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 ------- 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 . ------- 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 ------- 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 ------- 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. ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 $1 million of sales account for 64 percent of the companies but only 16 percent of the sales. 3. Age of Plant and Level of Technology The leather tanning and finishing industry can be described as having basically old plants in terms of actual brick and mortar with slightly over 70 percent of the plants 50 years of age or older. From the member- ship records of the Tanners' Council, the age of plants, tanning and/or finishing leather, converter excluded, is as follows: Plant Units Less than 10 years 3 10-15 years 5 15-20 years 11 20-30 years 17 30-50 years 68 over 50 years 257 Total 361 Although the majority of industry units are in old buildings, a substantial number of plants have been rebuilt, modernized and re-equipped at a cumulative cost approaching the capital investment required for new plants. The Urban Systems and Engineering report (2 ) categorizes the level of technology for existing plants as older, prevalent, and new, i.e., 1950, 1963 and 1967 vintaj : respectively. II-5 ------- Table II-2. Percent of value of shipments accounted for by the largest companies in the leather tanning and finishing industry, 1935-1970 Year Conomts1 (IHMIM) VUvtofinftBUyUnpmnts' Tom (mtlita toll*!) Pvctnt accounted for By-1 4 larftSt companies 1 Iviesl companies 20 lettest companies SO Hips! companies PrMary product special- nation iltn' (percent) Cowate rail* fpucenl) 954.. 1947... 1915... ,M) i 474 sao 323 500 '93 870. 94O. 7SS. 732. 706. 1,070. HA, 100 100 100 too Source: Annual Survey of Manufactures. Table II-3. Distribution of companies and plants by dollar volume, 1972 Company Size ($ 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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. ------- 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 ------- 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. ------- 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 ------- 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. ------- 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 ------- 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?. ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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. ------- 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 ------- 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. ------- 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 ------- 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 ------- 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-; ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 ------- (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 resultat 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. ------- 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. ------- 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. ------- 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. ------- 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. ------- 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. ------- 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 ------- SELECTED REFERENCES ------- 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. ------- 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 ------- 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. ------- |