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
                  \
                  lil
                  O

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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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                                                         -11-
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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                                                       -111-
                        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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                                                          -v-
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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                                                     - 2 -
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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                                                          -  3  -





                           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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                                                      - 4 -


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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                                                     - 5 -
          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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                                                         - 6 -
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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                                                        - 7 -
 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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                                                         - 8 -
     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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                                                     - 9 -





      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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                                                    - 10 -



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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                                                     - 11 -

     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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                                                       - 12 -









     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.

-------
                                                      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

-------
                                                  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.

-------
                                                   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.

-------
                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
II
H

M
M
I

-------
                                                  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.

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                            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 " li50
West
iiD 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) 85-
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 80
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
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                                        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
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                                                 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.

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                                                         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
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                                                    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

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                   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.

-------
                                                          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.

-------
                                                            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.

-------
                                                      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.

-------
                                                        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

-------
                                                         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.

-------
                                                          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.

-------
                                                           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.

-------
                                                     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

-------
                                                         VI  -  26









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.

-------
                                                       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.

-------
            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 '

-------
                                                                    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

-------
         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

-------
                                                            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

-------
                   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

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                                                     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

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                                                     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.

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              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

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               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

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                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

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                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

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                   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

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         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-

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      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-

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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-

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           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-

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            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-

-------
 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-

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      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-

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      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-

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                       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-

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III.  FINANCING STEEL INDUSTRY POLLUTION
     ABATEMENT CAPITAL EXPENDITURES

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      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-

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 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-

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                  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-

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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-

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                  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-

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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-

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      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-

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                                       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.













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      r;:> T-;,IGT
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vi i  in H^VT nix

-------
    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)














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                                                                                                                  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

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             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)












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 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 ]^
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                                                                          153

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