EPA-230/1-73-027
FEBRUARY,1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
THE INTEGRATED IRON
and STEEL INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
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ECONOMIC ANALYSIS
OF
THE PROPOSED EFFLUENT GUIDELINES
FOR
THE INTEGRATED IRON AND STEEL INDUSTRY
FINAL REPORT
FEBRUARY, 1974
OFFICE OF PLANNING AND EVALUATION
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
CONTRACT NO. 68-01-1545
S. Bnviro^ental Protection Agency
rr:~n^
Chicago, IL 60604
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ENVIRONMENTAL PROTECTION AGENCY
ECONOMIC ANALYSIS OF THE PROPOSED EFFLUENT
GUIDELINES FOR THE INTEGRATED IRON AND STEEL INDUSTRY
TABLE OF CONTENTS
Section Title Page
EPA Review Notice
Preface
Executive Summary
INTRODUCTION
Statement of the Problem I - 1
Nature of the Problem 1-2
Scope of Work 1-2
Method of Approach 1-4
II THE IRON AND STEEL INDUSTRY
Discussion of the Industry II - 1
Production and Productive
Capacity II - 2
Projected Demands and Capacity II - 4
Industry Segmentation II - 4
Alternative Approaches to
Industry Segmentation II - 5
Steel Industry Employment II - 8
III FINANCIAL PROFILES
Industry Performance m - 1
Financial Effects III - 3
IV COSTS AND PRICES
Costs IV - 1
Steel Prices IV - 1
Effect on Smaller Producers IV - 7
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Section Title
V REVIEW OF COST AND CONTROL DATA
Data Sources V - 1
Comparisons of Pollution Control V - 3
Cost Estimates
Costs for Added Industry Capacity V - 6
Other Industry Costs ' V - 7
VI IMPACT ANALYSIS
Cost Effects VI - 1
Price Effects VI - 4
Secondary Effects VI - 5
Profitability VI - 7
Capital Availability VI - 12
Production Effects VI - 21
VII LIMITS OF THE ANALYSIS
Industry Segmentations VII - 1
Range of Error VII - 1
Critical Assumption VII - 2
Remaining Questions VII - 3
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SUPPLEMENT
Analysis of the Ability of the U.S. Steel Industry
to Finance Pollution Control Equipment -- Prepared by
Booz, Allen & Hamilton, Inc.
EXHIBITS
I Estimated Sustainable Annual Domestic Steel
Shipment Capacity - 1973
II Projected Net Steel Shipments 1973-1983
III Capital Investment Required to Expand Capacity
1973 - 1983
IV Total Capital Expenditures for New Capacity
1973 - 1983
V Air and Water Pollution Abatement Capital Investment
Requirements for Existing Capacity 1973 - 1983
VI Capital Investment Required to Replace Capacity
Shut Down as a Result of Pollution Abatement Costs
VII Total Capital Expenditures for Integrated Steel
Producers 1973 - 1983
VIII Total Net Cash Outlays for Integrated Steel
Producers 1973 - 1983
IX Steel Industry Funds Available for Investment
Assuming Constant Prices and No Capacity Increase
1973 - 1973
X Financing Pollution Abatement Investment Assuming
No Capacity Expansion and No Accelerated Facilities
Replacement 1973 - 1983
XI Net Funds Available for Investment from Increased
Output 1973 - 1983
XII Financing Capacity Expansion with No Requirement
for Pollution Control 1973 - 1983
XIII Additional Funds Available for Investment Assuming
a Steel Price Increase of $10 Per Ton 1973 - 1983
XIV Financing Total Potential Steel Industry Capital
Outlays Assuming a Price Increase 1973 - 1983
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-IV-
EXHIBITS
Exhibit
Number Title
I List of Reference Material Used in Economic
Impact Study
II-l Integrated Iron and Steel Companies Showing
Plants and Primary Facilities
II-2 Production of Primary Iron and Steal Products
II-3 Raw Steel Capacity Versus 1972 Production for
Integrated Steel Companies
II-4 USA Iron and Steel Industry Raw Steel
Production Trends
II-5 Finished Steel Imports and Exports
II-6 Current Best Demands of Finished Steel and
Raw Steel Demands in the U.S. for the Period
1973-1983
II-7 Classification of Iron and Steel Industry
Workers by Job Skills - 1972
III-l Iron Age 1972 Steel Industry Financial Analysis
III-2 Steel Industry Revenues and Profits, 1962-1972
III-3 Comparison of Revenues and Profits for 1971 of
51 Industries with Revenues of $2 Billion and Over
III-4 Captial Expenditures by Iron and Steel Industry
IV-1 Production Cost Data (for Companies Representing
91% of the Total Production)
IV-2 Composite Finished Steel Prices
IV-3 Graph - Composite Price of Finished Steel 1953-1973
IV-4 Iron Age Steel Prices
IV-5 Rough Comparisons of International Steel Prices
from January 1969 - October 1973
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Exhibit
Number Title
V-l Scope and Coverage of Prior Analyses of the
Economic Impact of Pollution Control on the
Iron and Steel Industry
V-2 Estimated Pollution Control Capital Investments
by the Iron and Steel Industry
V-3 Iron and Steelmaking Operations - Projected
Water Pollution Control Costs for Related
Categories
V-4 Projected Total Pollution Control Investment
Costs for Iron and Steel Industry
VI-1 Effect of Water Pollution Control Cost for
Primary Operations Only on Cost of Finished
Steel
VI-2 Estimated Cost of Water Pollution Control
for New Steel Capacity
VI-3 Effect of Water Pollution Control Cost for
Primary Operations Only on Cost of Finished
Steel
VI-4 Total Estimated Effect of Air and Water
Pollution Control Cost on Price of Finished
Steel
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EPA REVIEW NOTICE
This report has been reviewed by the Office of Planning
and Evaluation of 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 con-
stitute endorsement or recommendation for use.
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PREFACE
The attached document is a contractors' study prepared
for the Office of Planning and Evaluation of the Environmental
Protection Agency ("EPA"). The purpose of the study is to
analyze the economic impact which could result from the ap-
plication of alternative effluent limitation guidelines and
standards of performance to be established under sections
304(b) and 306 of the Federal Water Pollution Control Act, as
amended.
The study supplements the technical study ("EPA Develop-
ment Document ') supporting the issuance of proposed regulations
under sections 304(b) and 306. The Development Document surveys
existing and potential waste treatment control methods and
technology within particular industrial source categories and
supports promulgation of certain effluent limitation guidelines
and standards of performance based upon an analysis of the
feasibility of these guidelines and standards in accordance with
the requirements of sections 304(b) and 306 of the Act. Pre-
sented in the Development Document are the investment and opera-
ting costs associated with various alternative control and
treatment technologies. The attached document supplements this
analysis by estimating the broader economic effects which might
result from the required application of various control methods
and technologies. This study investigates the effect of alter-
native approaches in terms of produce price increases, effects
upon employment and the continued viability of affected plants,
effects upon foreign trade and other competitive effects.
The study has been prepared with the supervision and review
of the Office of Planning and Evaluation of EPA. This report
was submitted in fulfillment of Contract No. 68-01-1545 by
A. T. Kearney, Inc. Work was completed as of February, 1974.
This report is being released and circulated at approxi-
mately 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 publica-
tion. The^study will be considered along with the information
contained in the Development Document and any comments received
by EPA on either document before or during proposed rule making
proceedings necessary to establish final regulations. Prior to
final 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 EPA's views regarding the subject industry.
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ENVIRONMENTAL PROTECTION AGENCY
ECONOMIC ANALYSIS OF THE PROPOSED EFFLUENT
GUIDELINES FOR THE INTEGRATED IRON AND STEEL INDUSTRY
EXECUTIVE SUMMARY
INTRODUCTION
It was the objective of this study to determine the impact
of the costs of water pollution abatement on the Integrated Iron
and Steel Industry. The study was restricted in scope to an
analysis of the primary operations only, including coke plant,
blast furnace, steel production, sintering, degassing, casting
and slagging.
We would like to acknowledge the participation of J. E.
Allen & Associates in the technical aspects of this study, as
well as the participation of Father William T. Hogan and the
Industrial Economics Research Institute of Fordham University
in the economic aspects of this study. Cooperation of the
Environmental Committee of the American Iron and Steel Institute,
as well as that of several steel companies, is also acknowledged
with appreciation.
The supplementary section covering "Analysis of the
U.S. Steel Industry to Finance Pollution Control Equipment"
was prepared by Booz-Allen Public Administration Services,
Inc., at the request of the Environmental Protection Agency.
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THE STEEL INDUSTRY
The Iron and Steel Industry is one of the largest in the
nation, comprising some 179 companies operating 420 plants.
Total production was 133 million tons of raw steel and 92 million
tons of steel products in 1972, and reached an all time peak of
150 million tons of raw steel in 1973. Employment is 636,000
making the industry one of the largest employers. Growth rate
is expected to be at about 2% percent annually, with total pro-
duction of raw steel about 185 million tons by 1983, provided
that industry expansion keeps up with demands for steel products.
Twenty-three of the steel companies operate 63 integrated
steel plants, which were the subject of this study. The
primary operations in the integrated steel plants account for
about 90 percent of raw steel production, or about 120 million
tons in 1972, and 135 million tons in 1973.
SEGMENTATION
No further segmentation of the Steel Industry was made in
this study beyond that already made by the EPA in selecting the
primary operations of the integrated steel plants for study.
FINANCIAL
PROFILE
Financial data on individual plants of large companies
were not available. However, the limited published data provide
an estimated financial profile of the entire Steel Industry.
The following table is based on 1972 sales and profitability,
as reported by the American Iron and Steel Institute.
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TABLE 1
Total Production-Raw Steel 133,102,000 Tons
Total Shipments-Finished Steel 91,805,000 Tons
Net Sales and Revenues $22,157,000,000
Net Income After Taxes $738,000,000
Net Income as Percent of Sales 3.33
Invested Capital $17,078,000,000
Net Income as Percent of Investment 4.32
Capital Expenditures $1,158,000,000
With an estimated after-tax profit on sales of 3.3370, the
Steel Industry is under the return for all manufacturing firms
in general.
STEEL PRICES
Prices for steel products have followed an established
pattern of published base prices to which are added extras and
from which are deducted discounts to arrive at actual selling
prices for individual products. Composite price of finished
steel has increased continuously since the War, with present
composite about $221 per ton, an increase of over 10070 in
the past 20 years. This increase, since the early 1960's, has
been effectively controlled by the federal government through
both formal and informal means. These constraints have been
a major factor in the industry's low profitability. During the
peak demand of the past year's price controls, currency devalu-
ation and world-wide demand for steel have created the anomaly
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of foreign steel selling in the U.S. above domestic prices
and U.S. producers exporting scarce steel because it could
be sold above the controlled price overseas.
METHODOLOGY OF
IMPACT ASSESSMENT
The following methodology was used in assessing the economic
impact of the cost of water pollution control on the Iron and
Steel Industry.
1. The financial condition of the industry as a
whole was measured in terms of the industry's average profit
after taxes as a percent of sales and the average profit after
taxes as a percent of total assets.
2. The impact on prices of steel was determined
based on the projected costs of water pollution control for
primary operations. This was done for a low estimated cost
based on the Cyrus Wm. Rice report, and on a high estimate of
cost based on the AISI survey data."
3. Effect on capital requirements and debt structure
of the Industry was assessed, and sources for cap>ital for pollu-
tion control costs were analyzed. This information was obtained
from AISI published data annual reports of individual companies,
financial underwriters, and unpublished data frorr the files of
Kearney and its consultants.
* "Effluent Limitations Guidelines and New Source Performance
Standards for Iron and Steel Industry," Cyrus Wm. Rice Division,
June, July, and November, 1973.
"Survey of Water Pollution Control Costs in Iron and Steel
Industry," American Iron & Steel Institute Environmental
Committee.
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4. The impact on product curtailment, plant
closing, etc., was based on:
(a) Judgmental assessment of the
expected financial impact.
(b) Interviews with industry sources.
COST OF WATER POLLUTION CONTROL
The estimated investment and annual operating and mainten-
ance cost for effluent limitations for primary operations in the
integrated steel plants were supplied by the Cyrus Wm. Rice Division
of NUS Corporation. A second set of cost figures were received
from the Environmental Committee of the American Iron & Steel
Institute, based on data obtained from an Industry survey by AISI.
Because of the wide spread between these estimates, they were used
as low and high estimates, and cost impacts were developed for
both as shown in Table 2 as follows:
TABLE 2
(Millions of Dollars)
Low Estimate High Estimate
DATA SOURCE: Cyrus Wm. Rice AISI
LEVEL I - Best Practicable
Technology (BPT)- 1977
Investment $ 145 $ 500
Annual Operating Cost-1977 40 167
LEVEL II - Best Available
Technology (BAT)- 1983
Investment 122 1,100
Annual Operating Cost-1983 82 366
TOTAL LEVELS I and II
Investment 267 1,600
Annual Operating Cost 82 533
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IMPACT ANALYSIS
(a) Price Effects
The investment costs for water pollution control in primary
operations in the Integrated Steel Industry required to meet
the 1977 standards (BPT) have been estimated to range from a
low figure of approximately $145 million to a high figure of
approximately $500 million. The annual operating costs have
been estimated to increase in the range of $ 40 million to
$167 million by 1977. This has been projected to result in an
increased cost per ton of finished steel from $0.43 to $1.80
by 1977. It has been assumed that this industry will attempt
to recover these costs by increasing the price of steel.
The industry is projected to require an additional invest-
ment for water pollution control in the primary operations in
integrated steel plants, to meet the 1983 standards (BAT)
ranging from an estimated low figure of about $ 122 million to
a high figure of about $850 million. The annual operating
costs have been estimated to increase additionally in the
range of from $82 million to $283 million by 1983. This
results in a combined total increase for the period 1973-1983
of from $267 million to $1,350 million in capital costs, and
an increase in operating costs ranging from $82 million to
$450 million. This increase in operating costs will result in
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an increase in cost of production of a ton of finished steel
of from $0.88 to $5.04 This increase has been projected to
result in a similar increase in price of finished steel.
Those industries which use large quantities of steel in
their products can be expected to pass on any major increase
in cost of steel, in the form of a price increase in their
products. Such industries as automotive, construction,
appliances, farm equipment and containers are expected to be
among those most affected.
(b) Financial Effects
The alternates for paying for increased costs for pollution
control, which are open to the Steel Industry are: to hold
prices constant by absorbing higher costs from earnings; to
hold earnings constant by increasing prices to cover increased
costs; or to increase earnings to pay for increased costs for
pollution control, as well as to generate capital for investment
costs for pollution control. The cost data in this study
reflect the middle course, of raising prices sufficiently to
cover the cost of pollution control.
The high degree of capitalization in the Steel Industry,
combined with the high debt to assets ratio, and the low
earnings to assets ratio have made raising of capital for
expansion, modernization and replacement programs increasingly
difficult and costly.
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Since 1971, an increasing portion of pollution control
costs have been financed through issuing of tax exempt pollution
control revenue bonds. This method of financing offers lower
interest rates and has been easier to arrange for than
commercial financing, and is expected to be the principal
source of pollution control financing in the future.
(c) Production Effects
Based on the data analyzed and interviews with steel
manufacturers, it is believed that 11 of the 63 integrated
steel plants are either in the process of having operations
curtailed or of being closed, or are in danger of curtailment or
closing. Although the total costs and problems of installing
pollution controls may be the final event that results in the
decision to close, the fact that these plants have, for various
reasons, been marginal operations for many years is the basic
cause for this action. These plants produce about 5 percent
of raw steel and employ some 33,000 workers, or about 7 percent
of the total industry employment. In view of the fact that
overall production is expected to continue to increase despite
these potential closings, it is believed that the tonnage being
produced in these plants will largely be taken up by other mills
which will be upgraded in capacity. This is expected to result
in a re-employment in the industry up to half of the displaced
workers, or their equivalent. While national use of raw materials,
supplies and utilities is not expected to be diminished, there
will be local departments where isolated mills close.
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Because most of the mills which may be subject to
curtailment or closure employ thousands of people, the impact
on communities in which these plants are located may be severe.
This will be particularly true where the mill is the only, or
the principal industry in a small community, or where more than
one mill in the same community may close.
If U.S. production of steel is curtailed, or even if normal
growth is reduced, the result will be an increase in demand for
imported steels to meet needs in this country. However, unless
world steel capacities are raised beyond expected plans, foreign
steel may not be available to bridge the gap between demand and
production, which would result in an increasing shortage of steel
in this country. If price relief is not granted to the U.S.
Steel Industry, there may be an increasing trend toward exporting
U.S. steel to foreign countries.
It must be noted that this industry is under economic
pressure due to several other factors:
1. Total water pollution control costs for the entire
industry are expected to ultimately amount to three to five
times the costs for primary operations only.
2. Air pollution control costs are estimated to be
almost as much as those for water pollution control.
3. The total impact of air and water pollution control
costs by 1983, including costs already incurred, is expected
to result in a total investment ranging from about $6 billion
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to over $9 billion. This is expected to raise operating costs
from $15.07 to $24.50 per ton by 1983. This includes costs
of pollution control for estimated added steel capacity required
by 1983.
(d) New Source Standards
New source standard costs have been assumed to be the
same as those for the 1983 standards. Separate costs have
been estimated for this purpose for added steel industry
capacity required to satisfy demands by 1983.
LIMITS OF THE
ANALYSIS
(a) Accuracy
The accuracy of this study depends upon the accuracy of:
1. Published industry data.
2. Unpublished information supplied by knowledgeable
industry personnel.
3. Cost data developed separately from this analysis
by Cyrus Wm. Rice Division and the Iron and Steel Industry
represented by AISI.
4. Estimates by A. T. Kearney consultants.
The wide range in costs estimated by the two sources
resulted in presentation of two sets of economic figures,
representing potential low and high costs for pollution control.
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The limitation in scope, covering only water pollution
control for the primary operations in the integrated steel
plants, resulted in only a partial coverage of the actual
costs and impact on the Steel Industry.
The only industry financial data which was available was
overall company statistics for those steel companies which
were not wholly owned by other corporations. No data on costs
or profitability of individual plants was available, nor was
data available for wholly owned steel companies.
(b) Critical Assumptions
The assumptions which directly affect the findings and
conclusions of this study are listed below.
1. Cost estimates provided by Cyrus Wm. Rice
Division, and by the AISI were used without modification.
2. It was assumed that the industry's average
profitability as a percent of sales would continue to be
equal to the average for the 1967-1972 period. This would
require that cost increases for pollution control be passed
on in the form of price increases.
(c) Impact on Individual
Companies
Obviously the economic impact on individual companies or
plants will not be equal. With a limited number of industry
producers however, it is impossible to discuss these cases
without disclosing information which was obtained under
promise of confidentiality.
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Even a general discussion of these companies would reveal
the identities to knowledgeable industry personnel. Therefore,
no discussion which contained data gathered from confidential
sources and could identify individual firms was presented in
this report.
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I - INTRODUCTION
STATEMENT OF THE
PROBLEM
The 1972 amendments to the Federal Water Pollution Control
Act have required the Environmental Protection Agency to estab-
lish effluent limitations for most major industries which are
sources of water pollution. Studies are now under way to es-
tablish these limitations in some 28 industries. These effluent
limitations will apply to existing and new plants, and at legis-
lated dates, progressively more restrictive limitations will be
imposed. Specifically, by July, 1977, effluent requirements
will be in effect that require application of the best practicable
control technology currently available. By July, 1983, a more
restrictive set of limitations will be enacted that require the
application of the best available technology economically achiev-
able; by 1985, if possible, techniques and systems that enable
the industries to effect a zero level of discharge will come
into effect.
The tremendous effort which has been expended by the EPA
and its predecessor agencies in the technical development of
the nature of the pollution problem and its solutions has re-
sulted in a multiplicity of programs which have begun to bring
the pollution problem under control. The establishment of
timetables has put time parameters on these control efforts,
requiring the expenditure of vast sums of money by all types
and levels of industry to meet these deadlines by installation
of pollution controls.
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1-2
NATURE OF THE
PROBLEM
In recent years a recognition of the potential economic
problems facing industry in meeting the control requirements
has resulted in study programs in which the economic impact of
the costs of pollution control on American industry and on the
economy in general has been analyzed. These culminated in the
Economic Impact Studies sponsored by the Council for Environ-
mental Quality, the Department of Commerce, and the EPA in 1971
and 1972, in which 11 industries were studied.
The EPA is now increasing the number of industries which
are being studied and expanding the scope of previous studies
by authorizing the current series of Economic Impact Studies
which are specifically aimed at analyzing the economic impact
of the costs of water pollution abatement requirements under
the Federal Water Pollution Control Amendments of 1972.
SCOPE OF WORK
The industry which is covered by this study is the integrated
Iron and Steel Industry as covered by SIC 3312. However, al-
though this code includes all aspects of the industry, the scope
of this study has been limited by the EPA to only the follow-
ing processes: coke production, burden preparation, iron pro-
duction, steel production, degassing, metal casting, and slag-
ging.
The EPA has provided copies of prior studies, reports and
analysis which give pollution abatement cost, technology
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1-3
information and economic data. This has enabled this study
to build upon prior work. The Iron and Steel Industry has
probably been more thoroughly studied with respect to all
aspects of pollution control than any other industry. Technical
studies of air and water pollution control have been made, and
in 1971-72, a study of the Economic Impact of Pollution Control
on the Iron and Steel Industry was prepared for the Council on
Environmental Quality and the EPA. Although the technical
studies were relatively thorough, the economic impact studies
have generally been superficial due to lack of cost and financial
data at the individual plant level.
Therefore, in view of the existence of these prior studies,
the scope of work for this study was concentrated on the fol-
lowing tasks:
1. Review new cost and technology data to determine
additional cost required to meet the proposed guidelines.
2. Assess the overall economics of the industry by
reviewing the earlier study to confirm or modify the basic
assumptions and conclusions.
3. To assess the possibility of plant closings, in-
cluding an identification of situations where plant closings
are possible.
4. Based, on the data which is developed, to provide
an impact analysis covering the viability of the industry and
the question of possible plant closings.
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1-4
The limitation in coverage of the industry resulted in
only integrated steel companies being covered, that is companies
with iron, coke and steel making capabilities. This has
eliminated the non-integrated companies who only cold melt in
open hearth or arc furnaces, and/or roll steel into shapes for
sale. Another and more critical limitation was the coverage
of only the primary part of the integrated plants, that is the
coke, iron and steel producing facilities, leaving out at this
time the rolling and finishing departments. This means that
with only a few exceptions, only part of each of the plants is
covered by the study. This limitation was imposed because the
effluent guidelines study recently completed also covers only
this portion of the industry.
This subject will be covered in greater detail in another
section of the report, and the effect of these limitations, on
the ability to analyze a major segment of the Iron and Steel
Industry, will be discussed.
METHOD OF
APPROACH
This study was conducted in three phases. Phase I devel-
oped a physical and financial profile of this industry. Phase
II analyzed the economic impact of water pollution control
costs on the industry, and Phase III was the preparation of
the final report.
The method used in conducting this study is discussed in
the following paragraphs.
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1-5
(a) Phase I
1. Collected and reviewed all published data and
information which could be found in trade journals, government
sources and A. T. Kearney files.
2. Reviewed the data and information prepared for
the study of air pollution in the Iron and Steel Industry.
3. Met with the following in order to gather any
additional information:
(a) National Industrial Pollution Control
Council, U.S. Department of Commerce
(b) Bureau of Competitive Assessment and
Business Policy, U.S. Department of
Commerce
(c) American Iron & Steel Inst.industry representative
(d) Cyrus Wm. Rice Division, NUS Corp.
(e) Environmental Protection Agency
4. Met with the Contracting Officer to redefine the
scope of the study.
5. Conducted telephone interviews with each of
the major steel companies to obtain additional necessary infor-
mation. Twenty-two companies, operating 58 plants were contacted.
Company executives interviewed included nine Vice Presidents and
13 General Managers and Department Heads.
6. Analyzed all of the data collected. A list of
reference sources used in this study is given in Exhibit 1-1.*
* All exhibits are located at the end of the section in
which they are discussed.
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1-6
7. Prepared a draft report covering the findings
of Phase I and reviewed Phase I findings and conclusions with
the EPA.
(b) Phase II
1. Analyzed the data developed by Cyrus Wm. Rice
Div. with respect to the projected costs of water pollution
control.
2. Revised some of the data collected in Phase I
due to the availability of additional and revised information,
3. Analyzed all data collected and developed con-
clusions based on this analysis.
4. Prepared a draft report covering the findings
and conclusions of Phase II.
(c) Phase III
The draft reports covering the results of Phase I and
Phase II were combined into a single report, finalized and
submitted to the EPA.
------- OCR error (C:\Conversion\JobRoot\$NEPIS SEND\000003K0\tiff\2000BODH.tif): Unspecified error
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EXHIBIT 1-1
Page 2 of 3
PUBLISHED ARTICLES AND DATA
1. Directory of Iron and Steel Plants in the USA and
Canada, American Iron and Steel Institute, 1970.
2. Annual Statistical Report of the Iron and Steel Indus-
try, American Iron and Steel Institute, 1972.
3. Iron and Steel Plant Directory, Association of Iron
and Steel Engineers, 1973.
4. Articles and Reference Data published by 33 Magazine
5. Articles and Reference Data published by Iron and Steel
Engineer Magazine
6. Articles and Reference Data published by Iron Age
Magazine
7. Articles and Reference Data published by Blast Furnace
and Steel Plant Magazine
8. Articles and Reference Data provided by the American
Iron and Steel Institute
9. Annual Reports published by the Steel Companies who
operate integrated iron and steel plants.
10. Statistical Data published by the U.S. Dept. of
Commerce.
OTHER
J. E. Allen & Associates, Inc.
Chicago, Illinois
Bureau of Competitive Assessment and Business
Policy, U.S. Department of Commerce
Washington, D.C.
Cyrus Win. Rice Division
Pittsburgh, Pennsylvania
Environmental Protection Agency, Effluent
Guidelines Division
Washington, D.C.
American Iron and Steel Institute
Washington, D.C.
National Industrial Pollution Control Council,
U.S. Department of Commerce
Wa shington, D.C.
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EXHIBIT 1-1
Page 3 of 3
Industrial Economics Research Institute
Fordham University
Bronx, New York
PERSONAL
INTERVIEWS
(a) Manufacturers
Interviews with the major integrated iron and steel
producers.
(b) Financial Organizations
Interviews with underwriters of industrial and pollution
control revenue bonds.
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II - THE IRON AND STEEL INDUSTRY
DISCUSSION OF
THE INDUSTRY
The American Iron and Steel Industry is extremely large
and complex. It is of interest to explore the make-up of the
industry in terms of plants and companies, since this is the
area which is investigated in this study. The following tabu-
lation lists the number of companies and plants falling into
the categories of integrated, non-integrated melting, and hot
and cold working plants.
Table 3
Non-Melting
Number of Integrated Non-Integrated Hot and Cold
Companies Plants Melting Plants Working Plants
23 63 20 73
59 - 76 32
97 _=L _^ 156
179 63. 9J> 261
Total Number of Plants - 420
These plants are located in almost every state, but the
principal concentrations are in the northeast quadrant of the
country in the steel states of Pennsylvania, Ohio, Indiana and
Illinois. Some of the mills are very old, dating back to pre-
World War I, while others, particularly the mini-mills, are
new, having been built during the last decade.
-------
II - 2
In Exhibit II-l, a plant-by-plant tabulation of facili-
ties of the integrated plants covered by this study is given.
Most of these integrated plants are equipped with coke plants,
blast furnaces, and either or both types of steel furnaces,
open hearths and basic oxygen converters. Some are also
equipped with sintering plants and all of those which produce
steel are provided with ingot or continuous casting facili-
ties. In a few cases only coke plants and blast furnaces are
in operation. All of the plants which produce steel are also
equipped with rolling mills and some type of finishing
facilities.
The integrated plants represent all of the coke making
and iron making capacity which is associated with the steel
industry, and about 90 percent of the steel making capacity.
The balance of the steel making capacity is represented by the
non-integrated steel producers, many of which are classed as
mini-mills.
A detailed description of the coke, iron and steel pro-
cesses and of the individual plants is not given in this study
since it has already been covered in prior studies referenced
in Exhibit 1-1. Additional data regarding the steel plants
is given in the Appendix of this study.
PRODUCTION AND PRODUCTIVE
CAPACITY
Although the year-to-year production of raw steel
has fluctuated widely as shown in Exhibits II-2 and II-4, the
average rate of growth during the past 15 years has been about
-------
II - 3
2.5 percent per year. This has been accomplished by the Iron
and Steel Industry with a very modest establishment of new
integrated steel plants since World War II, although many of the
non-integrated "mini-mills" have been built. Most of the increase
in capacity has been accomplished by upgrading capacities of exist-
ing steel plants, building larger blast furnaces, and replacement
of open hearths with basic oxygen furnaces (EOF).
Normally the actual productive output of raw steel is well
uner the rated productive capacity, generally in the range of 60
to 70 percent. This was particularly true when open hearth furnaces
accounted for the bulk of raw steel production. In recent years,
however, the actual output has moved closer to the rated capacity,
being about 74 percent in 1972, and about 83 percent in 1973 based
on estimated raw steel capacity of 180 million tons. This 1973
production level can be considered as 10070 Industry capacity, as
evidenced by the fact that shipments included tonnage taken from
inventories to meet demands. Exhibit II-3 shows the company-by-
company rated capacities versus actual production in 1972. One
factor which somewhat distorts rated capacities is the fact that
many steel plants have open hearth shops still installed, but not
operating. Although these are listed as "stand-by" facilities, the
lack of air and water pollution controls actually prevents them
from being put into service under present pollution control regu-
lations. For all practical purposes the Industry operated at
full capacity in 1973, a record which is not expected to be
sustained in 1974.
-------
II - 4
PROJECTED DEMANDS
AND CAPACITY
Industry sources have projected steel production at an
average rate of increase of 2 to 3 % per year. This is shown
on Exhibit II-4, with past production shown for comparison. Pro-
duction has been estimated to increase from the 1972 figure of 133
million tons to 183 million tons by 1983, based on an assumed
average growth rate of 2.5 percent per year, and assuming that
industry growth will keep up with increased demands.
However, as shown on Exhibits II-5 and II-6, this is not
expected to keep up with average steel demands, and will have to
be supplemented by imports which have averaged 14 million tons
per year for the past 10 years, and almost 18 million tons per
year for the last five years. Due to limitations of world steel
capacity, net imports of steel are expected to level off at
approximately 14 million tons per year. Due to the demand, both
foreign and domestic, the production growth rate which has been
only about 1 percent, will have to increase dramatically to the
2-1/3 percent level to compensate for the lack of availability
of foreign steel.
INDUSTRY SEGMENTATION
The American Iron and Steel Industry has been previously
described as consisting of 179 companies operating 420 plants.
Of these, only 63 plants operated by 23 companies were identified
as being integrated, having coke, iron and steel producing
facilities, as well as rolling and finishing facilities. These
-------
II - 5
63 integrated plants were the subject of study for this inves-
tigation. The scope of work further segmented the plants into
primary facilities and finishing facilities. The primary
facilities which were to be covered by this study included
all operations from raw materials through casting of ingots
or continuous cast products. This included coke plants, blast
furnaces, sintering plants, steel production, degassing and
continuous casting. Not included were fugitive run-offs
from raw materials stockpiles such as coal, iron ore, limestone
and slag dumps. This segmentation resulted from the fact that
the first phase study for effluent guidelines, prepared by
Cyrus Wm. Rice Division, was also limited to this portion
of the industry.
ALTERNATIVE APPROACHES TO
INDUSTRY SEGMENTATION
The principal segmentation of the industry, into inte-
grated and nonintegrated plants, has already been done as part
of the scope of this study. A further segmentation into pri-
mary and rolling-finishing operations has also been specified,
with this study covering only the primary operations involving
coke, iron and steelmaking operations in integrated plants.
Consideration has been given to further segmentation into
such areas as:
1. Level of integration.
2. Size of plant.
3. Type of processes.
4. Production technology.
-------
II - 6
5. Age of facilities.
6. Efficiency of operation.
7. Current level of pollution control.
8. Geographic location.
9. Level of production.
10. Profitability of operation.
There was no attempt in the prior studies by Booz, Allen
and Hamilton, and by Cyrus Wm. Rice Division, to segment the
industry into any of these areas. It is believed that for the
part of the industry being considered for this study, the
areas of most importance probably involve the following:
(3 and 4) - Types of processes and production tech-
nology. This involves such considerations as use of beehive
coke ovens, use of small blast furnaces, use of small open-
hearth furnaces, and continuing the use of the open-hearth and
ingot casting practices when basic oxygen convertors and con-
tinuous casting are commonly utilized for the steels and
products involved. Only one steel plant still operates bee-
hive coke ovens, and these are scheduled for eventual shut-
down. Eleven plants operate with small blast furnaces 22 feet
in diameter or less, and 14 additional plants have one or more
of their blast furnaces under 22 feet in diameter. Ten plants
operate entirely ,on open hearth furnaces, while 13 others have
part of their steel produced in open hearths. Only 14 of the
integrated plants are provided with continuous casting, and
15 are equipped with vacuum degassing.
-------
II - 7
(9 and 10) - Level of production and profitability
of operation. Data regarding these items were not possible to
obtain, but were estimated to provide a good index to the
viability of continued operation of an individual plant.
Approximately one-sixth of the integrated steel plants were
considered to be sufficiently marginal in their profitability
or their facilities to make them potential candidates for
curtailment of operations or even actual shutdown. Although
the reasons for this are not directly involved with problems
and costs of pollution control, the actual decision, when it
is made, will take into account the high capital costs and
increased operating costs for this purpose.
(8) - Geographic location. Plants which were
located for strategic reasons in remote areas, or near former
sources of raw materials, may now be economically unsound, and
may be candidates for a phasing out of operations. These
plants now are located remotely from markets, and in some
cases are no longer near good sources of raw materials. At
least two plants now fall into this category.
In Appendix I is given a plant profile sheet for each of
the 63 integrated plants covered by this study. Such important
information as equipment in use, sizes and productive capaci-
ties, and other data are tabulated.
-------
II - 8
STEEL INDUSTRY
EMPLOYMENT
Total employment in the Steel Industry, as reported by
the American Iron and Steel Institute, was 636,549 in 1972, of
which 75 percent were hourly workers and 25 percent were
salaried. Approximately 85 percent of these were employed by
the integrated steel companies, and approximately 75 percent
or 406,000 are employed in the plants covered by this report,
averaging approximately 6,500 employees per plant. Employment
in the individual steel plants ranges from under 1,000 to over
15,000.
Total employment in the Steel Industry has been declining
somewhat in recent years, from the high of 735,000 in 1966, to
637,000 in 1972. Since steel production was relatively uni-
form during that period, the decline represented an increase
in productivity per worker, at an average increase of about
two percent annually.
Although a survey of employment within the industry by
job classification has not been made, it was possible to classify
workers in the industry by wage levels, and to convert this to
an index of job skills. This tabulation is given in Exhibit
II-7, and identifies one-third of the wage earners as unskilled,
one-third as semi-skilled, and one-third as skilled.
-------
INTEGRATED IRON AND STEEL COMPANIES
SHOWING PLANTS AND PRIMARY FACILITIES
Company
Allegheny -Ludlum
Armco
Plant Location
Coke
Plant
Blast
Furnace
Brackenridge , Pennsylvania
Ashland,
Kentucky
Middletown. Ohio
Bethlehem
Houston,
Texas
Bethlehem, Pennsylvania
Burns Harbor, Indiana
Sparrows
Point, Maryland
Lackawanna, New York
Johnstown, Pennsylvania
C F 6, I
Crucible
Cyclops
Donner-Hanna Coke
Ford Motor
Inland
Interlake
Pueblo, Colorado
Midland,
Pennsylvania
Portsmouth, Ohio
Buffalo,
Dearborn
New York
, Michigan
Indiana Harbor, Indiana
Chicago, Illinois
Erie, Pennsylvania
Toledo, Ohio
International Harvester
J & L
Chicago,
Illinois
Aliquippa, Pennsylvania
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Cleveland, Ohio
Pittsburgh, Pennsylvania
Kaiser
Lykes -Youngs town
Fontana,
California
Youngs town, Ohio
Campbell
, Ohio
East Chicago, Indiana
McLouth
National Steel
Lone Star
Detroit,
Granite
Ecorse,
Buffalo,
Weirton,
Michigan
City, Illinois
Michigan
New York
West Virginia
Lone Star, Texas
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Steelmaking Facilities Continuous
Open Hearth BOF
X
X
X X
X
X
X X
X X
X
X X
X
X
X
X X
X
X
X
X
X
X X
X
X
X X
X
X
X
X
X
Electric Arc Sintering Degassing Casting Other
X Cupola
X
XXX
X XXX
X XXX
X
X
X X
X X
X X
XXX
X
XX X
X
BF Idle
X
XXX
X X
X X
X
X
X
X
X
XX X ^
ft)
XX X
h-
XXX
o
X l-h
ho
M
{£
M
Cd
M
H
M
I— 1
H*
-------
I"7FGR.\TE^ IRON AND STEEL COMFANIUS
SHOWING PLANTS AND PRJM<\RY FACILITIES
Company
Republic
Sharon
Shenango
U. S. Pipe and Foundry
U. S. Steel
Wheeling-Pittsburgh
Plant Location
Birmingham, Alabama
Buffalo, New York
Carton, Ohio
Chicago, Illinois
'Cleveland, Ohio
Gadsden, Alabama
Massillon, Ohio
Warren, Ohio
Youngstown, Ohio
Fairmont, West Virginia
Parrel, Pennsylvania
Pittsburgh, Pennsylvania
Sharpsville, Pennsylvania
Birmingham, Alabama
Braddock, Pennsylvania
Clairton, Pennsylvania
McKeesport, Pennsylvania
Fairless, Pennsylvania
Ensley, Alabama
Gary, Indiana
Geneva, Utah
Homestead, Pennsylvania
Lorain, Ohio
Chicago, Illinois
Young.stown, Ohio
Cleveland, Ohio
Duluth, Minnesota
Eteubenville, Ohio
Monessen, Pennsylvania
Coke
Fla-it
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Blast
Furv-jcG
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Steelmaking F;
Open K.'.-rth
X
X
X
X
X
X
X
X
X
X
X
A
X
BOF
X
X
X
X
X
X
X
X
X
X
X
X
A
X
2r i 1 i ties
r Itiv t ric Arc
X
X
X
X
X
X
X
X
Sintering Degassing
X
X X
X
X
X
X
X X
X
X
X X
X
X
X
X
X
X X
X
X
X
Continuous
Casting Other
BF Idle
X
BF Idle
BF Idle
x
X
BF Idle
Idle
OH Idle
Woodward
l-'oodward, Alabama
Chattanooga, lennessee
BF Idle
Source' AISI Steel Plant Directory
OQ
o
l-h
M
X
M
I
-------
EXHIBIT II - 2
PRODUCTION OF PRIMARY
IRON AND STEEL PRODUCTS
(Thousands of Net Tons)
Year
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973**
Coke
48,486
50,181
45,721
46,125
47,925
54,859
58,618
59,649
57,465
56,990
58,205
59,777
51,476
53,184
Iron
60,829
67,320
65,295
66,291
72,375
86,212
88,859
92,150
87,647
89,333
95,480
91,816
81,692
89,400
Steel
93,446
99,282
98,014
98,328
109,261
127,076
131,462
134,101
127,213
131,462
141,262
131,514
120,443
133,241
150,000
Finished
Steel*
69,377
71,149
66,126
70,552
75,555
84,945
92,666
89,995
83,897
91,856
93,877
90,798
87,038
91,805
104,000
* Finished steel shipments. (Does not include shipments from
inventory in 1973.)
** Projected.
Source: American Iron and Steel Institute Statistical Report.
-------
Company
United States Steel Corp.
Bethlehem Steel Corp.
Armco Steel Corp.
National Steel Corp.
Republic Steel Corp.
Inland Steel Co.
Jones & Laughlin Steel Corp.
Youngstown Sheet & Tube Co.
Wheeling-Pittsburgh Steel Corp,
Allegheny-Ludlum Ind., Inc.
Kaiser Steel Corp.
Cyclops Corp.
Interlake, Inc.
Sharon Steel Corp.
McLouth Steel Corp.
CF & I Steel Corp.
Alan Wood Steel Co.
Phoenix Steel Corp.
Ford Motor Co.*
Crucible, Inc.""
Lone Star Steel Co.*
International Harvester Co.*
RAW STKEL CAPACITY VELIGUS 1972 PRODUCTION
FOR INTEGRATED STEEL COMPANIES
Oxygen
Furnaces
19,000
15,900
4,000
11,300
8,300
5,700
6,000
3,000
5,000
500
1,800
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
000,000
1,600,000
2,300,000
1,200,000-
2,000,000
3,000,000
1,000,000
1,200,000
Electric
Furnaces
2,510
2,850
3,980
500
3,050
500
960
750
370
330
400
600
560
500
500
,000
,000
,000
,000
,000
,000
,000
-
-
,000
-
,000
,000
,000
,000
,000
-
,000
-
,000
-
-
Open
Hearth
Furnaces
24
10
1
2
3
2
6
2
2
1
,850
,500
,500
,800
,000
,500
,500
,000
,000
300
400
,500
,000
,000
,000
-
,000
,000
,000
,000
-
-
,000
,000
,000
-
-
-
-
,000
-
-
,000
-
Total
Actual
Production
Capacity
46,360
29,250
9,480
11,800
14,150
9,200
9,460
9,500
5,000
1,250
3,800
2,370
1,430
2,000
3,400
1,760
2,000
900
3,000
1,500
1,500
1,200
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
,000
30
18
8
9
10
7
7
5
4
2
1
1
1
2
1
1972
,743
,334
,507
,843
,399
,771
,344
,547
,099
903
,430
,595
,249
,343
,046
,786
897
544
,055
,000
,000
,700
,584
,000
,000
,200
,000
,485
,000
,141
,977
,698
,000
,000
,463
,015
NA
NA
NA
NA
Percent of
Capacity
1972
65
61
89
83
73
84
77
58
82
72
64
67
87
67
60
101
44
60
.2%
.5
.7
.4
.4
.5
.5
.3
.0
.2
.0
.3
.4
.2
.4
.3
.9
.4
Note: *Wholly owned subsidiary companies not reporting,
Source: AISI and private estimates.
X
H
M
-------
RftW bTEEL PRODUCTION
MILLION NET IONS
\
g a
5 E
\
-ii naiHxa
-------
EXHIBIT II-5
FINISHED STEEL IMPORTS
Year
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
ar Average
ar Average
(Thousands of Net
Steel
Exports
2,846
4,266
3,089
2,278
2,168
2,782
5,939
8,140
3,547
3,606
3,866
4,823
AND EXPORTS
Tons)
Steel
Impo rts
6,522
7,701
11,964
12,778
12,813
19,563
15,444
14,609
19,611
19,559
14,059
17,757
Net
Imports
3,676
3,435
8,875
10,500
10,645
16,781
9,505
6,469
16,064
15,953
10,190
12,954
Source: American Iron and Steel Institute Statistical Report,
-------
CURRENT BEST ESTIMATES OF FINISHED
STEEL AND RAW STEEL DEMANDS IN THE
U.S. FOR THE PERIOD 1973-1983
(MILLIONS OF TONS)
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Estimated
Demands
Finished Steel Raw Steel
119
113
116
120
122
126
128
132
134
138
142
Note * -
173
164
163
174
177
183
186
192
194
200
206
1973 finished
Estimated
Net Imports
U.
Finished Steel Finished
13
13
13
14
14
14
14
14
14
14
14
steel shi.pments includes
•'-106
100
103
106
108
112
114
118
120
124
128
Estimated
S. Production
Raw Steel
Steel Raw Steel
150
145
149
154
157
163
165
171
174
180
185
three million tons from inventories.
X
ffi
M
w
I—I
H
M
M
I
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EXHIBIT II-7
CIASSIFICATION OF IRON AND
STEEL INDUSTRY WORKERS
BY JOB SKILLS
Job Skill
Common Labor
Unskilled
Semi-Skilled
Skilled
Highly Skilled
Speciality
(1972)
Wage Range
Under $3.65
$3.65
4.40
5.10
5.85
Over
- 4.40
-5.10
- 5.85
-7.35
$7.35
Total
Workers
21,000
130,000
140,000
107,000
67,000
13,000
Percent
4.3
27.2
29.2
22.3
14.3
2.7
478,000
Adapted from "Industry Wage Survey1'
"Basic Iron and Steel - 1967"
U. S. Department of Labor
-------
Ill - FINANCIAL PROFILES
INDUSTRY PERFORMANCE
With few exceptions, the 23 integrated steel companies
covered by this study operate more than one plant, some of them
many steel plants as well as other types of operations. Although
overall company financial and other operating information is
published in annual reports, individual plant statistics are
not available. Operating and financial information covering 29
steel companies is given in Exhibit III-l. Included are data
from 19 of the 23 companies covered in this study. The remain-
ing four companies are subsidiaries of large corporations who
do not report separately on their steel divisions.
The Steel Industry, one of the largest in the United States
has long been characterized by high capitalization and relatively
low return on sales and investment. Industry financial sta-
tistics for the past 10 years are summarized in Exhibit III-2.
By comparison the average of all manufacturing companies has
had a better performance as illustrated in the tabulation on
the following page. In an analysis of all basic manufacturing
industries with combined revenus of more than $2 billion in
1971, the Steel Industry ranked 36 in return on equity, and
28 in return on sales, as shown in Exhibit III-3.
-------
Ill - 2
Table 4
Performance of Industry
1972 1971
Return on Sales
Steel Industry
All Industry
Return on Equity
Steel Industry
All Industry
3.4%
4.8%
5.7%
10.5%
2.8%
4.5%
4.3%
9.0%
1970
2.8%
4.5%
4.1%
8.6%
Return on
Revenues
3.0%
3.7%
4.7%
5 . 6%
Return
Equity
4.7%
5.8%
6.9%
7.9%
on
.
Steel Industry
Return
Period
1970-1972
1968-1972
1963-1972
1963-1969 (Best Period) 5.6%
The very low comparative return on equity is an outgrowth
of the high capitalization of the Steel Industry by comparison
with all industries, while the lower return on sales has been
characteristic of the Steel Industry. The decline in earnings
is illustrated by comparing the average rate of return for different
periods during the past decade. From a high during the middle
Sixties, the rate of return on revenues has declined from an
average of 5.6% to 3%, and return on equity from 7.970 to 4.770
-------
Ill - 3
1973 represented the Steel Industry's top production year,
with raw steel production of 150 million tons, and finished
steel shipments of over 108 million tons, including shipments
from inventories. Estimated financial performance improved in
1973, with return on sales increasing to 4.3 percent, and return
on equity to 8.4 percent. However, in spite of this the
Industry still ranked well below the average of all industries.
FINANCIAL EFFECTS
The continued decline in net earnings in relation to sales
and equity, combined with continued steady payment of dividends
and, until 1970, continued high capital expenditures, has
resulted in an increasing degree of deficit operation, in which
cash outlays have exceeded internally generated cash flows.
In their "Study of Economic Impact on the Steel Industry of Costs
of Air and Water Pollution Requirements," Booz, Allen and
Hamilton pointed out that the Steel Industry's long-term debt
has increased steadily from a low of 19.7 percent of invested
capital in 1963, to a high of 28.6 percent in 1970. By 1972
this had increased to 30.9 percent.
The capital expenditures for the industry have fallen off
from the high of $2.3 billion in 1968, to under $1.2 billion
in 1972. As a result, the long term debt increased relatively
slowly from 1970 to 1972. Although this tends to reduce the
-------
Ill - 4
rate of growth of the debt to investment ratio, it: does have
other long term effects which will create serious problems
for the industry in the future, (Exhibit II-3).
Steel demands in the U.S. as well as worldwide, have
continued to rise, and have bee projected to continue to do
so for the foreseeable future. However, growth of capacity
has not been keeping up with demands, and unless an acceleration
in growth of capacity is forthcoming, there could well be a
shortage of steel which will be worldwide, as well as in the
U.S. Expenditures, which have been made in recent years have
principally been for replacement, modernization and pollution
control, with relatively little being spent to increase
capacity. Except for several small mini-mills, no significant
new steel plant capacity has been added for several years,
and none is contemplated in the U.S. at present.
The expenditures required to increase capacity will range
from about $250-$350 per annual ton of capacity for increased
production in existing mills, to up to $500 per ton for new
plant construction. Thus, to increase capacity to provide for
128 million tons per year of finished steel production in the
U.S. by 1983 (Exhibit II-5), an increase of about 25-30 million
tons per year of capacity will be required. A total expen-
diture of approximately $2-$5 billion will be required
-------
Ill - 5
for new plants and increases to existing plants. This is
in addition to normal replacement and modernization costs,
and does not include pollution control costs for existing
facilities. This subject is discussed further in Section VI,
in which requirements for financing pollution control costs
is discussed.
-------
EXHIBIT III-2
STEEL INDUSTRY REVENUES AND PROFITS
1962 - 1972
(Millions of Dollars)
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Revenue
$13,980.6
14,612.6
16,357.1
17,971.7
18,288.4
16,880.4
18,679.6
19,231.0
19,269.5
20,126.2
22,471.5
Net
Income
$ 566.4
782.0
992.3
1,069.3
1,075.3
829.8
992.2
879.4
531.6
566.2
772.1
Percent
Return
on Revenues
4.1%
5.4
6.1
5.9
5.9
4.9
5.3
4.6
2.8
2.8
3.4
Percent
Return
on Equity
5 . 3%
7.1
8.7
8.9
8.9
6.8
7.9
6.9
4.1
4.3
5.7
Source: AISI Annual Statistical Report
Data represents estimated 90% of steel production,
-------
EXHIBIT III-3
COMPARISON OF REVENUES AND PROFITS
FOR YEAR 1971 OF 51 INDUSTRIES WITH
REVENUES OF $2 BILLION AND OVER
Industry SIC No.
Crude Petroleum and Natural Gas
Oil and Gas Field Service
Meat Products
Dairy Products
Canned, Cured and Frozen Foods
Grain and Mill Products
Bakery Products
S a£ ar
Beverages
Food and Kindred Products
Cigarettes
Weaving Mills Cotton
M.-ns and Boys Furnishings
Women's and Children's Undergarments
Sawmills and Planting Mills
Millwork, Plywood and Related
Products
Paper Mills except Building Paper
Paperboard Mills
Newspapers
Industrial Chemicals
Drugs
Soap, Cleaners and Toilet Goods
Points and Allied Products
Miscellaneous Chemical Products
Petroleum Refining
Tires and Inner Tubes
Footware except Rubber
Flat Glass
Miscellaneous Nonmetalic Mineral
Products
Blase Furnace and Basic Steel
Products
Primary Nonferrous Metals
Mttai Cans
Fabricated Structural Metal
Products
Farm and Equipment Machinery
Construction and Related Machinery
Met,-:l Working Machinery
Special Industrial Machinery
General Industrial Machinery
Office add Computing Machinery
Service Industry Machinery
Electric Test and Distributing
Equipment
Electrical Industrial Apparatus
Radio and TV Receiving Equipment
Co'imunication Equipment
Electronic Components and
Accessories
Miscellaneous Electric Equipment
and Supplies
Motor Vehicles and Equipment
Aircraft and Parts
Mechanical Measuring and Control
Devices
Medical Instruments and Supplies
Photographic Equipment and Supplies
131
138
201
202
203
204
205
206
208
209
211
221
232
234
242
243
262
263
271
281
283
284
285
289
291
301
314
321
329
331
333
341
344
352
353
354
355
356
357
358
361
362
365
366
367
369
371
372
382
384
386
Revenue
(Millions)
$ 4,303.9
2,670.0
11,493.1
11,016.4
7,562.0
9,960.9
3,544.6
2,150.8
10,641.0
7,900.7
7,367.3
6,437.0
2,320.5
2,926.6
3,748.5
3,787.8
7,664.5
2,068.3
2,372.5
20,427.9
11,939.1
8,798.2
2,058.3
3,773.9
79,258.5
9,072.3
2,807.5
4,166.3
2,634.5
21,215.7
11,888.8
4,884.8
3,555.8
8,722.6
4,876.7
2,672.3
2,284.1
4,433.4
15,925.1
2,148.4
17,741.8
3,468.1
7,249.6
14,536.5
4,417.3
2,102.9
49,180.7
21,910.9
3,864.2
3,082.7
3,766.1
Net
Income
(Millions)
$ 300.2
230.2
107.5
283.9
219.9
296.9
72.0
55.4
526.0
232.4
416.5
159.5
67.0
63.6
197.8
130.4
269.2
51.6
142.8
1,115.0
1,134.0
555.1
67.0
144.4
5,738.1
275.8
101.1
163 2
110.3
536.8
866
191.4
98.3
314.5
210.8
102.7
64 . 0
118.5
1,386.8
87.7
671.6
92.1
171.8
564.6
8.9
79.5
1,228.8
233.6
100.1
201.3
478.1
Percent
Return
on
Revenue
5.7
6.6
1.0
2.1
-2.1
1.2
.7
-1.3
3.5
3.0
5.3
2.4
2.0
2.8
5.3
-2.6
2.9
.2
7.1
3.7
7.3
2.1
2.7
5.6
3.7
2.9
2.2
2 1
4.1
2.2
2.5
3.8
1.5
1.9
2.7
1.3
1.4
2.7
-6.2
2.7
3.0
5.9
1.1
-4.3
-4.6
1.9
2.5
.2
.4
2.4
-.1
Rank
No,
5
3
40
31
47
39
41
46
13
14
7
26
32
18
8
48
17
44
2
11
1
30
20
6
12
16
27
29
9
28
23
10
35
34
19
37
36
22
51
21
15
4
38
49
50
33
24
43
42
25
45
Percent
Return
on
Equity
.3
6.1
6.4
6.8
5.7
5.7
-.1
.1
11.6
11.7
13.9
5.9
9.1
8.5
7.1
-3.1
4.5
-3.1
13.2
8.3
16.1
6.8
6.4
12.2
9.5
7.1
6.5
4.9
8.9
3.9
3.6
11.0
5.3
4.5
6.5
3.4
2 .7
6.4
-3.4
6.1
7.3
9.5
1.4
-3.9
-2.8
4.4
6.5
1.6
-1.5
9.0
-3.9
Rank
No.
42
26
24
18
30
29
44
43
6
5
2
28
10
13
16
47
34
48
3
14
1
19
25
4
9
17
20
32
12
36
37
7
31
33
21
38
39
23
49
27
15
8
41
50
46
35
22
40
45
11
51
-------
EXHIBIT III-4
CAPITAL EXPENDITURES BY
IRON AND STEEL INDUSTRY
Year
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
(Millions
Amount
$1,040.0
1,599.5
1,822.5
1,952.7
2,145.7
2,307.3
2,046.6
1,736.2
1,425.0
1,164.2
1,837.1
of Dollars)
Net Fixed Assets
$ 8,843.4
9,304.8
9,972.7
10,678.4
11,371.9
12,703.6
13,411.0
14,145.1
14,462.0
14,379.0
NA
Expenditures
as Percent
of Assets
11.8
17.2
18.3
18.3
18.9
18.2
15.2
12.3
9.9
8.1
_
(In Progress)
Source: American Iron & Steel Institute
Statistical Review
-------
IV - COSTS AND PRICES
COSTS
Production costs, as reported by the American Iron and
Steel Institute for 91 percent of the Steel Industry are given
in Exhibit IV-1. The percentages for various elements of costs
have not varied greatly in recent years, and have averaged
as follows:
Materials, Supplies, Services - 49.070
Employment Costs - 40.0%
Depreciation, Depletion, Amortization - 5.5%
Interest and Charges - 1.5%
Taxes ( Federal, State, Local ) - 4.0%
While the relationship of these cost elements to total
costs has not varied greatly, the relationship of total costs
to total sales has changed, as shown in Exhibit III-2, with
the results that earnings as a percent of revenues have declined
steadily for the past decade.
STEEL PRICES
Steel prices have increased steadily for many years, as
illustrated by the composite price for all steel shown in Exhibits
IV-2 and IV-3 for the past 20 years. In recent years the rate
of increase of steel prices has been below the average price
increases for all products with exception of 1969 and 1970. These
years were not sufficient however, to enable steel prices to
-------
IV - 2
catch up to prices of all products. Although prices quoted
by individual companies may vary somewhat from the industry
norm, as built up from base prices by adding extras and
deducting discounts, the general trend in the Steel Industry
has been for all companies to reasonably follow the established
price index. Increases in costs such as labor and raw materials
have generally been reflected in increases in published steel
prices.
The steel basing price system had its origins in the early
days of the Steel Industry, and has continued, with some exten-
sions and modifications, to the present time. A typical steel
price sheet as printed in Iron Age Magazine, and other publi-
cations, is given in Exhibit IV-3. The established base prices
are used by all companies within a district, with only a few
exceptions, and provide the means of building up actual prices
for steel orders by adding extras or subtracting discounts.
Until very recently, steel producers charged approximately
the same price for a specified product. While this may seem
strange, it really is not, since producers produce their
product from the same raw material, on the same kind of equipment
using about the same power factors, incurring the same freight
rates, etc. Each product, therefore, has a cost per ton
arrived at by adding the cost of labor, raw materials, power,
and all other services. The number of man-hours per ton for
-------
IV - 3
a specified product will vary surprisingly rather little, plant
by plant. The plant with the newest equipment, that employs
the most efficient use of manpower, that buys raw materials
properly, will have the best costs and usually makes the greater
profit. The most efficient and profitable producer is not
necessarily the largest. It should be mentioned here, also,
that each plant has a slightly different product mix. Each
plant learns over the years which products they can produce
most profitably, and which products they should stay away from.
However, customer demands many times dictate the necessity of
producing some low profit items as well as just the profitable
ones.
If the above can be used to set the stage, the following
procedure has been used by the Steel Industry to determine
price increases up to the beginning of Phase I of price control
in the United States on August 15, 1971.
Each producer publishes a price book which its sales
organization uses to sell their products. Management continually
keeps track of increased costs of raw materials, labor, freight,
and services, and at some point finds that it can no longer
absorb these costs in the existing pricing framework. In other
words, its return on investment and/or its return on sales
goes below a preprescribed percentage which management must
watch to satisfy the profit requirements of the company for
equipment replacement, for future expansion reasons, for
stockholder acceptance, etc.
-------
IV - 4
These accumulated costs are converted into a incremental
increase to be applied to the sales prices that will bring the
return on sales back to the desired level. Sales management
and general management must then decide whether it is practical
to announce a price increase. Such factors as customer acceptance,
the general level of business, and obviously, will a price increase
be met in the marketplace by competition must be considered. Since
conversations between producers on the subject of changing prices
are illegal, the mechanism is as follows.
A producer determines that he needs a price increase.
Regardless of his size as a producer, he may send an announcement
to the principal trade journals and newspapers that, effective
on an established date, the price that he will charge for his
product will be up X70. The announcement usually explains the
reason for the increase stating the exact price of the new base
price or the new extra charges, or some other basis.
Since he is leading a price increase, he must have some
experience as to what competition will do. As explained above,
with steel made on similar equipment, from the same raw materials,
at the same labor rates, the leader knows that his competition
probably needs relief as badly as he does. The leader can
make his announced increase immediate, or he can space it out,
-------
IV - 5
which would allow competition time to follow. If his price
change is not met immediately or in a reasonable length of time,
he then must decide to leave it in, and perhaps lose some
business or announce a retraction of the price increase.
Governmental price controls came at a particularly poor time
for the Steel Industry. The present wave of inflation started
in the mid-sixty's driving the cost of raw materials, services,
and labor upward on a steep curve. Also, the recession of the
late 1960's and early 1970's reduced the requirements for steel.
Combined with this was a tremendous increase in low priced
imported steel. We had, therefore, rapidly increasing costs
for the industry at a time when steel demand was low. Price
increases were frowned upon by the Government, and competitive
actions resulting from the above mentioned factors prevented
adequate price increases.
August 15, 1971 saw the beginning of price controls creating
additional problems for increasing prices. Without detailing the
steps of Phase I through IV, the Steel Industry went into this
period of controls with inadequately priced products, and
continued to lose ground during each phase.
The Cost of Living Council and the general public must not
look only at the improvement in earnings of the Steel Industry
1972 over 1971, and 1973 over 1972. The return on investment
-------
IV - 6
must be analyzed, and it will be found to be extremely poor.
The Steel Industry ranks 41st out of the 41 major industries
in earnings. If cost controls continue, and non-productive
expenses for pollution control equipment and OSHA controls
are pushed too fast, the United States will have a badly
weakened steel industry. New production equipment must be
bought, not only to replace obsolete and worn out equipment,
but to expand the output to meet 1980 and 1985 forecasts. As
of January, 1974, the Steel Industry does not have the money
to spend for equipment, nor should it. Steel Industry manage-
ment can be severely criticized by its stockholders if the cash
flow generated is not put into some diversification that can
show a better return on investment than the Steel Industry itself
can show.
Although the increase in composite steel prices has
approximately equalled the increase in average costs per ton
during the past decade, this relatively stationary relationship
has not been adequate to cover the increased capital require-
ments, resulting in an increase in debt to investment ratio as
previously reported. This situation has not provided for a
build-up of capital necessary to provide for projected expen-
ditures for pollution control, for replacement and obsolescence,
for increase of industry capacity, and for other purposes,
as covered further in Section VI.
-------
IV - 7
The relatively modest increases in prices for steel
products have been the result of price controls imposed on
both a formal and an informal basis for several years. Price
increases averaged 7.2 percent in 1971, 5.6 percent in 1972,
and 3.2 percent in 1973, while labor and material costs
increased 8 percent and 5 percent respectively in 1971, 7
percent and 5 percent in 1972, and 7 percent and 7 percent in
1973. By comparison, foreign steel prices have increased
sharply as shown by the comparative figures in Exhibit IV-5.
Reports from financial analysts _(Peter F. Marcus, Mitchell,
Hutchins, Inc., October 12, 1973), have estimated that steel
prices would be at least 10 percent higher if it were not for
artificial price controls. Although such a price increase
would not be sufficient to generate the 10 percent return on
equity which is believed necessary to justify a new round of
expansion programs, it would go far in providing capital for
spending requirements for such purposes as replacement, environ-
mental and OSHA control, and some expansion of capacity.
EFFECT ON SMALLER
PRODUCERS
Later discussions will concentrate on industry-wide
costs of pollution control, and their potential impact on
steel prices. From this the reader may infer that pollution
control costs, expressed in terms of cost per ton of product,
-------
IV - 8
are the same for all producers. Actually evidence from the
Industry indicates that this is not true, and that size of
plant has a direct effect on unit costs of pollution control.
Smaller plants incur proportionately higher unit costs.
Price increases in the Steel Industry, until 1962, were
initiated across the board for all tonnage mill products, and
were led by the largest steel producers. After 1962, due
principally to strong government persuasion, selective steel
price increases were made on parts of the total product line,
also initiated by the larger producers. There have been excep-
tions to this, notably the lower prices charged by the mini-mills
for carbon steel reinforcing bar and light structural steel
shapes, where until scrap prices increased drastically early in
1973, these mills were selling for under the domestic market
price. Since then, with increased demands for these steel
products, and the extremely high scrap prices which currently
exist, these mills have been selling for somewhat above the
current domestic market price. However, in the absence of a
strong sellers' market, the smaller producers generally follow
the lead of the large mills in setting prices.
Assuming normal conditions in the market place, the price
increases, which will include the costs for pollution control,
will be initiated by the larger companies, with the smaller
-------
IV - 9
companies following the same pattern. If these price
increases are calculated to recover increased costs for the
large producers, they well may not be adequate to cover higher
unit costs for pollution control by the small producers. This
situation, if it occurs, could result in added burden on the
smaller companies, requiring relief which may not be able to
be met by price increases alone.
-------
IRON AND STEEL INDUSTRY
PRODUCTION COST DATA
(FOR COMPANIES REPRESENTING 91% OF TOTAL PRODUCTION)
(MILLIONS OF DOLLARS)
Element
of Cost
Materials, Supplies, Freight
and Other Services
Employment Costs
Depreciation, Depletion and
Amortization
Interest and Charges on Long
Term Debt
State, Local and Federal
Taxes
1972
Amount Percent
$10,659.2
8,699.6
1,168.1
323.3
849.2
49.1
40.1
5.4
1.5
3.9
1971
Amount Percent
$ 9,936.8
7,794.0
1,076.9
332.1
655.2
50.3
39.3
5.4
1.7
3.3
1970
Amount Percent
$ 9,160.
7,685.
1,044.
288.
558.
9
5
2
5
8
48.9
41.0
5.6
1.5
3.0
1969
Amount Percent
$ 8,764.6
7,495.7
1,042.4
245.7
803.2
.47.7
41.0
5.7
1.3
4.3
1968
Amount 1
$ 8,587.0
7,040.1
965.8
224.5
870.0
Percen
48.5
39.8
5.5
1.3
4.9
Total Costs $21,699.4 100.0 $19,795.0 100.0 $18,737.9 100.0 $18,351.6 100.0 $17,687.4 100.0
Total Revenue $22,471.5 $20,357.8 $19,269.5 $19,231.0 $18,679.6
Net Income 772.1 562.8 531.6 879.4 992.2
Present Return on Revenue 3.4 2.8 2.8 4.6 5.3
Source: American Iron and Steel Institute Statistical Report.
M
X
H
M
-------
EXHIBIT IV-2
COMPOSITE FINISHED STEEL PRICES
Annual Averages of
Composite Finished Carbon Steel
as Computed by
AMERICAN METAL MARKET
in Cents Per Pound
Year
1953
1954
1955
1956
1957
1958
1959-1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Prices
Price
5.12
5.33
5.61
6.00
6.55
6.86
6.98
7.05
*8.370
*8.373
*8.422
*8.505
8.729
9.165
10.143
10.886
11.090
*Retroactive to new basis of compilations started
January 1, 1966.
-------
COMPOSITE PRICE OF FINISHED STEEL
L953-I973
w
u
t-l
w cu
w
H (X
W W
On
W
EH CO
CO
g
g
o
CJ
w
1953
1957 1961 1965 1969 1973
w
x
TIME PERIOD
U5
-------
EXHIBIT IV-4
Steel Prices
C'"i, J'-"l 'y Producers listed
in |r e >\,,f on tne lollowmg
^.\^<' ,v'n.,*i> are quoted in
tei-ts tier pound unless other-
wise noted.)
Billets. Blooms, Slabs
' ' ' I Fast
, 11 j I n,t
)' , »lo. 1...
Midwest
l( i II3J CD
l,1,, st, \\ 5. i 1 J) Ji 'J "it
h - 1 1 , 1 w
I I lljo 00
V*ust
N'> . 11 32 5(1
Carbon forging, Last
MJ II5J.5U
1)' .'. Hi . 1151.50
Mi Jwesl
l.,j »15J50
LI". Cll. «S. Ill li.M.
Ll 4 , «?. H (151 5,1
Ll " »li«50
West
ii«D iisiio
11 1 . M. Nil 115.JSU
boulh
A.' I1U50
Alloy East
BI.JJ, I(J. MJ . . . . 1131.00
A- . 1184 00
Midwest
CIO. I'll. US. HJil), bl, 15.
LI 4i. Us, H 118000
West
UJi-'l, hi . 1186.00
South
A7 IIH600
Piling Sheet Steel
!)„. Ll' '" "' 'J25
Midwest
IJ. LKJ;. A I, Yl .. 'J.25
Structurals
Carbon, Last
L;: if. . . » 5o
Midwest
A7.CJO,.,) II, SO'lJ, 1 KJ).
UJ, v,s, \\, i. 8,50
West
M.II. O.. 1'5, hi. So. OJ, L'l SCO
South
Ai 7.80
A7, I'll,. III. 11 *5U
H'gh Strength, Low Alloy, East
1! ,, . 11.J5
M ilwest
JJ. H 'JSU
11. M, I'llli. \V 1, US, H S.5U*
V,C!.t
A7. 11 85(1*
h 1 B.OO
A':, L.I 850
W.Oe FlJ"KC-. Carbon, East
U"... I'J 650
M'.lwesl
11. M. LKJ' 8.50*
U 1 8 50
We jt
Ct> . 8.65
South
A. 850
Strip
Hoi Kolli'd C.irhon. Cut & Mill
EJ i'-- .ill * Jlhs. tdit
A ' M . . t4 1 ^
Midwest
Hi. A". HI. (, (. n. MJ,
N ... u j . .1 , . n t. M, L u).
u J. U 5. l i J) 8.15
M 810
r.'. l.J 840
M 840
N 4 8.50
I I - ,y\
1 ' 1 VO
West
hi 8 25
111.'. Si, fe'.O
*''! ' *,'
l~ 4 J , >
South
All I 1". II I. 1 1 7 7S
Co''l Wo"~i) Cjrbun Max ^'j"/o.
[jst
HI. 1 .', 1 M. '., M\ 1(7 1100
I'l 11 IS
ri5 'j.ij.5
1" 'JO. 5
1 * W.JJ5
Mini trad* .in*
A12. 87, 810 . . 11.00
He 10.40
97 11.15
04 . 11,00
N7 «4JS
( ., 10.275
Midwest
'Is 9.475
Bv. I.G4, 14, MS|2). PI 1, Pit.
HI, H5IJ), PI, 14, 14. Ul,
\VS Yl 11 40
J3 , , _9.975
Dl "1.00
West
Cl.Ji 1045
High-Strength, Hot Rolled, Low
Alloy, Cut Edge & Mill Edge-
all widths, East
AJ, Bll II 5,70*
Midwest
1.1 700'
U 8 . 7.85
A7. R3 815'
G3'.'i, 13, MJ, HI, SI. W3,
YKJ) 975
L'l . J15*
N4 9.125
West
Kl ».25*
nt(J) . 025'
I I 8.15*
South
I'l 815*
High-Strength. Cold-Rolled, Low,
Alloy. Mill Edge, East
1-4 1210
1(7 14 45
Midwest
Ll . . 8.30-
G4. RJ, SKJ), YKJ) 1J.55
Alloy, Hot-Rolled, Midwest
H.SI. UKJ), YKJ 10 '.0
Alloy, Cold-Rolled. East
ril.M. M8 10.10
T8UI . 16.65
1(7 1880
N7, 1«(J) 10.90
Midwest
M 8. 1(5, 1(8 1810
1(5 K140
14. J3, PIG. SI. L'l 1750
J3 Ifi 05
G4 18JIO
West
CI.1J.J3 1880
Sheets
Hot-Rolled. Carbon (18 Ga &
Hvyr). East
AJ. IIIU). L'l 8.35
Midwest
A7, Ul. 1 J. HJ, G.1, H. 14(2),
JKJI. MJ. Mil, l'7. It 112),
bl, LK5I. UJ, Uj, YKJ). 8 li
I 1 7.90
West
UKJ) 8 15
Kl 8 45
South
ir! r i s 35
Cold Rolled, East
A J .100(5
Bt'-'\ VI 10075
Midwest
AT. Ill, Dl, I"-1, V *, rij, m,
n, [i. .nc>. MJ, MU. IT.
Y I ' ' 10 075
West
Ul 10075
hi 10 175
South
111. L'l 10075
Galvanized (hot dipped). East
1IIIJ1 10525
Midwest
A7 . 10 87i
West
Kl 10.125
1(1 Ul 10425
South
III, L'l 10.J25
Electro-Galvanized, East
III 1050
Midwest
Oil, K8. L5 H3. P1.T9 1055
rig • n oo
\\ ( 10 55
Enarnelina, East
11 UJ, 10673
Midwest
A7Ui, II, Mil, 111 I'I'Ji Yl iOi.75
Lonp, Te^nc, Midv.cst
A 7 H M l( '' U ^ M fW
Hich-StrenRth. Low Alloy. Hot-
Rolled. East
111(21 5.B5"
AJ. HI. \V3 8.15'
Midwest
B3,J' . J8J-
Ai, 13, 14, J3I2), MI, MU,
R3(2), Bl. UK4), W3. W8.
YK2) . 8.35'
G4 . . . 6.95
Ll . . 7.90'
West
Kl. Ul . , 8.46*
South
Ul 10.35
High. Strength, Low Alloy, Cold-
Rolled, East
BJ(2) .... . 7.20
B3 7 20*
Midwest
GJL'I. JJ(2). MJ. H3(J), bl.
Ul, VVJ. YKJ) 930'
Ll 7,90
West
Kl . 10.179
Wire Rod
East
B3(2), C«, Ul 9.15
815 . , 867S
Midwest
JJ. Ll, H5, P7. R3, UK5), Yl 915
C9, K2 9 25
N4 9.25
Wast
C6, A7 . 9.15
113. Ul 9 15
South
UJ. Ll .. 0,15
Tlnplate
Electrolytic Tlnplate
( 10 II, co.,titu, A.1,1 1'jt lor 25 Uj .
Wt (or 50 II. . ami 11 70 (or 75 IU 1
Single Reduced (55 II) to 75 11. )
B.I. Ul J9.35
Midwest
B3, IJ. JJ. Mil, H3, UU2).
Ul, U5.71 19.35
West
Kl. Ul - . »9.45
South
Ul $9.35
Double Reduced (55 Ib)
East
Midwest
B.I. Ul S8JO
B3, I.I, JJ, Mil, UKJ). W3,
W 5. i 1 . $8-20
West
hi. '!! $8.30
South
Ul 18.20
Black Plate
Single Reduced (55 Hi. to 75 Hi )
East
11.1. Ul $8.15
Midwest
GJ. Ll, JJ, Mil. 1(3, Ul, U3,
US. 11 $8.15
West
hi. L'l J825
South
Ul $815
Double Reduced (55 Ib.)
East
B3.U) $u.60
Midwest
Jl. Mil. 113. Ul, \U. WS, Yl $660
West
Ul $6 70
South
Ul K 60
Hollowware Enameling
BlacK Plate
OJ.JJ.US.Yl $'J35
Bars
Carbon Steel. Hot-Rolled
(Mtrch^at tlUdllty- .--wcul iiuallt* $2 00
hixhrr )
East
H!(J), 111, L'l, M7 8175
bl5 S 175
Midwest
CJO. ItllJI. I.!. 14. J.I. 11. Nl.
I'll, KJU), LK5,, V\» KJ75
YKJ) 8.175
05 7975
N4 8 175
NIO 815
CIO. llMipcc ,iu,il) S.775
Cll (n,cc nual ) » US
West
Bid) 8275
UKJ), Kl, Ul ».!75
Nl, 8075
02 * 475
A 7 8 175
Cl, 8 175
A7, rin. ItJ, Ul ... 8 J75
South
A7. All, Cll.. HI, I'l « 175
A8 C J75
Cold-Finished Carbon, bast
1)5 U JO
(VI 1165
All.JI . 1175
h4 11 'JO
I'lO, VUO 1J05
113 9 70
T14.WIO l.'IS
Bi. . 9.70
Midwest
B4. B5iJ), BIO. C8, CIO, Cll.
C1J. f>, H2. JKJ). LJ, Ml),
N9, Plti, HJ, UKJ), UKJ).
W8(2), WIO(J). U1JU), Yl I1JO
B5 u jo
Wast
B5(J). C8, P14, 113 . .. 12.34
South
B5, KJ, P8 ... 11.75
CIS 125S
Slo 12.05
Alloy. Hot-Rolled, East
BliJi, M7.R3 1010
SIS - • 985
Midwest
CIO, C11.G3.G5. 13, J3. R3(3),
H5.81.T5. UK5). W8, Yl 10.10
West
BJ(1) . . - 1020
H.l(l). Kl. Ul 10.10
South
A7 10 10
Alloy. Cold Drawn. East
K4 . 13475
AH.CH.Jl, lU.fflO . U.75
W10 13 65
Pl(, " 13 85
Midwest
B5(.l), BIO. C8, CIO, C11.C1.1.
FJ. H J.J.I. LJ. Ml. M9 N».
P.I. P8, H2(J). UJ(J). K5.
T5. UK2). U8UI. VVIO(J).
WI3:J), YK2) 13 JO
WlO 1350
South
Slli U8S
High-Strength. Hot-Rolled, Low
Alloy, East
Ul ... 8425-
B3 8.425
Midwest
Ll 8 425*
N4 8 375
13, W8 10-25
01(8). YKJ) 8«5-
G3 8.975
J3, 1(3(2) 9.00
UK?) *-725
Kl 8425
BJ(2) - 8J25_
A7 • 8.42**
South
111 8.425-
A7 8.4M-
Plates
Carbon Steel, East
AJ. Illll), L4, I'J. Ul 8.50
Midwest
A7, Ul, K1. G2, Cl, IJ. 14,
J.iCJ). N4I2), KJU), SI.
U1C4), W8, YK3) 850
Ll 860
West
Ul 860
BJ. Cb. K1.02 8«0
South
A7. 113. t'l 850
Alloy, East
AJ, UJ. 1,4, PJ 13-15
Midwest
IIJ Jo SI, UKJ), «8, Yl 1.1 15
14 1J2J
11 ! U 25
hi I3"
f?uth n 15
High-Strength. Low Alloy. East
A ' I'J, L'l * 5II§
Midwest
(, I 11 ,1J(J), H 1' Jl, SI.
V'UJ). Y UJ> * ^('l
Bl 7
-------
Rough Comparisons of International
Steel Prices from January 1969 to October 1973
(U.S.
dollars per metric ton)
Cold Reduced Sheets
USA* '
Japantf
Germany*
France*
U.K.*
EEC Export Price
USA*
Japan#
Germany*
France*
U.K.*
EEC Export Price
1/69
159
129
143
132
133
118
1/69
134
94
110
110
105
100
1/70
167
150
168
137
135
170
Heavy
1/70
142
140
149
134
115
158
1/71
197
124
177
149
156
129
Plates
1/71
150
106
149
142
134
130
1/72
210
153
197
167
174
128
1/72
180
127
165
150
155
128
9/72
222
154
206
175
176
154
9/72
180
140
177
168
155
128
10/73
222
396
287
225
197
291
10/73
187
350
279
245
174
278
Merchant Bars
1/69
140
79
103
96
107
80
1/69
137
142
100
99
100
81
1/70
147
155
116
106
114
130
Heavy
1/70
144
160
130
116
107
155
1/71
157
114
130
116
134
106
1/72
185
106
145
129
154
112
9/72
157
107
147
132
154
121
10/73
185
362
228
202
176
246
Strueturals
1/71
132
147
136
125
125
122
1/72
179
167
151
138
140
122
9/72
179
157
163
148
142
130
10/73
187
226
236
213
162
241
0
IT
CD
03
••••
O
M
X
PC
H
W
M
H
Source: Various trade publications.
These figures can be inaccurate for a variety of reasons including changes in definitions, discounts from list prices, etc.
*List price
^Japanese price is "market price" quoted for small users and is not representative during shortage periods of the prices
paid by large users. Large users in Japan may currently purchase steel at the lowest price levels in the world.
Ln
-------
V - REVIEW OF COST AND
CONTROL TECHNOLOGY DATA
DATA SOURCES
Valid determination of the economic impact of pollution
control was contingent upon prior identification of the capital
investment and operating costs to be incurred. Data regarding
these costs for the Iron and Steel Industry were provided by
the Environmental Protection Agency. The scope of work for
this study included review of these cost and control technology
data to determine additional capital investments and operating
costs required to meet the proposed water effluent guidelines.
This was to be done at the plant, company and industry levels,
to the extent that necessary data were available.
For the primary operations being considered in this study,
the problems and costs of air and water pollution control are
generally closely associated. With the exception of coke
quenching, and the coke by-products plants, water is not used
for processing, but is principally used for cooling, and for
cleaning of gases where wet cleaning systems are used. There-
fore, with the exceptions noted, water pollution control and
costs must be related to air pollution control and costs in
any discussion of economics.
The prior studies covering air pollution control and water
pollution control in the Iron and Steel Industry gave control
technology and cost data for each major operation. Relatively
-------
V - 2
little new technology or data has been added since these reports
were released, with the principal exception of the new air
pollution control systems being tried out in several coke plants,
and sulfur dioxide control where high sulfur fuels are used.
Definitive data regarding these new processes are not yet available
The EPA provided two primary sources of data regarding
capital investments and operating costs to meet pollution con-
trol requirements in the Iron and Steel Industr}'-. Air pollu-
tion control data were provided in a report prepared by Battelle
Memorial Institute for EPA: "A Cost Analysis of Air Pollution
Controls in the Integrated Iron and Steel Industry," May 15,
1969. Cost data regarding water pollution control require-
ments were provided in a report prepared by Cyrus Wm. Rice
Division of NUS Corporation for EPA: "Development Document
for Effluent Limitations Guidelines and New Sources Performance
Standards, Iron and Steel Industry, Supplement A Cost Information,"
June, 1973, and revised in July and November, 1973.
EPA provided a third source of data which covers both air
and water pollution control cost estimates for the entire Iron
and Steel Industry. This source, "A Study of the Economic
Impact on the Steel Industry of the Costs of Meeting Federal
Air and Water Pollution Abatement Requirements," was prepared
for the Council on Environmental Quality by Booz, Allen and
Hamilton (BAH) in 1971. The BAH report provides estimates of
the incremental capital investments and annual operating costs
based on an undefined assumption regarding the level of
-------
V - 3
pollution control existing in 1971. Exhibit V-l lists the
coverage of these prior studies.
In addition to the reports which were provided by the EPA,
other sources of air and water pollution control costs were re-
viewed and compared with the official data. These included
information gathered from steel companies by the American Iron
and Steel Institute regarding costs incurred by the Industry
prior to 1973, and a recent survey which summarized water pol-
lution control costs required to reach Levels I and II control
technology. McGraw-Hill Publishing Co. has prepared annual
surveys of pollution control costs for major industries, in-
cluding iron and steel, based on surveys conducted within each
industry.
COMPARISONS OF
POLLUTION CONTROL
COST ESTIMATES
A major problem in assessing the economic impact of pol-
lution control costs on the Iron and Steel Industry has been
to arrive at a reasonable estimate of the costs of implementing
control regulations. Probably the fact that many studies have
been made, officially for the EPA, and unofficially by Industry
and private groups, has resulted in a wide divergence of cost
data. Even costs prior to 1973, which should be a matter of
historical record, vary, as shown in Exhibit V-2, which com-
pares AISI data and McGraw-Hill data. Almost 1.5 billion dol-
lars was reported by the AISI as having been spent through 1972,
-------
V - 4
for air and water pollution control, about 45 percent of which
was for water pollution control, and 55 percent for air pollu-
tion control.
The official water pollution control cost data provided
by EPA was that prepared by Cyrus Rice, and published in June, Julj
and November, 1973, for the primary operations only in the integ-
rated steel plants. The capital and operating costs for Levels
I and II were developed in this study for coke plants, blast
furnaces, sintering plants, steelmaking plants, degassing and
continuous casting operations, but not for fugitive run-offs from
coal, stone and ore piles and from slag pits. The revised
costs as reported by Rice are summarized in Exhibit V-3 and
are further summarized in the following table:
Table 5
Operating and Capital Costs Reported in
Rice Report (November. 1973)
Level I Level II
Initial Capital Investment $145,272,000 $122,310,000
Annual Capital and
Operating Costs 39,963,000 82,405,000
It is beyond the scope of this study to evaluate the
guidelines proposed in the Rice report. However, because the
Iron and Steel Industry as represented by the Environmental
Committee of the American Iron and Steel Institute has prepared
their own figures of estimates of capital costs to achieve Best
Practicable Technology (Level A), and Zero Discharge Technology
(Level B), these figures are analyzed in this study and compared
-------
V
to those prepared by Rice for EPA. The Steel Industry's cost
estimates were prepared by accumulating estimates submitted
by individual steel companies, and adjusting the total to
cover those companies who did not submit estimates. The In-
dustry's estimates were presented as totals to achieve each
level of control, with an estimate for separation into primary
and finishing costs for Level A. Their best estimate is that
approximately 36 percent of the costs will apply to primary
operations, and 64 percent to finishing operations. No costs
were estimated for operating of pollution control equipment.
However, we have estimated that annual operating and capital
costs will approximate one third of the total capital invest-
ment costs.* The following tabulation gives the Industry's
estimates, adjusted for primary operation separation, and for
operating costs:
Table 6
Operating and Capital Costs Based on
Steel Industry Survey Data
Level I Level II
Total Initial Capital
Investment $1,349,000,000 $3,117,000,000
Estimated Capital
Investment for Primary
Operations 486,000,000 1,122,000,000
Estimated Capital and
Operating Costs for
Primary Operations 162,000,000 374,000,000
Note* - Annual costs consist of: direct operation cost - 1270,
Depreciation - 10%, Interest -8%, Replacement - 3%,
Total - 33%.
-------
V - 6
A comparison of the Rice and the Industry estimates shows
a wide divergence, particularly in achieving Level II control
technology. Industry figures are 3.5 and 9.5 times the Rice
figures for Levels I and II capital investment respectively,
and similarly higher for operating costs. While the Rice
estimates have been considered by Industry and other knowledgeable
sources to be low, it is likely that the Industry estimates are
high, particularly for Level II. It is known that the need for
installing pollution controls in existing and often old instal-
lations results in additional costs for premature replacement
of facilities, which are not economically feasible to alter to
receive control equipment. The Industry estimates undoubtedly
contain allowances for this type of cost, which was not covered
in the Rice estimates. The two sets of numbers can, therefore,
be considered as low and high estimates of capital and operating
costs, and are treated in this manner in our economic analysis.
It is of interest to note that a detailed plant-by-plant
survey is being made by A.D.Little, Inc. under AISI sponsorship,
to determine actual pollution control needs and costs. This
study is expected to be completed in the Fall of 1974.
COSTS FOR ADDED
INDUSTRY CAPACITY
In Exhibit II-5, the Iron and Steel Industry capacity was
projected to increase to 185 million tons of raw steel, and 128
million tons of finished steel by 1983, an increase of 25 million
-------
V - 7
tons of finished steel, or about 24 percent, provided that
capacity is added to keep up with demands for steel. Industry
sources have estimated that the cost of a new, integrated mill
producing finished steel products, will be about $500 per ton
of annual capacity, based on technology and pollution control
as they exist today. Although no estimates have been made
regarding the costs of pollution control for new source
standards, for a new steel mill a figure of $50 per ton of
annual capacity, or about 10 percent of the total mill cost,
appears to be a reasonable estimate. Based on this figure,
the added cost for air and water pollution control for new steel
mill capacity by 1983 is estimated to be approximately $1,180
million. As shown in Exhibit V-4, this additional costs will
increase the estimated pollution control total capital cost
by 1983, resulting in a low of $6 billion to a high of over $9
billion, of which only $1.4 billion has been already expended.
OTHER INDUSTRY COSTS
The scope of this study was limited to consideration of
water pollution control costs for the primary operations in
integrated iron and steel plants. However, it should be
noted that this represents only a small portion of the total
cost which the Industry will be required to make. Other areas
which have been, or will be covered by other studies include:
water pollution control costs for finishing operations in
integrated steel plants; water pollution control costs for
-------
V - 8
operations in non-integrated steel plants; air pollution control
costs for all steel plants. Additionally, the Industry will
soon be faced with the necessity for complying with the require-
ments of the Occupational Safety and Health Act (OSHA) which in
other industries has cost as much as air and water pollution
control combined, and with expenditures to achieve reductions
in energy usage, or substitutions of available energy supplies
for scarce energy items such as petroleum products.
Although it is beyond the scope of this study to consider
and estimate these additional costs, the facts should not be
ignored that the costs reported in this study probably represent
only about one tenth of the total potential costs for all as-
pects of environmental and OSHA controls. Finally, the aspect
of premature obsolescence due to requirements of installing
these controls will undoubtedly add to the financial burden
which must be borne in the next decade.
Exhibit V-4 gives a projection of total air and water
pollution control costs for the industry, as gathered from
various sources. Total costs have been projected to range from
a low figure of about $6 billion to a high figure of over $9
billion, of which under $1.4 billion has been already spent.
-------
SCOPE AND COVERAGE OF PRIOR ANALYSES OF THE ECONOMIC
IMPACT OF POLLUTION CONTROL ON THE IRON AND STEEL INDUSTRY
Performing
Organization
Battelle Memorial
Institute (1)
Date
of
Analysis
1968-1969
The Council on
Economic Priorities (4)
Cyrus Wm. Rice
Division, NUS
Corporation (5)
1973
Impact
Period
Analyzed
Principal
Leve1 o f
Impact Analyses
Not Specified Production Pro-
cess and Model
Plant
Booz, Allen & Hamilton (2) 1971-1972 1972-1976
Industry
Booz, Allen & Hamilton (3) 1972-1973 1973-1978
1972-1976
1973-1983
Industry
Company
Manufacturing
Process
Industry
Segments
Covered
All
All
Pollution
Abatement
Coverage
Federal Air
Quality Act
of 1967
EPA Air Quality
Standard
Guidelines for
States; Second-
ary Treatment
Technology for
Water Pollu-
tion Control
All
7 Companies
7 Manufac- Water Pollution
turing Control at
Processes Levels I, II
and III
4,
5,
"A Cost Integrated Analysis of Air Pollution Controls in the Integrated Iron and Steel Industry",
May 15, 1969. Conducted for EPA by Battelle Memorial Institute.
"A Study of the Economic Impact on the Steel Industry of the Costs of Meeting Federal Air and
Water Pollution Abatement Requirements, July 27, 1972. Conducted for the Council on Enviornmental
Quality by Booz, Allen & Hamilton.
"A study of the Impact of Pollution Controls on Foreign Trade," 1973, conducted by Booz, Allen
& Hamilton for the Department of State,
"Enviornmental Steel, Pollution in the Iron and Steel Industry," conducted by staff of the Council
on Economic Priorities,,
"Development Document for Effluent Limitations Guidelines and New Source Performance Standards,
Iron and Steel," Nov., 1973. Prepared by Cyrus Wm. Rice Devison of NUS Corporation for EPA.
X
ffi
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Cd
M
H
-------
EXHIBIT V-2
ESTIMATED POLLUTION CONTROL CAPITAL INVESTMENTS
BY THE IRON AND STEEL INDUSTRY
"(Millions of Dollars)
Year
Prior to 1966
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
American Iron and
Steel Institute
Estimate*
Air Water Total
209 239
19
55
61
71
97
88
145
v
201
37
39
40
67
69
74
57
Y
135
448
56
94
101
138
166
162
201
V
336
McGraw-Hill
Estimate**
Air Water Total
110
96
112 105
104
89
146 130
206
217
193
276
450 420
327 190
870
241
*AISI News Release, March 12, 1973.
**Annual McGraw-Hill Survey of Pollution Control Expenditures.
-------
IRON AND STEELMAKING OPERATIONS
PROJECTED WATER POLLUTION CONTROL COSTS
FOR RELATED CATEGORIES
Level I (1977)
Category
Coke Making
By Product
Beehive
Subtotal
Burden Preparation
Sintering
Iron Making
Blast Furnace - (Fe)
Blast Furnace - (FeMn)
Subtotal
Steelmaking
Basic Oxygen Furnace (EOF)
Open Hearth (OH)
Electric Furnace (EF)
Subtotal
Steel Operations
Degassing
Continuous Casting
Subtotal
Fugitive Runoffs*
Coal Pile
Stone Pile
Ore Pile
Slag Quench Pit
Subtotal
Total - All Items
1972 Annual
Production
(Millions of
Net Tons)
64.2
0.8
65.0
6.5
82.1
0.9
83.0
64.9
13.5
6.5
84.9
5.5
18.0
23.5
Number Annual Capital
of and
Plants Operating Cost
66 $10,034,000
3 38.000
$10
6 $
68 $20
3 1
$21
27 $ 4
5
10
$ 5
29 $ 2
46
$ 2
$
$
$39
.072.000
408.000
,169,000
.059.000
.228,000
,274,000
746,000
400.000
^420,000
,840,000
0
,840,000
0
0
0
0
0
^63,000
Initial Capital
Investment
$ 11
$ 11
$ 1
$100
5
$105
§ 9
2
1
$ 14
$ 12
$ 12
$
$
$145
,118,000
152.000
.270.000
,910,000
,414,000
.177.000
.591.000
,770,000
,665,000
.776.000
.211.000
,290,000
0
.290,000
0
0
0
0
0
,272,000
Level II
Annual Capital
and
Operating Cost
$23,537,000
0
$23
$
$40
2
$42
$ 5
2
$ 8
$ 5
$ 6
$
$
$ 82
.537.000
814.000
,021,000
.629.000
.650.000
,676,000
,290,000
877.000
.843.000
,297,000
226.000
.523.000
0
0
0
0
0
,A05V00_0
(1983)
Initial Capital
Investment
$
$
$
$
$
$
$
$
$
$
$
61
61
1
28
29
6
7
2
16
8
4
13
$122
,725,000
0
.725.000
.765.000
,086,000
963,000
.049.000
,175,000
,837,000
.289.000
.301.000
,908,000
.562.000
.470.000
0
0
0
0
0
.310.000
New Source
Not Estimated
Not Estimated
Not Estimated
Not Estimated
Not Estimated
Not Estimated
Not Estimated
Note: ^Fugitive Runoffs will be included in Phase II study by Cyrus Win. Rice.
Source: Adapted from final revision - Cyrus Wm. Rice Report - November, 1973.
w
X
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M
i-3
-------
EXHIBIT V-4
PROJECTED TOTAL POLLUTION CONTROL
INVESTMENT COSTS FOR IRON & STEEL INDUSTRY
(Millions of 1973 Dollars)
Low High
Area of Control Estimate Estimate
Air and Water Pollution Control
Costs Prior to 1973 as reported
by AISI $1,365 $1,365
Water Pollution Control Costs
1973-1983 for Primary Operations
in Integrated Steel Plants.
(Low estimate by Cyrus Wm. Rice; 268
High estimate by AISI) 1,350
Water Pollution Control Costs
1973-1983 for balance of Iron and
Steel Industry
(Low estimate projected by Kearney
from Cyrus Wm. Rice Data; 1,200
High estimate from AISI 3.,115
Air Pollution Control Costs
1972-1976 given in BAH Report 1,800 2,400
Total Air and Water Pollution
Control Costs for Existing $4,633 $8,230
Facilities
Air and Water Pollution Control
Costs for New Facilities 1,180 1,180
Total Air and Water Pollution
Control Costs $ 5,813 $ 9,410
-------
VI - IMPACT ANALYSIS
Any analysis of the economic impact of water pollution
control requirements alone on only the primary portion of the
integrated Iron and Steel Industry must be considered as only
one factor among several which will have total impact on
operating and capital costs in the industry. The other non-
productive cost factors are water pollution control in the
finishing portion of the integrated industry, water pollution
control in the non-integrated steel plants, air pollution control
in all sections of the Steel Industry, and in the future, the
OSHA requirements and energy related expenditures in the industry,
Although this study only covered the first of these factors,
it should be recognized that the total impact must take into
account all of the other factors.
COST EFFECTS
The estimates which were prepared by Cryus Rice and by the
Steel Industry for the costs of water pollution in the primary
operations of the integrated Iron and Steel Industry, can be
considered as low and high estimates for purposes of impact
analysis. The projected effect of these pollution control
costs have been analyzed in terms of effect on costs per ton
of finished steel, with the results tabulated in Exhibit VI-1.
Starting with a base year, assumed to be 1973, the control
capital costs were distributed evenly for each year for Level I
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VI - 2
and for Level II, with operating costs being spread out evenly
for each year from 1973-1977 and 1979-1983 respectively. This
distribution was used for calculation purposes only, since it
is recognized that actual distribution will be non-uniform,
and the tendency will be to defer any expenses as long as is
possible to keep interest expense at a minimum.
Operating costs for the low estimate were taken from the
Cyrus Rice report (Exhibit V-3), and high cost estimates were
taken at one-third of the Industry estimated high cumulative
capital costs. To arrive at an estimated cost per ton of
finished steel for water pollution control costs for primary
operations, raw steel production estimates for the years from
1973-1983 were converted to finished steel, using a yield of
697o, and 9070 of total steel production was estimated to be
produced in the integrated mills. The estimated costs per
ton of finished steel for water pollution costs for primary
operations in integrated steel plants were developed in Exhibit
VI-1 for existing mill capacity, and in Exhibits VI-2 and VI-3
for projected mill capacity by 1983. These are summarized in
the following tabulation:
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VI - 3
TABLE 7
Cost of Water Pollution Control for Primary Operations
Per Ton Finished Steel
Year
(Existing Mill Capacity)
1977
1983
(Projected Mill Capacity)
1977
1983
Low Cost
$0..43
0.88.
$0. 45
1.48
High Cost
$1.80
5.04
$1.86
5.41
We have called attention to the fact that these costs are
only a part of the total pollution control cost. Although it
is beyond the scope of this study to investigate the other areas
in detail, an attempt was made to arrive at order-of-magnitude
costs for the other requirements, as a means of presenting the
overall pollution control costs and their effect on prices. In
doing this, we have taken into account: costs of installations
prior to 1973; additional costs of water pollution control in
all parts of all mills; and additional costs of air pollution
control for all mills. This is given in Exhibit VI-4, and sum-
marized in the following tabulation taking into account costs
for added Steel Industry capacity.
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VI - 4
Total Capital Costs
by 1983
Total Annual Operating
Costs by 1983
Total Cost per Ton Finished
Steel by 1983
Table 8
Low Estimate
^Millions 1973
Dollars)
$5,945
1,930
15.07
High .Estimate
"(Millions 1973
Dollars)
$ 9,410
3,138
24.-50
PRICE EFFECTS
In an earlier section of this report, note was made of the
alternates available to the industry with regard to the effect of
costs of pollution control on steel prices. The alternates
available to the industry are three: increased costs can be
absorbed, thereby holding prices constant and reducing earnings;
increased costs can be directly added to prices, thereby holding
earnings constant and raising prices to cover increased costs;
earnings can be raised to provide for capitalization requirements
for pollution control, thereby raising prices beyond the amount
needed only to cover control costs. The low earnings record of
the industry will probably eliminate the first alternate as a
viable method, while government pressures and/or regulations
may possibly prevent the third alternate from taking place.
The middle alternate has been chosen as the most likely to
occur, resulting in a direct price increase to cover increased
operating costs for pollution control.
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VI - 5
The total cost of pollution control on composite price
of finished steel is estimated to be from 7 to 11 percent of the
the present cost depending on the actual final pollution control
costs. Effects of OSHA control and energy related costs have
not been estimated^ but will have a considerable effect on
increasing production costs in the future. Steel mill products
have a weighting factor of 3.5 percent on the wholesale price
index, so that the estimated price increase would have an effect
of raising the wholesale price index by from 0.245 to 0.385
percent. Although this is not a large effect, the large usage
of steel tends to result in a much greater psychological impact
on attempts to combat inflation when steel prices increase.
SECONDARY EFFECTS
Steel is one of the basic materials used in our economy,
and price changes in this commodity inevitably result in changes
in costs of many other products. Principal users of steel in
1972 were as indicated in the following table.
Table 9
Principal Userfe of Steel
Construction Industry - 10.1% Machinery - 5.9%
Automotive Industry - 19.6% Appliances - 2.6%
Contractors Products - 5.5% Containers - 7.2%
Rail Transportation - 3.0% Exports - 2.8%
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VI - 6
Increases in costs of steel will have a direct effect in
increasing costs of construction, automobiles, containers,
appliances, and other products. As a result of effect of yields
of products from steel purchased, and the effect of pyramiding
of steel prices from the initial mill costs to the effect on cost
of final product, the impact of pollution control costs on costs
of products using steel, will be in the order of 3 to 5 tiroes the
actual pollution control costs, varying with the method of pur-
chase of steel by the consuming industry. Examples of the effect
of the projected increases in cost of finished steel on the costs
of major products and industries, are given in the following
tabulation:
Table 10
Examples of Effect of
Increase in Steel Prices*
Typical Use
of Steel
3,500 Ibs.
) 3,000
150
5,000
Increase
Low Estimate
$105
113
6
151
in Cost
High Estimate
$172
185
9
244
Product
Automobiles
Construction (Homes)
Major Appliances
Farm Equipment
These potential cost increases include costs already in
effect for installations prior to 1973. Approximately 10 percent
of the low estimated effect, and 22 percent of the high estimated
effect can be traced to costs for water pollution control in
primary operations in integrated mills.
* These prices are estimated costs at consumer levels after
normal mark-up between steel producers and finished product
sales have been included.
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VI - 7
PROFITABILITY
Total operating costs, including fixed charges, on the
pollution control facilities needed for EPA compliance are
substantial and could be provided for, theoretically at
least, by three alternative means. The steel companies could:
1. Absorb the additional costs involved.
2. Strive to raise profits in order to attract
additional capital.
3. Raise prices sufficiently only to cover anti-
pollution costs.
The first two alternatives may be ruled out, particularly in
view of the industry's poor profit performance in recent years
and the overall structure of increased costs that must be
shouldered in the years ahead. This leaves the alternative of
passing on the added cost to steel consumers, which is contingent
upon a number of factors, namely, the possibility of government
price controls over the period in questions, the supply-demand
relationship in steel markets — both in this country and abroad,
and the ability of steel users to shift their demand to
substitute prodcuts.
In regard to price controls, current Phase IV regulations
require that any cost increase a company intends to pass on in
the form of higher prices be submitted to the Cost of Living
Council for its approval, and provided the Council raises no
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VI - 8
objection within 30 days, the price increase automatically
takes effect. However, hearings can be held, as was the case in
late August following the Steel Industry's request to increase
the prices of flat rolled products an average of approximately
5 percent. Should such regulations remain in effect, it will be
more difficult for steel companies to pass on the operating costs
of pollution control facilities than if there were freedom to
raise prices at will.
In the absence of price controls the marketplace will
determine whether or not the industry can pass on the increased
cost of air and water pollution control in the form of higher
prices. Considering the period ahead to 1983, when steel will
most likely be a commodity in short supply, this seems to be
a possibility.
The United States will require at least 183 million net
tons of raw steel production by 1983 to satisfy the demands of
the economy, which in light of the present steel shortage, may
be a conservative figure. At present the steel capacity is
between 160 million and 165 million tons. In order to produce
183 million tons, capacity will have to expand to 195 million
tons, since cushion is needed for peaking periods. Thus,
between 30 million and 35 million tons of capacity must be added
by 1983 if the demands of the economy are to be met. There is
some doubt that this amount of tonnage will be added. In fact,
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VI - 9
several companies have stated that unless price increases
are permitted to restore profitability, major expenditures
for capacity expansion will not be made. Consequently,
there could be a shortage of steel, and if there are no
government price regulations the industry will be able to charge
higher prices to take care of its increased costs. There are,
however, limits to this. There could possibly be competition
from substitute materials should steel be in short supply and
high priced. Such a situation developed at the end of World
War II when many steel products were scarce. In the construction
industry for example, reinforced concrete was substituted for
steel to a point unknown before that time. This was inspired
by the shortage of structurals to take care of the demand for
highrise buildings, a demand which was not only a backlog of
World War II but a backlog from the depression years of the 1930's
Other substitutes, such as plastics and aluminum, could
well move into areas served by steel if there were a shortage
and prices were high, although aluminum prices have already
increased significantly since removal of price controls, and
unavailability of plastics may reduce sharply due to shortages
of petroleum based feed stocks. Consequently, it would be
up to the officials of steel companies to make a judgment as
to whether or not they could afford to increase the price of
steel to cover additional capital costs of pollution control
in the face of possible inroads by substitute materials.
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VI - 10
Another factor to consider in evaluating the possibility
of raising steel prices is whether domestic steel consumers
will be able to switch to imports. During the 1960's, imports
rose rapidly from 4.5 million tons in 1959 to 19.5 million tons
in 1968. The question remains as to whether a steel deficit
country, which the United States could well be by the end of
this decade, can count on additional supplies from other steel
producing countries around the world to make up its deficit.
This possibility must be ruled out in view of the expected
balance of supply and demand on a worldwide basis. By 1980, the
world will need one billion tons of raw steel production to
satisfy its demands. This will require a capacity of 1.1 billion
tons to assure the amount of production needed. At the present
time there are some 800 million tons of steel capacity throughout
the world, a fair portion of which is obsolete. Thus, by 1980,
300 million tons of additional capacity will be needed, and a
minimum of 250 million tons of existing capacity will have to
be replaced.
Currently, on the basis of a world survey taken in all of
the major steel producing countries and many of the minor ones,
it is evident that there are no plans to add 300 million tons
of capacity by 1980. The United States has virtually no
expansion plans on the drawing boards. The Soviet Union will
probably add about 50 million tons, while Japan will limit its
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VI - 11
expansion to 165 million tons, 30 million tons above its
current capacity, some of which will be located outside Japan
proper. Based on current plans, the European countries will
add only small tonnages: Great Britain will account for 5
million to 6 million tons; France will account for possibly
8 million tons; Western Germany will add 5 million tons, and
Italy will add 10 million tons. Some of the developing
countries, such as Spain and Brazil, will add substantial tonnages
in terms of their present capacities, but absolute figures will
be confined in both countries to a total of less than 20 million
tons. Therefore, given these expansion plans and the demand
for steel in the world through 1980, we face a substantial
shortage.
With this worldwide situation in steel, the United States
will not be able to import the increasing tonnages of steel
which it might need to satisfy its demand. Consequently, if
the marketplace is the determinant of steel pricing, costs can
be passed on. However, the limitation will be substitute
materials. If there are considerable substitutes used in place
of steel, they could take a substantial part of the steel market
on a permanent basis; witness the reinforced concrete in
construction. Therefore, the ability of the industry to pass on
an increased cost in a free market will not be limitless and, as
mentioned previously, if prices are controlled the ability to
pass on additional costs could be severely limited.
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VI - 12
In respect to imports it must be stressed that there are
pollution problems in the present and the future. The Japanese
have a particularly severe pollution problem to which they must
devote considerable attention in the next few years. This is
true to a lesser degree of other countries which have supplied
steel to the U.S. market. Without question, the solution of these
problems will be costly and will be reflected in the price of
steel. Consequently, the segment of increased costs due to pollu-
tion controls in the United States and the rest of the world may
produce a standoff as far as competition is concerned.
CAPITAL AVAILABILITY
(a) Alternates Available
It is the opinion expressed by industry representatives as
well as by those in the financial community that traditional
avenues of conventional financing will only be open to the
industry in limited amounts of take care of normal replacement
and modernization costs. The majority of companies in the Industr
are fully committed in their equity financing, and industry analys
are extremely cautious in elevating any long-term attractiveness
of steel stocks in the investment community. This is primarily du
to the low rate of return on investment. Improved pricing struc-
ture and rate of return could enhance this possible source
of financing.
There is however, another avenue open to the industry for
financing of pollution control and related investments. Indus-
trial Revenue Bond financing, a means of providing long-.term
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VI - 13
capital to industrial corporations at tax exempt rates, was
conceived in certain Southern states in the late 1930*s as a
means of attracting industry to predominately agricultural areas.
They remained a highly controversial and little-used means of
long-term financing until the Internal Revenue Service ruled
favorably on their tax-exempt status in 1957. Their use had
become so wide-spread by the mid 1960's that projections
of the U.S. Treasury Department indicated an annual tax
revenue loss to the Government of $200 million in 1970 rising
to an annual loss of $1.5 billion in 1975.
Substantial opposition to the use of tax exempt financing
as a substitute for traditional corporate debt securities
developed in the investment banking community, local governments,
Congress and the Treasury Department. Passage by Congress of
the 1968 Revenue and Expenditure Control Act resulted in effective
revocation of the tax exempt status of Industrial Revenue Bonds
and limiting such financing in general to $5 million or less.
Thus, by the end of 1969 this type of corporate financing had
largely disappeared.
The 1968 Act, however, contains an important exception
to the general restrictions imposed on Industrial Revenue Bonds
in which, regardless of size, substantially all of the proceeds
of the bond issue were to be used for air and water pollution
control facilities.
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VI - 14
In August 1972, the Internal Revenue Service ruled that
where all proceeds of an Industrial Revenue Bond issue were to
be used for air and water pollution control facilities, the
earnings of such an issue would be tax exempt.
One investment banking firm, Eastman Dillon, Union
Securities & Co., cites the following benefits from a Pollution
Control Industrial Revenue Bond issue (PCRB).
1. Money is borrowed at a tax-exempt rate, thereby
reducing interest costs from 1%70 to 270 below prevailing
corporate rates.
2. Property taxes based on a proportion of the value
of pollution control facilities may be avoided.
3. Investment tax credit or rapid amortization,
as well as interest deductions, are available just as if the
corporation had financed with its own debt.
4. In certain instances, previously constructed
facilities can be refinanced through the public authority at
a tax exempt rate.
5. Alternate sources of financing, seldom available
to corporations, may be used, such as insurance companies, trust
accounts and commercial banks that buy tax-exempt: bonds for
their own portfolios and for wealthy individuals.
6. The borrower has an ability to obtain 1007, of
financing as opposed to having to provide some form of equity.
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VI - 15
PCRB's are not without some disadvantages however. First
Boston Corporation, in a definitive document on tax exempt
pollution control financing, describes three of these:
1. Difficulty in the identification and segregation
of pollution control facilities. Conformance to Internal
Revenue Service guidelines in engineering cost estimates and
allocations of incremental costs are complex, and can require
considerable in-house education of the borrower's staff or
contractors.
2. Existing mortgage liens on partially completed
facilities may prove a hindrance and must be examined to
determine the legality and ease of conveyance of such facilities
to the financing municipality for ultimate sale or lease back
to the borrower.
3. Additional lead time in financing is needed over
conventional methods. There are fairly complex legal steps
required for issuance of the bonds, and if a ruling from the
Internal Revenue Service on compliance of the facilities within
its definitions is required, the issuer can expect a three
month delay until a ruling is received.
An estimate is that 120 days is required to complete a
PCRB issue if no ruling is required from the Internal Revenue
Service. If such a ruling is required, then an average lead
time of 215 days is suggested.
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VI - 16
On balance, however, PCRB's appear to be the current
solution to financing pollution control investment, in the
requisite plant and equipment devices.
(b) Pollution Control Financing
From an initial venture by U.S. Steel in 1971, financing
$5 million in air pollution control through the Allegheny County
Industrial Development Authority, PCRB's for all industries
totaling $84.8 million were issued in 1971, of which $7.4 million
was for the Iron and Steel Industry. In 1972, total issues
were $491.3 million, of which $145.9 million were for pollution
control in the Industry. Present estimates by bond underwriters
range from $500 to $750 million in 1973, $1 to $1.5 billion
in 1974 and upwards at $2 billion annually out at least into
the 1980's.
It is reasonable to assume that the Industry therefore, will
have a possible source for the financing, not only that portion
of pollution control costs to which this study has been directed,
but for the larger scope of total pollution control investment
costs required to meet the required levels over the next decade.
Parenthetically, in closing, a collateral matter is of
interest. In many discussions with Industry financial repre-
sentatives, frequent mention was made of new trends in the
Industry to seek alternative uses of capital which provide
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VI - 17
better potential in earnings and investment return than
basic steel production.
Baring a change in Internal Revenue Service regulations,
PCRB's can finance pollution control. At the present time,
non-taxable Pollution Control Revenue Bonds (PCRB) are being
used extensively by steel companies as a principal source of
capital for financing pollution abatement facilities. Bethlehem
Steel, for example, recently financed a pollution control
package for its Sparrows Point, Maryland plant with a $42 million
bond issue; Republic Steel has a $20 million issue planned for
later this year, and Wheeling-Pittsburgh has already used $30
million in PCRB financing and plans to use an additional $40
million over the next five years. There is no current legis-
lative upper limit on the amount of capital investment for
pollution control that can be financed by this means, which is
being counted on throughout the steel industry as a major
source of future capital for achieving compliance with federal,
state and local pollution control regulations.
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VI - 18
The major current attraction of PCRB financing from the
Steel Industry's standpoint is the relatively low rate of interest
involved, typified by the Bethlehem issue's 6% rate, which
compared to a prime lending rate of 9.7570. This particular
saving must be viewed as extraordinary reflecting the recent
upward spiral in lending rates. However, non-taxable bonds
traditionally carry a lower interest obligation than comparable
credits sold in the taxable market, the extent of the saving
determined by prevailing money market conditions. Interest
considerations, therefore, will continue to favor the Industry's
use of PCRB financing as a means of raising capital for pollution
control.
Another factor favoring the use of PCRB is the existence
of the corporate income tax and the deductibility of interest
expenses in calculating steel company taxable income. Because
of the tax treatment accorded interest, the debt incurred by
using PCRB's is usually cheaper than any form of equity, particularly
common or perferred stock. The poor market performance of
common steel equities over the past decade tends to preclude the
possibility of extensive new financing by this means, considering
the dilution of commong share earnings and the additional
downward bias to common stock prices that this would entail.
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VI - 19
Further, the risk to shareholders of common steel equities is
less with PCRB debt financing than it would be with additional
preferred stock issued involving dividend expenses that are non-
deductibility of interest expenses reduces the after-tax cost
of debt and the size of the fixed burden borne by the common
shareholder, PCRB's constitute a preferred method of steel
financing, particularly in view of the need to improve the
stockmarket performance of common steel equities.
The remaining alternative for financing the capital
costs of pollution control, namely, retained earnings, cannot
be given serious consideration in view of the industry's profit
performance in recent years. Since 1964, steel industry cash
flows (i.e., profits after taxes, plus depreciation and changes
in reserves for future federal income taxes, minus dividend
payments) have consistently lagged behind capital expenditure
requirements, resulting in a sharp rise in the industry's long-
term debt position. The need for continued plant and equipment
replacement and a substantial addition to steel capacity, which
j.
is detailed later, is expected to get first call on internally
generated capital, particularly if low-interest PCRB's are
available to finance pollution control.
"See Supplementary Statement by BAH.
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VI - 20
In view of the reliance to be placed in PCRB financing, the
question naturally arises as to whether this source of capital
will be available throughout the period to 1983, when Level II
compliance must be achieved. The primary reason PCRB's are
favorably regarded by investors is their tax-exempt status
(which accounts for their low interest charged). Consideration
must be given to the very real possibility that this tax exemptior
may be suspended by a tax reform program aimed at closing "tax
loopholes," in which case the Steel Industry's ability to finance
pollution control would be seriously jeopardized.
Assuming that PCRB financing is available through 1983, the
problem then becomes the resultant debt burden to be carried by
steel companies,and the likelihood that it will eventually act
to seriously impede their ability to attract capital for
esstential purposes other than pollution control, particuarly
for the replacement and expansion of capacity. The fact that
PCRB debt financing is the clearly preferable means of paying for
mandated pollution control expenditures restricts the control
over a steel company's capital structure normally exerted by
its management in selecting the amounts of debt and equity to
be employed. This poses a difficulty in terms of management's
ability to hold the proportions of debt and equity within the
limits of its own risk preferences and, more importantly, within
the limits regarded as prudent by lenders.
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VI - 21
Debt limitations are usually established based on the
degree of protection particular assets afforded lenders, and
the amount of earnings expected to be available to repay interest
and principal. Generally speaking, lending agencies have
informally established a ratio of debt to total invested capital
of 30% as an appropriate upper level for the Steel Industry,
and unfortunately, given the Industry's heavy use of debt
financing in recent years, it has already reached its debt
limitation (i.e., 30.2% of the Industry's total capital is
currently from debt and for some companies this limit has been
exceeded substantially.) It is true that lenders have been
somewhat flexible in their consideration of debt financing
by means of PCRB's, given the low interest charges, as well
as their generally favorable disposition to the objective of
curtailing environmental pollution. However, it is doubtful
that this flexibility will continue indefinitely, particularly
in view of the sharp increase anticipated in PCRB financing
to meet EPA standards over the next ten years. The figure will
run into billions of dollars and will likely affect the
availability of investment capital for other purposes.
PRODUCTION EFFECTS
(a) Effect on
Industry
In the study of "Economic Impact of Pollution Control on
the Steel Industry," prepared for the Council for Environmental
Quality by Booz, Allen & Hamilton in 1972, the statement was
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VI - 22
made that steel demand is relatively inelastic to price. We
believe that insofar as prices are related to pollution control
costs, this will be particularly true in the future.
The assumption was made earlier in this study that the
most probable effect of costs of pollution control will be to
raise steel prices sufficiently to cover these costs, while
retaining profits at their historical level. If this effect of
pollution control costs were unique to the U.S. Iron and Steel
Industry, the probable result would be that substitutions of
other materials in place of steel, and imports of foreign steel
would cut substantially into the markets for steel from U.S.
mills. However, all indications are that the industries produc-
ing potential substitute materials such as aluminum, will also
be faced with increasing costs and prices due to pollution
control costs, while plastics are already faced with increasing
new materials costs. Similarly, foreign steel producers are
being faced with an increasing requirement for pollution control
within their countries. England, Germany and Japan are already
well advanced in pollution control techniques, and other
countries are following. Costs of foreign steels will, therefore,
in general be faced with similar increases as are required
for U.S. steels. Those countries which do not require pollution
controls, may possibly be faced with import duties which will
penalize polluting mills to prevent them from taking unfair
advantage over the mills that do practice pollution control.
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VI - 23
We do not believe, therefore, that there will be any sub-
stantial reduction in steel demands, or of production require-
ments for U.S. steel mills due to increased costs for pollution
control.
Production curtailments, where they take place, will be
caused by another factor, the comparative economics of
production in one mill versus another. We have previously
segmented the integrated steel mills into those which continue
to depend partially or entirely on obsolete processes or
equipment, and those which are utilizing modern process and
equipment for all operations. To this factor of modernity
must be added other factors involving poor location with respect
to raw materials and markets, poor labor climate, and high
costs or unavailability of utilities and services.
To the degree that pollution control related curtailments
may take place in individual plants, they will be involved
with departments or equipment which have become obsolete, and
which cannot be continued to be operated without expensive
modifications and installation of pollution control equipment.
For example, open hearth shops may be shut down where alternate
steelmaking equipment is available, and small, uneconomical
blast furnaces may be shut down if larger units are available.
In some isolated cases, the primary operations may be shut
down, and only the finishing departments operated with steel
brought in from other plants, or some finishing operations
may be shut down, and only part or all of the primary operations
continuing to be operated.
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VI - 24
An important problem facing the Steel Industry is related
to selective curtailments, and involves premature obsolescence
of plants and equipment. Historically the Industry has spent
vast sums of money for capital expenditures for increased capa-
city, modernization, replacement and obsolescence. These costs
were shown in Exhibit III-3 for the past ten years. In this period
the capital expenditures have averaged about 15% of net fixed
assets in the industry although they have been under 10% in
recent years.
In many plants equipment is currently being used which
will ultimately be scheduled for replacement in future years.
However, the requirements for installation of air and water
pollution controls, and at a later date OSHA controls, will
involve extensive modifications to existing equipment to
accommodate the controls. In some cases complete rebuilding
will be necessary for this purpose. Economically, these pro-
grams are often unsound since even after extensive modificaticn
and rebuilding, the equipment is still of older, sometimes
obsolete design, and with lower productive capacity. Therefore,
in many cases the steel companies may elect to prematurely replace
the equipment, resulting in capital expenditures some years
ahead of the normal replacement schedule. This premature ob-
solescence requires unusual amounts of capital in addition to
regularly scheduled capital expenditures for increased capacity
and replacement, and for pollution control.
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VI - 25
(b) Plant Closings
There are several steel mills located in various parts of
the United States which have for many years been regarded as
marginal operations, or even as losing operations. These mills
have been continued in operation as long as they could be main-
tained without expending large sums of money for modernization,
replacement or for nonproductive requirements. Once faced with
the necessity for making large scale investments for pollution
control, with the probability of having to replace or rebuild
equipment to accommodate controls, the parent companies are faced
with the decision of whether to spend money in the marginal plant,
or to shut down part or all of the operations and transfer
production to more profitable plants. In view of the limited
amount of capital which many companies have available, they
may be forced to make an unpleasant decision to close down
part or all facilities in an operating plant, and to spend the
available funds to increase capacity at a more profitable plant.
There is no special formula for identifying situations
where potential curtailments or closures may take place,
particularly since operating cost and earning information for
individual plants have not been available. The assessment
regarding potential plant curtailments or closures had to be
made by analyzing each of the plants covered by this study,
and identifying those which have been considered as marginal
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or obsolete operations by their parent companies, Some of
these plants have been identified in prior reports used as
reference material for this study, and in news media in feature
articles and also used as references for this study. However,
because of the confidential nature of some of the information
which we received from industry sources, and because of the
potential impact on the company's standing in the financial
community and the economic outlook of the communities where
marginal mills are located, we will not specifically name or
otherwise identify such plants. Instead our discussion will
be limited to the factors which may result in curtailment or
closure decisions, and the national effect of such action.
In the initial screening of the 63 integrated steel
plants, one-third were identified as operations which were
known to be marginal to some degree with regard to production
costs, quality, and ability to produce products to meet current
market needs. In most cases these plants were old, were still
operating with processes and equipment which may be considered
obsolete, had not been provided with modern equipment and
processes, and in some cases already had some of the operations
shut-down. At least two of the plants were poorly located with
regard to markets, as they exist today, for the products
being made.
-------
VI - 27
A second screening of these marginal plants narrowed
the list to nine plants which were considered as prime
candidates for closure or curtailment of a significant portion
of their operations. In addition, two other plants are known
to have already been largely shut down and have been publicized
in the news media.
Factors which were considered in the final analysis included
the present condition and degree of modernization of the mills in
question, the attitude of the parent companies as reflected by
the expenditures made in recent years to expand capacity or to
modernize the facilities, and public announcements made by some
of the steel companies with regard to the future of these plants.
In some cases these conditions are so well known in the
communities involved, that local efforts are being made to
influence the companies to maintain operations at the plants
involved.
Of the 11 plants involved, seven are in the primary steel
production area in the eastern Great Lakes-Ohio River part of
the country; two are in the south, and two are west of the
Mississippi River. Two are limited operation-type plants, while
the rest all produce finished products. Total employment in the
11 plants is about 33,000 or approximately 7% of the total Steel
Industry employment. About 30,000 of these workers are in the
plants located in the East-Central steel district. The plants
-------
VI - 2.8
are fairly well disbursed except for a principal group located
in one district. This group, containing some 18,000 workers, has
long been considered a problem for the parent companies, and for
the district in which they are located.
The mills which may be candidates for shut-down decisions
or curtailment of operations have a combined productive capacity
of approximately five percent of the industry capacity, or about
8 million tons of raw steel per year. To maintain present levels
of production, the capacities displaced by shutting down any
of these mills will have to be taken up by increasing capacities
of other mills producing similar products.
Generally it cannot be stated that the problems and costs
of pollution control are the only, or even the principal reasons
for the potential curtailments or closures of these plants. They
have had a history of problems and were considered marginal
operations before the impact of pollution control was felt.
Rather it can be stated that pollution control is the final blow,
like the "straw that broke the camel's back." It is entirely
probable that some of those plants would ultimately have been
partially or entirely closed, even without pollution control
requirements, while others may have continued as long as the
high demand for steel continued. In some cases, community
-------
VI - 29
pressures undoubtedly have contributed to the company decisions
to keep the plants in operation. However, faced with the poten-
tial capital costs for air and water pollution control, the
premature obsolescence costs which will accompany pollution
control requirements, and the expected increases in operating
costs which will result, we believe that early decisions may
made by several steel companies to shut down or drastically
curtail operations at most of these marginal plants.
(c) Employment Effects
The potential gross displacement of workers has been esti-
mated to be as high as approximately 33,000 of which about 25,000
are wage earners, and the balance are salaried. Approximately
one-third of the wage earners represent unskilled labor, and
one-third will represent semi-skilled labor, both of which
require retraining for replacement in other industries. The
remaining third represents skilled and specialized labor
categories, such as crane operators, maintenance men, craftsmen,
melters, mill operators, etc., who can be placed in other plants
in the Steel Industry or in other industries without retraining.
The salaried workers, covering supervisors, clerical,
technical and management classifications can, in many cases, be
reemployed in the industry or in other industries without
extensive retraining.
-------
VI - 30
The losses in productive capacity which may result from
the decision will probably be made up by increasing capacity
and rate of operations at other plants which produce the same
products. Where the plants which are closed are located near
other steel mills, at least part of the workers who may be
displaced will be re-employed in the other plants. In general,
experience in other industries where plant closures have taken
place has resulted in about half of the displaced workers, or
their equivalent in numbers, being re-employed in the industry.
We believe that this will take place in the Steel Industry.
However, because of the fact that some of the plants are isolated
or located in small communities, there will be local unemployment
problems which will result from individual plant closures. The
greatest problem will occur in the steel district previously
described where several mills potentiall may close or
curtail operations.
The net potential unemployment, requiring placement
outside the Steel Industry, is therefore estimated at as much
as 16,500. It is believed that this will be concentrated among
the unskilled and semi-skilled wage earners, and the clerical
part of the salaried staffs.
-------
VI - 3i
(d) Community Effects
As long as the productive output of the Steel Industry
continues to grow, the effect on suppliers to the Industry will
remain unchanged on a national basis. The principal raw
materials, i.e., iron ore, coal, scrap, limestone and ferro-
alloys, will continue to be used in about the same or greater
total quantities, and principal supplies such as fuels,
refractories, lubricants, and replacement parts will also continue
to be used at or greater than present rates.
However, in local areas where mills close, there will
undoubtedly be local effects on suppliers of raw materials
and operating supplies, which may cause some companies to close
down or curtail operations. This will be particularly true in
the most heavily impacted district previously described. In
those cases there will be secondary local unemployment effects
from suppliers being forced to curtail operations.
Other effects which will be felt in communities where
mills which may close are located, will involve the individuals
and companies which service the mills and their employees,
and companies which were established near supplies of steel to
operate industries fabricating steel into finished products.
In severe cases, relocations of some of these secondary companies
may occur, resulting in an increased impact on the community.
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VI - 32
(e) Balance of Trade
As previously shown in Exhibit II-6, the United States has
changed from a steel exporter to a steel importer in the past
15 years. During that period the balance shifted from 4.2
million tons net exports in 1957, to 15.9 million tons net
imports in 1972.
We have previously observed, that the growth in steel
demand will require an increase in net imports, even if production
capacity is increased in some relationship to growth in demand.
(Exhibit II-5). However, if the growth in U.S. capacity does
not keep up with demands, the net imports will have to increase,
provided that foreign steel is available. Such increases,
which could raise net imports as much as 50 percent or more in
the next decade, will have a direct effect on the present
unfavorable balance of trade in steel products, and consequently
on our entire economy. This adds another factor to the need
for providing capital for expansion of steel productive capacity
in this country.
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ENVIRONMENTAL PROTECTION AGENCY
EFFECT OF WATER POLLUTION CONTROL COST FOR PRIMARY OPERATIONS
ONLY ON COST OF FINISHED STEEL
Total Production
Year 1
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Notes:
(Million Tons)
taw Stepl Finished Ste
150
145
150
150
150
150
150
150
150
150
150
(1)
(2)
(3)
(4)
103
100
103
103
103
103
103
103
103
103
103
(1973 Dollars) (Based on 1973 Steel
Integrated Mill
Production Low Cost Estimate
Capacity)
High Cost Estimate
(Million Tons) Capital Cost Cumulative Operating Pollution Capital Cost Cumulative Operating Pollution
P! Rau c,r,,f>-\ Fim^hf.H srf>pl npr Ypar Canital Cost Cost per Year Cost per Ton per Year Capital Cost Cost per Year Cost per Ton
135
131
135
135
135
135
135
135
135
135
135
(Millions) (Millions) (Millions)
93 $29 $ 29 $ 8
90 29 58 16
93 29 87 24
93 29 116 32
93 29 145 40
93 22 167 47
93 20 187 54
93 20 207 61
93 20 227 68
93 20 247 75
93 20 267 82
Integrated mill production assumed to be 907, of total mill production.
Finished steel assumed to be 69% of raw steel.
Low cost estimate from Cyrus Wm. Rice Report.
High cost estimate from AISI Industry Survey.
(Millions) (Millions) (Millions)
$0.09 $100 $ 100 ? 33 $0.35
0.18 100 200 67 0.74
0.26 100 300 100 1.08
0.34 100 400 133 1.43
0.43 100 500 167 1.80
0.51 150 650 217 2.34
0.58 150 800 267 2.87
0.66 150 950 317 3.40
0 73 150 1,100 367 3.95
0.81 150 1,250 417 4.50
0 88 100 1,350 450 5.04
M
X
M
w
M
1— '
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ENVIRONMENTAL PROTECTION AGENCY
ESTIMATED COST OF WATER POLLUTION CONTROL
FOR NEW STEEL CAPACITY
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Capacity
Increase
(Million Tons
Finished Steel)
0
0
0
3
2
4
2
4
2
4
4
Cumu 1 3 1 i ve
Capacity
Increase
(Million Tons
Finished Steel)
0
0
0
3
5
9
11
15
17
21
25
Cost Pollution
Control
Facilities
(Millions)
0
0
0
$ 80(A)
100(B)
200 (B)
100(B)
200(B)
100 (B)
200 (B)
200(B)
Cumulat ive
Cost Pollution
Control
Facilit ies
(Millions)
0
0
0
$ 80
180
380
480
680
780
980
1,180
Cumulative Cost
Pollution Control
Facilities-Primary
Operations Only
(Millions)
0
0
0
S 29
65
137
173
245
281
353
414
Notes: (A) The first 3 million tons of increased capacity are not based
on building new plants, but in up-dating existing facilities.
(B) Based on cost of $500 per annual ton finished steel capacity for
new construction, plus $50 per ton for pollution control.
Annual Cost
Operation
Pollution Control
(Millions)
0
0
0
$ 27
60
126
155
225
258
324
390
Annual Cost
Operation
Pollution Control-
Primarv Operations
(Millions)
0
0
0
$ 10
22
46
58
81
93
117
141
Annual Cost
Operation Water
Pollution Control-
Priirarv Operations
(Millions)
0
0
0
$ 6.0
13.5
2F.5
34.0
51.0
58.5
73.5
88.5
W
X
ffi
M
H
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ENVIRONMENTAL PROTECTION AGENCY
EFFECT OF WATER POLLUTION CONTROL COST FOR PRIMARY
OPERATIONS ONLY ON COST OF FINISHED STEEL
Total Production
(Million Tons)
Year Raw Steel Finished Steel Raw
(1973 DOLLARS)
(BASED ON INCLUDING COSTS OF ADDITIONAL STEEL CAPACITY)
Integrated Mill Low Cost Estimate High Cost Estimate
(Million Tons) Car
Steel
Finished Steel l
Jital Cost Cumulative Operating Pollution Capital Cost Cumulative Operating Pollution
)er Year Capital Cost Cost per Year Cost per Ton per Year Capital Cost Cost per Year Cost per Ton
(Millions) (Millions) (Millions) (Millions) (Millions) (Millions)
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Notes :
150
145
149
154
157
163
165
171
174
180
185
(1)
(2)
(3)
(4)
103
100
103
106
108
112
114
118
120
124
128
135
130
135
139
141
146
149
154
157
162
167
93
90
93
96
97
101
103
106
108
112
115
Integrated mill production assumed to be 90/i of
Finished steel assumed to be 69% of raw steel.
Low cost estimate from Cyrus Wm. Rice Report.
High cost estimate from AISI Industry Survey.
$29
29
29
46
41
65
42
63
42
63
63
total
$ 29 $ 8 $0.09 $100 $ 100 $ 33 $0.35
58 16 0.18 100 200 67 0.74
87 24 0.26 100 300 100 1.08
133 38 0.40 118 418 139 1.45
174 44 0.45 123 541 180 1.86
239 65.0 0.64 245 786 262 2.60
281 86.1 0.84 223 1,009 336 3.27
344 107.2 1.01 245 1,254 418 3.95
386 128.3 1.19 223 1,477 492 4.55
449 149.4 1.33 245 1,722 574 5.12
512 170.5 1.48 145 1,867 622 5.41
mill production.
M
X
PC
ta
M
M
LO
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ENVIRONMENTAL PROTECTION AGENCY
TOTAL ESTIMATED EFFECT OF
AIR AND WATER POLLUTION CONTROL COST
ON PRICE OF FINISHED STEEL IN 1983
(Millions of 1973 Dollars)
Low Estimate
Description of
Pollution Control Requirement
Air and Water Pollution Controls Prior
to 1973
Water Pollution Controls (Existing
1973 - 1983 Facilities)
Air Pollution Controls (Existing
1973 - 1983 Facilities)
Totals (Existing Facilities)
Air and Water Pollution Controls
for New Facilities - to 1983
Totals (Existing and New Facilities)
Estimated
Total
Capital Cost
$1,365
1,468
1.800
$4.633
$1,180
$5.813
Estimated
Annual
Operating Cost
$ 455
482
600
$1.537
$ 393
$JU930
Estimated
Cost per Ton
Finished Steel
$ 4.41
4.68
$14.91
$15.70 *
$15.07
Estimated
Total
Capital Cost
$1,365
4,465
2.400
$8.230
$1,180
$9^410
Hish Estimate
Estimated
Annual
Operating Cost
$ 455
1,490
800
$2.745
$ 393
$3^138
Estimated
Cost per Ton
Finished Steel
$ 4.41
14.48
7.76
$26.62
$15.70
$24.50
Note: *For 25 million tons or new steel capacity.
X
H
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VII - LIMITS OF THE ANALYSIS
INDUSTRY SEGMENTATION
Attention has previously been called to the fact that
this study covers only water pollution control in the primary
operations of the integrated Iron and Steel Industry. This
portion of the costs represents only about 15 to 20 percent
of the total air and water pollution control expenditures
which remain to be carried out in the entire Industry, and
only about one-fourth to one-fifth of the total water pollution
control costs for the Industry. This limitation in industry
coverage has greatly limited the effectiveness of the study,
since it is almost impossible to isolate only a part of the
operations in the plants, and attempt to analyze the effect
of water pollution control for so small a portion of the total
pollution control cost, and then relate it to the entire plant.
RANGE OF
ERROR
The primary input to this study was the "Effluent Guidelines
Study" prepared by Cyrus Wm. Rice Division for EPA. The capital
and operating cost data prepared by Rice have been revised four
times in the course of the study. Furthermore, they are
considered by almost all sources who have reviewed their report
-------
VII - 2
as highly questionable with regard to accuracy and completeness.
The general belief, in which we concur, is that the costs
are very low. Some of these problems are caused by recommen-
dation of unrealistic standards which we do not believe can
be met within the limitations of Levels I and II guidelines.
The low estimates of capital cost are, we believe, caused by
not recognizing that it is not possible to install the water
pollution controls which are required without major replacements
or rebuilding of facilities in which these controls are located.
As a means of establishing a more reasonable range of
cost data for water pollution control, we have used figures
developed by the Environmental Committee of the American Iron
and Steel Institute. These figures are almost five times the
totals estimated by Rice, and while possibly on the high side,
do establish a range within which the cost effects could be
estimated. However, it should be noted that the accuracy of
the figures used in this report has been subject to question
from the beginning, and at best only provide a range of order-
of-magnitude numbers.
CRITICAL ASSUMPTIONS
The most critical assumption which has been made is that
the Steel Industry can actually achieve the effluent guidelines
at the costs proposed by Rice. At this time the Environmental
-------
VII - 3
Committee of AISI has stated that the guidelines cannot be
met in the time periods established with known technology,
and in fact, based their own estimates on levels that they
believed could be achieved. If entirely new technology has
to be developed to achieve some of the proposed effluent
requirements, the control costs could be far in excess of those
estimated, even by the Industry.
REMAINING QUESTIONS
Until the balance of the Industry is studied, and control
guidelines and costs are established, the overall impact of
water pollution controls on the Industry cannot be accurately
assessed. Additionally, since in this Industry the costs and
problems of air and water pollution control are inseparable,
and are completely related, any realistic analysis must take
into account the total pollution control problem and costs.
-------
SUPPLEMENT
FINAL REPORT
Analysis of the Ability of the U. S.
Steel Industry to Finance Pollution
Control Equipment
ENVIRONMENTAL PROTECTION AGENCY
Washington, D. C.
January 9, 19.74
-------
TABLE OF CONTENTS
Page
Number
LETTER OF TRANSMITTAL
I. INTRODUCTION
II. STEEL INDUSTRY CAPITAL EXPENDITURE
REQUIREMENTS
III. FINANCING STEEL INDUSTRY POLLUTION
ABATEMENT CAPITAL EXPENDITURES 15
-------
INDEX OF EXHIBITS
Following
Page
I. ESTIMATED SUSTAINABLE ANNUAL
DOMESTIC STEEL SHIPMENT
CAPACITY - 1973
II. PROJECTED NET STEEL SHIPMENTS
1973 - 1983
III. CAPITAL INVESTMENT REQUIRED
TO EXPAND CAPACITY 1973-1983
IV. TOTAL CAPITAL EXPENDITURES FOR
NET CAPACITY 1973-1983
V. AIR AND WATER POLLUTION ABATEMENT
CAPITAL INVESTMENT REQUIREMENTS
FOR EXISTING CAPACITY 1973-1983
VI. CAPITAL INVESTMENT REQUIRED TO
REPLACE CAPACITY SHUT DOWN AS A
RESULT OF POLLUTION ABATEMENT COSTS 11
VII. TOTAL CAPITAL EXPENDITURES FOR
INTEGRATED STEEL PRODUCERS 1973-1983 11
VIII. TOTAL NET CASH OUTLAYS FOR
INTEGRATED STEEL PRODUCERS 1973-1983 12
IX. STEEL INDUSTRY FUNDS AVAILABLE FOR
INVESTMENT ASSUMING CONSTANT PRICES
AND NO CAPACITY INCREASE 1973-1983 17
-------
INDEX OF EXHIBITS
(Continued)
Following
Page
X. FINANCING POLLUTION ABATEMENT
INVESTMENT ASSUMING NO CAPACITY
EXPANSION AND NO ACCELERATED
FACILITIES REPLACEMENT 1973-1983 20
XL NET FUNDS AVAILABLE FOR INVESTMENT
FROM INCREASED OUTPUT 1973-1983 21
XII. FINANCING CAPACITY EXPANSION WITH
NO REQUIREMENT FOR POLLUTION
CONTROL 1973-1983 22
XIII. ADDITIONAL FUNDS AVAILABLE FOR
INVESTMENT ASSUMING A STEEL PRICE
INCREASE OF $10 PER TON 1973-1983 24
XIV. FINANCING TOTAL POTENTIAL STEEL
INDUSTRY CAPITAL OUTLAYS ASSUMING
A PRICE INCREASE 1973-1983 25
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I. INTRODUCTION
-------
I. INTRODUCTION
This report contains an evaluation of the ability of the U. S.
Steel industry to obtain the capital required to meet pollution
abatement and other capital needs over the period 1973-1983.
The following specific subjects are addressed in the body of the
report:
Steel industry capital expenditure requirements
Capacity modernization and replacement
Capacity expansion
Pollution abatement
Steel industry earnings and cash flow
Steel industry capital access
Internally generated funds
Access to debt markets
Access to equity markets
We wish to acknowledge our appreciation to the staff of
A. T. Kearney for their cooperation and assistance in preparing
this report.
-1-
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II. STEEL INDUSTRY CAPITAL
EXPENDITURE REQUIREMENTS
-------
II. STEEL INDUSTRY CAPITAL
EXPENDITURE REQUIREMENTS
This chapter contains estimates of steel industry capital
expenditure requirements over the period 1973-1983.
The future capital expenditures required by the domestic
steel industry can be placed into the following three categories:
Expenditures for capacity modernization and
replacement
Expenditures to expand output capacity
Pollution abatement expenditures
Each category of expenditures is discussed in turn below.
1. EXPENDITURES FOR CAPACITY MODERNIZATION
AND REPLACEMENT
The steel industry, as is the case in all manufacturing in-
dustries, must maintain a minimum annual level of capital expendi-
tures to modernize and replace obsolete and worn out production
facilities. If such investment does not take place, productive
capacity will decrease over time as over-age facilities are phased
out of production without replacement.
-2-
-------
In a report prepared by Booz, Allen & Hamilton Inc. for the
Council on Environmental Quality in 1972 on the economic impact
of pollution control costs on the steel industry, minimum annual
expenditures for capacity modernization were estimated to be
approximately $1. 375 billion. This same estimate is used for
purposes of this study.
2. EXPENDITURES TO EXPAND OUTPUT CAPACITY
The level of capital expenditures required to increase pro-
ductive steel capacity depends on the output capability of presently
existing capacity, future demand for steel, and the cost of new
capacity.
(1) Current Productive Capacity
As has been pointed out in several previous studies,
domestic steelmaking capacity has been extremely difficult
to estimate. This difficulty arises from the fact that steel-
making capacity is not systematically reported by domestic
producers.
The events of 1973, however, appear to provide a
reasonably good basis for estimating capacity. Steel demand
since January, 1973 has been running at record levels with
•
consumption for the year expected to reach more than 120
-3-
-------
million tons of finished steel. Raw steel production during
the year has peaked at an annual rate of 155-156 million tons
in the face of increasing producer backlogs, with some pro-
ducers reporting their order books filled through the first
quarter of 1974. Net finished steel shipments for 1973 are
expected to be approximately 109 million tons with about 103
million tons representing current year production and the
balance representing producer inventory withdrawals. The
above events suggest that domestic raw steel production
capacity is about 155 million tons and capacity to produce
and ship finished steel on a sustained basis is about 103
million tons. Exhibit I, following this page, presents a
summary of the apparent relationships between raw steel
production capacity and sustainable finished steel shipment
capacity during 1973. It should be noted that the differential
between finished steel production capacity (107 million tons)
and sustainable annual steel shipment capacity (103 million
tons) is smaller than traditional methods of computing ship-
ment capacity would indicate. Traditional practice would
require the provision of approximately 9 million tons of
finishing capacity, equal to approximately 6% of raw steel
capacity to accommodate demand peaking and product mix
changes. Developments during the current year suggest
-4-
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that during very strong demand periods the pattern of
demand tends to smooth with customers taking all of the
steel they can get, whenever they can get it.
For purpose of further analysis, current sustainable
domestic steel shipment capacity will be considered to be
103 million tons per year.
(2) Steel Consumption and Shipments
Exhibit II, following this page, contains baseline
projections of finished steel consumption, net imports and
shipments. The projection of finished steel consumption
for the period 1974-1983 has been prepared by A. T.
Kearney, Inc. Projected steel shipments have been derived
*
by estimating the potential level of net finished steel imports.
The annual level of net imports indicated (13 million -
14 million tons) is considerably lower than that experienced
in prior years. There are two basic reasons for postulating
lower future import levels:
Steel demand in the current year is strong
throughout the world and has placed significant
pressure on productive capacity in most producing
nations. This pressure on world-wide capacity
is expected to continue for the foreseeable
future as currently known capacity expension
plans are not expected to keep pace with growth
-5-
-------
in world-wide demand. The expected tight
supply-demand situation in world-wide markets
should cause import pressure on U. S. markets,
which is greatest in periods of world-wide excess
capacity, to ease considerably.
The devaluations of the dollar have improved
the competitive position of U. S. producers in
relation to major foreign producers.
To achieve the level of shipments indicated, additional
finished steel production capacity of about 9 million tons
would be required by 1978, increasing to a total of about
26 million tons by 1983. In addition, continued capacity
expansion at a rate of 2 million tons per year after 1983
has been used as a basis for estimating capital expenditures
for the period 1980-1983 with an-assumed four year con-
struction lead time.
There remains the question of whether producers will
be motivated to expand capacity in view of current industry
profit levels. Given the operation of a free market and the
expected tight supply-demand balance in world markets, it
would appear, conceptually, that prices and associated
profits should increase to a level to make capacity expan-
sion attractive. This specific subject is explored in greater
detail in Chapter III of this report.
-6-
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(3) The Cost of New Capacity
The Association of Iron and Steel Engineers (AISE)
and the American Iron and Steel Institute estimate that the
cost of fully integrated new steel capacity is approximately
$500 per annual ton, before allowing for any additional costs
related to pollution abatement requirements. For some
portion of the incremental capacity to be installed, the cost
will be less than $500 per ton as capacity can be increased
by rounding out existing facilities. According to data
supplied by steel industry sources during a recent study
completed by Booz, Allen for the Council on Environmental
Quality, the extent of capacity expansion achievable through
such practices is limited, although not known with any pre-
cision. Accordingly, a sliding scale has been applied to
estimate the cost of additional capacity as follows:
Cost Capacity
per Ton Increment
$200 1st million tons
$275 2nd million tons
$350 3rd million tons
$425 4th million tons
$500 All additional capacity
increments
The above scale was developed and used in the CEQ study
mentioned above and has been used for estimating purposes
in this study.
-7-
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Provision must be made for the cost of installing
pollution abatement equipment on new capacity. A. T.
Kearney, Inc. has estimated the cost of such equipment
installed on new fully integrated capacity to be approximately
$50 per annual ton of capacity. This estimate has been
adopted for this study. Where incremental capacity is
priced at less than $500 per ton (see the sliding scale above)
pollution abatement cost per ton is assumed to be equal to
10 percent of the basic capacity cost.
(4) Capital Investment for New Capacity
Exhibit III, following this page, shows estimated annual
capital investment required for additional capacity (excluding
pollution abatement) over the period 1973-1933. The esti-
mated cost per ton for new capacity is based upon the sliding
scale discussed above. Expenditure patterns are based on
the following assumptions:
Capacity must be in place at the end of the year
prior to operation
Construction lead times will be:
First three million tons - 2 years
Fourth and fifth million tons - 3 years
All additional tonnage - 4 years
-8-
-------
Total capital expenditures for new capacity, including
pollution abatement expenditures, are shown on Exhibit IV,
following this page. Over the period 1973-1983 total expendi-
tures for steel industry capacity expansion should come to
approximately $16. 2 billion, including expenditures for
capacity to become operational over the period 1984-1987
at the rate of 2 million tons per year.
3- POLLUTION ABATEMENT EXPENDITURES
Capital expenditures related to pollution abatement can be
placed in two categories.
Expenditures to install air and water pollution
abatement equipment
Expenditures to replace capacity, which would
normally remain operational, but which cannot
economically be cleaned up
(1) Expenditures to Install Pollution Abatement Equipment
Exhibit V, following Exhibit IV, shows estimated high
and low air and water pollution abatement capital expendi-
tures covering existing capacity for the period 1973-1983.
Estimated total expenditures have been provided by A. T.
Kearney, Inc. The annual pattern of expenditures is based
-9-
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upon the following:
Air pollution abatement expenditures must be
completed by the end of 1976 to meet compliance
deadlines
Water pollution abatement expenditures have
been spread according to a pattern of outlays
developed by A. T. Kearney (Exhibit VI-1 of
the A. T. Kearney Report to EPA).
Total estimated pollution abatement capital expenditures
for the period 1973-1983 range from $3. 4 billion to $6. 9
billion.
(2) Expenditures to Replace Capacity Shut Down as a
Result of Pollution Abatement Requirements
A. T. Kearney, Inc. estimates that eleven plants
representing approximately 5. 6 million tons of finished
steel production capacity may be shut down, due at least
partially to pollution abatement costs. These shutdowns
may be regarded as being accelerated by pollution abate-
ment requirements as the plants would likely continue to
operate for several years were pollution abatement require-
ments not imposed.
The estimated annual capital investment required to
replace the 5. 6 million tons of capacity lost is $2. 5 billion
-10-
-------
as indicated to Exhibit VI, following this page. The follow-
ing assumptions were made in preparing this estimate.
Capacity to be shut down will be taken out of
service by the end of 1976 because of pollution
abatement compliance deadlines. Replacement
capacity must be operational by the beginning
of 1977.
The cost of replacement capacity will be $450
per ton
Plants to be replaced are primarily
integrated. They will be replaced with
integrated plants.
Ore extraction and transportation facilities
will not require replacement, thus reducing
the cost per ton of replacement capacity
from $500 to $450 per ton.
Pollution abatement capital expenditure require-
ments for replacement capacity are not included in
the estimates shown on Exhibit V as they include
the cost of cleaning up the 5. 6 million tons of
capacity vulnerable to shutdown.
4. TOTAL CAPITAL EXPENDITURE REQUIREMENTS
Exhibit VII, following Exhibit VI, shows total steel industry
capital expenditure requirements. It should be noted that the totals
contained in previous Exhibits have been reduced by 10 percent to
facilitate financial analysis. Steel industry financial statistics as
reported by the AISI cover integrated steel producers accounting
for approximately 90 percent of total domestic output. Capital
-11-
-------
investment estimates have accordingly been adjusted for compati-
bility with reported industry financial data.
Over the period 1973-1983 integrated steel producers will
require investments of $18 billion to $21 billion to maintain exist-
ing capacity and meet pollution abatement requirements. If ex-
penditures are to be made to replace facilities potentially shut
down by pollution abatement and to expand capacity, total outlays
would increase to $35 billion - $38 billion.
5. NET INCREMENTAL CASH OUTLAYS
For purposes of the financial analysis contained in the
following chapter, the capital expenditures shown on Exhibit VII
must be adjusted to reflect net incremental cash outlays by
integrated producers. The adjusted expenditures are shown in
Exhibit VIII, following this page. The expenditures shown reflect
adjustments for the 7 percent investment tax credit which has
been assumed to be operational through 1983 and for depreciation,
computed on a 15 year straight-line basis. Specific assumptions
used in making adjustments are as follows:
Capacity modernization and replacement
Outlays we're reduced by the amount of
the 7 percent investment credit
-12-
-------
No provision was made for depreciation.
It is assumed for purposes of the financial
analysis in the following chapter that de-
preciation for replacement and moderni-
zation facilities is included in the annual
industry depreciation base (i. e. , that
facility retirements balance with replace-
ments).
Pollution abatement
Outlays were reduced by the amount of
the 7 percent investment credit
Depreciation on each year's expenditures
was computed as follows:
The first year's depreciation was
taken on 50 percent of the amount
invested per Exhibit VII. In sub-
sequent years, the full amount of
annual depreciation was taken.
The full value of depreciation has
been credited against annual invest-
ment reflecting the assumption that
price increases will result in full
depreciation recovery.
Accelerated facilities replacement
Outlays were reduced by the amount of
the 7 percent investment credit
Annual depreciation was computed as
described above
Credits against annual investment were
taken for 50 percent of the applicable
annual depreciation reflecting the depre-
ciation tax shelter. Price increases to
fully recover depreciation were not
assumed.
-13-
-------
No adjustments were made to depreciation
calculations to reflect accelerated facili-
ties retirements. It was assumed that
such facilities would continue to be depre-
ciated after shutdown.
Capacity Expansion
Outlays were reduced by the amount of the
7 percent investment credit
Depreciation was computed as indicated
above
Credits for the full amount of depreciation
were taken against that portion of total
expenditures representing investment in
pollution abatement equipment
The net outlays contained in Exhibit VIII provide the basis
for the financial analysis in the following chapter.
-14-
-------
III. FINANCING STEEL INDUSTRY POLLUTION
ABATEMENT CAPITAL EXPENDITURES
-------
III. FINANCING STEEL INDUSTRY POLLUTION
ABATEMENT CAPITAL EXPENDITURES
This chapter contains an evaluation of the ability of the U. S.
steel industry to finance pollution abatement capital expenditures
over the period 1973-1983.
1. STEEL INDUSTRY PROFITS AND CASH FLOW
Since the late 1960's, steel industry earnings have fallen off
sharply in the face of slack demand coupled with rising imports.
In 1970 and 1971, profits were equal to only 2.8 percent of sales.
Return on stockholders' equity was only about 4 percent in both
years. In 1972, profits increased to 3. 4 percent of sales and
return on equity to 5. 7 percent as steel shipments recovered from
the 1971 low. For 1973, demand and steel shipments are running
at record levels with net steel shipments expected to reach 109
million tons, an increase of 18 million tons over the 1972 level.
The best available estimate of industry profits for 1973
indicates that profits should increase to approximately $1.2
billion, an increase of about 55 percent over 1972. Considering
increased shipments and what price increases have taken place,
net profits should increase to about 4. 3 percent of sales and
-15-
-------
return on shareholders' equity to 8. 0 - 8. 3 percent. It should be
noted that estimated profit margins for 1973 are lower than those
in seven of the preceding eleven years. Estimated returns on
shareholders' equity for 1973 are lower than those experienced
during the peak years of the 1960's (1964-1966), although the
amount of debt in the steel industry's capital structure in propor-
tion to equity has increased sharply and steadily since those years.
For purposes of analysis, baseline steel industry profits
and cash flow have been projected for the period 1973-1983 in
constant 1973 dollars. The assumption has also been made that
capacity will not be increased in order to test the possibility of
financing pollution abatement capital expenditures without a concur-
rent increase in capacity. Projected steel industry funds available
for investment using the above assumptions are shown on Exhibit IX
following this page. Specific elements of this projection have been
developed as follows:
Net profits reflect steel shipments of 109 millior
tons for 1973, 100 million tons for 1974, and 10[
million tons for 1975-1983, adjusted to apply to
integrated producers. It is assumed that the
effect of productivity increases and price in-
creases will offset cost increases but no price
increases to increase profitability will be made.
(The subject of price increases is addressed in
the following sections of this chapter. )
Depreciation is assumed to be constant with
capacity retirements balancing replacements.
-16-
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Dividends are assumed to be slightly less than 50
percent of earnings with the dollar amount of divi-
dends paid approximating levels experienced in
the 1960's.
Net borrowing available has been computed at
40 percent of annual earnings retained (net
profit less dividends) under the assumption that
the industry's debt ceiling is equal to approxi-
mately 40 percent of shareholders' equity, a
level at which the industry now stands.
It should be noted that the pattern of earnings indicated in
Exhibit IX presumes a high degree of future stability in domestic
steel markets. In the past, steel output and steel company
profits have been subject to fairly wide fluctuations reflecting
cyclical swings in steel demand and pressure from imports. At
the present time, the energy shortage has raised questions about
near term steel output in terms of both demand for steel products
and the capability of producers to acquire the fuel needed to
maintain output.
Assuming no fuel shortage and no capacity expansion, the
impact of cyclical downturns on domestic steel production should
be less severe in future years than in preceding years for the
following reasons:
The gap between domestic consumption and
domestic capacity will increase, thus insu-
lating domestic producers from the effects
of a downturn in demand.
-17-
-------
Import pressure should lessen as current
estimates indicate that for the near term, at
least, worldwide demand may exceed supply.
Given such an imbalance the influence of
cyclical demand fluctuations on worldwide
excess capacity should be mitigated. In addi-
tion, devaluation and inflation in major steel
producing nations have made U. S. steel
products more competitive with foreign pro-
duced products than in the past.
Vulnerability to cyclical demand swings could potentially
be a serious problem if large scale capacity expansion programs
were undertaken simultaneously both in the U. S. and in other
producing nations. Such a worldwide surge of capacity, however,
is not apparent at this time. In addition, the increased compe-
tativeness of U. S. output should provide a restraint to import
penetration which has not existed in the past. Nevertheless,
a significant economic showdown in the midst or at the comple-
tion of a large scale industry capacity expansion could seriously
curtail industry profits and cash flow when capital needs would
be greatest. This type of risk will undoubtedly be carefully
weighed by responsible executives in establishing rates of return
required to justify capacity expansion and in establishing tonnage
goals for new capacity.
In the past, industry wage negotiations have contributed to
loss of market share to imports as purchasers would stockpile
*
steel at a rate far exceeding domestic output capabilities in
-18-
-------
anticipation of a steel strike. Both the steel industry and the
United Steel Workers have recognized this problem and in an
attempt to solve it have developed a no strike agreement for the
coming 1974 negotiations which, it is hoped, will set the pattern
for the future. Whether this arrangement will work remains to
be seen. If it does work, however, this source of pressure on
steel output and producer profits will be removed.
The primary source of uncertainty regarding future steel
consumption and output in the near term is the energy shortage.
Because the true extent of the shortage is not known at this time,
the consequences cannot be projected with any degree of confidence.
Nevertheless, it is possible to identify elements of the situation
which will bear on the consequences. These are discussed below:
The U. S. is significantly more self sufficient
in fuels and energy than either Western Europe
or Japan. Consequently, the Arab oil embargo,
if applied equally to all nations, can be expected
to have a greater impact in these areas tnan in
the U. S. For the same reason, fuel price
increases by the OPEC countries will have a
greater and more immediate inflationary impact
in Western Europe and Japan than in the U. S.
The impact of fuel shortages on industrial produc-
tion in Japan and Western Europe will be greater
than in the U. S. , Arab oil policies remaining
equal because of their import dependence.
Accordingly, it is possible that steel shortages
will exist due to lack of imports in the near term
even if U. S. output is maintained at or near
capacity.
-19-
-------
Concerning the internal impacts of the energy
shortage on output, constraints can be imposed
by both demand and supply factors. Steel con-
sumption in the automotive and appliance in-
dustries is likely to decrease; however, indus-
try analysts have estimated that strength in the
capital goods and construction materials mar-
kets will keep 1974 shipments at or above 100
million tons. In the final analysis, however, the
impact of the energy shortage on industrial ex-
pansion and construction starts, if severe enough,
could cause these markets to contract sharply.
In addition to overall consumption, the avail-
ability of imports or lack thereof will remain an
important swing factor. For example, if
domestic consumption decreased by 17 million
tons from 1973 levels and imports were simply
not available due to foreign production cutbacks
for lack of fuel, U. S. producers would be re-
quired to operate at full capacity to meet domes-
tic demand. On the supply side, shortages of
natural gas and fuel oil, if severe enough, could
force steel production cutbacks due to lack of fuel
to operate plants.
For the short term, the impact of the energy shortage, as
indicated above, is unclear. Over the long term, the energy
shortage, if it persists, will have a restraining influence on steel
consumption, output, and capacity expansion.
2. FINANCING POLLUTION ABATEMENT INVESTMENT
Exhibit X, following this page, illustrates the impact of
pollution abatement capital expenditures on the steel industry's
funds availability, assuming constant profitability. In preparing
this analysis, provision has been made for a small increase in
-20-
-------
working capital occasioned by pollution abatement annual operating
and maintenance costs. As is apparent, only limited funds would be
available for capacity expansion, at least through 1977. There
would be no financing capacity available to replace facilities shut
down as a result of pollution abatement or to expand capacity
until close to the end of this decade.
The analysis presented in Exhibit X does not, of course,
reflect the individual differences among producers in profitability
and cash flow. If such factors were taken account of, the possi-
bility exists that industry financing capacity in total would be in-
sufficient with some firms unable to meet their capital needs.
At the constant level of profitability assumed, access to
equity markets for capital would be out of the question. Returns
of 8 percent on equity are clearly not sufficient to make a stock
issue feasible.
3- FINANCING CAPACITY EXPANSION, ASSUMING NO
POLLUTION ABATEMENT REQUIREMENTS
Exhibit XI, following this page, shows the impact of in-
creased production on steel industry cash flow and funds avail-
ability, assuming current steel prices and a net profit on sales
of 4. 3 percent. Note that until 1979, required increases in work-
ing actually produce a negative funds flow.
-21-
-------
The impact of financing requirements for capacity expansion
on the industry's financing capability are indicated in Exhibit XII,
following this page. It is clear that capacity expansion at the rate
indicated, even without the requirement for pollution abatement ex-
penditures would not be feasible at current levels of profitability.
Indeed, current industry returns are not sufficient to justify an
investment decision, even if the financial resources were available.
4. THE IMPACT OF A PRICE INCREASE ON THE STEEL
INDUSTRY'S FINANCING CAPABILITY
As indicated above, the capability of the steel industry to
finance pollution abatement investments at current levels of
profitability is marginal at best, especially over the next 4-5
years. If investments to replace capacity shut down as a result
of pollution abatement requirements or to expand capacity are
considered in addition to basic pollution abatement expenditures,
the industry's financing capabilities are clearly insufficient to
meet its capital needs.
The question next arises as to the impact of a price increase
on the industry's financing capability in terms of access to debt
and equity capital markets.
-22-
-------
(1) Access to Equity Markets
At the present time the stocks of major steel makers are
selling at slightly more than 50 percent of their book value with
earnings multiples of approximately 7 times. A stock issue
when market values are less than book value is clearly out
of the question for the following reasons:
The equity position of current stockholders would
be diluted
Even with an increase in total earnings, the
addition of a greater than proportional number
of shareholders for a given amount of capital
would likely result in dilution of earnings and
dividends per share thus causing returns to
individual stockholders to decrease. For
example, to maintain earnings per share undi-
luted, the return on a stock selling at one half
of book value would have to be double that of
the issuers return on equity prior to the stock
issue, assuming, of course, that the market
would accept such an issue.
It is clear then, that to make a new stock issue feasible the
market value of steel industry stocks must increase. This
increase will take place only as a result of improved
earnings.
During the 1960's, steel stocks sold at earnings
multiples ranging from 10 to 14 for the most part. During
this period, returns on stockholder equity peaked at close
to 9 percent in 1965-1966 with earnings multiples for major
-23-
-------
producers at about 11-12 times. Because the industry is
more highly levered now than in the past, a higher return
on equity would likely be required to produce similar
multiples in the future.
If industry returns on shareholders" equity were to
increase to 10 percent, with good prospects for future mar-
ket stability, it appears reasonable to assume an earnings
multiple of about 12 times.
A ten percent return on equity would require an increase
in earnings per share of about 25 percent over 1973 levels.
Assuming such an earnings increase and a resulting earnings
multiple of 12 times, the market value of steel stocks could
increase to 130 percent of book value, a level which could
make a public offering of stock feasible. To produce a ten
percent plus return on equity, a price increase of roughly
$10 per ton over current levels would be required. This
price increase which is equal to about 4. 3 percent of current
prices would be in addition to price increases required to
offset increased production costs.
(2) Steel Industry Financing Capability
Exhibit XIII, following this page, indicates the impact
of a $10 per ton price increase (in addition to price increases
-24-
-------
to pass on increased cost) on steel industry investment funds
availability. Exhibit XIV, following this page, shows the
impact of the price increase on the ability of the industry
to finance all capital outlays required including capacity
expansion, pollution abatement and accelerated facilities
replacement. Note that by 1976 a cumulative amount of
$2. 6 - $3. 5 billion in outside funding will be required.
The need for such funds to meet investment requirements
would be immediate as deficits of up to $1 billion would
occur in 1974. The ability of the steel industry to acquire
the indicated amount of capital in equity markets, even after
adjustments for increased borrowing power (30 percent of
required funds) and considering incremental dividend pay-
ments to new shareholders to prevent dividend dilution
(about $100 million annually), within the very short time
period indicated is highly questionable even if a January 1,
1974 price increase of $10 per ton purely to increase profits
were granted. Given the time required for an earnings
record to be acquired to make the issue marketable and the
preparations required to take the issues to the market
place, as well as the need to carefully time the offering of
stock, especially since several companies would be issuing
stock, it is unlikely that the funds would be available prior
-25-
-------
to 1976. The uncertainties created by the current energy
shortage would also have a negative impact on the market-
ability of a new issue. Of course, the feasibility of a $10
per ton price increase to increase profits is also highly
questionable given the current climate regarding steel
prices.
5. CONCLUSIONS
On the basis of the preceding analysis, the following con-
clusions can be drawn:
Without price increases, the ability of the steel
industry to finance either pollution control
capital expenditures or significant capacity
expansion is doubtful. Pollution abatement
capital requirements will preclude capacity
expansion.
Even if a $10 per ton price increase were
achieved, purely to increase profits, on
January 1, 1974 the ability of the steel industry
to meet all potential near term capital require-
ments is doubtful. In view of this situation, it
is probable that capacity expansion would be
deferred in favor of required pollution abate-
ment expenditures.
-26-
-------
EXHIBIT I
Environmental Protection Agency
ESTIMATED SUSTAINABLE ANNUAL
DOMESTIC STEEL SHIPMENT CAPACITY - 1973
(Millions of Short Tons)
Tons Percent
Raw Steel Capacity 155 100.0
Provision for Finishing
Scrappage (48) (31.0)
Finished Steel Production
Capacity 107 69.0
Provision for Demand
Peaks and Product
Mix Changes (4)* (2. 6)'~
Sustainable Annual Steel
Shipment Capacity 103 86. 4
Note: Traditional practice would require the use of a factor
of 6% of raw steel capacity to provide for demand peaking
and product mix changes. The lower figure of 2. 6% of
raw steel capacity has been used for this estimate to
reflect the apparent smoothing of demand peaks during
periods of very strong demand as has occurred during
1973.
-------
EXHIBIT II
Environmental Protection Agency
PROJECTED NET STEEL SHIPMENTS 1973 - 1983
(Millions of Short Tons)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Projected
Finished
Steel
Consumption
122
113
116
120
122
126
128
132
134
138
142
Net Imports
(13)
(13)
(13)
(14)
(14)
(14)
(14)
(14)
(14)
(14)
(14)
Projected
Domestic
Steel
Shipments
109
100
103
106
108
112
114
118
120
124
128
Source: A. T. Kearney - Steel Consumption 1974 -- 1983
Booz, Allen & Hamilton Inc. - Steel Consumption 1973
- Net Imports and Domestic
Steel Shipments 1973-1983
-------
Environmental Protection Agency
CAPITAL INVESTMENT RKQUIRLIJ
TO EXPAM) CAPACITY 1973-1383
(Millions of 1973 3)
Capacity
Increment
(n-.illio
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
n toi.s)
(1984)
(1984)
(1985)
(1985)
(1986)
(1986)
(1987)
(1987)
Total Inv
Cost (-)
Per Ton 1073
S200
275
350
425
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
500
estment ^
19~4 1975 1975
<100 =100
133 137
175 175
142 141 S141
167 167 166
125 125 125
125 125 125
125 125 125
125 125 125
125 125
125 125
125
125
125
125
si, 222 •= 1 , 4 7 1 Si, 5 57
1977
«123
125
125
125
125
125
125
125
125
125
125
125
SI, 500
lc'78
S125
125
125
125
125
125
125
125
125
125
125
125
125'=
SI, 625
1974
S125
125
125
125
125
125
125
125
125
125
125.
125
125
125
125
S 1 , 8 7 5
1980
$125
125
125
125
125
125
125
125
123
125
125
125
125
SI, 625
1981 1P82 1983
$125
125
125
125
125,
125 $125
125 125
125 125
125 125
125 125 $125
125 125 125
125 125 125
125 125 125
125 125
125 125
125
125
SI, 625 $1,250 $1,000
EXHIB
H
H
Includes construction r,f 1 million ton reserve for peaking and product mix changes.
-------
EXH[BIT IV
Environmental Protection Agency
TOTAL CAPITAL EXPENDITURES
FOR NEW CAPACITY 1973-1983
(Millions of 1973 $)
Total
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Total
Capacity
Expansion
$ -
1,222
1,471
1,557
1,500
1,625
1,875
1,625
1, 625
1,250
1,000
$14, 750
Pollution
Abatement
d>
-------
EXHIBIT V
Environmental Protection Agency
AIR AND WATER POLLUTION ABATEMENT
CAPITAL INVESTMENT REQUIREMENTS
FOR EXISTING CAPACITY 1973-1983
(Millions of 1973 $)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Low
Water Air
$ 174 $ 450
175 450
174 450
175 450
173
131
120
120
120
120
118
Total
$ 624
625
624
625
173
131
120
120
120
120
118
High
Water Air
$ 330 $ 600
331 600
330 600
330 600
330
500
496 ' -
496
496
496
330
Total
$ 930
931
930
950
330
500
496
496
496
496
330
$1,600
51,800 $3,400
$4,465 $2,400 $6,865
-------
EXHIBIT VI
Environmental Protection Agency
CAPITAL INVESTMENT REQUIRED TO
REPLACE CAPACITY SHUT DOWN AS A
RESULT OF POLLUTION ABATEMENT COSTS
(Millions of 1973 $)
Year
1974
1975
1976
Total
Capacity
Replaced
(million tons)
1.87
1.87
1.86
5. 6
Investment
@ S450/ton
$ 842
842
837
$2,521
Source: Booz, Allen & Hamilton Inc.
-------
Environmental Protection Agency
TOTAL CAPITAL EXPENDITURES FOR
INTEGRATED STEEL PRODUCERS
1973-1983
(.Millions of 1973 S)
Capacity •
Modernization Pol'i.tion
and Abatement
Year Replacement Lon
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
* 1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
$15,
375
375
375
375
375
375
375
375
375
375
375
125
S 562
563
562
563
156
118
108
108
108
108
106
S3, 062
- Expenditures for capacity modernization
integrated producers. Accordingly, the
High
$ 837
838
837
837
297
450
448
448
448
448
297
$6, 185
I.
^ 1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
SIR,
>u
937
938
937
938
531
493
483
483
483
483
481
187
and replacement were derived
10 percent adjustment has not
Subtotal
Accelerated
Facilities
High Replacement
f- 2 , 2 1 2 $
2,
2,
2,
1,
1,
1,
1,
1,
1,
1,
$21,
213 758
212 758
212 753
672
825
823
823
823
823
672
310 $2,269
Capacity Total Expenditures
Expansion Low High
S - $ 1,937 2,212
1,210 3,906 4,181
1,456 4,151 4,426
1,542 4,233 4,507
1, 485 3, 016 3, 157
1, 609 3, 102 3,434
1,857 3,340 3,680
1,609 3,092 3,432
1.609 3,092 3,432
1,238 2,721 3,061
P90 2, 471 2, o62
$14,605 $35,061 $38,184
from statistical data covering
been applied.
M
X
M
w
M
H
M
M
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i^.II uc- i U(.i&UB(l\;[ }Udu«oeid.->},[ q<5TH v>o [ q.;i|[ «o ] juaaia JBIOO>[ JE,).\
r;:> T-;,IGT
t!lf! TKIJ^ U'lJ
vi i in H^VT nix
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Environmental Protection Agency
STEEL INDUSTRY FUNDS AVAIL ABLE
TOR INVESTMENT ASSUMING CONSTANT
PRICES AND NCt CAPACITY INCREASE
1973-U83
(Millions of 1973 .->)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Net
Profit
,S1, 200
950
1,000
1, 000
1,000
1,000
1, 000
1, 000
1, 000
1, 000
1, 000
Total
Depreciation
•?l, 200
1, 200
1, 200
1,200
1, 200
1,200
1,200
1, 200
1, 200
1, 200
1, 200
Cash Flow
S2
9
2,
2,
2
2,
2,
2,
2,
2,
2,
400
150
200
200
200
200
200
200
200
200
200
Dividends
^(450)
(450)
(450)
(450)
(450)
(450)
(450)
(450)
(450)
(450)
(450)
Net
Cash
?1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
Flow
950
700
750
750
750
750
750
750
750
750
750
Net
Borrowing
Available
$300
200
220
220
220
220
220
220
220
220
220
Total Funds
Available for
Investment
$2,
1,
1,
1,
1,
1,
1,
1,
1,
1,
1,
250
900
970
970
970
970
770
770
970
970
970
X
X
-------
EXHIBIT X
U £ H
I"! C! rj
U
u
u
< c <
" t/1 J
C
C
c
L.
c
o
£
U p^ :
^ X ',
U ^,
' H =o
, C o
: u
£ «i
Er c
CTJ c
H O Q
LJ -, W
^_J W ^
*~t X L--
r^
U -^
C
3
U
o
o
>
c
,« z: u
^PS
o
1 z*
CO t^
CNJ ^
C
i. %
o c
^ o
ra'l
-H U5
O CO
•s ^
•2 P
n) u;
O
O
O ^ CN
CO CO CO
CT5 GD O")
-------
Environmental Protection Agency
NET FUNDS AVAILABLE FOR
INVESTMENT FROM INCREASED
OUTPUT 1973-1983
(Millions of 1973 $)
Incremental Revenue
-------
Environmental Protection Agency
FI\\.\( IXC CAPACITY EXPANSION
\\1TH .NO REQUIREMENT FOR
POLLUTION CONTROL 1973-1983
(Millions of 1973 S)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
198€
1983
-
Total Funds
Available for
Investment
S2, 250
1, 900
1, 970
1,970
1, 970
1, 970
1, 970
1, 970
1, 970
1, 970
1, 970
nt fnr nnlliitinn abatement nn
Net
Funds Available
Through Increased
Production
$ -
-
-
(70)
(11)
(31)
65
43
139
117
167
npw ranacltv
Net Capital
Outlay Required
For Facilities
Replacement
and Capacity
Expansion
SI, 279
2,284
2,451
2,478
2, 383
2, 443
2,599
2,338
2,289
1, 931
1,688
Cumulative
Funds
Surplus
(Deficit)
S 971
587
106
(684)
(1, 108)
(1,612)
(2, 176!
(2,501)
(2,681)
(2,525)
(2,076)
M
X
M
W
H
H
-------
Environmental Protection Agency
ADDITIONAL FUNDS AVAILABLE FOR
INVESTMENT ASSUMING A STEEL PRICE
INCREASE OF 310 PER TON 1973-1983
(Millions of 1973 A)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Net Steel Shipments:
(million tons)
95.4
90.0
92. 7
95.4
97.2
100.8
102.6
IOS.2
108.0
111.6
115.2
Incremental Revenue
£ -
900
927
954
972
1,008
1,026
1,062
1.080
1, 116
1, 152
Incremental Net Profit
S -
450
464
477
486
504
513
531
540
558
576
Additional
Borrowing
Available
S -
180
186
191
194
202
205
212
216
223
230
Total Additional
Funds Available
$ -
630
650
668
680
706
718
743
756
781
806
H
X
ffi
:: Adjusted to apply to integrated producers
M
H
X
M
M
-------
Environmental Protection Agency
FINANCING TOTAL POTENTIAL STEEL INDUSTRY CAPITAL
OUTLAYS ASSUAIING A PRICE INCREASE 1973-1983
(Millions of 1973 S)
Year
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Incremental Incremental
Funds Funds
Funds Available Available
Available Through Through
for Production Price
Investment Increase Increase
S2, 250 S - S -
1,900 - 630
1,970 - 650
1.970 (70) 668
1,970 (11) 680
1,970 (31) 706
1,970 65 718
1,970 43 743
1,970 139 756
1,970 117 781
1,970 167 806
Total
Funds
Available
S2, 250
2, 530
2, 620
2, 568
2, 639
2, 845
2, 753
2, 756
2,865
2, 868
2, 943
Total Net Outlays
Required
Low
SI,
3,
3,
3,
2.
2,
2,
2,
2,
1,
1,
783
538
660
618
395
411
559
261
194
790
511
High
$2,029
3,
3,
3,
2,
2,
2,
2,
2,
1,
1,
769
869
807
447
624
759
437
348
920
483
Annual Funds Surplus
(Deficit)
Low
.? 467
(1,008)
(1, 040)
(1,050)
244
234
194
495
671
1, 078
1, 432
SifiiL
S 221
(1,230)
(1, 249)
(1, 239)
192
21
6
319
517
948
1,460
Cumulative Funds
Surplus (Deficit)
Low
S 467
(541)
(1,581)
(2,631)
(2,387)
(2, 153)
(1, 959)
(1,464)
(793)
285
1, 717
High
S 221
(1,
(2,
(3,
(3,
(3,
(3,
(2,
(2,
(1,
018)
267)
506)
314)
293)
287)
968)
451)
503)
(43)
M
X
M
H
-------
BIBLIOGRAPHIC DATA
SHEET
1- import No.
EPA-230/1-73-027
3. Recipient's Accession No.
4. iiilc anj >ubciclc
Economic Analysis of the Proposed Effluent Guide-
lines for the Iron and Steel Industry
5. Report Date
February, 1974
6.
7. Author(s)
8. Performing Organization Kept.
No.
9. Performing Organisation Name and Address
A. T. Kearney, Inc.
100 South Wacker Drive
Chicago, Illinois 60606
10. Pro'cct/Task, Work Unit V
11. Contract Grant .No.
68-01-1545
12. Sponsoring Organization Name ana Address
Qffice of Planning and Evaluation
Environmental Protection Agency
Washington, D.C. 20460
13. Type of Report 8; i'cnoii
Coveted
Final Report
14.
15. Supplementary Notes
16. Abstracts
The report summarizes the economic impact of water pollution
abatement on the Iron and Steel Industry. Discussed are the
industry structure, financial profile, sources of water pollution,
projected costs and price increases, and the effects on production
plant closings on local communities.
17. Key Words and Document Analysis. Ma. Descriptors
Economic Factors: Iron and Steel Industry, pollution,
industrial waste treatment, water pollution, ecology.
17b. Uentifiers/Opcn-Ended Terms
Iron and Steel Industry, water pollution economics,
economic impact
7c. fOSATI
^roup 5C
S. Availability .X JUT.ii.-n:
OHM -J 1 I >- ID I r> t_ -J . 5 - /.' ;
19. >ci ur;rv ( i.iss ( i hi
Kcporti
\'\t i \^ ;' [i ]^
20. >r> mi", ( . i . , i 1 n
I'..r,c
i \( i ^--M i! :'
153
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