EPA-230/1-73-023
SEPTEMBER 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
PULP, PAPER, AND PAPERBOARD
INDUSTRY
( SELECTED SEGMENTS )
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 2046O
s
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ECONOMIC ANALYSIS OF
PROPOSED EFFLUENT GUIDELINES
PULP, PAPER AND PAPERBOARD INDUSTRY
(SELECTED SEGMENTS)
DECEMBER 1973
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D.C. 20460
JI.--.C'. v-, '-•-•-si en V
•*• i;^-jj ;I'.C^;T D-r-iv*
Chicago, Illinois 60606
-------
This report has been reviewed by the Office
of Planning and Evaluation, EPA, and approved
for publication. Approval does 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 en-
dorsement or recommendation for use.
-------
PREFACE
The attached document is a study prepared by the Office
of Planning and Evaluation of the Environmental Protection
Agency ("EPA"), with the assistance of Arthur D. Little, Inc.
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 estab-
lished 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 proposed regulations under
sections 304(b) and 306. The Development Document surveys exist-
ing 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 techno-
logies. The attached document supplements this analysis by
estimating the broader economic effects which might result from
the required application of various control methods and techno-
logies. This study investigates the effect of alternative
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 is a revision of a report entitled "Economic Impact
of Anticipated Paper Industry Pollution-Abatement Costs." The
aforementioned report included all segments of the pulp and paper
industry, and was submitted in fulfillment of contract no. 73977
for the Council on Environmental Quality by Arthur D. Little, Inc.;
Cambridge, Massachusetts. Work was completed as of November 1971.
The revision was completed as of December 1973.
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11
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 con-
tained 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 promulgation 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 EPA1s views regarding the subject industry.
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TABLE OF CONTENTS
I. INTRODUCTION
A. Introduction 1-1
B. Subcategorization and Definition 1-2
II. INDUSTRY SEGMENTS
A. Mill Characteristics II-l
B. Employment 11-2
III. FINANCIAL
A. Perspective III-l
B. Current Status III-l
C. Pollution Control Expenditures III-4
IV. PRICES
A. Projected Industry Supply and
Demand IV-1
B. Projected Segment Supply and
Demand IV- 3
C. Exports/Imports IV-6
D. Prices IV-7
V. POLLUTION CONTROL COSTS V-l
VI. METHODOLOGY VI-1
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TABLE OF CONTENTS (cont.)
Page
VII. ECONOMIC IMPACT
A. Price Effects VII-1
B. Production Effects VII-2
C. Employment/Community Effects VII-4
D. Balance of Payment Effects VII-6
E. Growth Effects VII-6
VIII. LIMITS OF THE ANALYSIS
A. Critical Assumptions VIII-1
APPENDICES
A. Proposed Effluent Guidelines and
Technologies
B-D. Economic Impact of Anticipated Paper
Industry Pollution - Abatement Costs,
1971, Arthur D. Little, Inc.
Part I - Executive Summary
Part II - Industry Structure and
Business Outlook
Part III - Economic Analysis
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1-1
I. INTRODUCTION
A. Introduction
In accordance with the Federal Water Pollution Control
Act Amendments of 1972, effluent limitations have been proposed
for the unbleached kraft, neutral sulfite semi-chemical (NSSC),
paperboard from waste paper, and builder1s paper and roofing
felt segments of the pulp, paper and paperboard industry. The
effluent limitations proposed for these segments are consistent
with three levels of technology: proposed best practicable
technology (BPT) currently available, to be met by 1977;
proposed best available technology (BAT) economically achievable,
to be met by 1983; and proposed new source performance standards
(NSPS) to be applied to all new facilities (which discharge
directly to navigable waters) constructed after the promulgation
of these guidelines. The purpose of this report is to assess
the potential economic impact of these guidelines on the in-
dustry segments they affect.
This economic impact analysis is essentially an update
of a 1971 Arthur D. Little, Inc. study, Economic Impact of
Anticipated Paper Industry Pollution-Abatement Costs, conducted
for the Council on Environmental Quality. The updated assessment
was made by the Office of Planning and Evaluation staff, with
assistance from Arthur D. Little, Inc. The 1971 impact projec-
tions were revised to reflect the actual proposed guidelines and
associated costs, the current industry segment status and current
projections regarding capacity, demand, etc. The 1971 Arthur D.
Little, Inc. study is contained in Appendices B, C, and D.
The economic impact assessment has focused upon the
following potential effects of increased capital and operating
costs for water pollution abatement:
- Price Effects
- Production Effects
- Employment Effects
- Community Effects
- Balance of Payment Effects
- Growth Effects
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1-2
B. Subcategorization and Definition
For purposes of establishing effluent limitations, the
industry segments under consideration have been classified under
point source categories and further subcategorized as follows:
Point Source Category Subcategory
Pulp and Paper - Unbleached Kraft
" - Ammonia Base Neutral Sulfite
Semi-Chemical (NSSC)
" - Sodium Base Neutral Sulfite Semi-
Chemical (NSSC)
" - Unbleached Kraft/NSSC (Cross-
recovery)
" - Paperboard from Waste Paper
Builder's Paper and Board - Builder's Paper and Roofing Felt
These subcategories are defined as shown below:
o Unbleached Kraft means the production of pulp without
bleaching by a "full cook" process, utilizing a highly
alkaline sodium hydroxide and sodium sulfide cooking
liquor. This pulp is used principally to manufacture
linerboard, the smooth facing of corrugated boxes, but is
also utilized for other products such as grocery sacks.
o Ammonia Base Neutral Sulfite Semi-Chemical (NSSC) means
the production of pulp without bleaching, using a neutral
sulfite cooking liquor having an ammonia base. Mechanical
fiberizing follows the cooking stage, and the pulp is used
to manufacture essentially the same products as sodium
base NSSC.
o Sodium Base Neutral Sulfite Semi-Chemical (NSSC) means the
production of pulp without bleaching utilizing a neutral
sulfite cooking liquor having a sodium base. Mechanical
fiberizing follows the cooking stage, and the principal
product made from this pulp is the corrugating medium or
inner layer in the corrugated box "sandwich." It is also
a component of other products which do not require
maximum tearing resistance or folding endurance.
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1-3
o Unbleached Kraft—NSSC (Cross Recovery) means the
production of unbleached kraft and sodium base NSSC pulps
wherein the spent NSSC liquor is recovered within the un-
bleached kraft recovery process. The products made are
the same as outlined above for the unbleached kraft and
NSSC subcategories.
o Paperboard From Waste Paper means the production of paper-
board products from a wide variety of waste papers such as
corrugated boxes, box board, and newspapers, without bleach-
ing and without wood pulping. Small quantities of virgin
wood pulp (up to 20 percent of total furnish) may be ad-
mixed with the waste paper furnish . Paperboard from
waste paper is most familiar in a wide variety of commercial
packaging which does require a folding capability, such as
bottle carriers. "Combination Board" is the Bureau of
Census term for paperboard from waste paper which refers
to the fact that although waste paper is the primary furnish,
a small percentage of virgin pulp is frequently used.
o Builder's Paper and Roofing Felt means the production
of heavy papers used in the construction industry from
cellulose fibers derived from waste paper, wood flour
and saw dust, wood chips, and rags without bleaching or
chemical pulping.
Building papers are generally characterized as saturating
papers, flooring paper, and deadening papers which are used
in the construction and automotive industries. They differ
from unstructured roofing felts only in thickness and
possible chemical additives added to the process in order
to achieve a specific property, i.e., strength, density,
wet strength, water repellent capability, or similar
physical qualities.
The function of dry roofing felt is to provide a strong,
highly absorbent material as support and backing for the
bituminous coatings necessary for the water-proofing charac-
teristics essential to the finished product.
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II-l
II. INDUSTRY SEGMENTS
A. Mill Characteristcs
1. Size and Number
In general, mill size is a key indicator of economic
viability, with the smaller mills in each product sector being
typically less profitable. Table II-l presents the estimated
number of mills and their approximate size distribution in terms
of three size categories for each of the subcategories.
TABLE II-l
Size Distribution of Mills
Subcategories
Unbleached Kraft
NSSC only
Estimated
Number
Of Mills
27
16*
UK-NSSC (Cross recovery)10
Paperboard from Waste- 135
paper
Builders Paper
and Roofing Felt
56
Size
Range
200-599 tons/day
600-999
1000-1875
100-199
200-399
400-700
600-999
1000-1499
1500-2100
15-99
100-299
300-1000
22-49
50-99
100-325
Size
Distribution
20%
50%
30%
20%
65%
15%
30%
30%
40%
55%
35%
10%
30%
40%
30%
Source: Arthur D. Little and Wapora, Inc. Estimates
*14 Sodium base and 2 Ammonia base mills.
One ammonia base mill is scheduled to close due to reasons
unrelated to pollution control.
Although 14 sodium base mills are indicated here, there exist
six additional sodium base mills. Three of these mills have
not been included here because they are in the building board
category (timber). The other three utilize bleaching processes
and therefore are not included in this subcategory.
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II-2
2. Geographic Distribution
Unbleached kraft mills are primarily located in
the South East and Far West regions, with combined unbleached
kraft/NSSC operations concentrated in the South East. NSSC
mills, more broadly distributed than unbleached kraft mills,
are located in the North Central, South Eastern, and North
Eastern regions. Paperboard from wastepaper mills are evenly
distributed close to population centers, their source of waste
paper supply, with some concentration in the North East and
North Central regions. As in the case of paperboard from
waste paper, builder's paper mills are distribution over most
of the United States and are primarily located in or near
metropolitan areas. The geographic distribution of the
unbleached kraft and NSSC mills, and that of combined
unbleached kraft/NSSC operations is shown in Figure II-l.
Figures II-2 and II-3 illustrate the distribution of the
paperboard from waste paper and builder's paper mills.
B. Employment
Current employment is presented in Table II-2. Total
employment in these segments represents about 20% of
the employment in the industry.
Segment
Unbleached Kraft
Board
Paper
TABLE II-2
Current Employment
Annual Tons/Employee
753
247
NSSC
Paperboard from Waste Paper
Builder's Paper and Roofing
Felt
698
300 *
138
Approximate
Number of
Employees
18,000
16,000
5,500
37,000
12,000
Total
88,500
Source: Arthur D. Little, Inc. and Environmental Protection
Agency estimates.
*Revised from 1971 estimate.
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FIGURE II-l
DISTRIBUTION OF UNBLFACHFTi KRAFT, NSSC, AND WAFT-IJFSC MTI.T.S IN TIIF U.S. (1973)
'--blotched Krcft
Kraft-NSSC
Source: Wapora, Inc., Effluent Guidelines Deve
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FIGURE II-2
DISTRIBUTION OF WASTE PAPERBOARD MILLS IN THE U.S. (1973)
Source: 'Wapora, Inc. Effluent Guidelines Development Document
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FIGURE II-3
DISTRIBUTION OF BUILDING PAPER AND ROOFING FELT
MILLS IN THE U.S. (1973)
Source: Wapora, Inc. Effluent Guidelines Development Document
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III-l
III. FINANCIAL
A. Perspective
The pulp and paper industry is subject to the classic
cycles of a capital intensive industry -- expansion and over
capacity followed by declining profits and the closing of
marginal facilities. The supply and demand readjustments
that follow lead to price increases and improved profitability
to support further expansion. Several relevant parameters
illustrating this process are shown in Figures 1 and 2.
Examination of Figure 1 reveals low operating ratios,
weak prices, and low capital expenditures during the first
half of the 1960's. As operating rates and prices improved
over the second half of the decade, capital expenditures in-
creased. Because excess capacity had generally been main-
tained throughout the sixties, combined industry prices for
pulp,paper and paperboard rose an average of only 1% annually.
Due to increasing costs and sluggish prices, the industry's
cash flow dropped from 13% of net sales in 1960 to less than
9% in 1971. Furthermore, much of the expansion during the
'60's was financed through debt, with the industry debt to
asset ratio increasing from 29% to over 50%.
Thus, the pulp and paper industry entered the 1970's
with excess production capacity, high debt utilization, the
lowest profits since the depression and declining cash flow.
With decreased demand in 1970 and increasing costs in 1971,
it is no surprise that these were difficult.years for the
industry, and that the rate of growth of capacity decreased.
However, many inefficient mills were closed during 1970 and
1971, helping to raise the average level of efficiency for
the industry.
B. Current Status
The dramatic acceleration of growth of the economy in
1972 led to record sales of $23 billions, and to record output
in the first quarter of 1973. Operating rates have jumped to
an average of 97% for paper, 98% for paperboard, and 87% for
construction paper and board and wet machine board (demand for
construction products is seasonal).
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20 X 20 TO THE INCH 46 1242
7 X 10 INCHES MAOE IN U fl A
KEUFFEL a ESSER CO.
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20 X 20 TO THE INCH 46 1242
' * ' > ! N' I I S MAutlfiUSA
K L U F- F t L 0- ESSER CO.
U.S. Paper Industry Pre-Tax Income As Percent of Sales 1960-1972
-3":
rrj
12
11
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tel C
om ?ar
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itxrt:
rFFrhrtrr
1960
1962
1964
1966
1968
1970
1972
Source:
American Paper Institute
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Ill- 4
This tight supply/demand has led to price increases which
have yielded a ratio of net profit after taxes to sales of
3.8% in 1972, compared to 2.3% in 1971. Earnings are expected
to increase 10% in 1973 over 1972 earnings.
The segments under consideration have followed general
industry trends regarding sales, profitability and operating
rates. The supply/demand balance has become tight in all
cases, especially for the unbleached kraft segment.
C. Pollution Control Expenditures
The National Council of the Paper Industry for Air
and Steam Improvement, Inc has estimated that the industry's
expenditures for pollution abatement will reach $2 billion
by the end of 1973 (Table III-l). Another $433 million is
expected to be committed in 1974. The allocation of these
expenditures through 1974 is expected to be, roughly, 62% for
water quality protection, 36% for air quality protection and
2% for solid waste disposal. The 1971 Arthur D. Little study
estimated (assuming 95% suspended solids removal and 90% BOD
reduction for all paper mills) that by 1976, total capital
investment by the industry will reach $4.1 billion.
Table IH-1
Environmental Quality Protection Capital
Expenditures-1971; Pulp and Paper Industry
(Million Dollars)
Water Air Solid Waste Disposal Total
Through 1971 $690 $386 $18.5 $1095
Planned 1972 274 132 8 414
Planned 1973 257 204 16 477
Planned 1974 256 162 15 433
TOTAL thru 1974 $1497 $884 $57.5 $2419
Source: National Council of the Paper Industry for Air and
Stream Improvement, Inc. Special Report No. 73-01,
January 1973
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IV-1
IV. PRICES
A. Projected Industry Supply and Demand
Total paper and paperboard consumption has been closely
correlated with real GNP as shown in Figure 1. This should
remain true at least through 1976, because of the wide spread
use of paper and paperboard products throughout the economy.
It is expected, therefore, that the long run average annual
growth rate in demand for paper and paperboard products will
be about 3.5-4.5%. The average annual growth rate in demand
for the 1970's, however, may decrease to about 3% due to
supply constraints and rising prices.
Additions to capacity in the pulp and paper industry
generally require a two to three year lead time. Thus when
operating rates are high, capacity is generally slow to re-
spond to rapid increases in demand. Over the past year,
however, the industry has been able to expand capacity quickly
by speeding machine improvements, delaying the closure of
mills scheduled for shutdown, and by increasing the number
of operating days. It is unlikely that capacity can be further
increased by these methods, and it is uncertain as to whether
this additional capacity can be sustained.
Planned expansion through 1976 will result in an
average annual growth of 2.4% — a decline from the 18-year
average of 3.8% Projections for the three major product
grades are shown in Table IV-1. The rates of expansion beyond
1976 are more uncertain. Difficulties in raising capital,
increased construction costs, scarcity of mill sites, and
increased emphasis on improving return on investment may
slow expansion.
Thus the supply/demand balance is expected to be
tight through 1976, and perhaps the remainder of the seventies.
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M.1C 20 X 20 TO THE INCH 46 1242
C 7 X 10 INCHES
IAOE IN U. S. A.
Paper & Paperboard Consumption Per Billion $ Real GNP
1960
1962
American Paper Institute
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IV-3
Table IV-1
Growth Trends In Paper and Paperboard
Capacity
(Average Annual Growth)
GRADES 1956-1973 1974-76*
Total All Grades
Total Paper
Total Paperboard
Total Construction Paper
& Board & Wet Machine Board
3.8%
3.9
3.9
3.1
2.4%
2.1
2.9
1.4
*These estimates represent presently known commitments for
1976, and do not necessarily represent final expansion plans.
Source: American Paper Institute, Capacity 1972-1975,
Paper, Paperboard, Wood Pulp
B. Projected Segment Supply and Demand
Projections of capacity expansion for the segments under
consideration through 1976 are presented in Table IV-2. The
paperboard from waste paper segment is the only segment for
which projected growth in excess of its recent (1956-73)
average growth rate is expected. The builder1s paper and
roofing felt segment is the only segment in which projected
growth is very low — this segment is very sensitive to con-
struction levels and expansion plans are likely to reflect
projected construction activity.
The current tight supply/demand balance and current prices
may not be sufficient to induce major commitments of capital
as in the past. Increased industry attention to return on
investment (ROI) criteria may result in the delay of mill con-
struction until prices are projected to rise sufficiently
to realize a 20% before-tax ROI.
This may be an important factor which helped lead to
the moderate growth expected in 1974 and 1975. Table IV-3
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IV-4
TABLE IV-2
Projected Year End Capacity 1973-76
(Thousands of short tons)
Segment^
Unbleached Kraft
(linerboard)
NSSC
(paper board)
Paperboard from
Wastepaper
Builder's Paper
1973
8,651
1974
1975
Average
Annual
1976* Growth11
13,117 13,343 14,053 14,079 2.4%
4,363 4,520
5,008
4,895 3.9%
8,985 9,523 9,759 4.1%
2,237 2,233 2,241 2,247
.2%
* These estimates represent presently known commitments
for 1976, and do not necessarily represent final expansion
plans
Source: American Paper Institute, Capacity 1972-1975 Paper,
Paperboard, Wood Pulp
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IV-5
TABLE IV-3
Product Price Required For Plant Investment*
Capital Cost/Ton Output
Construction Cost/daily ton (1972)
Size of Plant (daily tonnage)
Total construction cost
Annual Production (x350)
Capital Cost/Ton Output
Unbleached Kraft
$100,000
x 1000
$100,000,000
4 350,000
$286
NSSC
$70,000
x 250
$17,500,000
87,500
$200
Required Profit Per Ton for 20%
Pre-tax Return on Capital
(Capital Cost/Ton Output)x.2
1972 Profit Before Taxes
Year-end Price
1972 Pre-tax return on Sale
Profit Before Tax/Ton
$57.20
$130.
x.12
$15.60
$40
$120
x.08
$9.60
Required Price Increase
Required Profit-Current Profit
$41.60
$30.40
Approximate % Price Increase
Required for Plant Investment
Required Price Increase + Current Price 32%
Approximate Required Price $170
25%
$150
*Prior to consideration of any additional costs, including
pollution control costs.
Source: Environmental Protection Agency estimates based upon
financial data obtained from Arthur D. Little, Inc.
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IV-6
presents models of the investment decision for unbleached
kraft (linerboard) and NSSC operations in which ROI is the
dominant factor. The models yield the approximate required
price increases (over 1972 prices) which would result in a
20% before-tax ROI. The results indicate that if a 20% ROI
was required, then substantial price increases must have
been projected in order to justify expansion.
Difficulty in raising capital, increased construction
costs and emphasis on profitability could result in a con-
tinued tight supply/demand balance throughout the remainder
of the 1970's.
C. Exports/Imports
Export trade has accounted for approximately 5% of total
industry output tonnage (nearly 3/4 billion dollars) and
consists primarily of wood pulp and linerboard. Approximately
43% of these exports have been sent to European markets. North
American producers have had a cost advantage over foreign
producers because of significantly lower wood costs on this
continent, and because wood represents a large proportion
of total cost of the U.S. primary exports. However, a relative
12% cost differential effective in 1980, created by the
European Economic Community tariff, may eliminate any
advantage.
The unbleached kraft segment is the only segment under
consideration which has significant exports. These exports
have comprised about 10% of the U.S. linerboard production,
and have provided approximately 50% of the world-wide liner
board supply. However, exports of linerboard have declined
recently due to the tight supply/demand balance experienced
in 1973.
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IV-7
D. Prices
As noted in the 1971 Arthur D. Little, Inc. study,
in the short run, demand for most of the industry's products
is inelastic, or relatively insensitive to price changes. Few
substitute products compete directly with paper, the key ex-
ceptions being plastics in certain packaging markets, wood
products in certain construction applications, and textiles
in many tissue paper markets. Also, even where substitute
items exist it takes some time and capital investment to
allow the intermediate processors or converters to change
their equipment and procedures to adapt to substitute
materials. Finally, direct or indirect expenditures on paper
products represent a small portion of the consumer's total
disposable personal income.
Therefore with a tight supply/demand balance, prices
(in the absence of price controls) would be expected to rise.
This, in turn, would be expected to lead to increased profit-
ability and incentives to expand capacity. Price increases
for the builder's paper and roofing felt segment, however,
may be moderated if a recession and construction slow down
occur.
Table IV-4 shows recent prices for the segments
under consideration.
TABLE IV-4
Prices 1971-72
Year End
Segment 1971 Prices 1972 Prices % Increase
UK (linerboard) $120 $130 8%
NSSC 104 120 15
Waste 110 150 36
Builders (Shingle) 65 80 23
Source: Arthur D. Little, Inc.
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V-l
V. POLLUTION CONTROL COSTS
The treatment costs associated with the proposed 1977,
1983, and new source effluent standards will be discussed in
this chapter. Appendix A lists the applicable technologies
and the proposed guidelines for each subcategory. The proposed
effluent limitations guidelines, the recommended technologies,
and the costs of attaining the proposed standards are fully
described in the appropriate Effluent Guidelines Development
Documents.
The costs associated with the proposed guidelines were
developed for one model plant of average size for each of the
industry subcategories. In each case it should be noted that
treatment costs generally increase for smaller operations.
The production capacities of the model plants were as follows:
Production Capacity
Point Source Category Tons/Day
Pulp and Paper
Unbleached Kraft (linerboard) 1000
Unbleached Kraft/NSSC (with cross recovery) 1000
NSSC-Sodium Base 250*
NSSC-Ammonia Base 250*
Paperboard From Waste Paper 100
Builder's Paper and Board
Builders Paper and Roofing Felt 100
*includes use of 50 TPD waste paper
The cost functions used were for conventional treatment methods
based on industry experience with full scale installations and
equipment suppliers estimates. For more advanced processes,
where full scale installations are few or nonexistent, the cost
estimates were largely based on experience with pilot installations
and on estimates from and discussions with equipment suppliers.
The results are presented in Tables V-l and V-2.
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V-2
It should be recognized that actual treatment costs vary
largely from mill to mill depending upon the design and operation
of the production facilities and local conditions. Furthermore,
effluent treatment costs reported by the industry vary greatly
from one installation to another, depending upon bookkeeping
procedures. The estimates of effluent volumes and treatment
methods incorporated in the models is intended to be descriptive
of the segments of the industry that they cover. However, the
industry is extremely heterogeneous in that almost every installa-
tion has some uniqueness which could be of critical importance in
assessing effluent treatment problems and their associated costs.
Finally, it was assumed for each of the six models that no
pollution control facilities were in place. However, the existence
of substantial in-place treatment facilities (Table V-3) and the
availability of municipal treatment for many mills would suggest
lower overall additional costs than those indicated by the cost
models. For example, the majority of NSSC (sodium base) mills
either have chemical recovery systems or incinerate waste properly,
thereby reducing additional PBT annual costs by over 60%. At
least 47% of the paperboard from waste paper mills are tied into
municipal systems and would by unaffected by the proposed guide-
lines; and perhaps another 13% have access to municipal treatment,
so that their cost per ton could be as much as 40% less than
the model plant expenditures. Finally, at least 50% of the
builder's paper and roofing felt mills are tied into municipal
systems, and perhaps another 25% have access.
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V-3
TABLE V-l
ANNUAL TREATMENT COSTS
Incremental Pollution
Pollution Control
Subcategory
Unbleached Kraft
(linerboard)
NSSC (Sodium)
NSSC (Ammonia)
Kraft-NSSC
(Cross recovery)
Paperboard from
Waste Paper
Builder's Paper and
Roofing Felt
Size
Ton/Day
1000
250
250
1000
100
100
Cost/Ton
BPT BAT NSPS**
$ 7.35
13.65*
4.30**
8.06
9.64
7.83
$4.30
4.26
3.21
4.70
1.17
2.67
$8.26
4.72
6.03
8.14
3.43
5.40
Includes depreciation, interest, and
costs. Assumes no pollution control
Control Cost As Percent
Of Year-End 1972 Product Prices
BPT
5.8%
11.3
3.5
***
5.7
10.3
operating
facilities
BAT NSPS
3.3% 6.4%
3.6 3.9
2.7 5.0
*** ***
0.7 2.2
3.5 7.3
and maintenance
are in-place
*Includes cost of chemical recovery @ $8.79/ton, or 7.3% of 1972 prices. Does not include
the savings realized when recycling chemicals.
**External treatment costs only. Data was not available to determine internal treatment costs.
***The cost per ton of unbleached kraft or semi-chemical product would depend upon the
allocation of pollution control costs to these products.
SOURCE: Wapora, Inc, Effluent Guidelines Development Document
-------
V-4
TABLE V-2
EFFLUENT TREATMENT CAPITAL
COSTS (THOUSANDS)
Subcategory
Unbleached Kraft
(linerboard)
NSSC (Sodium)
NSSC (Ammonia)
Kraft-NSSC
(cross recovery)
Paperboard from Wast Paper
Builder's Paper and Roofing Felt
Size
Tons/Day
1000
250
250
1000
100
100
Potential
BPT
$10,270
3,488*
1,406**
8,897
983
915
Incremental
BAT
$4,463
1, 220
790
5,604
240
548
Capital O
NSPS**
$10,652
1,592
1,954
9,864
415
725
Assumes no pollution control facilities are in-place.
All costs are expressed in terms of August 1971 prices.
*Includes cost of chemical recovery of $2,060,000.
**External treatment costs only. Data was not available to determine internal treatment costs,
SOURCE: Wapora, Inc., Effluent Guidelines Development Documents
-------
V-5
TABLE V-3
Estimated Distribution of Operation and
Treatment Systems Employed by Subcategory
Builder's
Paperboard Paper &
Unbleached NSSC- NSSC- Kraft- From Roofing
Kraft Ammonia Sodium NSSC Waste Paper Felt
Number of Plants
Plants with No Treat-
ment, %
Plants Using Activated
Sludge, %
Plants Using Aerated
Stabilization
Basins, %
Plants Using Storage
Oxidation Ponds, %
Plants Using Other
Treatment, % *
27
Plants Using
Municipal Systems,% 0
0
0
60
25
15
0
50
0
50
14
10
0
40
10
0
0
0
0
60
10
10
135
60
10
10
10
56
75**
None
10***
*Other treatment includes clarifiers, holding ponds, trickling
filters, etc.
**Rough estimates - very little information available.
***Primary only or equivalent.
Note - Percentages may not total 100% for each subcategory indicating
that data was not available for all mills within the subcategories.
SOURCE: Effluent Guidelines Development Document
-------
VI-1
VI. METHODOLOGY
This economic impact analysis is essentially an
update of a 1971 Arthur D. Little, Inc. study, Economic
Impact of Anticipated Paper Industry Pollution-Abatement
Costs, conducted for the Council on Environmental Quality.
The updated assessment was made by the Office of Planning
and Evaluation staff, with assistance from Arthur D. Little,
Inc. The 1971 impact projections were revised to reflect
the actual proposed guidelines and associated costs, the
current industry segment status and current projections
regarding capacity, demand, etc.
The economic impact assessment has focused upon the
following potential effects of increased capital and
operating costs for water pollution abatement:
- Price Effects
- Production Effects
- Employment Effects
- Community Effects
- Balance of Payment Effects
- Growth Effects
The economic analysis, with regard to closure projections
in particular, has focused upon the 1977 impact of the
proposed guidelines. The reason is that this analysis is
based upon the 1971 Arthur D. Little study which considers
economic impact through 1976.
The impact analysis began with a determination whether
the industry segments would have to absorb the cost of
effluent control, or whether the cost could be passed on
through price increases. This assessment was made on the
basis of the structure of the industry, assessed future
supply/demand balances, and the existence of substitute
-------
VI-2
products. Potential segment price increases were
represented by the pollution control cost estimates.
These were considered maximum segment price increases
rather than likely price increases because of the wide-
spread access to municipal treatment and the extent to which
facilities are already in place, Ii^ all cases, barring a
general economic downturn, it was assessed that these costs
could be passed on.
These conclusions were incorporated into an assess-
ment of the economic viability and a determination of the
probability of closure for the mills in each subcategory.
Because little financial data was available to the Office
of Planning and Evaluation on a mill by mill basis, an
aggregate approach was used which focused upon mills under
a minimum economic size for each subcategory. Specifically,
the minimum economic sizes for each subcategory were assumed
to be:
Minimum Economic Size
Subcategory Tons Per Day
Unbleached Kraft 200
NSSC (Sodium & Ammonia Base) 200
UK/NSSC (with cross recovery) 400
Paperboard from Waste Paper 120
Builder's Paper & Roofing Felt 100
The foundation for this approach is the observation that, in
general, both profitability and the availability of capital
decrease, while treatment costs increase for small mills
relative to large mills. An accompanying assumption is that
mills in excess of the minimum economic size will not be
impacted to the point of closure. The result is an approxi-
mation of potentially lost capacity.
Additional criteria used in assessing economic viability
and the likelihood of closure were: level of integration,
process factors (e.g. chemical recovery), access to municipal
treatment systems, profitability, general market considerations,
and product values. For each subcategory, the dominant factors
leading to the closure assessments were:
-------
VI-3
o Unbleached Kraft - there are no small linerboard
mills. All of these mills have capacity in excess
of 200 tons per day, with over 80% of the mills
having capacity in excess of 600 tons per day.
These large, integrated mills were assessed to have
sufficient return, available capital, cash flow,
and favorable market conditions to finance ex-
pected pollution control expenditures through 1977.
o NSSC - small (under 200 tons pe r day) sodium base
mills without chemical recovery systems in-place
were assessed to be unable to make this additional
investment or to consider conversion to waste paper
pulp to be a financially superior alternative.
o UK/NSSC (with cross recovery) - these large inte-
grated mills compare financially to the larger un-
bleached kraft mills, and therefore, were considered
able to finance pollution control expenditures.
o Paperboard from Waste Paper - all mills with capacity
under 120 tons per day and which did not have access
to municipal treatment (assumed to be 40%) were con-
sidered to be potentially impacted. A 0-6% pretax
return-on-sales (ROS) criteria was used to determine
the number of mills with high (above 75%) to moderate
(25%-75%) probabilities of closure.
o Builder's Paper and Roofing Felt - with a tight
supply/demand situation and the ability to pass on
effluent control costs, the builder's paper and
roofing felt segment was considered able to meet
the 1977 proposed guidelines with minor impact to
industry capacity. However, because of the segment's
sensitivity to overall construction levels, an
assessment of the economic viability of the mills
in the event of a recessionary period was made.
Mills smaller than 100 tons per day without access
to municipal treatment (assumed to be 25%) were
considered to have high to moderate probability of
closure. Specifically, mills under 50 tons per day
capacity were assessed to have high probability
-------
VI-4
(above 75%) of closure and mills with 50-99 tons
per day capacity were assessed to have moderate
probability (25%-75%) of closure.
Potential unemployment was calculated using the
potential capacity losses and the "annual tons per employee"
factors provided in the 1971 Arthur D. Little, Inc. study.
The general locations of these mills were dominant factors
in assessing the potential impact upon the community and
upon those unemployed.
Potential industry segment price increases due to
pollution control expenditures were used to assess the impact
of the proposed guidelines on the segments' international
competitive postures. The pollution control expenditures
of foreign counterparts were projected to be less than the
expenditures by the United States pulp and paper industry.
The impact upon the segments' competitive posture, however,
was judged minor compared to the importance of tariffs.
Potential growth effects were based upon general con-
sideration of the industry segment projections, capital
availability and upon the magnitude of additional pollution
control expenditures relative to additional capital expenditures.
These factors indicated that although over-all growth might be
slowed, it should not be inhibited.
-------
VII-1
VII. ECONOMIC IMPACT
The economic impact assessment has focused upon:
A. Price Effects
B. Production Effects
C. Employment and Community Effects
D. Balance of Payment Effects
E. Growth Effects
A. Price Effects
Chapterv summarized the additional costs per ton of
product which might be incurred by a mill having to purchase
an entire treatment train to achieve the proposed effluent
standards. It was shown that the majority of the plants in
question have substantial in-place facilities or discharge to
municipal treatment systems. From these estimates, it may be
concluded that the potential price increases for the industry
segments would be less than the costs shown, although some in-
dividual operations might require such price increases to pass
on costs fully.
The ability of the segments to pass pollution control
costs on to the consumer will depend upon future supply/demand
balances, substitute products, and (as noted) the extent to
which pollution control facilities are already in-place. The
supply/demand balances are expected to be tight through 1976 and
perhaps the remainder of the 1970's, and substitute products
(such as plastics) will also be facing additional pollution
control costs. Therefore, it is likely that, on average, the
mills in each industry segment will be able to pass on the bulk,
if not all, of the cost of pollution control. In some cases,
a return on investment for pollution control may be realized.
However, in the event of a recessionary period, builder's paper
and roofing felt operations may be forced, temporarily, to
absorb the cost of pollution abatement.
-------
VII-2
The potential price effects through 1971 for product
categories are shown in Table VII-1. In the cases where the
majority of mills have access to municipal treatment, potential
price increases were estimated using the overall average in-
cremental cost and the average full cost to the segment of com-
pliance with the proposed 1977 standards. In the case of NSSC
sodium base operations, it was assumed that chemical recovery
systems, if not in-place, would not be installed in existing
mills; or if they are installed, the full cost could not be
passed on through price increases.
Table VII- 1
Potential Price Increases - 1977
Product Category Potential Price Increase
Unbleached Kraft (linerboard) less than 6%
NSSC less than 4%
Paperboard from Waste Paper 3-5%
Builders Paper and Roofing Felt 3-7%
'o
B. Production Effects
o Unbleached Kraft - no shutdowns or production curtail-
ments are projected. These large, integrated mills have
sufficient return, available capital, cash flow, and
favorable market conditions to finance expected pollu-
tion control expenditures through 1977.
o NSSC (Sodium and ammonia base) - no shutdowns or
production curtailments attributable to the effluent
guidelines are likely.
One plant is projected to close for reasons unrelated
to water pollution abatement. There is the possibility
that six small plants might shift to waste paperboard
production. These six are privately-owned, do not
currently have chemical recovery systems, and could
have some difficulty raising capital. Their potential
conversion to waste paper could reduce NSSC capacity
over the next four years by as much as 9%, which would
be balanced by the addition of waste paper corrugating
medium, an NSSC product substitute. Some of these plants
may close if sufficient neighboring waste paper sources
are not available.
-------
VII -3
o Unbleached Kraft/NSSC (with cross recovery) - no
shutdowns or production curtailments are indicated.
These mills compare financially to the large unbleached
kraft linerboard mills.
o Paperboard from Waste Paper - there are 5-7 small mills
(less than 120 tons per day) with high to moderate pro-
bability of closure due to projected costs associated
with the proposed effluent standards. These mills have
no access to municipal treatment and have low pretax
margins — from 0-6% ROS, including consideration of
projected effluent control costs. Approximately 1.5-
2.1% of industry capacity is represented by these mills.
Overall, a large percent (perhaps as much as 60%) of
paperboard from waste paper mills are tied into or have
access to municipal sewers reducing the impact of the pro-
posed guidelines. In addition, competitive products
(bleached kraft, plastics) also face pollution abatement
costs, and should not be able to achieve a significant
competitive advantage on that basis.
o Builder's Paper and Roofing Felt - perhaps 10 mills,
having no access to municipal treatment systems, could
close if costs to achieve the proposed effluent guide-
lines occur during a period of general economic downturn.
Otherwise no shutdowns or production curtailments are
indicated through 1977.
Four of the mills which may close have capacity under
50 tons per day each and have high probability of closure
(above 75%) . The remaining six mills are larger, with
capacity between 50 and 99 tons per day each, and have
moderate probability of closure (25%-75%). The high
probability mills represent about 2.9% of industry
capacity, and the moderate probability mills comprise
about 8.3%. Loss of this capacity should occur only
during a recessionary period in which demand contracts
sufficiently to prohibit the industry segment from pass-
ing the cost of pollution control on to the consumer.
Therefore, if this capacity is lost, the segment should
not have significant problems in meeting resulting
demand.
The ability , in some cases, to recycle water relatively
inexpensively could reduce the number of potential closures.
-------
VII-4
C. Employment/Community Effects
o Unbleached Kraft - with no production curtailments
foreseen, no negative community or employment effects
are projected.
o NSSC - no negative employment or community impacts are
likely. However, in the event that six small plants
shift to waste paper production, less employees would
probably be needed than for semi-chemical production.
If all six mills close, as many as six hundred employees
could be affected.
o Unbleached Kraft/NSSC (with cross recovery) - with no
production curtailments foreseen, no negative community
or employment effects are projected.
o Paperboard From Waste Paper - about 400-560 employees
could be displaced by shutdowns of those seven mills
having a high to moderate closure probability. Should
some proportion of this unemployment occur, the proximity
of mills to metropolitan areas suggests alternative
sources of nearby employment are fairly likely.
Similarly, the location of mills near metropolitan
areas indicate it is unlikely that any closures would
have significant economic or social impact on the
community.
o Builder's Paper and Roofing Felt - approximately 350
people are employed by the mills with high probability
of closure, and about 975 people are employed by the
mills with moderate probability of closure. Should
this unemployment occur, it would be located near
metropolitan areas, and, thus, near alternative sources
of employment. The proximity to urban areas minimizes
the likelihood of significant negative community impacts.
The projected production and employment effects are summarized
in Table VII-2.
-------
VII-5
Table VII-2
POTENTIAL PRODUCTION AND UNEMPLOYEMENT EFFECTS
Subcateqory
Unbleached Kraft
NSSC-sodium base
NSSC-ammonia base
Unbleached Kraft/NSSC
(with cross recovery)
Paperboard from Waste Paper
Builder's Paper and
Proofing Felt
Potential
Closures
None
(6)*
None
None
5-7
4-10
Potential
Un emp1oyment
None
(600)*
None
None
400-560
350-1325
*These mills are projected to convert to waste paper pulping
operations. However, some of these mills may close if sufficient
waste paper sources are not available. A total of approximately
600 employees work in these mills.
-------
VI I-6
D. Balance of Payment Effects
The unbleached kraft segment is the only segment under
consideration which has significant exports. This is because
of the relative raw materials cost advantages enjoyed by the
United States. The effect of additional U.S. pollution control
expenditures may be to reduce that advantage.
The Organization for Economic Cooperation and Development
recently completed a study, Pollution by the Pulp and Paper
I^ndustry (July 1973) , examining the state of pollution abatement
and the effects of anticipated pollution control regulations of
member nations.* Although the study did not examine unbleached
and bleached kraft operations separately, the relative cost
estimates are still useful indicators. Table VH--3 presents
OECD1s estimates of pollution control costs through 1975 for
kraft (sulfate) operations). The U.S. cost differential for
pollution abatement of about 3-4% is small compared to tariff
differentials expected by 1980. It should be noted, however,
that the effect of pollution control regulations upon international
competitiveness may depend on the extent to which these expenditures
are subsidized by foreign governments.
E. Growth Effects
Pollution control expenditures may effect growth by reducing
profitability or by reducing the amount of capital available for
expansion purposes. It has been assessed that , in most cases,
the cost of pollution control could be passed on through price
increases. Further, the industry as a whole has been experiencing
improved profitability and cash flow. Therefore, it is not
anticipated that the proposed effluent control requirements will
deter expansion, although, in the short run, the rate of addition
to capacity might be slowed.
*Australia, Austria, Belgium, Canada, Denmark, Finland, France,
the Federal Republic of Germany, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States
-------
VII-7
Table VII-3
Pollution Control Costs as Percent of
Price Integrated Sulphate Pulp, Paper and Board
Canada
Finland
France
Italy
Japan
Norway
Sweden
U.S.A.
Other OECD
Average
or Total
Pollution Control
Costs %
1970
0.0
0.4
0.3
0.0
0.9
0.1
0.9
1.3
1.1
1975
2.9
1.2
3.2
9.2
4.4
3.0
6.8
5.8
1980
3.0
4.1
4.3
(4.1)
Country Share
' °/
/o
Produc-
tion*
6
3
2
0
12
0
6
69
2
100
Exports11
41
12
1
6
0
0
24
17
5
100
Average**
Mill Size
1970
166
158
74
80
157
33
142
188
23
174
*Share in percent of total OECD production and exports
in 1970 (OECD without Australia). Exports figures include
exports of non-integrated mills.
**Yearly production in thousands of tonnes.
OECD production
exports
34.3 million tonnes
9.5 " " (this figure includes the
exports of non-integrated mills).
Price: $173, a weighted average of estimated 1970 prices
of bleached and unbleached qualities.
SOURCE: OECD, Pollution by the Pulp and Paper Industry. Present
Situations and Trends, 1973
-------
VIII-1
VIII. LIMITS OF THE ANALYSIS
A. Critical Assumptions
1) Minimum Economic Size - minimum economic size (for
the purpose of assessing economic impact) and the
associated probabilities of closure were estimated
by the Office of Planning and Evaluation staff with
assistance from Arthur D. Little, Inc. The justifi-
cation for using this criteria is the observation,
based upon financial data, that smaller mills are
generally less efficient and have less capital avail-
able than larger mills. The resulting closure esti-
mates are an aggregate approximation of potentially
lost capacity and associated unemployment. An accom-
panying assumption is that mills above the minimum
economic size, have zero to low probability of closure.
2) Closure Criteria - in the cases where high to moderate
closure probabilities were projected, it should be
noted that the closure decision is more complex than
the criteria used in this analysis. Even though
projected treatment costs may appear unacceptably high,
the decision to terminate operations will depend upon
corporate (or management) goals and managements assess-
ment of future market conditions.
3) Access to Municipal Treatment - it was assumed that
the use or potential use of municipal treatment systems
does not depend upon mill size. Therefore, the overall
use and availability of municipal treatment systems
for a subcategory was used to determine the number of
mills below the minimum economic size which have access
to municipal treatment.
4) Projected Price Effects - potential price effects were
difficult to project because cost estimates were avail-
able for only the average size mill in each subcategory.
In addition, no information was available regarding the
extent to which internal controls are already in place.
It was assumed, therefore, that prices would be determined
by the larger, more efficient operations (where pollution
control costs are assumed to be less than the average size
mill), by the extent that treatment or control facilities
already are in place, and by the extent to which mills have
access to municipal treatment.
-------
VIII-2
5) Projected Demand - it was assumed that demand was
related to general economic growth and that demand
would increase at an annual rate of about 3.5-4.5%.
This projection, along with capacity projections,
leads to the conclusion that the supply/demand balance
would be tight through 1976, and perhaps the remainder
of the 1970's. The determination that pollution con-
trol costs could be passed on to the consumer through
price increases is based upon this conclusion.
The effect of a temporary recessionary period was
not assessed to have significant impact on the ability
of most of the segments under consideration to pass on
pollution control costs. This is because of the exist-
ing tight supply/demand balance and because only modest
commitments for expansion in the near future have been
made.
The exception to this conclusion was builder's paper
and roofing felt where it was felt that demand would
be very sensitive to construction levels which in turn
jband to be sensitive to the overall state of the
economy. This relationship is reflected in the estimate
of potential closures for this segment of the industry.
-------
APPENDIX A
-------
POINT SOURCE CATEGORY
PULP AND PAPER
-------
A-l
BEST PRACTICABLE CONTROL TECHNOLOGY CU1;.":~LY AVAILABLE
T'n-2 following limitations constitute t'c • cuantity of pollutants which may
be discharged with the application or l>f JTvJA:
Values irt--lbs/ton-
BOD5 TSS
Max 30 day Daily Max 30 day
Subc?_t^?".crv Avsr;~2 I!EM Av2rc.c;e
Unbleached
Kraft
NSSC-An-onia
Base
NSSC- Sodium
Base
(Cross Recovery)
Paperboard from
Waste Paper
4.4 8.0 9.2
10.5 17.5 10.0
6.5 9.0 10.0
6.1 12.7 10.6
2.5 ' 4.4 3.0
Daily pH
Ma:: Ranqe
22.2 5.Q-9.
17.0 6.0-9.
17.0 6.0-9.
25.0 6.0-9.
5.6 6.0-9.
0
0
0
0
0
Temperature Variance
Additional allocations equal to the above guidelines, (excluding pH),
are allowed during periods when the waste water temperature within the
treatment systec is 35 °F or lower. If 35 °F is the maximum, ter.pera-
ture which occurs in the waste water within the treatment system for
one day or for 30 consecutive days, the allocation nay be applied to
the daily naxinmn and 30 day caxin-ua guidelines, respectively.
Hydrr.ulic Cebarklr.g Variance
An additional Allocation to the EDD5 guidelines of 0.05 kg/hkg
(0.1 Ib/ton) is allowed ofr nills practicir.j; hydraulic debarhing.
-------
BEST AVAILABLE TECHNOLOGY ECONOMICALLY ACHIEVABLE
The following limitations consitute the quantity of pollutants which may be discharged with
the application of BATEA:
Values in Ibs/ton
BODS
Subcategory
Unbleached
Kraft
NSSC-Ammonia
Base
NSSC-Sodium
Base
Kraft-NSSC
(Cross Recovery)
Paperboard from
Waste Paper
Max 30 Day
Average
2.75
7.0
3.0
3.0
1.3
Daily
Max
5.0
11.75
4.2
5.9
2.5
TSS
Max 30 Day
Average
3.7
4.0
4.0
4.2
1.2
Daily
Max
8.9
9.0
9.0
10.0
2.2
Color
Max 30 Day Daily pH
Average Max Range
20 30 6.0-9.0
75% Removal 6.0-9.0
75% Removal 6.0-9.0
i
20 30 6.0-9.0
6.0-9.0
In addition effluent limitations are recommended for ammonia nitrogen for NSSC-ammonia
base mills. However, no specific limitation has been established because the removal
technologies have not yet been fully demonstrated. Also, the above limitations for
KSSC mills of 75% color removal will be changed to a pounds per ton bases when reverse
osmosis technology has been further demonstrated.
-------
STANDARDS OF PERFORMANCE FOR NEW SOURCES
The following limitations constitute the quantity of pollutants which may be discharged with the
application of NSPS. The limitations are the same as for BATEA with the exceptions that color
removal is not included for NSSC-ammonia base and NSSC-sodium base mills, and ammonia nitrogen
is not included for NSSC-ammonia base mills.
Values in Ibs/ton
BODS TSS
Color
Max 30 Day Daily Max 30 Day Daily Max 30 Day Daily pH
Subcategory Average Max Average Max Average Max Range ,
Unbleached
Kraft
NSSC-Ammonia
Base
NSSC-Sodium
Base
Kraft-NSSC
(Cross Recovery)
Paperboard from
Waste Paper
2.75 5.0 3.7 8.9
7.0 11.75 4.0 9.0
3.0 4.2 4.0 9.0
3.0 . 5.9 4.2 10.0
1.3 2.5 1.2 2.2
20 30 6.0-9.0
6.0-9.0
6.0-9.0
20 30 6.0-9.0
6.0-9.0
-------
A-4
Recoiriiuended Guidelines
The recommended guidelines were based upon the application of internal
and external control technologies. The internal control technologies
generally reduce total Xvater usage through recycling measures and are
shown in Table A-l. The external control technologies are as follows:
BPCTCA
All Subcategories
One or two stage biological treatment.
BATEA
All Subcategories
Two stage biological treatment, and
Mixed media filtration with, if neces-
sary, chemical addition and coagulation.
Unbleached Kraft, Kraft-NSSC (Cross Recovery)
Lime treatment (color removal)
NSSC-Ammonia Base, NSSC-Sodium Base
Reverse Osmosis (color removal)
NSPS
All Subcategories
Two stage biological treatment, and
Mixed media filtration with, if neces-
sary, chemical addition and coagulation.
Unbleached Kraft, Kraft-NSSC (Cross Recovery)
Lime treatment (color removal)
-------
A-5
Table A-l
Recommended Internal
Pollutant Control Technologies
BPCTCA
All Subcategories
1. High volume, low pressure, self-cleaning water
showers on the paper machine.
2. Segregation of white water systems.
3. Filtering and reuse of press waters.
4. Collection and reuse system for vacuum pump
seal water.
5. Installation of save-all with associated equipment.
6. Gland water reduction.
Unbleached lyTaft, Unbleached Kraft - NSSC (Cross Recovery)
1. Re"6 stock screening.
2. Spill and Evaporation boil-out storage.
NSSC - Ammonia Base
1. Non-Polluting Liquor Disposal.
NSSC - Sodium Base
1. Disposal of spent liquor by partial evaporation
followed by incineration in a fluidized bed reactor.
Paperboard from Waste Paper
1. Land disposal of junk materials.
-------
A-6
Table A-l (Cont1d)
r.ATKA - In addition to intcrnr.l technologies in BPCTCA, FATKA
includes the following:
All subcategories (except pnperboard From waste paper)
1. Expanded process water reuse.
2. Separation of cooling water and recovery.
3. Reuse of fresh water filter backwash.
4. Control of spills whereby major pollutional loads
bypass the waste water treatment system to a reten-
tion basin and are ultimately wether reused, gradually
discharged into the treatment system, or treated sepa-
rately; and
5. Reduction of pulp wash and extraction water.
Paperboard from Waste Paper
1. No additional technologies beyond BPCTCA.
NSPS
All Subcategories
1. Same as BATEA.
-------
A-7
New Source Pre treat merit Standards^
Section 307(c) of the Act requires the Administrator to promulgate
pretreatment standards for a category of new sources at the same time
that standards of performance for that category are promulgated under
Section 306.
The proposed regulation essentially adopts the pretreatmetrt—standards
which have been proposed by the Agency under Section 307(c) of the Act.
-------
POINT SOURCE CATEGORY
BUILDER'S PAPER AND BOARD
-------
A-8
BEST ?IO.C'n (V.F.LE CONTROL Tj:C!'"0:!.nnY j:URIT!:T[.Y AVAI1.A1M.E
The- follov'ir.r", llritaticnr; constitute the quantity of pollutants
xrhich inay be: discharged v;ith the application of BPCTCA:
V.i]i'cr> in II r,/ton
ro^-
IV x 30 c'.-y Dailv
'^orv /-verafc Max
TSS
K-x 30 day Daily
Average :'ax
pH
Errge
Builders Paper
and Roofing
Felt 5.0 7.5 5.0 7.8 6.0-0.0
T_eiEp_eiMture Variance
Additional allocations equal to the above guidelines, (excluding pH)-,
are. allowed during periods v;hen the waste water temperature within the
treatment system is 35 °F or lower. If 35 °F is the maximum temperature
which occurs in the waste water within the treatment system for one day
or for 30 consecutive ,days, the allocation may be applied to the daily
ir.axitr.uiTi and 30 day maximum guidelines, respectively.
BEST AVAILABLE TECHNOLOGY ECONOMICALLY ACHIEVABLE
The following limitations constitute the quantity of pollutants which
may be discharged with the application of BATEA:
Values in Ibs/ton
BODS TSS
Max 30 day Daily Max 30 day Daily
Sub category Average Max Average Hax
Builders Paper
and Roofing
Felt 2.0 2.8 2.0 3.1 6.0-9.0
-------
A-9
ST/:T:\\r;.'S o? PEiTor",'-"CE FOR un'v SOURCES
Tlie follcvir.p, lir.Itr.L: ons conr.titutc the quantity of pollutants v.-hich
p.ay-4>e- oiseirar^ed- ^iviv—the- apf>-M c&t-ion—of- NSPS :
V.-1 n?c> in Ibs/ton
BODS TSS
Kax 30 day Daily J'jix 30 day Daily pi!
Subcateeory A v err [re t-'ax Av&rr.f;e I 'an Range
Builders Paper
and Roofing
Felt 2.0 2.8 2.0 3.1 6.0-9.0
New Source Pretreatresnt Standards
Section 307(c) of the Act requires the Administrator to promulgate
pretreatment standards for a category of new sources at the same time
that standards of performance for that category are promulgated under
Section 306.
The proposed regulation essentially adopts the pretreatnient standards
which have been proposed by the Agency under Section 307(c) of the Act.
-------
A-10
E pcor'-.rcrded Guv.'1 c 1 inf:s
Tno recor.r.Lt-nded guidelines were; based upon the application of
internal and external control technologies. The internal control
technologies generally reduce total water usr.ge through recycling
measures and are shown in~Table A-rZ.The "exfe'FnaT control technologies
are as follows:
EPCTCA
One or two stage biological treatment.
EATEA
Two stage biological treatment, and
Mixed media filtration with, if necessary, chemical
addition and coagulation.
NSPS
Two stage biological treatment, and
Mixed media filtration with, if necessary,
chemical addition and coagulation.
-------
A-11
Table A-2
SyiT'iZIX-P""L '' ^cPiLi;''-'i1'''2,C'_JDJ;9rnaL_
an;! Hxi:;ii'njl Control Techno I ogles
P r e 1i i'i 1 n a r y U p g r e d i n g_
Internal measures
The internal measures selected can be summarized as follows:
- control of asphalt spills
- installations cf low volume, high pressure self
cleaning showers on paper machine
- filtering and reuse of press water
External Treatment
For all mills the liquid external treatment consists of
raw waste screening by bar screens, primary treatment
by mechanical clarifiers, foam control, effluent
monitoring and automatic sampling and outfall system by
diffuser.
The screenings are sanitary landfilled.
BPCTCA Technology
Internal Measures
The internal measures selected to bring the mills up to
BPCTCA, consist of the preliminary additions already
made plus the following:
- segregation and reuse of white waters
- collection and reuse of vacuum pump seal v/aters
- installation of savealls
- gland water reduction
- press water filtering, and
- water showers
- Save-alls and associated equipment
-------
A-12
Table A-2 Cont1d
External Measures
Screening, prirrr.ry, and secondary treatment are
provided to loial mill effluents for all mills, where
the: screening is by bar screens and priirary
sedimentation in i.echanical clarifiers as was used when
the upgrading was done in the previous upgrading step.
Secondary trev.triont is provided by one or two sTafe
biological tre.",L;r.::nt with nutrient addition. An
ei.'.ctvency spill basin is installed prior to the
secondary treatment step.
Foam control, flow monitoring and sampling and outfall
system are as used under previous upgrading step.
BATEA Technology
Internal measures
The internal measures selected to bring the mills up to
technology BATEA consist of technology BPCTCA
installations plus the following additions:
- no additional installations beyond those selected
to bring these mills up to BPCTCA technologies.
External measures
All mill effluents are screened by bar screens, and are
subjected to primary solids separation in mechanical
clarifiers and secondary treatment by two stage
biological treatment with nutrient addition. Suspended
solids are further reduced by mixed media filtration
with, if necessary, chemical additional and
coagulation. Emergency spill basins are provided prior
to the secondary treatment step.
Effluents receive foam control treatment, monitoring
and automatic sampling prior to entering the receiving
waters through diffusers.
Screenings are disposed of by sanitary landfill ing.
Primary sludges and waste activated sludge are
thickened in gravity sludge thickeners, and dewatered
mechanically by vacuum filters and presses prior to
ultimate disposal.
Ultimate sludge disposal is by sanitary landfilling.
-------
A-13
Table A-2 Cont' d__
NSPS Technology
Internal Measures
The internal measures selected for NSPS include those
for BPCTCA and BATEA as previously discussed.
External measures
The external measures selected for NSPS include those
for BATEA.
-------
APPENDIX B
-------
ECONOMIC IMPACT OF ANTICIPATED PAPER INDUSTRY POLLUTION
ABATEMENT COSTS
PARTI: EXECUTIVE SUMMARY
Report to
The Council on Environmental Quality
November 1971
C-73977
-------
TABLE OF CONTENTS
Page
List of Tables iii
I. INTRODUCTION 1
II. FINDINGS AND CONCLUSIONS 3
A. INDUSTRY STRUCTURE 3
B. PROFITABILITY TREND 3
C. PRICE IMPACT 7
D. MILL SHUTDOWN PROBABILITIES 7
E. EMPLOYMENT IMPACT 10
F. INDIRECT IMPACTS 11
III. SUMMARY OF POLLUTION ABATEMENT COST
ESTIMATES 14
-------
LIST OF TABLES
Table No. Page
1 Summary of Economically Marginal Pulp and Paper
Capacity, 1971 4
2 Paper Industry Financial Summary, 1970 5
3 Summary of U.S. Paper Industry Operating Rate
Trends, 1970-1973 6
4 Anticipated Pollution Abatement Cost Impact on
Prices, 1972-1976 8
5 Summary of Mill Shutdown Probabilities, 1972-1976 9
6 Summary of Employment Impact by Region 11
7 Summary of Anticipated Pollution Abatement Costs 15
-------
I. INTRODUCTION
This analysis provides our assessment of the economic impact on the paper
and related industries that will result from the air and water pollution control
requirements anticipated through 1976. Developed within a period of nine weeks
under contract with the Council on Environmental Quality, the analysis is meant
to provide information that can be used in formulating federal policy for pollu-
tion abatement programs in the paper industry over the next five years.*
The information contained in this analysis is based upon our knowledge of
and experience with the paper industry plus data derived from a number of
sources during the analysis. Of substantial assistance were the supply/demand data
and analyses of industry financial performance compiled by the American Paper
Institute (API). Our analyses of economically marginal mills were based on our
familiarity with many mills and on the mill data file that we have derived from
the two industry directories: Lockwood's and Post's. We cross checked our
identification of marginal mills with the API Divisions for tissue paper, printing
and writing papers, and paperboard, and with key officers of firms judged to be
marginal within these sectors and within the special industrial paper, insulating
board, construction paper, and semi-chemical corrugating-medium product sec-
tors.
Each of the above sectors was found to contain a relatively large number of
marginal mills and to have experienced severe financial difficulties in 1970 and,
except for construction paper, in 1971. Through our company contacts we
obtained data from a number of mills that would serve to characterize the
financial performance of typical marginal mills in each sector. We are indebted to
the companies that provided us with the information; to safeguard their interests
we have pledged to maintain the strictest confidence on individual company data.
The basic approach used in our analysis was to subdivide the industry into its
major product sectors. We then assessed which mills in each sector are marginally
profitable in today's market. Our assessment was based primarily on paper
machine and mill size criteria, but also took into account the relative severity of
pollution control problems in each sector, current overcapacity and price weak-
ness, the degree of vertical integration of the facility and current industry
profitability levels. Then we evaluated future supply/demand trends in each sector
to determine the likelihood that future price increases can be obtained to restore
profits to an adequate level and to absorb additional pollution abatement costs.
(This analysis is described in Part II.)
"The term "paper industry" as used throughout this report includes all of its components:
pulp, paper, paperboard, and building paper and board. In most cases we exclude converting
operations unless they are an integral part of the paper mill.
-------
We then evaluated (see Part III) the estimated pollution abatement costs
against current prices of pulp and paper products and expected profitability of
marginal firms to assess the impact of these costs on price increases and mill
shutdowns. The mill dislocations were compared with our estimates of mill
closures that would occur without any pollution abatement expenditures above
current levels. The estimates of productive capacity removed were then utilized to
reflect the number of jobs that would be lost in each major region of the country
because of the impact of pollution control requirements. Finally, we called upon
our specialists in supplier industries to determine the impact upon them.
The underlying economic assumptions used in this analysis were:
(1) real growth in gross national product will average 4%/year between
1971 and 1976 with somewhat higher growth (5%/year) in 1972
and 1973; and
(2) paper prices will be determined solely by market conditions rather
than by regulated price controls.
The assumptions regarding degree of pollution abatement required by 1976
were:
(1) Water: entire paper industry will be required to remove 95% of
the suspended solids in its waste water through primary treatment
systems, and reduce biological oxygen demand (BOD) by 90%
through secondary systems.
(2) Air: entire industry will meet the air pollution abatement regula-
tions, tentatively adopted by Oregon; namely, that maximum
discharge of particulate matter will be less than four pounds per
air dried, unbleached ton of kraft pulp (or 90% particulate re-
moval in other processes) and that the maximum discharge of
reduced sulfur gases will be less than 10 parts per million (dry
basis) in the tail gas.
Note that both the capital and operating costs and their impacts will rise
extremely rapidly as the degree of pollution abatement approaches zero pollution.
- 2
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II. FINDINGS AND CONCLUSIONS
A. INDUSTRY STRUCTURE
About 45% of all U.S. mills - accounting for some 15% of total U.S. paper
capacity, are economically marginal by current standards of efficiency.* In
general, this means that they fall below the current minimum economic size for
mills in their product sector. These mills will have the greatest difficulty in
meeting the anticipated pollution abatement requirements. Table 1 shows the
distribution of these mills by product sector.
B. PROFITABILITY TREND
The paper industry's profitability is at its lowest point since World War II,
with after-tax returns on total assets averaging about 4% in 1970. Profitability has
declined further to about 3% of total assets in 1971, judging from the financial
performance reported by 39 publicly held companies for the first nine months of
1971.
Table 2 provides various measures of the total industry's financial perfor-
mance in 1970, and a comparison of the profitability of typical marginal mills in
key impact product sectors. It indicates that profitability for the industry as a
whole is clearly below that necessary to attract capital over the long term. The
situation for economically marginal mills is considerably worse. Thus, this in-
dustry's ability to finance the capital costs and absorb the additional operating
costs necessary for pollution abatement will depend upon its ability to improve
profits through price and productivity improvements.
Table 3 summarizes our projections of U.S. paper industry operating rate
trends between 1970 and 1973.** Our analysis points to improved operating rates
in most sectors of the industry by 1973, assuming real GNP growth of 5% in 1972
and 1973. Significant overcapacity is expected to continue through 1973 in three
product sectors: insulation board, semi-chemical corrugating medium, and special
industrial paper. Mills in these sectors will have great difficulty in coping with
additional pollution abatement costs because of weak prices and low profits. For
the rest of the industry the market environment will generally provide increased
mill utilization and be conducive to price increases in the absence of rigid price
* In this report, except as noted, the term "mill" refers to a single facility that includes both
pulp and papermaking facilities; that is, an integrated facility is considered a single mill.
** 1973 was chosen as the terminal year since this is as far ahead as one can accurately predict
capacity expansion.
8- 3
-------
TABLE 1
SUMMARY OF ECONOMICALLY MARGINAL PULP AND PAPER CAPACITY, 1971
Economically Marginal Mills
Total No.
of Mills
37*
41*
102
138
38
170
97
32
47
23
29
752
Size Criteria
(under tons/day)
150**
200**
50
200
25
100
200-400
350
100
100
100
No. of Mills
12
9
49
97
9
78
17
11
31
6
10
329
Percent of
Total Mills
33*
22*
48
70
25
49
18
29
60
26
35
44
Percent of
Total Capacity
14
6
18
48
17
27
5
19
36
9
10
15
Production Sector
Sulfite Pulp
Semi-Chemical Pulp
Tissue
Printing, Writing and
Related
Special Industrial Paper
Combination Paperboard
Other Packaging Paper
and Board
Newsprint and Groundwood
Construction Paper
Insulation Board
Hardboard
Total
*Nearly all of these pulp mills are integrated to mills making paper and paper board.
"Includes some larger mills without chemical recovery systems.
Source: Arthur D. Little, Inc., estimates
-------
Percent of Sales
Profit before Tax
Profit after Tax
Depreciation and Depletion
Cash Flow
Percent of Total Assets
Profit before Tax
Profit after Tax
Depreciation
Cash Flow
Depreciated Asset Value
TABLE 2
PAPER INDUSTRY FINANCIAL SUMMARY, 1970
Typically Economically Marginal Mills
Total
Industry
6.6
4.1
4.8
8.9
6.4
4.0
4.7
8.7
55
Tissue
(7.7)
(2.3)
4.6
2.3
(13)
(4)
8
4
75
Printing and Related
1.5
0.9
4.4
5.3
1.8
1.1
5.0
6.1
55
Special Industrial
4.8
2.4
2.0
4.4
*
8.0
4.0
3.3
7.3
53
Combination Board
3.0
1.5
3.3
4.8
*
2.0
1.0
2.2
3.2
27
*ln these large composites we used gross fixed assets as an approximation of total assets, since the mills were parts of larger companies.
Sources: American Paper Institute composites (Total Industry and Non-Integrated Printing and Related). Arthur D. Little, Inc., composites
(Economically Marginal Tissue, Special Industrial and Combination Board).
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TABLE 3
SUMMARY OF U.S. PAPER INDUSTRY OPERATING RATE TRENDS
1970-1973
Product Sectors
Pulp
Dissolving
Bleached Kraft (integrated and market)
Packaging
Unbleached Kraft Board
Semi-chemical Board
Combination Board
Bleached Paperboard
Unbleached Kraft Paper
Bleached Paper
Communication Paper
News and Uncoated Groundwood
Coated Paper
Uncoated Book, Writing, and Related
Bleached Bristols
Building Paper and Board
Construction Paper
Hardboard
Insulation Board
Others
Tissue and Other Creped
Special Industrial Paper
Wet Machine Board
Operating Rate, Percent of Year-End
Capacity
1970 1973
(Estimated)
97
93
92
89
86
100
91
94
96
91
87
91
73
95
70
86
74
95
99
97
96
87
94
100
97
99
98
97
95
98
89
97
77
93
81
92
Sources: Arthur D. Little, Inc., estimates of 1973 demand. American Paper Institute survey
of capacity expansion plans.
- 6
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controls. Between 1974 and 1976 we expect operating rates to decline again
judging from previous cycles in this industry. Industry profitability will follow the
same cyclical trend.
C. PRICE IMPACT
To determine the price increases necessary to absorb the increased pollution
abatement costs anticipated by 1976, we compared the abatement costs for
efficient mills with the approximate median price of each product group (Ta-
ble 4). The major price increases relative to current prices will be in hardboard,
newsprint and uncoated groundwood, bleached kraft pulp and unbleached kraft
linerboard. Here, the price increases range from 6.5 to 10% of product value,
depending upon the grade. Product sectors that will experience moderate price
increases (3.5 to 6% of current product value) are: bleached paperboard, semi-
chemical corrugating medium, bag and wrapping paper, combination paperboard,
insulation board, printing papers, and dissolving pulp. The other product sector
will require only modest price increases.
We anticipate that all of the above price increases will be obtained (in the
absence of price controls) because of the tightening supply/demand balances
projected for most sectors in 1972 and 1973. In many sectors increases signifi-
cantly higher than those reflected in Table 4 are anticipated by 1974. Beyond
1974 prices might well decline again should the industry enter another cycle of
overcapacity.
In most cases abatement cost levels for marginal mills will be appreciably
higher than those for larger more efficient mills since the latter benefit from
economies of scale. This factor adds to the economic difficulties of the marginal
mills.
D. MILL SHUTDOWN PROBABILITIES
TableS summarizes mill shutdown probabilities between 1972 and 1976
with and without pollution abatement expenditures above current levels. It
indicates that the key impact areas are: sulfite and semi-chemical pulp, tissue
paper, printing and writing paper, special industrial paper, and combination
paperboard. In addition to these we expect less extensive dislocations to occur in
other product groups - mainly newsprint, uncoated groundwood paper, and
packaging paper and board.
Some mills in all of the above sectors will close by 1976 strictly because of
economic considerations, but the closure rate will be increased significantly by
the requirement to expend capital to correct a pollution problem. In most cases
marginal single-mill companies in these sectors will be unable to obtain capital for
-------
TABLE 4
ANTICIPATED POLLUTION ABATEMENT COST IMPACT ON PRICES
1972-1976
Key Grades
Unbleached Kraft Liner
Bleached Paperboard
Semi-chemical Medium
Combination Paperboard
Unbleached Bag and Wrapping
Bleached Packaging Paper
Newsprint
Uncoated Groundwood
Coated Publication
Uncoated Book
Tissue Paper (Converted)
Special Industrial Paper
Construction Paper (shingles)
Insulation Board
Hardboard
Bleached Kraft Pulp
Hardwood
Softwood
Dissolving Pulp
Approximate
Current
Average Price
($/ton)
120
210
104
110
160
200
160
180
220
220
400
600
65
135
80
120
140
220
Estimated
Abatement Cost for
Efficient Mills
($/ton)
8.50
12.00
5.50
5.50
8.50
11.00
12.50
12.50
8.50
8.50
8.50
9.50
1.00
6.00
7.50
10.00
10.00
7.05
Increase Over
Current
Price
7
6
5.5
5
5.5
5.5
8.5
7
4
4
2
1.5
1.5
4.5
10
8.5
7
3.5
Source: Arthur D. Little, Inc., estimates
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TABLE 5
SUMMARY OF MILL SHUTDOWN PROBABILITIES, 1972-1976
Marginal
Capacity
(000 tons/yr)
Probability of
Closure
Status Additional
Quo* Abatement
(%) (%)
Capacity Removal
Status Additional
Quo* Abatement
(000 tons) (000 tons)
750
650
5-10
15
65
50
4,730
60
2,030
3,315
11,535
10
30
10
5
20
85
25
25
50
105
Product Sector
Sulfite and Semi-
Chemical Pulp
Tissue
Printing, Writing and
Related
Special Industrial Paper
Combination Paperboard
Other Products
Total 11,535 1,070
'Assumes no additional pollution control expenditures above current levels.
Source: Arthur D. Little, Inc., estimates
485
345
490
20
200
205
890
50
540
775
3,085
pollution control equipment because their return on investment is destined to
remain very low. Most such mills are not integrated to woodpulp and will face a
cost/price squeeze since prices for the market pulp or waste paper upon which
they are dependent are expected to increase at a more rapid rate than the price of
the end products which they produce. The life of many of these mills will be
prolonged if they are able to minimize their capital costs by joining in a municipal
water treatment system. For other mills, particularly tissue paper and special
industrial paper companies, it is still questionable whether they can absorb the
increased operating costs for pollution abatement since these costs are signifi-
cantly higher for them than for large-scale producers.
Many marginal mills are parts of larger companies which will have difficulty
justifying the expenditure of the necessary cajiitaJ in. an obsolete facility. A
numoer of tissue, prinfihg and writing, and combination paperboard mills fit this
category. In many cases the parent companies will elect to centralize their
production in a larger mill rather than revamp a marginal mill. Again the life of
these mills will be extended if they are able to share a municipal treatment system
and thus minimize the required capital investment.
0. 9
-------
We expect all six of the marginal mills in the insulation board sector to be
closed by 1976 strictly because of the economic pressures resulting from stagnant
demand and continuing overcapacity. Pollution control requirements will advance
tjieir shutdown by about three years.
Product sectors where we expect no shutdowns as a result of the increased
pollution abatement costs through 1976 are: unbleached kraft linerboard,
bleached paperboard, construction paper, hardboard and bleached kraft pulp. In
each of these sectors we anticipate significantly improved operating rates through
1973 which will restore profitability to an acceptable level and create an environ-
ment for price increases to fully absorb the increased operating costs for pollution
abatement anticipated through 1976. By 1974 firms in these sectors should have
made commitments for the capital expenditures necessary to meet the 1976
abatement requirements.
E. EMPLOYMENT IMPACT
Table 6 translates our tonnage removals due to pollution abatement in each
product sector into a regional employment impact. We expect about 16,000 jobs
in the paper industry to be lost by 1976 because of mill shutdowns caused by the
anticipated pollution abatement requirements. In addition to the direct employ-
ment losses there will be indirect losses of jobs in the local service and supplier
industries. These generally will amount to about 200% of the direct labor impact
and will raise the unemployment totals accordingly. The greatest impact will be
felt in the New England, Middle Atlantic, and North Central regions which
together will incur about 85% of the paper industry unemployment. The remain-
ing 15% of the jobs will be split between the West and the South.
Within some of these regions the unemployment impact will be localized and
severe. Principal examples are small communities in Massachusetts, Connecticut
and the northern portions of New York and Wisconsin. Most of these communi-
ties are highly dependent on the local paper industry and are in areas already
considered "depressed" by the Economic Development Administration. Thus
there are relatively few nearby employment alternitives for the affected workers.
Production capacity lost through marginal mill closures will be made up by
mill construction or expansions principally in the South and West and to a lesser
extent in Maine and Minnesota. Such expansion should more than compensate for
pollution related jobs lost in the South and the West; however, they will do little
to relieve the unemployment in other regions. These expansions not only will
involve long distance moves by the unemployed mill workers in the other regions,
but also, because of economies of scale, will offer fewer jobs than those elimin-
ated by the closures.
- 10
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TABLE 6
SUMMARY OF EMPLOYMENT IMPACT BY REGION
Net Capacity Removed Jobs Lost Jobs Lost
Due to Additional in Paper in Service and
Region Abatement Industry Support Industries
(000 tons)
New England 645 6,000 12,000
Mid-Atlantic 350 4,400 8,000
North Central 560 3,150 6,300
South Atlantic 45 750 1,500
South Central 110 300 600
West 305 1,550 3,100
Total 2,015 16,150 32,300
Source: Arthur D. Little, Inc., estimates
F. INDIRECT IMPACTS
1. Supplier Industries
In the logging industry we expect pollution-related job reductions of about
200 workers in New England, 700 in the North Central region, 400 in the West,
and 70 in the South Central region. We believe that indirect unemployment in
these relatively remote logging areas will be about 50% of these figures.
In New England and in the North Central region the reduction in pulpwood
demand will have a_more significant impar.t than the above numbers indicate.
Much of this timber is supplied by small woodlot owners who harvest their wood
on a part-time basis to obtain supplementary income. Thus, many part-time jobs
are at stake.
In the West the decline in jobs will probably be offset by increased activity
in the export of wood chips. Woods labor in this region is involved primarily in
sawlog production since the pulp mills use mostly saw mill residue rather than
roundwood. In the South the job loss is small and will be offset by growing
demand for pulp wood and sawlog production.
We anticipate significantly reduced saltcake consumption in the U.S. kraft
pulping industry as a result of greater recovery of sulfur values to minimize the air
pollution caused by the process. We estimate that this factor, coupled with
substitution of other chemicals to provide sodium values, will lead to a consump-
tion loss of 750,000 tons, mostly from imported and natural saltcake. We
estimate a loss of employment of about 500 jobs, primarily from domestic natural
saltcake production in the West.
ft- 11
-------
We also estimate a displacement of chlorine consumption by the paper
industry as chlorine bleaching processes are increasingly replaced by oxygen
bleaching to avoid water pollution. Oxygen bleaching should reduce chlorine
consumption about 140,000 tons by 1976. This reduction will result in the loss of
roughly 70 jobs in the chlor-alkali industry, mainly in the Southeast and North-
west.
The implementation of increased water and air pollution abatement by the
paper industry in itself will create new increments of market demand for capital
goods industries associated with the abatement processes. The effects will be
substantial in the initial years as existing manufacturing plants expend capital to
meet evolving pollution abatement requirements. We expect the paper industry's
capital expenditures (in 1971 dollars) to amount to $2.5 billion for water
pollution between 1972 and 1976, and $800 million for air pollution, for a total
of $3.3 billion if the assumptions about abatement levels and timetables are
correct.
2. Customers
Our analysis shows increased pollution expenditures to have no measurable
impact upon market demand trends since demand for paper products is generally
price inelastic. Accordingly, we do not foresee significant changes in growth rates
associated with the use of the various paper and board products comprising this
industry. In every case where we anticipate capacity removals as a result of
additional pollution abatement costs, the larger and more efficient producers
should be able to make up for the tonnage lost. Therefore, customers generally
should have no difficulty in obtaining pulp and paper products as a result of this
capacity removal.
As noted earlier, price increases ranging from 2 to 10% of product value can
be expected as a result of the additional pollution abatement costs anticipated
through 1976. However, the paper industry's profitability is extremely low and
price increases are already needed if profits are to be restored to a level that will
attract sufficient capital to expand capacity and assure a continued supply of
these products beyond 1973 when supply and demand are expected to be closely
balanced. Thus, if the market behaves freely, customers of the pulp and paper
industry can expect more significant price increases from market and general
economic factors than from pollution abatement costs. If a stringent price control
is levied on the industry there is likely to be a shortage of paper products after
1973.
8- 12
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3. Balance of Payments
The pollution abatement costs anticipated through 1976 will not signifi-
cantly affect the international competitiveness of U.S. paper producers. The
pollution abatement objectives are similar in all of the pulp and paper producing
regions of the world. Also, differences in implementation schedules are expected
to be small (probably less than three years), and not sufficient to cause a
substantial shift in world trade patterns and capital flow for pulp and paper
production. Consequently, pollution abatement in the paper industry should not
exert a measurable impact upon the United States balance of payments with
respect to Canada, Scandanavia, Western Europe, or other competing regions of
the world.
13
-------
III. SUMMARY OF POLLUTION ABATEMENT COST ESTIMATES
We called upon our own specialists in water and air pollution control to
analyze the capital and operating costs associated with the pollution abatement
requirements anticipated over the next five years. They drew upon a variety of
sources of current cost data including both published and unpublished Environ-
mental Protection Agency (EPA) data; the Department of Commerce report,
"Control of Atmospheric Emissions in the Wood Pulping Industry" by E.R.
Hendrickson, et al.; information and reports provided by the National Council of
the Paper Industry for Air and Stream Improvement; and our own data on costs
incurred by specific mills. These data were then applied to the air and water
emissions associated with each major type of pulp and paper making process to
calculate the anticipated capital and operating costs for each.
We found that our cost estimates for water pollution abatement generally
fell close to the median of those provided by EPA for this study; we felt,
however, that the EPA data were not specific enough for our detailed product
sector analysis and that a narrower range of uncertainty (typically ± 20%) could
be placed around our estimates. Our air pollution costs are higher than those
provided by the EPA since the latter did not take into account removal of
reduced sulfur gases except in defining the upper range of uncertainty in the EPA
data. However, our costs for sulfur compound removal should be considered
tentative since the technology is not yet fully defined. Table 7 shows the basic
cost estimates we employed. (The bases for these estimates are discussed in
Part III.)
I- 14
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TABLE 7
SUMMARY OF ANTICIPATED POLLUTION ABATEMENT COSTS1
Operating Costs ($/Ton)
Capital Costs ($000/Daily Capacity Ton)
Product Sector
News and Uncoated Ground wood
Printing and Writing3
Tissue3
Unbleached Industrial and Converting
Unbleached Kraft Board
Semi-Chemical Medium
With Cross Recovery
Without Recovery
Bleached Packaging and Board
Combination Board3
Construction Paper3
Insulation Board3
Hardboard3
Bleached Kraft Pulp
Bleached Sulfite Pulp
Groundwood Pulp
Deinked Waste Paper
1. Based on minimum economic size mills in 1971 dollars. Costs for economically marginal mills are higher. Example: operating costs/ton - Tissue $19; Printing and Writ-
ing $19; Special Industrial $26; Combination Board $9. Capital costs/daily ton ($000): Tissue $46; Printing and Writing $43; Special Industrial $52' Combination Board
$17.
2. Based on extended aeration.
3. Not integrated to pulping.
Source: Arthur, D. Little, Inc., estimates
Water2
13.20
10.50
12.20
8.30
6.50
3.80
11.50
9.70
6.20
5.90
7.10
8.70
7.70
8-17
2.90
13.80
Air
1.00
1.00
1.00
2.50
2.50
2.00
2.00
2.50
1.00
1.00
1.00
1.00
2.50
2.00
1.00
1.00
Total
14.20
11.50
13.20
10.80
9.00
5.80
13.50
12.20
7.20
6.90
8.10
9.70
10.20
10-19
3.90
14.80
Water2
23
16
18
20
13
13
20
22
10
9
9
8
16
8-43
4
20
AirAir
3
1
1
1
3
2
2
3
1
1
1
1
2
2
-
_
Total
26
17
19
21
16
15
22
25
11
10
10
9
18
10-45
4
20
-------
APPENDIX C
-------
ECONOMIC IMPACT OF ANTICIPATED PAPER INDUSTRY
POLLUTION ABATEMENT COSTS
PART III
ECONOMIC ANALYSIS
Report To
THE COUNCIL ON ENVIRONMENTAL QUALITY
73977
November 1971
-------
TABLE OF CONTENTS
PART III
Page
I. INTRODUCTION 1
A. Purpose and Scope 1
B: Approach 1
II. CAPITAL AND OPERATING COSTS TO MEET ANTICIPATED
POLLUTION ABATEMENT REQUIREMENTS 3
A. Water Pollution Control 3
B. Sulfite Pulp Liquor Treatment and Chemical Recovery Systems 5
C. Other Pulp Mills 9
D. Air Pollution Control 9
E. Total Industry Capital Requirements 1972-1976 11
F. Summary of Water and Air Pollution Costs for Marginally
Sized Mills 12
ffl. DIRECT ECONOMIC IMPACT ON THE PULP AND PAPER
INDUSTRY 15
A. Prices 15
B. Mill Shutdown Probabilities 15
C. Employment 42
D. International Competitiveness 46
IV. INDIRECT ECONOMIC IMPACT 49
A. Effect on Supplier Industries 49
B. Effect on Customers 53
C. Effect on Balance of Payments 54
111
-------
I. INTRODUCTION
A. PURPOSE AND SCOPE
The purpose of this part of our report to the Council on Environmental
Quality is to analyze the specific dislocations and changes that are anticipated as
a result of the increased capital and operating costs the paper industry will face
in complying with the water and air pollution limits anticipated over the next
five years. This analysis draws on the description of the industry structure and
trends in supply/demand and profitability provided in Part II of our report.
This section, Part III, is mainly statistical in nature. For a summary of our find-
ings and conclusions, see Part I.
B. APPROACH
The information contained in this report is based primarily upon our back-
ground knowledge developed through our consulting experience in the paper
industry plus data developed from a number of sources during this analysis.
Specifically, we called upon key staff members of the American Paper Institute
Divisions for tissue papers, printing and writing papers and paperboard to review
and critique our selection of each of the marginal mills in these industry sectors.
We also contacted officers of firms within these sectors and within the special
industrial paper, insulation board, construction paper and semi-chemical corru-
gating medium product sectors. All of the above sectors were found to contain
a relatively large number of marginal mills and to have experienced severe finan-
cial problems in 1970 and, in most cases, in 1971; therefore they are likely to
have the greatest economic difficulty in meeting the anticipated pollution
standards. Through our contacts we sought to cross-check our analysis of poten-
tial dislocations within these sectors and to obtain data from a number of mills
that would serve to characterize the financial performance of typical marginal
mills in each sector. We are indebted to the companies that provided us with this
information; to safeguard their interests we have pledged to maintain the
strictest confidence on individual company data.
We called upon our own specialists in water and air pollution control to
analyze the capital and operating costs anticipated over the next five years. They
drew upon: data contained in the report "Control of Atmospheric Emissions in
the Wood Pulping Industry" (U.S. Department of Commerce, E.R. Hendrickson,
et. al), EPA pollution cost data, information from the National Council of the
Paper Industry for Air & Stream Improvement, Inc. and ADL files on specific mill
cost experience.
These data were then applied to the gaseous and water emissions associated
with each major type of pulp and papermaking process to calculate the
-------
anticipated capital and operating costs for each. This information was cross-
checked with key staff members of the National Council of the Paper Industry
for Air & Stream Improvement, Inc. We found that our cost estimates generally
fell close to the median of those provided for the purpose of the study by the
Environmental Protection Agency; we felt, however, that the EPA data were not
specific enough for our detailed product sector analysis and that a narrower
range of uncertainty could be placed around our estimates (typically ± 20%).
Our cost estimates are provided in Chapter II and Appendices A and B.
We then reflected our pollution abatement cost estimates against current
prices of pulp and paper products and expected profitability levels of marginal
firms to assess the impact on price increases and mill shutdowns. The impact on
mill dislocations was compared against estimated mill closures that would occur
without any additional pollution abatement expenditures above current levels.
The difference represents the anticipated capacity removal due to problems
associated with obtaining the required capital and incurring the operating costs
associated with anticipated pollution control requirements through 1976. The
estimates of net production tonnage removed were then utilized to reflect the
number of jobs that would be lost in each major region of the country due to
the economic impact of pollution control requirements. These direct impacts
are discussed in Chapter III.
Finally, we called upon a number of our specialists in industries related to
the pulp and paper industry to analyze the impact of the anticipated pollution
abatement requirements on these industries. These and other indirect impacts are
discussed in Chapter IV.
C- 2
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II. CAPITAL AND OPERATING COSTS TO MEET ANTICIPATED
POLLUTION ABATEMENT REQUIREMENTS
A. WATER POLLUTION CONTROL
The treatment of wastewaters from the pulp and paper industry will encom-
pass an increasing number of operational steps and procedures because the quality
of the effluent must be improved. From long experience with the treatment of
wastewater, we recognize that the presently most economical approaches will be
based on physical removal of the suspended solids matter and the conversion of
soluble biological oxygen demanding substances (BOD) into biological organisms
which can then be separated for disposal. Of course, a large number of variables
in equipment and operation can be applied to achieve the required cleanup; for
industry-wide economic considerations, however, it is possible to develop gener-
alized capital and operating costs for a limited number of treatment processes
which are currently installed and operating satisfactorily. The wastewaters from
the pulp and paper industry are in general readily treated by biological systems
if sufficient nutrients in the form of nitrogen and phosphorus are supplied. The
removal of color bodies remains a significant problem and our assumption in
establishing capital and operating costs is that color removal will not be required
by 1976.
For purposes of considering the economic impact of pollution abatement
between now and 1976, we have considered only suspended solids removal and
BOD reduction as the key parameters in estimating future costs since compliance
with other standards (such as pH, temperature, color and alkalinity) either is not
universally required, has little effect on costs, or does not have clearly developed
solutions available. Our analysis assumed that by 1976 all paper mill effluents
would be subjected to both primary and secondary treatment. We further
assumed implementation of 95% suspended solids removal in the primary treat-
ment systems, and 90% BOD reduction in the secondary systems.
In order to establish the water pollution abatement costs to the pulp and
paper industry we examined the cost estimating model data provided us by the
Environmental Protection Agency (EPA) for the various corrective steps
(neutralization, flotation, sedimentation, stabilization and incineration) and
compared those with data we have for specific mills. Although it was possible to
obtain a reasonable agreement between, for example, our estimates of costs for
activated sludge treatment plants and the summation of the EPA neutralization,
flotation, sedimentation and stabilization costs, we chose to establish a separate
estimating procedure which would be more flexible in providing cost estimates
for the various product sectors of the industry than appeared possible by the
techniques used to establish the costs furnished to us. Furthermore, our proce-
dures allowed us to utilize recent data sources such as unpublished EPA data on
C'3
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wastewater loads which were unavailable when the EPA mathematical models
were developed. By applying this current data to specific treatment processes
that have begun to be employed by some mills we believe that a narrower range
of uncertainty (generally ± 20%) can be placed around our estimates.
We estimated the capital investment using the Engineering News Record
Construction Cost Index of 1550 (1913 = 100; i.e., approximate mid-1971 costs)
for primary treatment (solids removal), neutralization, activiated sludge via a
conventional plant, and extended aeration via aerated lagoons. Our capital invest-
ment estimates were based on the following sources of information:
(1) The Cost of Clean Water, Volume III, Industrial Waste Profiles-
Paper Mills, (U.S. Department of the Interior, FWPCQ, 1967).
(2) The Cost of Clean Water and Its Economic Impact, Volume IV:
Projected Wastewater Treatment Costs in the Organic Chemicals
Industry (U.S. Department of the Interior, FWPCA, 1970).
(3) Cost of Conventional and Advanced Treatment of Wastewaters,
(Robert Smith, Cincinnati Water Research Laboratory, EPA; July
1968).
(4) Cost of Wastewater Treatment Processes, Report No. TWRC-6:
Ohio River Basin Region (EPA, December 1968).
(5) Advanced Wastewater Treatment, (Gordon Gulp and Roger Gulp,
D. Van Nostrand, Reinhold Publishing Company, 1971).
(6) A Survey of Pulp and Paper Industry Expenditures and Accomplish-
ments in Receiving Water Quality Protection Programs: Special
Report No 71-02 (National Council of the Paper Industry for
Air and Steam Improvement [NCASI], New York, August 1971).
(7) Arthur D. Little, Inc., files on specific mill experience.
Capital investment costs were established as a function of volumetric flow
rates in millions of gallons per day. This procedure is sufficiently accurate
because the wastewaters from the pulp and paper industry are treatable by
methods involving considerable physical similarities regardless of variations in
specific operational requirements. Relationships between capital investments
and flow rates, plotted on log-log coordinates, were used for interpolation and
extrapolation. (See Appendix A.) Annual costs were established as a function of
flow rates for labor, maintenance, amortization and debt services. Interest rates
of 10% per year and 20-year amortization factors were used. Annual maintenance
- 4
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costs were taken as 2% and 4%, respectively, for primary plus activated sludge
treatment plants and for aerated lagoons. Operating labor was estimated for
three flow sizes and summed with the above costs to provide estimating curves.
Electricity and chemical costs per unit of throughput are essentially constant
for BOD removal at efficiency levels in the range of interest (estimated to be
over 75% but not over 90% for chemicals and 1.5<^ per KWH for electricity
amounting to $0.011/lb BOD for activated sludge treatment and S0.015/lb BOD
for extended aeration). Land filling of waste sludge was assumed to cost
$5.00/dry ton of solids. These costs were translated directly to unit costs for the
various paper mill products using standard raw waste loads. Table 1 shows the
waste water loads by product sector and Table 2 presents our water pollution
abatement cost estimates for all sectors except sulfite and semi-chemical pulps
which will be discussed later.
Our calculations indicate that both the capital and operating costs for
activated sludge treatment plants are two to three times greater than comparable
figures for extended aeration systems. It has been obvious for some time that
most mills in the pulp and paper industry will use extended aeration as their
principal method of secondary treatment except when the required lagoon area
is not available; in these cases, activated sludge plants will be used.
Since extended aeration will be the rule, our cost analysis has focused upon
it as the most acceptable processing technique. Our calculations show that the
cost of primary and secondary wastewater treatment to meet the above objec-
tions will range from a minimum of approximately $3 per ton of product to a
maximum of approximately $ 14 per ton of product depending upon production
tonnage, water use and pulp or paper product.
B. SULFITE PULP LIQUOR TREATMENT AND CHEMICAL
RECOVERY SYSTEMS
The sulfite pulping and recovery processes are substantially more complex
than kraft in terms of the alternative chemical systems and methods employed
in making the pulp and processing the waste liquor. Therefore, we have treated
the abatement problem separately in this section. Sodium, ammonia and magne-
sium are employed as alternative bases in the chemical system mixed with
sulfur to form sulfite. The chemistry provides for recovery for both sulfur and
base in certain instances, but in others a waste treatment plant (producing a
by-product) must be employed instead of a recirculating recovery system.
Table 3 summarizes the capital and operating costs for the various pollution
abatement systems which may be adapted to the sulfite pulping industry.
Appendix B provides the graphs and details employed in making these estimates.
C- 5
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TABLE 1
STANDARD UNTREATED RAW WASTE WATER LOADS IN THE PAPER INDUSTRY
o
\
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
NEWSPRINT &, UNCOATED
GROUNDWOOD PAPER
COATED PRINTING, WRITING
AND FINE PAPER (1)
UNBLEACHED IND. 6. CONV. PAPERS
TISSUE PAPER (1)
UNBLEACHED KRAFT BOARD
S.C. CORRUGATING
WITH CROSS RECOVERY
WITHOUT RECOVERY
BLEACHED BOARD
COMBINATION BOARD INCL. (1)
JUTE LINER & BOGUS MOD.
BUILDING PAPER (1)
INSULATION BOARD (1)
HARDWOOD (1)
BLEACHED KRAFT PULP
BLEACHED SULFITE PULP
(NO RECOVERY)
UNBLEACHED SULFITE PULP
(NO RECOVERY)
GROUNDWOOD PULP
DEINKING
TABLE
HYDRAULIC
LOAD, 1000 GAL/
TON OF PAPER
60,000
30,000
40,000
30,000
40,000
10,000
15,000
65,000
12,000
10,000
10,000
12,000
65,000
100,000
80,000
5,000
30,000
BOD LOAD
LB/TON OF
PAPER
120
50
50
50
50
60
500
100
30
10
150
200
100
1200
1200
50
90
SUSPENDED SOLIDS
LOAD LB/TON OF
PAPER
140
50
70
50
70
40
80
90
40
10
200
100
90
60
50
60
800
(1) NOT INTEGRATED TO PULPING
Source: Arthur D. Little, Inc., estimates
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TABLE 2
PRIMARY AND SECONDARY WATER TREATMENT COSTS FOR PULP AND PAPER PRODUCTS (EXCEPT SULFITE PULP)
Annual Operating Costs
Mill
Production ._.
Capacity
(tons/day)
Newsprint and Groundwood
Printing and Writing
Unbleached Industrial
and Converting
Tissue Paper
Unbleached Kraft Board
Semi-Chemical Corrugating
(a) With Cross Recovery
(b) Without Recovery
Bleached Board
Combination Board
Building Paper^
Insulation Board
Hardboard*-1^
Bleached Kraft Pulp
Groundwood Pulp
Deinking
(1) Not integrated to
(2) These mill sires
200
125
125
75
350
250
250
300
100
75
100
100
600
150
50
pulping.
establish
(3)
Waste $ Million
Water (Except Power and Chemicals) Power
Load
Activated
10 gal/day
12
3
5
2
14
2
3
19
1
0
1
1
39
0
1
.00
.85
.00
.25
.40
.50
.75
.50
.20
.75
.00
.20
.00
.75
.50
the upper end
Sludge
2.00
0.85
1.05
0.60
2.20
0.65
0.85
2.80
0.38
0.275
0.33
0.38
4.70
0.275
0.45
of the range
Aerated
Lagoons
0.80
0.43
0.33
0.30
0.70
0.25
0.35
0.85
0.20
0.15
0.17
0.20
1.30
0.12
0.22
which we
Cost per Ton of Product
(Dollars)
& Chemicals
Activated
Sludge
1.
0.
0.
0.
0.
0.
5.
1.
0.
0.
1.
2.
1.
0.
0.
32
55
55
55
55
66
50
10
33
11
65
20
10
44
99
consider to be
Aerated
Lagoons
1.80
0.75
0.75
0.75
0.75
0.90
7.50
1.50
0.45
0.15
2.25
3.00
1.50
0.60
1.35
marginal
Total Costs
Sludge Activated Aerated
Disposal
0.85
0.20
0.30
0.20
0.30
0.20
1.45
0.45
0.15
0.05
0.85
0.70
0.45
0.25
2.20
by current
Sludge Lagoons
29.90
20.20
24.80
23.60
20.00
8.30
16.60
28.20
11.30
10.70
12.00
13.80
23.80
5.90
28.90
standards .
13.20
10.50
8.30
12.20
6.50
3.80
11.50
9.70
6.20
5.90
7.10
8.70
7.70
2.90
13.80
(3) See Appendix A, Figure A-l, for cost bases.
Source: Arthur D. Little, Inc., estimates.
-------
TABLE 3
SULFITE PULP WASTE LIQUOR TREATMENT AND CHEMICAL REC0VERY
Cooking Liquor
Base
(2)
Sodium v '
Ammon i a
Magnesium
CAPITAL
Pulp
Yield (%)
48
72
44
72
47
60
AND OPERATING COST RANGES^
Fixed Capital Investment
($000 per Ton /Day)
Pulp Mill Capacity
(Unbleached Tons /Day)
100 700
13 7
8 4
35 21
24 15
43 25
36 21
Operating Cost
($ per Ton Pulp)
Pulp Mill Capacity
(Unbleached Tons /Day)
100 700
16.70 8.80
11.70 4.80
11.80 0.50
12.50 3.00
8.10 (8.10)(3)
15.00 0.10
(1) Mid 1971 Capital and Operating Costs
(2) Na SO by-product
(3) Credit
Source: Arthur D. Little, Inc. , estimates
C- 8
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The capital investment requirements for these recovery and liquor treatment
systems range from a low of about $5,000 per daily ton of capacity to a high of
$40,000—45,000 per daily ton of pulp capacity, with total operating costs
ranging from a maximum of approximately $17 per ton of pulp for fluid bed
incinerators operating on small sodium-based, low-yield pulp mills to a net
chemical recovery credit of about $8 per ton of pulp for fully cooked magnesium
bisulfite pulp.
Considerable care should be employed in using these unit costs and net
credit figures since the conversion of a sulfite pulp mill from a polluting one to a
non-polluting one often entails a change in the base chemical. It is important to
note that pulps made with the various base chemicals are not of equal quality
and value and it is virtually impossible to work the economics of this relationship
into the equations associated with the cost of chemical recovery. For example, a
sodium base sulfite mill might convert to magnifite pulping in order to achieve
relatively low cost recovery economics at the expense of pulp quality and pro-
duct value. Alternatively, the continued use of sodium base pulping with the
relatively high liquor treatment costs associated with that base might prove to be
more acceptable based on the particular company's needs in papermaking. In
general, sulfite pulp producers can be expected to have to pay an additional $10
per ton of pulp in order to accommodate liquor treatment and this is the basic
cost factor we have employed in our analysis. The low figures are for large
magnefite mills with chemical recovery. Conversely, the highest figure is for the
sulfite component in newsprint, where low sulfite pulp throughput contributes to
the high cost of waste treatment.
C. OTHER PULP MILLS
We have calculated the cost of wastewater treatment from bleached kraft
pulp and from groundwood pulp and the de-inking of waste fibre. Waste treat-
ment from groundwood pulp is estimated to be about $3 per ton of pulp,
principally because water use is very low (5,000 gallons per ton). We calculate the
cost of wastewater treatment from bleached kraft market pulp operations at
$7.70 per ton of pulp and for waste treatment from de-inking operations at $14
per ton of pulp.
D. AIR POLLUTION CONTROL
1. Kraft Mills
The kraft pulp mill and recovery plant are by far the most important
sources of air pollution in the pulp and paper industry. In our cost analysis we
have assumed that the air pollution regulations tentatively adopted by the state of
Oregon will be observed by all U.S. kraft mills by 1976. The Oregon regulations
C- 9
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stipulate that the maximum discharge of participate matter will he less than four
pounds per air dry unbleached ton of kraft pulp and that the maximum discharge
of reduced sulfur gases will be less than 10 parts per million (dry basis) in the
tail gas.
Several combinations of process alternatives may be implemented to reduce
gaseous emissions from kraft mills. The cost effectiveness of these technical
alternatives is not clearly understood nor is their technical practicality. Equip-
ment suppliers and interested members of the industry are undertaking studies
to determine the best courses of action, keeping in mind manufacturing effi-
ciencies and pollution abatement effectiveness. At this point in time it is prema-
ture to attempt to judge the cost effectiveness of these possibilities and therefore
the ultimate cost of air pollution control on the kraft pulping industry.
As a result, the capital cost of air pollution control in the kraft pulp indus-
try is far from being a clearly defined subject. There have been many articles
written and data developed indicating that the capital cost of add-on systems
normally anticipated can total approximately $2500 per daily ton of pulp
capacity. On the other hand, we have reliable recent data from a specific mill
(and one which has a relatively bad pollution problem) where the total capital
cost to achieve the above objectives will be only $1300 per daily ton of pulp
capacity. In addition, there is the very complicated issue of the replacement of
existing kraft recovery boilers with new boilers, part of which is assignable to
pollution control. Reductions in pulp production rates are also likely to occur
in many instances of air clean-up, and the incremental cost associated with these
lower tonnage rates can also be assigned to pollution control.
It is also impossible to develop any great accuracy with respect to the
operating costs associated with pollution abatement. On the lower end of the
spectrum, we would judge that the total cost might be about $1.50 per ton of
kraft pulp. On the other hand, substantially higher figures are reported and
figures of $3 or $4 per ton of pulp can easily be claimed.
Until the technology is more properly understood and the choice of process
systems more clearly delineated, it will be impractical to attempt greater refine-
ment of either the capital or operating cost figures associated with air purity
control in the kraft pulping industry.
2. Sulfite Pulp Mills
As chemical recovery and liquor treatment systems are applied to sulfite
pulp mills, they will result in new increments of air pollution from the inciner-
ation processes employed and from the volatile sulfur gases which already con-
stitute a problem. However, the technology for solving these problems is
C- 10
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relatively simple: recycle of the volatile gases back to the process, and the institu-
tion of wet scrubbers for the abatement of particulate emissions. We expect that
the capital costs for the add-on devices will average $200 per daily ton of pulp
capacity, resulting in an incremental operating cost (including the depreciation
and interest charges) of $0.75 to $1.00 per ton of pulp produced.
3. Power Boilers
For the most part power boilers in the pulp and paper industry are already
converted from coal firing to No. 6 fuel oil. In order to put these boilers into
compliance with air pollution regulations, they will be fired with low sulfur fuels,
resulting in a substantial increase in the cost of steam and power and, in many
cases, requiring that tail gases be purified before being discharged into the
atmosphere in order to reduce particulate emissions. We estimate that the capital
cost for these boiler conversions will total approximately $700 per daily ton of
paper or board capacity, and taking into account the incremental cost of low-
sulfur fuel, will raise the cost of paper and board production by about $1 per ton.
E. TOTAL INDUSTRY CAPITAL REQUIREMENTS 1972-1976
In estimating the paper industry's capital requirements to achieve the air
and water pollution standards anticipated by 1976, one must consider the
abatement levels already achieved by the industry. On the water side many mills
have already implemented in-plant waste control measures; many have primary
treatment facilities (about 70% of the mills, about 90% of the tonnage), and far
fewer employ secondary treatment (perhaps 40% of the mills or 60% of the
tonnage). Since a substantial portion of the capital costs for water treatment lie
in secondary treatment facilities, the industry has yet to spend over 50% of the
capital costs associated with meeting the level of control anticipated by 1976. '
On the air side there is nearly universal use of electrical precipitators to con-
trol particulate emissions in U.S. pulp and paper mills. However, very few mills
are now achieving 90% particulate removal. Since the capital (and operating
costs) escalate very rapidly as 90% removal is approached, we can say that most
of these costs have yet to be incurred. Very few mills are currently controlling
kraft pulp mill reduced sulfur emissions although many are making plans to do
so. Thus for all intents and purposes, this cost has yet to be incurred.
(1) The above percentage estimates of mills with primary and secondary treatment are
derived from a recent mill survey by NCASI. These figures may be misleading as to the
degree of accomplishment to date for two reasons: not all mills in the industry
responded, nor is the degree of pollution reduction known for existing installations.
Thus, remaining costs for 95% suspended solids removal and 90% BOD reduction in
secondary systems may be far in excess of the 50% estimate.
C -11
-------
Table 4 recapitulates the average capital costs for air and water pollution con-
trol in the various pulp, paper and product sectors of the industry. The figures are
reported on a unit basis (capital dollars per daily ton of throughput) with the figures
in the water column accounting for primary and secondary biological treatment of
all aqueous wastes from the various manufacturing operations. The air column pro-
vides for air pollution abatement except for power boilers, which are covered sepa-
rately, and a liquor treatment column accounts for sulfite systems only.
In this way, taking into account those product sectors of the industry which
are integrated and also those which are not, we are able to total the unit costs and
then convert these into total capital dollars to be expended by 1976 based on the
anticipated production tonnage in the various product categories at that time. By
this mathematical exercise we have calculated that the total expenditure to abate
pollution from a point of no primary or secondary treatment in the industry to
anticipated levels of treatment by 1976 (taking into account growth during that
period) will total $4.1 billion, approximately $800 million of which will be in air
pollution control and approximately $3.3 billion of which will be in water pollu-
tion control.' •* Approximately $800 million of this total has already been invested
through 1971, leaving a balance of $3.3 billion.
F. SUMMARY OF WATER AND AIR POLLUTION COSTS
FOR MARGINALLY SIZED MILLS
In Table 5 we have prepared specific capital and operating cost data for water
pollution controls applied to the most sensitive product sectors of the industry at
low tonnage levels where the difficulties will be most acute. In these product
categories (tissue, special industrial, printing and writing, and combination paper-
board) the operating costs of water pollution control range from $8 to $25 per
ton of product with capital costs ranging from $ 16,000 to $51,000 per daily ton
of capacity. These costs are substantially higher than those of larger mills.
To these figures can be added air pollution control requirements associated
with modifying the power boilers typically used by this sector of the industry.
These figures amount to approximately $1 per ton of product for operating
expenses and $700 per daily ton of capacity for capital improvements.
(1) Here again, it should be noted that these figures are at variance with survey figures pro-
vided by the industry. For example, industry estimates indicate $800 million will have
been spent for water treatment by 1972, with about $200 million to be spent per year to
1976, or a total of $1.6 billion. The difference may be accounted for in several ways:
overstatement by the industry of the degree of primary and secondary treatment now
installed, industry underestimation of degree of BOD removal by secondary treatment
ultimately to be required - (up to 90%), and overstatement of total capacity by 1976.
C- 12
-------
TABLE 4
PAPER INDUSTRY CAPITAL COSTS OF AIR AND WATER POLLUTION CONTROL
Dollars Per
Product Water Air Liquor
Newsprint & Groundwood 23,000 2,000
Printing, Writing &
Related 16,000 —
Unbleached Industrial
& Converting 20,000 —
Bleached Packaging 22,000 2,000
Tissue 18,000 —
Unbleached Kraft Board 13,000 2,000
Semi-Chemical Medium 9,000 1,000 —
Bleached Board & 22,000 2,000 —
Bristols
Combination Board & 10,000 —
Wet Machine
Construction Paper 9,000 —
Insulation Board 9,000 —
Hardboard 8,000 ~
Bleached Kraft Market ,16,000 2,000 —
Pulp
Sulfite Pulp — 1,000 20,000
NSSC Pulp — 1,000 20,000
Groundwood Pulp — — —
De-inked Pulp
•L- T_ T n -7 1 j „ i i „ —„
Jaily Ton
Boilers
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
—
Total *
Cost
26,000
17,000
21,000
25,000
19,000
16,000
11,000
25,UOO
11,000
10,000
10,000
9,000
18,000
22,000
22,000
4,000
20,000
Total
Estimated
1976
Daily
Capacity
(000 tons)
18
35
15
4.3
15
38
14
17
28
6.5
6.1
7.6
10.
6.9 **
9.1 **
15
3.0
Total
Industry
Cost
1976
($million)*
470
560
320
110
280
610
150
430
310
65
60
70 •
180
150
200
60
60
4,085
** Reflects current capacity without liquor
and le^s anticipated removals.
recovery systems plus anticipated expenses
Source: Arthur D. Little, Inc., estimates
13
-------
TABLE 5
SUMMARY OF WATER POLLUTION COSTS FOR MARGINALLY SIZED MILLS
(1)
Product Tonnage Operating Cost Capital Cost
Level $/Ton of Product $/Daily Ton
TPD Of Capacity
Tissue 20 18 45,000
Special Industrial 15 25 51,000
Printing and Writing 50 18 42,000
Combination Paperboard 50 8 16,000
(1) Based on extended aeration
Source: Arthur D. Little, Inc., estimates
C- 14
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III. DIRECT ECONOMIC IMPACT ON THE PULP
AND PAPER INDUSTRY
A. PRICES
To determine the price increases necessary to absorb the increased pollution
abatement costs anticipated by 1976, we have compared the abatement costs for
efficient mills with the approximate median price of each major product group.
We have utilized the abatement costs for efficient mills since these will generally
set the price ceiling for the entire industry. We have already discussed the abate-
ment cost levels for marginal mills in Chapter II. In most cases, their costs will be
appreciably higher than those of larger mills since the latter benefit from scale
economies; this factor adds to the economic difficulties of the marginal mills.
Table 6 shows our analysis of the price effect on each major product sector.
Table 6 indicates that the major price increases relative to current prices
will be in hardboard, newsprint and ground wood paper, bleached kraft pulp and
unbleached kraft linerboard. Here the price increases range from 6.5 to 10% of
product value, depending upon the grade. Product sectors that will experience
moderate price increases ranging from 3.5 to 6% of current product value are:
bleached paperboard, semi-chemical corrugating medium, bag and wrapping
papers, combination paperboard, insulation board, printing papers and dissolving
pulp. The other product sectors will require only modest price increases.
While several hardboard and insulation board producers employ dry pro-
cesses, we do not believe that they control enough volume or have any incentive
to hold prices down. We anticipate that all of the above price increases will be
obtained in the absence of regulated price controls because of the tightening
supply/demand balances projected for most sectors in 1972 and 1973. (See
Part II.) In most sectors significantly higher price increases than those reflected
in Table 6 are anticipated by 1974. Beyond 1974, prices might well decline again
should the industry enter another cycle of overcapacity.
B. MILL SHUTDOWN PROBABILITIES
In this section we have concentrated upon the product sectors and mills
that will have the greatest difficulty in either raising the capital or absorbing the
operating costs associated with the anticipated pollution abatement standards.
These key impact areas which were selected in the overall industry analysis in
Part II are: sulfite and semi-chemical pulps, tissue paper, printing and writing
paper, special industrial paper and combination paperboard. In addition to these
sectors, we expect some dislocations to occur to a lesser extent in a variety of
other product sectors; these are analyzed in the last part of this section.
C- 15
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TABLE 6
PRICE IMPACT OF ANTICIPATED POLLUTION ABATEMENT COSTS
Approximate
Current
Key Grades Price
($/Ton)
Unbleached Kraft Liner
Bleached Paperboard
Semi-chemical Medium
Combination Paperboard
Unbleached Bag and Wrapping
Bleached Packaging Paper
Newsprint
Uncoated Groundwood
Coated Publication
Uncoated Book
Tissue Paper (Converted)
Special Industrial Paper
Construction Paper (shingles)
Insulation Board
Hardboard
Bleached Kraft Pulu
Hardwood
Softwood
120
210
104
110
160
200
160
180
220
220
400
600
65
135
80
120
150
Estimated
Abatement Cost
For
Efficient Mm
($/Ton)
8.50
12.00
5.50
5.50
8.50
11.00
12.50
12.50
8.50
8.50
8.50
9.50
1.00
6.00
7.50
10.00
10.00
Cost As
% of
Current
Price
7
6
5.5
5
5.5
5.5
8.5
7
4
4
2
1.5
1.5
4.5
10
8.5
7
Dissolving Pulp
220
7.50
3.5
Source: Arthur D. Little, Inc., estimates
C-16
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1. Sulfite, Semi-chemical and Dissolving Pulp
In Tables 7 and 8 we report the total number and criteria for selection of
marginal sulfite and dissolving pulp mills in the various sections of the country.
In our view there are 12 marginal mills amounting to an annual capacity of
500,000 tons of sulfite pulp, and we feel that pollution abatement will result in
the closure of 9 of the 12 mills, reducing the annual production of sulfite and
dissolving pulp grades by 350,000 tons per year. Most of the impact of this
change will be felt in the North Central region of the country, but with close-
downs anticipated in New England and the West as well. As a result of these mill
closures, approximately 13% of the United States domestic supply of sulfite pulp
will be removed from the market.
In Table 9 we report anticipated marginal capacity shutdown factors in
semi-chemical pulping. In our judgment there are nine marginal mills producing
250,000 tons per year of semi-chemical pulp, a very high percentage of which is
ultimately converted into corrugating medium. Based on pollution abatement
requirements, we foresee the closure of five semi-chemical pulp mills whose total
tonnage amounts to 135,000 tons per year. Most of these closures will occur in
the North Central region. The removal of 135,000 tons per year of semi-chemical
pulp from the domestic supply will result in a reduction in that supply of approx-
imately 15%. We do not foresee a diminution in the production of corrugating
medium per se. Alternatively, we anticipate a greater use of secondary fibre in
this product as marginal semi-chemical pulp mills are closed and pressures for use
of recycled fibers increase.
Both sulfite and semi-chemical pulp face substantial competition from other
pulp sources within the industry: sulfite by substitution from kraft, and semi-
chemical by substitution from secondary fiber such as corrugated clippings.
Whereas the exposure of sulfite pulp compared with semi-chemical pulp is
somewhat greater and therefore the future of sulfite is somewhat more tenuous,
the future of both products represents a borderline situation.
Sulfite pulp in particular has been decreasing in supply over many years as
the higher quality (and higher priced) kraft pulps have supplanted sulfite in order
to keep pace with increasing product quality demands. Notwithstanding this
factor certain properties of sulfite give it advantages over kraft in specific product
applications, and particularly in mills integrated to papermaking. Were it not for
the pollution cost factors we feel that further reductions in sulfite capacity below
existing levels would not likely come about.
On the other hand, nearly all semi-chemical pulp goes into corrugated
medium, a product with an assured long-term growth and substantially less
C-17
-------
TABLE 7
SULFITE PULP
No.
Total Mills 37 9,750
OK 25 8,365
Marginal 12 1,395
MARGINAL CRITERIA:
1. No recovery or inadequate recovery facilities
2. Mill capacity less than 150 tpd
3. Wood species limitation
4. Product value
Marginal Mills
Area No. tpd
New England 3 455
Middle Atlantic 0 0
East North Central 5 495
West North Central 1 115
South Atlantic ' 0 0
East South Central 0 0
West South Central 0 0
West (including Alaska) _3 330
Total 12 1,395
Able-to-Cope Mills
Area No. tpd
New England 2 915
Middle Atlantic 3 785
East North Central 6 1,030
West North Central 0 0
South Atlantic 1 400
East South Central 0 0
West South Central 0 0
West (including Alaska) 13 5,225
Total 25 8,365
Source: Arthur D. Little, Inc. estimates
C- 18
-------
TABLE 8
SULFITE PULP MILL SHUTDOWN PROBABILITIES, 1972 - 1976
Region
New England
Total Marginal Production* Probability of Closure
Mills
Annual
Capacity
(000 tons)
160
Status
Quo**
Additional
Abatement
67
Annual Capacity Removed
Status Additional
Quo** Abatement
(000 tons) (000 tons)
87
North Central
220
33
100
50
220
West
120
33
40
Totals
12
500
10
70
50
350
* i.e., Vulnerable to increased pollution abatement costs.
** Assumes no additional pollution abatement expenditures above current levels.
Source: Arthur D. Little, Inc. estimates.
-------
TABLE 9
SEMI-CHEMICAL PULP MILL SHUTDOWN PROBABILITIES. 1972 - 1976
Region
North Central
Total Marginal Production Probability of Closure Annual Capacity Removed
Mills
Annual
Capacity
(000 tons)
100
Status
Quo*
Additional
Abatement
50
Status Additional
Quo* Abatement
(000 tons) (000 tons)
50
NJ
O
South central
50
100
50
West
100
50
35
Totals
of Total Industry
22
250
55
135
3.5
* Assumes no additional pollution abatement expenditures above current levels.
Source: Arthur D. Little, Inc. estimates.
-------
rigorous historical competition from secondary fiber. Clearly, in the absence of
pollution abatement, semi-chemical pulp would continue to grow at 4—5% per
year, and decreases in this rate of growth can be attributed to pollution abate-
ment expenses.
In summary it seems that both sulfite and NSCC pulp would be able to
sustain a status quo or growth condition in the absence of pollution abatement;
with pollution abatement some diminution in each is anticipated with the impact
felt rather more strongly in the future of sulfite than in the future of semi-
chemical pulp producers.
2. Tissue Paper
Table 10 shows the number of tissue mills and average daily capacity which
we consider to be marginal, along with the criteria for selecting these mills. It
indicates that nearly half of the mills and 20% of the capacity are considered
marginal by comparison with the larger, more modern mills in this product
sector. Nearly all of this marginal capacity is located in the New England,
Middle Atlantic and East North Central regions.
Table 1 1 shows the financial characteristics of marginal tissue mills in 1970
derived from a sampling of eight small mills with an average daily capacity of
about 40 tons per day. These mills are integrated to converting but not to pulp,
relying instead on purchased market pulp. Our analysis indicates that such mills
actually opeiated at a loss in 1970, primarily because of weak prices in the tissue
paper market coupled with relatively high market pulp prices. While we expect
tissue product prices to increase in 1972 and 1973, due to tightening supply/
demand balances, market pulp prices are expected to increase at an even greater
rate. Therefore, the only significant profit improvement in this sector will come
from the increased capacity utilization foreseen for the entire industry sector.
While this may correct the current deficit situation for many marginal tissue
mills, their return on investment is destined to remain very low. It is therefore
unlikely that they will be able to obtain capital for pollution control equipment.
If they are able to avoid capital costs by joining into a municipal water treatment
system, it is still questionable whether they can pass on all of their increased
operating costs which will amount to 3-5% of sales compared to about 2% of
sales for a large-scale tissue producer.
As a result of the foregoing analysis Table 12 shows our estimates of tissue
mill closures with and without additional pollution abatement expenditures over
the next 5 years. This indicates that while about 1 5% of the marginal tonnage can
be expected to shut down in any case, a full 50% is likely to be terminated in the
face of increased pollution abatement costs. By far the major impact will be felt
in the New England and Mid-Atlantic regions. The total production tonnage
C • 21
-------
TABLE 10
MARGINAL TISSUE MILLS
No.
102
53
49*
Total Mills
OK
Marginal
*(Incl three fine paper mills)
MARGINAL CRITERIA:
1. Size — under 50 tpd
2. Pulp Mill — • pollution problem load
• sulfite - no recovery
• deinked
3. Product Value
tpd
10,615
8,730
1,885
Marginal Mills
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
No. Mills
tpd
730
510
385
0
90
18
0
I'M
1885"
Able-to-Cope Mills
No. Mills
tpd
670
2,265
2,390
0
500
(1)
(2)
(3)
(4)
1.700
8,725
(1) Incl. two mills which also produce fine papers.
(2) Incl. two mills which also produce fine papers; incl. one
mill which also produces bleached wrapping paper.
(3) Mill also produces coarse papers.
(4) Incl. one mill which also produces bleached f oodboard; one
mill which also produces coarse and fine papers.
(5) Mill also produces coarse papers and f oodboard.
Source: Arthur D. Little, Inc. estimates
C- 22
-------
TABLE II
FINANCIAL CHARACTERISTICS OF MARGINAL TISSUE MILLS. 1970
% of Sales % of Fixed Assets
Sales *
Profit (Loss) Before Tax
Profit (Loss) After Tax
Depreciation
Cash Flow
Net Fixed Assets
Total Fixed Assets
Operating Rate 80% of Capacity, averaging 40 tons/day.
Pollution Abatement Cost Range; 3 - 5% of Sales
* Reflects integrated converting and papermaking
Source: Arthur D. Little, Inc., sampling of representative mills
6,500
(500)
(150)
300
151)
2,800
3,300
100
(7.7)
(2.3)
4.6
2.3
43
59
170
(13)
(4)
8
4
75
100
C - 23
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TABLE 12
TISSUE PAPER MILL SHUTDOWN PROBABILITIES. 1972 - 1976
Total Marginal
Mills
18
16
7
2
1
4
49
Production
Annual
Capacity
(000 tons)
250
180
130
30
6
52
650
14
14
Probability
Status
Quo*
(%)
20
20
0
0
100
25
15
of Closure
Additional
Abatement
(%)
60
60
30
50
100
50
50
Annual Capacity Removed
Status
Quo*
(000 tons)
50
35
0
0
6
15
105
2.6
2.5
Additional
Abatement
(000 tons)
150
110
40
15
6
25
345
8.0
7.7
Region
New England
Mid-Atlantic
North Central
South Atlantic
South Central
West
TOTAL (Rounded)
% of 1973 Capacity
% of 1976 Demand
* Assumes no additional pollution abatement expenditures above current levels,
Source: Arthur D. Little, Inc. estimates.
-------
involved is small and will be easily absorbed by the larger mills. However, a large
number of small mills will be affected and these are often located in small towns
with limited alternative employment opportunities. The employment impact is
accentuated by the fact that a relatively labor-intensive converting operation is
usually attached to the mill.
3. Printing, Writing and Related Papers
Table 13 shows the criteria, number and capacity of marginal printing and
writing paper mills. It indicates that about 70% of the mills and nearly 50% of
the industry capacity are marginal by today's standards of efficiency. Most of
this marginal capacity is located in the New England, East North Central and
Mid-Atlantic regions.
Table 14 indicates the 1970 financial performance of the typical marginal
mill to which we refer. This analysis employs a composite performance of 17 non-
integrated companies compiled by the American Paper Institute. It indicates that
such mills were operating at an extremely low level of profitability in 1970.
Based on the financial performance of the larger publicly-held companies in the
first three quarters of 1971 there has been no improvement in the profitability
of smaller firms this year. We do expect a rapid tightening of the supply/demand
balance in this sector of the industry in 1972 and 1973 which should significantly
improve labor productivity and cause prices to rise. However, the nonintegrated
mills will be faced with steeply rising pulp prices; thus their profitability will not
improve nearly as much as companies integrated to pulp. The main pollution-
related difficulties encountered by marginal mills will be either in obtaining the
necessary capital (because of their low profitability) or in justifying its expendi-
ture in a relatively obsolete mill. Many of these mills are parts of larger companies,
which in many cases will elect to centralize their production in a larger mill
rather than revamp a marginal mill. It is unlikely that the increased operating
costs for pollution abatement will eliminate the profits of these mills. These
costs, as a percent of their sales, are small; while their cost per ton is considerably
higher than those of the larger firms the impact as a percent of sales is mitigated
by the fact that the smaller mills tend to make higher valued products.
Table 15 shows our estimates of the amount of marginal tonnage likely to
be shut down over the next five years, with and without additional pollution
abatement costs. It indicates that 10% of the marginal tonnage will probably be
removed in any case and that an additional 10% will close mainly because of the
inability to cope with the additional pollutional abatement costs. The affected
closures will be spread over four regions in descending order of importance:
New England, Mid-Atlantic, North Central and West Coast. The total tonnage
involved is greater than the slack capacity anticipated in 1973. However, we
C • 25
-------
TABLE 13
MARGINAL PRINTING. WRITING AflU RELATED PAPER MILLS
(Except News and Uncoated Groundwood)
No. tpd
Total Mills 138 29,175
OK 41 15,650
Marginal 97 13,525
MARGINAL CRITERIA:
1. Size — under 200 tpd
• non-integrated
2. Pulp Mill — • rag or deinked
• sulfite or NSSC
• hi-pollution load
Marginal Mills
Area No. Mills tpd
New England 32 5,400
Middle Atlantic 21 2,975
East North Central 31 3,600
West North Central 2 335
South Atlantic 4 155
East South Central 0 0
West South Central 1 125
West (2 subdivisions) 6 930
Total 97 Tl
Able-to-Cope Mills
Area No. Mills tpd
New England 4 1,665
Middle Atlantic 5 1,875
East North Central 17 6,295
West North Central 0 0
South Atlantic 5 2,335
East South Central 4 1,375
West South Central 3 1,300
West (2 subdivisions) 3 790
Total 41 15,650
Source: Arthur D. Little, Inc. estimates
' 26
-------
TABLE 14
FINANCIAL CHARACTERISTICS OF MARGINAL PRINTING & WRITING
PAPER MILLS, 1970
$000 % of Sales % of Total Assets
Sales
Profit Before Tax
Profit After Tax
Depreciation
Cash Flow
Net Assets
Total Assets
13,000
195
115
575
690
6,200
11,500
100
1
0
4
5
48
87
.0
.5
.9
.4
.3
.0
.0
114.
1.
1.
5.
6.
55.
100.
0
8
1
0
1
0
0
Operating Rate 85% of Capacity, averaging 150 tons/day.
Pollution Abatement Cost Range: 3.5 -6.0% of Sales
Source: American Paper Institute composite of non-integrated companies,
• 27
-------
TABLE 15
PRINTING AND WRITING PAPER MILL SHUTDOWN PROBABILITIES, 1972 - 1976
N)
oo
Total Marginal Production
Probability of Closure
Annual Capacity Removed
Mills
32
21
33
4
1
6
97
Annual
Capacity
(000 tons)
1,900
1,040
1,370
55
45
320
4,730
45
43
Status
^uo*
(%)
10
10
10
0
0
20
10
Additional
Abatement
(%)
20
20
15
0
0
30
20
Status
Quo*
(000 tons)
190
100
140
0
0
60
490
4.7
4.4
Additional
Abatement
(000 tons)
380
200
210
6
0
100
890
8.5
8.0
Region
New England
Mid-Atlantic
North Central
South Atlantic
South Central
West
TOTAL (Rounded)
% of 1973 Capacity
% of 1976 Demand
* Assumes no additional pollution abatement expenditures above current levels.
Source: Arthur D. Little, Inc. estimates.
-------
expect that shifts in capacity to other larger mill locations will more than make
up for the capacity lost by 1976.
4. Special Industrial Paper
Table 16 shows the number of marginal mills, their capacity and the criteria
for selection in the special industrial paper sector. It documents our estimate that
25% of the mills and 16% of the capacity are marginal by current standards.
About half of this tonnage is in the Mid-Atlantic region and the remainder distri-
buted equally between the New England, East North Central and South Atlantic
regions.
Table 17 illustrates the 1970 financial characteristics of a typical marginal
mill based on a composite of five mills. Since these mills are parts of larger
companies, we employed the capitalization measure of total fixed assets which
approximates total assets. The 4% return on gross fixed assets achieved by these
mills in 1970 is certainly less than an adequate return from an investment stand-
point, although it is comparable to the industry average in that year. This sector
has benefited from weak pulp prices in 1971; however, this was offset by gen-
erally weak industrial paper prices caused by continued significant overcapacity.
Thus, profits have not improved significantly, if at all. We anticipate that this
sector will continue to experience a cost/price squeeze through 1973 as market
pulp prices increase at a faster rate than those of special industrial paper. This
is one of the few industry sectors where we anticipate continued slack capacity.
through 1973. Under these conditions, the additional cost of pollution abatement
could well eliminate the profit margins of the marginal firms. The wide range in
abatement costs, from 2.5% to 6% of sales, is caused primarily by the wide range
in product values as well as mill production volumes. Thus, a small mill producing
a relatively low-valued industrial paper product mix is particularly vulnerable.
This profitability factor is accentuated by the fact that the anticipated abatement
costs for the typical large mill in this sector are only about 1.5% of sales.
Table 18 shows our estimates of the amount of capacity likely to be closed
by 1976 with and without additional pollution abatement costs. It indicates that
about 30% of the marginal capacity is likely to be removed in any case while as
much as 85% of this capacity is likely to be shut down when faced with additional
pollution abatement costs. The tonnage involved, however, is small and can cer-
tainly be made up by the larger firms in this industry. The impact caused by
additional pollution abatement costs will be felt mainly in the Mid-Atlantic
region and to a lesser extent in the South Atlantic and New England areas.
C- 29
-------
TABLE 16
MARGINAL SPECIAL INDUSTRIAL PAPER MILLS
No.
36
27
9
tpd
1120
935
185
Total Mills
OK
Marginal
MARGINAL CRITERIA:
1. Size — 25 tpd and under
2. Non-integrated with other products
3. Grade value
Marginal Mills
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
No. Mills
2
5
1
0
1
0
0
0
tpd
35
9C
25
0
35
0
0
0_
185
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West,,,
Total
Able-to-Cope Mills
No. Mills
10
6
0
1
2
0
0
27
tpd
460
175
230
0
20
50
0
0_
935
Source: Arthur D. Little, Inc. estimates
30
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TABLE 17
FINANCIAL CHARACTERISTICS OF MARGINAL SPECIAL INDUSTRIAL PAPER MILLS, 1970
$(000) % of Sales % of Fixed Assets
Sales 5,000 100 167
Profit before tax 240 4.8 8.0
Profit after tax 120 2.4 4.0
Depreciation 100 2.0 3.3
Cash Flow 220 4.4 7.3
Net fixed assets 1600 32 53
Total fixed assets 3,000 60 100
Operating rate about 75% of capacity, averaging 20 tons/day.
Pollution Abatement Cost Range: 2.5 - 6% of sales
Source: Arthur D. Little, Inc. sampling of representative mills.
C- 31
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TABLE 18
SPECIAL INDUSTRIAL PAPER MILL SHUTDOWN PROBABILITIES 1972 - 1976
Region
New England
Mid-Atlantic
North Central
South Atlantic
Total Marginal Production
Mills
2
5
1
1
Annual
Capacity
(000 tons)
10
30
10
10
Probability of Closure
Status
Quo*
(%)
50
20
100
0
Additional
Abatement
(%)
100
60
100
100
Annual Capacity Removed
Status
Quo*
(000 tons)
5
6
10
0
Additional
Abatement
(000 tons)
10
20
10
1P_
TOTAL (Rounded)
of 1973 Capacity
of 1976 Production
60
10
12
30
85
20
* Assumes no additional pollution abatement expenditures above current levels,
Source: Arthur D. Little, Inc. estimates.
3.4
3.8
50
8.6
9.6
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5. Combination Paperboard
Table 19 shows our estimates of the number and tonnage of combination
paperboard mills and the criteria used in their selection. It indicates that nearly
50% of the mills and 25% of the total sector capacity falls into the marginal
category. This sector has been the hardest hit in the paper industry from the
standpoint of mill shutdowns with nearly one million tons of annual capacity
removed in 1970 and 1971. Nevertheless, a significant amount of overcapacity
still exists in this sector and many mills similar to those that were shut down in
the past 18 months continue to operate. The Mid-Atlantic region is the most
vulnerable to the impact of further shutdowns followed by the East North
Central and New England regions. Potential mill dislocations in other parts of
the country are relatively minor by comparison.
Table 20 illustrates the financial characteristics of a typical marginal com-
bination board mill in 1970. This analysis was based on a sampling of four mills
that were actually closed in 1971, but that are representative of a number of
mills still in operation. We have estimated that the operating rate in this sector
will improve to about 94% of capacity in 1973, compared to 86% in 1970; thus,
market conditions will be conducive to increased prices and profit margins.
However, we have greater uncertainty about this forecast than in any other paper
industry sector. It is predicated upon an estimated average annual growth in
demand of,3% per year over the next five years on the basis of growing use of
recycled paper products; this contrasts with no growth in this product sector
during the 1960's. At the moment we are unsure how rapidly this increased
demand will materialize. On the other hand, a sharply increased demand for
recycled paper products will cause waste paper prices to increase significantly,
particularly in view of the labor-intensiveness of the collection process which is
extremely difficult to mechanize. Therefore, the marginal mills are still likely to
face a cost/price squeeze unless they are able to upgrade their product mix to
higher valued products. Also, their pollution abatement costs as a percent of
sales are somewhat higher than those of larger mills, mainly because of their
smaller size.
Table 21 shows our estimates of the combination paperboard capacity likely
to be removed by 1976, with and without additional pollution abatement costs.
It indicates a 10% removal of marginal capacity with no additional pollution
abatement cost compared with a 25% removal when the factor of additional
abatement cost is considered. The Mid-Atlantic region will feel the greatest
impact followed by the New England and North Central areas. Minor effects
will be felt in the South Atlantic and Western regions. The total tonnage affected,
however, is small in comparison with total sector capacity and can certainly be
made up by capacity expansions at the larger, more viable mills.
-------
TABLE 19
MARGINAL COMBINATION PAPERBOARD - WET MACHINE BOARD MILLS
No._ tpd
Total Mills
OK
Marginal
MARGINAL CRITERIA:
170
91
78
24,525
18,355
b,170
Combination Paperboard: Folding Boxboard, Non-folding, Set-up
1. Size — 100 tpd, no. of machines, size and age
2. Integration to converting
3. Product value
4. Pollution — receiving waters
5. Raw material availability
6. Markets and management
Jute, bogus medium and linerboard
1. Size — 100 tpd, no. of machines,
2. Integration to converting
3. Company characteristics
4. Markets, management
5. Pollution - receiving waters
6. Raw material availability
trim and age
Marginal Mills
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
No. Mills
19
29
19
1
6
1
0
3
Able-to-Cope Mills
78
13
17
31
4
6
5
2
13
(1)
(1)
91
tpd
1,280
2,575
1,47C
35
510
115
0
185
6,170
1,230
4,675
7,100
820
1,235
740
410
2.140
18,355
Note:
(1) Mill produces NSCC medium (not bogus), but is likely to switch.
Source: Arthur D. Little, Inc. estimates
C-34
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TABLE 20
FINANCIAL CHARACTERISTICS OF MARGINAL COMBINATION BOARD MILLS. 1970
$(000) % of Sales % of Fixed Assets
Sales 3,000 100 66.6
Profit before tax 90 3 2.0
Profit after tax 45 1.5 1.0
Depreciation 100 3.3 2.2
Cash flow 145 4.8 3.2
Net fixed assets 1,200 40 27
Total fixed assets 4,500 150 100
Operating rate 80% of capacity, averaging 80 tons/day.
Pollution Abatement Cost Range: 5 - 8% of Sales
Source: Arthur D. Little, Inc. sampling of representative mills.
C-35
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TABLE 21
COMBINATION PAPERBOARD MILL SHUTDOWN PROBABILITIES. 1972 - 1976
Total Marginal Production
Probability of Closure
Annual Capacity Removed
Mills
19
29
20
6
1
3
78
Annual
Capacity
(000 tons)
425
850
485
170
40
60
2,030
25
25
Status
Quo*
(%)
15
10
10
0
0
0
10
Additional
Abatement
(%)
30
30
25
10
0
33
25
Status
Quo*
(000 tons)
60
90
50
0
0
0
200
2.5
2.5
Additional
Abatement
(000 tons)
130
250
120
20
0
20
540
6.6
6.6
Region
New England
Mid-Atlantic
. North Central
CO
South Atlantic
South Central
West
TOTAL (Rounded)
% of 1973 Capacity
% of 1976 Demand
* Assumes no additional pollution abatement expenditures above current levels.
Source: Arthur D. Little, Inc. estimates.
-------
6. Other Product Sectors
Table 22 summarizes our estimates of the likely capacity removal by 1976
in other sectors of the paper industry with and without additional pollution
abatement costs. The product sectors included here in descending order of the
amount of dislocations we expect are: insulating board, newsprint and uncoated
groundwood papers, packaging paper and board (except that made from waste
paper), construction paper and hardboard. Each of these sectors will be less
affected by pollution abatement costs than the sectors discussed previously in
this chapter. The greatest dislocations in these product sectors are expected to
occur in the New England, North Central, Western and South Central regions.
However, the total tonnage involved is very small in relation to the total capacity
and demand for these grades. Thus, there will certainly be a sufficient capacity
available in the remaining mills to make up for the loss. To back up the analysis
shown in Table 22 we estimated the probability of closure in each of the indivi-
dual product sectors.
Table 23 shows our analysis and criteria for marginal mills in the insulation
board sector. Here only six mills are involved. We believe that these will be
closed by 1976 regardless of whether they are faced with additional pollution
abatement costs mainly because we expect no growth in demand and continuing
overcapacity through 1976. Thus, all of the marginal mills are likely to be closed
strictly because of economic considerations.
Table 24 shows a similar analysis for newsprint and uncoated groundwood
paper mills. All of this marginal tonnage is located in the New England, Western
and North Central regions. We estimate that by 1976, in the face of increased
pollution abatement costs, two mills will close in New England, one in the North
Central region, and one in the West. Without additional pollution abatement
costs, probably only one New England mill would close.
Our analysis of marginal packaging paper and board mills (excluding com-
bination board) is shown in Table 25. About 60% of this tonnage is located in the
North Central region. We expect significantly improved operating rates for most
of these products in 1972 and 1973. Thus, in view of the associated price
increases expected, it is unlikely that any of these mills would close by 1976, if
they did not have to incur additional pollution abatement costs. We estimate that
the anticipated abatement costs will cause one mill to close in each of the
following regions: New England, North Central, South Central, and West.
A different set of reasons support our conclusion that few, if any, semi-
chemical corrugating medium mills will close as a result of additional pollution
control requirements. Our supply/demand analysis indicates that this sector
should continue to experience significant overcapacity through 1973; this implies
C-37
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TABLE 22
OTHER PAPER AND BOARD MILL SHUTDOWN PROBABILITIES, 1972 - 1976
oo
Total Marginal Production
Probability of Closure
Annual Capacity Removed
Region Mills
New England 11
Mid-Atlantic 6
North Central 26
South Atlantic 3
South Central 15
West _14_
TOTAL (Rounded) 75
% of 1973 Capacity
% of 1976 Production
Annual
Capacity
(000 tons)
665
165
1,400
75
430
580
3,315
8.4
7.9
Status
Quo*
(o/\
\/o)
15
10
5
0
10
0
5
Additional
Abatement
(%)
45
10
15
0
25
30
25
Status
Quo*
(000 tons)
100
15
50
0
40
0
200
0.5
0.5
Additional
Abatement
(000 tons)
290
15
210
0
100
160
780
2.0
1.9
* Assumes no additional pollution abatement expenditures above current levels.
Source: Arthur D. Little, Inc. estimates.
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TABLE
MARGINAL INSULATION BOARD MILLS
No. tpd
Total Mills 23 5,600
OK 17 5,205
Marginal 6 395
MARGINAL CRITERIA:
1. Size — under 100 tpd
2. Location - re. pollution
Marginal Mills
Area No. tpd
New England 1 80
Middle Atlantic 1 45
East North Central 0 0
West North Central 2 150
South Atlantic 0 0
East South Central 0 0
West South Central 2 120
West 0 0
Total 6 395
Area No. tpd
New England 1 100
Middle Atlantic 2 155
East North Central 3 550
West North Central 2 1,300
South Atlantic 1 400
East South Central 4 1,500
West South Central 2 925
West 2 275
Total 17 5,205
Source: Arthur D. Little, Inc. estimates
C-39
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TABLE 24
MARGINAL NEWSPRINT AND UNCOATED GROUNDWOOD PAPER MILLS
Total Mills
OK
Marginal
MARGINAL CRITERIA:
No.
32
21
11
tpd
14,785
11,940
2,845
1. Size — under
2. Pulp Mill — «
350 tpd
deinking
non-integrated to chem pulp
sulfite without recovery
Marginal Mills
Area
New England
Middle Atlantic
East North Central
West North Central
South (3 subdivisions)
West (2 subdivisions)
Total
No. Mills
Able-to-Cope Mills
Area
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
No. Mills
2
2
1
(2)
21
tpd
1,225
0
550
200
0
870
2,845
tpd
1,980
900
250
250
860
2,900
2,100
2.700
11,940
(1) Incl. one mill which also produces variety bleached and
unbleached kraft papers.
(2) Incl. one mill which also produces linerboard.
(3) Incl. two mills which produce kraft containerboard; one
mill which produces tissue.
Source: Arthur D. Little, Inc. estimates '
C-40
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TABLE 25
MARGINAL PACKAGING PAPER AND BOARD MILLS
No. tpd
Total Mills 97 74,160
OK 80 70,425
Marginal 17 3,735
MARGINAL CRITERIA:
1. Size — under tpd
200 - unbleached kraft paper
400 - unbleached kraft board
400 - bleached kraft board
200 - semi-chemical medium
2. No recovery - NSSC
3. Unusual pollution load
Marginal Mills
Area No. Mills
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
Able-to-Cope Mills
Area No. Mills tpd
New England 0 0
Middle Atlantic 0 0
East North Central 5 2,220
West North Central 0 0
South Atlantic 31 30,670
East South Central 15 10,855
West South Central 15 15,430
West 14 11.250
Total 80 70,425
Note: NSSC mills with cross recovery and integrated with large
board mills not shown separately — includes the following
NSSC mills: South Atlantic 7
West South Central 4
West 5
Source: Arthur D. Little, Inc. estimates
C- 41
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that profitability will continue to be insufficient to justify capital expenditures
on non-productive pollution abatement equipment. However, after discussing
this situation with a number of contacts close to this industry sector, we believe
that when faced with this situation the management of many such mills will
elect to close their semi-chemical pulp mills which cause most of their pollution
problem, and switch to the use of waste paper as their fiber raw material. So
doing will also help them meet the new Government requirements concerning
amounts of post-consumer waste paper to be used in corrugated shipping con-
tainers. It is easier for most paperboard producers to meet this requirement by
utilizing waste paper in the corrugating medium rather than adding waste paper
to the linerboard component of the container. Since the employment involved
in the re-pulping of waste paper is fairly close to that required in a semi-chemical
pulp mill, this change in raw material sources will have relatively little effect on
employment in this sector. It will, however, have an effect on the logging firms
that supply these mills; this impact is discussed in Chapter IV.
Table 26 shows our analysis of marginal mills in the construction paper
sector. We have denoted a large number of marginal mills in this sector mainly
because of the prevalence of many small mills located near urban centers. This
sector as a whole had extremely low or non-existent profits in 1970. However,
with the significant growth in new residential construction, coupled with a large
amount of remodeling activity in 1971, this sector is operating at full capacity,
and is now one of the more profitable portions of the paper industry. We estimate
that residential housing construction activity will continue to remain relatively
strong through 1976. Therefore we believe that most building paper mills will be
able to cope with the additional pollution control requirements. This reasoning
was reinforced by conversations with the management of several firms in this
sector and led us to the conclusion that none of these mills will be shut down as
a result of the additional abatement costs anticipated through 1976.
We came to the same conclusion in the case of the marginal hardboard mills
which are analyzed in Table 27. In this sector we expect a growth rate averaging
5.5% per year through 1976, and a continuing tight supply/demand at least
through 1973. Thus, the marginal producers should be able to survive under the
umbrella of price increases in spite of the additional costs anticipated for pollu-
tion abatement through 1976.
C. EMPLOYMENT
In Table 28 we have reported the anticipated jobs lost in the various regions
of the country and in the various product categories based on expected mill
closures resulting from the anticipated pollution abatement requirements through
1976.
C- 42
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TABLE 26
MARGINAL CONSTRUCTION PAPER MILLS
(Incl. Roofing Felt)
No. tpd
Total Mills 47 5,535
OK 16 3,465
Marginal 31 2,070
MARGINAL CRITERIA:
1. Size — under 100 tpd
2. Location - re. pollution
Marginal Mills
Area No. tpd
New England 2 50
Middle Atlantic 5 440
East North Central 7 660
West North Central 3 210
South Atlantic 2 130
East South Central 3 170
West South Central 6 290
West 3 120
Total 31 2,070
Able-to-Cope Mills
Area No. tpd
New England 0 0
Middle Atlantic 5 1,740
East North Central 4 820
West North Central 1 150
South Atlantic 2 225
East South Central 1 110
West South Central 3 420
West 0 0
Total 16 3,465
Source: Arthur D. Little, Inc. estimates
C-43
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TABLE 27
MARGINAL HARDBOARD MILLS
No. tpd
Total Mills 29 5,845
OK 19 5,270
Marginal 10 575
MARGINAL CRITERIA:
1. Size — 100 tpd
2. Location - re. pollution
Marginal Mills
Area No. tpd
New England 1 10
Middle Atlantic 0 0
East North Central 1 50
West North Central 1 75
South Atlantic 1 90
East South Central 0 0
West South Central 0 0
West 6_ 350
Total 10 575
Able-to-Cope Mills
Area No. tpd
New England 0 0
Middle Atlantic 2 520
East North Central 1 430
West North Central 1 240
South Atlantic 3 790
East South Central 3 1,600
West South Central 3 740
West 6 950
Total 19 5,270
Source: Arthur D. Little, Inc. estimates
C- 44
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TABLE 28
ANTICIPATED PAPER
PRODUCT SECTOR
Sulfite and NSSC
Tissue
INDUSTRY
New
England
130
2800
Printing and Writing Paper 1770
Special Industrial Paper
Combination Paperboard
Other Products
100
450
750
JOBS LOST BY
Middle
Atlantic
— _..
2100
950
300
1050
1976 DUE
North
Central
300
1100
650
450
650
TO ADDITIONAL
South
Atlantic
__ —
420
200
130
—
POLLUTION ABATEMENT
South West
Central
70 11U
280
380
—
130
240 650
REQUIREMENTS
Totals
(Rounded)
610
6700
3750
600
2210
2290
TOTAL (Rounded) 6000
4400
3150
750
310
1550
16,160
Source: Arthur D. Little, Inc., estimates
-------
The principal product areas in which closures are expected to occur include
sulfite and semi-chemical pulp, tissue, printing and writing paper, special indus-
trial paper, combination paperboard, newsprint and packaging paper.
Our analysis foresees the loss of 6000 jobs in New England, 4400 in the
Middle Atlantic region and 3150 in the North Central region. These three regions
will incur about 85% of the paper industry unemployment foreseen as a result of
pollution abatement requirements through 1976. The remaining 15% of the jobs
lost will be split about equally between the West and the South.
Within some of these regions the loss of employment will be relatively
localized. Principal examples are small communities in western and central
Massachusetts and Connecticut and the northern portions of New York and
Wisconsin. Most of these communities are in areas already considered "depressed"
by the Economic Development Administration, which indicates that there are
relatively few nearby employment alternatives for the workers affected. It should
be noted that the production capacity lost from marginal mill closures will be
made up by mill construction or expansion principally in the South and West, and
to a lesser extent in Maine and Minnesota. While such expansions will more than com-
pensate for pollution related jobs lost in the South and the West, they will do little to
relieve the unemployment in the other regions. These capacity expansions not
only will involve long distance moves by the unemployed mill workers, but also
will offer fewer jobs due to economies of scale.
In addition to the direct employment losses there will be indirect losses of
jobs in local service and supplier industries. These generally amount to about
200% of the direct labor impact and will raise the unemployment totals accord-
ingly. The impact of these employment losses will be substantial in a number of
smaller cities and towns, particularly in New England, New York, Pennsylvania,
Indiana, Ohio, Michigan and Wisconsin. Many rural communities in these areas
are dependent in large measure on the local paper industry.
D. INTERNATIONAL COMPETITIVENESS
World production of pulp and paper products focusses upon three major
areas: the United States, Canada and Scandinavia. Pulp and paper is one of
relatively few product areas where the United States continues to maintain a
generally favorable position relative to foreign competition. We have been able to
do so mainly because of the economies of scale realized in our extremely large
mills, coupled with our abundant timber resources and the resulting low procure-
ment cost of pulpwood delivered to the mill sites. Pulpwood costs in Scandinavia
are significantly higher because the demand now exceeds their timber growth
rate. In eastern Canada production centers heavily on newsprint, a significant
quantity of which is produced in relatively obsolete mills. In addition, eastern
C-46
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pulpwood costs tend to be higher than those in the southern and western United
States because of the difficulties of harvesting and transporting the wood in
Canada. Western Canada supports large, integrated lumber, pulp and paper
complexes with relatively low wood costs typical of the U.S. Pacific Northwest.
More importantly from the standpoint of this analysis, there is very little
difference in the objectives and timetables for reducing paper industry air and
water pollution in all these regions. We expect that the United States will be the
leader in the provision of systems for purification of air- and water-borne emis-
sions. This will result in some short-term timing differences associated with the
rate of adoption of pollution control systems, causing some differences in
capitalization and costs which will be unfavorable to U.S. producers. However,
we expect that the timing difference in implementation between these regions
will be very short (perhaps three years). Consequently, the U.S. producers will
not be placed at such a disadvantage as to cause substantial shifts in World trade
patterns and capital flow for pulp and paper production. We do expect increased
net imports of newsprint and a decline in the rate of growth of linerboard
exports over the next several years; however, this will result mainly from the
expected tightening of supply/demand balances in the United States as our
economic growth is restored rather than from any significant decline in the
competitiveness of U.S. producers.
47
-------
Reduction in
Pulpwood
Harvest
150,000 cords
500,000
50,000
260,000
Direct
Job
Reduction
210
720
70
370
Indirect
Job
Reduction
105
360
35
185
IV. INDIRECT ECONOMIC IMPACT
A. EFFECT ON SUPPLIER INDUSTRIES
1. Logging Industry
The direct employment entailed in felling, bucking, loading and hauling
pulpwood to a mill (including direct supervision and equipment maintenance)
totals about one man-year per 700 cords of pulpwood delivered. All indirect
employment is believed to be about 1 /2 man-year per 700 cords of pulpwood
delivered. The impact of reduced pulpwood consumption is thus expected to
be as follows:
Region
New England
North Central
South Central
West
In the New England and North Central regions the reduction in pulpwood demand
will have a more significant impact than the above numbers indicate. Most of the
reduction will be in hardwood species; this timber is predominantly owned and
supplied by small woodlot owners. Many harvest their wood on a part-time basis
to obtain supplementary income, particularly when alternative job opportunities
such as farming and construction work are not available. Thus many part-time
jobs are at stake; pulpwood payments for many families, while not the principal
source of income, make the difference between having or not having discretionary
income. Most of the hardwood timber in these areas is of small size and low
quality, unsuitable for anything other than fiber products: pulp and paper and
composition board. Demand for roundwood in composition board is insignificant
now and, given the abundance of sawmill and planning mill residue, is expected
to remain insignificant for at least 1 0 years. Thus, for these areas pulp is the only
alternative in this decade for this resource.
In the South the job loss is small and will be offset by growing demand for
softwood pulpwood and sawlog production. In the West where the reduction of
pulpwood demand reflects a decline in softwood consumption the potential
decline in jobs will probably be offset by increased export of wood chips. This
is particularly likely since the woods labor here is primarily involved in sawlog
49
-------
production and the pulp mill purchases mostly sawmill residue not round wood.
For the sawmills to keep in operation they will have to find new outlets for their
residue but we expect them to be able to do so.
2. Salt Cake
In the kraft pulping system sodium sulfide and sodium hydroxide are the
active pulping chemicals. Sodium and sulfur values are lost from the kraft pulping
and associated recovery system in a variety of ways. Because of the volatility of
organic and a few inorganic sulfur compounds, a higher percentage of the sulfur
is lost than of sodium. Salt cake provides sodium and sulfur in approximately the
same ratio as they are lost and so is widely used as a source of make-up chemicals
for the kraft pulping system. About 70% of the total salt cake consumed in the
United States goes into kraft pulping.
Pressure to reduce air pollution in the kraft industry has resulted in a de-
crease in the consumption of salt cake. Over the past 20 years, consumption per
ton of pulp has decreased from over 200 pounds to 110-130 pounds. It is ex-
pected that this trend will continue and consumption will be in the neighborhood
of 75 pounds per ton of pulp in 1976. Despite a projected increase in kraft pulp
production, the potential total U.S. demand for salt cake in kraft pulping is
expected to decrease by about 20% in the 1971-76 period.
The market for salt cake in kraft pulping is being reduced further by the use
of other sources of sodium-sulfur values as make-up chemical. Caustic wash solu-
tions from oil refineries contain sulfides and other sulfur compounds. These
refinery wastes are being used in the place of salt cake as make-up chemicals in
kraft pulping systems. An important source of sodium-sulfur values for kraft
pulping is the spent liquor from NSSC pulping. When the NSSC mill is located at
the same site as the kraft mill the spent pulping liquor can be combined with a
kraft liquor and will supply the needed sodium and sulfur values as make-up for
the kraft cooking liquor. A third major source of sodium sulfur values for kraft
mills is the by-product salt cake from captive chlorine dioxide manufacturing
facilities. The net result of the availability of these other sources of sodium-sulfur
values in competition with salt cake, plus the expected decrease in the consump-
tion of salt cake per ton of pulp, will be close to a 60% decrease in the consump-
tion of purchased salt cake by the kraft industry in 1976 (compared to 1970).
The estimated consumption of purchased salt cake by the U.S. kraft industry in
1976 will be 900,000 tons vs 2,000,000 tons in 1970. It would be 2,000,000
tons in 1976 if the level of salt cake consumption per ton of pulp did not change
in the 1970-76 period.
By 1976, the only U.S. markets of any magnitude for purchased salt cake
in kraft pulping will be in the southeastern United States (about 650,000 tons
C-50
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per year) and the northwestern United States (total of 250,000 tons for both the
United States and Canada in northwestern North America). At the present time
the southeastern U.S. requirements are met by imported salt cake, by-product
salt cake from rayon and cellophane manufacture, Mannheim furnaces, bichro-
mate manufacture, and naturally occurring salt cake, from Texas and the West
Coast.
By 1976 the requirements can be met almost entirely by the by-product
salt cake. Most of this is generated in the eastern and the southeastern area of
the United States, so it is favored by the lower transportation charges, in com-
parison with imported and West Coast salt cake. If the level of salt consumption
per ton of pulp remained unchanged in southeastern United States, 1970-76
estimated purchase salt cake requirements would be about 1,400,000 tons. Thus
the estimated actual consumption of 650,000 tons would lead to a loss of
750,000 tons - mostly from imported and natural salt cake. Estimated loss of
employment is 350 jobs, primarily from domestic natural salt cake production.
In northwestern North America the present requirements are met largely by
western U.S. and Saskatchewan natural salt cake deposits. There will be a decrease
of about 200,000 tons in the demand for purchased salt cake in the 1970-76
period, and of course the 1976 demand will be met by the naturally occurring
chemical. With no change in the level of salt cake consumption per ton of pulp,
1976 demand for purchased salt cake would be 450,000 tons. The loss of employ-
ment attributable to the difference between 450,000 and 200,000 tons is equi-
valent to 140 jobs.
With regard to the remaining areas of the United States — in New England
the demand for purchased salt cake will decline by about 30,000 tons per year
in the 1970-76 period. At present the demand is met by imported and by-product
salt cake. In the Great Lakes area, including both U.S. and Canadian mills, the
decline in purchased salt cake will amount to about 90,000 tons in the 1970-76
period. The demand is met by naturally occurring salt cake from Saskatchewan
and by-product salt cake. The decreased demand will hit the imported and
natural (Canadian) salt cake most heavily. Impact on U.S. employment will be
slight.
3. Chlorine
An important source of water pollution from kraft mills is the bleach plant
effluent. Dissolved organics and spent inorganic bleaching chemicals are present
in low dilution in these mill effluents.
The major portion of the organic load and the offensive inorganic chemicals
are in the mill effluent from the first two stages of the bleach plant — the
C-51
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chlorination and caustic extraction stages. Substitution of these two stages by an
alkaline oxygen stage has been developed and put into commercial operation in
one mill (in South Africa) and has undergone large-scale pilot plant evaluation in
another mill (the Hurum mill of Mo och Domsjo in Sweden). Another commer-
cial mill, and the first one in the United States, is being installed at the Chesapeake
Corporation mill in West Point, Virginia.
The effluent from the alkaline oxygen stage can be recycled back into the
pulp mill and used as make-up process water in various stages of the recovery
process. In this manner, a major portion of the dissolved organic material even-
tually goes to the recovery boiler and is burned. Thus, the bleach plant effluent
leaving the mill is relieved of the major portion of the dissolved organic load and
in addition there are no chlorinated organics or other reaction products of the
chlorine to contribute to the water pollution problems. Our estimates of the
process economics of oxygen bleaching indicate that the capital investment will
be slightly higher than for conventional bleaching but that operating costs will be
somewhat lower.
The technology appears to be sound and well established. We expect that a
substantial portion of new kraft pulp mill bleach plants installed in the United
States in the next five years will employ oxygen bleaching. In addition, bleached
kraft pulp mills which are currently experiencing difficulties in meeting water
pollution standards may switch from conventional chlorine-caustic extraction
bleaching to alkaline-oxygen bleaching.
The kraft industry is one of the larger consumers of chlorine in the United
States. In 1970, for example, 880,000 tons of chlorine were consumed in the
manufacture of bleached kraft pulp. It is possible that 10% of the chlorine con-
sumed in bleaching kraft pulp could be lost to oxygen bleaching by 1976. Pro-
jected consumption of chlorine in kraTt pulping with an oxygen bleaching in 1976
is about 1,400,000 tons. Thus, oxygen bleaching could bring about a reduction of
140,000 tons in chlorine consumption. This reduction would result in a loss of
roughly 70 jobs by 1976.
4. Effect on the Capital Good Industries
It is our conclusion that dislocational effects resulting from the application
of water and air pollution abatement in the pulp and paper industry in the United
States will not be of sufficient magnitude to cause measurable changes in market
demand in any of the product sectors comprising the industry.
With respect to supply to meet market demand, we anticipate regional
dislocations and the closure of antiquated facilities as discussed in other sections
of this report, but we are convinced that the effects will be dislocational only and
C-52
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will not create a temporary lull in the growth ot the industry. We therefore fore-
see no depressing effects upon the magnitude of the business enjoyed by the
capital goods suppliers dealing with pulp and paper industry.
On the other hand, the application of water and air pollution abatement
by the industry will in itself create new increments of market demand for capital
goods associated with the abatement processes. These effects will be substantial
in the initial years as existing manufacturing plants expend capital with equip-
ment suppliers, and construction contracts, in implementing pollution abatement
plans to meet evolving criteria. We expect the total capital to be expended in the
paper industry 1972-1976 will amount to S1.2 billion for water pollution
and $800 million for air pollution or a total of S2 billion.
In addition, as the industry continues to grow (this growth rate is anticipated
to average 4'/,' per year), continuing investments in pollution abatement will be
common. We anticipate that these continuing incremental investments in pollu-
tion abatement will approximate 3 to 5% of the total annual industry investment
or $30—40 million per year.
B. EFFECT ON CUSTOMERS
Our analysis shows no measurable impact upon market demand trends which
may be assignable to the burden of increased pollution abatement expenditures.
Accordingly, we do not foresee significant changes in growth rates associated
with the use of the various paper and board products comprising this industry.
In every case where we anticipate capacity removals as a result of additional
pollution abatement costs the larger, more efficient producers should be able to
make up for the tonnage loss. Therefore, customers generally should have no
difficulty in obtaining pulp and paper products as a result of this capacity
removal.
However, we have noted earlier in Table 6 that price increases ranging from
2% to 10% of product value can be expected as a result of the additional pollution
abatement costs anticipated through 1976. It should also be noted that in view of
the current extremely low profitability of the pulp and paper industry, price
increases are needed to restore profits to a level that will attract sufficient capital
for capacity expansion to assure a continued supply of these products beyond
1973 when supply and demand is expected to be closely balanced. Thus, if the
market behaves freely, customers of the pulp and paper industry can expect much
more significant price increases caused by market and general economic factors
than those due to pollution abatement costs. If stringent price controls are levied
there is likely to be significant shortages of pulp and paper products after 1973.
C-53
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C. EFFECT ON BALANCE OF PAYMENTS
In Section III-D of this report we presented the factors which led to our
conclusion that the pollution abatement costs anticipated through 1976 will not
significantly affect the international competitiveness of U.S. pulp and paper
producers. The pollution abatement objectives are similar in all of the major
pulp and paper producing regions of the world. Also differences in implementa-
tion timetables are expected to be small (probably less than three years). There-
fore, these timing differences will not be sufficient to cause substantial shifts in
world trade patterns and capital flow for pulp and paper production. Conse-
quently, we conclude that pollution abatement in the pulp and paper industry
will not exert a measurable impact upon United States' balance of payments with
respect to Canada, Scandinavia, Western Europe or other competing regions of
the World.
C- 54
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APPENDIX A
PRIMARY AND SECONDARY WATER TREATMENT COST
ESTIMATING GRAPHS FOR PULP AND PAPER PRODUCTS
(except sulfite pulp)
C-55
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FIGURE A-1
OPERATING COSTS OF WASTE WATER TREATMENT PLANTS
$/Te*r"
T.o
l°o.o
3 46171
ibtf.o
Untreated Effluent Flow - Millions of Gallons ?er Day
C.57
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FIGURE A-2
CAPITAL COSTS FOR AERATED LAGOONS
100 x 10
Untreated Waste Flow - Millions of Gallons per Day
C- 58
-------
100 x 10
FIGURE A-3
CAPITAL COSTS FOR ACTIVATED SLUDGE SYSTEMS
0.1
6678
16ft. o
Untreated Waste Flow - Millions of Gallons per Day
C' 59
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FIGURE A-4
CAPITAL COSTS FOR PRIMARY TREATMENT
Includes Inlet Piping, Sludge Removal Equipment
o«
n:
If
o.i
3 4 5678910
10.0
4 5 ( 7 • * 10
100.0
Untreated Waste Flow - Millions of Gallons Per
£-60
Day
-------
APPENDIX B
SULFITE PULP LIQUOR TREATMENT AND CHEMICAL RECOVERY SYSTEM
CAPITAL AND OPERATING COSTS
C-61
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tfl
O
o
H
.C
O
CTS
0)
,—1
.£>
C
P
O
VJ
•H
OJ
P-i
O
o
o
c
01
e
cfl
CJ
FIGURE B-l
FLUID BED SALTCAKE AND S00 RECOVERY - NA BASE
PULPING VARIATION IN CAPITAL INVESTMENT
WITH PULP MILL CAPACITY
48% Yield
10 -
5 .
100
400
Pulp Mill Capacity (Air Dry Unbleached Tons Per Day)
700
Source: Arthur D. Little, Inc., estimates
C- 63
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Operating Cost ($ Per Air Dry Ton Unbleached Pulp)
o
o
o
C
!-•
X)
n
0)
O
h1-
>
H-
n
O
ro
(U
o
H
o
CO
O
fa
O
O
-j
O
o
W
-------
FIGURE B-3
40
EVAPORATION. BURNING AND SO RECOVERY - NH BASE PULPING
VARIATION IN CAPITAL INVESTMENT WITH PULP MILL
CAPACITY
100
400
700
Pulp Mill Capacity (Air Dry Unbleached Tons Per Day)
C-65
-------
15
&
iH
3
13
0)
.G
O
rt
0)
c
O
H
Q
M
•H
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n)
Q
l-i
at
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O
H
T)
01
JC
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n)
0)
T— I
43
Q
M
•H
<
O
O
O
C
01
4-1
tn
01
•H
CX
(0
u
FIGURE B-5
MgQ and SO^ RECOVERY - MgO BASE PULPING
£ ' '
VARIATION IN CAPITAL INVESTMENT WITH PULP MILL CAPACITY
100 400
Pulp Mill Capacity (Air Dry Unbleached Tons Per Day)
Source: Arthur D. Little, Inc., estimates
700
C' 67
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3
PH
O
CO
c
c
O
H
M
•H
t-J
0)
CO
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u
oc
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0)
O.
O
10
FIGURE B-6
MgO AND S02 RECOVERY - MgO BASE PULPING
VARIATION IN OPERATING COST WITH PULP MILL CAPACITY
100
400
Pulp Mill Capacity (Air Dry Unbleached Tons Per Day)
700
Source: Arthur D. Little, Inc., estimates
C'68
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TABLE B-1
SULFITE PULP WASTE LIQUOR TREATMENT AND CHEMICAL RECOVERY SYSTEMS - CAPITAL AND OPERATING COSTS
Recovery System Fluid Bed Incineration,
Pulping Base Sodium Sodium Sodium
Pulp Yield (X) 48 48 60
Pulp Mill Capacity (Tons/Day) 100 700 100
Days/Year Operation 350 350 350
Plant Investment ($ Million) 1.1 4.3 0.9
Fixed Capital Investment ($ Million) 1.3 5.0 1.1
Na-SO and SO
Sodium Sodium
60 72
700 100
350 350
3.6 0.7
4.1 0.8
Recovery
Sodium
72
700
350
2.6
3.0
OPERATING COST
($ per Air Dry Ton Unbleached Pulp)
Makeup Chemicals'
Sulfur (Credit) (2.20) (2.20) (1.40)
Mg(OH), (Credit) -
Na2SO (Credit) (0.92) (0.92) (0.83)
Bleach Chemicals -
Steam 5.75 5.75 3.80
Power 2.13 2.13 1.30
($5/hr +31Z Operating Labor)
Factory Overhead 3.14 0.45 3.14
(130Z of Operating Labor)
Repair Labor 4 Materials 1.25 0.72 1 06
(4Z Plant Investment /Year)
Operating Supplies 0.09 0.04 0.07
(0.25Z Plant Investment /Year)
(1.5Z Plant Investment/Year)
Depreciation 2.37 1.32 1.97
(6.5Z Fixed Capital Investment)
Interest on Borrowed Fundsd) 1.46 0.82 1.20
(4Z Fixed Capital Investment /Year)
TOTAL OPERATING COST ', $16.70 8.82 13 84
(1.40)
_ _
-
(0.83) (1.00)
-
3.80 2.32
1.30 0.76
0.45 3.14
0.59 0.74
0.04 0.06
0 22 0.29
1.09 1.40
0.67 0 . 86
6.38 11.70
-
_
-
(1.00)
-
2.32
0.76
0 45
0.45
0.42
0.02
0 16
0.78
0.48
4.85
Evaporation,
Ammonia Ammonia
44
100
350
3.0
3.5
44
700
350
13.0
14.9
Burning, SO. and Heat Recovery
Ammonia Ammonia Ammonia Ammonia
48 48
100 700
350 350
2.8 12 . 2
3.3 14.0
72
100
350
2.1
2.4
72
700
350
9.0
10.3
(3.29)
0.75
-
0.20
(8.88)
1.33
3 14
3.14
3.46
0.23
1.29
6.46
3.97
11.79
(3.29)
0.75
-
0.20
(8.88)
1.33
0.45
0.45
2.13
0.13
0.80
3.96
2.44
0.47
(3.06) (3.06)
0.70 0.70
-
0.18 0.18
(8.25) (8.25)
1.19 1.19
3.14 0.45
3.14 0.45
3.23 1.99
0.20 0.12
1.20 0.75
6.03 3.71
3.71 2.29
11.41 0.52
(0.99)
0.25
-
0.10
(4.44)
0.63
3.14
3.14
2.40
0.14
0.89
4.46
2. 74
12.46
(0.99)
0.25
-
-
0. 10
(4.44)
0.63
0.45
0.45
1.47
0.09
0.55
2.74
1.69
2.98
Evaporati
Magnesium (5>
47
100
350
3.9
4.3
on, Burning. SO.
Magnesium'5'
47
700
350
15.6
17.4
. MgO, «id(
60
100
350
3.2
3.6
Heat Recovery,.
> MagnesiumW
60
700
350
13.0
14.5
(4.14)
—
(7.56)
~
-
(10.24)
1. 33
4. 71
4.71
4.43
4.94
8.15
(4.14)
-
(7.56)
-
-
(10.24)
1.33
0.67
0.67
2.56
2.85
(8.12)
(1.29)
—
(2.34)
-
-
(7.73)
0.84
It 71
4.71
3.69
0.23
1 37
6. 71
4.11
15.01
(1.29)
—
(2.34)
-
-
(7.73)
0.84
0.67
0.67
2.13
0. 13
0.80
3.86
2.38
0. 11
o
•
ON
($ per Air Dry Ton Unbleached Pulp)
Notes: (1) F.O.B. Pulp Mill Chemical Prices: Sulfur 538 per 2000 Ibs , NH S50 per ton, Mg(OH>2 $70 per ton, NajSO S15 per ton
(2) Steam (Fuel) Credit $0.80 per Million Btu's, Steam Cost $0.95 per Million Btu's, Power Cost 7 mils per KwH
(3) For Sodium and Ammonia Base Recovery Systems, Operating Labor is 2 men per shift; for magnesium base, 3 men per shift
(4) 100Z Fixed Capital Borrowed at 8Z Interest Unpaid Balance
(S) Magnesium Acid Sulflte
(6) Magnetite (Bisulfite)
SOURCE: ARTHUR D. LITTLE, INC. ESTIMATES
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APPENDIX D
-------
ECONOMIC IMPACT OF ANTICIPATED
PAPER INDUSTRY POLLUTION -
ABATEMENT COSTS
PART II: INDUSTRY STRUCTURE AND BUSINESS OUTLOOK
Report to
THE COUNCIL ON
ENVIRONMENTAL QUALITY
December 1971
C-73977
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TABLE OF CONTENTS
Page
List of Tables jv
List of Figures v
I. SUMMARY 1
A. PURPOSE AND SCOPE 1
B. APPROACH 1
C. CONCLUSIONS 1
II. INDUSTRY CHARACTERISTICS AND TRENDS 3
A. COMPANY CHARACTERISTICS 3
B. PHYSICAL STRUCTURE OF THE INDUSTRY 4
C. MILL CHARACTERISTICS 15
D. LABOR DISTRIBUTION 35
III. MARKET AND COMPETITIVE TRENDS 37
A. OVERVIEW 37
B. MARKET AND CAPACITY PROJECTIONS 37
C. PRICE TRENDS 52
IV. FINANCIAL STRUCTURE AND PROFITABILITY
TRENDS 57
A. PROFITABILITY VARIATIONS BY PRODUCT
SECTOR 59
B. CAPITAL FLOW RELATIONSHIPS 61
-------
LIST OF FIGURES
Figure No. Page
1 U.S. Map of Papermaking Operations 5
2 Size Distribution of U.S. Mills for Production of News-
print and Uncoated Groundwood 18
3 Size Distribution of U.S. Mills for Production of Coated
Papers, Uncoated Book and Fine Papers 19
4 Size Distribution of U.S. Mills for Production of
Special Industrial Papers 20
5 Size Distribution of U.S. Mills for Production of Tissue 21
6 Size Distribution of U.S. Mills for Production of Un-
bleached Kraft Papers 22
7 Size Distribution of U.S. Mills for Production of
Bleached Board 23
8 Size Distribution of U.S. Mills for Production of Semi-
chemical Corrugating Medium and Kraft Linerboard 24
9 Size Distribution of U.S. Mills for Production of Jute
Liner, Bogus Medium, Chipboard and Bogus Boxboard 25
10 Size Distribution of U.S. Mills for Production of Con-
struction Paper, Insulating Board and Hardboard 26
11 Size Distribution of U.S. Mills for Production of
Kraft Pulp 27
12 Size Distribution of U.S. Mills for Production of Pulp 28
13 Size Distribution of U.S. Mills for Production of De-
ink Pulp Mills 29
14 Total Paper and Paperboard Consumption, Production
and Operating Rate Trends 40
15 Paper Industry Operating Rate and Wholesale Price Index 54
0 • v
-------
LIST OF FIGURES (Continued)
Figure No. Page
16 Total Paper Industry Profit and Capital Expenditure
Trends 62
17 Pulp, Paper and Paperboard Sector Profit and Capital
Expenditure Trends 63
18 Pulp, Paper and Paperboard Sector Profitability and
Capital Expenditure Relationship 64
19 Total Paper Industry Profitability and Capital Expendi-
ture Relationship 65
l~ VI
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LIST OF TABLES
Table No. Page
1 Economically Marginal U.S. Paper and Paperboard
Mills by Grade 31
2 Economically Marginal Paper and Paperboard Capacity
by Region 32
3 Sulfite Pulp iVlills 33
4 Pulp and Paper Industry Employment, 1970 36
5 U.S. Pulp and Paper Market Structure, 1970 38
6 Packaging Paper and Board — U.S. Production and
Capacity, 1960-76 42
7 Communication Paper — U.S. Production and Capacity
19601976 45
8 Construction Paper and Board — U.S. Production
and Capacity, 1960-1976 47
9 Tissue, Special Industrial Paper and Wet Machine
Board U.S. Production and Capacity 1960-1976 49
10 Bleached Kraft and Dissolving Pulps - U.S. Produc-
tion and Capacity, 1960-1970 51
11 Wholesale Price Indexes for Selected Subgroups and
Classes of Wood Pulp, Paper, Paperboard and Con-
verted Products 53
12 Balance Sheet and Profit and Loss Statement
Ratios-1970 58
13 Percentages of Total Assets, Sales, Net Worth
Integrated Companies: 1957 - 1970 60
0" vii
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I. SUMMARY
A. PURPOSE AND SCOPE
This is the first of two reports developed under contract with the Council on
Environmental Quality to assess how costs associated with new environmental
protection standards will affect the pulp and paper industry. The purpose of this
report is to describe industry characteristics and trends that are relevant to this
economic analysis. Thus this report serves to focus the analysis on those sectors of
the industry that will be most adversely affected. A more detailed analysis of
specific economic adjustment problems is given in Part III. (Part I summarizes
both reports.)
B. APPROACH
The information contained in this report is based primarily upon our
background knowledge developed through our consulting experience in the paper
industry plus reference to numerous sources of current statistical information. Of
substantial assistance were the supply/demand data and analyses of industry
profitability trends compiled by the American Paper Institute.
The basic approach used in our analysis was to subdivide the industry into its
major product sectors. We then made an assessment of which mills in each sector
are marginally profitable in today's market; our assessment was based mainly on
paper machine- and mill-size criteria, but also took into account the relative
severity of pollution control problems for each sector, current overcapacity and
price weakness, the degree of vertical integration of the facility, and current
industry profit levels. Finally, we evaluated future supply/demand trends in each
sector to determine the likelihood that future price increases can be obtained to
restore profitability to an adequate level and to absorb additional pollution
abatement costs. The basic assumptions made in the latter analysis were: (1) real
growth in gross national product will average 4%/year between 1971 and 1976
with somewhat higher growth (5%/year) in 1972 and 1973; and (2) the industry
will be able to operate without price controls.
C. CONCLUSIONS
Paper industry profitability is at its lowest point since World War II with
after-tax return on total assets averaging about 3% in the first 9 months of 1971.
Thus this industry's ability to finance the capital costs and absorb the additional
operating costs necessary for pollution abatement will depend on its ability to
improve profits through price and productivity improvements.
-------
We anticipate improved operating rates in most sectors of the industry by
1973 assuming real GNP growth of 5% in 1972 and 1973. Therefore, the market
environment should generally provide increased mill utilization and be conducive
to price increases, if it is allowed to operate freely. Between 1974 and 1976 we
expect that operating rates will probably decline again, judging from previous
cycles in this industry.
Significant overcapacity is expected to continue through 1973 in three
product sectors: insulation board, semi-chemical corrugating medium and special
industrial paper. Thus mills in these sectors will have great difficulty in coping
with additional pollution abatement costs.
Small producers who are not integrated to pulp or who have sulfite pulp
mills which must be closed because it is not feasible to equip them for chemical
recovery also are expected to have particular difficulty in coping with increased
pollution costs. Despite improvements in operating rate and price these producers
will be caught in a cost/price squeeze because of the rapid increase in market pulp
and waste paper prices foreseen for the next several years. Moreover, many of
these mills are obsolete by today's standards. Particularly affected will be the
smaller producers of tissue, printing and writing papers.
Finally, we expect to see continued dislocations, caused in part by increased
pollution abatement requirements, among the combination paperboard producers.
Although many of these mills have closed over the past 18 months, many
similarly marginal mills continue to operate. A number of these can be expected
to close despite the modest improvement in operating rates foreseen in this
product sector through 1973. Many certainly will not survive another economic
recession beyond 1973.
We expect the greatest regional dislocations to occur in the New England,
Mid-Atlantic and North Central areas — where most of the marginal producers of
the above products are found. Moreover, the mills in these regions are more apt to
experience site constraints in dealing with their pollution abatement problems or
be under increased clean-up pressures because of their proximity to urban areas.
0- 2
Arthur D Little Inc.
-------
II. INDUSTRY CHARACTERISTICS AND TRENDS
A. COMPANY CHARACTERISTICS
The U.S. Pulp and Paper Industry (excluding independent converting opera-
tions) consists of approximately 450 companies operating about 673 manufactur-
ing establishments. Of these 673 about 120 are in New England, 133 in the
Middle Atlantic region, 156 in the East North Central region, 21 in the West
North Central section, 69 in the South Atlantic area, 46 in the East South Central
region, 44 in the West South Central region, and 84 in the West (Figure 1).
Of the 450 companies in the industry, the top 20 account for 65-70% of
pulp paper and paperboard value of shipments, while the top 50 firms account for
about 90% of the output. These are typically companies integrated to pulp
manufacture and having sales greater than $40 million per year.
The top 20 companies generally produce papermaking pulps in tonnages
equivalent to their captive needs. Usually, they manufacture commodity paper
and board products, being the major producers of such items as linerboard,
corrugated medium, solid bleached board and sack kraft paper. The major
operations of these companies characteristically are located in the deep South and
in the Pacific Northwest. In addition, as a result of properties owned for many
years in the Northeast many of these companies manufacture specialty paper
goods as well as the commodity items discussed above. Thus, for example,
International Paper Company and St. Regis Paper Company have major opera-
tions located in the North in addition to major mill complexes in the South.
At the other end of the spectrum are the family-owned single-mill concerns,
characteristically located in the New England, Mid-Atlantic and North Central
regions, which produce specialty paper materials in tonnage ranges from less than
10 tons per day to several hundred tons per day. These manufacturers usually rely
on purchased pulp, although in certain instances they operate small pulp mills.
Between these two opposites resides the medium-size company of the
industry, usually a pulp producer, and often a net buyer of pulp as well. These
companies tend to concentrate on a rather narrow product range and are not as
diversified in terms of the kinds of paper and board products they can supply as
are the major companies in the industry.
* 3
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B. PHYSICAL STRUCTURE OF THE INDUSTRY
1. Regionality Factors
a. Historical
The U.S. Pulp and Paper Industry had its principal beginnings in New
England in the 1800's with the development of papermaking, groundwood pulp-
ing and sulfite pulping to supply the growing paper needs of the Northeast section
of the country. The relative proximity of the growing population centers to the
large resources of high-quality softwood pulpwood in northern New England and
New York State was a substantial factor in the development of the infrastructure
of the area as the Northeast continued to grow and develop. As a result, even
today there is a substantial amount of papermaking in the area bounded on the
west by the Ohio border and on the south by Virginia.
As the country grew and spread westward and to the south, the need for
substantial wood supplies for pulping (and for lumber and plywood as well)
outstripped the capabilities of the northeastern area to meet the burgeoning
market demands and in particular the demands of regions far removed from New
England.
b. Wood Supplies
Several sectors of the country have commercial forest resources:
(1) The northeastern region is a mixture of northern softwood species
ranging from pine to spruce, hemlock and fir; concentrations of
softwood species generally increase in the more northerly regions
and those of higher elevations. In addition, the area has substantial
volumes of mixed hardwood species (which also may be used for
paper with today's technology) ranging from the desirable maple,
beech and birch groups to the less valuable (and sometimes use-
less) oaks, elm and other mixed hardwoods. With the exception of
northwestern Maine, the Northeast no longer possesses substantial
untapped tracts of softwood species. The area also has some
untapped hardwood reserves throughout northern and central
Maine and in the area bounded by the Connecticut River and Lake
Ontario, north of Albany.
However, the major growth in the pulp and paper industry of the
future will not involve the Northeastern sector of the country, and
increases in capacity in this region will be limited for the most part
to incremental additions to the manufacturing capabilities of exist-
ing facilities in order to optimize the utilization of local resources
and to raise manufacturing efficiencies.
0* 4
-------
FIGURE i us. MAP OF PAPERMAKING
OPERATIONS
-------
(2) The major forest reserves in the United States are in the deep
south (with the exception of southern Florida), bounded by North
Carolina on the north and eastern Texas on the west. This area is
the country's major source of pulp and paper products.
The southern industry had its beginnings with the development of
the kraft pulping process which evolved in the 1930's and pro-
vided a method of producing high-strength unbleached packaging
materials from southern pinewood to meet the packaging demands
as industrial America grew. Today approximately 75% of the
paper and board products used in the United States originate with
southern kraft pulping. Furthermore, kraft pulping throughout the
country accounts for approximately 90% of the total chemical
pulp produced.
(3) Michigan, Wisconsin, and parts of Minnesota also are substantial
producers of pulp and paper products. The wood species and
availability of this region are not substantially different from New
England's and the only major difference between the two areas is
that the midwestern area was developed somewhat later than New
England and New York.
Nevertheless, the softwood reserves in the Midwest are essentially
exhausted. Although some supply of hardwood pulpwood could
be developed, the Midwest (like New England) will not contribute
substantially to the growth of the industry in the years ahead.
(4) The fourth major sector of the U.S. pulp and paper industry is in
Washington, Oregon and northern California and comprises about
15% of the total industry. Wood resources in the Northwest are
essentially softwood resources, and substantial quantities of tim-
ber are as yet untapped for the production of pulp as well as for
lumber and plywood.
However, the mountainous terrain and relatively remote location
from major markets have somewhat restricted the growth of the
industry in this locale. Most of the products made here are utilized
in the western markets or are exported (but some western pulps
are seen in Chicago and even on the east coast).
(5) Finally, there are substantial reserves of untapped timber through-
out the Rocky Mountain region extending from a line drawn
between Denver, Colorado, and Helena, Montana, to California,
excluding the plateau prairie lands in Utah and Nevada. As the
0- l
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country's needs for wood raw materials continue to grow, a
substantial portion of this need will be filled by these resources,
resulting in substantial new increments of manufacturing capacity
for pulp, paper, lumber and plywood in the Northwest and in the
Rocky Mountain area. This will supplement future growth in the
deep South.
2. Production Processes
The pulp and paper industry has many of the characteristics of the chemical
process industries, since it embodies many of the technical functions and design
methods employed in the manufacture of such products as inorganics and petro-
chemicals as well as in the refining of oil. The major process steps are pulping (the
digestion or separation of whole wood into a fibrous mass) and papermaking (the
formation of the discrete fibers into a web or sheet of paper or board). In
addition, particularly in the papermaking part of the process, special highly
specific manufacturing techniques have been developed and are standardized
throughout the industry.
Manufacturing plants vary widely in complexity — from small plants that
produce low-tonnage products from purchased pulps to large integrated facilities
that receive harvested timber, convert it to pulp, and then convert the pulp to
paper and board. For the most part, pulp manufacturing operations are coupled
to chemical recovery processes, which provide for waste disposal by incineration
together with recovery of the inorganic chemicals employed in the pulping
process.
In addition a substantial converting sector of the industry is sometimes
physically integrated into the papermaking process. Alternatively, it may be
physically removed from paper manufacture and independently organized in a
corporate sense.
The major process steps in the industry are described below.
a. Pulping
There are two major methods for converting wood to papermaking pulps:
Mechanical Pulping and Chemical Pulping. In addition, each of these pulping
procedures is broken down into two or more sub-methods:
(1) Mechanical Pulping. Mechanical pulping is either of two physical
methods employed to produce groundwood pulps. In the older technology of the
two, stonegrinding, pulpwood logs are ground on large grindstones. The newer
technology, chip refining, converts pulpwood chips to groundwood pulp using
0- 8
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attrition mills called refiners. Chip refining finds most of its application with
raw material derived from the waste produced in sawmills and other wood
products operations. Essentially all groundwood pulp, whether of the stone or
refiner type, is produced from softwood raw materials - spruce in the Northeast,
pine in the South, and Douglas fir and hemlock on the West Coast. Aspen, a
low-density hardwood, is used for some groundwood production in the North
Central region.
(2) Chemical Pulps. A high percentage of the chemical pulp produced today
is manufactured by the kraft process, which finds substantial utility in the
manufacture of softwood as well as of hardwood pulps. The process is also
commonly termed the sulfate process, because sodium sulfate is used as make-up
chemical. The kraft process employs a water solution of sodium sulfide and
sodium hydroxide to dissolve the lignin and pentosan fractions of wood while
leaving the cellulose portion untouched. This cooking process is achieved in
high-temperature batch or continuous reactor vessels after which the pulp is
separated from the cooking liquor, usually with countercurrent rotary vacuum
filters. The pulp enters into a number of process operations before its ultimate
conversion to paper, and the waste liquor from the pulping step is fed to a kraft
recovery system which provides for incineration of the dissolved organic chemi-
cals and the recovery and reconstitution of the sodium sulfide and sodium
hydroxide values for recycle to the pulping step. Incineration, recovery of
chemicals, and recycle are an economic necessity in kraft pulping because of high
chemical loading in the digesters. The incineration process, however, creates the
significant air pollution problems associated with the kraft process.
The other major chemical pulping process is the sulfite process, wherein the
chemicals employed in dissolving the undesirable constituents of wood comprise a
water solution of a cationic material, typically sodium, magnesium, or ammonia
(sometimes calcium) as the sulfite salt mixed with excess amounts of SO2 or
alkali (depending upon pH). Again lignin and other undesirable chemicals are
dissolved from the wood, producing a waste liquor which is separated from the
pulp. The chemical requirements and costs are far lower than for the kraft
process; hence these liquors historically have been discarded without treatment.
With the ammonium and magnesium sulfite processes, recovery technology is
available for treatment of pulp mill waste liquors and recovery of chemicals.
Adaptation of these techniques in the industry has been slow because of the
added cost burden, but is now under way. In the sodium sulfite process, no
economically attractive chemical recovery method is available and current prac-
tice involves liquor disposal into rivers and streams. In addition, straight incinera-
tion is employed, in certain cases, to produce an inert ash for disposal.
0-9
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A special sector of the sulfite industry is known as the neutral sulfite
semi-chemical (NSSC) process. By this method, hardwood pulpwood is converted
into a special high-yield pulp used almost exclusively for the manufacture of
corrugating medium, the fluting material found in corrugated containers. NSSC
pulp is usually manufactured by the sodium netural sulfite process (although
ammonia is sometimes used). Like other sectors of the sulfite industry, the
sodium neutral sulfite pulping process has no economic recovery system which
may be applied to the waste stream from the pulping process. In certain instances
specially designed incineration systems are employed, producing an inert ash
material, a mixture of sodium sulfate and sodium carbonate. This ash is often
produced in substantial quantities and must therefore be either sold or discarded.
In ammonium base semi-chemical pulping the same recovery procedures as
are employed for full ammonium sulfite pulping may be applied. These generally
involve concentration and incineration of waste material, producing a tail gas
containing SO2 which may then be recovered. The ammonia is oxidized to
nitrogen and discharged to the atmosphere.
As in the kraft industry, the sulfite pulp is usually recovered by filtration
and subjected to further processing before finally being manufactured into paper.
b. Pulp Bleaching
Unbleached pulps are typically dark brown and many of these pulps (typi-
cally southern pine) are employed in the unbleached state. For example, corru-
gated containers and grocery bags are manufactured from unbleached southern
kraft pulp. On the other hand, many pulps and recycled papers are bleached
before being converted to paper, and the bleaching technology is highly variable
depending upon the pulp produced and the paper products desired.
Almost invariably, however, the major portion of the bleaching step involves
the use of chlorine as a bleaching agent followed by extraction of the solubilized
materials in sodium hydroxide solutions. The chlorination and extraction steps
are followed by a series of steps, involving treatment of the partially bleached
pulp with chlorine dioxide or sodium hypochlorite together with additional
extraction steps as required. A minimum bleaching sequence for sulfite pulps
might involve a three-step process; fully bleached kraft pulps typically involve six
steps; some dissolving pulps involve as many as eight or nine bleaching steps.
The bleaching steps are generally conducted near atmospheric pressure in
large stirred vessels, with filtration operations between adjacent bleaching steps to
separate the pulp from the aqueous-phase spent bleaching chemicals. In all cases,
pulp bleaching results in the development of substantial quantities of aqueous
effluent for which no inexpensive disposal or recovery system is available. Bleach
0- 10
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plant effluents contain, in addition to spent and unreacted chlorine, quantities of
sodium hydroxide, sodium chlorate, sodium hypochlorite, sodium chlorides,
cellulose degradation products and lignin chemicals which impose a substantial
biological oxygen demand (BOD) and color load on effluent receiving waters.
Biological treatment of these aqueous effluents is necessary for BOD control and
partial color reduction. The required secondary biological treatment to achieve
these objectives is not generally practiced today.
c. Papermaking
The papermaking process is the most standardized of the manufacturing
processes employed in the pulp and paper industry; it universally consists of
dewatering a dilute aqueous slurry of pulp fiber through a continuous screen
moving at relatively high speeds.
Most paper and board is made on Fourdrinier paper machines. The dilute
aqueous slurry of pulp (called the stock) is poured onto the top of a continuous
filtering screen (called the wire) which may be more than 100 feet long and up to
30 feet wide and travel over driving and support rolls at speeds ranging from
several hundred to several thousand feet per minute. Water drains through the
screen, leaving the paper sheet on the top; the sheet is then removed from the
screen and passed through wet presses and a series of drum dryers to evaporate
the water which did not drain through the screen in the formation process or
which was not removed mechanically in the presses. Fourdrinier machines pro-
duce an extremely wide range of products from very lightweight materials to
relatively heavy boards.
An alternative to the Fourdrinier paper machine is the so-called cylinder
machine, where paper is formed on a rigid cylindrical screen immersed in the
stock bath instead of a continuously travelling flexible screen with stock pumped
onto the top. For the most part, cylinder machines are employed to make
high-caliper board products that involve multi-ply lamination from a number of
cylinders. The detailed design of a paper machine is specific for the product and
caliper of materials to be manufactured; one machine design does not produce the
entire spectrum of the industry's products.
After the paper is dried, it is removed from the machine and formed into
large rolls, sometimes six or eight feet in diameter and ten feet wide. In certain
instances (such as newsprint) these rolls are rewound and slit into smaller rolls
which are sold directly to the consumer (the publisher). In other cases, rolls are
converted to end products, either in operations physically adjacent to the paper-
making enterprise, in separate locations within the same company, or at indepen-
dent converting organizations.
O- 11
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3. Products
Substantial statistical information has been developed by the U.S. Depart-
ment of Commerce in accordance with a product breakdown that is fairly well
standardized throughout the industry. The breakdown divides the industry into
two major classifications: paper products and board products, and these major
classifications are broken down again into subcategories, the major sectors of
which include: newsprint and other ground wood papers; coated printing, writing
and fine papers; unbleached industrial and converting papers; bleached industrial
and converting papers; tissue paper; containerboard (kraft liner and corrugating
medium); bleached board; bogus board (including jute and chip); and a special
category of building paper and boards including construction paper, insulating
board and hardboard.
There are some regional characteristics to the categories. For example,
essentially all the kraft linerboard (and a large percentage of the entire container-
board category) is produced in the South and Pacific Northwest. This is also true
of unbleached paper and bag. Most sack kraft paper is produced from southern
pine pulp. On the other hand, a large percentage of the coated and fine paper
categories for business papers and printing and writing papers is produced in the
older paper mills of the Northeast and the Midwest, many of which rely on
purchased pulp and de-inked waste to supply raw materials. Much of the tissue
paper is also manufactured in the Northeast and Midwest, principally because of
the proximity to market. For the most part, the bogus and building paper and
board products are produced in or near urban centers where waste fiber, the
principal raw material, is more readily available.
In a gross sense, the non-integrated and older mills in the Northeast and
Midwest (with their relative inefficiencies) have tended to become producers of
low-volume specialty products that command higher prices and require higher
levels of customer service. On the other hand, the large integrated southern mills
(and some of those in the Northwest) focus on low-price commodity products
because of their need to limit the number of products they produce and thereby
achieve optimum manufacturing efficiencies.
The large commodity producers such as the southern sack kraft and liner-
board manufacturers are the most capital intensive sector of the industry; the
small bogus boxboard, tissue and fine paper mills in the Northeast and Midwest
are more often the independent companies, with relatively low net worth and
restricted capabilities with respect to the infusion of new capital.
D- 12
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4. Proximity to Markets
The tonnage producers of linerboard, kraft pulp, bag paper and other
commodity items find it economically necessary to be close to forest resources. In
this instance, integration is the rule. The specialty paper makers such as small
tissue manufacturers and the producers of communication and fine writing papers
find it necessary to be close to their markets so they can provide adequate
customer service and overnight shipments and respond quickly to orders.
The specialty producers usually sell their paper in either roll form or as
packaged sheets; the commodity producers of bag paper, linerboard and corru-
gated medium are usually integrated within their own corporations to converting
operations such as the manufacture of multi-wall and grocery sacks and corru-
gated containers.
5. Generations of Waste
a. Airborne
By far the major air pollution problem of the pulp and paper industry is
associated with the emission of particulate matter and gaseous chemicals from the
kraft furnace, which is the heart of the kraft pulp mill recovery system. The kraft
furnace is designed to incinerate pre-concentrated waste materials (wood-derived
lignin and carbohydrate chemicals) from the kraft pulping process to carbon
dioxide and water vapor and to use the generated heat to maintain the sodium
and sulfur chemical values in the reduced state (as sodium sulfide) for recovery
from the furnace as a smelt. Accordingly, the furnace is designed for oxidizing
conditions in its upper section and reducing conditions in its lower section, and
these design requirements impose certain limitations on its effectiveness. In
addition, the boiler complexity and high cost are such that it is designed for
operation at high thru-puts and gas velocities, resulting in high entrainment losses
of particulate matter into the overhead boiler banks which are specially designed
to accommodate the contaminated gas.
The results of these design and operating characteristics are:(1) the carry-
out of substantial amounts of fly ash (approximately 90% sodium sulfate and 10%
sodium carbonate) and (2) the evolution of varying amounts of reduced and
oxidized sulfur gases — SO2, H2 S, various mercaptans, and higher sulfides of
carbon. The use of add-on devices to reduce these emissions has not, to date, been
particularly successful, and the normal kraft mill today produces high volumes of
white smoke which settles to the ground surrounding the mill area and substantial
quantities of gaseous effluents which creates the characteristic kraft mill odor,
typically that of rotten eggs.
' 13
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The industry is moving toward the application of abatement equipment to
reduce these emissions, but the industry is reluctant to invest the needed capital
without a foreseeable return. However, the technology is available to reduce
particulate emissions extremely efficiently; the technology of gaseous emission
reduction remains somewhat obscure in terms of the ultimate efficiencies of the
alternative techniques being considered.
In addition, other process unit operations of the kraft recovery system
involve emissions of gaseous and particulate materials. These emission points are
as follows: evaporator non-condensibles, digester relief gases, smelt dissolving tank
gases, causticizer tank gases, and lime kiln tail gases.
For the most part these gaseous emissions are minor compared to that of the
kraft furnace itself, and their solution is relatively easy. Particulate emissions from
lime kilns, and dissolving and slaking tanks can be effectively reduced by scrubb-
ing systems. The minor gaseous emissions can be recycled normally to the kraft
boiler or other incinerator for ultimate disposal.
In addition, the sulfite pulping industry is incinerating waste liquors. In some
cases an inert chemical ash is produced; in others acid and/or base is recovered
and recycled to the pulping system. These incineration processes produce particu-
late and (in certain cases) gaseous emissions of varying magnitudes, depending on
the system employed. However, these emission levels are not expected to lead to
the difficulties currently experienced in the kraft sector of the industry, because
simple incineration procedures are employed in sulfite liquor processing.
In addition, of course, the entire pulp and paper industry employs power
boilers to generate steam and electric energy by burning fossil fuels. The air
pollution problems which commonly reside with the steam generating industry
are typical of these operations within the pulp and paper industry. The industry is
moving in the direction of purification systems for particulate removal from stack
gases and anticipates the substitution of low-sulfur fuels for the standard Bun-
ker C nfaterial which has been most often employed in the past.
b. Waterborne
All sectors of the pulp and paper industry pollute water, with most of the
problems resulting from sulfite and NSSC pulp mills without recovery, from pulp
bleaching plants, and from papermaking operations.
The manufacture of pulp and paper products results in an aqueous waste
that poses problems because of suspended solids, BOD, color, pH, dissolved solids,
and temperature. In addition, specific toxic materials may appear in some aque-
ous effluents.
0- 14
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The industry is an inherent producer of water-conveyed suspended solids and
biologically active dissolved chemicals, principally cellulose derivatives. These
contaminants are derived for the most part from the wood raw material employed
in the pulping process or from the pulp raw material employed in non-integrated
papermaking. In addition to these contaminants, pulp mills produce effluents that
contain inorganic chemicals and have high and low pH's; bleach plants produce
effluents that contain excess chlorine, sodium hydroxide, and spent bleaching
chemicals such as chlorides, hypochlorites and chlorine dioxide. Waste sulfuric
acid is generated in certain sectors of the industry (although it is usually used
internally) and miscellaneous inorganic sludges — such as calcium sulfate — are
produced in the recycling recovery processes employed in many pulp mills.
Paper machines produce substantial quantities of waste-water effluents
which are contaminated with suspended solids, dissolved biodegradable chemicals,
and trace amounts of inorganic chemicals from prior process operations.
Taken together, these aqueous effluents result in the pulp and paper indus-
try's being one of the major water consuming industries and one of the major
developers of water borne pollutants.
Waterborne pollution abatement procedures are being established through-
out the industry as local and national regulations concerning the emissions of
water-borne materials become more restrictive. The classical methods of pollution
abatement technology, specifically primary and secondary biological treatment,
find substantial utility in the separation of suspended matter and the reduction of
BOD in aqueous effluents from the pulp and paper operations. Color pollution
remains a substantial problem, and technology associated with color reduction is
not yet universally applicable. High and low pH's are experienced in certain
effluents, and their neutralization will be required in the near future. Tempera-
tures can be controlled with recirculating tower systems. Dissolved inorganic
solids will remain important water pollution problems for the foreseeable future
until such time as tertiary treatment methods become economically acceptable to
the industry.
C. MILL CHARACTERISTICS
1. General Traits
Mills vary widely in their physical characteristics, in part because of the
regionality of the industry. In southern New England and upper New York State
approximately 200 mills produce a wide variety of specialty papers and boards -
ranging from tissue and fine papers for communications to special board materials
such as shoe board. These mills, and the paper machines within them, are almost
universally old, small and inefficient, some of which have resided in this area since
0' 15
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the founding of the industry in the 1800's. For the most part these operations
rely on purchased pulps for their raw materials and upon high-quality products
and high levels of customer service to achieve the selling prices necessary to
sustain these businesses. The mills are usually low in net worth and seldom
affiliated with the large corporations of the industry. As such, they represent the
low end of the spectrum in their ability to deal with the pollution abatement
investments and anticipated running costs.
In northern New England a sector of the industry has integrated pulp
manufacture with papermaking but is characterized by antiquated facilities, low
tonnage levels, and high wood costs. However, more of the manufacturing
facilities in this sector have been recapitalized than in southern New England; thus
this sector of the industry is better equipped to deal with pollution abatement
than the southern New England and New York State areas. On the other hand,
certain of the pulping operations in northern New England are of the sulfite
variety, and substantial investments will be necessary in sulfite-pulp-mill liquor
treatment systems (or alternatively, must be shut down) in addition to the
biological systems required for the general treatment of aqueous mill effluents.
Other mills are involved in kraft pulping, and new increments of investment in air
pollution abatement in the kraft recovery systems will have to be implemented
for these mills to continue in compliance with evolving air pollution regulations.
Although the northern New England sector of the industry will be better
equipped to deal with pollution abatement than southern New England and New
York, this is not to say that northern New England will have an easy time in
complying with emission criteria. Ultimately these mills can expect substantial
capital expenditures for this purpose, but for the most part they are owned by
major pulp and paper concerns with the capital resources necessary to implement
these investments.
The midwestern part of the country is comprised of a mixture of non-
integrated paper mills such as are found in New York and southern New England,
together with a group of integrated mills such as those in northern New England.
The pollution abatement requirements of the Midwest (both for air control and
reduction in water emissions) are not expected to be substantially different from
those anticipated for the Northeast. Most mills in the Midwest will be faced with
relative difficulty in solving their pollution problems. They are a mixture of
independent organizations, some with pulping and some without, and a group of
mills belonging to the major corporations of the industry where integration to
pulping is usually possible. Here again, a number of sulfite pulp mills will require
major capital investments for spent liquor treatment if they are to avoid being
shut down.
* 16
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In the southern kraft industry, integration to pulping is the rule rather than
the exception. In addition, southern mills are more modern and represent substan-
tially higher investments than is the case in the North. In addition, the southern
kraft industry is probably more profitable than the northeastern industry and the
midwestern industry, and is therefore better equipped financially to deal with air
and water pollution abatement.
Most of the southern industry is located away from the metropolitan areas,
whereas much of the northeastern and midwestern industry is located close to and
even within city boundaries. It is also true that, for the most part, the mills of the
southern kraft industry are owned by the major corporations whereas this is not
universally the case in the Midwest and the North.
The West Coast mills are more typical of the southern kraft mills than the
eastern mills in the sense that they are relatively new, usually integrated into
pulping, and often owned by the major concerns of the industry. Notwithstanding
this fact, some non-integrated independents in the Far West have pollution prob-
lems that will be as difficult to manage as those of some of their counterparts in
the East and Midwest. In an overall sense, however, the western mills, with their
relatively high levels of capital investment and cash flow, will be in a more secure
position with respect to pollution abatement in the years ahead.
2. Mill Size Distribution
In general, mill size is a key indicator of economic viability with the smaller
mills in each product sector being typically less profitable.
Figures 2-13 demonstrate mill size distribution throughout the United
States in the various pulp, paper and board product categories.
For kraft pulp mills, the average size is 750 tons per day, for NSSC 250 tons
per day, for sulfite about 150 tons per day and for de-ink pulp mills less than 100
tons.
In paper manufacture, the commodity products (such as newsprint and
groundwood printing papers) range from 300 to 500 tons per day. This range also
holds for the commodity board products such as linerboard and bleached food
board. On the other hand, the specialty paper and board products (including fine
papers, industrial papers, tissue, bogus boxboard, and construction materials)
average 100 tons per day or less.
It is apparent that certain product sectors of the industry are subject to
greater pressure with respect to the cost of pollution abatement because of
throughput differences. The most exposed product sectors include the fine-paper
0' 17
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FIGURE 2
Size Distribution of U.S. Mills
For Production of
Newsprint and Uncoated Groundwood
Total Number of Mills: 32
oo
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1
4 !
10
11
12 13
14 15
16
Total Paper Production - Hundreds of Tons Per Day
-------
o
*
p
0)
4J
5
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28
en
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FIGURE 5
C
•H
sa
4-1
O
0)
20
10
Size Distribution of U.S. Mills
For Production of
Tissue
Total Number of Mills: 102
Total Papermill Production - Hundreds of Tons Per Day
-------
10 1
CO
CO
i-H
° a
« ss
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tO "4-1
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en
cu
4-1
•S
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M
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11
10
FIGURE 7
Size Distribution of U.S. Mills
For Production of
Bleached Board
Total Number of Mills: 29
0
12
16
20
Total Board Production - Hundreds of Tons Per Day
-------
a1
ID
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en
13 1
12
11}
10
7 *
3 6
2 .
FIGURE 8
emi-chemical
Corrugating Medium
Size Distribution of U.S. Mills
For Production of
Semi-chemical Corrugating
Medium and Kraft Linerboard
Total Number of Medium Mills: 33
Total Mills Producing Liner: 38
[raft linerboard
j
*
t
012
S
3 4
5 6
7
8 9
"* — — -C^ ,
10 11 12 13 14 15 16
17
18
Total Board Production - Hundreds of Tons Per Day
-------
90
80
70
60
CO
•
Jj 50
OS
«"
3 40
S
o
M
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•§ 30
20
10
0
p\
\
5"
FIGURE 9
Size Distribution of U.S. Mills
For Production of
Jute Liner, Bogus Medium,
Chipboard and Bogus Boxboard
Total Number of Mills: 157
-2 --• - -3
Total Board Production — Hundreds of Tons Per Day
-------
en
0)
I
40
36 J
32 ,
28 .
24
HI
JJ
c
•H
co
r-t
S
20 .
16 .
12 .
FIGURE 10
Size Distribution of U.S. Mills
For Production of
Construction Paper, Insulating
Board and Hardboard
Total Number of Mills: 99
Total Production - Hundreds of Tons Per Day
-------
-S
CO
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O
-------
26
24
22 j
20
FIGURE 12
Size Distribution of U.S. Mills
For Production of
Pulp
Total Sulfite Mills: 37
Total NSSC Mills: 41
18 .
16
<°
00 G
•H
M
QJ
12
10
O
T"
Total Production - Hundreds of Tons Per Day
-------
w
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-------
mills, the special industrial paper mills, the tissue mills, and the combination
paperboard operations together with the wastepaper recovery and repulping
operations which often accompany these papermaking activities.
3. Marginality Analysis
To obtain a preliminary assessment of the economic impact of pollution
abatement, we grouped all the mills in the industry by major product categories
and by regions. For each category and region we established judgment criteria as
to what might constitute marginal economic mill operations and therefore suffer
disproportionately with imposition of pollution abatement controls.
The judgment criteria included the following considerations:
• Size of mill with respect to a minimum economic size for each
particular grade;
• Age of mill;
• Whether integrated to a pulp mill or non-integrated;
• Pulp mill process factors, such as a sulfite mill or NSSC mill
without recovery, rag or de-inked plant without recovery or other
known high-pollution load factors;
• Pollution abatement requirements relative to receiving water con-
ditions;
• Whether integrated to subsequent converting operations;
• Product values;
• General market considerations;
• Raw material availability; and
• Management capabilities;
Each pulp, paper and board mill in the United States was then scrutinized
against these criteria and, our judgment or specific knowledge, where applicable,
was applied to categorize each mill as economically marginal or as better able to
cope with increased pollution abatement requirements. Results of these judg-
ments are shown in Table 1 by major paper and paperboard product groupings.
Table 2 shows a summary by regions. Table 3 shows the results of our marginality
analysis of sulfite pulp mills.
P« 30
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TABLE 1
ECONOMICALLY MARGINAL U.S. "PAPER AND PA^ERBOARD MILLS BY GRADE
Tons/Day % of US
Marginal Mills
Total Capacity
Tons/Day % of US
Newsprint + Uncoated Groundwood 14,800 100%
Printing, Writing + Related
Papers:
Non-integrated 7,120
Integrated to Pulp 22,000
Total 29,120 100%
Special Industrial 1,120 100%
Tissue:
Non-integrated 5,365
Integrated to' Pulp 5,250
Total 10,615 100%
Unbleached Kraft Paper]
Unbleached Kraft Board j^
Bleached Packing Board]'
Semichemical Medium ]
Non-integrated 320
Integrated to Kraft Pulp 67,265
Integrated to NSSC Pulp 6,575
Total 74,160 100%
Combination Boxboard, Bogus
+ Jute + Wet Machine 24,655 100%
Construction Paper 5,535 100%
Hardboard 5,845 100%
Insulation Board 5,600 100%
TOTAL PAPER + BOARD 171,450
Sources: Arthur D. Little, Inc.. mill data and
Lockwood's Directory of the Paper and
(Lockwood Publishing Company, Inc., N
Post's 1971 Pulp and Paper Directory
San Francisco, 1970)
0-31
Total % of % of
Mills Mills Capacity
32 29% 19%
75 95% 91%
63 41% 32%
138 70% 48%
36 25% 17%
72 68% 22%
30 23% 13%
102 48% 18%
3 100% 100%
73 5% , 1%
21 48% 41%
97 18% 5%
170 49% 27%
47 60% 36%
29 35% 10%
23 26% 9%
674 46% 18%
estimates based on:
Allied Trades. 1970
ew York, 1969)
(Miller Freeman Publications,
-------
TABLE 2
ECONOMICALLY MARGINAL PAPER AND PAPERBOARD CAPACITY BY REGION
Marginal Mills
Region
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West
Total
T/D
15,485
18,980
28,535
4,315
38,055
20,680
22,420
22,795
Capacity
% US
10%
11%
17%
3%
22%
12%
13%
13%
Total
No.
120
133
156
21
69
46
44
^m_
Mills
% US
18%
20%
23%
3%
10%
'l/t,
6%
12%
In Region
% Mills J
69%
58%
48%
57%
23%
13%
27%
25%
I Cap
64%
33%
29%
36%
3%
2%
5%
11%
Of Total
% Mills
12%
11%
117
2%
2%
1%
2%
3%
US
% Cap
5%
3%
5%
<1%
<1%
<1%
<1%
1%
Totals (rounded) 171,265 100%
673 100%
(rounded)
44%
Sources: Arthur D. Little, Inc., mill data and estimates based on:
Lockwood's Directory of the Paper and Allied Trades, 1970
(Lockwood Publishing Company, Inc., New York: 1969)
Post's 1971 Pulp and Paper Directory (Miller Freeman Publications,
San Francisco: 1970)
32
-------
TABLE 3
SULFITE PULP MILLS
Estimate
of % Economically Marginal
Total Mills
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
West (incl. Alaska)
Total
No.
5
3
11
1
1
0
0
16
37
ces: Arthur D. Little, Inc.
Lockwood's Directory
Publishing
Post's 1971
Company,
Pulp and
No.
tpd % U.S
1,370 25
785 0
1,525 42
115 8
400 0
0 0
0 0
5,555 25
9,750 100
Marginal
tpd
% U.S. %
33
0
35
8
0
0
0
24
100
, mill data and estimates based
of the Paper and Allied Trades,
Inc. , New York:
Paper Directory
Mills
No . tpd
Region % Region
60
0
45
100
0
0
0
19
on:
1970
33
0
32
100
0
0
0
6
(Lockwood
1969)
(Miller Freeman Publications,
San Francisco: 1970)
33
-------
It is clear that most of the mills in potential economic trouble lie in the
northeast quadrant of the United States. About 807' of all U.S. mills that are
rated as marginal are found in New England, the Middle-Atlantic and the East-
North-Central regions. These mills are generally the smaller and older ones, many
of which are non-integrated paper mills largely producing printing, writing, and
related papers, tissue, and special industrial papers. For example, we rated all of
the non-integrated printing and fine paper mills in New England and over 80% in
the other two regions as being in potential economic difficulty. Non-integrated
tissue mills are in similar trouble, with about 807 of the mills in New England and
around 507 in the other two regions appearing in the marginal category. It is
equally clear that the large producing units in the southeast, south central and
western regions are much more viable and will be able to better absorb pollution
costs; typically the larger the mill, the lower the unit costs per ton of pulp.
It is interesting that about 487 of all U.S. mills were rated as marginal. These
mills, however, represent only 19% of the total U.S. capacity. Again, this observa-
tion is indicative of the large number of small producing units now struggling for
survival within the industry.
It should be pointed out that a substantial number of pulp mills, paper
machines and integrated mills have been shut down during 1970 and 1971 for
economic and/or pollution abatement reasons. For the most part these mills were
small, inefficient units that produced printing-writing papers and combination
paperboard. These mills have been excluded from our tabulations, but a number
of operating units falling in the marginal classification are similar to them.
Outside of the printing and writing, tissue and combination paperboard
grades indicated above, a key problem area is the semi-chemical pulp mills which
are not equipped with a process to recover the NSSC spent liquor. Here, about
48% of the mills, about 40% of the total semi-chemical corrugating medium
capacity, have substantial problems.
Clearly, many of the mills that we have placed in the marginal category will
survive the economic and pollution abatement rigors of the industry. A number of
smaller mills will maintain their position by astute application of new technology
in the specialty paper field and survive with higher margin profits. Others will ride
out the current recession and absorb their increased costs through higher prices as
supply/demand balances improve. The judgment of what portion of this marginal
production is likely to be shut down by 1976 because of the inability to bear
additional pollution abatement costs will be the subject of our second report.
34
-------
D. LABOR DISTRIBUTION
Table 4 shows our estimate of the employment distribution in the various
industry products sectors.
On a regional basis, the northeastern part of the country represents about
35% of the total labor force utilized by the industry. The second largest labor area
is the deep South, which produces principally unbleached kraft packaging papers
and board along with bleached board and semi-chemical board and utilizes about
30% of the total labor demand of the industry. We expect the remaining labor
(comprising approximately 35% of the entire industry) to be divided about equally
between the Midwest and the Northwest.
- 35
-------
TABLE 4
PULP AND PAPER INDUSTRY EMPLOYMENT. 1970
Pulp, Paper and Total
Paperboard Employees
Newsprint &
Groundwood Printing
Paper
Printing, Book, Writing
Unbleached Kraft Packaging
and Converting Paper
Bleached Packaging and
Special Industrial Paper
Unbleached Kraft Board
Bleached Packaging Board
Semi-Chemical Board
Combination Board
Pulp Mills
Tissue (1)
Building Paper and
Board Mills
Total
(1) Includes converting
Sources: Arthur D. Little, Inc
Lockwood 's Directory
(Lockwood Publishing
Post's 1971 Pulp and
18,000
81,000
15,000
12,000
15,000
8,000
5,000
45,000
58,000
100,000
30,000
387,000
. , mill data
of the Paper
Percent
of Total
5%
21
4
3
4
2
1
12
15
25
8
100%
Annual
Tons /Employee
252
107
247
137
753
560
698
155
727
36
138
and estimates based on:
and Allied Trades. 1970
Company , Inc . , New York
Paper Directory (Miller
: 1969)
Freeman Publi
San Francisco: 1970)
0-36
-------
III. MARKET AND COMPETITIVE TRENDS
A. OVERVIEW
The paper industry to be viewed realistically, comprises a number of sub-
industries built around major product groupings. To organize a supply/demand
trend analysis, we have divided the industry into four major product groupings
and three other product sectors. The four major product groups (each of which
contain several grades) are: packaging paper and board (52% of the industry's
current production tonnage); communication papers (25%); construction paper
and board (7%); and market pulp (9%). Three product sectors account for the
remaining 7%: tissue paper, special industrial paper, and wet machine board. To
illustrate the composition and relative importance of each group Table 5 shows
the 1970 production, import and export levels of the major product grades.
The only significant imported items are newsprint and market pulp, which
constituted virtually all of the United States pulp and paper imports in 1970.
Most of these imports come from Canada, which supplies about two-thirds of the
United States demand for newsprint and for market pulp used primarily by
non-integrated papermakers. These products are imported duty-free; hence they
are not subject to the current import surcharge. Kraft paperboard and market
pulp are the industry's largest export items; they account for 69% of its total
exports in 1970. However, total exports amounted to only 10% of all United
States production of pulp, paper, and board products. The major import and
export items are products in which wood represents a significant portion of the
total cost; North American producers will continue to have an advantage over
foreign producers because of significantly lower wood costs on this continent.
Our objective in this section is to analyze United States supply/demand trends; we
will concentrate on the above items in determining export/import balances.
B. MARKET AND CAPACITY PROJECTIONS
Since operating rates are crucial to profitability in this capital intensive
industry, we have projected United States production taking into account domes-
tic consumption and significant export and import trends. The historical produc-
tion statistics for this industry, reported regularly by the United States Depart-
ment of Commerce, represent the basis for our growth projections. Rather than
simply projecting these data, we have considered the overall growth rate of user
industries; the extent of substitution of different pulp, paper, and board grades
for each other; and the effect of competition from other products, such as
plastics. We assumed the average GNP (constant dollars) growth rate to be
57c/year in 1972 and 1973. We assumed a decline thereafter, which would reflect
an average growth of 4%/year between 1971 and 1976. This compares with a GNP
growth of 3.9%/year from 1960 to 1970. We have also assumed there would be no
O- 37
-------
TABLE
U.S. PULP & PAPER MARKET STRUCTURE, 1970
(thousands of tons)
GRADE
Packaging Paper and Board
Unbleached paper
Bleached paper
Unbleached kraft paperboard
Semi-chemical paperboard
Combination paperboard
Bleached paperboard
PRODUCTION
3715
1237
11300
3341
6854
3465
IMPORTS
35
39
sm
EXPORTS
125
14
1761
58
151
129
APPARENT
CONSUMPTION
3625
1262
9539
3283
6712
3336
Communication Paper
Newsprint
Uncoated groundwood
Coated
Uncoated book and writing
Bleached bristols
Construction Paper and Board
Construction paper
Insulation board
Hard pressed board
Other End-Products
Tissue and other creped
Special industrial paper
Wet machine board
3356
1176
3351
5349
1012
1491
1194
1452
3611
408
158
6635
234
84
sm
10
35
153
sm
sm
144
7
75
98
14
19
26
20
51
5
9847
1403
3276
5335
1012
1487
1210
1579
3591
357
162
Papermaking for market
Alpha and dissolving
3720
1716
3235
277
2226
869
4729
1124
TOTALS
sm - small
Source: U.S. Department of Commerce
57834
10745
5792
628 6P
0-38
-------
significant increases above current expenditures for air and water pollution
abatement since our purpose is to illustrate a base case for the subsequent impact
analysis.
To estimate future operating rates, we compared our market projections
with the capacity expansion plans of the pulp and paper mills as reported to the
American Paper Institute (API). These announcements usually reflect expansions
scheduled to be on-stream about two years from the date of announcement; it
takes about two years to put a paper or board mill on-stream once a firm
committment has been made. Because of continual improvements in reporting
procedure we consider the API capacity figures to be reasonably accurate, for
analyses of future operating rates (through 1973 in this case). In reviewing these
analyses for most paper and board grades, a 95-96% annual operating rate
represents a practical upper limit because of demand and capacity fluctuations
during the year.
In general, the short range (1-2 years) demand for most of the industry's
products is inelastic, or relatively insensitive to price changes. Few substitute
products compete directly with paper, the key exceptions being plastics in certain
packaging markets, wood products in certain construction applications, and
textiles in many tissue paper markets. Also, even where substitute items exist it
takes some time and capital investment to allow the intermediate processors or
converters to change their equipment and procedures to adapt to substitute
materials. Finally, direct or indirect expenditures on paper products represent a
small portion of the consumer's total disposable personal income. Unfortunately
it is difficult to demonstrate demand inelasticity numerically since there have
been only modest price increases over the past decade. We will note, however,
those product areas where price changes or relative stability appear to have had
the effect of slowing or increasing demand.
Overall, total paper and paperboard consumption has maintained close
correlation with real GNP. This should be true at least through 1976, because of
the widespread use of paper and paperboard products throughout the economy.
This total consumption forecast coupled with the expected changes in our net
import tonnage provided the basis for our production and operating rate projec-
tions shown in Figure 14. This analysis indicates a solidification of industry
operating rates from a slack situation in 1971 to an extremely tight supply/
demand balance in 1974. Our examination of past cycles indicates that operating
rates will probably decline again between 1974 and 1976. Operating rates will
vary considerably by product group, as shown below.
39
-------
Figure
Total Paper and Paperboard Consumption, Production and Operating Rate Trends
90
co
O
H
O
M
,-J
80
70
60
50
Consumption
V
Net
'Imports
Production
30
90
80
Go
isumpt
iill;
DO tons
on. $ Real
70
100%
au
o
o
o
o
H
90/
Qp^ratin> late, % of
Capacity
>
-~-r
I960 1962 1964 1966 1968 " 1970 1972 1974 1976
0' 40
-------
1. Packaging Paper and Board
Our projections for packaging paper and board supply/demand balances are
summarized in Table 6.
Unbleached kraft paperboard, the largest volume packaging grade, consists
primarily of linerboard which forms the outer facing of corrugated shipping
containers. About 90$ of United States production is consumed by box plants
owned by linerboard producers. We expect domestic consumption to taper off
somewhat from the 7%/year rate achieved in the 1960's. This will reflect the
current economic slowdown, the decleration of the Indo-Chinese conflict, and
modest displacement of corrugated containers by plastic film overwrap contain-
ers. Export growth will also slow down, because of an expected temporary
slackening of world economic growth; exports will still maintain higher growth
than domestic consumption. United States linerboard suppliers are in a favorable
export position because they have cheaper wood and larger, more efficient mills
than producers in Scandinavia, Russia, and Canada - the only other major
softwood producing regions. Unbleached kraft board is made predominantly from
softwood, which is still abundant in North America. Southern U.S. pine is better
suited for this product than Canada's softwood species. Russia's softwood re-
sources, although abundant, are in a geographically remote region (Siberia);
transportation lines have not been developed to handle large export tonnage
economically. Also, per capita consumption of paperboard in the Soviet Union is
low but expected to rise rapidly; domestic demand will have to be met before
export markets are pursued. Finally, east-west trade barriers will continue to
impede exports from Russia. Our analysis indicates a significant tightening of the
United States supply/demand balance by 1973 to an operating rate of 96% - the
practical upper limit for this sector.
Semi-chemical paperboard, used for the inner fluting of corrugated con-
tainers, is expected to grow faster than domestic corrugated box consumption,
because the market share held by fluting made from wastepaper has been
continually displaced. There is a high degree of interest in recycling wastepaper,
and we believe that this factor will increase the amount of recycled fiber used in
corrugating medium. On the other hand, 100% recycled corrugating medium has
inferior strength properties and growth of the semi-chemical product will be
stimulated by continuing overcapacity and hence weak prices. This is one of the
few sectors in which operating rates are expected to remain weak through 1973.
Ihe export potential for this product is minimal. It is made primarily from
hardwoods which are abundant throughout most of the world; thus it is usually
produced close to the market.
41
-------
TABLE 6
PACKAGING PAPER AND BOARD - U.S. PRODUCTION AND CAPACITY. 1960-76
GRADE
(thousands of tons)
1960 1970 1973
Avg. Annual Growth (%)
1976 1960-70 1970-76
Unbleached Kraft Board
Domestic Consumption
Exports
Total Production
Capacity
Operating Rate (%)
Semi-Chemical Board
Production
Capacity
Operating Rate (%)
Combination Board
Production
Capacity
Operating Rate (%)
Bleached Paperboard
Production
Capacity
Operating Rate (%)
4805 9539 11000 12200
381 1761 2200 2800
5186 H300 13200 15000
12307 13708
1736
7017
1746
92
3341
3756
89
6983
8084
86
3466
3472
100
96
4000
4594
87
7800
8267
94
3800
3807
100
4600
8300
4300
7.1
16.2
8.1
6.8
7.1
4.2
8.0
5.0
5.5
3.0
3.5
Unbleached Kraft Paper
Production
Capacity
Operating Rate (%)
Bleached & Other Paper
Production
Capacity
Operating Rate (%)
2961
996.
3715
4070
91
1237
1316
94
3900
4001
97
1270
1291
99
4400
1350
2.3
2.3
3.0
1.5
Sources: U.S. Department of Commerce (past production)
American Paper Institute (year end capacities)
Arthur D. Little, Inc. (production forecasts)
P- 42
-------
Combination paperboard — used primarily in folding cartons and set-up
boxes — has been hard hit by competition from plastics, thin-walled corrugated
containers, and bleached folding boxboard. This sector has also faced rising costs
for reclaimed paper, because the high labor cost component in reclamation has
increased faster than the cost of virgin wood fiber. However, we believe that the
concern about solid waste disposal and reclamation will revitalize the growth of
this sector because the paper raw material which it uses can be reclaimed much
more easily than plastics; also the product uses far less virgin pulp than the solid
fiber paperboard products with which it competes. The Federal government will
probably have a significant influence in stimulating this growth by changing its
purchasing specifications and by encouraging the states to change their require-
ments for the packaging materials used in the products which they purchase. Our
estimate of future demand indicates that the operating rate will increase to
94% of capacity by 1973 in this sector. However, we are more uncertain about
the actual growth to be achieved here than we are about other product sectors. If
only a 1%/year growth is achieved, there will be no operating rate improvement
through 1973 other than from attrition of existing mills.
Competition from plastics and retardation in the displacement of combina-
tion paperboard in folding cartons should cause a decline in the growth rate of
bleached paperboard. Bleached board is being displaced by molded plastic con-
tainers in some of its key markets, i.e., milk cartons, ice cream containers, and
cups. Capacity figures for this sector are suspect because monthly fluctuations in
demand make it infeasible to operate at 100%. Indeed there is a great deal of
flexibility in producing bleached bristols or simply drying pulp on these machines.
However, since producers in this sector are mostly vertically integrated to the
market and since the export potential is relatively low, the producers have been
able to keep capacity in line with demand in recent years and should continue to
do so through 1973.
Unbleached kraft paper — used primarily in paper shipping sacks and grocery
sacks - has faced strong competition from plastic film and bags, particularly in
the multi-wall bag sector. This competition plus a gradual trend to bulk shipments
has contributed to the low growth rate of this product during the 1960's. We
expect the growth to improve somewhat through 1976 because of the disposal
problems associated with plastic bags, and because paper bags are being used more
for refuse disposal since they are biodegradable or can be cleanly burned. This
increased growth combined with a modest capacity reduction should improve
significantly the operating rate in the sector by 1973.
Bleached and other packaging paper includes bleached bag and sack paper,
glassine and greaseproof papers. This sector suffers more than the unbleached
kraft paper sector from competition with plastic film because of the relatively
higher cost and demand-price elasticity of bleached papers and glassine. We expect
0' 43
-------
the growth rate of this sector to decline somewhat below the rate achieved in the
1960's. Nevertheless since no additional capacity is planned for this sector
through 1973, its operating rate should become extremely tight during that year.
2. Communication Paper
Table 7 shows our supply/demand projections for the various communica-
tion paper grades.
We forecast the continuation of the growth trends of the 1960's for domes-
tic consumption, net imports, and United States production of newsprint and
uncoated groundwood papers. The increasing market share of domestic suppliers
is due mainly to continued expansion of large efficient newsprint mills in the
south. Most of the imports are from Canada; Canada has expanded its newsprint
output even more rapidly than United States producers, but is directing much of
its increased production to overseas markets. North American producers have a
favorable export position in newsprint because they have large, efficient mills, and
their softwood costs are relatively low.
We forecast a slowing of the growth rate of coated papers because of reduced
substitution of coated papers for uncoated printing papers and slower growth in
the magazine industry - a key market. The slow growth in magazines stems from
a trend toward use of lighter weight papers to offset rising postal costs and from
continued displacement of magazine advertising by television media. Other mar-
kets (particularly books and general commercial printing) should show good
growth. There is relatively little new capacity planned for this sector; the operat-
ing rates should improve significantly by 1973.
The printing and business forms industries are both sluggish, because of the
economic recession. Consequently, we forecast a rate of growth slower than that
of the 1960's for uncoated book and writing papers. However, there has been a
commensurate slowdown in capacity expansions. The operating rate for this
sector should improve significantly by 1973 as growth is restored with the pick-up
in the general economy.
Our significantly lower forecast growth for bleached bristols as compared
to the historical trend is based on the static outlook for tabulating card stock,
which is one of the largest components of this sector. Tabulating cards, which
experienced a high growth rate during the 1960's, are now being displaced by
magnetic tape and optical scanners for computer input/output. The operating rate
in this sector, however, should improve signifcantly by 1973 because other bristol
applications (file folders and index cards) are growing and a slow rate of capacity
expansion is planned.
44
-------
TABLE 7
COMMUNICATION PAPER - U.S. PRODUCTION AND CAPACITY 1960-1976
GRADE
(thousands of tons)
Avg. Annual Growth (%)
1960 1970 1973 1976 1960-70 1970-76
News & Uncoated Groundwood
Domestic Consumption
Net Imports
U.S. Production
Capacity
Operating Rate (%)
8248 11250 12300 13400
5305 6690 7400 7700
2941 4522 4900 5700
4690 5018
96 98
3.1
2.4
4.4
3.0
2.5
4.5
Coated Paper
Production
Capacity
Operating Rate
2125
3351
3700
91
3800
3901
97
4200
4.6
4.0
Uncoated Book Writing & Related
Production
Capacity
Operating Rate (%)
3288
5349
6177
87
6300
6616
95
6900
5.0
4.5
Bleached Bristols
Production
Capacity
Operating Rate (%)
603
1012
1112
91
1100
1123
98
1200
5.3
3.0
Sources- U.S. Department of Commerce ( past production )
American Paper Institute ( year end capacities )
Arthur D. Little, Inc. ( production forecasts )
45
-------
3. Construction Paper and Board
Underlying our projections of construction paper and board grades is the
basic growth outlook for the construction industry. Using 1970 as the base year,
we have projected construction unit growth to 1976 at 8.5%/year (residential),
4%/year (non-residential) and 5%/year (remodeling). Most of the residential
construction growth will occur in the early part of the forecast period; we project
housing starts of 2.4 million units in 1976 as compared to an estimated 1.95
million units in 1971 and 1.45 million in 1970. Our projections for the various
construction paper and board grades are summarized in Table 8.
Construction paper used in residential construction and remodeling will
benefit directly from the substantial growth forecast for these activities. However,
there will be some displacement of construction paper with expanded use of
wall-to-wall carpeting and tile floors as a substitute for hardwood floors, which
require the use of construction paper. Our growth forecast indicates a significant
improvement in the operating rate for this sector although it will still have
some slack capacity in 1973.
Approximately 50% of domestic hardboard consumption is distributed in
construction; 20% is in furniture and cabinets; 30% is in miscellaneous uses. Its
high growth in the 1960's is attributed mainly to substitution of printed hard-
board for hardwood veneer in wall panels and furniture. While this trend will
continue, we expect somewhat lower growth rates in consumption, averaging 7%
per year through 1976. This decline from the historical growth rate of 7.6%/year
will be caused by increasing competition from particleboard and medium density
fiberboard in thicker products. Domestic suppliers will face continued competi-
tion from imports. Imports as a percent of domestic hardboard consumption have
fluctuated between 10 and 18% during the last decade; they accounted for 10% in
1970. Assuming a lifting of the current import surcharge, we believe that imports
will recapture a 15% share of the United States consumption by 1976. United
States tariffs on most unfinished hardboards will remain at 7.5%; tariffs on some
unfinished hardboards will drop from 11-12% in 1970 to 7.5% in 1972. The
previous 19% tariff on surface-finished hardboard will drop to 15% in 1972 under
the GATA agreement. Hardboard can be produced economically in tropical
countries because the dense hardwoods and hardwood residue available make an
excellent product without resin. The production process uses high temperature
and pressure to bind the wood fibers by fusing the natural lignin of the cell walls.
Hardboard is a denser, higher-value-added product than either particleboard or
insulation board; it is better able to absorb transportation costs. The net result of
product substitutions and increasing competition from imports will be that
domestic production growth will be considerably lower than the rate achieved
during the 1960's. Nevertheless, the operating rate of this sector should maintain
the high level it achieved in 1970 through 1973.
0- 46
-------
TABLE 8
CONSTRUCTION PAPER & BOARD - U.S. PRODUCTION AND CAPACITY. 1960-1976
(thousands of tons)
Avg. Annual Growth (%)
GRADE 1960 1970 1973 1976 1960-70 1970-76
CONSTRUCTION PAPER
Production 1410 1491 1900 2100 0.5
Capacity 2042 2148
Operating Rate (%) 73 89
HARD BOARD
Domestic Consumption 761 1579 2150 2400 7.6 7
Net Imports 75 127 300 300 5.4 15
Production 686 1452 1950 2100 7.8 5.5
Capacity 1597 1938
Operating Rate (%) 95 97
INSULATION BOARD
Production 1097 1194 1400 1200 0.9
Capacity 1721 1813
Operating Rate (%) 70 77
Sources: U.S. Department of Commerce (Past production)
American Paper Institute (Year end capacities)
Arthur D. Little, Inc. ("reduction forecasts)
47
-------
Insulation board is used primarily for interior wall board and ceiling tile.
Growth in the United States demand over the past 10 years has been less than 1%
per year; demand is expected to remain relatively static through 1976. Output
should reach a peak by 1973, due to the near-term acceleration of construction
activity. Beyond 1973 the industry will have difficulty maintaining its current
output level as building codes requiring the use of sheathing are eliminated; as fire
codes become increasingly stringent; and as alternative sound-deadening materials,
particularly plastic foams, become more widely used. Insulation board imports
will remain negligible. On balance we expect continued overcapacity.
4. Other End-Product Sectors
The other major end-product sectors of the paper industry are tissue paper,
special industrial papers, and wet machine board. Our projections of growth and
operating rates in these categories are shown in Table 9.
Tissue paper, which includes toilet tissue, napkins, towels, and facial tissue is
the largest consumer category in the pulp and paper industry. The growth of
tissue products has been slowing over the past five years because they are not
being as readily substituted for textiles. However, we expect that they will
maintain an average growth of 4.5%/year from 1970 to 1976. The demand for
non-woven disposable products will contribute to this growth. Non-wovens now
represent a very small portion of the total volume of tissue papers, but they are
projected to increase at about 15-20%/year. Without the bolstering effect of
disposables, the tissue sector's growth rate would continue to decline, as displace-
ment of cloth products by paper products runs its course. Based on this analysis,
operating rates should improve significantly in this sector through 1973.
The special industrial paper sector contains various grades whose properties
are specific to technical applications. These products include cable wrapping paper,
filter paper, sandpaper backing, and paper and resin impregnating stock. Because
of the widespread industrial applications for these grades, their growth depends
on that of the overall economy. Exports should grow at a higher rate than
domestic consumption, due to the relatively higher economic growth rate in other
parts of the world that will continue to rely on the technical know-how and scale
economies of United States producers. On the basis of our production forecast,
the operating rate for this sector should inprove considerably through 1973; still
it will be only about 80% in that year.
The wet machine board sector consists primarly of shoe board; it also
includes products such as automotive board, chair seat backing, and electrical
insulation board. Growth has been static during the 1960's, because the United
States shoe industry has declined and plastic composition materials have been
substituted for wet machine board in a number of applications. We expect this
P-48
-------
TABLE 9
TISSUE. SPECIAL INDUSTRIAL PAPER & WET MACHINE BOARD
U.S. PRODUCTION AND CAPACITY 1960-1976
(thousands of tons)
Avg. Annual Growth (%)
GRADE 1960 1970 1973 1976 1960-70 1970-76
TISSUE & OTHER CREPED
Production 2201 3611 4200 4700 5.1 4.5
Capacity 4185 4492
Operating Rate (%) 86 93
SPECIAL INDUSTRIAL PAPER
Domestic Consumption 254 358 410 450 3.5 3.8
Net Exports 29 50 60 70 5.6 5.5
Production 283 408 470 520 3.7 4.0
Capacity 554 583
Operating Rate (%) 74 81
WET MACHINE BOARD
Production 175 158 160 160
Capacity 166 175
Operating Rate (%) 95 92
Sources: U.S. Department of Commerce (Past production)
American Paper Institute (Year end capacities)
Arthur D. Little, Inc. (Production forecasts)
0-49
-------
situation to continue through 1976. Because capacity has been expanded mod-
estly in the face of static demand, the operating rate for this sector should decline
through 1973, as compared to the relatively high level attained in 1970.
5. Market Pulp
Market pulps are intermediate products which consist of papermaking pulp
grades and dissolving pulp. Papermaking grades are used to supply the fiber needs
of non-integrated paper mills and to balance the pulp needs of integrated pro-
ducers. There is also substantial world trade of market pulp to fill regional
imbalances. In this analysis we have emphasized bleached sulphate or kraft pulps,
which is by far the most important grade of market pulp. Dissolving pulp, which
is a special category of bleached chemical pulp, is more similar to a chemical raw
material than the other pulps produced by the paper industry. Its principal
applications are in rayon-acetate textile fibers, cellophane, and cellulose ester
plastics. Table 10 presents our production, trade, and capacity projections for
these two types of pulp.
A long-term forecast of United States bleached kraft pulp production is
bound to be uncertain, because exports and imports exert a great influence, and
because world trade patterns are always difficult to project. We have based our
United States import/export forecast on our worldwide supply/demand forecast
for all grades of bleached pulp (including market and integrated pulp) through
1973. This reflects the continued displacement of sulphite pulp by kraft pulp,
which is due to the severe water pollution problem and cost/property disadvan-
tages associated with sulphite pulp. Our analysis reveals an average growth in
demand of 8%/year for kraft pulp from 1969 to 1973 as compared to a growth in
capacity of 7%/year. These trends will lead to a significant tightening of world
operating rates in 1973. The maximum operating rate which this industry is able
to achieve in a full year is 96% because of demand fluctuations; we do not expect
this practical maximum to be exceeded in 1973, because there is still an opportu-
nity to add capacity beyond the expansions reported to the various associations.
Also, there will be an excess of capacity in Canada and a dearth in the
United States. Therefore, we have projected a significant retardation in the
growth of United States exports and a rapid increase in imports particularly
through 1973, as shown in Table 10. The forecast slowing domestic consumption
rate will be caused mainly by the price elasticity of demand. We expect significant
price increases in bleached kraft pulp by 1973, because the world supply/demand
balance is tightening. This factor will retard the displacement rate of sulphite pulp
and will stimulate greater use of deinked waste paper as a pulp substitute. It will
also create a cost-price squeeze for paper producers who are not integrated to
pulp.
p. 50
-------
TABLE 10
BLEACHED KRAFT AND DISSOLVING PULPS - U.S. PRODUCTION AND CAPACITY, 1960-1970
(thousands of tons)
Avg. Annual Growth (%)
GRADE 1960 1970 1973 1976 19.60-70 1970-76
BLEACHED KRAFT PULP
Domestic Consumption 6506 13727 16700 20000 7.5 6.5
Exports 408 1567 1800 2500 14.4 8.0
Imports 1005 2220 3500 4000 8.2 10.0
U.S. Production 5909 13074 15000 18500 8.3 6.0
Capacity 13999 15452
Operating Rate (%) 93 97
DISSOLVING PULP
Domestic Consumption 909 1124 1200 1100 2.2
Exports 408 869 980 1280 7.9 4.0
Imports 179 277 280 280 4.4
U.S. Production 1138 1716 1900 2100 4.2 3.5
Capacity 1768 1926
Operating Rate (%) 97 99
sources: U.S. Department of Commerce (Past production)
American Paper Institute (Year end capacities)
Arthur D. Little, Inc. (Production forecasts)
D- 51
-------
We projected a slowdown in dissolving pulp consumption, mainly because
declines are expected in the growth of rayon-acetate fiber use and because
cellophane will continue to decline. These are the two largest applications. Use in
cellulose esters, which is growing, will somewhat offset the declines in other
domestic applications. However, projected United States production growth de-
pends entirely on increasing exports. The projected export growth is based on
continued displacement of the market share held by Scandinavian dissolving pulp
producers who have higher wood costs than the United States producers. The
operating rate in this sector should maintain its currently high level. There is a
high degree of supply concentration in this sector; we expect the current pro-
ducers to undertake the necessary expansions as they increase their market share.
C. PRICE TRENDS
Table 11 shows the trends in the wholesale price indices from 1960 to 1970
for the various reported paper industry product groups. The overall pulp and
paper wholesale price index demonstrates a general pattern of price stability and
relatively modest price increases over the past decade. The 11% growth, in the
pulp and paper price index 1960-70 compares with a 16% increase in the general
wholesale price index. This comparison understates the actual case, because prices
for several important paper categories are based on list prices and do not reflect
prevailing discounts. For example, a recent survey of the members of the Ameri-
can Paper Institute shows an "actual" index of 95 (1957-59=100) for all
uncoated book papers in the first quarter of 1971 as compared to an index of 131
for A grade book paper, reported by the Bureau of Labor Statistics. A similar
discrepancy exists for bond papers made from chemical pulp.
We attribute the relative price stability of this industry to the high degree of
intra-industry competition and the general pattern of slack capacity during the
1960's. In most sectors there are at least 30 domestic suppliers. Many sectors,
however, display an oligopolistic characteristic; a few suppliers share a major
portion of the market. The price leadership exercised by these firms during
periods of excess capacity also contributes to price stability. Prices respond to
fluctuations in industry supply/demand relationships, although there is a 6- to
12-month time lag, particularly on the up side; the lag reflects the time required
to react to a tightening supply and price protection clauses in some supply
contracts. Figure 15 illustrates this relationship with the overall paper price index,
although imperfectly, mainly due to deficiencies in the index.
The significant tightening of the supply/demand balances which we foresee
for most industry product sectors in 1972 and 1973 portrays a market environ-
ment for appreciable price increases if the market is allowed to react freely. This
pressure for price increases is intensified because the industry's profits are at a low
point due to current weak prices (generally below 1960 levels) and cost increases
Q* 52
-------
TABLE 11
WHOLESALE PRICE INDEXES
FOR
SELECTED SUBGROUPS AND CLASSES OF
WOOD PULP. PAPER. PAPERBOARD AND CONVERTED PRODUCTS
(Index L9S7-S9 = 100)
1960 - 1970
Item
1960 1961 1962 1963 1964 1965
PULP, PAPER & PRODUCTS. 101.8 98.8 100.0 99.2 99.0 99.9
Wood Pulp Sub-Group 100.2 95.0 93.2 91.7 96.1 98.1
Sulphate, unbleached... 100.0 100.0 98.8 98.1 102.8 103.0
Sulphate, Semi-bleached * N.A. N.A. 98.1 97.8 105.8 109.1
Sulphate, bleached 100.1 94.4 91.5 90.b' 94.5 96.1
Sulphite, bleached 100.0 91.0 90.2 88.2 92.8 95.5
Groundwood , 100.0 100.0 100.0 100.0 100.0 100.0
Soda, bleached 100.0 89.9 87.7 82.6 86.1 90.4
1966 1967
102.6 104.0
93.0 98.0
102.1
109.4
102.1
109.4
1968
104.9
98.0
102.1
109.4
1969 1970
108.0 112.3
98.0 107.1
102.1
109.2
96.1 94.9
95.7 95.7
100.0 100.0
90.8 90.8
96.1
95.7
100.0
90.8
101.4 100.8 97.2 96.2 94.0 92.7 92.6 91.9
92.7
N.A.
116.6
96.1 105.2
95.7 111.6
100.0 100.0
90.8 N.A.
Waste Paper Sub-Group.. 90.3 80.5 97.5 92.2 92.4 99.4 105.0 78.1 101.5 108.3 97.6
No. 1 news )
No. 1 mixed )
Old Corrugated boxes..)
.009 sem.chem.kr.clippings)*
.009 mixed kr.clipping) *
White news blanks ) *
122.8
109.7
93.8
98.2
100.7
100.6
119.0
98.5
90.8
90.8
95.8
101.3
110.2
94.7
98.3
101.8
107.7
106.1
121.
104.
99.
108.
114.
116.
3
6
5
8
7
7
123.
103.
119.
116.
124.
118.
3
2
2
3
6
6
122
64
72
76
77
111
.5
.6
.3
.6
.4
.7
167.9
99.8
92.9
96.2
101.8
102.7
150.6
110.0
101.5
114.2
122.0
99.8
132.5
85.2
98.0
111.9
119.3
93.7
Paper Sub-Group 102.0 102.2 102.6 102.4 103.5 104.1 107.3 110.0 112.2 116.0 122.1
Paper, except newsprint
Printing Paper
Book Paper, A grade..
Wood Bond
Writing Paper
Wrapping Paper
Butcher's Paper
Waxing Paper
Wrapping Tissue
Newsprint class
Book Paper, No. 2,
Offset
Paperboard Sub-Group...
Contalnerboard class.
Linerbd.,83-100 test
Corrugating Medium..
Folding boxboard class
Set-up boxboard class
Construction Paper &
Board Sub-Group...
Converted Products
Sub-Group
102.7
102.6
105.5
102.6
101.7
101.3
102.0
99.8
97.6
100.2
99.4
99.6
100.0
98.6
99.3
99.1
102.9
101.7
106.1
102.6
101.8
100.9
101.4
99.8
100.4
100.2
92.7
91.2
95.0
82.9
94.5
96.9
103.4
101.4
107.6
103.7
103.0
98.6
101.2
99.9
102.7
100.2
93.1
92.4
94.7
87.6
93.6
97.1
103.2
101.4
107.4
104.3
104.2
93.5
100.4
99.9
102.7
100.2
94.7
94.6
96.9
89.6
94.0
97.7
104.9
.101.4
109.4
106.2
106.3 '
97.0
102.7
99.9
104.1
100.1
96.4
97.5
100.0
92.3
93.6
97.4
106.1
101.4
110.5
106.7
108.8
101.1
105.3
99.9
104.2
98.7
96.4
97.5
100.0
92.3
93.5
97.2
109.4
101.7
115.1
111.0
113.2
104.0
107.6
101.0
107.3
101.6
97.1
97.5
100.0
92.3
95.3
99.2
112
101
117
115
118
108
109
101
108
104
97
97
96
87
95
100
.1
.9
.6
.2
.3
.0
.3
.5
.8
.3
.3
.5
.8
.5
.9
.1
114.6
101.4
119.6
120.6
121.2
110.2
112.6
102.2
111.3
105.4
91.1
87.3
92.3
81.4
96.1
101.9
119.2
102.7
122.9
124.1
125.8
118.5
117.4
102.2
118.8
108.9
94.4
91.1
94.3
84.1
98.1
106.5
125.5
N.A.
128.5
131.8
132.4
126.7
121.5
104.1
N.A.
112.2
132.5
96.0
93.0
96.2
86.4
98.8
110.3
97.0 93.0
102.8 99.5 101.0 99.7 98.3 99.3 102.3 104.8 105.9 108.7 113.3
Sanitary Paper, etc....
Paper bags,shaping sacte
Boxes, shipprg ocntainets....
Packaging accessories..
Games, Toys, novelties.
Office supplies 101.5
Composite cans, 12/©=100.
102.9
99.6
103.9
103.6
100.4
101.5
__
101.9
99.0
98.4
101.3
100.4
102.3
--
101.1
97.9
101.8
99.8
102.0
102.3
--
100.7
90.1
101.8
98.7
102.0
103.1
100.0
100.5
90.4
99.1
98.5
102.0
102.9
101.3
101.2
96.8
98.7
99.6
102.0
103.6
102.4
104
102
101
102
102
106
100
.3
.7
.1
.4
.0
.3
.7
109.7
103.9
103.3
111.1
112.8
107.2
102.6
114.4
98.5
105.3
103.4
115.4
107.4
105.8
119.6
102.4
108.0
104.8
117.4
107.2
107.7
126.4
111.6
111.8
105.6
124.7
108.6
111.9
Source: Bureau of Labor Statistics, Wholesale Prices and Price Indexes, Various issues.
U.S. Department of Labor, Washington, D.C.
N.A. - Not Available
Note: Annual Figures are averages based on monthly data. * - January, 1962 = 100
-------
Figure
JPaper Industry Operating Rate and Wholesale Prire Index
120
110
100
100
90
80
1960
-------
beyond those which have been offset by productivity gains. The industry's overall
operating rate has remained higher during the current recession than in any
previous major recession; thus the productivity gains due to increased capacity
utilization are not likely to be as high during the recovery phase as they were after
previous recessions. The industry is bound to seek relief from any government
attempt to stabilize paper prices at their current levels.
- 55
-------
IV. FINANCIAL STRUCTURE AND PROFITABILITY TRENDS
We found that the most relevant and current information on the financial
structure and profitability trends of the pulp paper and paperboard industry
comes from a survey of 38 integrated and 17 non-integrated companies which
report these data annually to the American Paper Institute. The converting
operations of these companies are also included in the survey. Unlike the paper
industry composite used in the FTC-SEC Quarterly Financial Reports, there are
no companies in the API composite that have converting operations only. The
API data also depict the financial structure of the non-integrated companies.
Many are closely held corporations and do not publish financial information; the
composite is also broken down into company size groupings. For 1970, participat-
ing companies accounted for approximately 54% of total U.S. paper and paper-
board capacity and 58% of the pulp capacity. Their net sales amounted to about
59% of net sales in the paper and allied products industries. This survey includes
18 companies whose sales were in excess of $ 100 million and 21 companies whose
sales were less than $25 million; the survey represents a good cross-section of the
industry, although it does not include many marginal single-mill firms.
Table 12 compares the financial performance of the participating companies
by size categories in 1970. These data show that the non-integrated companies
and the smaller integrated companies are less profitable than the larger integrated
companies. The smaller firms also have lower borrowing power; their net worth as
shown represents a larger proportion of their total capital structure. The main
difference between the cost structures of the non-integrated companies and
smaller integrated companies and those of the larger firms is the raw materials
cost. This mainly reflects the fact that non-integrated firms pay more for pulp by
buying it on the open market; also smaller firms often are unable to obtain
quantity discounts on their chemical raw materials. The non-integrated firms will
feel this disadvantage more over the next several years, because market prices of
pulp are expected to rise.
The total cost of goods sold for the past three years amounted to about 80%
of net sales; the 1970 ratio was 81.4%. Average hourly wages rose 6.2% in 1970.
In 1969 an increase of 6.0% in output per man-hour helped offset the 6.2% rise in
hourly earnings that year, but in 1970 the output per man-hour rose by only 1.3%.
Government data on pulpwood prices indicate a continuous upward trend of
about $l/cord annual increase since 1968. Pulp prices advanced by over 9% in
1970, but wastepaper prices declined by about 10%. Sulphur prices declined
sharply in 1969 and 1970, but total costs of chemicals used by the paper industry
moved up sharply. A shortage of low sulphur content fuel caused an increase of
about 30% in fuel prices from the 1-969 level. Rail rate increases raised transporta-
tion costs for the paper companies by about 10% from the 1969 levels. Paper-
making equipment rose 6.4% in 1970, which is well above the long-term trend of
2.8%/year since 1960.
P'57
-------
TABLE 12
BALANCE SHEET AND PROFIT AND LOSS STATEMENT RATIOS - 1970
17 NON-INTEGRATED
Total
All
Sales: (OOO's) Companies
BALANCE SHEET ITEMS
Cash & Government
Securities (including
Tax Reserve)
Receivables (Net)
Total Inventories
Other Current Assets
TOTAL CURRENT ASSETS
Timberlands (Net)
Plant, Equipment, And
Other Property
Reserve
TOTAL FIXED ASSETS
Other Assets
TOTAL ASSETS
Total Current
Liabilities
Other Liabilities
(Long-Term Debt
Deferred Credits, Etc.)
Net Worth
TOTAL LIABILITIES
AND NET WORTH
PROFIT 6. LOSS STATEMENT
Sales:
(Net Of Returns, Allow-
ances, All Discounts,
And Sales Excise Taxes)
Depreciation
Depletion
Labor**
Other Costs***
TOTAL COST
OF GOODS SOLD
GROSS OPERATING
PROFIT
Less :
Selling, General And
Administrative Expenses
NET OPERATING PROFIT
Less: Other Income
And Expenses, Net
NET INCOME BEFORE
INCOME TAXES
INCOME TAXES
NET INCOME AFTER
INCOME TAXES
CASH DIVIDENDS PAID
OR DECLARED
1
Under
$5,000
$ 5,000-
$10,000
PAPER COMPANIES
$10,000
And
Over
I !
Under
Total $25,000
38 INTEGRATED COMPANIES
$25,000-
$50,000
$ 50,000-
$100,000
$100,000
And
Over
1
Total
(Percent Of Total Assets)
3.3
12.4
15.0
0.6
31.3
7.4
98.3
46.2
59.5
9.2
100.0
14.1
30.8
55.1
100.0
100.0
4.4
0.4
23.8
52.8
81.4
18.6
11.5
7.1
0.5
6.6
2.5
4.1
2.8
SOURCE: A.P.I. Annual Capital
NOTES:
4.7
12.6
23.3
3.1
43.7
0.0
100.9
48.1
52.8
3.5
100.0
12.7
6.6
80.7
100^0
100.0
4.3
0.0
29.2
46.5
80.0
20.0
17.1
2.9
0.6
2.3
1.8
0.5
0.7
10.2
11.9
18.3
0.8
41.2
0.0
106.7
54.4
52.3
6.5
100.0
12.2
21.0
66.8
100.0
100.0
4.4
0.0
21.1
56.7
82.2
17.7
8.5
9.2
1.0
8.2
3.5
4.7
4.0
4.9
12. i
14.9
2.5
34.8
0.0
118.2
56.3
61.9
3.3
100.0
14.1
25.4
60.5
100.0
100.0
4.3
0.0
20.5
65.6
90.4
9.6
10.4
- 0.8
0.4
- 1.2
- 0.6
- 0.6
1.2
6.3
12.3
16.2
2.1
36.9
0.0
114.4
55.4
58.9
4.1
100.0
13.6
23.4
63.0
100.0
(Percent Of Net
100.0
4.4
0.0
21.1
62.2
87.7
12.3
10.2
2.1
0.6
1.5
0.6
0.9
1.9
4.8
13.1
15.6
1.4
34.9
1.1
105.9
47.3
59.6
5.4
100.0
12.8
18.2
69.0
100.0
Sales)
100.0
4.2
0.1
22.7
57.7
84.7
15.3
10.4
4.9
- 0.1
5.0
2.2
2.8
1.3
4.8
15.4
8.9
0.5
29.6
8.2
99.8
46.5
61.5
8.9
100.0
11.8
31.7
56.5
100.0
100.0
6.6
1.5
21.2
49.6
78.9
21.1
15.1
6.0
- 0.5
6.5
3.0
3.5
1.0
4.4
13.9
8.2
0.3
26.8
10.6
103.4
44.9
69.1
4.1
100.0
13.7
30.8
55.5
100.0
100.0
7.0
0.4
23.2
49.2
79.8
20.2
6.9
13.3
1.0
12.3
5.8
6.5
2.2
3.1
12.2
15.7
0.6
31.6
7.2
99.4
46.1
58.4
9.8
100.0
14.2
31.0
54.8
100.0
100.0
4.1
0.4
24.0
'2.9
81.4
18.6
11.8
6.8
0.5
6.3
2.3
4.0
3.0
3.3
12.4
15.0
0.6
31.2
7.4
98.1
46.1
59.5
9.3
100.0
14.1
30.9
55.0
100.0
100.0
4.4
0.4
23.8
52.7
81.3
18.7
11.5
7.2
0.5
6.7
2.5
4.2
2.9
Income Survey.
B. .1 ««.1 .ul «ul .«**!««- tit
M
***
includes All wages jiiiu aaioi*t»( uAw«i|r«. h..v«~ &.»* — ».— — --- victi^ta*., w«.....-.ue
Includes such costs as Raw Materials, Maintenance and Repairs, Interest, etc.
Components may not add to total due to rounding.
0- 58
-------
With only a modest increase in 1970 sales and a considerable increase in
costs, the after-tax profit margin for the paper industry dropped to its lowest level
right after World War II. In 1970 and during the first half of 1971 the industry
tried to bring its costs under control. Although labor costs are expected to rise,
productivity is expected to increase substantially due to cost reductions and
increased capacity utilization in 1972. Many inefficient mills were closed during
1970 and early 1971; this will help raise the average level of efficiency for the
industry. However, at present the financial performance reported by 39 publicly
held paper companies for the first nine months of 1971 indicates an average profit
decline of 28% from the same period in 1970. Thus the industry is still caught in a
cost/price squeeze mainly due to weak prices and current overcapacity.
As shown in Table 13, the non-integrated companies have attained consis-
tently lower profit margins since 1960. This profitability differential was accentu-
ated during the cost/price squeeze in 1970. The current profitability differential is
likely to continue through 1976, because market pulp prices are expected to rise
steeply; also most non-integrated companies cannot attract enough capital to
increase their scale of operations, to backward-integrate to pulp production, or to
achieve product diversification.
The declining proportion of equity capital or net worth reflects the increas-
ing importance of debt financing in the capital structure of most paper com-
panies. Although this trend should have resulted in increasing return on net
worth, the general decline in return on total assets and the increasing cost of debt
capital during the 1960's caused it to decline in recent years. The declining trend
in return on total assets understates the real earning power decline, because the
paper company asset values do not reflect the rapidly increasing value of their
timberlands.
A. PROFITABILITY VARIATIONS BY PRODUCT SECTOR
Since most paper companies produce a wide variety of both paper and
paperboard grades, some of which are produced in the same mill, it is impossible
to measure meaningfully product line profitability from published information.
Since we intend in our second report to show the cost/price structure for key
products which will be most affected by increased pollution abatement costs, it is
sufficient at this point to assess qualitatively the relative profitability of the
various product sectors.
We have found that the profitability of a given product sector at a point in
time usually relates directly to the degree of capacity utilization. One can obtain a
reasonable conception of how each sector ranks in profitability outlook by
reviewing the operating rate forecasts presented in Chapter III. On this basis the
59
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TABLE 13
PERCENTAGES OF TOTAL ASSETS. SALES. NET WORTH
INTEGRATED COMPANIES: 1957 - 1970
PERCENTAGE OF TOTAL ASSETS
S. les
Net Worth
Profit Before Taxes
Federal Taxes
Profit After Taxes
Dividends
PERCENTAGE OF SALES
Total Assets
Net Worth
Profit Before Taxes
Federal Taxes
Profit After Taxes
Dividends
PERCENTAGE OF NET MOUTH
Total Assets
Sales
Profit Before Taxes
Federal Taxes
Profit After Taxes
Dividends
PERCENTAGE OF TOTAL ASSETS
Seles
Net Worth
Profit Before Taxes
Federal Taxes
Profit After Taxes
Dividends
PERCENTAGE OF SALES
Total Assets
Net Worth
Profit Before Taxe*
Federal Taxes
Profit After Taxes
Dividends
PERCENTAGE OF NET NORTH
Total Assets
Sales
Profit Before Taxes
Federal Taxes
Profit After Taxes
Dividends
1957
91
68
12.7
6.0
6.7
3.7
110
75
14.0
6.6
7.4
4.0
146
133
18.6
8.8
9.8
1957
140
72
12.7
6.5
6.2
2.1
71
51
9.0
4.6
4.4
1.5
139
195
17.7
9.0
8.7
1958
89
68
11.1
5.4
5.8
112
77
12.5
6.0
6.5
3.8
147
130
16.3
7.8
8.4
1959
96
69
12.5
6.0
6.5
104
72
13.1
6.3
6.8
3.6
144
138
18.1
8.7
9.4
1960
97
71
11.6
5.7*
5.9
103
73
11.9
5.9*
6.1
3.0
141
138
16.4
8.1*
8.3
1961 1962
100 100
71 70
10.7 10.7
5.2* 5.2*
5.5 5.5
100 100
71 70
10.7 10.7
5.2* 5.1*
3.4 3.4
140 143
141 143
15.0 15.2
7.3* 7.4*
7.7 7.9
NON-INTBGRATKD COMPANIES:
1958
136
74
10.2
5.1
5.1
2.1
74
54
7.5
3.8
1.6
135
184
13.8
6.9
6.9
1959
144
75
13.6
6.8
6.8
2.2
69
52
9.5
4.8
1.5
133
192
18.2
9.1
9.1
1960
132
76
12.9
6.6*
6.3
2.3
76
57
9.8
5.0*
1.7
132
174
17.1
8.8*
8.3
1961 1962
122 115
72 73
11.7 10.4
6.3* 5.5*
5.4 4.9
2.3 2.4
82 87
59 63
9.6 9.0
5.2* 4.7*
1.9 2.1
138 136
168 157
16.2 14.2
8.7* 7.5*
7.5 6.7
1963
100
70
10.4
4.8*
5.6
100
70
10.4
4.8*
3.3
144
143
14.9
6.9*
8.0
1957
1963
118
74
9.9
4.9*
5.0
2.5
87
63
8.4
4.2*
2.2
135
160
13.4
6.7*
6.7
1964 1965
101 104
69 66
10.5 10.8
4.4* 4.4*
6.1 6.4
99 97
68 64
10.3 10.5
4.3* 4.2*
3.3 3.1
145 152
147 157
15.1 16.5
6.3* 6.7*
8.8 9.8
- 1970
1964 1965
113 123
70 72
8.5 10.5
3.4* 4.5
5.0 5.9
2.2 2.5
88 82
62 59
7.5 8.6
3.0* 3.7
1.9 2.1
142 139
161 170
12.1 14.5
4.9* 6.3
7.2 8.2
1966
102
62
11.3
4.6*
6.7
3.0
98
61
11.1
4.5*
3.0
161
164
18.1
7.4*
10.7
1966
132
66
12.2
5.4*
6.8
2.0
76
50
9.3
4.1*
5.2
1.5
152
199
18.5
8.2*
10.4
1967
94
60
8.0
2.9*
5.1
2.9
106
64
8.5
3.1*
3.1
168
157
13.3
4.8*
8.5
1967
128
69
9.0
4.0*
4.9
2.4
78
54
7.0
3.2*
3.8
1.9
146
187
13.1
5.9*
7.2
1968
94
58
8.3
3.3*
5.0
2.8
106
61
8.8
3.5*
2.9
174
169
14.7
5.8*
8.9
1968
128
70
9.4
4.2*
5.2
2.4
78
54
7.4
3.3*
4.1
1.9
144
184
1969
1C 1
57
9.3
3.8
5.5
2.8
99
56
9.2
3.8
2.8
176
177
16.4
6.7
9.7
5.0
1969
119
64
7.7
3.5
4.2
2.6
84
54
6.5
2.9
3.6
2.2
156
186
13.5 12.1
6.0* 5.5
7.5 6.6
1970
97
55
6.5
•>.4
4.1
2.8
103
57
6.7
2.5
2.9
182
176
11.8
4.5
7.3
5.0
1970
114
63
1.8
0.7
1.1
2.2
87
55
1.5
0.6
0.9
1.9
159
182
2.8
1.2
1.6
2.9 2.9 2.9 3.0 3.1 3.3 3.4 3.1 3.5 3.7 3.6 3.4 4.1 3.5
SOURCE; American Paper Institute, "Annual Capital Income Survey.'
0- 60
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least profitable product sectors, in approximate ascending order of 1970 profit-
ability, are:
Least Profitable
Combination paperboard
Insulation board
Construction paper
Special industrial paper
Semi-chemical corrugating medium
Unbleached kraft packaging paper
Coated paper (particularly the publication grades)
Uncoated book, writing and related paper
Tissue paper
Most Profitable
The sectors destined to maintain a condition of excess capacity through
1973 are more relevant to our analysis. These sectors, in approximate ascending
order of future profitability, are:
Poorest Outlook
Insulation board
Semi-chemical corrugating medium
Special industrial paper
Best Outlook
Our analysis shows that each of the above product sectors will be operating
below 90% of capacity at the end of 1973; the rest of the industry will be
significantly above this level. Firms in these sectors therefore, should be least
able to accommodate the capital and operating costs associated with increased
pollution abatement requirements. It will be more difficult for them to achieve
price increases to cover additional pollution abatement costs; and to attract
capital for the required capital expenditures, because of their relatively low
profitability.
B. CAPITAL FLOW RELATIONSHIPS
To illustrate the relationship between capital flows and profitability in the
paper industry, we have plotted trends in these relationships since 1960 (Figures
16-19).
0*61
-------
Figure 16
Total Paper Industry Profit anc
Lax rtfLum aa % off toca]
1960
-------
Figure 17
Pulp, Paper and Paperboard Sector Profit and Capital Expenditure Trends
7.0
6.0
600
400
1960
-------
Figure 18
Pulp, Paper and Paperboard Sector Profitability and Capital Expenditure Relationship
''•"I „_.,
5.0 i
4.0
1000
1200
New capital expenditures lagged one year
-------
Figure
Total Paper Industry Profitability and Capital ExpenditureRelationshin
800
1000
1200
1400
1600
New capital expenditures lagged one year
-7
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Figure 16 compares the trend in total industry operating rates and profit-
ability with the trend in new capital expenditures. Changes in profitability
fluctuate directly with changes in operating rates; changes in new capital expendi-
tures succeed profit and operating rate changes by about one year. Also illustrated
is close correlation between the profitability trends of the API company com-
posite and the FTC-SEC quarterly financial samplings. The profitability levels
reported by the FTC-SEC have been consistently lower than those reported by
the API composite.
Figure 17 shows the relationship between profitability and capital expendi-
tures more specifically for the pulp paper and paperboard sectors, which are most
directly affected by increasing pollution abatement costs. This correlation em-
ploys profitability data derived from the Internal Revenue Service based on total
tax returns of all pulp, paper, and paperboard companies. These data differ from
the FTC-SEC profitability samplings in that companies solely engaged in paper
converting operations are excluded. The profitability levels reported by the IRS
have been consistently lower than the profitability of the API company com-
posite; the latter does not include many of the smaller and least profitable firms
in the industry. The capital expenditure trend in Figure 17 is also specific to the
pulp paper and paperboard sectors. Again, fluctuations in capital expenditures
usually occur about one year after changes in profitability. This relationship
between profitability and capital expenditures is shown in Figure 18.
An even more interesting relationship between profitability and capital
expenditures lagged one year is shown in Figure 19; here this relationship is
compared for the total paper industry. By virtue of utilizing more current
profitability data than that published by the IRS, this analysis shows a step
change in the relationship between capital expenditures and profitability, starting
in 1967. Apparently, the, industry has been more willing to commit greater
amounts of capital at lower levels of profitability in recent years. A number of
explanations can be offered for this changed relationship: the effect of inflation
on capital equipment costs; the trend toward larger scale mills to obtain increased
productivity and offset labor cost increases; and more importantly, significantly
higher capital expenditures for pollution abatement equipment.
This step change in the relationship between profitability and capital expen-
ditures also indicates that the paper industry management and owners, at least
temporarily, have been willing to accept lower returns on their capital expendi-
tures. We believe that aside from a long-standing over-emphasis on production
volume, the paper industry has been a low-risk business. Therefore, the companies
within it have become accustomed to accept commensurately low profit expecta-
tions in justifying new investments. However, this trend certainly cannot continue
indefinitely. With increasing interest costs the paper industry may not be able to
D- 66
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afford nor attract sufficient debt capital at the profitability levels of recent years.
Equity financing does not offer a more attractive alternative to debt financing at
today's depressed stock prices.
The concern about attracting sufficient capital is accentuated because the
risk level appears to be increasing significantly in the paper industry. One easily
measured element of risk over the past decade is the industry's increasing reliance
on long-term debt. Many paper companies have now borrowed to their maximum
limits. This factor and rising interest rates now make the industry heavily
dependent on equity financing for future expansion. However, return to the
equity shareholders can be expected to fluctuate more widely now because of the
leveraging effect of heavy interest and principal repayment charges. Also, the
intense national concern over environmental protection has raised new uncertain-
ties over the last few years. Besides implementing increased water and air pollu-
tion control programs, the paper industry now faces possible restrictions on its
timber harvesting practices and mounting pressure to recycle more of itsproducts;
thus major changes in raw material supply are created. Substitute materials — e.g.,
plastics — have partially eroded traditional paper markets. Increasing timberland
taxes reflecting competitive uses for this land and possible changes in capital gains
laws add to the uncertainties. Some if not all of these uncertainties are likely to
materialize into greater dispersion and fluctuations in profitability among firms in
this industry. Such variability is a basic sign of increasing risk. To restore its
profitability to former levels and to compensate for additional risk, the industry is
likely to attempt vigorously to increase prices when supply/demand balances are
favorable.
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