_ _


Branded
Cents
14. 20
9. 93
10, 17
10. 07
7. 00
6.44
8. 17
11. 28
—
-_
--
--
--
_ _


Calf-
skins
Cents
64. 95
55. 64
62. 16
61. 08
36. 61
40. 63
53. 29
59-09
46. 51
54. 85
56. 33
33. 55
30. 17
51.77
65.50

Kip-
skins
Cents
52. 32
43. 92
51. 70
44.48
29. 99
32. 34
34. 09
45. 67
33. 11
32. 96
35. 10
27. 81
22. 70
..


—  Prices for packer steer,  cow and bull hides obtained from Livestock Market News publication beginning in 1967.
   Data for calfskins and kipskins compiled from National Provisioner weekly publication.   Calfskins classified as
  (North)  10-15 Ib. , kipskins classified as (North) 15-25 Ib.
2/
—  January,  February,  March only.
   Source: USDA  Livestock and Meat Statistics,  1971 and earlier.  1972 Tanners' Council of America.

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            Table A-7.     Movement into sight of cattlehides
                                    (1, 000 hides)

Estimated
Total
Slaughter
Exports
and
Re-exports
Imports
Net
Exports
Total
Movement
To Tanner s(l)
                                ANNUAL TOTALS
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
28,257
29,242
28,514
25,880
25,223
27,590
28,012
28,516
29,800
33,262
34,550
35,260
35,381
36,076
36,118
35,740
36,280
36,480
5,863
4,943
6,518
5,434
4,107
6,899
7,645
7,121
7,972
11,540
13,320
14,205
11,866
12,853
14,790
15,229
15,969
17,595
333
340
167
417
1,025
331
294
413
360
314
301
221
232
494
277
385
275
292
5,530
4,603
6,351
5,017
3,082
6,568
7,351
6,708
7,612
11,226
13,019
13,984
11,634
12,359
14,513
14,844
15,694
17,303
25,537
26,441
24,924
23,690
22,606
22,044
22,271
22,585
21,815
22,799
23,241
23,572
23,607
23,617
21,096
20,199
20,189
19,218
—  Includes both domestic and foreign hides and side leather kips.
Source:  Tanners' Council of America, Inc.

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                    Table A-8.  .   Movement into sight of all calfskins and kips

                                                  (1, 000 skins)

Federal
Inspected
Slaughter
Total
Commercial
Slaughter
Exports & Re-exports
Calf
Kip
Total
Imports
Calf
Kip
Total
Movement Calf
and 'Whole Kip
To Tanners (1)
                                   ANNUAL TOTALS
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
7,499
7,843
7,324
5,672
4,875
5,260
5,005
4,979
4,535
4,820
5,077
4,432
4,001
3,876
3,637
3,025
2,806
2,420
12,377
12,512
11,904
9,315
7,683
8,225
7,701
7,494
6,833
7,254
7,419
6,647
5,919
5,443
4,863
4,072
3,689
3,051
1,815
1,851
2,076
2,362
1,422
1,648
1,994
1,715
1,611
2,118
2,010
2,087
1,973
1,852
1,238
1,076
1,974
1,613
1,765
1,259
1,226
7-19
483
481
557
345
253
280
474
519
495
382
414
241
254
451
3,580
3,110
3,302
3,081
1,905
2,129
2,551
2,060
1,864
2,398
2,484
2,606
2,468
2,234
1,656
1,317
2,228
2,064
1,189
924
1,103
555
1,103
860
763
669
875
926
458
242
480
509
356
189
67
87
288
272
269
353
462
503
661
778
1,037
1,084
607
438
357
285
334
353
168
174
1,492.
1,196
1,372
908
1,565
1,363
1,424
1,447
1,912
2,010
1,065
680
837
794
690
542
235
261
10,234
8,346
9,074
7,648
6,394
6,407
6,488
5,757
5,851
6,663
5,745
4,275
4,059
3,854
3,390
2,425
1,120
1,491
I/
—  Includes both domestic and foreign skins; excludes kips for side leather.


Source:  Tanners' Council of America,  Inc.

-------
          Table A-9.     All sheep and lamb leathers,  1955 - 1972
                                      (1, 000 skins)

Federal
Inspected
Slauahter
Net
Imports
Input
Total
Shear-
linRS
All
Other
Excluding Shearlings
Produc-
tion
Deliv-
eries .
ANNUAL TOTALS
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
14,384
14,228
13,234
12,397
13,466
14,036
15,036
14,692
13,955
12,947
11,710
11,553
11,516
10.888
10,070
10,010
10,256
9,903
19,247
25,825
20,487
22,404
29,865
23,475
23,288
23,461
21,555
25,952
25,167
23,464
15,005
25,580
15,513
13,507
12,073
10,470
26,597
27,119
25,517
27,368
32,731
30,905
31,898
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
2,437
2,561
1,987
1,892
2,307
2,179
2,200
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
24,160
24,558
23,530
25,476
30,424
28,726
29,698
27,622
30,980
28,753
27,578
27,176
25,669
29,679
23,444
21,310
20,008
18,641
24,006
24,713
23,527
25,550
29,753
28,321
29,627
27,697
21,292
28,908
27,786
26,897
26,180
29,328
23,297
21,868
19,895
18,781
24,568
24,793
23,350
25,874
29,859
28,060
29,959
27,814
31,485
28,981
27,896
26,702
26,461
29,241
23,106
22,177
19,870
18,731
Source:  Tanners' Council of America, Inc.

-------
       Table A-10.
All goat and kid skins and leather,  1955 - 1972
                (1, 000 skins)

Net
Imports
Raw Skins
Wettings
Your
7.
Production
Deliveries
Leather
Exports Imports
(1,000 Sq. Ft.)
                                   ANNUAL TOTALS
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
28,504
27,004
20,292
19,550
25,414
19,254
14,740
14,370
14,774
12,882
14,079
9,882
6,731
4,914
4,708
2,597
1,532
2,995
26,879
24,498
22,211
19,882
22,827
17,973
14,572
14,101
14,660
13,172 .
15,475
12,061
8,185
6,457
5,727
3,675
2,417
2,947


















26,109
25,103
22,336
19,992
22,797
18, 83^
14,865
14,213
14,182
12,874
14,557
13,372
8,456
6,764
5,856
3,979
3,148
3,522
27,005
23,973
22,265
21,264
22,781
18,114
15,162
15,266
14,423
13,619
15,228
13,090
8,856
7,031
6,196
3,938
3,659
4,022
4,348
4,124
4,013
3,713
4,942
5,150
6,309
3,385
7,442
6,219
8,456
4,974
2,541
3,083
2,051
1,837
2,750
4,766
7,133
7,739
9,666
9,574
14,789
12,114
13,761
12,404
12,080
11,348
16,096
19,952
17,082
15,219
13,980
17,437
17,330
26,961
Source: Tanners' Council of America,  Inc.

-------
Table A-11.   U.  S.  cattlehide exports by countries  (1, 000 pieces)

Country of Destination
Canada
Mexico
Honduras
Colombia
Venezuela
Salvador
Chile
Peru
Other Latin America
West Germany
Sweden
United Kingdom
Netherlands
Denmark
Belgium
Norway
Finland
France
Switzerland
Italy
Portugal
Greece
Spain
Austria
Bulgaria
Hungary
E. Germany
Poland
Yugoslavia
U.S.S.R.
Rumania
Czechoslovakia
Other Europe
Tunisia
Iraq
Turkey
Israel
Japan
Australia
Hong Kong
Philippine Republic
Korea Republic
China Taiwan
Iran
Other Asia
Other
Total U.S.

1965 1966
1967
676 1,720 850
1,217 j 803
-
-
47
12
-
-
16
1,235
54
606
1,705
16
84
24
27
126
95
624
17
37
363
48
-
97
-
227
112
922
241
222
9
-
13
351
134
3,777
6
20
57
34
40
-
12
6
13,309
2
32
2
-
-
5
8
775
55
504
1,150
24
85
30
25
234
29
710
14
74
368
45
_
42
-
349
269
1,230
474
257
18
4
4
440
86
3,994
7
69
57
142
28
3
2
20
4,189
1,551
12
4
1
_
-
-
1
575
30
99
323
7
29
11
3
207
4
57
15
18
271
42
_
4
-
218
311
1,836
145
191
6
14
-
375
98
4,197
3
3
84
170
72
1
7
8
11,853
i
1968 1969
1,030
I 1,540
21
1
5
-
-
-
-
790
33
289
594
3
22
15
24
297
14
203
17
17
317
55
_
25
-
243
147
383
76
297
9
39
-
109
113
5,259
2
5
88
333
104
-
20
1
12,840
1,013
1,721
8
1
4
_
.
-
-
760
37
328
537
4
37
17
21
263
21
431
11
33
262
40
m
5
6
274
272
1,223
379
312
-
9
.
124
127
6,006
4
25
64
257
125
1
10
6
14,778

1970
761
2,046
10
-
1
_
-
-
2
714
25
166
332
_
25
7
20
287
12
335
5
29
260
59
_
36
25
152
459
1,492
449
499
-
15
_
113
109
6,206
2
33
63
271
188
_
13
1
15,222

1971
883
2,195
4
1
13
_
-
^
14
576
7
171
306
9
29
4
13
544
18
62
5
8
842
11
5
130
20
472
229
1,252
571
694
-
5
_
69
107
6,010
3
29
43
357
247
„
3
-
15,963

. 1972
894
1,776
-
_
12
_
261
20
27
588
6
189
306
_
78
_
13
753
3
179
42
19
758
23
65
93
—
545
210
523
1,201
852
18
20
_
42
117
7,246
-
64
10
414
215
_
2
5
17,589
Argentine exports 6,811 8,125 8,658 8,302 8,265 7,506 3,363 1 344
Source: Tanners' Council of America, Inc.

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           Table A-12.  Wet process leather tanning plants
                        by size and location
x-s
New England
Delaware
Maine
Massachusetts
New Hampshire
Vermont

Mid Atlantic
New York
New Jersey 1
Pennsylvania
Maryland
T
South
Georgia
Florida
Kentucky
North Carolina
Tennessee
West Virginia
Virginia
Texas

Mid West
Illinois 4
Indiana
Iowa
Michigan
Minne s ota
Missouri
Ohio
Wisconsin
4
West Coast
California
Oregon 1
1
Total 6
S

-
4
23
4
-
31

17
5
7
1
30

1
1
2
1
3
1
1
1
11

5
. 2
1
-
1
2
2
9
22

3 •
1
4
98
M

1
_
11
3
1
16

6
4
1
-
IT

-
-
-
i
3
-
-
-
4

1
-
1
1
-
-
1
3
7

4
1
5
43
L

-
3
3
2
-
8

2
2
4
-
~~8

-
-
1
- .
1
2
1
-
"5

1
-
-
2
-
-
-
2
5

2
-
2
28
X-L Total

1
7
37 I/
9
1
55

25 U
12
12
1
so"

1
1
3
2
7
3
2
1
20"

11
2
2
3
1 2
1 3
3
. 3 17
5 43

9
3
12
5 180
_  28-30 plants in Boston Metropolitan area
_' 20 plants located in Fulton County

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SELECTED REFERENCES

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                              Selected References
 1.   USDI,  Federal Water Pollution Control Administration,  The Cost of
     Clear  Water ."Volume III Industrial Waste Profile No. 7 -- Leather
     Tanning and Finishing, " September,  1967.

 2.   The President's Council on Environmental Quality,  The Leather
     Industry--a Stud, of the Impact of Pollution Control Costs, prepared
     by  Urban Systems  Research and Engineering,  Inc. ,  December,  1971.

 3.   U.  S.  Environmental Protection Agency, Development Document for
     Effluent Limitation Guidelines and Standards of Performance -  Draft.
     Prepared by Stanley Consultants,  Inc. ,  June,  1973.

 4.   USDC,  Census of Manufactures  1967 and Earlier, Bureau of the Census,
     U.  S.  Government Printing Office, Washington,  D.  C.,  1971.

 5.   USDC,  Annual Survey of Manufacture rs,  1971 and earlier,  Bureau of
     the Census, Washington, D. C. ,  1972.

 6.   Tanners' Council of America, "Membership Bulletin Leather Industry
     Statistics, 1955-1972," Trade Survey Bureau, Tanners' Council of
     America  Inc.,  New York,  New York,  1973.

 7.   Poats,  Fred.   "Cattle Hides and Shoe Prices,"   Marketing and Trans-
     portation Situation, Marketing Economic Division,  USDA, Washington,
     D.  C. , August",  1972.

 8.   Baker, Allen  J. , "Hides and Skins, " Livestock Marketing Situation,
     Economic  Research Service,  USDA,  Washington,  D. C. , November,
     1971.

 9.   Thompson, John W. , "Marketing Spreads for  Leather Products, "
     Marketing and Transportation Situation, Marketing Economic Division,
     Economic  Research Service,  USDA,  Washington,  D. C. , February,
     1965.

10.   Thompson, John W. and Poats,  Frederick J. , "Economics of Segment-
     ing Cattle  Hides,"  Marketing Economics  Division,  Economic Research
     Service, USDA, Washington,  D.  C. ,  1965.

11.   Poats,  Frederick J. and Thompson,  John W. , "Alternative Markets
     for Cattle  Hide  Trim,"  Marketing Economics Division, Economic
     Research Service,  USDA,  Washington, D. C. , February, 1965.

12.   New England Tanners Club, " Leather Facts, "  Peabody, Mass., 1972.

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 3IBUCGFAPHIC DATA
 SHE? T
EPA-230/l-73-Qlfa
4. 1 I.It 1T.J >ubl 1C 1C
     '-"conomi.c Analysis of Proposed Effluent Guidelines
     Leather  Tanning and Finishing Industry
7. Author(s)
             Donald J. Wissman
                                         3. Recipient's Accession No.
                                         5. Kepotc Due
                                           September,  i 973
                                                                    6.
                                                                    8. Pcriorming Organization Kept.
                                                                      No.
9- Performing Organization, Name and Address
    Development Planning and Research Associates,  Inc.
    P.  O. Box 727, 200 Research Drive
    Manhattan, Kansas  66502
                                         10. Project/Task/ *ork Unit No.
                                           Task Order No. 8
                                         11. Contract/Grant No.
                                         Contract No.  68-01-153
12. Sponsoring Organization N'ame and Address
    Environmental Protection Agency
    Waterside Mall
    4th and M Street, S. W.
    Washington.  D. C.  20460	
                                         13. Type ot Report & Period
                                           Covered
                                             Final Report
                                         14.
15. Supplementary Notes
16. Abstracts
   The  economic impacts  of proposed effluent guidelines  on leather tanning and finishing
   industry are assessed.  The analysis includes classification and description of types
   of firms and plants; financial profiles, investments and operating costs, and profits
   for selected model plants; evaluation of pricing mechanisms and price relationships
   and description of analytical procedures employed.  The financial impact of proposed
   effluent treatment technology was assessed in terms of prices,  industry returns,
   volume of production, employment,  community impact and international trade.

   Imposition of the BPT level controls (1977) will have serious impact on the industry
   if control costs are as  stated by EPA.  An estimated 18 of the  176 wet processing
   tanning plants will be forced to  close assuming that small plants with less  than
   5G, OOP GPD of wastewater and disposing into municipal treatment systems  will be
17. Key Vor-s anj Dccurv-'nt Arutysis.  17o. Descriptors

   Water pollution, economic analysis,  leather tanning, tanneries,  wet process
   tanneries, chromium, rawhides, finished leather, pollution, indust rial wastes,
   economic demand,  supply, prices, variable costs,  fixed costs,  fixed investment,
   discounted cash flow.
7b. Idcmifiers/Open-Ended Terms
                             02  Agriculture,  B-Agriculture  economics
                             05  Behavioral and Social Sciences, C-economics
7c. OiMTl F:eM/Or up
                                                                                 • j .  l  t ,. •
                                                                                   115
                                                        20. *•(.,. ,mty > i.i- .-. ii',.
                                                           )'_, c
                                                             • \.'-l '  • II II II

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16.  Abstracts (continued)

exempt from pretreatment requirements (according to EPA approxi-
mately 70 percent of the small plants discharge into municipal facil-
ities and 60 percent of the larger plants).  This represents 2. 6 per-
cent of the productive capacity of the industry and employment for
875 persons.  If the municipal exemption is eliminated,  it will mean
the loss of 2 1 plants  representing 2. 8 percent of the industry capacity
and an estimated 950 jobs.

Price  increase as a result of BPT Standards is  estimated at 0.9 percent
with an additional price increase of  . 3 percent as the  result of BAT
Standards.  No plant closures are projected for BAT Standards.

The loss of production will impact the leather consuming industries,
principally  shoe production.  The lower impact will result in an esti-
mated loss  of tanned leather for 4.6 million pair of shoes and commensurate
quantities of other leather goods and an additional loss of employment esti-
mated at 2, 900 jobs.  Without the municipal exemption,  the resulting loss
in the  leather consuming industry is estimated at 5.0  million pair of shoes
and other leather goods and 3,200 jobs.

The proposed guidelines will  adversely affect the balance of payment
situation with an estimated net loss of $22  million with the  municipal
exemption and $24 without.

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