EPA-E30/1-73-029
AUGUST 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
THE TIMBER PROCESSING INDUSTRY
(Hardboard, Wood Preserving,
Plywood & Veneer)
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
UJ
O
<>.
.
-------
This document is available in limited quantities through rhe
U. S. Environmental Protection Agency, Information Center,
Room W-327 Waterside Mall, Washington, D. C. 20460.
The document will subsequently be available through the
National Technical Information Service, Springfield, Virginia
22151.
-------
EPA-230/1-73-029
ECONOMIC ANALYSIS OF PROPOSED
EFFLUENT GUIDELINES - TIMBER
PROCESSING INDUSTRY
August 1973
Contract No. 68-01-1541
Office of Planning and Evaluation
Environmental Protection Agency
Washington, B.C. 20460
-------
This report has been reviewed by the Office
of Planning and Evaluation, EPA, and approved
for publication. Approval does not signify
that the contents necessarily reflect the
views and policies of the Environmental
Protection Agency, nor does mention of trade
names or commercial products constitute en-
dorsement or recommendation for use.
-------
PREFACE
The attached document is a 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 application of alternative effluent limita-
tion guidelines and standards of performance to be established under
Sections 304 (b) and 306 of the Federal Water Pollution Control Act, as
amended.
The study supplements the technical study ("EPA Development Docu-
ment") 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 indus-
trial source categories and supports promulgation of certain effluent
limitation guidelines and standards of performance based upon an analy-
sis of the feasibility of these guidelines and standards in accordance
with the requirements of Sections 304 (b) and 306 of the Act. Presented
in the Development Document are the investment and operating costs
associated with various alternative control and treatment technologies.
The attached document supplements this analysis by estimating the
broader economic effects which might result from the required applica-
tion of various control methods and technologies. This study investigates
the effect of alternative approaches in terms of product 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 the EPA. This report was sub-
mitted in fulfillment of Task Order No. 1, Contract 68-01-1541 by
Arthur D. Little, Inc. Work was completed as of August 1973.
This report is being released and circulated at approximately
the same time as publication in the Federal Register of a notice of
proposed rule making under Sections 304(b) and 306 of the Act for the
subject point source category. The study has not. been reviewed by EPA
and is not an official EPA publication. The study will be considered
along with the information contained in the Development Document and
any comments received by EPA on either document before or during proposed
rule making proceedings necessary to establish final regulations. Prior
to final 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 sub-
ject industry.
ill
------- OCR error (C:\Conversion\JobRoot\$NEPIS SEND\000003K1\tiff\2000BOHV.tif): Unspecified error
-------
TABLE OF CONTENTS
(cont.)
B. HARDBOARD 83
1. Overview 83
2. Price Effects 86
3. Financial Effects 89
4. Production Effects 90
5. Employment Effects 91
6. Resultant Regional Effects 91
7. Balance of Trade Effects 91
1C. WOOD PRESERVING 92
1. Overview 92
2. Price Effects 95
3. Financial Effects 96
4. Production Effects 98
5. Employment Effects 100
6. Resultant Regional Effects 101
7. Balance of Trade 102
D. SOFTWOOD PLYWOOD AND VENEER 102
1. Overview 102
2. Price Effects 121
3. Financial Effects 121
4. Production Effects 122
5. Employment Effects 123
6. Resultant Regional Effects 123
7. Balance of Trade 124
E. HARDWOOD PLYWOOD AND VENEER 124
1. Overview 124
2. Price Effects 126
3. Financial Effects 126
4. Production Effects 131
5. Employment Effects 136
6. Resultant Regional Effects 137
7. Balance of Payments Effects 141
APPENDIX A 143
vii
-------
LIST OF TABLES
Table No. Page
II.A.I Capacity Utilization by Hardboard Industry,
1967-1972 12
II.A.2 Shipments, Imports and Apparent Consumption,
1962-1972 13
II.A.3 Hardboard Plants - Summary of Characteristics 17
II.A.4 Companies and Plants in the Hardboard Industry 19
II.A.5 Estimated Shipments of Hardboard Producers, 1972 22
II.A.6 Plant Income Statement 25
II.B.I Wood Treated with Preservatives 29
II.B.2 Material Treated in 1971 by Region, and United
States Total 1970-71 30
II.B.3 Value of Shipments of Preserved Wood Products
for 1963 and 1967 31
II.B.4 Total Shipments of Wood Preserving Industry1967
to 1971 32
II.B.5 U.S. Exports and Imports of Preserved Wood 33
II.B.6 Preserved Wood Products and Their Substitutes 35
II.B.8 Wood Preserving Plants in the United States by
State and Type, 1971 37
II.B.9 Regional Distribution of Plant Size and Production
for 1967 38
II.B.10 Employment and Production by Size of Establishment 39
II.B.ll Time Series on Size Distribution of Wood Preserving
Industry 40
II.B.12 Concentration in Wood Preserving Industry for
1963, 1967, and 1970 41
II.B.13 Ownership Organization of the Wood Preserving
Industry 43
II.B.14 U.S. Corporate Profits (After Taxes) as a
Percent of Sales 44
II.B.15 Profits on Sales of the Southern Pressure Treaters
Association Membership, Quarter Ended March 31,
1972 and 1973 45
II.B.16 Cost of Production Factors: 1967 46
II.B.17 Selected Operating Ratios for the Wood Preserving
Industry: 1958 to 1967 47
ix
-------
LIST OF TABLES
(cont.)
Table No. Page
II.B.18 Expenditures for New Plant and Equipment by the
Wood Preserving Industry 48
II.B.19 Materials Consumed by the Wood Preserving Industry:
1967 and 1963 50
II.B.20 Wood Preservatives - Price History 51
II.B.21 Price of Treated and Untreated Piles and Ties 53
II.B.22 Price of Treated and Untreated Lumber 54
II.B.23 Spread in Selling Price of Poles and Piling 59
II.C.I New Housing Starts 64
IJ.C.2 Plywood Industry (SIC 2432) Concentration Patterns 68
II.C.3 Plywood Industry Market Shares1972 70
II.C.4 Domestic Production & Imports of Hardwood Plywood 72
II.C.5 Domestic Production of Softwood Plywood 73
II.C.6 Financial Profile Softwood Plywood and Veneer
Mill - 1972 74
II.C.7 Financial Profile Hardwood Plywood and Veneer
Mill - 1972 76
II.C.8 Financial Profile Veneer & Plywood Mill, 1971 77
III.B.I Summary of Alternative Costs 87
III.B.2 Wet Process Hardboard Plants - Approximate Invest-
ment Requirements and Annual Operating Costs 88
III.C.I Sample of Ratios for Wood Preserving Companies 99
III.D.I Softwood Plywood Mills Operating Status, 1960-1972 105
III.D.2 Estimated Mills Operating and Closing by Year 106
III.D.3 Questions and Answers 108
III.D.4 Normal Monthly Rainfall in Inches for Selected Cities 112
III.D.5 Distribution of APA Member Softwood Plywood Mills
in 1972 and Estimated Total U.S. Distribution 113
III.D.6 Estimated Incremental Capital and Operating Cost
Levels for Each Alternative 118
III.D.7 Estimated Mill Costs and Compliance by Alternative 119
III.D.8 Estimated Mill Costs and Compliance by Alternative 120
xi
-------
LIST OF TABLES
(cont.)
Table No. Page
III.E.I Profitability of Representative Hardwood
Plywood and Veneer Plant1972 128
III.E.2 Profitability of Representative Hardwood
Plywood and Veneer Plant1972
Using Prior Guidelines Data 130
III.E.3 Characteristics of Representative Mill in High
Probability of Closure Category 134
III.E.4 Factors Influencing Plant Closure Decision 135
III.E.5 Regional Economic Impact 138
III.E.6 Regional ImpactBased on Prior Data 140
A-l Control Technology Cost Factors 145
A-2 Effluent Flow Per Unit of Production 147
xiii
-------
LIST OF FIGURES
Figure No.
II.A.I Hardboard Plants in the United States 16
II.B.I Marketing Systems in the Wood Preserving Industry 33
II.B.2 Production and Price History of Preserved Piling 55
II.B.3 Production and Price of Preserved Ties 56
II.B.4 Production and Price of Preserved Lumber 57
II.C.I Plywood Distribution Patterns 65
A-l Possible Effects of Economies of Scale on Treatment
Costs 149
A-2 Number and Size Distribution of Plants 150
xv
-------
I. SUMMARY
This report presents the contractor's final analysis of the eco-
nomic impact of meeting 1977 and 1983 effluent guidelines on certain
timber processing industry sectors.*
A. PURPOSE AND SCOPE
Specifically, the impact was defined as: the financial impact on
companies in these industry sectors, e.g., in terms of cost/profitability
changes and forced mill closures, and the impact on employment and com-
munities because of curtailed production or plant closures.
To evaluate these two parameters, the contractor:
defined the structure of the timber processing industries and
indicated which industry segments have the highest probability
of significant economic impact;
determined how prices are set in the industry to ascertain how
much of the increased costs due to abatement requirements
firms could pass on;
developed a financial perspective on the industry; and
determined the economic impact on these industry segments,
based on the information supplied in the effluent guideline
document.**
As part of this analysis, the contractor developed a structural model of
the industry, and the points of sensitivity to water pollution related
costs and technology, so EPA or its subcontractors can revise the basic
analysis as new information becomes available.
In the interests of clarity, the basic outline supplied originally
by the EPA was modified to treat each industry sector in independent
sections. Moreover, as a prelude to the industry structure discussion
(Chapter II), a chapter entitled "Industry Structure" was added. This
- Defined by EPA as SIC-2432, Plywood and Veneer; SIC-2661, Building
Board MillsHardboard Only; SIC-2491, Wood Preserving.
**
Developed for the EPA by Environmental Sciences and Engineering, Inc.,
and Dr. Warren S. Thompson, June 1973.
-------
chapter analyzes the basic supply/demand patterns and market structure in
the industry. In addition, a section entitled "Overview" was added to
the economic impact analysis sections. These overviews indicate any
major simplifying assumptions and any concerns regarding the applicability
of technological and cost information used as input to the analysis.
This analysis was based on discussions with industry personnel,
the contractor's own background knowledge, published information on the
industry, and technical and cost data supplied in the effluent guidelines
document. The contractor was instructed by the EPA to use this techno-
logical and cost information for the analysis and did so. As indicated
in the report, however, there is substantial concern about the applica-
bility of this data to specific situations.
B. CONCLUSIONS
It is necessary to view timber products processing not as a
single industry, but rather as four separate, only partially interrelated
sectors. The products are generally noncompetitive; the sectors are in
differing states of growth; and, the companies active in one sector are
not necessarily active in another. Each of these four sectors requires
a separate analysis of economic impact.
In general, the costs, as reported in the effluent guidelines
document, are not overwhelming on these industry sectors. There is
essentially no major impact on the hardboard and the softwood plywood
sectors. The impact is focused more specifically on hardwood plywood
and wood preserving, since these industries are the province of the small,
independent business the type of firm and plant that will face the
most serious kinds of problems.
There will be essentially no impact on production in any of these
industry sectors. Where companies will be forced to close, the companies
closing will be smaller firms, with relatively little impact on total
industry output. In addition, with the exception of the hardboard industry
which is operating at a 90%+ capacity utilization rate, these industry
sectors are characterized by flexible capacity. (Certain producers move
in and out of production depending on price/profitability levels.) The
industries typically operate at 70-80% of total capacity. Thus, any
production deficiency that results from plant closures can be offset by
the remaining facilities.
In many cases, plants that are categorized as high-probability-
of-closure plants are already marginal operations because of their low
profitability over the preceding 5-10 years. Furthermore, many of these
companies will also face the added burden of air pollution abatement costs.
The combination of previous low profitability and anticipated air pollu-
tion costs, when added to the burden of effluent costs, will precipitate
a plant shut-down decision.
-------
Finally, a small operation with a relatively small asset base
will have difficulty in raising the capital required to purchase the
necessary abatement equipment, and the owner/manager of the facility
will not be willing to assume the risk of a substantial investment in new
equipment for effluent control. If the capital cost of abatement equip-
ment cannot be financed out of the cash flow from operations, the firms
will have to resort to debt financing. Many of the firms will not be
willing to support the risk of debt to finance such equipment.
Prices will not be affected materially by pollution abatement
costs. That is, price increases of more than 1% per year are not neces-
sary to cover the costs of abatement. Similarly, profit margins will
not be altered substantially if price increases are not possible. Although
some firms with low profitability may be forced out of business because
of an inability to absorb increased costs, that will not be a common
occurrence for the industry sectors at large.
Unemployment effects will impact most severely on operations in
the mid-South and Southeast. The total effect on unemployment will not
be great, but 30-40 individual communities in this region could be impacted
with as much as a quarter of their work forces becoming unemployed.
Abatement costs will not affect export trade, such as it is; little
of these products is exported. Imports are significant only in hardwood
plywood. Here, the bulance of payment situation will be affected more
significantly by othei: factors than by £tbat,ement costs.
1. Hardboard
Hardboard is .anufacCured primarily from wood cellulose fiber,
and used for paneling. siding9 furniture, and millwork. The product can
be produced by eithei: of two basic, methods, the first being the "dry
process," which uses little process water; the second being the "wet pro-
cess," which is analogous to the manufacture of pulp and paper and which
uses substantial process water.
Seventeen dry process raills were considered in this analysis.
Water pollution control requirements to meet 1977 or 1983 recommended
guidelines will have no economic impact on these 17 mills.
Nine wet process mills were considered in this analysis. These
mills will face added costs of pollution control. However, this added
cost burden will not be severe.
Specifically, for wet process mills:
Added costs of abatement will result in increased prices.
To meet 1977 guidelines, prices will increase by a maximum of
8%; to meet 1983 costs, prices will increase approximately 15%.
-------
Four of the nine wet process mills will be unable to pass on
the full amount of the cost increase. These four mills will
absorb up to 6% added costs.
The absorption of added costs places one of the mills into
the high-probability-of-closure category, the other three into
the moderate-probability-of-closure category.
Total industry production is running at a 95%+ capacity utili-
zation rate. Production will not be materially affected by
abatement costs.
A maximum of 300 persons could be displaced by plant closures.
However, this will not result in any major community effects.
U.S. producers have not expanded capacity enough to meet demand.
The balance of trade in this industry sector will be affected
more by the willingness of producers to build new plants than
by abatement cost increments.
2. Wood Preserving
The wood preserving industry is composed of more than 400 small,
privately-owned companies with long-standing technology and largely
depreciated plant and equipment. The top four producers account for
about 35% of production and are owned by large, public corporations
which are in the chemical and timber products industries. Approximately
40% of the value of shipments is represented by wood costs. Prices of
wood have increased sharply over the last four years; the value added by
preserving has been approximately constant.
The impact on this industry sector is as follows:
The abatement impact will be felt from 1977 standards, with
no additional impact from the 1983 standards. The costs for
existing and new plants are the same.
The cost for control for 1977 averages 0.5% of sales.
The industry, in toto, will have no difficulty passing on costs
of this magnitude as price increases.
Profitability in the industry has remained fairly stable
6-7% on sales before taxes during periods of strong price
increases. Industry profitability will not be materially
affected by pollution control costs.
Because of the sharply rising cost of control per unit of pro-
duction for very small plants, because their competitive profit
position will be eroded, and because they will not be able to
-------
finance pollution control facilities either out of cash flow
or by recourse to debt, there is a high probability that smaller
plants in the industry will be forced to close. The industry
is operating at about 75% of capacity. Pollution control
requirements are not expected to affect production or growth
rate.
Plants in the high-probability-of-closure category are located
primarily in the rural regions of the mid-South and Southeast.
They treat wood with oil-based preservatives, using pressure
processes and steam conditioning of the vood.
Plants in danger of closing could change preservatives from
oil-based to non-oil-based systems. Because of local market
and specific economic conditions, however, this option will not
be available to all of the affected facilities.
Plant closures could cause as many as 2100 persons (17% of
total employment) to become unemployed. However, the most
likely employment impact will be approximately 1,050 persons
(9% of total employment) unable to find comparable jobs.
Plant closures will be scattered throughout the rural Southeast
and mid-South, with no specific communities impacted. Employ-
ment impact is ameliorated by the fact that many employees in
wood preserving plants are part-time workers, e.g., full-time
farmers, who do not rely solely on this industry for income.
3. Softwood Plywood and Veneer
The softwood and hardwood plywood and veneer sectors must be con-
sidered separately. The industries are distinct. Products within each
sector are generally not competitive. Softwood plywood is used for
structural applications, e.g., exterior sheathing and residential homes;
hardwood plywood is used for its decorative qualities, e.g., in furniture.
Moreover, while both industries have approximately the same number of
plants, the total output of hardwood plywood and veneer is approximately
12% of the total output of plants in the softwood sector. Softwood plants
tend to be much larger economic units with significantly higher asset
bases. For example, representative plants in each sector would be of the
following sizes:
Softwood 75-150 MMSF/year, 3/8" basis;
Hardwood 5-10 MMSF/year, 3/8" basis.
A simply arithmetic average shows that softwood plywood mills produced
an average of 96 MMSF in 1972, versus less than 12 MMSF for hardwood
plywood mills.
-------
The 192 softwood plywood mills in operation in 1972 produced
18.3 billion square feet (3/8" basis). The industry employed approxi-
mately 40,000 workers. Geographically, the industry is concentrated in
the Pacific Northwest (Douglas fir based products) and in the Southeast
(Southern pine based products). Prices have been at record highs in the
last year, peaking during the first quarter of 1973, largely because of
strong demand in residential construction sectors. Prices are highly
variable and tend to follow residential construction activity.
The softwood plywood industry actually faces more expensive
pollution control problems than those associated with water pollution.
We do not anticipate a major impact on prices, production or employment
from water pollution costs. In combination with air and solid waste
disposal expenditures, however, the impact on the industry will be sig-
nificant.
The industry sector will be impacted by water pollution abatement
costs and technology as follows:
Annual costs to the industry will be 0.75% of sales. It will
not be necessary to pass on a cost of this magnitude.
Profitability will not be materially affected by the absorption
of abatement costs.
A maximum of three mills can be characterized as high-probability-
of-closure facilities because of abatement costs. Even if all
three plants were to close, the industry's production would not
be materially affected.
Unemployment caused by water abatement will be negligible.
Thus, no communities will be severely impacted.
Neither softwood plywood nor veneer is a significant inter-
national trade item. The effects on balance of payment from
pollution abatement costs is negligible.
4. Hardwood Plywood and Veneer
This industry sector is characterized by the small operation,
owned and operated by an independent businessman. The industry's 2 billion
square feet of production in 1972 was produced by 190 firms employing a
total of 20,000 persons. The industry is concentrated in the eastern
United States, primarily in the mid-South and Southeast, but also in the
North Central and Northeast states.
Although profit margins in the industry are tight and price in-
creases over the past decade have lagged cost increases, an increase in
annual operating cost due to pollution control equipment is not: really
the key issue. Rather, the issue here is related to the ability and
-------
willingness of the ownership/management of small firms in these sectors
to raise necessary capital. With an asset base of $0.2-1 million for a
typical plant, capital costs for abatement equipment represent a signifi-
cant percentage of total assets.
The economic impact on this industry is as follows:
Prices will not increase significantly in this sector. The
necessary price increases to cover costs fully under the most
severe abatement alternative would be a 2% increase.
The financial statements of most companies in the industry
will not be affected by abatement costs. However, many small
firms, operating at low levels of profitability, will be
impacted.
A maximum of 30 plants can be characterized as in the high-
probability-of-closure category. These plants represent 16%
of the total number of plants, but only 4% of industry capacity,
and 4% of total employment.
Plant closures will cause approximately 750 persons to
become unemployed. These workers will include a substantial
number of older persons, persons with skills unable to be
translated to other industries, and persons located in rural
areas with no available employment options.
Approximately 20 communities will be impacted by the resulting
unemployment. These communities will be located mainly in the
mid-South and Southeast.
There will be no substantive balance of payments effects.
-------
II. INDUSTRY STRUCTURE
The following three sections (III.A-III.C) contain the analyses
of the basic patterns of the industry sectors under consideration. Each
sector discussion contains as a prelude a description of the supply/
demand dynamics of the sector, to add perspective to the analysis. These
analyses, in turn, serve to give basic understanding to the economic
impact analysis sections (III.B-III.E).
A. HARDBQARD
The manufacture of hardboard is primarily concerned with the re-
constitution of wood via a fiber forming and pressing process using
natural wood binders (lignins) supplemented by synthetic resins. In the
industry, the terms wet-wet, wet-dry, dry-wet, and dry-dry describe the
processing steps. The terms SIS and S2S describe the finish of the board
as developed in pressing, and tempering refers to oil treating.
The following definitions will clarify these terms:
1. Wet-Wet processing involves forming the board with excess moisture
on an endless wire (or fourdrinier) removing water via drainage
and vacuum, then sending the high moisture content board to
pressing. In pressing, the board is pressed between steel
plates with wire on one side to allow for water/steam to escape
during the pressing/heating cycle. The board pressed between
plate and wire is referred to as SIS (screen back) due to one
smooth side and one rough side (marking caused by the wire).
2. Wet-Dry processing entails forming the board as in wet-wet,
followed by drying before pressing. The wire is not needed and
the board can be pressed between smooth plates to produce S2S
product. The pressing can also be accomplished via SIS if this
kind of board is desired.
3. Dry-Dry processing involves the felting of dry fiber on a steel
plate without water for feed to the press for either SIS or S2S
production.
4. Dry-Wet processing is used by one plant and entails dry forming
followed by wetting and pressing.
-------
1. Industry Structure
a^ Product Definition
Hardboard is manufactured from vegetable fiber, principally from
wood, and used primarily as panels, siding, furniture, and millwork.
Waste or secondary quality wood are the major raw material ingredients.
In practice, densities are generally in the 40 Ib/cubic foot to
70 Ib/cubic foot range and the product is manufactured in thicknesses of
1/8 inch to more than 1/2 inch and in sheets as large as 4 x 16 feet.
End uses define the particular thickness required. For example, 1/8 inch
board is most commonly used for the manufacture of tileboard, 1/4 inch is
either pre-finished for interior wall paneling or sold to a myriad of
industrial and furniture applications, and 7/16 inch finds most frequent
application as an exterior residential siding. Hardboard is dense, uni-
form, usually smooth surfaced, can be worked with ordinary woodworking
tools, takes finishes well, can be bent to single curvature, and can be
punched or die-cut. The material can also be embossed or scored during
the pressing operation to simulate various surface finishes.
The manufacturing process can result in products of different
finishes. The boards are marketed with either one smooth face and one
face with a screen impression (known as SIS or screen-back) or with 2
smooth faces (S2S). The latter finish is required for certain applications
and is achieved by first drying the mat before hot pressing. Hardboard
can also be tempered by impregnating the pressed boards, either during or
after the manufacturing process, in oils and/or resins and then heat
treating. This treatment increases the strength and water resistance
above that of untempered hardboard and generally increases the density.
An S2S finish can also be achieved by laminating thin SIS boards or by
sanding high-quality SIS products. Another finishing operation that can
and is usually carried out at the manufacturing location is to perforate
the board to produce pegboard for store display and do-it-yourself appli-
cations.
Plants manufacturing a lower density hardboard, often known as a
medium density fiberboard, are included in this study as the product is
made by the same company and in plants using similar technologies to the
higher density hardboard. The density range is theoretically 25 to 50 Ibs/
cubic foot, but the majority of current production is over 40 Ibs. density.
The boards are thicker than standard hardboard, most frequently at 1/2
inch, and are higher in quality than particleboard for furniture appli-
cations where they most frequently compete. Fiberboard can be used as
corestock in furniture as it can be fabricated and worked easily.
Insulation board, manufactured at six plants that are also engaged
in hardboard production, is also made from wood fiber but is normally
1/2" to 1 1/2" in thickness. It does not compete with hardboard, being
a softer product with density of 10-25 Ibs/cubic foot, and is used primarily
10
-------
as a sheathing, as a rigid roof insulation in mobile homes and as ceiling
tiles. The capacity, production,shipments, and other data identified in
this sector discussion refers entirely to hardboard, being the principal
output of the plants identified. However, the analysis is confused by
the ability to produce two such different products at the same location,
although on separate lines, as the effluent that results is not separate.
b. Production
The hardboard industry has experienced rapid growth over the past
decade and shipments from plants have doubled since 1965. At the same
time, capacity utilization has improved from the mid-1960's and currently
stands at about 90%. In Table II.A.I we show total industry capacity and
estimated production for the number of plants operating in each year from
1967 to 1972 and the estimates of capacity utilization. A typical plant
schedules operations at 24 hours per day for 361 days a year, taking 4
days for boiler repairs and other necessary maintenance. Thus, a utili-
zation rate of about 90% of rated capacity is close to the maximum possible
under normal operating conditions. From the mid-1960's to 1972, however,
the number of plants in operation has remained fairly constant and capacity
additions have been mostly through expansion of existing facilities. A
number of new mills were added to existing ones in 1971 and 1972 and by
the end of 1972 the total number of plants in operation was 33, with an
aggregate industry capacity of 7.8 billion square feet, 1/8 inch basis.
Industry sources indicate this has now reached 8.0 billion and that a
28% increase in capacity can be anticipated by the end of 1975, including
the addition of four new medium density plants and three new companies.
Shipments from domestic plants, as Table II.A.2 indicates, have
also grown rapidly and totalled 5.8 billion square feet in 1972. While
shipments have grown at an annual rate of over 9% since 1962 (from 2.4
billion square feet), apparent consumption in the U.S. has experienced a
slightly faster rate of growth. This is mainly because the level of
imports, which remained relatively stable up to 1971, increased by nearly
70% in 1972, as domestic producers were unable to meet the extraordinary
increase in demand from customers. Much of these imports come from Scan-
dinavia and Brazil, with other European and Latin American countries of
secondary importance. It is important to note that much of the increase
in imports in 1972 was credited to the account of domestic producers,
either from their own overseas manufacturing plants or from those of other
producers, in order to meet the requirements of their regular U.S. cus-
tomers .
Imports were valued at $29.9 million in 1972, up from $16 million
in 1971 (87%) and $11.9 million in 1970 (151%). In contrast, exports
have been at such a low level that the relevant data is not shown separately
in U.S. Government statistics but included with that for other products.
11
-------
TABLE II.A.I
CAPACITY UTILIZATION BY HARDBQARD INDUSTRY. 1967-1972
(Million Square Feet - 1/8" Basis)
No. Plants
Annual Estimated Capacity
Capacity Production Utilization (%)
1967
1968
1969
1970
1971
1972
28
27
27
28
28
33
4555 3562
4648 4163
5019 4297
5335 4928
6000 5338
7791
(end of year)
78
90
86
92
89
SOURCE: 1967 - 1971 : Forest Industries
1972 : American Hardboard Association
12
-------
TABLE II.A.2
SHIPMENTS. IMPORTS AND APPARENT CONSUMPTION. 1962-1972
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
(million square feet -
U.S. Shipments
2426
2432
2689
2921
3083
3038
3710
4247
4384
5225
5798
Imports
342
432
471
572
443
426
648
708
457
634
1070
1/8" basis)
Apparent
Consumption
2768
2864
3160
3493
3526
3464
4358
4953
4841
5869
6868
Inputs
as % of
Consumption
12.4
15.1
14.9
16.4
12.6
12.3
14.9
14.3
9.4
10.8
15.6
Shipments plus Imports; Exports are negligible and are not reported
by the U.S. Government.
SOURCE: American Hardboard Association
13
-------
c. Markets
Three broadly defined hardboard markets exist today:
Exterior siding
Interior paneling
Industrial board
Exterior siding hardboard is generally 7/16 inch in thickness.
It is marketed either in panel form or as narrow width sheets for lap
siding and is usually pre-finished for residential applications. The
product is a relatively late entry to the siding market and competes with
brick, stucco, plywood, and natural wood sidings. Metal sidings, especially
aluminum, are gaining favor in the single family and low-rise multi-family
sectors, but hardboard and other materials are also used in commercial,
industrial, and institutional applications.
Consumer acceptance of interior paneling as a decorative medium
for residential use, especially remodeling, has helped to create a sig-
nificant interior paneling market for various materials. The most common
such material is imported lauan hardwood plywood imported from the Philip-
pines and Southeast Asia for pre-finishing in the U.S. Lauan paneling is
relatively low in price and attracts the home owner and "do-it-yourselfer."
It represents at least 60% of total interior paneling sold in the U.S.
Hardboard paneling, either woodgrain or with a tileboard finish,
has been growing significantly in its market share and presently holds
about 15% of total paneling markets on a surface area basis. Woodgrain
hardboard paneling is generally 3/16 inch or 1/4 inch in thickness while
tileboard is usually 1/8 inch thick. Hardboard paneling is a medium-
priced product, competing to some extent with the full-thickness lauans
(but not with the lower cost 4 mm lauans) and with the lower-priced
domestic hardwood plywoods but considerably below the price of high
quality plywoods and natural wood paneling.
The third major category is industrial hardboard. This is largely
an OEM (original equipment manufacturer) market serving a myriad of end
uses and industries. These industries include furniture, tv/radio/stereo,
store displays, kitchen cabinets, automotive and miscellaneous applications.
A significant proportion of the total industrial hardboard market goes
through retail dealer channels to the home owner and "do-it-yourselfer."
Hardboards have many of the same uses that thin plywood has in these
industrial markets. It can be used as insert or surface panels in doors;
countertops, backs and dividers for cabinets; bottoms in drawers; facing
materials for poured-in-place concrete; templates and assembly jigs; signs
and store displays; and many other applications. Hardboard has taken many
of the markets previously held by plywood and lumber, but is, in turn,
being challenged by plastics and, to a lesser extent, metals.
14
-------
TABLE II.A.2
SHIPMENTS. IMPORTS AND APPARENT CONSUMPTION. 1962-1972
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
(million square feet -
U.S. Shipments
2426
2432
2689
2921
3083
3038
3710
4247
4384
5225
5798
Imports
342
432
471
572
443
426
648
708
457
634
1070
1/8" basis)
Apparent .
Consumption
2768
2864
3160
3493
3526
3464
4358
4953
4841
5869
6868
Inputs
as % of
Consumption
12.4
15.1
14.9
16.4
12.6
12.3
14.9
14.3
9.4
10.8
15.6
Shipments plus Imports; Exports are negligible and are not reported
by the U.S. Government.
SOURCE: American Hardboard Association
13
-------
c. Markets
Three broadly defined hardboard markets exist today:
Exterior siding
Interior paneling
Industrial board
Exterior siding hardboard is generally 7/16 inch in thickness.
It is marketed either in panel form or as narrow width sheets for lap
siding and is usually pre-finished for residential applications. The
product is a relatively late entry to the siding market and competes with
brick, stucco, plywood, and natural wood sidings. Metal sidings, especially
aluminum, are gaining favor in the single family and low-rise multi-family
sectors, but hardboard and other materials are also used in commercial,
industrial, and institutional applications.
Consumer acceptance of interior paneling as a decorative medium
for residential use, especially remodeling, has helped to create a sig-
nificant interior paneling market for various materials. The most common
such material is imported lauan hardwood plywood imported from the Philip-
pines and Southeast Asia for pre-finishing in the U.S. Lauan paneling is
relatively low in price and attracts the home owner and "do-it-yourselfer."
It represents at least 60% of total interior paneling sold in the U.S.
Hardboard paneling, either woodgrain or with a tileboard finish,
has been growing significantly in its market share and presently holds
about 15% of total paneling markets on a surface area basis. Woodgrain
hardboard paneling is generally 3/16 inch or 1/4 inch in thickness while
tileboard is usually 1/8 inch thick. Hardboard paneling is a medium-
priced product, competing to some extent with the full-thickness lauans
(but not with the lower cost 4 mm lauans) and with the lower-priced
domestic hardwood plywoods but considerably below the price of high
quality plywoods and natural wood paneling.
The third major category is industrial hardboard. This is largely
an OEM (original equipment manufacturer) market serving a myriad of end
uses and industries. These industries include furniture, tv/radio/stereo,
store displays, kitchen cabinets, automotive and miscellaneous applications.
A significant proportion of the total industrial hardboard market goes
through retail dealer channels to the home owner and "do-it-yourselfer."
Hardboards have many of the same uses that thin plywood has in these
industrial markets. It can be used as insert or surface panels in doors;
countertops, backs and dividers for cabinets; bottoms in drawers; facing
materials for poured-in-place concrete; templates and assembly jigs; signs-"
and store displays; and many other applications. Hardboard has taken many
of the markets previously held by plywood and lumber, but is, in turn,
being challenged by plastics and, to a lesser extent, metals.
14
-------
In evaluating the overall growth rate, it should be remembered
that at least 60% of hardboard is used directly in construction or is
affected by construction demand; most of the remainder is used in indus-
trial applications. Both primary industries are expected to grow at
about the same rate as the Gross National Product, or 4.3% per year.
Thus, a growth rate of from 7% annually implies increased market pene-
tration by hardboard and still represents a conservative viewpoint when
compared to its historic performance.
Almost all combinations of distribution patterns are employed in
getting the hardboard products to the marketplace. Industrial board is
generally sold direct to the OEM, although a certain portion does go via
the distributor-retail route to smaller OEM customers. Most paneling
and siding is distributed through wholesale distributors to retail out-
lets for purchase by the builder or by the do-it-yourselfer. An unknown
amount of commodity board also goes this route to virtually all customer
categories and miscellaneous end uses.
2. Industry Segments
a. Plant Characteristics
The 33 plants comprising the U.S. hardboard industry are, as the
map (Figure II.A.I) indicates, mainly clustered in four groupings
northwest, southwest, north central, and mid-Atlantic. Table II.A.3
summarizes the prin* ipal characteristics of these units.
Prior to l(J--i5, only (:wo plants were in operation in the U.S., both
in Mississippi, operated by the U.S. Gypsum Company and Masonite. In each
succeeding decade at. least 10 new "locations have been added and some of
the existing capacities increase,!. The older plants utilize mainly the
wet process. Of tl;i.- 12 plants buiJ t prior to 1955, five were wet type,
five were wet-dry, and the remaining two employed the dry process. In
fact, only one wet process plant has been brought on-stream since 1966,
while seven of the 15 dry process plants (5 producing medium density
board) were built since that year. P]ants expanding did not necessarily
retain the same process already in use at that location and three plants
now use combinations.
Although the largest plant in the industry is also the oldest
(startup, 1926), the Masonite facility at Laurel, Mississippi, has attained
its present size after many expansions and as recently as 1969 was only
two-thirds of its present capacity. In general, however, the older plants
tend to be smaller. Against an average capacity of 235 million square
feet and a median capacity of 180 million square feet, four of the 12
facilities built before 1955 are less than 100 million square feet capacity,
another three are less than 200 million square feet, and three more are
between 200 and 300 million square feet. In contrast, of the ten plants
built since 1966, only one has less than 100 million square feet and three
are between 300 and 400 million square feet.
15
-------
__
-ARIZONA
-------
TABLE II.A.3
HARDBOARD PLANTS - SUMMARY OF CHARACTERISTICS
(Total - 33)
By Year of Start-Up;
Up to 1945 2
1946-1955 10
1956-1965 11
1966-present 10
By Process:
Wet 7
Wet-Dry (& insulation 6
board)
Dry-Wet 1
Dry 16 (5 producing medium
density board)
Combination 3
By Size;
Up to 100 MMSF/year 8
101-200 11
201-300 7
301-400 4
401 and above 3
By Region;
Pacific 9
West North Central 4
West South Central 3
East North Central 3
East South Central 3
Mid-Atlantic 2
South Atlantic 8
17
-------
Table II.A.4 identifies the location of each plant (also shown in
Figure II.A.I), its owner company, capacity, process, year built, and
product characteristics. The capacities shown are for hardboard only and
do not include the capacity of insulation board production at six of the
plants.
A true S2S hardboard product can be manufactured by only three
companies at eight locations, but a further 16 plants have a screen-backed
product of sufficient quality so that it can be. sanded to approximate an
S2S board sufficient to satisfy customer requirements. Product tempering,
either in process or after the basic manufacture,, can be carried out at 21
of the 33 locations. A number of plants, in addition to producing standard
commodity industrial board, add value through fabrication or pre-finishing.
The board can be pre-finished to meet siding or paneling requirements by
grooving, etching and/or staining; it can be cut-to-size, perforated,
shaped or otherwise fabricated to meet industrial customer requirements.
One plant, that of Caradco, produces a moulded product largely used in
that company's millwork operations.
Finally, five plants produce a hardboard of medium density (AD-
AS Ibs. per cubic foot) serving applications basically dissimilar to those
served by the higher density (greater than 50 Ibs. per cubic foot) board
that predominates output. The lower density product is also known as
medium density fiberboard and more closely resembles particle board in
its appearance, color, thickness, and end use. These five locations are
included in this portion of the study, however, as the manufacturing pro-
cess and the effluents invplved are similar to that of standard hardboard
plants.
Total direct employment at these 33 locations was estimated at
8,000 in 1972. Secondary employment, such as of forestry workers, etc.,
is estimated at 20,000, but the majority of the latter are employed by
independent suppliers to the hardboard industry.
b. Firm Characteristics
Unlike other timber processing industry sectors (e.g., hardwood
plywood), the hardboard sector is comprised of a small number of large
corporations, generally publicly,owned and with ,a ,high degree of inte-
gration. Ten of the sixteen producers (82% of total capacity) listed in
Table II.A.4 have these characteristics in common. The industry is quite
concentrated, consisting of 16 companies operating 33 plants. The four
largest companies control 60% of available capacity .while the eight
largest control 82% and the ten largest, 93%.
The firms are integrated to raw .materials through the ownership
of woodlands. While each of the firms does not own enough wood to cut
totally from their own lands, they typically supply 30-40% of their needs
from captive sources. Similarly, most of the firms are integrated forward
beyond hardboard production into various finishing steps, including end
product manufacturing (e.g., siding or paneling).
18
-------
TABLE II.A.4
COMPANIES
CAPACITY,
1972
COMPANY MMSF(l/8"
Abitibi
1 Alpena, Mich. 435
2 Roaring River, N.C. 159
Anacortes Veneer
3 Anacortes, Wash. 40
Boise Cascade
4 Int'l. Falls, Minn. 455
Caradco, Div. of Ecovill
5 Uubuque, Iowa 25
Celotex Corp., Div. of Jii.
6 Deposit, N.Y. 180
7 Paris, Tenn. 240
Evuns Products
8 CorvalLis, Ore. 110
y Phillips, Wise. 80
10 Uoswell, Va. 250
11 Moncuie, N.C. 360
Forest Fiber Products, Div.
12 Forest Grove, Ore. 79
Ceorg ia-Paci Eic
13 Coos Bay, Ore. 220
14 Conway, N.C. 185
Masonite
15 Laurel, Miss. 1,643
16 Ukiah, Calif. 380
17 Towanda, Pa. 260
18 Spring Hope, N.C. 328
AND PLANTS IN THE HARDBOARD INDUSTRY
YEAR
!) BUILT
1959
1960
1971
1953
1958
1964
1970
Walter
1966
1970
1947
1958
1971
1972
PRODUCTS MANUFACTURED
PROCESS SIS S2S Insul. Temp. Ext. Int.
wet ^ (/ s
wet-dry
wet s
dry \S S "'
wet-dry i/ ^ S
dry (Moulded) ^ ""
dry (M.D.) S "
dry / ,^
wet ^~
-------
TABLE II.A.4
COMPANIES
AND PLANTS IN THE HARDBOARD INDUSTRY
CAPACITY ,
1972 YEAR
COMPANY MMSF(l/8") BUILT
19
Pope & Talbut
Oakridge, Ore.
120
1965
(Continued)
PRODUCTS MANUFACTURED
PROCESS SIS S2S Insul . Temp. Ext. Int.
dry (M.D.) " ^ /
Superior Fiber Products
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Superior, Wise.
Superwood
Duluth, Minn.
Bemidji, Minn.
N. Little Rock, Ark.
Temple Industries
Diboll, Texas
U.S. Gypsum
Greenville, Miss.
Pilot Rock, Ore.
Danville, Va.
U.S. Plywood; Div.
Catawba, S.C.
Lebanon, Ore.
Hood River, Ore.
Weyerheuser
Klamath Falls, Ore
Craig 1, Okla.
Craig 2, Okla.
120
225
100
150
175
140
75
180
1965
1949
1957
1956
1971
1934
1954
1967
wet / \s /
wet y
-------
In terms of marketing-distribution, only five of the firms operate
captive distribution systems. The others sell through independent, fre-
quently non-exclusive, distributors.
A second group of companies are considerably smaller in total
sales and in their involvement in hardboard manufacture. They generally
operate only one plant in this sector, although one company does represent
a significant proportion of total industry capacity from three locations.
Most of the companies are producing hardboard for further processing at
their own facilities into paneling or siding, as well as marketing less
specialized commodity boards for industrial applications. For example,
companies such as Masonite, Abitibi, and Georgia-Pacific pre-finish hard-
board for paneling and siding applications, as well as sell it to competing
pre-finishers. In addition, these same companies promote to OEM cate-
gories through direct sales.
Table II.A.5 Lists the producers in order of estimated 1972 ship-
ments. To illustrate the significance of hardboard in their operations,
we have calculated the dollar volume of hardboard sales assuming an
average sales price of $75/MSF (1/8" equivalent) and based on estimated
1972 production, recognizing that the actual revenue attributable to
hardboard will depend on the product (industrial, paneling, or siding),
degree of finish (sol 1 as a commodity board or as a pre-finished product,
siding, etc.) and the actual level of production. However, our review
and analysis of the c. Derations of each company suggests that for all of
the major companies '. lales exceeding $50 million) except Masonite, hard-
board accounts for li ;s than 15% of total sales, and usually less than
5%. The hardboard s..Les of the smaller independents are a greater pro-
portion of corporate sales.
c. Industry Segmentation
We proposed originally to segment the plants in this industry in
the following manner to pinpoint the most critical areas of potential
economic impact brought about by water pollution abatement requirements.
The actual segmentation used was modified based on the guidelines and
abatement costs established by the Guidelines Contractor and the sensi-
tivity shown to the various manufacturing processes, products produced,
age of plant, etc.
It is possible to identify the following representative plants
that could be modeled to provide the EPA with a realistic range of facili-
ties and range of economic impacts:
1. Wet process; start-up prior to 1955; capacity between 100
million square feet and 200 million square feet.
2. Dry process; plant built since 1966; capacity over 300 million
square feet.
21
-------
TABLE II.A.5
ESTIMATED SHIPMENTS OF HARDBOARD PRODUCERS. 1972
Million Square Feet
Masonite 2130
Abitibi 555
Georgia-Pacific 443
U.S. Plywood (Champion International) 428
Superwood 420
U.S. Gypsum 366
Celotex (Jim Walter) 300
Evans Products 275
Pope & Talbot 208
Weyerhaeuser 191
Temple Industries 158
Superior Fiber Products 120
Boise Cascade 76
Forest Fiber Products 70
Anacortes, Veneer 35
Caradco (Scovill Manufacturing) 23
5798
SOURCE; Annual Reports, Company Data, and Contractor's Estimates
22
-------
3. Wet process; built prior to 1955; capacity less than 100
million square feet.
4. Dry process; built between 1956 and 1965; capacity between
100 and 200 million square feet.
The plants most likely to have pollution problems are those:
utilizing a wet-forming process as considerable water is used
in the fiber preparation stage to remove semi-celluloses and
related compounds;
which have a proportion of their production in a wet process
SIS board;
that temper the board in oil;
built prior to 1965 and have not had pollution control equip-
ment added.
The final approach used to accomplish the economic impact analysis
is presented in Section III.B.
3. Financial Profile
The financial performance of a plant is more sensitive to the
age of the plant and its size than it is to the product mix or even the
type of process. Plants in this industry average about $60 per thousand
square feet on net sales for standard board. This amount excludes all
freight and discounts and will vary from $40 to $85 per thousand depending
on the location (for freight equalization) and other normal factors. The
following summarizes the range of financial elements existing in this
industry sector:
1. The fixed and variable cost proportions of total manufacturing
costs are approximately 40-60%, respectively.
2. Total manufacturing costs range from 55% of net plant sales to
70%, with an average of about 65%.
3. Gross profits as a percentage of net sales range from 15-45%,
with an average of about 25%.
4. Net profit before tax ranges from 10-30%, with an average of
about 18%.
5. The return on current investment after tax ranges from 6-20%,
with an average of approximately 15%. This would equal or
exceed the return on investment to targets set by most com-
panies in the industry.
23
-------
6. The net current asset value: for individual facilities will
vary depending on age of construction, dates of expansions
and current size, and thus will have little significance on
an industry basis. However, these asset values could be as
low as $3.0 million per facilities and range to well over
$50 million for the larger or newer plants.
Table II.A.6 incorporates these factors into a pro forma income statement
for plants in the industry.
4. Price Effects
Although a few companies dominate the industry capacity, little
price leadership is evident and intra-industry price competition cannot
be considered severe. To a great extent this is because the industry has
been operating at high capacity utilization rates; a contributory factor
is that the industry serves a very wide range of end uses and an indi-
vidual firm can usually obtain the price it requires without head-on
competition. However, a reasonable amount of inter-industry competition
does occur. Hardboard has traditionally gained its major markets by
competing against more entrenched products such as lumber and plywood
and now is itself being challenged by plastics and metal for some appli-
cations. Consequently, substitution competition by or for hardboard does
occur, and helps to determine prices.
Prices are quoted on a dollars per thousand square foot basis and
are usually based on standard units and sizes. Prices are FOB shipping
point with full rail freight allowed to destination on a zone basis,
Because of the wide range of end uses and resulting customer categories,
hardboard prices are set at a number of levels depending on the class of
trade of the purchaser and frequently involve a complicated schedule of
discounts and extras. The customer categories and their relationships to
the suppliers have been previously described; discounts and extras will
additionally vary depending on the size of the load, packaging, style of
product, degree of fabrication, quality, etc. The average net sales value
varies from $50 per thousand square feet to $85 per thousand square feet
for most standard 1/8 inch products, depending on the customer category,
but averages about $65-70.
The wholesale price index of 1/8" hardboard, as reported by the
Bureau of Labor Statistics, is as follows for the past six years:
1967 100.0
1968 98.0 -2.0%
1969 98.7 +0.7%
1970 101.1 +2.4%
1971 102.7 +1.6%
1972 108.0 +5.2%
24
-------
TABLE II.A.6
PLANT INCOME STATEMENT
Net Sales 100.0
Manufacturing Costs
Fixed 26.0
Variable 39.0
65.0
Subtotal 35.0
Other Operating Expenses 10.0
Gross Profit 25.0
Interest, Other Charges 7.0
Profit Before Tax 18.0
25
-------
The ability of hardboard manufacturers to pass on additional
costs, such as those arising from pollution abatement expenditures,
obviously depends on the amounts involved. The industry is operating
currently at high levels of capacity utilization and is expected to con-
tinue doing so into the foreseeable future. We believe that relative
price increases of up to 8% over the next five years, and 15% over 10
years, would have little or no effect on market demand, and capacity
utilizations and profitability will continue to be maintained. Relative
cost increases higher than these would make individual facilities uncom-
petitive and thus economically marginal and will certainly result in a
more cautious approach to the commitment of capital for capacity expan-
sions, although total demand on an industry basis will still be maintained.
Above 15%, relative price increases will begin to affect demand
for domestic hardboard as imported products will look relatively attrac-
tive and as purchasers will examine alternative materials. For industrial
board applications, however, substitutions are unlikely to occur in the
short term as products must be re-designed, contracts negotiated, and
purchases made. For construction uses, the change in allegiance can and
will occur more rapidly than for industrial applications. We believe
that the initial result of this loss of support would be a slower rate of
growth and rate of capacity additions rather than under-utilized facili-
ties or unprofitable operations. Some plants will, because of age, location,
energy availability, markets served, or other factors, become marginal.
No direct government influence on supply or demand has been ex-
perienced or is anticipated by the hardboard industry. However, indirect
influences to exist.
Hardboard competes to some extent with lumber and plywood; both
commodities have been under severe demand and price pressure over
these past twelve months. In addition, exports of lumber from the U.S.
to Japan have aggrevated the domestic availability and have stimulated
industrial and some construction users to consider alternate materials
in more ready supply. Hardboard has thus been considered as a substitute
material by users who have not necessarily purchased it before, but the
relative unavailability of hardboard, especially to new customers, has
made such substitution difficult in the short term.
Long-term substitution will depend to some extent on government
actions to limit the amount of lumber exports and to increase the availa-
bility of lumber and plywood in the domestic market. The Federal Government
did take some steps by negotiating with Japan to decrease that country's
imports and by increasing the amount of federal forest lands that could be
cut in the spring of 1973. These actions, together with a downturn in
the demand for lumber and plywood caused by a slower rate of residential
construction in the second half of 1973 and into 1974, will certainly
relieve pressures on lumber and plywood demand and, indirectly, on hard-
board.
26
-------
B. WOOD PRESERVING
1. Industry Structure
a. Products
The wood preserving industry in the United States has developed
based on the need for prolonging the life of wooden structural members.
Historically railroad ties, telephone poles, and piling treated with
creosote have been the major products of the industry. In recent years,
lumber and plywood treated for fire retardancy have experienced the
fastest growth.
As defined in Standard Industrial Classification (SIC) 2491,
the wood preserving industry "comprises establishments primarily engaged
in treating wood, sawed or planed in other establishments, with creosote
or other preservatives to prevent decay and to protect against fire and
insects. This industry also includes the cutting, treating, and selling
of poles, posts, and piping, but establishments primarily engaged in
manufacturing other wood products, which may also treat with preserva-
tives, are not included."* The industry's products include:
Bridges and trestles of wood, treated
Creosoting of wood
Crossties, treated
Flooring, wood block, treated
Mine props, treated
Millwork, treated
Piles, foundation and marine construction, treated
Piling of wood, treated
Poles, cutting and preserving
Poles and pole crossarms, treated
Posts of wood, treated
Railroad cross bridge and switch ties, treated
Structural lumber and timber, treated
Vehicle lumber, treated
Wood products, creosoted
The industry can be segmented in several different dimensions
corresponding to size, product, technology, and location. Roughly
speaking, the firms are located in the South, treating Southern Pine,
and in the West, treating Douglas Fir. Most treating is performed in
pressurized cylinders, although about 10% of the firms use nonpressure
processes. The pressure processing uses oil-borne or water-borne pre-
servatives. The products made with oil, such as piling and railroad
ties, have a distinct odor and "oiliness," which makes them unsuitable
for use where odor is objectionable. The water-borne preservatives are
used in these cases, such as for preserving plywood and lumber, includ-
ing treating with fire retardants.
*Standard Industrial Classification 2491.
27
-------
b. Production
From 1960 to 1972 the volume of wood treated with preservatives
increased from 216.1 million cubic feet to 272.6 million cubic feet
(+26%), with a peak production of 286.4 million cubic feet in 1967 result-
ing from shipments to Vietnam. Table II.B.I shows the historical pro-
duction data by product category. The industry has experienced sub-
stantial swings in its production levels over a long period of time with
a peak level of 356.6 million cubic feet in 1947. Production of fence
posts, piling, poles, and switch ties has fluctuated around a stable
level in recent years while cross ties, lumber and timber have exper-
ienced strong growth.
Table II.B.2 shows the regional breakdown of production by
product in 1971. There are no statistics available on the geographical
distribution of final sales. In terms of volume, the major production
components are poles and cross ties, and these would follow the railroad
and telephone pole distribution pattern. The third major component is
lumber and timber, which would have its heaviest demand in humid areas,
such as the South and the Northwest.
In addition to plants in the wood preserving industry, a number
of railroads and utility companies operate their own wood preserving
plants. The Forest Service of the U.S. Department of Agriculture re-
ported statistics for 1972 on 384 commercial wood preserving plants and
18 plants operated by railroads and others.* However, these 18 captive
plants are not considered part of the industry under SIC 2491 and are
not evaluated in this report.
The value of shipments rose from $240 million (1963) to $415
million (1971) (+73%). The price of preserved wood has increased sub-
stantially since 1967 due in large part to the increase in raw wood
prices. The value of shipments has followed these price increases.
Table II.B.3 lists the value of shipments by products for 1963 and 1967;
Table II.B.4 lists the total value of shipments for 1967 through 1971.
The levels of exports and imports of preserved wood are ambiguous
since, for the most part, wood products are not classified as preserved
or not. The value of exports and imports are very small and are mostly
transactions with Canada; for example, the 1963 input/output table
listed a net export of $1.2 million for the industry. Table II.B.5
lists the available data which at least sets an upper limit on the pre-
served wood values in 1967.
*Wood Preservation Statistics1972, Forest Service, U.S. Department of
Agriculture.
28
-------
TABLE II.B.I
Crossarms
Crossties
WOOD TREATED WITH PRESERVATIVES
By Product
(millions of cubic feet)
Lumber &
Timbers
Piling Poles
Switch
Ties
Miscellaneous
Total
VD
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
4.3
4.7
4.6
3.4
3.6
3.7
3.6
3.5
3.4
3.6
4.9
5.5
4.6
3.3
3.2
3.5
3.1
2.4
85.9
83.2
101.5
73.9
52.1
57.2
55.8
42.9
47.4
55.7
63.7
70.4
80.4
78.5
71.3
79.4
87.0
85.9
16.2
12.8
13.4
14.9
15.7
13.5
15.0
17.1
18.2
18.6
18.4
19.7
21.0
16.5
15.7
15.1
16.7
18.2
39.4
41.0
41.9
38.4
39.9
39.5
38.8
42.6
43.5
47.3
50.3
60.4
62.2
62.6
59.6
55.7
59.9
64.0
13.9
16.8
16.3
16.2
14.7
16.1
14.3
17.8
15.9
16.5
17.8
21.1
16.6
17.4
14.7
15.1
13.7
14.3
74.8
85.8
84.0
73.8
78.3
75.1
76.4
78.7
77.0
80.6
83.9
87.1
84.3
76.2
74.4
76.8
74.4
74.5
7.3
8.1
8.1
6.7
4.5
4.9
4.7
4.3
5.3
6.8
7.5
7.8
8.3
7.9
6.4
7.9
6.2
6.0
3.8
3.6
4.8
5.6
5.7
6.0
6.6
6.9
6.7
8.0
9.2
8.6
8.9
9.4
8.2
6.9
7.7
7.2
248.4
257.9
274.5
232.8
214.5
216.1
215.4
213.9
217.4
237.0
255,
280,
286,
271.9
253.5
260.3
268.6
272.6
(1) Data for 1966-1971 are not comparable with previous years because they include wood treated with
fire-retardant chemicals under each category rather than under MISCELLANEOUS.
(2) WOOD BLOCKS: Data for 1957-1969 are included in MISCELLANEOUS.
(3) MISCELLANEOUS: Includes all wood products treated with fire-retardant chemicals in 1955-1965.
In 1965, 2.8 million cubic feet of wood were treated with fire retardants.
SOURCE; WOOD PRESERVATION STATISTICS, U.S. Department of Agriculture, Forest Service, and American
Wood-Preservers' Association.
-------
TABLE II.B.2
HAmiAL TREATED IN 1971 BY KEG10N, AND UNITED STATES TOTAL 1970-71
(THOUSAND UNITS)
/ NORTH SOUTH ROCKY
NORTHEAST CtNFlUL SOUTHEAST Cf-NTRAL MOUNTAIN PACIFIC
TOTAL PUNTS
1970 1«71 REROUTING
USUAL UNITS OF MtASUAE
OJ
O
POL6S
CROSSTIES
LUHSfK ANl TJHBfcRS
Fc\CC PJSTS
PILING
SWITCH TIES
CKOSSARMS
PLYWnou
OTHtR
NUMBER
NUMBER
BCARO FECT
NUMBCR
LINE** FCliT
BCARO *CfcT
NUMBER
SOUAPi FfETT
CUBIC FEET
IS
179*
49S16
217
1926
*048
10)
ID)
545
548
7918
64770
34
545
7969
26135
5263
2537
877
2001
323
131
2529
22836
16063
14925
JdlO
3727
1065
471
175
H56
29720
30037
16469
9371
5602
2180
322
241
1058
3342
4047
1437
563
71
277
10)
1C)
308
10400
4773
12286
152
2191
183
1032
R21
840
76760
79364
55699
15106
15128
7874
3454
1344
5538
74374
87029
59851
166J9
136<>9
6208
3075
1578
6136
12111
47764
97199
10138
33479 260288 268(19
(0) WITHHELD TO AVOID POSSIBLE DISCLOSURE OF INDIVIDUAL COMPANY OPERATIONS.
NOTfc- COMPONENTS MAY N(,T ADD TO TOTALS DUE TO KOUN01NC.
SOURCE; Wood Preservation Statistics, 1971, Forest Service, U.S. Dept. of Agriculture
-------
TABLE II.B.3
VALUE OF SHIPMENTS OF PRESERVED WOOD PRODUCTS
FOR 1963 AND 1967
Total shipments including
SIC Code
2491
24911
24911
24911
w 24911
M 24911
24911
24919
24910
24910
12
18
15
19
00
11
00
02
Unit of
Product Measure
WOOD PRESERVING, TOTAL
Wood owned & treated by same establishment:
Receipts from sales & transfers of wood
owned & treated by same establishment
Poles & piling
Crossarms & sawn lumber, except railway ties MM bd.ft.
Railway crossties & switch ties MM ties
Other wood products owned & treated by
same establishment
Wood owned & treated by same establishment,
n.s .k.
Receipts for treating wood owned by other
establishments
Wood preserving, n.s.k. (for companies with
10 or more employees)
Wood preserving, n.s.k. (for companies with
less than 10 employees)
1967
Quantity
(X)
(X)
(X)
327.0
10.3
(X)
(X)
(X)
(X)
(X)
Value
(MM$
327.
284.
175.
55.
37,
15.
0.
28.
6.
7.
)
5
5
1
7
6
2
9
7
6
r
7 !
interplant
transfers
1963
Quantity
(X)
(X)
(X)
7.4
(X)
(X)
(X)
(X)
Value
(MM$)
240.3
209.
164.
22.
19.
3.
25.
5.
1
0
3
4
4
9
3
(X) Not applicable.
n.s.k. Not specified by kind.
SOURCE: U.S. Census of Manufactures, 1967-
-------
TABLE II.B.4
TOTAL SHIPMENTS OF
Year
1967
1968
1969
1970
1971
WOOD PRESERVING INDUSTRY 1967 TO 1971
Shipments
($ Million)
327.5
356.3
372.6
397.1
416.9
SOURCE; Annual Survey of Manufacturers, 1967, 1968, 1969, 1970, 1971;
Arthur D. Little, Inc.
32
-------
TABLE II.B.5
U.S. EXPORTS AND IMPORTS OF PRESERVED WOOD
Exports (1967)
Poles and piling (treated & untreated) $9,032,650
Ties and mine timbers (treated & untreated) 1,702,316
Imports (1967)
Poles and piling (treated & untreated) 5,513,554
Ties (treated & untreated) 255,736
Lumber and siding (drilled and/or treated) 3,071,312
c. Marketing System
The marketing system for preserved wood differs somewhat among
products. Figure II.B.I illustrates the general marketing system.
FIGURE II.B.I
MARKETING SYSTEMS IN THE WOOD PRESERVING INDUSTRY
Wood Wholesalers
Forests
Lumber Mills
I
Wood Preserving Plants
Logging Contractors
Wood Commission Man.
Final consumers: contractors, rail-
roads, utilities, etc.
33
-------
Preserved wood is largely a commodity market modified by trans-
portation costs which give regional advantages to some producers. For
some products, wholesalers and commission firms conduct continuous pric-
ing and bidding between the preserving plants and the final customers on
the telephone. Much of the preserved lumber is sold from price lists.
On the other hand, most piling and railroad ties are sold through formal
bids for specific projects. Some large consumers deal directly with the
wood preservers. Purchase decisions are made on the basis of price and
delivery of future production, since most preservers only keep small
inventories and make the products only on order.
A few wood preservers own forests. These companies will not
sell preserved wood when it is more profitable to sell the wood in other
forms. Therefore, the range of possible prices for preserved wood is
limited to some extent by the prevailing prices of other wood products.
d. Substitute Products
Preserved wood products face continuing competition from non-
wood products. As in most such situations, there are advantages and
disadvantages to each product in addition to price differentials. How-
ever, prices of wood products are strongly influenced by the prices of
substitute products and tend to be set slightly below the substitute if
there is strong competition.
Table II.B.6 lists some of the preserved wood products and their
potential substitutes. There is more competition for some uses than in
others. Wood piling, for example, is only used for loads up to 50 tons.
In some applications, such as building shingles, the aesthetic quality
of the wood makes it a premium product which can be sold above the price
of competitive products.
e. Future Demand
Total production in the wood preserving industry is the sum of
products variously experiencing growth and decline. It would appear
that production for the whole industry will continue to have long-term
growth on the order of 2% per year. Growth in railroad ties will con-
tinue to be strong because of the tightened federal railroad safety
regulations. Treated lumber and plywood will also experience growth
higher than 2%, but will be subject to the fluctuations in non-residential
construction.
2. Industry Segments
The wood preserving industry is composed of a large number of
small, privately-owned plants and a few larger establishments owned by
corporations not primarily in the wood preserving industry. The Koppers
Corporation has the largest share of the market, followed by Mass-
American, Inc., J.H. Baxter & Co., and American Creosote Works, Inc.
34
-------
TABLE II.B.6
PRESERVED WOOD PRODUCTS AND THEIR SUBSTITUTES
Preserved Wood Product
Piling
Substitute
In-place concrete
Driven concrete
Steel piling
Hollow I beams
Marine piling
In-place concrete
Driven concrete
Interlocking iron
sheets
2 x 4's, etc.
Plywood
Metal tubing
Concrete
Cinder block
Fire-retardant lumber, plywood, etc.
Asbestos
Gibson
Metal sheets
Poles
Metal tubing
Precast concrete
35
-------
Each of these firms operates at numerous locations.
The industry is located primarily in the. South and the Northwest.
According to the Department of Agriculture's Forest Service, there were
in 1972 407 known wood treating plants. Of these, 18 were operated by
railroads and other wood-using organizations and did not treat wood for
sale or contract. Three of the plants were reported to be inactive. Of
the remaining plants, about 320 (83%) used exclusively pressure process-
ing equipment; 50 used non-pressure equipment, and 30 used both types.
Table II.B.8 shows the geographical distribution of wood pre-
serving plants in the U.S. The largest number of plants are in the
South Central region (127; 34%), followed by the Southeast (99; 26%).
Table II.B.9 shows the regional distribution of plant size and produc-
tion for 1967. The regions in Tables II.B.8 and II.B.9 are not exactly
the same, but the important states are broken out separately. Table
II.B.10 describes the total industry according to the number of employees
in an establishment.
Of the 375 establishments reported by the Census of Manufactures
(1967), 177 had 20 or more employees; 198 had less than 20 employees.
The 177 plants with more than 20 employees produced $122.6 million (91%)
of the $135.6 million of value added by the industry. These larger firms
also employ 11,000 (90%) of the 12,200 employees in the whole industry.
Table II.B.ll is a time series of the employment breakdown and the
number of establishments from 1967 to 1971 taken from the Annual Census
of Manufactures. The number of establishments reported for 1967 is 388
rather than the 375 reported by the Census of Manufactures. The differ-
ences may result from slightly different definitions of what is in the
industry category. The time series from the Forest Service is also
included in the table. Their estimate of the number of plants is even
higher394 for 1967which may be due to different definitions. How-
ever, the Forest Service does not recontact each plant each year, and
they may not be as likely to pick up plant closings as the
Census of Manufactures. The Forest Service conducted a new survey in
1972 which located several previously unreported plants.
While the wood preserving industry has a large number of small
firms, it is fairly concentrated in terms of the market share held by
the largest firms. Table II.B.12 shows the concentration in the in-
dustry for 1963, 1967 and 1970.
There are basically two different patterns of ownership and
management in the industry. Plants in the first category are one of a
number of plants owned by a corporation which may or may not be pri-
marily in the wood preserving industry. These plants are managed by
individuals with little or no equity in the corporation. Plants follow-
ing the second pattern are owner managed. They may have even been owned
by the same family for several generations. The operation is probably
incorporated, but the corporation is privately-held. There are no
36
-------
TABLE II.B.8
WOO_D-PRE SERVING PLANTS IN THE UNITED STATES BY STATE AND TYPE. 1971
CCMMPflf. IAI
PRESSURE
PRESSURE
NCfc- AND NCN-
PRESSURE PRESSURE
RA1L.ROAD A«Q
PRESSURE
NON-
PKESSURE
NUNSE*
PLANTS
NOT
REPORTING
REPORTED
INACTIVE
NORTHEAST
CCNNrCUCUT
OELABARS
OUT. Of COLUMBIA
HAlNc
MARYLAND
MASSACHUSETTS
NtM MAIKSrllPE
NEW JERSEY
NEW YORK
PENNSYLVANIA
RHOCE ISLAND
VERMONT
VEST VIRGINIA
TOTAL
NORTH CENTRAL
ILLINOIS
IHOIANA
lOHt
KANSAS
KENTUCKY
MICHIGAN
MINNESOTA
MISSOURI
NEBRASKA
NORTH DAKOTA
OH 1C
WISCONSIN
TOTAL
SOUTHEAST
FLOR1CA
GEORGIA
NORTH CAROLINA
SOUTH CAROLINA
VIRGINIA
TOTAL
SOUTH CENTRAL
ALABAMA
ARKANSAS
LOUISIANA
MISSISSIPPI
OKLAHOMA
TENNESSEE
TEXAS
TOTAL
ROCKY MOUNTAIN
ARIZONA
COLCaADO
IDAHO
MONTANA
NEVADA
NEW MEXICO
SOUTH DAKOTA
UTAH
WYOMING
TOTAL
PACIMC
ALASKA
CALIFORNIA
HAUAII
OftEGON
WASHINGTON
TOTAL
0
1
C
0
6
1
1
4
9
6
1
0
3
2*
23
24
II
II
15
91
22
11
21
It
4
*
IT
111
3
2
0
1
o
0
1
10
0
t
3
6
T
2*
0
0
0
0
0
1
9
9
0
0
0
0
12
0
2
0
4
4
10
1
0
T
4
41
2S
27
1*
11
17
21
12
22
22
*
34
127
0
2
I
2
2
29
0
12
3
10
17
42
9
4
1
1
0
13
4
24
UNITED STATES TOTAL
30*
35
10
390
SOURCE: Wood Preservation Statistics, 1971, Forest Services, U.S. Department
of Agriculture.
37
-------
TABLE II.B.9
Industry and .
geographic area
United States
Northeast Region
Middle Atlantic Div.
Pennsylvania
North Central Region
East N.Central Div.
Ohio
Indiana
Illinois
West N.Central Div.
Minnesota
Missouri
South Region
South Atlantic Div.
Maryland
Virginia
West Virginia
North Carolina
South Carolina
Georgia
Florida
East S.Central Div.
Tennessee
Alabama
Mississippi
West S.Central Div.
Arkansas
Louisiana
Oklahoma
Texas
West Region
Mountain Div.
Wyoming
Pacific Div.
Washington
Oregon
California
[BUTION OF
PLANT SIZE
AND PRODUCTION
Establishments
Total
(number)
375
21
16
10
57
30
10
3
10
27
11
10
231
97
4
12
6
21
11
22
20
55
6
17
24
79
18
25
9
27
66
28
4
38
13
10
13
With 20
employees
or more
(number)
177
8
6
4
32
18
6
2
7
14
6
7
101
40
2
7
3
4
5
12
6
24
3
7
11
37
7
11
6
13
36
9
2
27
11
9
6
All
employees-
Number
(1.000)
12.2
.4
.3
.2
1.9
1.2
.4
AA
.5
.8
.3
BB
7.7
3.3
AA
.4
BB
.4
.5
.9
.5
2.0
.2
.6
1.0
2.4
.6
.7
.2
.9
2.2
.6
AA
1.6
.6
CC
.4
FOR 196;
Value
added
by manu-
facture
($MM)
135.6
4.9
4.0
2.5
24.0
15.9
5.3
(D)
7'. 2
8.1
. 4.0
(D)
78.9
36.2
(D)
5.9
(D)
3.2
5.7
11.5
4.6
19.1
2.3
5.8
9.3
23.6
5.6
7.6
2.8
7.6
27.7
5.7
(D)
22.0
8.0
(D)
7.2
Value of
shipments
($MM)
344.2
13.0
10.3
6.7
54.5
33.8
11.4
(D)
16.4
20.7
12.2
(D)
203.8
89.6
(D)
13.3
(D)
8.5
17.4
24.6
14.3
53.2
6.9
17.0
25.7
61.0
13.6
19.9
6.4
21.2
72.9
14.5
(D)
58.4
22.0
(D)
19.0
General statistics for some producing States have to be withheld to avoid
disclosing figures for individual companies. However, for such States, the
number of establishments is shown and the employment size range is indicated
by one of the following symbols: AA - less than 250 employees; BB - 250-499
employees; CC - 500-999 employees; ...
(D) Withheld to avoid disclosing figures for individual companies.
SOURCE; U.S. Bureau of the Census, Annual Survey of Manufacturers: 1967..
38
-------
TABLE II.B.10
EMPLOYMENT AND PRODUCTION BY SIZE OF ESTABLISHMENT
Item
Establish- All Employees
ments Number Payroll
(number) (1.000) ($MM)
Value added
by manu-
facture
($MM)
Value of
shipments
($MM)
2491Wood Preserving
Establishments, Total 375
Establishments with an
average of:
1 to 4 employees
5 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499 employees
2,500 employees or more
Establishments covered
by admin, records-'- 108
12.2
.3
61.9
1.4
135.6
3.0
344.2
102
39
57
89
60
27
1
.2
.3
.8
2.8
4.3
3.9
(D)
.8
1.3
3.6
14.8
21.7
19.7
(D)
2.2
2.8
7.9
34.9
46.4
41.3
(D)
5.1
7.6
21.1
86.2
118.8
105.4
(D)
7.7
Estimated using administrative records of other public agencies.
(D) Withheld to avoid disclosure of individual firms.
SOURCE: U.S. Bureau of the Census, Annual Survey of Manufacturers: 1967.
39
-------
TABLE II.B.ll
-C-
o
TIME SERIES ON SIZE DISTRIBUTION OF WOOD PRESERVING INDUSTRY
U.S. County Business Patterns - Summary
number of reporting units. by employment-size class
1972
1971
1970
1969
1968
1967
s.
5
1 to 3
86
82
78
71
64
L -
4 to 7
63
58
57
57
46
8 to 19
97
107
108
88
95
20 to 49
93
96
91
95
99 1
50 to 99
56
56
53
51
57
100 to 249
24
22
23
27
26
250 to 499
1
2
2
2
1
1
500 or
more
1
-
-
i
i
;
_J
Total units
reporting
421
423 H
412
391
388
Number of
employees
12,605
ta . . .. - ---T-.-TL , ., ,
12,523
12,268
12,099
12,524
Total units
reporting1
389
367
368
371
387
394
U.S.
Forest
Service
forest Service, U.S. Department of Agriculture. Data includes all plants in operation for at least part
of the year, and excludes plants owned by railroads and others which do not produce preserved wood for sale.
SOURCE; Arthur D. Little, Inc.
-------
TABLE II.B.12
CONCENTRATION IN WOOD PRESERVING INDUSTRY FOR 1963, 1967. AND 1970
Value of shipments
Percent accounted for by
SIC
Code
2491
Industry and Year
-1970
Wood Preserving -1967
-1963
4
largest
companies
34
35
34
8
largest
companies
NA
44
44
20
largest
companies
NA
63
64
50
largest
companies
NA
84
84
SOURCE: U.S. Bureau of Census, Annual Survey of Manufacturers, 1970 and 1967.
-------
publicly-held companies primarily engaged in wood preserving. Table II.B.13
lists the organizational breakdown of companies in the industry.
The ownership and management patterns in an industry are important
for an assessment of how the industry will be impacted by pollution control
costs. Profitability requirements are very different between an owner-
manager who is receiving a good salary and a corporation which more cri-
tically views the return on equity from one of many plants. There are
120 multiunit companies in the industry with 20 or more employees; all
but one are corporately held. The 120 produce $99.4 million (73%) of
the $135.6 million of value added by the entire industry. The remain-
ing 255 will tend to have older technology, less financial resources,
and higher unit costs of production. Also, on the basis of per unit of
production, the costs of pollution control tend to fall more heavily on
smaller plants. These competitive disadvantages, combined with the
different behavior of the firms' owners, will produce whatever differences
there are in the way firms within the wood preserving industry react to
the addition of pollution control costs to the costs of production.
The impact analysis will focus on plants using pressure pro-
cesses in the Southeast and South Central sections of the U.S. In these
areas there were a total of 231 plants in 1971. The pressure plants
totaled 202, nine plants were nonpressure, and eleven plants use both
pressure and nonpressure.
Of the 202 plants using pressure processes, 163 use oil-based or
creosote preservatives. Twenty-three of the 163 plants are primarily
lumber companies or firms with other activities besides wood preserving.
Of the 52 plants using nonoil-based preservative, 24 are operated by
lumber companies. The nonoil-based operations are all very small with
a large concentration of plants in Georgia and Florida.
The primary business activity of the company operating the pre-
serving facility can be important to economic impact analysis from three
perspectives. If the- treating operation is small but part of a company
with larger financial capabilities, the company as a whole will be better
able to make capital expenditures necessary to put the preserving facil-
ity into compliance with the pollution control requirements. Secondly,
if preserving is an important service, e.g., one that a lumber company
provides to its customers, the company will not usually judge the pro-
fitability of the treating operation as if it were an independent
plant. The treating operation will tend to be viewed as, part
of the entire process of logging, cutting, treating, and selling which
must stay profitable. Finally, if a treating facility operated by a
lumber company is closed, there will be substantially less employment
loss than if it were independent. Most of the employees are involved
with handling the wood, and they can be absorbed in other plant activities.
42
-------
TABLE II.B.13
OWNERSHIP
ORGANIZATION OF THE
WOOD PRESERVING INDUSTRY
Establishments
Item
Wood Preserving, Total
Type of operation
Multi-unit companies,
total
Corporate ownership
Non-corporate ownership
Single unit companies,
total
Corporate ownership
Non-corporate ownership
Adminis. records
Total
(number)
375
145
143
2
122
95
27
108
With 20
employees
or more
(number)
177
120
119
1
57
50
7
0
Employees
(number)
(1,000)
12.2
8.5
(D)
(D)
3.4
(D)
(D)
0.3
Value
added by
manufacture
($ Million)
135.6
99.4 '
(D)
(D)
33.1
(D)
(D)
3.0
Value of
shipments
($ Million)
344.2
253.4
(D)
(D)
83.1
(D)
(D)
7.7
Legal form of organization
Corporate
Non- corporate, total
Adminis. records
238
29
108
169
8
0
11.5
0.4
0.3
128.9
3.6
3.0
328.6
7.8
7.7
(D) Information withheld to avoid disclosures of individual firms.
Administrative records - information received from the records of other public agencies,
SOURCE; U.S. Bureau of Census, Annual Survey of Manufacturers, 1967.
43
-------
3. Financial Profile
An industry such as this with a large number of mainly small
firms, frequently privately held, utilizing a variety of production tech-
nologies and producing several different end products , is not ready
profiled in a financial sense. Thus, financial data presented here is a
blend of total industry (macro) and individual firm (micro) data.
The Southern Pressure Treaters Association, which covers the
plants which are likely to have the most difficulty meeting the pollu-
tion standards, conducts surveys of plant operations including profit-
ability. Over the last several years profits for the Association members
have varied between six and seven percent of net sales before taxes.
The industries' profits on sales are lower than the average for all
manufacturing industries and the average for lumber and wood products
generally. (See Table II.B.14.)
TABLE II.B.14
U.S. CORPORATE PROFITS (AFTER TAXES)
AS A PERCENT OF SALES
Lumber and
Year All Manufacturing Wood Products
1965 5.6 3.9
1966 5.6 3.8
1967 5.0 3.4
1968 5.1 5.3
1969 4.8 4.8
1970 4.0 2.5
1971 4.2 4.4
Note: Before tax profits are approximately double after tax
profits.
Source : Quarterly Financial Report for Manufacturing Corporations,
Federal Trade Commission Securities and Exchange
Commission.
While the average profitability of firms in the Southern Pressure
Treaters Association has remained fairly constant over a period of sharp
changes in prices and production, the range of profits has been very
large. Table II.B.15 lists the profits for the first quarters of 1972
and 1973.
44
-------
TABLE II.B.15
PROFITS ON SALES OF THE SOUTHERN PRESSURE THEATERS ASSOCIATION
MEMBERSHIP, QUARTER ENDED MARCH 31, 1972 AND 1973
1972 1973
Upper 25% 12.4% 19.8%
Middle 50% 7.0 9.7
Lower 25% 2.2 4.7
Average 3.4 7.4
Source: Southern Pressure Treaters Association survey for
quarters ending March 31, 1972 and 1973.
It is important to remember that the costs to the treater of wood
accounts for 50% of the sales price. The cost of preservatives accounts
for another 15%. When profitability is measured against net worth or
stockholders' equity, the profits are much stronger. The firms inter-
viewed generally had little or no long-term debt. They have made sub-
stantial capital expenditures in the last two or three years generally
made out of cash flow. While it is not entirely true, we have the im-
pression that the most profitable firms are the ones whicli have made tlie
capital expenditures. The bottom quartile of firms in Table II.B.15
with before tax profits of 2% to 4% do not have much leeway for existing
with increased costs due to abatement, especially if industry demand
slackens.
Tables II.B.16 through II.B.18 describe this industry on the
macro scale. Key factors characterizing this industry include:
Cost of materials: 60%+ of value of shipments; primarily
cost of raw wood. (Tables II.B.16; II.B.17.)
Increasing productivity. (Table II.B.16.)
Low amount of new capital committed to the industry;
e.g., $10.7 MM (1967) =3.3% value of shipments, $10.4
MM (1971) = 2.5% (Tables II.B.17 and II.B.18).
In short, the industry adds a small amount of value (39.4%,
1967, Table II.B.16) to the raw wood. Further, it is a mature industry
which warrants and attracts relatively little new investment.
45
-------
TABLE II.B.16
COST OF PRODUCTION FACTORS: 1967
Items
Wood Preserving (SIC 2491)
Establishments, total
With 1 to 19 employees
With 20 to 99 employees
With 100 employees or more
All employees, average for year
Payroll for year, all employees
Production workers:
Average for year
Number
do
do
do
1,000
million dollars
1,000
375
198
149
28
12.2
61.9
10.3
18.0
Wages
million dollars
Cost of Materials, etc., total
Materials, parts, containers, etc.consumed
Cost of resales
Fuels consumed
Purchased electric energy
Contract work
Value of shipments, including resales
Value of resales
Value added by manufacture
Manufacturers' inventories:
Beginning of year, total
Finished products
Work in process
Materials, supplies, fuel, etc.
End of year, total
Finished products
Work in process
Materials, supplies, fuel, etc.
Expenditures for plant and equipment, total
New plant and equipment, total
New structures and additions to plant
New machinery and equipment
Used plant and equipment
SOURCE: Census of Manufactures, 1967.
*% of value of shipments.
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
do
47.1
214.5
198.4
8.7
4.3
1.7
1.5
344.2
10.9
13.7
62.3
57.6
2.5
1.2
0.5
0.4
3.2
135.6
39.4
71.3
37.4
9.1
24.8
77.0
41.7
10.7
24.5
11.3
10.7
1.4
9.3
.5
3.3
3.1
0.4
2.7
0.1
46
-------
TABLE II.B.17
SELECTED OPERATING RATIOS FOR THE WOOD PRESERVING INDUSTRY: 1958 TO 1967
Year
1967 Census
1966 ASM
1965 ASM
1964 ASM
1963 Census
1962 ASM
1961 ASM
1960 ASM
1959 ASM
1958 Census
Payroll
per
employee
(dollars)
5,068
4,712
4,330
4,336
4,049
3,920
3,802
3,713
3,555
3,350
Production
worker as
percent of
total
employment
(percent)
84
85
84
84
85
85
84
84
85
84
Annual
man-hours
of
production
workers
(number)
2,105
2,141
2,107
2,064
2,046
2,050
2,047
2,080
2,074
1,949
Average
hourly
earnings of
production
workers
(dollars)
2.17
1.99
1.86
1.86
1.79
1.70
1.67
1.61
1.55
1.57
Cost of
materials
per
dollar of
shipments
(dollars)
.62
.63
.64
.63
.63
.62
.61
.62
.62
.63
Cost of
materials &
payrolls
per dollar
shipments
(dollars)
.80
.80
.81
.81
.81
.80
.79
.80
.79
.81
Value
added
per
employee
(dollars)
11,103
10,479
9,050
8,788
8,344
7,859
7,439
8,194
7,775
6,632
Payrolls
as percent
of value
added
(percent)
46
45
48
49
49
50
51
45
46
51
Value
added per
man-hour of
production
worker
(dollars)
6.25
5.74
5.10
5.08
4.81
4.50
4.32
4.70
4.41
4.06
SOURCE; Census of Manufactures, 1967.
-------
TABLE II.B.18
1967
1968
1970
1971
[EW PLANT AND
Total New
Expenditures
10.7
9.3
8.4
10.4
EQUIPMENT BY THE WOOD PRESERVING INDUS
New Structures and
Additions to Plants
1.4
(1.4)
1.4
.5
New
Machinery
and
. Equipment
9.3
(7.9)
7.0
9.9
( ) Standard error is greater than 15%.
SOURCE: U.S. Bureau of the Census, Annual Survey of Manufacturers-
1967, 1968, 1970, 1971.
48
-------
4. Price Effects
A critical issue to resolve in determining how an industry will
be affected by pollution control costs is how the industry establishes
its prices and, following from that, whether the industry will be able
to raise prices sufficiently to cover the costs of pollution control.
It is important to remember that the pattern for the industry as a whole
may not be representative of many individual firms. The data presented
in this section covers price histories for preserved and unpreserved wood,
comparisons between histories and national production levels, and histor-
ies of some of the important cost components of the treating process.
The two major factors affecting the price of preserved wood are
the price of untreated wood and the price of substitute products. The
price range for treated wood is set on the upper end by the price of
substitute materials. If the cost of raw materials or the cost of
production forced the cost of the product beyond the competitive range,
then the user would switch to substitute products. Clearly, the pressure
for substitution is more important for some preserved products than for
others. The lower limit on the price range is set by the prices for
other uses of the wood. If prices fall below this point, preserved wood
is not produced. Both ends of the price range move in an absolute and
a relative sense.
Table II.B.19 lists the materials consumed by the wood preserv-
ing industry in 1967 and 1963. Of the $344.2 million in products shipped
by the industry in 1967, $136 million (40%) went for the purchase of the
wood treated by the industry. Another $35.7 million (10%) went for
creosote oil, a treating chemical. Table II.B.20 shows the price history
of wood preserving chemicals. The price of preservatives has remained
constant over a long period of time with the exception of a 12% increase
in creosote prices in 1971 and a 14% decline in pentachlorophenol prices
in 1969. This data comes from the County Business Patterns and, as was
noted earlier, may differ slightly from the Census of Manufactures'
count of firms in the industry. The payroll figures in the County
Business Patterns are January through March. For 1967, one quarter of
the full year's wages reported by the Census of Manufactures was $15.5
million, as compared with the County Business Patterns' first quarter
payroll of $15.1 million. The Business Patterns payrolls can, therefore,
be used as a good approximation of the total wages paid within SIC 2491.
The rising labor costs are an important phenomenon in .the wood
preserving industry. Wages per employee rose by 19% between 1967 and
1971. The passage of a new minimum wage bill by the Congress (which
seems likely) will have a substantial added impact on the industry.
Most of its employees are classified as laborers and would either
directly or indirectly have their wages raised by the new bill.
49
-------
TABLE II.B.19
MATERIALS CONSUMED BY THE WOOD PRESERVING INDUSTRY: 1967 AND 1963
Code
Material
1967
1963
Delivered Delivered
Unit of cost cost
measure Quantity ($MM) Quantity ($MM)
Materials, parts, &
supplies, total
Treated in same estab-
lishment:
241109 Poles, piling, & other
round or hewn wood pdks
Rough lumber including
sawn ties:
242110 Hardwood
242118 Softwood
Consumed in same estab-
lishment :
281551 Creosote oil
970099 All other materials,
components, parts, con-
tainers , and supplies
consumed
976000 All other materials,
components, parts, con-
tainers, and supplies
consumed, n.s.k.
MM bd.ft.
MM bd.ft.
(X)
(X)
241.4e
383.1
MM gallons 149.8
(X)
(X)
198.4 (X)
81.7. (X)
35.7 124.6
17.1 (X)
9.5 (X)
143.6
55.3
20.6 158.7 12.0
33.7 276.6 23.0
29,4
12.5
11.4
NOTES: (X) Not applicable.
n.s.k. Not specified by kind.
eFrom 10 to 30 percent of this figure was estimated.
SOURCE; Census of Manufactures, 1967
50
-------
TABLE II.B.20
WOOD PRESERVATIVES - PRICE HISTORY
creosote oil, tanks pentachlorophenol, drums
(cents per gallon) (cents per pound)
1960 24.0 22
1961 24.0 22
1962 24.0 22
1963 24.0 22
1964 24.0 22
1965 24.0 21
1966 24.0 21
1967 24.0 21
1968 24.0 21
1969 24.0 18
1970 24.0 18
1971 27.0 18
1972 27.0
(1) Prices are list prices taken on or near July 1 of each year.
Whenever a range of prices was given in the source, the lowest
was used.
(2) CREOSOTE OIL, TANKS: Prices are for crude, coaltar creosote.
Price bases are:
1951-1962 Works, freight adjusted
1963-1972 Works, freight equalized
(3) PENTACHLOROPHENOL, DRUMS: Price bases are:
1955-1963 Carlots, truckloads, freight equalized, works
1964 Carlots, truckloads, delivered
1965-1966 Carlots, truckloads, works
1967-1971 Carlots, truckloads, freight equalized
SOURCE; Chemical Marketing Reporter (formerly Oil, Paint, and Drug Reporter)
51
-------
In recent years the industries' capital expenditures have either
gone to pollution control or equipment to reduce labor costsparticularly
wood handling equipment. Firms which have not been making the expenditures
to reduce labor costs are becoming progressively less profitable. Their
lower earnings will make it most difficult for them as opposed to other
firms to finance major capital expenditures for pollution control or any
other requirement.
Tables II.B.21 and II.B.22 and Figures II.B.2-3-4-5 show the
price and production histories for piles, ties, and lumber. We do not
have a price history for poles but we believe it would be similar to
that for piles. Two relationships are important when examining these
histories. The first is the ability of the industry to change its prices
when the cost of producing the product is changed. (Can the industry raise
prices to pass on the added costs of pollution control?). The second,
relationship is the degree to which production levels are affected by
changes in price levels. (Will increased prices reduce total industry
production?)
Table II.B.21 demonstrates that the price of preserved ties
follows very closely the price of unpfeserved ties. The difference in
price between treated and untreated ties of $1.50 in October, 1968, is
typical of the differences for earlier-months as well. Thus, the $1.50
difference in 1973 is the same as in 1968, even though the cost of labor
has increased substantially during this period. Figure II.4 shows that
the price increases have occurred at a time of strong growth in the
production. The evidence suggests that the industry as a whole is able
to easily pass on even large price increases. But, the data also suggests
that there is strong price competition. In this situation it is very
difficult for less profitable (less efficient) plants to increase prices
more than their more profitable (more efficient) competitors. Small
plants with a higher per unit cost of pollution abatement than larger
firms may have to absorb part of the higher cost of control. The same
analysis is also true of lumber as seen in Table II.B.21.
Piles on the other hand do not exhibit this same strong price
competition. While price increases in treated piles can be broadly
related to increase in untreated wood price, they do not exactly corres-
pond, and the difference between the prices has increased almost 100%
since 1968. One would conclude that as a whole firms treating piles
would be able to increase prices if the costs of production are increased
by pollution abatement. It may also be possible for individual firms to
have some degree of price independence if their coats are slightly
different than their competitors'.
Figures II.B.2-5 compare the price histories with total produc-
tion for the industry. Since the prices are for particular plants or
products, they should be viewed as representative of prices in that
product category. The volume of pile production has fallen as prices
have increased, but we must wonder why prices would have continued to
52
-------
TABLE II.B.21
PRICE OF TREATED AND UNTREATED PILES AND TIES
Ul
U)
Date
April
Feb.
Oct.
July
April
Nov.
July
April
Jan.
Sept.
June
March
Jan.
Oct.
July
April
Jan.
Oct.
1973
1973
1973
1972
1972
1971
1971
1971
1971
1970
1970
1970
1970
1969
1969
1969
1969
1968
Untreated
($/ft.)
.98
.94
.89/. 90
.89/.90
.85
.78
.78
.72
.72
.72
.72
.72
.72
.72
.72
.72
.67
.67
Piles
Treated
($/£t.)
2.00
1.80
1.80
1.70
1.70
1.64
1.64
1.64
1.56
1.56
1.56
1.56
1.56
1.49
1.38
1.38
1.38
1.20
Difference
($/ft.)
1.02
.86
.89/. 90
.797.80
.85
.86
.86
.92
.84
.84
.84
.84
.84
.77
.66
.66
.71
.53
Untreated
($ each)
4.25
4.25
4.25
4.25
4.25
4.25
4.25
4.25
4.25
3.40
3.40
3.40
3.40
3.40
3.40
3.40
3.40
3.10
Ties
Treated
($ each)
5.75
5.75
5.75
5.75
5.75
5.75
5.75
5.75
5.75
4.75
4.75
4.75
4.75
4.75
4.75
4.75
4.75
4.60
Difference
($ each)
1.50
1.50
1.50
1.50
1.50
1.50
1.50
1.50
1.50
1.35
1.35
1.35
1.35
1.35
1.35
1.35
1.35
1.50
Piles: 12-13 ft. from butt. 7 in. 40 to 50 ft.
Ties : St. Louis ... Mixed Oak, 6" x 8" x 8'6"
SOURCE; Engineering News Record, and Contractor estimates.
-------
TABLE II.B.22
PRICE OF TREATED AND UNTREATED LUMBER
Date
March 1973
October 1972
May 1972
January 1972
August 1971
April 1971
October 1970
February 1970
October 1969
June 1969
January 1969
October 1968
May 1968
February 1968
Untreated
174
145
137
126
116
106
101
97
97
110
130
118
101
99
Treated
210
180
172
161
151
141
136
132
135
148
165
153
138
136
Difference
36
35
35
35
35
35
35
35
38
38
35
35
37
37
NOTE; Prices were supplied confidentially by a pressure treating
plant in the South. The prices are for 1000 board feet
(wholesale, FOB plant) of Southern pine 2 x 4 x 12 pressure
treated for above-ground exposure (0.23 pcf. retention) with
water-borne salts preservation.
SOURCE; Statement by the American Wood Preservers Institute to the
Cost of Living Council, April 6, 1973.
54
-------
Price of Preserved Piles
$)
2.0-
1.9-
(X)
Ln
1.8
1.7 -
1.6 -
1.5 -
1.4 -
1.3-
1.2-
1.1 -\
FIGURE II.B.2
PRODUCTION AND PRICE HISTORY OF PRESERVED PILING
Production of Piles
(millions of cubic feet)
\
1.0
Oct. '68 Oct. '69
SOUIC1: Contractor estimates.
\
\
Production.
Oct. '70
Oct. '71
Oct. '72
- 18.0
- 17.0
- 16.0
- 15.0
- 14.0
13.0
-------
FIGURE II.B.3
Price of Preserved Ties
($)
6.00
5.50.
(X)
5.00-
4.50-
\
\
PRODUCTION AND PRICE OF PRESERVED TIES
Production
Prices.
Production of Preserved Ties
(millions of ft.3)
Oct. '68 Oct. '69 Oct. '70
SOURCE: Contractor estimates.
Oct. '71
Oct. '72
85.0
80.0
75.0
70.0
-------
FIGURE II.B.4
PRODUCTION AND PRICE OF PRESERVED LUMBER
Price of Preserved Lumber
($/M Bd. Ft.)
210
200
19Q _
iao
170 _
160
150
140
120
Production of Lumber & Timber
(MM cubic feet)
.64.0
.63.0
-62.0
-61.0
_60.0
-59.0
_58.0
_57.0
in. '*Jan.1 '69
SOURCE: Contractor estimates.
Jan.1 '70
Jan.1 '71
Jan.1 '72
55.0
Jan.! '73
-------
rise in excess of wood price increases if the prices were really respon-
sible for a decline in production. The figure for lumber and timber are
moving in the opposite direction. Production is increasing as prices
are increasing. It is possible that production would have increased
more in the absence of price increases, but there is no evidence to
support that conclusion.
The wood preserving firms generally view treating as a service
rather than treated wood as a product independent of untreated wood.
They establish prices by adding a fixed charge to the raw wood. It is
this fixed charge which has remained fairly constant over a long period
of time. For this reason, many firms view the present period of high
wood prices as a period of low preserved wood prices because the cost of
treating as a percent of the untreated wood has declined.
We do not have industry-wide production figures for 1973, but
interviews with wood preservers have shown a clear decline in production
resulting from a shortage of untreated wood. Firms are operating in
terms of rationing the products they are able to produce. If this pheno-
menon continues during the time that plants are facing abatement costs,
it will be fairly easy for them to charge the prices necessary to fully
pass on the cost of abatement.
Table II.B.23 shows the distribution of prices of poles and piles
sold during the first quarter of 1972 and 1973. In 1973, only 2% of
sales were made at prices averaging 15% above the average sales price,
though 24% of the volume of sales were made at prices averaging 20% below
the average selling price. In 1972. the distribution between companies
in the middle 50%, and the top 25% were almost equal.
In addition to government influences which affect all industry,
such as OSHA, the demand for preserved wood is influenced in the five
major areas as follows:
Federal requirements for upgrading railroad tracks.
Building codes allowing the use of wood treated with
fire retardants where noncombustibles are required.
Federal government induced changes in the level of
nonresidential construction.
Government influences on the availability (and thus
price) of wood, e.g., export restrictions.
Government price control regulations.
The first two points are recent developments which have produced
the increased demand for railroad ties and lumber and plywood. The very
large increases in wood prices resulting from a fall in wood supply can
reduce preserved wood's competitive position with respect to substitute
products.
58
-------
TABLE II.B.23
SPREAD IN SELLING PRICE OF POLES AND PILING
Total Average Company Total Average Company
Quantity Net Selling Quantity Net Selling
Sold (ft.3) Price ($/ft.3) Sold (ft.3) Price ($/ft.3)
By the 25% of the reporting com-
panies realizing the highest per
cubic foot net selling price.
3,441,194
1.900
119,687
2.154
By the 50% of the reporting com-
panies realizing the highest per
cubic foot net selling price.
3,747,750
1.677*
4,299,408
1.999
By the 25% of the reporting com-
panies realizing the highest per
cubic foot net selling price.
1,215,727
1.708*
1,405,401
1.794
By All Companies
8,404,671
1.708*
5,824,496
1.987
NOTE: The averages shown above are the average company selling prices and are not weighted averages to give
the effect of company volume.
*Unknown error in the data.
SOURCE: Southern Pressure Treaters Association survey for quarter ended March 31, 1972, 1973.
-------
In addition to the government influences affecting all industry,
the wood preserving industry is or could be affected in at least two
important ways:
1) government influences on the price of wood, such as export
restrictions and the level of construction;
2) pollution control requirements for air, water, and solid
waste abatement.
Higher wood prices and the resulting higher prices for preserved
wood will tend to reduce the demand for preserved wood. Pollution con-
trol costs can both raise preserved wood prices,and the requirements to
finance pollution control equipment costs can be a major problem for
small, marginal firms.
In summary, the history of cost changes in this industry suggests
that increased costs, of all types, will be passed on in the form of
increased prices to users. For example, raw wood prices are commonly
passed on; many annual contracts have clauses to permit price escalation
based on wood cost increases. Therefore, increased costs, industry-wide,
due to effluent control, will probably be passed on to the user.
60
-------
C. PLYWOOD AND VENEER
Plants incorporated into SIC-2432 (now SIC 2435-hardwood and
2436-softwood) include plants manufacturing plywood and veneer, or just
plywood or veneer, of interior and/or exterior grades, and of softwood
or hardwood species.
The description of the plywood and veneer industry sector in this
section considers both hardwood and softwood products and markets. One
objective of this analysis is to demonstrate the distinctness of hardwood
and softwood plywood, by contrasting the two sectors. In recognition of
this distinctness, these two sectors are analyzed separately in the eco-
nomic impact analysis sections (Section III.D-softwood and Section III.E-
hardwood).
For the past 15 years plywood has been an unusually rapidly growing
forest products commodity. For example, in the period from 1960 through
1972, major forest products commodities exhibited the following growth
rates:
Pulp and paper production: 4-1/2 - 5% per year
Total lumber production: 1-1/2 - 2% per year
Softwood plywood production: 7-8% per year
A key issue which typically arises in any consideration of the
future of the forest products industry is the question of wood availa-
bility. Our underlying assumption throughout the study is that while the
cost of wood is expected to rise, in some specific areas quite precipi-
tously, we do not expect that a lack of wood will exist to the extent
that the industry growth rate will be reduced. There are still many good
sites for new plywood plants and plywood plant expansion. Other issues,
such as market demand, will be more controlling factors than wood availa-
bility.
1. Industry Structure
a. Products
Hardwood and softwood products are basically non-substitutable.
Hardwood is used primarily in decorative applications, while softwood is
used in structural applications.
Hardwood plywood is used for interior grade products. The pro-
duct is considered a hardwood plywood product as long as it has a hardwood
veneer (surface); however, the core can be either hardwood or a softwood
laminate or lumber or particleboard. Hardwood plywood is finished to
different degrees depending upon its end use. Sanded and stained hard-
wood plywood can be used as tongue and groove flooring or can be made
61
-------
into interior wall paneling, and moldings. These are relatively high-
quality uses. Hardwood veneer and finished hardwood plywood is used in
moderate-high quality furniture. Lower grades of hardwood plywood are
used in industrial applications, for container and packaging products.
Softwood plywood is manufactured in both interior and exterior
grades, the primary differentiation being the composition of the adhesives
used to bind the laminates and, to some extent, finishing techniques, both
of which serve to increase moisture resistance levels. Interior grades
are used for such products as flooring underlayment, sub-flooring, and
paneling. Exterior grades are used for siding, sheathing, and roof
decking.
b. Markets
Markets for hardwood plywood products are furniture uses, interior
wall paneling, other decorative applications, and flooring. These markets
utilize the hardwood plywood primarily as a decorative material, less than
softwood plywood as a structural, load-bearing material. In most cases,
hardwood plywood is a well-established product in these markets, having
gained access to the markets via substitution for solid wood products
many years ago. The substitution effect is nearly complete. Thus, the
growth of hardwood plywood consumption will parallel or be slightly less
than the overall market growth within these sectors.
The hardwood plywood markets are less subject to wide cyclical
economic swings and represent a broader base of industries than is the
case for softwood plywood. This broader base makes the demand for hard-
wood plywood more stable (less subject to the substantial year-to-year
variations that affect softwood plywood).
Softwood plywood markets can be defined as follows:
Residential construction: 52%sheathing, siding, underlayment;
General construction: 14%concrete footing;
Industrial uses: 20%shipping containers, packaging uses;
Agricultural and other: 14%furniture, boats, paneling.
Perhaps 10% out of the 14% in the agricultural and other category is for
products frequently purchased by a consumer and utilized for residential
repairs and remodeling uses. Thus, the residential construction uses
account for, in total, more than 60% of total uses, and total construction
uses account for about three-quarters of the total consumption.
Agricultural, industrial and non-construction markets normally do
not fluctuate widely on a year-to-year or on a seasonal basis. Residential
repair and remodeling activity also tends to be relatively stable, although
62
-------
less so than the previous categories. However, new residential con-
struction is an extremely volatile industry in the United States. With
its substantial dependence on construction activity, softwood plywood
demand, and prices, are heavily exposed to the vagaries of wide demand
swings. Table II.C.I demonstrates graphically this volatility. For
example, new housing starts dropped by more than 20% in 1966 vs. 1965,
and rose by more than 40% in 1971 vs. 1970, and another 14% in 1972 vs.
1971.
c. Marketing
Softwood plywood is basically a commodity product. With the
exception of redwood plywood, which has particular attributes such as
workability, weather resistance, and appearance, the softwood plywood
species are largely interchangeable products. The major product cate-
gories relate to the type of adhesive used (designed for interior or
exterior conditions), the finish of the sheet (rough for construction
and industrial use, smooth for interior, cabinetry and finish work), and
the appearance of the face (such as the number and size of knots and
cracks, and the thickness of the sheets). The products are graded at
the mill by the producer. Independent inspectors visit mills on a spot
basis to ensure that grading standards are maintained.
A demonstration of the commodity nature of plywood is the recent
acceptance of trading in plywood future's contracts on the Chicago Com-
modities Exchange. Other forest products commodities, such as pulp, are
also traded on the Exchange. Specialty products, such as specialty
papers and pre-finished plywood panels, are not traded as futures.
Figure II.C.I depicts plywood distribution channels. A captive
warehouse is a warehouse owned by the producing mill. Georgia-Pacific,
Champion International (U.S. Plywood), and Weyerhaeuser are examples of
three firms which own captive warehouses. An independent warehouse refers
to a wholesaler which is an independently-owned firm, performing the same
activities as a captive warehouse, but handling a number of producers'
products. An office wholesaler is generally a small, independently-owned
firm which operates as a middleman between the mill and retailers or
other large end users, such as contractors. An office wholesaler maintains
no inventory, and serves to facilitate the match between user and mill.
Even more than the other sectors, an office wholesaler sells relatively
large unit volumes at relatively low margins.
The distribution pattern is in practice considerably more compli-
cated than that depicted in Figure II.C.I. For example, some retailers
have joined together to form cooperatives which are then able to buy in
carload quantities at volume discounts from the producing mill. In such
cases, the mill will ship directly to the cooperative and/or its individual
members, bypassing the captive warehouse entirely. Similarly, large con-
tractors, either acting in concert or independently, can also buy directly
from the producing mill.
63
-------
TABLE II.C.I
NEW HOUSING STARTS
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
Starts
(1,000)
1,300
1,360
1,500
1,640
1,560
1,510
1,200
1,320
1,540
1,500
1,470
2,080
2,400
Change
11)
4- 5.3
+ 9.3
4-10.0
- 4.9
- 3.3
-20.8
4-10.5
4-16.9
- 2.9
- 2.2
+42.1
4-14.2
SOURCE; U.S. Department of Commerce
64
-------
FIGURE II.C.I
PLYWOOD DISTRIBUTION PATTERNS
WHOLE-
SALE
LEVEL
RETAIL
LEVEL
Producing Mill
Independent
Warehouse
Office
Wholesaler
SOURCE; American Plywood Association
65
-------
Our latest data indicates the following importance of the three
primary wholesale members in the distribution chain:
Captive: 45-50% of total shipments
Independents: 20%
Office: 15%
Approximately 15-20% of the total value of shipments went directly from
the producing mill to the retailer and end user. The primary trend which
is developing in terms of distribution patterns is the increasing impor-
tance of captive warehouses, the lessening of importance of office
wholesalers, and the increasing capability of the producing mill to ser-
vice the retailer or end user directly.
d. Substitute Products
In a general sense, the following sort of substitution chain
applies: plywood substitutes for lumber, and composition wood products
(particleboard, hardboard, and softboard) replace plywood. However, the
residential construction industry is particularly traditional in its use
of materials and adopts substitutes only gradually. More specifically,
hardwood plywood used in furniture faces competition from solid wood in
high-quality markets, from plastics and plastic laminates in low-moderate
quality markets, and from composition board products with a hardwood or
printed veneer. In other decorative uses, hardwood plywood faces generally
the same competitive mix.
In all uses hardwood plywood, domestically produced, faces its
real competition from relatively low-cost imports. While total hardwood
consumption has risen considerably during the period of the last 20 years,
domestic production has remained relatively constant. Imports have
absorbed the major portion of the increase.
Softwood plywood does not face the same import substitution threat.
However, softwood plywood used in siding faces substantial competition
from plastics (vinyls and vinyl-clad products), aluminum, steel and hard-
board, and solid wood (clapboard) siding, the product plywood has replaced.
In sheathing applications, softwood plywood can be substituted by soft-
board (insulation board), gypsum board; in certain areas of the country
sheathing is being eliminated entirely. Softwood.plywood,.faces relatively
little competition in general construction markets where it'is'used as-*--
concrete footing and should not in the near future, barring a major change
in building technology. In industrial applications, which include ship-
ping and packaging containers, the competition is plastics and solid wood
products, on purely price-based factors.
66
-------
e. Future Demand
Hardwood plywood faces a relatively stable market demand, due to
its position as a relatively mature product in generally mature market
sectors. Thus, a stable 1-2% per year growth rate can be projected.
The growth rate of domestic hardwood plywood production could rise
substantially above this level if imports would plateau. Such a develop-
ment is possible due to rapidly rising prices for imported plywood. This
price rise is due largely to the siphoning of the output of Southeast
Asia/Oceania producers to Japan rather than into United States markets.
If this trend continues and if productive capacity is not increased to
meet the added Japanese demand, then imports will taper off and the market
growth rate could rise above the 1-2% per year we project at present.
Softwood plywood market demand and prices fluctuate widely on an
annual, seasonal, and daily basis. Certainly, month-to-month or quarter-
to-quarter graphs of these prices show wide variation. As noted in
Section III.G.l.b above, this is largely due to the heavy dependence on
residential construction activity. Thus, our projection is for a 4-6%
per year annual increase in demand for softwood plywood, but the pattern
will be one of wide swings, around a 4-6% per year trend line.
Although this growth rate represents a decrease from the 9% per
year of the 1950's through the mid-1960's, it represents only a modest
decrease of the 6-7% per year average during the late 60's and early 70's.
We project increasing usage of softwood plywood in residential construc-
tion in all categories, including single family homes, mobile and modular
housing, and multi-family homes. These increases in consumption of ply-
wood will enhance the ability for softwood plywood to grow at a rate
greater than the residential construction activity growth rate for the
period.
2. Industry Segments
The hardwood plywood and veneer industry is best characterized as
a small company business. There are more than 400 firms active in the
hardwood industry sector versus less than half that many softwood plywood
producers. After the largest company in this sector, Georgia-Pacific,
is considered, the size of the firms falls off rapidly. (For the purposes
of this discussion, we have not separated the plants that Georgia-Pacific
was forced to spin off to Louisiana-Pacific.) Hardwood plywood producers
frequently service narrow, regional markets, e.g., a cluster of firms in
the mid-South servicing the furniture industry. These firms tend to be
located in the Eastern section of the United States, both North and South,
which is where the hardwood wood species predominate.
Table II.C.2 illustrates the concentration in this industry.
While 152 firms have less than 20 employees, these 152 firms represent
only 3% of the total value of shipments. Similarly, while 246 estab-
lishments (37% of the total number) have 100 or more employees, they
account for 63% of the total value of shipments.
67
-------
TABLE II.C.2
PLYWOOD INDUSTRY (SIC 2432)
CONCENTRATION PATTERNS
Plant Size Patterns1967
Number of
Employees
1-19
20 - 99
100 +
Number of
Establishments
152
269
246
667
Value of Ship.
in %
. 3
34
63
100
Concentration Ratios% Total Shipments
4 largest firms
8 largest firms
20 largest firms
50 largest firms
1967
26
37
50
65
1966
24
33
-
_
1963
23
31
42
58
SOURCE: 1967 Census of Manufacturers
68
-------
As the concentration ratios show, the four largest firms account
for about one quarter of total production; the 20 largest firms account
for half of total production. The trend has clearly been toward greater
concentration in the industry, which will continue.
The concentration patterns within the hardwood plywood industry
sector indicate a considerably less concentrated industry than for soft-
wood plywood. Table II.C.3 indicates market shares for the major firms
in each industry. Georgia-Pacific, which accounted for 20% of the domestic
hardwood plywood production in 1972, is clearly the leader in this segment.
The companies that follow trail by substantial market shares. The com-
panies beneath Boise-Cascade, which is the fifth largest in the industry
with only a 2% market share, exhibit market shares of 1-1/2% and less.
The picture is different than this for softwood plywood. Again,
Georgia-Pacific is the leader with a 16% market share, but the top eight
firms account for a 50% market share, the top 10, 54%. There are eight
firms here with a 2% market share or more, double the number present in
the hardwood plywood industry.
Another factor is that four out of the five major hardwood plywood
producers (excepting Roseburg) have their own marketing distribution
(captive warehouse) outlets. All five of the leading hardwood manufac-
turers are integrated to wood fiber. Similarly, the four leading softwood
plywood producers all have captive marketing outlets, and all of the top
nine producers are integrated to woodlands. This degree of integration
affords the majors greater control over volume produced and sold. For
example, having captive woodlands insulates a firm from wood availability
problems more so than a firm which must buy on the open market. Similarly,
in a weak market, a firm's captive distributor can emphasize its own
product. The ability to gain market access and to control or moderate
wood price effects is an extremely important advantage to a firm operating
in this industry.
The typical hardwood plywood plant is a small, privately-owned
mill producing 5-10 million square feet of product per year. This is in
contrast to the production pattern in the softwood plywood section, which
is typified by a mill of 100-125 million square feet output per year.*
Further, softwood plywood plants tend to be multi-plant operations owned
by a broad-based forest products company.
Based on an arithmetic average of 1972 production, the "typical"
plant produced:
hardwood plywood: 11.6 MM sq. ft. 3/8"
softwood plywood: 95.3 MM sq. ft. 3/8"
69
-------
TABLE II.C.3
PLYWOOD INDUSTRY
MARKET SHARES1972
Hardwood Plywood %
Georgia-Pacific 22
Champion International 6
Weyerhaeuser 5
Roseburg 2
Boise-Cascade 2
37
Softwood Plywood
Georgia-Pacific 16
Boise-Cascade 8
Weyerhaeuser 7
Champion International 6
Willamette 5
Roseburg 4
International Paper 3
Vanply 3
Potlach _2
54%
SOURCE; Contractor Estimates
70
-------
Domestic production of hardwood plywood, as depicted in Table II.C.4,
has not increased dramatically in the past 20 years. Domestic production
has increased by 60% in the 20-year period 1951-71, a 2.5%/year annual
rate. However, total consumption of hardwood plywood has risen substan-
tially, by 360% in the same period, a 6-1/2% per year annual rate of growth.
Imports, rising from 49 million square feet in 1951 to 2.6 billion square
feet in 1*571, have accounted for the major portion of the increase.
Softwood plywood production is outlined in Table II.C.5. As this
table indicates, softwood plywood production over the period 1958-72 has
risen by 190%, or a 9% per year annual rate of growth. Where data was
available, a percent utilization ratio was indicated. The comparison of
operating rates to year-end prices is a further description of the com-
modity nature of these products. For example, an 84% operating rate in
1970 relates to a $57/MSF price for standard, exterior grade Douglas Fir
plywood, 3/8" basis. The same product sold for $102 in 1968 at a 95%
operating rate, and at $105 at a 100% operating rate in 1972. By February/
March of 1973, the same product sold in the range of $145-$155, and the
industry's operating rate was well in excess of rated capacity.
3. Financial Profile
The task of developing a financial profile in this industry is
complicated by the large number of mills of varying sizes and technological
sophistication, and a substantial variation in product line. The indi-
vidual firm can produce only veneer, or only plywood, for both products.
Similarly, part of a plant's operations can be the production of semi-
finished or pre-finished products, such as tongue and groove hardwood
flooring. It is difficult to separate the costs of the production of the
finished product from the cost of manufacture of the basic product.
Table II.C.6 presents the financial profile of a softwood plywood
and veneer mill if constructed at the end of 1972. The mill's capacity
was put at 125 million square feet, 3/8" basis. A price level was assumed
to be $100/MSF. As the income statement indicates, at that price level,
net profits, after tax, were $800,000 on a total revenue base of $12.6
million, or 6.1% of net sales.
Profitability is extremely sensitive to the assumed price level.
For example, at a price of $155/MSF, a price level which was achieved in
February/March of 1973, total revenues would have been $19,375,000.
Assuming the same costs, net profits after tax would have been $4.4 mil-
lion, or 22% of net sales. Conversely, the mill would be only breaking
even at a price level of $90/MSF.
That these profitability figures are representatives of the soft-
wood industry is attested to by a study done by the National Forest Products
Association of Washington, D.C., in March 1971. Their study, commenting
on softwood lumber and plywood prices, indicated that, "The majority of
plywood producing units operated at a loss during most of 1970." Prevailing
price levels for softwood plywood products during 1970 were below $100/MSF.
71
-------
TABLE II.C.4
DOMESTIC PRODUCTION & IMPORTS OF
Year
1951
1955
1960
1965
1966
1967
1968
1969
1970
1971
HARDWOOD PLYWOOD
Domestic
Production
(MMSF-3/8")
1,197
1,355
1,102
2,049
2,076
1,916
2,009
1,869
1,758
1,930
Net
Imports
(MMSF-3/8")
49
442
715
1,047
1,254
1,244
1,896
2,107
2,047
2,545
per cent change
+60%
51-71: +5,200%
65-71: + 240%
SOURCE; U.S. Department of Commerce
72
-------
TABLE II.C.5
Year
1958
1965
1966
1967
1968
1969
1970
1971
1972
DOMESTIC PRODUCTION
SOFTWOOD PLYWOOD
Domestic
Production
(MMSF, 3/8")
6,340
11,680
13,140
12,960
14,810
14,205
14,960
16,408
18,303
OF
%
Total
Capacity
83
-
-
80
95
88
84
98
100
Year
End
Price
($/MSF)
49
60
102
60
57
80
105
per cent change +190% = +9%/yr.
Based on Standard Douglas Fir, Exterior Grade Plywood,
3/8" Basis
SOURCE; American Plywood Association; Crow's Plywood Guide, 1973
73
-------
TABLE II.C.6
FINANCIAL PROFILE
SOFTWOOD PLYWOOD AND VENEER MILL - 1972
Characteristics:
Products: rough sanded and S2S
Annual Production: 125 MM sq. ft., 3/8" basis
Annual Sales: $12.6 MM
Employees: 275
Net Assets: $10 MM
Income Statement - 1972:
% $MM
Net Sales 100.0 12.6
Cost of Sales
Operating Expenses
Cost of Goods Sold 76.7 9.7
GS&A 11.6 1.3
88.3 11.0
Operating Profit 11.7 1.6
Other Charges
Profit Before Income Tax 11.7 1.6
Provision for Income Tax 5.6 0.8
Net Profit 6.1 0.8
Return on Net Assets 6.0%
74
-------
Table II.C.7 contains a similar profitability analysis for a
hardwood plywood and veneer mill. The mill represents the investment
required to build a 6.0 MM square foot mill at the end of 1972. If the
analysis were performed on an older mill, the assets would be amortized
to a greater extent, yielding a higher return on net assets figure.
However, with older equipment operating costs would be correspondingly
higher. As is, the analysis indicates a rate of profit generation of
only 2.6% after tax.
Table II.C.8 presents comparable financial data on veneer and
plywood mills during the year 1971, as compiled by Robert Morris Asso-
ciates. In this case, profits before taxes were 2.9% for mills with
assets of $1-10 million, and 3.6% for mills in all size categories.
4. Price Effects
Softwood plywood prices exhibit almost classic supply/demand
commodity market responses. Softwood plywood prices at a given time are
determined by the following considerations:
Distribution channels are not controlled by producers. Prices
to retailers, consumers, contractors, etc. cannot be maintained
or set by even the largest manufacturers.
Plywood is a commodity product. Users are generally unconcerned
with the identity of the producer. There is little brand loyalty.
Price competition is severe.
Residential construction, the dominant end use market for soft-
wood plywood, fluctuates sharply both annually and seasonally.
Since efficient production must be carried out at a relatively
level amount, and since large inventories are costly, it is
difficult for producers to compensate for short-term demand
changes.
As a result, softwood plywood prices have historically varied con-
siderably in response to supply/demand conditions. Prices change daily
in what is essentially an auction market. Most sales are made by telephone
with buyers shopping among suppliers for the lowest price. Producers
seek to maintain "order books," which will allow the mill to ship as
rapidly as it produces. If the "order book" gets thin, i.e., the backlog
of orders is small, then producers lower prices. Conversely, if demand
is strong, prices rise.
The ceiling on prices is reached as alternate materials become
economic and plywood markets erode. Particleboard, hardboard, lumber,
and other wood fiber building boards can displace plywood in certain uses.
Further, alternative construction techniques or building designs can be
employed using stone, metal, stucco, and asbestos products. Or, of
course, some construction projects may be deferred until building and
building material costs recede to more "palatable" levels.
75
-------
TABLE II.C.7
FINANCIAL PROFILE
HARDWOOD PLYWOOD AND VENEER MILL - 1972
Characteris tics:
Products: stock and cut-to-size panels
Annual Production: 6 MM sq. ft., 3/8" basis
Annual Sales: $1.0 MM
Employees: 50
Net Assets: $500,000
Income Statement - 1972:
Net Sales
Cost of Goods Sold
GS&A
Operating Profit
Other Charges
Gross Profit
Provision for Income Tax
Net Income
Return on Net Assets
84.9
10.0
$1.000
.00.0
850
100
94.9
5.1
(.1)
5.0
2.4
2.6
5.2%
1,000
950
50
(1)
49
24
25
76
-------
TABLE II.C.8
FINANCIAL PROFILE
VENEER & PLYWOOD MILL, 1971
Assets
$1MM-$10MM
All Sizes
Net Sales
Cost of Sales
Gross Profit
Other Expenses, Net
Income Statement
100.0
89.0
11.0
8.1
100.0
87.6
12.4
8.8
Profit Before Income Taxes
2.9
3.6
SOURCE: Robert Morris Associates, 1972
77
-------
Nonetheless, there are many advantages to plywood which continue
to make it an attractive building material. Plywood is easily workable,
is a versatile material, and pound-for-pound, due to its alternative
grain laminating construction, exhibits great strength.
Hardwood plywood prices exhibit far less volatility than do soft-
wood plywood prices. Markets for these products are more mature and more
stable. Pressure from low cost imports has also acted to inhibit price
increases.
The cost of manufacture is not the primary determinant of hardwood
or softwood plywood prices. Rather, manufacturing costs determine that
point at which a mill will shut down, thereby reducing supply., or a
"mothballed" mill will start up. As prices have risen in recent years,
mills have begun to peel smaller and smaller logs, a step which would not
be possible without new machinery and prices high enough to make peeling
smaller logs economical. Similarly, many mills ceased production during
the price trough of 1970. Interestingly enough, many of the same mills
came back on-stream during the strong demand market of 1972.
Thus, the effect of cost increases due to water pollution abate-
ment, if a significant proportion of total manufacturing costs, will
manifest itself in plant closings, not price increases.
78
-------
III. ECONOMIC IMPACT ANALYSIS
A. METHODOLOGY
Economic impact, in fact, implies consideration of two primary
issues:
Price effects;
Plant closurescommunity effects.
We have dealt with these two issues by using the costs generated
for each of the pollution abatement technology alternatives. Specif-
ically, to determine price and plant closure effects we have determined
the economic impact of these costs on plants within each of the industry
segments in terms of:
Price effects
Price increases
Secondary effects
Financial effects
Profitability
Capital availability
Production effects
Production curtailment
Absolute plant closings
Total industry growth
Employment effects
From production curtailments
From plant closings
From changes in industry growth rate
Resultant regional effects
Location of plant closings or production curtailments
Number and location of seriously impacted regions
Probability of new plants being built in seriously
impacted areas
Probability of dislocated employees being absorbed into
local work force
Secondary effects resulting in further unemployment
79
-------
1. Price Effects
The ability for firms operating in these industries to pass cost
increases on in terms of increased prices is largely a macro issue, very
much based on total market supply/demand. In a strong market, such as
pertained in the last half of 1972 and the first quarter of 1973, demand
was strong enough to absorb substantial price increases. Conversely, in
a weak market firms would absorb abatement costs.
Thus, determination of price effects was heavily influenced by
the consideration of market influences on these industry sectors in
total; subfactors to be studied included:
Capacity utilizationif due to capacity increases and/or
demand slackening, the industry begins to operate at lower
utilization rates, the ability to increase prices will be
reduced.
Availability of substitute productsfor example, the
willingness of builders to shift toward more plastic mater-
ials in construction would hinder the ability to pass on
costs.
Individual product price elasticityfor those product
areas which are extremely price sensitive, increased
prices could result in reduced demand, lower operating
rates, less profitable operations, and plant closures.
Specific geographic market effectsfor example, a
marginal producer for special reasons could have a
protected market position in a local market; or,
demand could be strong nationally but weak in a speci-
fic local market making it difficult for a local
producer to pass on cost increases.
Importance of the product in its secondary markets
if certain of these products represent a significant
cost component in the manufacturing of derivative
products, e.g., plywood utilized in prefinished panel-
ing, and if the users have relatively more market
leverage (are much larger and/or consume a significant
portion of the primary producers' output), then price
increases will be more difficult to pass on.
Industry growth rateprice increases are most likely
in rapidly growing markets as opposed to static or
declining markets.
80
-------
Of course, a primary factor regarding whether or not cost in-
creases can be passed on to users concerns the magnitude of the
abatement costs. Where abatement costs represent a relatively small
proportion of the total cost of manufacture or selling price (as is the
case for these sectors), price increases will be more likely and more
palatable. In situations where abatement costs are substantial, the
previously described items determine whether or not a price increase is
likely.
2. Plant Closure Effects
To determine the numbers of plants which will be shut down and
the resultant employment effects, we have characterized industry plants
based on their operating characteristics and the financial effects to
be incurred by abatement cost increases. We have developed a financial
profile for plants in our various operating characteristic categories.
Individual facilities have been reviewed and categorized as
high, moderate, or low probability of closure. It is impossible to
determine with certainty which will close. Our intent has been to
isolate the "most likely." Plants were categorized as high probabili-
ties of closure if their financial performance was less than the indus-
try target performance measure or less than the performance achieved
(overall industry average) during the worst of the five previous years.
Financial performance was determined primarily on these two parameters:
meters:
Profit margin, net income/net sales;
Profitabilitye.g., return on net assets or other
available profitability criterion.
Further, plants were categorized as highly probable to close if their
financial position is such that they will be unable to raise capital
costs required to meet abatement guidelines. It is this latter factor
which has the most impact in these sectors, particularly on the smaller
firms in hardwood plywood and wood preserving.
The analysis of these issues was tempered based on the specific
characteristics of the individual industry sectors. For example, as is
typical of hardwood plywood, a small, privately-held firm usually has
quite a different set of profitability criteria than a larger, publicly-
held corporation. The sheer magnitude of net cash flow is the important
issue to privately-held firms, whereas a publicly-held corporation
generally defines successful performance and makes a closure decision
based on profitability ratios, such as return on net assets. Further,
for historical/emotional reasons, a founder-owned and managed firm is
likely to have a stronger commitment to continued operations of a given
plant than would absentee ownership/professional management firms.
81
-------
The following characteristics were analyzed to determine the
likelihood of plant closure:
Salvage value of assetsan old, technically obsolete
plant could have a high salvage/sell off value, e.g.,,
valuable woodlands useful for the operations of a con-
tiguous plant.
Specific plant capacity utilizatione.g., some firms
in a locally poor market region may be unable to sell
products in other geographic markets, and therefore
be severely impacted.
Degree of integrationboth forward integration into
marketing channels, and backward integrations into
raw materials (woodlands).
Multiplant operationsapparently unprofitable plants
may be kept onstream if its products are essential to
the marketing strategy of the corporation as a whole,.
Technological obsoletionsif technology has changed
substantially since the equipment was installed, a
shut-down would be likely.
Prior air pollution equipment installationif the
firm has already committed funds to control air
pollution, it is more likely to commit water pollu-
tion funds; however, if a company faces substantial
costs on both water and air abatement problems, the
dual effect could be a powerful incentive to shut-
down.
Corporate commitmentthe emotional commitment of
the firm to manufacture a specific product (e.g.,
to maintain a competitive position), or to a parti-
cular plant (e.g., a given plant being the company's
first facility) or commitment to the community (e.g.,
corporate commitment to continue a marginal plant to
maintain employment in a "one-industry" region, parti-
cularly if tax incentives are offered).
The effect of plant closure was translated into regional commun-
ity effects. That is, the number of people unemployed by the plant
closure/curtailment were considered in the context of other employment
options available for those employees in that region. In addition, the
possibility of other plants taking up the production/employment slack
was considered. These effects were, to the extent possible, traced
through to the impact on the secondary industries.
82
-------
With the large number of firms in the two plywood sectors, and
in the wood preserving sector, it was necessary to sample firms and key
personnel. Thus, we met with the trade associations in these sectors,
as well as representatives of major firms and key smaller (high prob-
ability of impact) firms to discuss key issues. Our analysis was there-
fore based on considerations of representative firms and plants rather
than a complete survey. We generalized, knowing the dynamics of the
industry, to accomplish the total industry impact analysis.
In the hardboard sector, only nine firms (wet process) were
involved. Thus, we interviewed each of these firms to gather data for the
analysis, in addition to certain dry process firms.
B. HARDBOARD
1. Overview
a. Industry Subcategorization
In carrying out the Economic Impact Analysis on the Hardboard
Industry, we were obliged to make a number of simplifying assumptions
that arose both from the technical guideline recommendations and the
general market and economic conditions. In addition, the hardboard in-
dustry and its constituent companies commented specifically on the sub-
categorization adopted by the Guidelines Contractor, Environmental
Science and Engineering, and on some technical aspects of the guideline
proposals.
Of the latter, the following points were emphasized:
There is little historic evidence of success to support
the recommendations and, in fact, mills that already
have the suggested technology in use do not consistently
obtain the level of effluent quality promised.
"Zero discharge" is not defined.
Caul water is not the only effluent of a dry process
plant and investments to treat other sources will
greatly exceed guideline estimates.
Potential elements of Subcategorization that were considered by
the contractor but not used as an element of categorization include:
Size of PlantThe contractor did conclude that the "plant size
will only affect costs of treatment as treatment costs for larger plants
will generally be less per unit basis than for small plants." Such a
simplifying assumption may be reasonable for those facilities that
approximate the typical plant in daily capacity (assumed to be 1AO tons
per day for the wet process and 250 tons per day for the dry process),
83
-------
but it should be noted that the current capacities of wet process plants
range from 80 to 1,650 tons per day and those of the dry process from
25 to 360 tons per day. The simplifying assumption is thus on the
pessimistic side (i.e., unit cost estimates are too high) for those
plants larger than the typical plant capacity, and is optimistic for
those facilities with lesser capacities. However, a straight line cost-
capacity relationship, as we were forced to assume in this analysis, is
probably only valid for a narrow range of capacities and becomes un-
realistic for those that deviate greatly from the typical plant size.
We were not in the position to estimate the effect of this deviation on
unit costs and have thus accepted (on EPA's counsel) the straight line
relationship to accomplish this analysis.
Product MixWhile the in-plant processes have a greater effect
on the waste water characteristics than do the specific products result-
ing from the processes, the product mix has a substantial effect on the
financial profile of an individual facility. Typically, the smaller
plants, especially those operated by small independent companies, are
producing and marketing a low value industrial board that may average
from $35 to $50 per thousand square feet, f.o.b. the mill. The larger
facilities, frequently owned by major forest products companies, are
typically integrated in their product output and add value to the basic
board by finishing it in some way. This added value increases the
average f.o.b. price to at least $45 and perhaps to as much as $70 per
thousand square feet and thus makes these facilities relatively better
able to absorb increased costs or to effect price increases.
b. Simplifying Assumptions
In the analysis that follows, we have made three simplifying
assumptions.
Phase IV price controls that went into effect on August 12
indicate that future price increases will be permitted on a
dollar-for-dollar basis to match increased costs. We assume
an economic environment where increased costs can be re-
captured through increases in prices, assuming that market
conditions permit, to the extent that current rates of
profitability are maintained. Although this assumption
is slightly less stringent than Phase IV Guidelines, we
believe it to be more realistic for the purpose of this
analysis over the next decade.
The base conditions we have assumed for current pollu-
tion control technology in place at each facility is
that indicated to us by the Guidelines Contractor. The
steps required to reach 1977 and 1983 control and
treatment technology is thus on an incremental plant-
by-plant basis.
84
-------
The Guidelines Contractor has given cost data for August
1971 and May 1973. We have assumed an average of these
two cost levels to represent the cost that would be
applicable in 1972. We have also used 1972 plant
financial data and have assumed constant 1972 dollars
for 1977 and 1983.
c. EPA Approach
In our analysis, we have followed the EPA policy of separating
the evaluation of control technology and effluent guidelines for air,
solid waste, and water pollution. However, one pollution source can,
and does, negatively influence the other. For example, it is apparent
that the dry process hardboard mills produce relatively little water
pollution but can be faced by significant air pollution control costs.
The converse is true for wet process plants. Any economic analysis
that considers water pollution costs independently magnifies the wet
process mill's disadvantages relative to dry and can reach unreasonable
conclusions relative to the economic competitiveness of the dry process
vis-a-vis the wet. There are indications that dry process plants will
have proportionately greater air pollution control costs than water
pollution costs for wet process plants.
d. Guideline Assumptions
In characterizing the hardboard industry, the Guidelines Con-
tractor categorized the 33 mills into four sectors and reviewed the
technology for two of these sectors in making recommendations. The two
sectors include the dry process mills (17 in number with an aggregate
capacity of 3.05 billion square feet per year) and wet process mills
(with 9 mills at 2.9 billion square feet). Two mills were considered
unique in their respective processes and were thus not considered.
These are the Weyerhaeuser dry-wet process mill at Klamath Falls, Oregon,
and the Abitibi wet-dry mill at Alpena, Michigan. The fourth sector
includes six wet-dry hardboard plants that are operated in conjunction
with insulation board production; guideline recommendations for these
mills will be considered under Phase II of the EPA guideline study series.
For the wet process, the best practicable control technology
currently available and recommended in the contractor guidelines calls
for screening and primary settling (Alternative A) followed by an
activated sludge process (B-l) and an aerated lagoon system (C).
Additional treatment and control technology to meet the best available
technology economically achievable by 1983 calls for a pre-press be-
tween the cyclone and the stock chest (D) and also the treatment of the
condensate in an activated sludge process prior to discharge (D-2). In
subsequent pages of this section we refer to the 1977 Guidelines as
Alternative C and the 1983 Guidelines as Alternative D-2.
85
-------
For the dry process, 1977 Guideline recommendations call for the
installation of a holding tank to retain caul washwater for a minimum of
one week so that it can be neutralized and hauled to land disposal.
(Alternative B.) No additional control and treatment technology is
required beyond 1977 for dry process mills.
The Guidelines Contractor developed investment and operating
cost data for each alternative, each process, and each year for typical
plants sized at 140 tons per day, wet process, and 250 tons per day, dry
process. Total yearly costs were based on an 8% cost of capital; a
salvage value of zero at the end of 20 years for physical facilities and
equipment; and straight line depreciation.
We have restated and summarized these alternative costs in 1972
dollars in Table III-B-1. (The use of 1972 dollars naturally implies
no change in the cost mix between labor, materials, energy, etc.) The
investment and total yearly costs are shown on a dollar per thousand
square feet basis for the two processes, based on a straight line re-
lationship between costs and plant capacities.
Table III-B-2 indicates for each wet process plant the current
level of control and treatment technology and the 1977 and 1983 invest-
ment and operating costs. It also shows the average cost per thousand
square feet of capacity for each year.
2. Price Effects
Water pollution control for the dry process hardboard industry
has a minimal cost impact and thus will not in itself cause a major
price increase. It is estimated that the implementation of Alternative
B guidelines will result in an annual yearly cost of 2c per thousand
square feet.
Implementation of 1977 guidelines for the wet process, Alterna-
tive C, is equivalent to an aggregate yearly operating cost of $1.38
million, averaging $0.47 per thousand square feet of capacity. Some wet
process plants will have to increase prices by a maximum of $3 per
thousand square feet by 1977, equivalent to 6% to 8% of 1972 prices, in
order to maintain current profitability. We believe that pollution
control costs can and will be passed on by wet process mills and that
market size and rate of growth will be affected only marginally, if at
all.
Aggregate yearly operating costs to meet 1983 guidelines are
equivalent to $5.9 million, averaging $2.02 per thousand square feet of
capacity. Price increases ranging from $2.0 to $8.0 per thousand
square feet over 1972, equivalent to a maximum of 21% of 1972 selling
prices, will be needed to maintain current profit margins. Although the
median of these increases will average only 1.5% per year to 1983, the
amounts are significant in absolute terms. We do not believe that every
86
-------
TABLE III. B.I
SUMMARY OF ALTERNATIVE COSTS
(1972 dollars)
Process & Year Alternative Investment Total Yearly Cost
Wet - 1977 (2) C 5.66 2.61
Wet - 1983 D-2 11.23 6.50
Dry - 1977 B 0.09 0.02
NOTES:
(1) $/MSF based on typical wet process plant of 140 tons per day and
dry process plant of 250 tons per day.
(2) Costs assume that all wet process plants currently have
Alternative A technology in operation; Table III.B.2 examines
individual plant conditions.
SOURCE; Contractor Estimates based on Environmental Science and
Engineering, Inc. data.
87
-------
TABLE III.B.2
WET PROCESS HARDBOARD PLANTS - APPROXIMATE INVESTMENT REQUIREMENTS
AND ANNUAL OPERATING COSTS
($ OOO's)
Current Annual Cost/MSF Annual Cost/MSF
Level of Capacity Operating of Operating of
Technology (MMSF) Investment Costs Capacity($) Investment Costs Capacity($)
Abitibi;Roaring
River, N.C.
Evans Products;
Corvallis, Ore.
oo Forest Fiber;
oo
Forest Grove, Ore. B-l
Masonite;
Laurel, Miss.
Masonite;
Ukiah, Calif.
Superior Fiber;
Superior, Wise.
Superwood;
Duluth, Minn.
Superwood; North
Little Rock, Ark. B-2
U.S. Plywood;
Dee, Ore.
TOTAL
B-l
B-2
B-l
C
D-l
A
B-l
B-2
B-2
159
110
79
1,643
380
120
216
132
90
2,929
367
623
182
0
0
679
499
747
509
3,606
70
287
35
0
0
313
95
345
235
1,380
0.44
2.61
0.44
0
0
2.61
0.44
2.61
2.61
0.47
1,251
1,235
622
9,142
457
1,347
1,700
1,482
1,010
18,246
685
714
340
6,372
649
779
931
857
584
5,911
4.31
6.49
4.21
3.88
1.71
6.49
4.31
6.49
6.49
2.02
SOURCE: Contractor Estimates, based on Environmental Science & Engineering, Inc., data.
-------
mill will be able to pass on these price increases in full and we es-
timate that at least three wet process mills will be forced to absorb
up to 6% of these incremental costs, if they wish to remain price-competitive.
The industry as a whole will also experience a lower rate of growth than
what might other wise be anticipated, although the reduced growth due to
water pollution control costs alone is not expected to be significant.
3. Financial Effects
a. Effects on Profitability
Although we conclude that 1977 costs will be recaptured through
price increases, thus maintaining current rates of profitability, we
have calculated the effects on profits under the assumption that no
price increases are implemented either due to adverse market conditions
or because of more stringent price controls than is anticipated under
Phase IV. Effects on the profitability of dry process mills, of course,
is negligible and does not require any detailed analysis under the
currently proposed guidelines (although the industry believes that
estimated costs are understated).
Thus, assuming no price increases, the effects of increased
costs on the profitability of wet process mills would be to decrease
individual plant profits after tax as a percentage of net sales by up
to 75% by 1977 for one mill and by up to 55% for others. Some mills
will, of course, be affected less than others as they are currently
operating at higher profit levels; all facilities will maintain profit-
able operations.
At least five of the nine wet process mills will be able to
recover cost increases sufficiently to maintain their current profit
margins through 1983. The remaining four mills will be able to pass on
most of their incremental costs, since they are currently operating at
lower rates of profitability and lower average selling prices, and the
incremental costs will represent significant increases. These mills will
be forced to accept lower profit rates.
b. Availability of Capital
Capital requirements by the hardboard industry total $3.6
million for the wet process plants by 1977, and an additional $14.6
million by 1983; but only $284,000 for dry process mills by 1977. Con-
versations with manufacturers indicate that cspital availability for
implementing 1977 guidelines should present no problems. However, it
was pointed out that while most of the major forest products companies
would probably raise the capital from internal cash flow, the smaller
companies would have to seek loans in the financial market and banks may
show some reluctance to finance "nonproducing" investments such as pollu-
tion control. We believe this to be a pessimistic opinion and conclude
that 1977 capital requirements will be met with little or no difficulty.
89
-------
The additional $14.6 million required by the wet process mills
by 1983 is disputed by the industry as being too low an estimate. In
any event, the amount may be less available and will depend to a great
extent on the industry's overall rate of growth, the long-term profit-
ability of individual mills, and the capital needs by these mills for
other applications. It also depends on the cumulative effects of other
factors independent of water pollution abatement costs, such as energy
and wood availability, labor costs, etc., on operations. Keeping these
other factors in mind and assuming pollution cost recoveries referred
to earlier, at least one, and perhaps two, mills may have difficulty in
raising the capital required at a reasonable cost and could either be
acquired or go out of business.
4. Production Effects
a. Curtailment of Production
The industry has been operating at a high level of capacity utili-
zation (90%-f; Table II-l*) over the past decade and we expect this to
continue through 1977. Pollution abatement costs could affect aggregate
market demand to the extent that by 1983 average capacity utilization
will be lowered to 5%.
b. Plant Closures
We anticipate no plant closures by 1977. However, pollution
abatement costs may make several facilities economically marginal by
1983. Our current best estimates indicate that one facility has a high
probability of closure by that date; three others have medium probabili-
ties of closure. On a weighted basis, we estimate that about 235
million square feet of wet process capacity could be withdrawn by 1983
as a direct result of water pollution abatement costs, equivalent to
8% of 1972 available wet process capacity. These mills represent about
3% of total 1972 hardboard capacity.
c. Industry Growth
Industry growth is unlikely to be affected by the 1977 guideline
implementation but could be reduced to some extent by 1983. Quantifi-
cation of this is difficult as reliable data on the supply/demand of
competing materials is not available that far into the future.
One conclusion on industry growth is worth discussing. Assuming
that wet process mills are at the disadvantage relative to dry process
plants as indicated by the water pollution abatement costs, it is
evident that the hardboard industry will not add additional wet process
capacity in the future. The likelihood would then be that additional
Contractor's Phase I Report
90
-------
capacity would be entirely dry process, resulting in less screen-backed
board available than at present. Although dry process mills could be
modified to produce such a product, they are currently not doing so
to any great extent. The likelihood is that they would continue not to
do so and thus customers would have to change to the S2S board at a
higher cost if insufficient SIS board was available from the remaining
wet process capacity. This could cause them to seek substitute materials
and further affect hardboard growth.
Such a scenario, while theoretically possible if water pollution
is considered independently, appears unlikely since the industry in-
dicates that the investment and operating costs associated with air
pollution abatement for dry process mills will be at least equal to the
water pollution costs for wet process facilities, if not in excess of them.
Thus, the relative change in costs between dry and wet process mills
will be small, and may be negligible or even in favor of the dry process
mills.
5. Employment Effects
We anticipate no direct employment effects to result from im-
plementation of these guidelines except with regard to the marginal
plants referred to earlier. Direct hourly employment by these four
facilities totals approximately 475 people, with an additional 100 sal-
aried personnel. On a weighted average basis, approximately 275 hourly
and 30 salaried personnel would be put out of work by 1983 as a direct
result of these water pollution guidelines.
6. Resultant Regional Effects
The four marginal facilities are located in three geographic
regionsthe Northwest, North Central and South. All three of these
regions are significant forest products producing areas and all three
have considerable hardboard production capacity already onstream. The
probability is very high that new forest products plants will be
built in these impacted areas; chances are also good that new hardboard
facilities will be added. Thus, it is unlikely that those employees dis-
charged at the respective facilities would have difficulty in being
absorbed in the regional work force, although possibly not in the same
locality. It is also our belief that the secondary effects resulting in
further unemployment will be minimal, as those employed indirectly by
the industry (for example, forestry workers) presently derive a
small proportion of their total income from these mills.
7. Balance of Trade Effects
Analysis of balance of trade effects is made difficult by the
economic situation that has faced the hardboard industry for the past
two years. Before price controls, imported products were 10-15% lower
in price than domestic production for essentially the same SIS board
91
-------
serving the same end uses. With the exceptionally strong demand for
hardboard the U.S. has experienced over the same period (which domestic
producers have found impossible to supply), import prices have risen to
match or even exceed domestic prices. The proportion of total apparent
consumption in square feet represented by imports rose in 1972 (and
probably in 1973) from 9.4% in 1970 to the 12-15% levels that were
typical in the 1960's. At the same time, these imports were averaging
higher unit prices.
The long-term economic impact of pollution control costs on the
trade balance is difficult to assess. Without these costs, without
price controls, with a slower short-term rate of demand growth (to 1975)
than we have experience in the past few years, and with considerable
additions to domestic capacity, imports would probably stabilize at
their current market share and drop relatively in price. Allowing for
pollution control costs but holding the other factors constant, the
balance of trade is likely to remain unchanged to 1977 but to change
negatively beyond that date. We estimate the net effect to be an
increase to 17% of the ratio of imports to apparent U.S. consumption.
C. WOOD PRESERVING
1. Overview
The analysis of the economic impact of pollution control costs
on the wood preserving industry rests on an understanding of the industry
and the costs it will face. Appendix A to this analysis has been pre-
pared which discusses the costs in some detail, and takes the cost data
prepared by &r,- Thompson^ the Guidelines Contractor^ and puts it into a
form which can be used here. The cost data puts limitations on this
analysis which are important to understand at the outset.
For the purposes of the Effluent Limitations Guidelines Standards,
the industry was segmented into four subcategories:
1. Pressure processes employing oily preservatives in
which the predominant method of conditioning green
stock is by steaming or vapor drying;
2. Pressure processes employing oily preservatives
in which the predominant method of condition-
ing green stock is by Boultonizing;
3. Pressure processes employing water-borne salts;
4. Nonpressure processes.
92
-------
The standards for subcategories 2, 3, and 4 call for complete
recycling of waste water and no discharge. There are no treatment costs
and, thus, for the purposes of this analysis, there are no economic im-
pacts.
Plants in these categories which do not currently meet the
standards will have to make expenditures for process changes, but these
costs have not been estimated and their impact cannot be evaluated. The
process changes, if necessary, would include building a sump in which to
collect preservatives spilled from the tanks and dropped onto the aprons
near the tanks. The apron itself may have to be built along with im-
proved tanks or lagoons for storing the preservatives until it is reused.
According to the 1972 U.S. Forest Service listing of wood pre-
serving plants, there were 407 known plants, of whom 18 were noncommer-
cial captives of railroads and utilities. About 320 use exclusively
pressure processes, 50 nonpressure, and 30 are equipped with both.
There are 103 pressure plants that use exclusively processes
employing water-borne salts (subcategory 3). The remaining pressure
processes are geographically divided between the Northwest and the
Southern United States. Subcategory 1 plants are located in the South-
east and South Central parts of the country. These plants are the
focus of the remainder of this analysis.
In the South Central and Southeast, there are 202 pressure
plants, nine nonpressure, and 11 plants using both. Of the pressure
plants, 163 use oil-based preservatives and 53 do not.
In terms of segmenting the industry for the purposes of the
economic analysis (after the technology segmentation), size is the first
important breakdown.
For the industry as a whole, more than half of the plants have
less than 20 employees and a quarter have less than 10 employees. It
is these very small plants which will be most heavily impacted by the
pollution control costs. The medium-sized plants would fall in the
range of 30 to 100 employees and the large plants would have greater
than 100 employees.
In evaluating the impact of pollution control costs, it is im-
portant to realize that all of the larger and many of the medium-sized
plants have already been scrutinized by the state environmental pro-
tection agencies. The basic decision as to whether these plants will
close because of abatement regulations has already been made.
In parallel, it is important to note that most plants in the
medium and large categories made investments in recent years to upgrade
plant and equipment in such areas as materials handling equipment, as
well as pollution control equipment. The plants which have not made
93
-------
these investments now find themselves at a competitive disadvantage with
an old plant and typically lower profits. If these plants are to con-
tinue in operation, they must both invest in new production facilities
as well as pollution control facilities. Yet these are the plants with
the greatest limitations on their ability to finance themselves. Less
than 25% of the medium-sized plants may be in this category.
Of the 163 pressure plants using oil-based preservatives in the
South, 7 can be categorized as large with little or no probability of
closing. About 50 can be identified as being very small with a poten-
tially high probability of closure. For the remaining 100 plants, it is
impossible to draw the line more closely without a better definition of
abatement costs for small plants than is currently available. The
smaller plants in the group could be closed because the size of the in-
vestment required to be in compliance puts them at a severe competitive
disadvantage with larger plants. The 25% of the plants which are al-
ready marginal may simply be unwilling to make the necessary investment
in nonproductive equipment (whichcould represent 30% to 40% of the
capital assets of the plants). These plants have been closing without
the additional abatement costs. The addition of abatement costs will
accelerate the process.
The impact of pollution control costs come almost entirely as
plant closings. Price increases and production level changes will be
very small. In the area of plant closings there is one final unquanti-
fiable factor which can substantially reduce the number of plant closings.
Technically a wood preserver who is using oil-based preservatives can
change to water-based preservatives and eliminate the need for installing
a treatment facility. There will be some costs involved, but they will
be substantially less than that for the treatment facility.
The change is difficult from a business point of view
because most of the plants would also have to change their products and
customers. However, there is incentive to change since the largest
growth in the industry is in nonoil-based preserved products., e.g.:
% Change in
Production % of 1972
1968-1972 Preservative Production
-11% creosote and creosote-coal tar (oil) 46%
+16% petroleum-pentachlorophenol (oil) 28%
-10% creosote-petroleum (oil) 11%
+232% chromated copper arsenate 10%
+20% fire retardants 2%
-51% all other 4%
The opportunity exists for a number of firms presently treating with oil-
based preservatives to change to nonoil-based. In fact, some will have
to change or go out of business because of the declining market inde-
pendent of the cost of pollution control.
94
-------
How many plants facing pollution abatement costs could or would
change their processes is unclear. Some may not be able to because of
supply or market or capital constraints. Such a change would in many
respects be a new business venture, and older plant owners may not be
willing to go through the strain and risks of undertaking such a change.
For the medium-sized plant which has been poorly maintained and as low
profits (in effect, has been poorly managed), there is the question of
whether the management could make such a change.
In terms of plant closures, the worst case would be the closing
of all of the small (perhaps under 20 employees) plants using oil-based
preservatives and steam treating. There are about 50 such plants.
Added to this group would be a portion of the medium-sized plants (20 to
100 employees) with the same process. This portion would be made up of
the plants with old technology which have not modernized, particularly
in the area of reducing labor costs and are presently showing very low
profits on sales (less than 3%). There may be 10 to 20 such firms.
This worst case would be ameliorated by the movement of threatened
plants into nonoil-based processing and strong demand for preserved
products through 1976.
This analysis of economic impact focuses on the 1977 standards *
for existing plants. The costs for new plants are the same and the
added costs for compliance with the 1983 standards are very small and
will have no effect beyond those for the 1977 standards.
2. Price Effects
a. Primary Price Increases
The calculation of the impact of abatement costs on prices in
the wood preserving industry is presented in Appendix A. For the hypo-
thetical plant, the yearly costs of components B, GI, and E is 0.47% of
sales. This value is not product specific and does not include an in-
creased margin to cover a desired return on assets. Of primary impor-
tance is that the effect on prices is quite small.
In the industry description section of this report (II.B), it
is shown that the substantial increases in wood prices have been passed on
with little difficulty, and we do not anticipate the industry as a whole
whole having difficulty passing on abatement costs as prices increase. In
practice, prices are established by a fixed dollar add-on to wood
prices. Of course, all preserved wood prices would not be increased by
the same 0.47%; the increase would be distributed over the different
products.
To say that prices will be easily increased by the industry as
a whole is not to say that the costs will be fully recovered by each
plant immediately. Differences in the timing of expenditures and local
*Best Practicable Control Technology Currently Available.
**Best Available Technology Economically Achievable by 1983.
95
-------
competitive situations will require some firms to temporarily absorb
some or all of the costs. But, their viability should not be threatened
unless they are already in serious trouble, such as the small plants
discussed in Appendix A.
b. Secondary Price Effects
Preserved wood is a small component of the final product in
which it is used with only a few exceptions, and the increase in pre-
served wood prices will have no perceptible secondary impact. Even in
the few instances where the preserved wood prices are an important com-
ponent of the product, such as piers and recreational construction,
movements in construction costs in general by far dominate the projected
preserved wood price increases.
3. Financial Effects
a. Effects on Profitability
From the perspective of the industry as a whole, or at least
that portion of it affected by the standards, profitability will be un-
affected. The price increases necessary to cover costs plus a return on
assets should be well within the capabilities of the industry. The im-
portant profitability impact will be the differential impact on firms
within the industry segment.
Since we do not know what the minimum treatment plant size is
for which our costs are representative, we cannot draw the line at the
plant size below which the capital requirements remain consta.nt. How-
ever, the example worked out in Appendix A indicates that the capital
requirements per unit of production could rise by 100%, going from a
plant with 40 employees to one with 20 employees. The total yearly cost
of the capital and the annual operating costs will follow in about the
same proportion. If the plant with 40 employees can raise its prices
by 0.6% to cover its increased costs, the smaller plant may -only be able
to raise its prices by the same 0.6% and have to absorb another 0.6%.
Income surveys conducted for the Southern Pressure Treaters
Association have shown before tax profits of 6% to 7% on sales over the
last several years. This has been a period of strongly rising prices.
We do not expect this average to be affected by pollution control
costs. However, the distribution of profits shows a very wide range
among firms. For the quarter ending March 31, 1972, the top 25%, the
middle 50%, and the bottom 25% of the companies had profits (% sales) of
12.4%, 7.0%, and 2.2% respectively. The companies in the survey tend to
be the stronger rather than the weaker companies. 1972 was a good year
for the industry, and 1973 is a better year.
If the small company which must absorb part of its cost of abate-
ment is in the 2.2% before tax profitability category, the magnitude of
cost can be critical. It is not possible to be specific about the
96
-------
impact of the costs on the profitability of small plants without know-
ing more closely what the costs are; but impacts will be felt here.
Many wood preserving companies have high profitability on net worth,
even though their profits on sales may be low. This is a reflection of
low capitalization as compared with sales, and also a reflection of the
substantially depreciated state of plant and equipment. The pollution
control facilities can thus be a substantial portion of the capital assets
of the plant. And, they do not contribute to productivity. Having high
profits on net worth may make the plant owner wait longer before closing
down, if profits are reduced, but will not help him with securing' finan-
cing which he needs to build the facility.
b. Effects on Capital Availability
i
Capital availability again differs for the industry segment as a
whole and the individual firms. The effect on the industry depends on
the capital demands of growth and modernization as compared with the
demands for pollution abatement.
The Census of Manufactures reported that capital expenditures in
1970 and 1971 were $8.4 and $10.4 million respectively for the entire
wood preserving industry. The Contractor's interviews showed on average as
much as 50% of what the firms believed would be the expenditures
necessary to meet the 1977 standards had already been made.
As a rough estimate of the total capital requirements, the
capital costs per unit of production can be multiplied times the pro-
duction in Southeast and South Central United States. Using 1971 fig-
ures, the total capital requirements for compliance with the 1977 stan-
dards is $3,597,770. This value includes some plants not in subcategory
1 and excludes some that are. But, it is a good approximation for the
industry as a whole, since most of the subcategory 1 plants are in these
regions of the country. The regions represent about 61% of the country's
production (volume basis), and if capital expenditures are in proportion
to production, the capital expenditure value for the region for 1971
would have been $6.3 million. Of this value, a significant, though un-
known, portion has been going to pollution control.
The value of $3.6 million for total industry expenditures does
not seem unmanageable since projected growth in sales volume is about
2% per year while the industry is now operating at about 75% of capacity.
The industry does not need to make capital expenditures to expand
capacity, but rather to modernize. The industries are not being closely
pressed by competitive imports or substitute products. If there is a
short-term reduction in modernization expenditures, the whole industry's
long-term competitive position will not be threatened.
97
-------
This view is strengthened by consideration of the financial
condition of firms in the industry and their past ability to make capital
expenditures. In the Contractor's survey, most firms had low long-term debt
and a healthy ratio of current assets to current liabilities. Table III.C.I
lists the current ratios and ratios of long-term debt to total assets.
The firms interviewed had in recent years made capital expendi-
tures in excess of their to-date and planned pollution control expendi-
tures and almost without exception had made the expenditures without
bank financing. (The expenditures are typically made from cash flow.)
The industry seems to be in the position of being able to obtain bank
financing if necessary but generally having to get it for capital ex-
penditures such as that anticipated for pollution control equipment.
The earlier analysis showed that small plants making a substan-
tial capital investment may have the effect of continuing the plant in
operation at a lower level of profitability. This new level may or may
not be acceptable, depending on the level itself and the needs of the
owners. A multiplant corporation will typically have a higher accept-
able profitability level than will the owner-managed plant where the
profits are largely as the owner's salary.
For medium-sized as well as small plants, the necessity for
meeting the standards forces the owners to consider whether they want
to commit that level of expenditure to a facility which even after the
expenditure may continue to have low profits on sales and now reduced
profits on net worth. They may simply decide to sell the land, which is
often valuable, and invest their money in a more profitable or more
secure area.
Wood preserving plants have been closing at a rate of 12 per
year. Some of the plants have been of substantial size, and
some closings have been attributed to pollution control regula-
tions. The pollution control regulations will result in the closure of
a number of small plants and some proportion (less than 25%) of the
medium-sized plants for a combination of financial and competitive rea-
sons which result in the owner's perceiving better opportunities in
other areas.
4. Production Effects
Production levels can be changed due to reduced demand for pre-
served wood, due to price increases, and/or due to production losses via
plant closings. Further, there is a current reduction in pole and pil-
ing production because of a lack of wood supply.
As was discussed under price effects (III.C.2), the large in-
creases in wood prices have resulted in large increases in preserved
wood prices in recent years. It does not seem in most product categor-
ies that production levels have been significantly affected by these
98
-------
TABLE III.C.I
SAMPLE OF RATIOS FOR WOOD PRESERVING COMPANIES
Number
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Current Ratio
2.61
1.52
4.28
30.00
2.43
9.45
1.59
1.44
2.79
3.28
7.19
4.22
2.14
Long-Term Debt
Total Assets
4.2
7.3
0.0
0.0
19.0
0.0
0.0
17.7
17.4
3.8
0.0
26.1
3.6
Profits*/
Net Worth
-4.8
58
74
NA
12.6
17.6
48.7
NA
NA
NA
NA
0.1
NA
Before tax profits
99
-------
price increases. Therefore, we do not expect production levels to be
affected by a 0.47% increase in prices resulting from the abatement
costs.
Plant closings which can only be approximately estimated at this
point will also probably have no effect on total industry production
since there is excess capacity which would be able to compensate for the
capacity of plants which are closed. Using the 1967 statistics, if all
of the plants employing 19 or less persons were to close, 10% of that
year's production would be lost. With 25% unused capacity in the in-
dustry, this 10% of production could be made up by other firms.
The assumption that all plants with 19 or less employees will
close may be a good estimate, but we really do not know now where to
draw the line. The picture becomes even less clear for firms with more
than 20 employees, since many of the larger plants have already under-
gone the scrutiny of state environmental control officials and the most
vulnerable have closed or are about to close. If one assumed that all
of the plants with 49 or less employees closed, this would reduce 1967
production by 35%, 10% more than excess capacity. This is an unlikely
occurrence but it does indicate that the closings which are realistically
possible will not use up all of the current excess capacity in the in-
dustry.
Firms that do not close will see their demand grow more than
the industry's 2% per year, and in fact this may be the dominant source
of growth 'for many of these firms. But, the low growth rate of the
whole industry should not be difficult to meet, especially when one con-
siders that the firms staying in business will be the most profitable
ones and the ones most able to expand capacity if necessary.
5. Employment Effects
If all plants employing 19 or less people closed, there would be
a loss of'about 1,500 jobs. These would mostly be scattered through-
out the rural South.
There is one important factor to be noted. Many of the pre-
serving plants are really large farmers and lumber mills, who operate
the plant as an adjunct to their primary operation. It is often a
part-time operation. In 1967, average yearly wage of "production
workers" reported for the 102 plants with four or less employees was
$3,000, as opposed to $4,000 for the industry as a whole.
A simple examination of the names of the companies with treating
plants reveals that 23 or the 163 Southern pressure treaters using oil-
based preservatives are primarily lumber companies or in some other
activity than wood preserving. Twenty-four of the 53 nonoil-based
pressure treaters are lumber companies. These numbers do not include
firms whose names do not reveal their primary activity.
100
-------
Closing the treating facilities of lumber companies will have
less of an employment impact on the community than the closing of an
independent treater, since there will probably be some opportunity for
reemployment in other parts of the business.
The skill level of treating plant employees has both an exacer-
bating and mitigating effect on the community impact of a plant closing.
Most treating plant employees are low-skilled workers. These employees
tend to have the hardest time finding new work. On the other hand,
treating plants are generally located in the center of lumbering areas
and the employees' experience in working with the logs and lumber is
transferable to other timber products activities as well as other wood
preserving plants.
In regard to future employment growth in the industry, one would
not expect total employment growth to be affected. This is because we
are not expecting to see total production affected or production growth
to be affected.
6. Resultant Regional Effects
a. Regional Economic Impacts
The 1,500 jobs which would be lost if all of the plants with
less than 20 employees were to close are scattered throughout the South-
ern United States. Many of these are part-time or seasonal jobs and
there are no large concentrations which could have substantial commun-
ity or regional impacts. The closing of a larger plant in a rural area
can have a local impact. This impact can be somewhat lessened by trans-
ferability of employees to other timber product firms, as was discussed
above. The entire timber products industry is projected to have con-
tinued strong activity during the period when wood preserving plant
closures would be most likely.
b. Probability of New Plants
New plants have been opening in the industry because of local
opportunities for small operations and changing patterns of wood supply.
The profitability of a larger plant is very sensitive to its proximity
to its supply of wood. The optimum locations from a supply standpoint
change somewhat over time and thus provide opportunities for building
new plants even though the industry as a whole is only operating at 75%
of capacity. It is also true that plants become less profitable over
time because of a worsening supply situation in their locations.
c. Secondary Effects Yielding Further Unemployment
The small plants are so scattered that their closure will at
most have small, shortterm, secondary unemployment effects. There will
be no effect on wood suppliers since the demand is so strong. There will
101
-------
be small unemployment effects in rural areas resulting from a lower pay-
roll. But, this should be very short term.
If a larger plant closes in a small community, the impact can be
significant and sustained. At this time, we cannot identify the specific
larger plants which are threatened and, thus, cannot be any more specific
about the community or secondary impacts.
7. Balance of Trade
Very little preserved wood is handled in international trade, and
there is no reason to believe this would change as a result of pollution
control regulations.
D. SOFTWOOD PLYWOOD AND VENEER
1. Overview
a. Methodology
During July 1973, the Contractor participated in seminars with
representatives of the softwood plywood industry to determine the
economic impact of meeting suggested water pollution abatement standards.
The meetings were organized by the American Plywood Association (APA)
for the dual purpose of: (1) gathering the industry's reaction to the
technical aspects of the Guidelines Contractor's report, and (2) gather-
ing representatives of the industry together to respond to the Contractor's
inquiries.
Invitations were extended to 150 softwood plywood mills and 12
softwood veneer mills. Attendance at the meetings totalled 28 plywood
companies and five veneer companies. In 1972 the plywood companies
operated 93 plywood mills and seven veneer mills, and produced 10
billion feet (3/8" basis) of softwood plywood. This represents 48% of
the mills operating that year and 55% of total industry production.
The five independent veneer companies operated five mills and produced
an estimated 500 million feet (3/8" basis), or an additional 3% of total
industry production.
Three of the meetings were held in Oregon, one in Louisiana, and
one in Alabama. Mills represented were distributed between the Southern
Pine and Douglas Fir regions approximately according to the industry
pattern.
A telephone and personal survey was conducted on specific as-
pects of the issue with companies operating 64 plywood mills and eight
veneer mills. The plywood mills produced in excess of seven billion
feet of plywood in 1972 and the veneer mills produced about 600 million
102
-------
feet per year. We believe the plywood mill sample is adequate to base
an economic analysis on, although every mill would have to be surveyed
individually to determine whether it could physically comply with the
Guidelines Contractor's recommendations.
b. Base Case
The plywood industry has already encountered significant environ-
mental pressures from various state and federal agencies. Oregon, Wash-
ington, and California have forced many mills to install air pollution
control devices for their "hog fuel" (waste wood) burners used to gener-
ate steam and power, and some mills have reported spending in excess of
$1.5 million for new burners. Others have converted to natural gas in
areas where a sufficient, low-cost supply of that fuel is available.
Many mills have done nothing, however, and have yet to expend funds to
solve this problem.
In addition, mills are being pressed to eliminate the "haze"
which rises from a veneer dryer, although no one to date has technically
solved that problem. Several methods of coping with veneer dryer
emissions are being tested, but no results are yet available. Mills
contacted believe equipment to accomplish this may cost from $100,000 to
$500,000, although there is no way of concluding that with certainty.
In addition to air pollution control needs, mills are increas-
ingly faced with solid waste disposal problems. Bark and sawdust (if
not burned) accumulate at a great rate and are voluminous. The markets
for these waste products are very limited so mills must dump them some-
where. Oregon and Texas in particular have severely limited dumping of
plywood mill wastes due to water percolation and leaching through the
waste materials. Texas has required some mills to drill wells to prove
that water percolating through is not reaching water supplies for human
consumption. Oregon has reportedly forced some mills to stop dumping
phenol glue wastes, since these are regarded as poisonous.
Finally, several states and the U.S. Army Corps of Engineers
have forced mills to begin coping with water effluent. Although no
existing state limitations are as strict as those proposed by the Guide-
lines Contractor, a large number of producers have already invested in
recycling and wastewater treatment facilities.
In aggregate, therefore, water pollution control is not the most
pressing pollution control problem of plywood mills. Air pollution is
the most expensive problem currently faced and solid waste disposal, al-
though less expensive, is difficult to accomplish also. Water
pollution control may be at the top of the "worry list" for some mills
in some states, but in general it is lower in priority.
Plywood mills have historically operated or closed down on an
intermittent basis due to prevailing market prices. Below a certain
103
-------
price level they reduce production (cut back on shifts) and ultimately
close down. As prices rise, mills open again.
Plywood mills also close down as the timber base in the local
areas is cut out. Mills which own timber in fee can project when this
will occur. Others, who must purchase from the U.S. Forest Service and
private sources, are in a more tenuous position. In the last few years
the creation of new parks and wilderness areas as well as legal action
by conservation groups has restricted timber cutting and made the out-
look for some mills quite doubtful.
The decision to close a plywood mill, therefore, depends on
market conditions and timber availability as well as incremental invest-
ments for such things as pollution control. In addition, the waste
materials from some mills go to pulp mills which need a large, continuous
supply of wood fiber. Therefore, lumber and plywood plants owned by
integrated producers may operate or close based on conditions extraneous
to end use industries.
At present, Aug. 1973, the plywood industry is experiencing fall-
ing prices. This is partially seasonal, but mainly due to a decline in
new housing starts as credit resources have been restricted. If prices
continue to decline, mills will begin to curtail production and close
until prices improve.
It must be emphasized, however, that this is a seasonal and
cyclical phenomena and a "closed" mill does not necessarily mean
"permanently out of business."
Table III.D.I shows the annual total of new, reopened, and
closed mills in the softwood plywood industry by year since 1960. It
will be noted that, although 100 mills closed over the period, there
were 35 mills reopened. The historical statistics, therefore, show us that
total closings per year should equal about eight mills, reopenings will
average three, and new mills should total nine.
Based on the average number of producing units over the period,
mill closings should average about 5% of total producing mills in any
given year, although the range can be 1-10%, depending on price condi-
tions. It can also be stated that one-third of the mills closed in a
year will reopen at a later date, while two-thirds will remain shut.
The Contractor has estimated total U.S. softwood plywood pro-
duction should grow about 4-5% per year through 19801. In Table III.D.2,
therefore, we have estimated the average and possible range of the
number of mills likely to close by year under normal conditions. This
represents our "base case."
Outlook for the Forest Products Industry, September 1970.
104
-------
TABLE III.D.I
SOFTWOOD PLYWOOD
MILLS
OPERATING STATUS
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
TOTAL
AVERAGE
SOURCE :
No. Producing
152
151
155
157
164
174
184
180
175
177
179
189
192
N/A
171
1960-1972
Units New Mills
13
6
7
8
10
13
15
8
8
3
10
13
4
118
9
Reopened
1
1
2
1
2
7
5
3
7
4
2
35
3
Closures
7
3
7
5
4
7
19
18
4
15
7
3
1
100
8
American Plywood Association
105
-------
TABLE III.D.2
ESTIMATED MILLS OPERATING
AND CLOSING BY YEAR
No. of Producing
Units. End of Year
Average No. of
Mill Closings
During Year
Possible Range
in No. Mills
1973
201
10
2-20
1974
210
11
2-22
1975
220
11
2-22
1976
1977
230
240
12
12
2-24
2-24
1978
251
13
3-26
1979
263
13
3-26
1980
275
14
3-28
SOURCE: Contractor's estimates.
106
-------
c. Technical and Cost Responses of Mills to the Guidelines
Contractor's Report
The Guidelines Contractor's report was reviewed with mills par-
ticipating in the group meetings. Each alternative was examined from a
technical and expected cost basis. In addition, the mills were asked if
the recommended procedure was considered feasible and what conditions
made that alternative feasible or not feasible. Following are summaries
of the groups' responses by alternative. The survey question results
are referenced against the appropriate alternative for each.
Alternative A: No waste treatment or control. This was not
recommended by the Guidelines Contractor's report and was not discussed.
Alternative B; Complete retention of glue washwater. It was
agreed that a significant water saving could be achieved by glue re-
cycling and 69% of the 64 mills surveyed had already installed glue re-
cycling systems.2 The actual cost reported per installation ranged from
$35,000 to $85,000, and it was noted that a mill using more than one
glue type must install dual or even triple systems. Nineteen percent of
the mills surveyed used dual glue systems and would incur this cost.3
Of the 44 mills with glue recycling systems, only one reported
achieving complete retention of all glue washwater and that was an in-
stallation in place less than two months. All others reported a need
to dispose of batches of glue washwater and settled glue solids, most
commonly on a weekly basis in volumes of 400 to 1,600 gallons.
All mills reported a need to expend extra labor costs in the
clean-up process to achieve washwater recycling. Only one mill reported
enjoying "substantial savings in raw materials" as suggested in the
Guidelines Contractor's report.** Nearly all other mills seriously
challenged this claim, although a number reported achieving better glue
consistency and better glue bonds from using the washwater in glue make-
up. We conclude, based on these reports, that glue material savings at
best might equal the cost of added labor required for clean-up and
probably would be less than this extra expense.
It is worth noting also that one operator was in the process of
adopting concentrated glues which do not require make-up water. These
mills would be unable to recycle the washwater.
Two methods were commonly used for batch disposal of glue wash-
water which could not be recycledburning in the hog fuel boiler burner
2Question 1, Table III.D.3.
3Question 2, Table III.D.3.
V.P. 167
107
-------
TABLE III.D.3
1. Q: Does mill have existing glue recycling system?
Ans: Yes 44
No 15
NA/DK 5
2. Q: Type of glue used?
Ans: Phenol only 45
Dual 12
NA/DK 7
3. Q: Type of fuel used for boiler burner?
Ans: Hog Fuel 47
Gas 13
Both
NA/DK 4
4. Q: Type of log handling facilities?
Ans: Log Pond 7 Dry Deck 18 NA/DK 11
River Storage 3 Wet Deck 12
Ocean Storage 2 Combination Wet and Other 11
5. Q: Have existing evaporative or aeration ponds (not log ponds) usable
for water treatment?
Ans: Yes 23
No 36
NA/DK 5
6. Q: Land constrained (i.e., do not have water treatment pond and no
land adjacent on which to build one)?
Ans: Yes 8
No 52
NA/DK 4
7. Q: Type of log conditioning practiced?
Ans: Steam Spray Vats 6 9%
Steam Vaults 7 11%
Hot Water Vaults 23 36%
None 23 36%
NA/DK 5 8%
100%
108
-------
8. Q: Would mill close if had to spend
a) $100,000 capital plus $75,000 operating costs per year thereafter
b) $500,000 capital plus $75,000 operating costs per year thereafter
Ans: a)
b)
Yes
No
NA/DK
Yes
No
NA/DK
33
31
3
30
31
Distribution of Respondent Plywood Mills:
1 1
South 23 36%
West and Intermountain 41 64
Total 64 100%
Distribution of APA Member Mills:
1 1
South 48 32%
West and Intermountain 103 68
Total 151 100%
109
-------
and land fill dumping. Seventy-three percent1 of the plywood plants
surveyed had hog fuel burners and 27% did not. Of these remaining mills,
a few could dump glue wastes into municipal sewers,2 but most were faced
with batch disposal into land fill areas (some used independent con-
tractors to haul off these wastes). Mills dumping glue wastes into land
fill in Oregon and Texas were doubtful of the ultimate legality of this
practice and were probably in violation of state regulations. Mills in
other states reported increasing pressure against certain land filling
and felt this course was likely to be foreclosed to them.
Based on our survey data, we estimate 15-25% of plywood mills
could be unable to comply with the Alternative B recommendation except
by batch disposal of glue wastes.2 If local authorities prevent land
filling, they would probably be forced to directly incinerate these
materials, a practice for which we have no cost estimates.
Alternative C: Complete retention of wet decking wastewater.
This alternative was based on the assumption that "dry decking" of logs
is not a source of wastewater effluents and that "log ponds," presumably
including ocean and river storage, were to be considered in Phase II
of the Timber Products Processing study. Therefore, only "wet decking"
wastes were considered.
Dry decking of logs as a technique was practiced by 28% of the
mills surveyed.3 Nearly all of this group as well as many other mills
seriously questioned the proposition that dry decks produced no waste-
water effluent. During rainy periods (one mill received 90 inches of
rain per year) runoff from dry deck log storage was believed to contain
an equal amount of waste as water sprinkled on a log deck. Perhaps an
"act of God" exclusion might apply to dry decks during rainy weather,
but if not, this would appear to be a serious problem.
During periods of low rainfall or in the land area between the
Rocky Mountains and the Sierra/Cascade ranges, collection and recycling
of wet decking wastewater using a sump or settling pond was generally
regarded as possible. However, all mills operating in the South or on
the western side of the Sierra/Cascade ranges objected strongly to the
proposition that containment and evaporation would be adequate to handle
the water runoff.
It was pointed out that most rain in these areas falls in the
winter and that evaporation is at its lowest during this period. In
addition, during the winter some ponds are frozen and do not evaporate
at all.
Question 3, Table III.D.3.
2Dumping phenol wastes into municipal sewers requires careful metering
of the load to prevent sudden surves of high-phenol content which
3Question A, Table III.D.3.
110
-------
Table III.D.4 shows the average rainfall for selected points
within the three areas discussed (South, Intermountain, and west of the
Sierra/Cascades) by month. It will be noted there are substantial cli-
matic differences with the Intermountain region receiving much less rain-
fall than the others. The West, in particular, receives a large per-
centage of its precipitation in the winter.
Table III.D.5 shows the distribution of American Plywood Associa-
tion member mills among the three areas. Of this group, 89% are located
in higher rainfall regions. In addition, there are an estimated 75 mills
in Oregon producing green veneer only who are not members of the APA.
Most of these producers are also located west of the Cascade mountains
in the higher rainfall area.
The state of Oregon and the U.S. Army Corps of Engineers have
recognized this problem and permits issued to mills with existing aera-
tion and evaporation ponds allow pond overflows during specified periods
of the year. This forces the mills to treat the water, yet still allows
overflows which they cannot prevent.
Our survey1 showed 23 mills (36% of those surveyed) using wet
decking alone or in combination with some other method of log storage
and 18 mills (28% of the survey group) using dry decks alone. We con-
clude the latter group faces the same problems as the former and that a
total of 64% of plywood mills or 123 mills must cope with this issue.
By excluding mills located in the Intermountain region who could
probably evaporate most water the year around (estimated at 11% of the
total), we conclude that 57% of plywood mills (89% x 64% = 57%) or 109
plywood mills in total would be adversely affected. To this number we
would add the approximately 75 "green veneer only" mills in Oregon.
This gives a total of 184 facilities who would be unlikely to success-
fully collect and recycle all log deck waters throughout the entire
year and would be in violation of the proposed standards.
Our survey2 showed 23 of the 64 plywood mills (36%) already have
evaporative/aeration ponds or have ponds (not log ponds) which could be
used for this purpose. Of those mills without ponds3,8 reported no
available land at the mill site for the construction of ponds or for
land irrigation. These mills were located in urban areas, on pilings
over water, sandwiched between the ocean or river and some other barrier,
etc., and were all in the West. Most Southern plywood mills were built
since 1964 and company managements generally acquired excess land around
these plants.
Question 4, Table III.D.3.
2Question 5, Table III.D.3.
3Question 6, Table III.D.3.
Ill
-------
TABLE III.D.4
Area Jan Feb Mar Apr May Jun
West of
Sierra/Cascades
Seattle, Wa 4.5* 3.8* 3.0* 2.0 1.6 1.3
Portland, Wa 4.6* 4.2* 3.5* 2.2 1.8 1.7
Eureka , Ca
6.2* 5.6* 4.7* 2.9* 1.8
Intermountain
Spokane, Wa 1.7* 1.5* 1.3* .9 1.0
Pendleton, Or 1.3* 1.2* 1.1* 1.0 .9
Grand Junction, .6 .7 .8 .7 .6
Co
South
1.1
1.2
.4
.L
. IN
Jul
4
3
4
7
.5
.5
.1
.3
.3
.8*
.8*
.7
.7
.6*
INCHES FOR SELECTED CITIES
Total High
Sequential
Year 6 Month
Aug Sep Oct Nov Dec Total Period (1)
1.0 1.5 3.1* 4.6* 5.3* 32.2 24.3
.6 1.8 3.2* 5.2* 6.2* 35.5 26.9
.1 1.8 2.8 4.6* 6.1* 37.3 30.1
.4 .9 1.2* 1.9* 2.2* 14.4 9.8
.3 .8 1.2* 1.5* 1.6* 12.4 7.9
1.2* 1.0* .8* .6* .7* 8.9 5.1
4.2* 4.4* 3.8* 4.2* 4.6* 47.1 26.0
2.4 2.2 3.3 3.9 4.9* 45.4 27.2
3.3 2.1 2.2 4.2* 5.6* 51.2 31.1
7.4* 5.8 3.9 3.9 4.2 61.7 35.5
% of Rain
Received
During
High Period
75%
75
80
68
63
57
55
60
61
58
Houston, Tx 4.1 2.6 2.7 3.0 4.9 3.8
Shreveport.La 4.7* 3.8* 4.7* 4.6* 4.5* 2.7
Jackson, Ms 5.1* 5.1* 6.2* 4.9* 4.1 3.7
Pensacola, Fl 4.5 3.9 6.0* 4.9* 4.4* 5.2* 7.6* 7.4* 5.8 3.9
(1) This represents the total rainfall received during those sequential six months of the year when
the rainfall is greatest.
Months marked with an asterisk fall into the high rainfall period.
Source: Climatic Atlas of the United States.
-------
TABLE III.D.5
DISTRIBUTION OF APA MEMBER SOFTWOOD PLYWOOD MILLS IN 1972
AND ESTIMATED TOTAL U.S. DISTRIBUTION
1972 1972
APA Member-. Total U.S.,..
Area Mills ( ' Estimate ^ '
i °A i
South 48 32 61
West of
Sierra/Cascades 86 57 110
Intermountain 17 11 21
151 100% 192
(1) SOURCE: American Plywood Association
(2) SOURCE: Based on APA member distribution by %.
113
-------
Based on this evidence, we conclude as many as 20% of plywood
mills outside the South, (8 mills with land constraints .- by 41 Western
and Intermountain mills responding) would be unable to construct evapora-
tion and aeration ponds to comply with this alternative. This could
mean as many as 26 plywood mills in total would be unable to follow this
recommendation and could be forced to close or relocate.
Half of the 8 mills with land constraints were asked what they
would do under these circumstances. All would probably relocate a por-
tion of the plant (the "green end" of the plywood line) or the entire
plant. Thus, there would be no permanent closing on the part of these
four mills, although the expense would be high.
Cost experiences related to building sumps and ponds for re-
cycling varied widely according to the specific land condition where a
log deck was situated. In the case of a deck located on flat, rocky
land, a mill had only to bulldoze ditches and install a pump in an exist-
ing pond to recycle at a cost of less than $40,000. Other mills believed
they would be forced to pave the log deck area (as much as 30 acres) in
order to collect the water. This cost was estimated at $300,000 to
$500,000. We are unable to suggest the correct average figures, although
the suggested $39,000 cost for Alternative C in the report was consider-
ed by the mills to be very low.
Alternative C received the most severe criticism of any portion
of the Guidelines Contractor's report. The consensus of firms attend-
ing the meetings was that complete containment and recycling of wet (and
dry) decking wastewater was not possible at all times of the year. Mills
with ponds or with land area to build ponds believed they could contain
and treat water in dry periods and could treat during wet periods but
would still be faced with a seasonal overflow. We believe this argument
has merit.
Alternative D: Complete retention of wastewater from log con-
ditioning. This alternative allowed an exclusion through 1983 for mills
with existing steam spray vats for log conditioning with the provision
that wastewater be treated to specified levels before release. Our
survey1 showed six mills, or 9%, of those responding fell into this
category. This would mean 17 plywood mills in total would operate under
this exclusion through 1983 (our sample size does not permit general-
ization to the total population of veneer mills).
Of the remaining group 36% did not condition logs, 8% did not
answer, 11% had steam vaults and 36% used hot water vaults. The latter
two groups, totalling 47% of mills surveyed or 90 plywood mills in all,
would be required to comply with the recommendation of complete reten-
tion and recycling of conditioning wastewater.
Question 7, Table I1I.D.3.
114
-------
Principal discussion items concerning recycling log condition-
ing water related to the need to periodically drain and clean the vats.
Sludge collects in the bottom of vats and must be removed to a solid
waste dump. Minerals collect on heat exchanger pipes and form a scale
which is difficult to clean yet must be removed. Settling ponds and
sumps were again criticized as inadequate to handle overflow or drained
water due to the problem of heavy seasonal rainfall.
In addition, there was much discussion about the best type of
log conditioning to use in different parts of the country and with
different wood species. It was clear there is no accepted industry norm
for practice.
None of the mills surveyed had existing systems to achieve com-
plete retention and recycling. However, three mills represented at the
meetings but not surveyed had new installations which did achieve this
goal. In two cases the approximate cost of the system was $200,000 in
capital and in the third, the "hardware" costs were $40,000 and labor
cost to build the system was not known. One of these mills reported
annual labor maintenance expenses of $25,000; the others had not yet
developed operating cost experience.
Two veneer mills reported proceeding with engineering plans to
build recycling systems for existing steam vats. The plans included
large holding tanks for settling of solid wastes with the water then
recycled through the steam boilers. The estimated cost of these systems
was $300,000. This could conceivably be cheaper for some mills than in-
vesting in treatment facilities allowed under the interim exclusion
until 1983 and then complying with a zero discharge requirement later.
In summary, this proposal was less troublesome than wastewater
from log decking. Dependence on ponds and sumps was again rejected but
it appeared there were other courses which were open and the industry
was exploring them.
Alternative E: Complete retention of dryer washwater* Veneer
mills generally sell their product without drying, and this alternative
does not apply to them.
Plywood mills felt this recommendation could be followed at the
cost level suggested ($5,000 to $10,000) with one exception. The amount
of water used by a sprinkling system to put out a veneer dryer fire is
substantial. Again, it was not clear this water could be contained
during rainy weather since it was believed ponds would be overflowing.
It was further argued that less frequent cleaning of veneer dryers pro-
duced more fires, and hence more wastewater. Nevertheless, it appeared
a switch to dry and steam cleaning of veneer dryers would solve the
problem, although the labor cost for cleaning would increase.
115
-------
One mill reported veneer dryer washwater was put into hot water
soaking vats for makeup water. No others were now completely retaining
and recycling this water.
In general, however, this problem was considered less severe
than the major difficulty of controlling pond overflows. We estimate
95% of plywood mills would have to expend funds to contain dryer wash-
water.
d. General Comments by Attending Mills
In addition to the points previously mentioned, mills raised the
following issues:
1. Exclusion for lack of available land. The Guidelines Con-
tractor report recommends "consideration" be given mills
with a land availability problem, but this recommendation
is omitted from the reports' conclusions and recommendations.
This was particularly troublesome to affected mills, since
they had no idea what "consideration" means.
2. Reliance on irrigation and land fill. The long-term
viability of this method of water pollution control was
seriously questioned. One mill had attempted irrigating
and had voluntarily stopped the practice because of
damage to the land.
3. Treatment and release versus total containment. The con-
cept of "zero discharge of wastewater" was continually
questioned. Mills believed the Federal Water Pollution
Control Act specified zero discharge of "pollutants" instead.
Mills wanted the option to treat water and then release
it. This was particularly true for operators of integrated
facilities (i.e., a plywood mill situated adjacent to a
pulp and paper complex) who believed EPA standards will
allow treatment and release for pulp mill wastes. These
operators would prefer to build one treatment facility to
handle wastes from an entire complex.
4. Interest depreciation, and land costs. The report ignores
interest expense on capital employed and land cost. While
it is true most mills do have land available, there are
probably alternate economic uses for the land which create
an opportunity cost for the mill. Similarly, some mills
would have to purchase available land and this possibility
has been ignored. Depreciation was similarly ignored and
should be taken into account.
116
-------
e. Summary of Expected Costs and Mill Closings
This summary will deal with three possible conditions relating
to the cost and workability of the proposed alternatives.
Option 1: Assumes the Guidelines Contractor's cost estimates
are correct and the technical steps suggested will work. Plants unable
to comply (i.e., no land available) would close.
Option 2: Assumes the industry cost estimates are correct and
the technical steps suggested will work. Noncomplying plants would
close.
Option 3; Assumes the industry cost estimates are correct and
the industry's evaluation of the workability of the technical steps is
correct. Under this assumption a plant in violation would close.
The cost levels used for each alternative are shown in Table III.D.6
and are estimated annual operating costs.
Table III.D.7 summarizes costs and compliance statistics for
Option 1 by alternative.
Option 1 indicates the softwood plywood industry would be likely
to spend $10,929,000 for capital facilities, $980,000 for annual energy
requirements, and $14,000,000 in annual maintenance costs to comply with
the proposed regulations. A total of 26 mills might close due to a lack
of land (although we estimate most if not all of these would reopen
elsewhere).
Softwood veneer mills would spend $14,605,000 for capital facil-
ities and $177,800 for annual energy needs. As many as 15 veneer mills
might close, although again we feel many would relocate.
Table III.D.8 summarizes expected costs for Option 2 which re-
flects mill estimates of the costs of compliance again assuming the
technical feasibility of the proposed steps. Under this option plywood
mills would expend $45,792,000 for capital facilities, $980,500 for
energy needs and $10,580,500 for annual maintenance. Again, 26 mills
might close.
Veneer mills would expend $14,605,000 for capital facilities,
$177,800 for energy needs, and 15 mills would close.
Option 3 assumes the same level of expenditure as in Option 2
but also assumes the steps taken are not adequate to bring the mills
into compliance. The major technical issue is the ability of the mills
to contain rainwater runoff in evaporation ponds during the heavy rain-
fall seasons. Based on climatic differences, we have estimated as many
as 109 plywood mills and 75 veneer mills might not be in compliance dur-
ing the heavy rainfall periods (mainly winter). Obviously, this would
have a severe effect on the industry.
117
-------
TABLE III.D.6
ESTIMATED INCREMENTAL CAPITAL AND OPERATING
COST LEVELS FOR EACH ALTERNATIVE
Alternative:
Option, . Options
1 U; 2 and 3
A Capital Cost NA NA
Energy Cost NA NA
B Capital Cost $17,500 $50,000
Energy Cost 800 800
C Capital Cost $39,000 $150,000
Energy Cost 2,100 2,100
D Capital Cost^ $12,000 $200,000
Energy Cost 2,200 2,200
E Capital Cost $7,500 $7,500
Energy Cost 2.300 2.300
Total Capital Cost $76,000 $407,500
Total Energy Cost $7,400 $7,400
Annual Operating Costs $75.000 ^ $50.000^
Total Energy and
Operating Costs $82,400 $57,400
SOURCE; (1) EEI Report
(2) Estimates based on group response
(3) EEI Report, page 263
(4) Industry estimates of annual operating
costs were lower than EEI estimates.
(5) Cost of aeration facilities for mills with existing
steam vats is estimated at $81,000
118
-------
TABLE III.D.7
ESTIMATED MILL COSTS AND COMPLIANCE BY ALTERNATIVE
OPTION 1
Softwood
Plywood Mills:
Alternative
A
B (1)
(2)
C
D (1)
(2)
E
Total
Mills
Affected
%
31%
19
64
47
6
95
£
NA
60
36
123
90
17
182
Capital
Cost
Industry
Capital
Cost
Industry # Mills
Energy Energy Unable
Cost Cost To Comply
($l,000's) ($l,000's)
$17.5
35.0
39.0
12.0
81.0
7.5
$1,050.0
1.260.0
4.797.0
1,377.0
1,377.0
1,365.0
$10,929.0
$ .8 $ 48.0
1.6 57.6
2.1 258.3 26(3)
2.2 198.0
2.3 418.6
$980.5 26
Operating Costs
$75,000
100%
192
$14,400.0
Softwood Veneer
Mills (75):
A
B
C (6)
D (4) (6)
(5) (6)
E
Total
NA
NA
64% 48 $39.0 $1,872.0
47 35 12.0 420.0
6 5 81.0 405.0
NA
$2,697.0
Operating Costs
not estimated
2.1 $100.8
2.2 77.0
$177.8
(1) Mills with single glue systems
(2) Mills with dual glue systems
(3) Noncompliance is due to land constraint
(4) Mills with hot water vats and steam vaults
(5) Mills with existing steam vats
(6) Percentages estimated to be the same as for Western plywood mills
15
(3)
15
119
-------
TABLE III.D.8
ESTIMATED MILL COSTS
Softwood
Plywood Mills:
Alternative
A
B (1)
(2)
C
D (1)
(2)
E
Total
Mills
Affected
%
#
AND COMPLIANCE BY ALTERNATIVE
OPTION 2
Capital
Cost
Industry
Capital
Cost
Energy
Cost
Industry # Mills
Energy Unable
Cost To Comply
NA
31%
19
64
47
6
95
60
36
123
90
17
182
$ 50.0
100.0
150.0
200.0
81.0
7.5
$ 3,000.0
3.600.0
18,450.0
18,000.0
1,377.0
1,365.0
$45,792.0
$ .8
1.6
2.1
2.2
2.3
$ 48.0
57.6
258.3 26(3)
198.0
418.6
$980.5 26
Operating Costs
$50,000
100%
192
Softwood Veneer
Mills (75):
A
B
C
D
E
Total
(6)
(4) (6)
(5) (6)
NA
NA
64% 48 $150.0 $ 7,200.0
47 35 200.0 7,000,0
6 5 81.0 405.0
'NA
$14,605.0
Operating Costs
not estimated
2.1 $100.8 15
2.2 77.0
$177.8 15
(3)
(1) Mills with single glue systems
(2) Mills with dual glue systems
(3) Noncompliance is due to land constraint
(4) Mills with hot water vats and steam vaults
(5) Mills with existing steam vats
(6) Percentages estimated to be the same as for Western plywood mills
120
-------
2. Price Effects
The softwood plywood industry cannot pass increased costs along
to its customers in the short run. In the longer run, increased operat-
ing costs can serve to decrease supply during periods of low market
prices because mills may close down sooner than they would otherwise.
Under Option 1, we would expect the longer term price effect to
be a "new floor" under plywood prices in a depressed market equal to no
more than $.75 per 1,000 square feet. (This is equal to the maximum
projected increase in annual operating and energy costs of $82,400 *
the average mill size used of 110,000,000 feet.) Under Option 2, the
"new floor" would be about the same as under Option 1. We are unable
to predict the effect on price if Option 3 is accurate.
It should be noted here that only the annual change in variable
operating expenses should be taken into consideration in this calcula-
tion. Capital expenditures, once made, are a "sunk cost", and the
depreciation charges are a bookkeeping transaction, not a cash outflow.
Therefore, the decision to operate a mill or close it down in the short
run will not take "sunk costs" into account.
One interesting possible secondary effect on prices is the
potential impact on the market value of stumpage timber. The largest
seller of timber in the United States is the U.S. Forest Service. Since
mills cannot set the selling price of their finished product, the price
they can pay for timber is effectively:
Expected Selling Price - (Converting Cost - Profit) = Timber Price.
It is possible, therefore, that the U.S. government could share this
added cost to some extent through lower values realized for timber sold
and there would be essentially no impact on plywood prices.
3. Financial Effects
In the short run (up to 3 years), we believe the plywood and
veneer industry will suffer reduced annual profits in the amounts of:
For Option 1 For Option 2
Reduced profits from added:
Operating and Energy Costs $15,558,300 $10,758,300
Depreciation on Facilities 1,946,580 8,628,140
(7-yr. write off)
Interest Cost (8% simple int.) 1,090,080 4,831,760
TOTAL $18,594,960 $19,391,271
121
-------
Furthermore, the industry will direct between $13,600,000 and
$60,397,000 into water pollution control facilities that would other-
wise be invested elsewhere. It is doubtful that all of these funds
would have gone into plywood industry expension however. Many industry
participants also engage in other businesses and must allocate capital
between various industries. Mills questioned say capital is available
for this purpose, but note that this would be a diversion from other uses,
4. Production Effects
Under Options 1 and 2 we have projected up to 26 plywood plants
and 15 veneer plants may close due to a lack of available land to comply
with the suggested standards. However, it was also noted by those mills
responding to the question that the plants affected would probably be
wholly or partially moved to another site to continue operations. We
estimate nearly all of these plants might be relocated by 1977. Given
the time available to accomplish this, it is doubtful there would be a
significant impact on total industry production, although the companies
involved could suffer large accounting write-offs.
Our survey1 of 64 plywood mills asked the question, "Would you
close any of your mills if you had to spend: a) $100,000 for new
pollution control equipment and $75,000 per year thereafter in operat-
ing costs, or b) $500,000 for new pollution control equipment and
$75,000 per year thereafter in operating costs?" These options essen-
tially conform to Options 1 and 2 of the expected cost of compliance.
No mill reported it would close if faced with Option 1. Two
plywood mills and one veneer mill were considered possible candidates
for closure under Option, 2. This represents 3% of the plywood mills
surveyed. (Due to the small number of veneer mills surveyed we cannot
project across this part of the industry.)
If 3% of the plywood mills now operating closed under Option 2,
a total of six mills would permanently close their doors. However,
respondents answering this question indicated the mills in question were
already "marginal", chiefly due to shortages of timber (resulting in
higher timber costs) in the areas where they operate. Therefore, the
need to expend sums for pollution control facilities might only briefly
hasten the closing of an already weak unit.
Industry production in the local area would suffer in the short
run, but remaining mills would now be able to produce more plywood (more
logs available) or stay in business longer than they would otherwise.
Again, we believe the impact on total industry production would be
nominal.
Question 8, Table III.D.3.
122
-------
If Option 3 were to prevail, however, plywood industry production
could be dramatically reduced. If the position mills have taken is
correct (i.e., evaporative ponds will not hold all wastewater at all
times), two possibilities could occur:
1. 109 plywood mills and 75 veneer mills could permanently
close; or,
2. the above mills might close on a seasonal basis.
The latter case would obviously be more likely, although again we cannot
predict the impact.
We believe the effects of Options 1 and 2 on total industry growth will
be negligible.
5. Employment Effects
Total employment in the plywood industry is not expected to be
seriously affected by the impacts of Options 1 and 2. Most mills clos-
ing due to a lack of available land should reopen in the same local
areas where they now operate, since a plywood mill is usually tied to a
specific timber base (either owned in fee or a stand of market timber).
Again, the amount of time available to effect a relocation should allow
a reasonably smooth transition.
Production curtailments are more difficult to project. If
producers pass part of the added marginal costs of production back to
the log supplier, production curtailments might be nonexistent. Other-
wise, some mills might close sooner than they would have planned to in
a depressed market. We cannot predict the extent to which this will
occur, but we do not believe water pollution control costs will have a
serious impact through production curtailments.
6. Resultant Regional Effects
Most plant closings will occur in the West. The oldest mills
are located here (chiefly Oregon), and they suffer most from a lack of
available land. Therefore, the greatest disruption will occur in the
West, although as previously noted we expect most, if not all, of these
mills to rebuild in the local area.
In the event a mill does not rebuild, workers unemployed would
face a variety of local job conditions. A mill closing down in an
urban area would have less impact on local conditions than one situated
in a remote location. Oregon in particular has enjoyed strong economic
growth in the last decade, chiefly in its urban areas. In general the
economic climate in that state is good, although workers could be forced
123
-------
to relocate. We do not expect significant secondary employment effects
except in a very few isolated areas.
7. Balance of Trade Effects
The softwood plywood industry is not a significant exporter of
its finished products, nor does the U.S. import large quantities of this
material. It is possible a few mills might elect to sell their timber
into export markets and close production facilities. If so, this would
positively impact our balance of trade in the short term, although by a
very small amount.
Industry sources claim the logs likely to be freed by a plywood
mill closure are not those regarded as most desirable for export. We
project essentially no impact in this regard.
E. HARDWOOD PLYWOOD AND VENEER
1. Overview
The hardwood plywood and veneer industry is characterized by a
large number of small operations, in contrast to the softwood plywood
and veneer sector described in III.D. For example, both industries have
approximately the same number of plants190 in hardwood plywood, 192 in
softwood plywood. However, the total output from these 190 plants in
the hardwood sector is only 12% of the total output of the same number
of plants in the softwood sector. Further, typical representative plants
in these sectors would be of the following sizes:
Hardwood: 5-10 million square feet per year, 3/8" basis;
Softwood: 75-150 million square feet per year, 3/8" basis.
In fact, a simple arithmetic average shows that the 190 hardwood plywood
mills produced 11.6 million square feet each, the softwood plywood mills,
95.4 million square feet each in 1972.
The Guideline Contractor's original cost and technological data
for the plywood and veneer industry was based on a 100 million square
foot Southern pine (softwood) plywood and veneer mill. These abatement
cost factors were not applicable to the hardwood sector. Cost trans-
lations on the basis of size are difficult to make, since the cost
function is not linear; it is more parabolic in nature. For the tech-
nological options developed by the Contractor, there are minimum costs
to achieve the technological solution, beneath which cost is not related
to size. That is, for example, for a 25 million square foot plant, the
capital investment required may be the same as that for a 5 million
square foot plant.
124
-------
Since this industry is comprised of small plants, with relatively
modest plant and equipment investments, even small pollution-related
capital costs can force closure. For example, the $76,000 capital invest-
ment required by the Guidelines Contractor's Alternative E is not signif-
icant in the softwood plywood industry, compared against a capital base
of $10-15 million for plant and equipment. However, in the hardwood
plywood industry sector the investment base is in the range of $200,000-
$1,000,000 of capital invested; a $76,000 capital investment would be
significant. (8%-38% of assets)
Thus, new guidelines cost and technological data was prepared by
the Guidelines Contractor. At the writing of this report, the new data
was still preliminary. However, since it represented a substantive
revision, which would alter significantly the economic impact, the new
data was incorporated into this revised analysis.
The initial economic impact analysis performed by the Contractor
was accomplished on the basis of the Guidelines Contractor's softwood
plywood cost and technology information. The impact of those costs on
the hardwood sector are severe. Thus, to indicate the sensitivity of
the industry to capital costs, at critical points in the analysis, the
results of both the present and prior analysis are presented. It is
important to note that for small plants in this industry sector, capital
investments of $10,000-$15,000 carry important decision-making signifi-
cance. For most of these plants a "shut down" decision would be the
same at either a $25,000 or a $76,000 investment level.
The revised cost and technology data supplied by the Guidelines
Contractor is*:
Alternate B: $2,000; for glue washwater;
Alternate D: $5,500; retention of hot water vat effluents.
In addition:
Total annual costs: $11,025;
One-time cost of process changes: $10,000.
Thus, the total cost of abatement to a hardwood plywood mill is approx-
imately $17,500 capital costs (process changes plus abatement equipment).
Although profit margins are tight in the industry and price in-
creases over the past few years have lagged cost increases, an increase
in annual operating costs due to pollution control equipment is not
really the key issue. Rather, the issue is the ability and willingness
*Based on a 5 MMSF hardwood plywood and veneer mill.
125
-------
of the management of firms in these sectors to raise necessary capital
costs, and the availability of land to support settling ponds. The im-
pact analysis indicates that the impact on the industry is most sensitive
to these two issues.
2. Price Effects
The basic point to be made is that prices in the industry are
constrained to certain levels by the prices of low-cost import plywood,
and the manufacturing efficiencies of the larger firms. Because of the
import-related pressure the industry generally has relatively little
ability to pass on increased costs. Because of the efficiency of the
larger firms, the smaller firm is constrained.
a. Primary Price Increases
The additional cost to the major producers is insignificant; it
would not be necessary for them to alter prices in response to water
effluent abatement costs. The smaller firms will simply have to absorb
any cost increases, yielding lower profit margins. Specifically, we
anticipate a range of price increases from zero to a maximum of 2%.
Prices in the industry range from a low of $50 per thousand
square feet (3/8" basis) for imported, commodity, unfinished panels to
$1200 per thousand square feet (3/8" basis) for specialty, "fancy face"
decorative panels for expensive furniture. The inability to pass on
prices will put small firms in a further profit margin squeeze situation.
To the large firms the costs will not matter.
b. Secondary Effects
Since primary price increases are insignificant, there should be
no effect related to water effluent abatement costs translated into
higher prices for end products.
Pollution abatement costs will not affect stumpage costs, the
primary raw material factor. Changes in cost of stumpage will be due
to general wood availability and quality, influenced by the rising cost
of imported veneer and imported peeler logs.
3. Financial Effects
Financial effects on plants in the hardwood, plywood, and veneer
industry segment are presented here in terms of the profitability of a
representative hardwood plant. As noted above, this representative
plant is much smaller, with a much smaller asset base, than a representa-
tive softwood plant. The characteristics of this plant are as follows:
Annual production: 6 million sq. ft. per year (3/8" basis)
* Employees: 50
126
-------
Investment in plant and equipment: $500,000
Product line: (1) Stock, 4' x 8' panels
(2) Cut-to-size panels
Products unfinished ; rough sanded
Markets: (1) Wall panel prefinishers
(2) Furniture manufacturers
Integrated to veneer production, but no ownership of woodlands
and no market integration
Privately held
Works two shifts: Maximum 46-50 hours per week
Location: Mid-South, Southeast
Species: 5-15 different hardwood varieties
In essence, a plant such as this is producing commodity, but
quality, panels. The panels are sold in direct competition with low-
cost imports, and plywood panels manufactured domestically from low-
cost imported veneer. The use of hardwood plywood in the markets for
the firm's products is growing at a rate of 4-5% per year, but more than
half of that growth is met by imported products.
With no woodland ownership, the company operates with uncertainty
as to the ready availability of quality peeler logs and the cost of those
logs. The company does at least a portion of its own logging, employing
2-5 men in its logging operations.
a. Effects on Profitability
In 1972 the company would have enjoyed a better year than in any
of the previous three years, and probably as good a year as any since
1966 or 1967. The income statement for 1972 appears as the base case in
Table III.E.I The base case is the income statement without allowing
for any pollution abatement costs.
As the table shows, the company's net profits on approximately
$1 million worth of sales would be about $25,000, or 2.6% net return on
sales. The return on net assets would be 5.0%.*
*Net assets were estimated to be $500,000, which would represent the in-
vestment necessary to install the plywood and veneer equipment in 1972.
Since many of the mills are 10 years older or more, the depreciated
asset base could be approximately half of this, thus doubling the return
on net assets figure.
127
-------
TABLE III.E.I
00
Net Sales
Cost of Goods Sold
GS&A
Pollution Costs
Operating Profit
Other Income
Total Income
Provision for Income Tax
Net Income
PROFITABILITY OF REPRESENTATIVE HARDWOOD
PLYWOOD AND VENEER PLANT -1972
Base Case
Alternate A
I
100.0
84.9
10.0
-
94.9
5.1
(.1)
5.0
2.4
2.6
$M
1,000
849
100
-
949
51
(1)
50
24
26
**
Alternate B
1
100.0
84.9
10.0
0.2
95.1
4.9
(.1)
4.8
2.3
2.5
$M
1,000
849
100
2
951
49
(1)
48
23
25
**
Alternate D
1
100.0
84.9
10.0
1.1
96.0
4.0
(.1)
3.9
1.9
2.0
$M
1,000
849
100
11
960
40
(D
39
19
20
Return on Net Assets
5.0%
5.0%
4.0%
Pollution Investment
Net Assets
0
0.4
3.5*
*Includes one-time costs for process changes, plus costs of abatement equipment; $10,000 (process) +
$7,500 (abatement) = $17,500.
** Abatement Costs = Best Available Technology Economically Achievable by 1983; New Source Standards.
-------
Due to a combination of factors, such as increasing labor costs,
a firm such as the representative firm listed here would have enjoyed its
highest rate of profitability in 1966 at about 6-8% return on sales, pre-
tax.* In the years since then, labor costs have increased at a rate faster
than the company's ability to improve productivity and raise prices.
Thus, the past 5-7 years show a trend of a gradually shrinking margin of
profit for these firms.
The last two columns in Table III.E.I present the effect on pro-
fitability incurred as the plant uses the technology developed in the
Guidelines Contractor's report to meet effluent abatement guidelines.
The factor entitled "Pollution Costs" represents the total yearly cost of
investment,and operating and maintenance expenses as estimated by the
Guidelines Contractor.
The important fact to notice as the effect on profitability is
traced from alternative B through alternative D, is that while net profits
shrink by approximately 30% to achieve alternative D, at alternative D
the rate of profit is only 2.0%. An important factor is the magnitude of
the net profit, namely only $20,000.00 after tax for alternative D.
Assuming a simple depreciation rate of 10% per annum over 10 years, the
cash flow of the business would be approximately $70,000 per year.
The other important figure to track is the ratio of the magnitude
of the pollution investment to the net asset base. In alternative D, that
ratio is 3.5%.
Assuming that the representative plant was 20 years old, the value
of plant and equipment would be in the range of $200-$300,000.00. This
would, of course, raise each return on net assets figure, from 10% in
terms of the base case, to 8% for alternative D. However, it would imply
a pollution investment to net assets ratio ranging up to 7% for alter-
native D.
Table III.E.2 presents the corresponding financial analysis based
on the Guidelines Contractor's original estimates. The potential impact
is obvious. For example, at a $76,000 capital cost, a firm would be
investing in abatement equipment at the rate of 15% of its asset base.
For a company with the low profitability depicted here, that would usually
be an untenable situation; the company would probably shut down the
facility rather than make the investment.
*Data supplied by the Hardwood Plywood Manufacturers Association
annual financial survey.
129
-------
TABLE III.E.2
PROFITABILITY OF REPRESENTATIVE
HARDWOOD PLYWOOD
AND VENEER PLANT 1972
Utilizing Pr
Base Case
Alternate A
Net Sales
Cost of Goods Sold
GS&A
Pollution Costs
Operating Profit
Other Income
Total Income
Provision for Income Tax
Net Income
Return on Net Assets
Pollution Investment
%
100.0
84.9
10.0
94.9
5.1
(.1)
5.0
2.4
2.6
$1,000
1,000
850
100
950
50
(1)
49
24
25
5.0
IT?
Alte
%
100.0
84.9
10.0
.5
95.4
4.6
(.1)
4.5
2.2
2.3
ior Guidelines Data
* *
irnate B Alternate C
$1,000
1,000
850
100
5
955
45
(1)
44
22
22
4.4
3.5
%
100.
84.
10.
1.
96.
3.
(.
3.
1.
1.
$1,
0 1,
9
0
2
1
9
1)
8
9
9
3.8
11.3
000
000
850
100
12
962
38
(1)
37
18
19
*
Alternate D
%
100.0
84.9
10.0
1.5
96.4
3.6
(.1)
3.5
1.7
1.8
i
$1,000
1,000
850
100
15
965
35
(D
34
17
17
3.6
n 7
*
Alternate E
%
100.0
84.9
10.0
1.7
96.6
3.4
(.1)
3.3
1.6
1.7
$1,000
1,000
850
100
17
967
33
(D
32
16
16
3.4
15.2
Net Assets
* Abatement Costs = Best Available Technology Economically Achievable by 1983; New Source Standards
-------
b. Effects on Capital Availability
The representative plant depicted in Table III.E.I would also
be characterized by a low level of long-term debt. At most, the firm
would be relying on some short-term borrowing to finance operations, but
would generally finance new investments out of cash flow or retained
earnings, or through a lease-purchase arrangement with the equipment
supplier. Most pieces of production equipment are available on the
lease-purchase arrangement. This allows the firm to install new pro-
ductive capacity without a major capital expenditure and to gradually
gain ownership as the equipment becomes a productive, profitable asset.
Pollution abatement equipment might be available on a lease-
purchase arrangement, but since it is not a productive asset, its cost
is not financed in the same sense out of increased profitability. The
recourse to debt financing, of an amount such as this, which represents
a significant capital investment burden, is not attractive to the small
business owner. Rather than meeting the investment, the tendency will
be to close the plant and attempt to sell the assets.
In most cases, these companies have good relationships with local
financial institutions. Generally the companies will have met their
short-term borrowing responsibilities and will be operating at very low
rates of leverage. However, debt for pollution equipment will represent
a risk, one not buffered by economic incentives. On balance, a one-time
investment of $17,500 could be supported by individual firms in this
industry.
Simply put, then, the problem in this industry is not one of
relative capital availability, but one of willingness to support the
risk of debt to finance capital investment in pollution control equipment.
4. Production Effects
a. Production Curtailment
In this industry, production curtailment short of plant closure
is not a likely option. In a few cases, a company which is a producer
of both plywood and veneer may discontinue production of veneer, thereby
saving the investment in pollution abatement equipment on the veneer side.
However, veneer is becoming scarce, as domestic veneer mills shut down
and as imported veneer becomes less available. Thus, it is not likely
that large numbers of mills destined for closure will be able to cease
veneer production and continue plywood operations.
It is possible for a plywood plant to operate on less than 2-3
full shifts. However, since a significant portion of the abatement costs
must be absorbed by even a small plant, reducing production does not
affect capital costs for abatement equipment significantly. Thus, there
is little to be gained by simply reducing production. The decision in
131
-------
terms of production curtailment is reduced to one of complete shutdown
with no pollution abatement investment or full absorption of pollution
abatement costs at the same or a higher rate of output.
b. Plant Closings
We estimate initially that we would categorize 76 plants as
high-probability-of-closure plants, representing approximately 240
million square feet of annual production. This is approximately 11%
of the 1972 output of 2.2 billion square feet.* The fact that the
plant closures projected amount to 11% of 1972 production would not
imply that the industry output would be reduced by that amount. The
existing plants in the industry could increase output to more than
meet the apparent deficit caused by these closures.
These plants were segmented as follows:
Plants producing veneer only: 31;
Plants producing plywood and veneer and plywood: 45.
The production of these plants is:
Veneer: 85 MMSF per year; 3% 1972 veneer production;
Plywood and veneer and plywood: 155 MMSF per year;
7% 1972 plywood production.
Realistically, these 76 plants can be categorized as highly
probably to close based on the interaction of three factors:
A series of market/competitive environment parameters
related to decreasing profitability and inability to
compete with low-priced imports;
* This figure of 240 MMSF includes some double counting. That is,
some of the veneer production is sold by the veneer mill to a
plywood plant not integrated to veneer manufacture. However, that
did not create a substantive problem for the analysis.
132
-------
Anticipated costs for air pollution abatement programs, in
many* cases estimated to be in excess of the costs associated
with effluent abatement programs;
Costs of effluent abatement.
Originally, the costs of effluent abatement were projected to
account for two-thirds (51 plants) of the plants in this category.
In essence, the costs of air and water pollution abatement would
have been the deciding factor which influenced closure, already made
imminent through a history of marginal profitability over the previous
5-10 years.
Although statistics from different sources come up with different
answers in terms of recent plant closures, our analysis pinpoints at
least 39 hardwood plywood plants which were in operation in 1969 and are
not in operation in 1973. These 39 plants ranged in size from an annual
output of 1 million square feet per year to as much as 15 million square
feet per year. The average size was approximately 6 million square feet
per year.
Applying the revised cost data shifts the onus of the economic
impact from water pollution related costs to (anticipated) costs of air
pollution abatement and market/competitive environment parameters. Thus,
only 25-30 plants**can be categorized as high-probability-of-closure plants.
This is equivalent to approximately 100 MM square feet annual production,
or 4% of the domestic production in 1972.
Table III.E.3 lists the characteristics of the plant in the high-
probability-of-closure category. Table III.E.4 outlines the rationale
the owner of a hardwood plywood plant would undertake to make the closure
decision.
* It is difficult to separate plant closure effects due to water pollution
related costs and air pollution related costs. In many cases the air
pollution costs will be the more significant burden. At least the tenor
of the industry is such that the anticipated investments in equipment
necessary to control both sources of pollution will be sufficient to
cause the closure decision.
** To simplify calculations, 30 plants will be used as the number in the
high-probability-of-closure category.
133
-------
TABLE III.E.3
CHARACTERISTICS OF REPRESENTATIVE MILL
IN HIGH PROBABILITY OF CLOSURE CATEGORY
Product Line:
Commodity, unfinished panels, or
Specialty products at cost disadvantage, e.g., curved plywood
for upholstered chairs losing market share to plastics, re-
constituted wood
Plant Operating Characteristics:
Small plant, 10 MMSF or less annual capacity
Operating at 60-70% of capacity
Veneer manufacturing, but no woodlands ownership
Modest profitability, e.g., 2-3% net profit margin
* Basic equipment 10 years old or older
Ownership:
Privately held
Second generation in management
Employees:
Skilled (veneer peeler)semi-skilled
Live near plant
Generally older workers
Location:
Rural/remote or suburban
Mid-South region
134
-------
TABLE III.E.4
FACTORS INFLUENCING PLANT CLOSURE DECISION
CO
Ul
Plant
Characteristic
Factor
Salvage value of assets
Degree of integration
Multiplants
Plant
Closure
Implications
Old equipment, not valuable in new
plant
Little woodlands ownership
Low degree; veneer and plywood,
little raw material integration
Generally single plant or
strategically distinct plant
operations
Technological obsolescence Rate of change of technology is slow
Air pollution
Corporate commitment
Little equipment installed
Anticipate higher charges than for
water pollution
Some community commitment/emotional
attachment
Second generation owners less
committed
Net Effect
(Plant Closure Decision)
Favors closure
Favors closure
Favors closure
Favors continued
operation
Favors closure
No clear effect
-------
c. Industry Growth
The growth of the hardwood plywood and veneer industry will not
be materially affected by the anticipated plant shutdowns outlined here.
The 39 plants identified as ceasing operations between 1969 and 1973
represented 11% of 1972 domestic production. However, the actual pro-
duction in 1972 was 8% greater than that in 1969. Any increase in demand
will be absorbed by higher operating rates among both small and large
plants in the industry. For example, the industry's rated capacity in
1972 was approximately 3.1 billion square feet; production in 1972 was
2.2 billion square feet. This implies an operating rate of approximately
72%. Although due to the impreciseness of statistics, this operating
rate is not a hard figure, it does suggest that the industry is not now
operating, and typically does not operate, at maximum capacity utilization
rates.
5. Employment Effects
Employment effects were based on consideration of the number of
employees in the typical plant considered highly probably for closure.
For a large-scale mill, more than 75 million square feet output annually,
substantial productivity efficiencies can be gained. A ratio of approxi-
mately two employees per million square feet of production pertains to
plants in this larger-sized category. However, for smaller plants, the
ratio increases rapidly as size decreases. While a specific 40 million
square foot plant operates with approximately 70-80 employees (2 employees
per million square feet), another 6 million square foot plant requires
approximately 50 employees to operate (10 employees per million square
feet). Even a mill producing 1-2 million square feet annually would
require 20-30 employees. Thus, the impact on employment due to plant
closure in this industry will be higher than the impact on production.
a. Production Curtailment
As discussed in Section III.E.4, curtailment of production is not
a generally viable option for the industry. Thus, the employment effects
due to curtailment will be negligible.
b. Plant Closings
Plant closures account for the bulk of the employment impact.
We estimate the employment impact due to plant closures will be as follows:
Abatement Alternative
1 ID
Gross Employment Impact
Number - 750
% - 4.3%
Net Employment Impact
Number - 550
% 136 - 3.1%
-------
Again, it is worth contrasting the impact of the revised costs
with the impact based on the prior assumption of costs. Under the assump-
tion of prior data, the impact was:
Gross Employment Impact
Number 2,400
% 14%
Net Employment Impact
Number 1,045
% 6%
Employment dislocations of 1,000 or more persons are possible in this
industry sector if required capital costs, per plant, reach levels of
$25,000 or higher (based on 5 MM square feet annual production volume).
The actual total employment in the hardwood plywood industry
sector was difficult to determine since government employee statistics
list total employment in softwood and hardwood, and do not separate the
two sectors. Also, some plywood prefinishers which we have excluded from
our analysis are also included in these statistics. However, we estimate
that the employment in the hardwood plywood and veneer industry is approxi-
mately 17,500 employees.
c. Industry Growth
Again, as detailed in Section III.E.4 on production effects, we
do not anticipate that the industry growth rate will be materially dis-
rupted by plant closures due to abatement costs. Thus, the effect on
employment due to industry growth changes will be negligible.
6. Resultant Regional Effects
a. Regional Economic Impacts
Table III.E.5 presents the regional distribution of plant
closures* and unemployment. As the table demonstrates, 47% of the plant
closures and dislocated persons are located in the states of the mid-
South (the Carolinas, Virginia, Kentucky, Tennessee). Approximately
70% of the 750 persons dislocated (550 net unemployment) will be unable
to find other, comparable jobs due to the following factors:
location in a remote, rural community
unwillingness/inability to relocate in a new community
age
lack of skills needed/translatable to other industries
* All of these plants, of course, may not close. They are categorized
as high-probability-of-closure due to required abatement cost burdens,
137
-------
TABLE III.E.5
00
Region
Mid-South
North-Central
Southeast
Northeast
Southwes t
West
REGIONAL ECONOMIC IMPACT
Closures
% Number
47
21
17
9
3
3
00
14
6
5
3
1
1
30
Gross Employment
Impact
350
160
130
70
20
20
750
Net Employment Impact: 550
-------
Most of the plant closures will be located in rural communities.
Thus, the number of impacted communities will be approximately the same
as the number of plant closures, e.g., 30.
Again, to suggest the possible impact on the industry due to
higher required capital costs, Table 1II.E.6, based on the original
assumption of softwood plywood capital costs, is presented.
b. Probability of New Plants
Our studies of investment patterns in the forest products industry
in the United States suggests that for several reasons, including wood
availability and generally lower operating costs, the domestic forest
products industry will be investing more heavily in the states of the mid-
South and Southeast than any other comparable region. This suggests that
workers displaced from these plants could be utilized in new plants.
However, the lead time from investment decision to plant startup for a
pulp and paper mill is 3-5 years; it is about one year for a large saw
mill or veneer and plywood mill. Thus, while there will be new oppor-
tunities in these areas, they will not be available immediately. And,
rather than being located in a number of small communities throughout
the region, they will tend to be concentrated as larger complexes in
fewer communities.
c. Probability of Relocation in Local Work Force
Skills applicable to work in a plywood and veneer mill are, on
balance, translatable into other manufacturing operations. Certain
operations, such as the actual peeling of veneer from a debarked log,
are quite high-skill occupations. However, the bulk of the operations
performed in the plywood mill can be learned readily. Thus, employees
displaced from plants will generally not have skills so specific that
they could only find employment in another plywood plant. Nor will they
be in demand as highly skilled labor.
Since these mills are generally quite small, relatively few
people will be put out of work in an individual community. Thus, those
communities with a large enough population and economic base not to
be significantly impacted are expected to have vocational opportunities
for the displaced persons. We would expect of the persons displaced in
non-impacted communities, approximately 60-70% of these people would be
able to find other, comparable employment.
d. Secondary Effects Yielding Further Unemployment
Secondary effects should be minimal in this industry. Most of
the small plants are relatively self-contained, even to the extent of
having their own logging crews. Thus, the closure of a small veneer
mill will probably not imply displacement of logging personnel as well.
139
-------
TABLE III.E.6
REGIONAL IMPACT
Based on Prior Data
State
Alabama
Arkansas
California
Florida
Georgia
Indiana
Kentucky
Michigan
Mississippi
Minnesota
New Jersey
New York
North Carolina
Ohio
Pennsylvania
South Carolina
Tennessee
Texas
Vermont
Virginia
Wisconsin
TOTAL
Number of
Closures
6
1
2
2
3
3
2
3
1
1
1
5
15
1
2
9
3
2
1
7
_6
76
Number of
Community Impacts
Gross Employment Impact
1
1
4
7
1
1
1
1
4.
31
Net Employment Impact:
All Closures
210
20
35
70
100
100
70
100
45
25
25
170
470
30
75
290
100
50
30
210
190
Impacted Community
100
-
-
35
45
-
-
30
-
-
-
135
220
30
-
195
-
25
30
30
130
2,400
1,045
1,005
6552
Numbers may not add due to rounding.
"Based on assumption that 65% will not find comparable employment.
-------
Also, many of the persons who supply logs to plywood and veneer mills
are farmers and other land owners who cut logs to augment their income
but are not solely dependent on logging fees to support their families.
7. Balance of Payments Effects
Hardwood plywood imports account for approximately 75% of the
total domestic consumption of hardwood plywood. The imported product
competes on the basis of lower price due to substantially lower labor
costs and ready availability of quality peeler logs. In the last 20
years, there has never been a substantial export of domestically pro-
duced hardwood plywood. We do not anticipate a shift in this basic
trend.
There will be no effect on balance of payments due to pollution
abatement cost requirements. Although a significant number of plants
will be closed, the net effect will not be a significant reduction in
industry output or growth. Thus, domestic supply will not be materially
affected and, for that reason, imports will not materially increase.
There are other factors which may have a salutary effect on the
balance of payments. For example, Japan is consuming more hardwood
plywood from the primary producing nations, i.e., Korea, Philippines,
and Taiwan. Japanese demand siphons off a significant portion of the
productive capacity from this region. The Japanese market has been willing
to pay the prices which make it very attractive to ship to Japan instead
of to the United States. Further, the availability and cost of high-
quality peeler logs is rising in the Southeast Asia/Oceania countries,
causing higher landed prices in the United States. The net effect is to
make domestic production more competitive.
In effect, the balance of payments will not be materially affected
by pollution abatement requirements under the assumptions used for this
analysis. Other factors have a far more important influence on balance of
payments in this sector than environmental control costs.
141
-------
APPENDIX A
The Costs of Water Pollution Abatement
An evaluation of the impact of pollution control costs on the
wood preserving industry rests on an understanding of the industry and of
the costs of control. The industry description has been developed in
Section II.B of this report. This section takes the cost of control data
developed by the Guidelines Contractor and puts it into a form which can
be used for the impact analysis.
The cost data only applies to pressure treating plants using oil
borne preservatives and steam conditioning of the wood. Other industry
segments are required to have zero discharge and thus no treatment costs.
Firms which are in these segments of the industry and which are not now
in compliance will have to make expenditures to achieve zero discharge.
But these costs have not been estimated and are not included in the impact
analysis.
The costs and this impact analysis are thus confined to firms
which are for the most part in the Southeastern and South Central United
States.
Sources of Data
The cost of abatement estimates use data from two sources the
Effluent Limitation Guidelines Standards and the Contractor's field inter-
views .
Standards
The industry has expressed a substantial level of concern about
meeting the pollution standards. However, it appears that much of the
concern derives from confusion as to what the standards are, particularly
in the areas of the definition of zero discharge and the collection of
storm water runoff.
The following sections from the standards should be kept in mind:
"Control of storm water in the immediate vicinity of retorts
and preservative storage tanks may be required because of the
accumulation of oil from spillage... total area should be quite
small."
"Collection and treatment of storm water from yards where treated
products are stored are unnecessary."
143
-------
"Construction of a lagoon or other suitable structures at a
location such that it will intercept major spills is recommended
at all plants."
"Plants unable to acquire the land needed for lagoon construc-
tion should be given special consideration with regard to
effluent limitation requirements."
Also from conversations with the Guidelines Contractor, it is our
understanding that "zero discharge" includes (under prescribed conditions):
discharge into a sewer system
land disposal (3500 gal/acre/day) of effluent that has been
flocculated and put through an equalization pond
storage in a lagoon for reuse
Capital Costs of Abatement
The Guidelines Contractor conducted a survey of the costs of control
which "exemplary" plants were actually experiencing and then constructed a
set of costs of a "hypothetical" plant. It is these later costs which have
been used in the analysis. The abatement components are:
A - Oil Separation
B - Coagulation and Filtration
C..- Biological Treatment, Aerated Lagoons
C2~ Biological Treatment, Activated Study
D - Polishing Treatment, Chlorination
E - Effluent Measurement
The costs for 1977 assumed components A, B, GI or C~, and E. For
1983, component D is added. Table A-l lists the capital ana annual costs
of each component.
When evaluating the impact of the costs for 1977, components A,
C2, and D were omitted. The Guidelines Contractor's survey found that
almost all plants now have oil separation equipment, and plants would
choose C^ over £-2 as being less expensive. Thus, the total capital costs
for the hypothetical plant are $68,040 with annual costs (including
capital costs)of $22,917.
144
-------
TABLE A-l
CONTROL TECHNOLOGY COST FACTORS
Treatments
Cost Factor A B C C? D
Investment 29,760 43,320 21,120 120,000 8,400 3,600
Annual Cost
Capital (6%-20 yrs.) 2,600 3,800 1,850 10,500 650 315
Depreciation (20 yrs.) 1,488 2,166 1,056 6,000 4,200 180
Operation and
Maintenance 800 3,000 7,000 10,000 5,300 2,000
Energy - 200 1,300 1,300 150 50
Total Annual Cost 4,888 9,166 11,206 27,800 10,300 2,545
Based on 15.9 million liters per year
A - $0.31/1000 liters
B - 0.58/1000 liters
G!- 0.70/1000 liters
C2- 1.75/1000 liters
D - 0.65/1000 liters
E - 0.16/1000 liters
SPURGE; Development Document for Effluent Limitations Guidelines and New
Source Performance Standards, May 1973.
Best Available Technology Economically Feasible by 1983; New Source Standards,
145
-------
An Evaluation of Hypothetical Plant Costs
The hypothetical plant (HP) is described as producing 15.9 million
liters per year of effluent. We want to be able to relate the costs to
plants by their production volume and employment. With internal process
changes, a plant could get its effluent flow down to 133 liters (L) per
cubic meter (m ) of production. ,
The average flow/production value for plants 1, 2, 3, 4, 6, 7, 8,
and 9 is 180 L/m3. (Plant 7 had 189,300 L/day exclusive of cooling water.)
The plants in the Contractor's survey had an average flow of 192 L/m3.
The Contractor's number covered more plants but without the emphasis on
accuracy of the Guidelines Contractor's number. Therefore, we have taken
the 192 L/m3 as confirmation that our data sources are comparable and used
the 180 L/m3 figure in our calculations.
Perhaps the easiest way to see the approximate nature of the cal-
culations one must make for evaluating the impact of control costs on firms
is to examine the listing of effluent flow per production for the plants
in the Guidelines Contractor's survey. This is indicated on Table A-2.
The cost values are directly related to the flow, yet one sees
that the flow per unit of production and thus the costs per unit of pro-
duction can in principle vary by as much as -57% to +44%. These differences
reflect different products (railroad ties have significantly less flow)
and different amounts of internal housekeeping. But the important point is
that any analysis using the average values must be understood to represent
a wide range of values.
Using the effluent per production value, one can compute the pro-
duction of the HP as being 88,300 m3 of product.
From the Contractor's survey, those plants reporting both employment
and production give the value of 706 m3 of product per employee. Thus,
the HP has an employment of 125.
One can also compute the approximate sales of the HP by knowing
that the total production for the industry for 1971 was 7.6 million m
with a value of $416.9 million. The price per unit of production was
$54.86/m3. Thus, the sales for the HP would be $4,844,140.
When the total yearly control cost of $22,917 is divided by the
total production, one gets the cost of control per unit of production as
$.259/m3. Thus, value divided by the unit sales price gives the cost of
pollution control as a percent of the sales price as .47%. This means
that in order to completely cover the added yearly cost of pollution con-
trol, the HP would have to raise prices by .47% neglecting any increased
margin to cover a return on assets.
146
-------
TABLE A-2
EFFLUENT FLOW PER UNIT OF PRODUCTION
Plant No^ Effluent/Production
(L/n3)
1 261
2 174
3 223
4 78.2
6 84.8
7 267
8 231.5
9 84.8
average of ratios is 176 L/m
sum of effluent flow/sum of production is 186
SOURCE: Timber Products Effluent Limitation Guidelines
147
-------
As a measure of how realistic the capital costs are, one can com-
pute the capital expenditures per unit of production for the HP and the
actual plants surveyed. The $68,040 cost for processes B, C^, and E has
a ratio of $.77/m-^ of product for the HP, Using the data from plants 2S
3, 4, 6, and 7, which are in compliance with the standard, one. finds that
on the average these plants have experienced $.47/m^ or $.37/m assuming
250 working days and 312 working days per year respectively. Thus, the
cost of abatement estimates for the HP are significantly higher than the
average of actual costs experienced by plants in the industry, even assuming
significant inflationary effects. The impact analysis can be largely re-
garded as a worst case analysis.
The Effects of Scale
When extrapolating the costs of the HP to the impact analysis for
the whole industry, one quickly faces the problem of economies of scale.
If one assumes that the costs of abatement are a linear function of pro-
duction with zero cost for zero production, then the impact on the industry
will be very small. The cost data supplied to ADL implies such a rela-
tionship.
This cannot be the relationship since there are economies of scale
associated with water pollution control. There are specific technologies
with largely "off the shelf" components assumed in the cost estimates.
The situation suggests both discrete steps in treating capacity and costs
and perhaps a minimum size treatment plant.
We do not have any data to resolve this issue and can only describe
how it will have an effect. } Figure A-l plots the capital costs per plant
versus plant size and also the capital costs per unit of production versus
plant size. The figure assumes the HP costs and extrapolates them linearly
to other plant sizes. At 46 employees, it is assumed that the minimum
treatment plant size is reached. Smaller plants must build a treatment
plant of at least 18,950 L/day (5,000 gal/day). (It is the Guidelines
Contractor's impression that 5,000 gal/day is the smallest treatment plant
currently in existence and may be approximately the smallest that can be
built with the assumed costs). This may not be the right minimum size,
but the effect can be seen by the example. The capital cost per unit of
production rises very sharply for smaller plants. This does not mean that
every plant with less than 46 employees will be closed. The costs are
still small for plants in the 30 to 46 range. But already marginal plants
of 20 and fewer employees will have great difficulty justifying the finan-
cial investment necessary to be in compliance, especially when they will
be at a further competitive disadvantage when they reach compliance because
the costs will have fallen more heavily on them than their larger com-
petitors.
As a point of comparison, Figure A-2 shows the distribution of
wood preserving plants by number of plants and by value of shipments
versus the number of employees per plant. One quickly sees that the
148
-------
FIGURE A-l
Possible Effects of Economies of Scale on Treatment Costs
200
150
Total
Capital
Costs
X 1000 ($)
100
e-
VO
50
10
20
40
Capital Costs/Unit of Production
i i
60 80 100 120
Employees per Plant
140
160
180
3.20
2.70
2-40 Capital
Costs
2-00 ($/m3)
of Product
1.60
1.20
..80
.40
0
200
Capital Cost of B + C, + E * $68,040 for 15.9 x 10 L/yr of effluent
SOURCE: Contractor Estimates
-------
FIGURE A-2
Number and Size Distribution of Plants
Value of
Shipments
($MM)
1967
Ui
o
120
110
100
90
80
70
60
50
40
30
20
10
Value of Shipments
\
Number of
\ Establishments
\
100
90
Number of
80 Establishments
(1971)
70
60
50
40
30
20
10
10 100
Number of Employees per Establishment
1000
NOTE: ( |«>-4 ) indicates range of employees per plant.
The Hypothetical Plant (HP) has 125 employees.
-------
majority of the plants are below the 46 employee size and a significant
portion of the production is also below that size. One can also see that
the HP is much larger than the typical firms in the industry measured
both by the number of such firms and the production accounted for by
such firms.
151
-------
I II CIINK Al Kl POR'I
IMJAPAI.I
IKeport No.
EPA-230/1-73-029
i 4
Economic Analysis of Proposed Effluent Guidelines -
Timber Processing Industry
1 / A inIM.I is) Thomas L. Doorley, Karl P. Fagans, Ronald Levy,
Lauren S. Ward and Richard Williams
! ') I', i liirmmj: Org.mi/.ition N.imc anil Address
i Arthur D. Little, Inc.
] Acorn Park
j Cambridge, Massachusetts 02140
Sponsoimy Organi/ation Name and Addiess
Office of Planning and Evaluation
Environmental Protection Agency
Washington, B.C. 20460
:
j
' I *> Supplementary Notes
3. Recipient's Accession No.
5. Report Dale
August 1973
6.
8. Performing Organization Kept No.
C-75901
10. I'roject/Task/Work Unit No.
Task Order No. 1
11. Contract/Grant No.
68-01-1541
1 3. Type of Report & Period C overeil
Final
14
Ki. Abstracts
An analysis of the economic impact on certain timber processing industry
sectors (hardboard, wood preserving, plywood and veneer) of 1977 and 1983 effluent
guidelines. Impacts were found to be concentrated on small firms and particularly
manufacturers of hardwood plywood and veneer, and wood preservers. For small firms in
these sectors, capital costs for abatement equipment will force many of them to con-
sider plant closure. However, for each of these industries, in toto, abatement costs
will not be severe; plant closures and increased prices to users will be minor.
17. Key Words and Document Analysis. I7a. Descriptors
Effluent Abatement
Economic Impact AnalysisTimber Products Processing
171). Idcntificrs/Open-Knded Terms
I7e COS AM Held/Group
IS. Availability Statement
Availability through U.S. Environmental
Protection Agency Information Center; Rm.W327,
Waterside Mall, Washington, B.C. 20460
19. Secunt) Class (I his
Report)
(jNCl.ASSH II I)
21. No. of I'a.ue-
167
JO Sei-iintj ( las.s | This
Paw)
UN( l.ASSII II I)
2:. Price
IOKM N1IS-3.S (Rl V..I-72)
USCOMM-DC 14952 l'7
------- |