EPA 230/1-74-049
AUGUST 1974
           ECONOMIC ANALYSIS
                    OF
      PROPOSED EFFLUENT GUIDELINES

 THE  TIMBER PROCESSING  INDUSTRY
                PHASE  II
                  QUANTITY
      U.S. ENVIRONMENTAL PROTECTION AGENCY
          Office of Planning and Evaluation
             Washington, D.C. 2O460
                      \
                      UJ
                      O
                      ^

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  This document is available in limited quantities through the
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.

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EPA  230  1-74-0/j.-)
                    ECONOMIC ANALYSIS
                            of
              PROPOSED EFFLUENT GUIDELINES

            THE TIMBER PROCESSING INDUSTRY
                         PHASE II
                          Report to


              U.S. Environmental Protection Agency
                Office of Planning and Evaluation
                    Washington, D.C. 20460
                        August 1974
                          U.S. Environmental Protection Agency
                          Region V, Library
                          230 South  Dearborn Street ,x"
                          Chicago, Illinois  60604

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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
endorsement or recommendation for use.

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                                     PREFACE

     The attached document is a contractors' study prepared for the Office of Planning and
Evaluation of the Environmental Protection Agency ("EPA"). The purpose of the study is
to analyze  the economic impact which  could  result  from the application of alternative
effluent limitation guidelines and standards of performance to be established under Sections
304(b) and 306 of the Federal Water Pollution Control Act. as amended.

     The study supplements the technical study ("HPA Development Document") support-
ing the issuance of proposed regulations under Sections 304(b) and 306. The Development
Document surveys existing and potential waste treatment control methods and technology
within particular industrial  source  categories and supports  proposal of  certain effluent
limitation guidelines and  standards of performance based upon an analysis of the feasibility
of these  guidelines and standards in accordance with the requirements of Sections 304(b)
and  306 of the Act. Presented in  the Development  Document  are the investment and
operating costs associated with various alternative  control and treatment technologies. The
attached  document  supplements this analysis by estimating the broader economic effects
which  might result  from the  required application of various control methods and  tech-
nologies. This  study  investigates the effect of alternatee 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 EPA.  This report was submitted in fulfillment of Task Order No. 17,
Contract 68-01-1541 by Arthur D. Little, Inc. Work was completed as of August 1974.

     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 Sec-
tions 304(b) and 306 of the Act for the subject point  source category. The study is not an
official EPA publication.  It will be considered along with the information contained in the
Development Document and any comments received by EPA on either document before or
during proposed rule making proceedings necessary to establish final regulations. Prior to
final promulgation of regulations, the accompanying study shall have standing in any EPA
proceeding  or court proceeding only to the extent that  it  represents the  views of the
contractor who studied the subject industry. It cannot be cited, referenced, or represented
in any respect in any such proceeding as  a statement of EPA's views regarding the subject
industry.
                                        111

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                            TABLE OF CONTENTS

                                                                           Page

List of Tables                                                                  ix
List of Figures                                                                xjij

 I.    EXECUTIVE SUMMARY                                                 1

      A.   SCOPE OF WORK                                                   1
      B.   CONCLUSIONS                                                     1

           1.   Industry Segments                                               2
           2.   Financial Profiles                                                3
           3.   Pricing                                                         3
           4.   Methodology                                                   4
           5.   Costs of Compliance                                         '    4
           6.   Economic Impact Analysis                                        5
           7.   Limits to the Analysis                                           10

 II.    INDUSTRY SEGMENTS                                                 13

      A.   INSULATION BOARD                                              13

           1.   Industry Structure                                              13
           2.   Industry Segments                                              19
           3.   Types of Firms                                                 19
           4.   Types of Plants                                                20
           5.   Financial Profile                                               22
           6.   Pricing                                                       24

      B.   PLYWOOD AND VENEER                                          25

           1.   Industry Structure                                              25
           2.   Types of Firms                                                 33
           3.   Types of Plants                                                35
           4.   Financial Profiles            *                                   38
           5.   Pricing                                                       42

      C.   SAWMILLS AND PLANING MILLS, GENERAL                        44

           1.   Industry Structure - General                                     44
           2.   Softwood Lumber                                              48
           3.   Hardwood Lumber                                             70

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                      TABLE OF CONTENTS (Continued)

                                                                          Page

II.    INDUSTRY SEGMENTS (Continued)

      D.   HARDWOOD DIMENSION AND FLOORING MILLS                     77

          1.   Industry Structure                                               77
          2.   Types of Firms                                                 81
          3.   Types of Plants                                                 81
          4.   Financial Profiles                                               84
          5.   Pricing                                                        85

      E.   SPECIAL PURPOSE SAWMILLS                                      86

          1.   Industry Segments                                               86
          2.   Shingle Producers                                               86
          3.   Cooperage Producers                                            88

      F.   PARTICLEBOARD                                                 91

          1.   Industry Structure                                               91
          2.   Types of Firms                                                 96
          3.   Types of Plants                                                 96
          4.   Financial Profiles                                             103
          5.   Pricing                                                      103

      G.   MILLWORK                                                     106

          1.   Industry Structure                                             106
          2.   Types of Firms                                               108
          3.   Types of Plants                                               111
          4.   Financial Profiles                                             111
          5.   Pricing                                                      113

      H.   PREFABRICATED WOOD STRUCTURES                            113

          1.   Industry Structure                                             113
          2.   Types of Firms and Plants                                      114
          3.   Financial Profiles                                             115
          4.   Pricing                                                      115
                                     VI

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                      TABLE OF CONTENTS (Continued)

                                                                        Page

III.    METHODOLOGY                                                   117

      A.  SURVEY TECHNIQUES                                          118

          1.   Insulation Board                                            118
          2.   Hardwood Plywood and Veneer                                118
          3.   Softwood Plywood and Veneer                                 119
          4.   Sawmills and Planing Mills — General                            119

      B.  PRICE EFFECTS                                               121
      C.  PLANT CLOSURE EFFECTS                                      122

IV.    COSTS OF COMPLIANCE                                            125

 V.    ECONOMIC IMPACT  ANALYSIS                                      127

      A.  INSULATION BOARD                                           127

          1.   Costs of Compliance                                         127
          2.   Price Effects                                               128
          3.   Financial Effects                                            130
          4.   Production Effects                                          131
          5.   Employment and Regional Effects                              131
          6.   Balance of Payments Effects                                   131

      B.  HARDWOOD PLYWOOD AND VENEER                            132

          1.   Costs of Compliance                                         132
          2.   Price Effects                                               134
          3.   Financial Effects                                            137
          4.   Production Effects                                          140
          5.   Employment Effects                                         144
          6.   Resultant Regional Effects                                    145
          7.   Balance of Trade Effects                                      146

      C.  SOFTWOOD PLYWOOD AND VENEER                             147

          1.   Costs of Compliance                                         147
          2.   Price Effects                                               149
          3.   Financial Effects                                            151
                                     VII

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                       TABLE OF CONTENTS (Continued)

                                                                        Page

 V.    ECONOMIC IMPACT ANALYSIS (Continued)

      C.  SOFTWOOD  PLYWOOD AND VENEER (Continued)

          4.  Production Effects                                           152
          5.  Employment Effects                                         153
          6.  Resultant Regional Effects                                    153
          7.  Balance of Payments Effects                                   153

      D.  SAWMILLS AND PLANING MILLS, GENERAL-SIC 2421             154

          1.  Costs of Compliance                                         154
          2.  Price Effects                                                161
          3.  Financial Effects                                            161
          4.  Production Effects                                           167
          5.  Employment Effects                                         167
          6.  Resultant Regional Effects                                    167
          7.  Balance of Payments                                         167

      E.  OTHER SECTORS                                               168

          1.  Hardwood Dimension and Flooring Mills                         168
          2.  Special Product Sawmills                                      171
          3.  Particleboard                                               172
          4.  Millwork                                                  172
          5.  Prefabricated Wood Structures                                 172

VI.    LIMITS OF THE ANALYSIS                                          173

      A.  DATA LIMITATIONS                                           173
      B.  NATURE OF THE INDUSTRIES                                   174
      C.  RANGE OF ERROR ESTIMATES                                  175

APPENDIX A - SOFTWOOD PLYWOOD SURVEY FINDINGS                   177

APPENDIX B - INDUSTRY, IMPACT, SUMMARIES                          181
                                    Vlll

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                                 LIST OF TABLES

Table No.                                                                       Page

  S-1           Hardwood Plywood and Veneer - Plant Closure and Employ-
                ment Effect for Varying Levels of Compliance Costs                   7
  II.A.1         Insulation Board Shipments, 1967 - 1973                           14
  II.A.2         Exports of Insulation Board, 1970-1972                             15
  II.A.3         Apparent Consumption of Insulation Board, 1964-1972               15
  II.A.4         Production of Insulating Board                                     16
  II.A.5         Insulation Board Plants in the  United States                         20
  II.A.6         Summary of Insulation Board  Plant Characteristics                    21
  II.A.7         Typical Financial Profile, Insulation Board Plant                      22
  II.A.8-        Investment Profiles of Public Companies                            23
  II.B.1         New Housing Starts                                               27
  II.B.2         Domestic Production of Softwood Plywood                         30
  II.B.3         Domestic Production and Imports of Hardwood Plywood              31
  II.B.4         Hardwood Plywood and Veneer Production by Product Category       32
  II.B.5         Plywood Industry (SIC 2432)  Concentration Patterns                 34
  II.B.6         Plywood Industry Market Shares - 1972                            35
  II.B.7a        Hardwood Plywood and Veneer Manufacturing Industry Structure      37
  II.B.7b        Size Distribution  of Plants - Net Assets Basis                        38
  II.B.8         Financial ProVile: Softwood Plywood and Veneer Mill                 39
  II.B.9         Financial Profile:  Veneer and Plywood  Mill, 1971                    40
  II.B.10        Financial Profile:  Hardwood Veneer Mfg. — Semi and
                Specialty Grade                                                  40
  II.B.11        Financial Profile:  Hardwood Veneer Mfg. — Container Grade          41
  II.B.12        Financial Profile:  Hardwood Plywood and Veneer Mfg. —
                Stock Panels                                                     41
  II.B.13        Financial Profile:  Hardwood Plywood and Veneer Mfg. —
                Semi-Specialty and Specialty Products                              42
  II.C.1         U.S. Lumber Production                                          45
  II.C.2         Imports and Exports of Lumber, 1965-1972                         46
  II.C.3         Value of Shipments of SIC 2421:  1971                             47
  II.C.4         U.S. Lumber Production by Region 1972 vs. 1955                    48
  II.C.5         1972 Distribution of Shipments — SIC 2421 Sawmills and
                Planing Mills, General and SIC 2429 General Purpose Sawmills, Nee.    49
  II.C.5A       Value of Construction - 1972                                     53
  II.C.6         New Housing in the United States, 1965-1972                        54
  II.C.7         New Housing Construction by Region - 1972                        54
  II.C.8         Lumber Used in Manufacturing by Region — 1960                    55
  II.C.9         Shipments of Lumber by Destination - 1972                        56
  II.C.10        Shipments of Softwood Lumber by Rail, Truck, and Water - 1972     57
  II.C.11        Distribution Channels for Western Sawmills - 1972                  57

                                         ix

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                           LIST OF TABLES (Continued)

Table No.                                                                       Page

  II.C.12        Top Ten U.S. Softwood Lumber Producers - 1972                   58
  I1.C.13        Number of Establishments by Selected SIC Codes and States - 1971    59
  II.C.14        Softwood Lumber Production by Mill Size - 1972                    GO
  11.C.15        Sources of Timber for Lumber Produced - Western Mills              61
  II.C.16        Gross Inventories of Softwood and Hardwood Lumber at Year
                End 1965-1972                                                  62
  II.C.17        Cost to Produce, Ship and Sell Southern Pine Lumber                 63
  II.C.18        Estimated Costs for a "Typical" Large Western Mill: 1970 and 1971    65
  II.C.19        Corporate Profits After Taxes                                      66
  II.C.20'      Capital Expenditures for Sawmills and Planing Mills                   67
  II.C.21        Indexes of Wholesale Prices of Materials Used in Construction,
                by Selected Groups and Commodities (1967 = 100)                   68
  II.C.22        Index of New Housing in the United States: 1966-1972               70
  II.C.23        Hardwood Production by Principal Region and Species, 1972          71
  II.C.24        Hardwood Lumber End-Use Markets                                72
  II.C.25        675 Hardwood Producers by Mill Size, 1972                         73
  II.C.26        675 U.S. Hardwood Lumber Manufacturers by State                  74
  II.C.27        Estimated  Financial Strength of 104 Hardwood Lumber Producers     75
  11.D.I         Shipments of SIC 2426  Hardwood Dimension and Flooring Mills
                1967 and 1971                                                   77
  II.D.2         1972 Distribution of Shipments SIC 2426 Hardwood Dimension
                and Flooring Mills .                                              78
  ll.D.3         Trend of Oak Flooring                                            79
  II.D.4         Oak  Flooring Shipments by Geographic Region  1971                 80
  II.D.5         Oak  Flooring Manufacturers:  Distribution of Production Capacity
                and Current Operating Status                                      81
  M.D.6         1972 Distribution of Plants and Employment SIC 2426 Hardwood
                Dimension and Flooring                                          82
  II.D.7         Estimated Financial Strength of Oak and Maple Flooring Manu-
                facturers Who Also Operate Sawmills                               84
  11.E.I         Distribution of Affected Shingle Mills by Estimated Replacement
                Value of Total Plant Assets                                        88
   ||.E.2         Distribution of Shingle Mills by Estimated Replacement Value
                of Principal  Machinery and Total Plant Assets                        89
   II.E.3         % of 69 Cooperage Producers Making Selected Products               90
   II.E.4         Estimated Financial Strength of 69 Cooperage Producers              90
   H.F.1         Shipments of Particleboard, 1966-1972                             92
   II.F.2         Production of Particleboard by Region 1968-1972                    92
   II.F.3         Production of Partir -board by Type, 1968 & 1972                   93
   II.F.4         Exports and Import; of Particleboard                              94

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                           LIST OF TABLES (Continued)

Table No.                                                                       Page

  II.F.5         Particleboarcl Plants (Mat Formed)  - U.S.A.                          97
  II.F.6         Announced Additions and Expansions -  Particleboard Plants         102
  II.F.7         Geographic Distribution of U.S. Particleboard Plants                 102
  II.F.8         Financial Profile - Particleboard Plant                              103
  II.F.9         Particleboard Production and Values, 1972                          105
  II.G.1         Millwork Shipments by Type of Product: 1967 and 1971             106
  II.G.2         1972 Distribution of Firms and Employment -- SIC 2431 Millwork
                and SIC 2433 Prefabricated Wood Structures                        107
  II.G.3         1972 Distribution of Shipments - SIC 2431 Millwork                109
  II.G.4         Distribution of Millwork Producers by Employment Size              111
  II.G.5         Percent of 69 Woodwork Manufacturers Producing Various Products   112
  II.G.6         Estimated Financial Strength of 69 Woodwork Manufacturers         112
  II.H.1         Shipments of Prefabricated Wood Structures 1967 and 1971           114
  II.H.2         Estimated Financial Strength of Producers of Prefabricated
                Wood Structures                                                 116
  III.A.1        Survey  Sample  by Type of Mill and Location                        120
  III.B.1        Prica Increase Analysis Matrix                                     122
  III.C.1        Plant Closure Analysis Matrix                                     123
  IV.1          Potential Incremental Pollution Control Cost                        126
  V.A.1         Model Plant — Investment and Yearly Costs of Compliance           129
  V.A.2         Summary of Economic Impact                                    129
  V.B.1         Hardwood Plywood Mill Costs of Compliance                       132
  V.B.Ia        Plywood and Veneer Log Handling Practices                        133
  V.B.Ib        Price Increase Analysis Matrix                                     136
  V.B.2a        Financial Impact  Assessment                                      138
  V.B.2b        Financial Impact  Assessment                                      139
  V.B.3         Plant Shutdown Analysis Matrix                                   142
  V.B.4a        Preliminary Plant Closure Analysis Matrix                           143
  V.B.4b        Wet Plant Closure Analysis Matrix                                  143
  V.B.5         Hardwood Plywood and Veneer — Plant Closure and Employment
                Effect for Varying Levels of Compliance Costs                      144
  V.B.6         Potential Regional Employee Displacement Distribution              146
  V.C.a         Mills Expected  to be Affected and Corrective Costs — Softwood
                Veneer                                                         150
  V.C.I         Price Increase Analysis Matrix for Softwood Plywood and Veneer      150
  V.C.2         Plant Closure Analysis Matiix Softwood Plywood and Veneer         153
  V.D.1         Survey  Sample  by Type of Mill and Location                        155
  V.D.2         Log Storage Methods Employed                                   156
  V.D.3         Wet Deck Operations                                             157
  V.D.4         Pond Operations                                                 158

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                           LIST OF TABLES (Continued)

Table No.                                                                       Page

  V.D.5         Hardwood and Softwood Mills with Multiple Facilities at Site          159
  V.D.6         1973 Reported Production                                        160
  V.D.7         Capital Expenditures in 1973                                      162
  V.D.8         Summary of Estimated Water Pollution Control Capital Expenditure
                Requirements for Sawmill Industry                                162
  V.D.9         Financial  Impact of Log Storage Regulations on Northwest
                Softwood Sawmills                                              164
  V.D.10        Financial  Impact of Log Storage Regulations on Other U.S.
                Softwood Mills                                                  164
  V.D.11        1972 Operating Results for 11 Southern Pine Mills Producing
                0 to 10 Million Feet                                             165
  V.D.12        Financial  Impact of Log Storage Regulations on U.S. Hardwood
                Producers                                                       166
  VI.C.1        Range of  Error Estimates                                         175
                                         XII

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                                LIST OF FIGURES

Figure No.                                                                      Page

  H.B.1         Plywood Distribution Patterns                                      28
  V.B.1         Cost Burden Distribution Flow Chart                               135
  V.E.1         Plants Affected by Proposed Effluent Guidelines for Log
                Handling and Storage — Hardwood Dimension Manufacturers          169
                                        Xlll

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                            !.  EXECUTIVE SUMMARY

    This is a summary of the Contractor's final analysis of the economic impact on certain
Timber  Products  Processing Industry' sectors  lo meet proposed 1977 and  1983 Effluent
Guidelines.

A. SCOPE OF WORK

     The industry sectors analyzed include:

    •   Insulation Board (only - SIC-2661)
    •   Sawmills and Planing Mills, General (SIC-2421)
    •   Hardwood Dimension and Flooring Mills (SlC-2426)
    •   Special Product Sawmills (SIC-2429)
    •   Mill work (SIC-2431)
    •   Prefabricated Wood Structures (SIC-2433)
    •   Particleboard (SIC-2492)

In addition,  since new proposed Guidelines for wet log  handling and storage have  been
developed which affect segments of this industry previously studied (Contractor's report to
the EPA of August 1973), the following two sectors were also analyzed to determine the
economic impact of these costs:

     •    Hardwood Plywood and Veneer (SIC-2435), and
     •    Softwood Plywood and Veneer (SIC-2436).

     All of these sectors were studied to define the structure of the industry and to estimate
the nature and severity of the costs of compliance.  Based  upon estimated levels of costs, it
was clear that for five of the industry sectors effects of effluent abatement were minimal
and, thus, detailed analysis of economic impact  was not warranted.  Therefore, only the
following four sectors were analyzed in detail with regard to economic impact:

     •    Insulation Board
     •    Hardwood Plywood and Veneer
     •    Softwood Plywood and Veneer
     •    Sawmills and Planing Mills — General

B. CONCLUSIONS

     It  is necessary to consider the Timber Products Processing Industry not  as a single
industry but  rather as separate, only partially interrelated  sectors. The products are gener-
ally noncompetitive; the sectors are in differing states of growth; and, the companies active
in one  sector are  not  necessarily active in another. Thus, each of the  sectors requires a
separate analysis of economic impact.

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     In general, the costs of compliance as reported in the Development Document are not
overwhelming for  these  indu.stry sectors. Since those industry sectors do not  utili/.e large
amounts of process  water, the incremental capital and  operating costs necessaiy to meet
abatement Guidelines are not large. However, within  specific sectors the effect on opera-
tions  can  be significant, since certain sectors, such as hardwood  plywood  and  veneer
manufacturing, are the province of the  small,  independent business which is quite sensitive
to relatively small cost  increments.  Further,  unlike the  other  sectors, insuhtion board
manufacture does consume large quantities of process water and thus does face relative!.,
large costs of compliance.

     Since small   operators are so sensitive to modest cost increments, the analysis  of
economic impact  was performed via a series of  iterative  analyses to test the effect  of
different  Guidelines  (and their  attendant costs)  on  the most sensitive sectors. These
sensitivity analyses demonstrated the critical points at which  minimal effects became plant
closures. Thus, it is important to note that the conclusions presented here are quite specific
to the particular levels of costs incorporated into the analyses.

     There  will be essentially  no  impact on  total production  in  any of these industry
sectors. Where companies will close, they will be few in number, and will be smaller firms
with relatively little  impact on total industry output. In addition, these industry sectors are
characterized  by   moderate levels of capacity utilization, e.g.,  70-80% of total capacity.
Thus,  any  production   deficiency  resulting from  plant  closures will be offset  by  the
remaining facilities.

     Excepting small  price  increases by  insulation board  (0.5-4.0%) and particleboard
(0.157c)  manufacturers,  prices will not be increased; rather, plants will absorb pollution
abatement costs.   However,  profit margins will not be significantly affected since costs of
compliance are generally not large.

     Unemployment effects will impact mainly on  the  states of  the mid-South and South^_
east.  However, the total effect of unemployment will not be large; only two communities
within this region  will be affected.

     Abatement costs will not  affect balance of trade; export trade is minimal. Imports are
significant only in the  hardwood veneer and plywood and lumber sector. But, in those
sectors the balance  of trade will  be affected  more significantly by other factors than by
abatement costs.

1.  Industry Segments

     The objective of segmenting the industry was to  group plants into categories which
might be affected differently by effluent control requirements. For these industry sectors,
the costs ot compliance can be directly related to  the type  of process performed. Each of
the nine industry sectors studied performs different operations and has different effluent

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practices,  and thus faces different costs of compliance. Therefore, our analysis focused on
each of the nine sectors as separate segments.

     For insulation board manufacture, each of the eight plants was analyzed individually.
For  the other eight  major  sectors segmentation was based on operating characteristics of
plants  within subsectors. particularly  focusing on  those firms of small  size with limited
financial capability  to meet even modest levels of cost. Representative model plants were
developed for each of the operating subsegments.

2. Financial Profiles

     More  than  20 financial  profiles were developed to represent model  plants within  the
various major segments. These model  plants have widely-ranging characteristics as follows:

     •    Annual Sales: S100,000-S15MM+
     •    After Tax  Income: S4,500-$1MM
     •    Net Assets:  SI 00.000-S15MM+
     •    Number of Employees:  20-400+

3. Pricing

     Pricing dynamics vary considerably within the various sectors. Basically, however, they
are characterized by nearly commodity product pricing with the marketplace setting price
levels in response to the total industry supply/demand balance.

     For insulation board,  regional  pricing for standard products is practiced. The cost of a
standard product to a given buyer varies by location of supplier, among other factors, since
the supplier pays the end product freight charges. For hardwood plywood and veneer, prices
vary among the subsectors depending on the character of the product as a specialty or a com-
modity item. Commodity type products are priced in the marketplace, whereas specialties have
some degree  of price stability and some brand loyalty can be maintained. However, prices of
domestic hardwood  plywood products are basically influenced by the cost and availability
of imported  product. Millwork products also have a degree of uniqueness to them and can
be value-priced; however, substitute materials  such  as  plastics strongly affect  millwork
suppliers'  ability to  maintain  profit  margins.  Prelaminated wood  structures also  can be
specialty,  differentiated products. Softwood plywood  is almost the classic commodity
product in that it is traded on futures markets,  and the prices respond very rapidly to total
supply/demand balance and cycle dramatically in response to shifts in that balance.

     The remaining  products represent sawmill  products of varying degrees of specialness.
The products are all  in a mature state of growth and significantly influenced by both
imports  (primarily  from Canada), and  significant penetration of substitute products (e.g.,

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wall-to-wall carpeting over plywood replacing hardwood  flooring). General purpose sawmill
products (softwood and  hardwood)  prices vary substantially  depending on level of new
construction activity; in contrast, prices of the other special products are more stable.

4. Methodology

     To accomplish the economic  impact analysis we have developed data on the structure
of these  industry sectors and an analytical model to focus  on the following  two centra!
issues:

     •   The probability that costs of compliance will be passed on to consumers via
         increased end product costs or will be absorbed by operators, resulting in a
         lower level of profitability; and

     •   If costs cannot be passed through, the extent to which the effect on financial
         condition and limitations of capital availability will  force plant closures, thus
         causing unemployment and  community effects.

     Since there are many small, privately-held firms in this  industry for which data is not
generally available on operations or financial position, we had  to develop new  data on the
various industry segments through a series of surveys of firms within the individual sectors,
plus interviews with industry associations and others knowledgeable of industry  practice.
This was supplemented by background and interpretive data which we have accumulated
over time.

     The conclusion that prices are likely (or not likely) to be able to be passed on is a
relatively  straightforward economic  analysis.  Table III.B.I  presents  the  price  increase
analysis matrix which we used to derive  price increase conclusions. However, even if prices
are not likely to be increased  and  costs are absorbed  with  relatively  well-documented
financial effects, it is more difficult to reach conclusions regarding plant closures. The plant
closure  analysis matrix which we  used to structure  these decisions is presented  in Table
III.C.I.  This  analysis is complicated by the fact that small, family-owned and operated,
one-plant firms which  are common  in these industry sectors, show  remarkable  "staying
power" in  the face of  significant  negative  financial  effects. The extent of subjective
commitment to the business is an extremely difficult factor to measure and assess. Standard
business reasoning, such as effect of abatement costs on key profitability ratios  (e.g., return
on net assets, profit margin) can be used  to focus on the key issues, but the factors related
to the nature of the small firms in this business were used necessarily as subjective elements
to supplement the objective analysis.

5. Costs of Compliance

     Costs of compliance vary dramatically from sector to sector. Insulation board manu-
facture  is a  wet process, performed in  large operations. Capital  costs  of  abatement  for

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plants in this sector run to S1.5MM; annual operating costs can lie more than $400,000. In
contrast, the estimated capital required to achieve BPT  in the ply\\ood and sawmill sectors
is less than S15.000. and operating costs are less than $5.000. llo\\e\er, since many firms in
these categories are so small, the effects of the cost burden are as significant.

6. Economic Impact Analysis

     a.  Insulation Board

     Although insulation board mills use large quantities  of process water, the costs required
to meet effluent Guidelines will not  cause a severe dislocation in the industry.

     •   Price Effects: Implementation of BPT Guidelines will result in price increases
         ranging from 0% to 4% for eight (of 18) facilities. This will allow the plants
         to maintain present rates  of return on net assets. In addition, the equivalent
         price increases to meet BAT Guidelines will be implemented and will range
         from 1% to 4.5%.

     •   Financial Effects- Since price increases will be implemented, there will be no
         effect on  plant  profitability. The availability of capital  could make  one
         plant marginal, with a 50% probability of closure.

     •   Production Effects- The one marginal plant representing about 4% of indus-
         try production might close (50% probability)  by  1977.  However, this loss in
         capacity  will be almost  entirely  counterbalanced by the addition of a
         planned new facility in 1976.

     •   Employment Effects: From 0 to 200 workers could be unemployed.

     •   Regional Effects: The  plant likely to close is  located in an area  of consider-
         able forest products activity  with reemployment options. Some retraining
         will be required, presenting a more difficult situation for older workers, but
         little long term unemployment should result.

     •   Balance of Payment Effects: Zero.

     b.  Hardwood Plywood and Veneer

     This industry sector is typified by small operations, owned and operated by indepen-
dent  businessmen. For example,  a typical  container-grade veneer plant employs 10-20
persons, has a net asset  base of SI00-200,000, generates $100-150,000 of annual sales
revenues and an annual cash flow of less than 510,000. The small firms in all four subsectors
of this industry are in tenuous financial positions.

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    •    }}rii\'  Effects:  The  costs of  compliance  will not  be  passed  on through
        increases in end product prices. Hnd uses are  quite competitive, and abate-
        ment  costs fall unequally on firms within the sectors.

    •    Financial Effects:  Absorption  of the costs of compliance will not impact the
        financial condition  of  most of the firms in this  sector.  However, manu-
        facturers of container  grade  veneer (used  in packaging)  are in the most
        tenuous financial  condition and will feel  a significantly negative fnrncial
        effect.

    •   Product Effects/Plant Closures/Employment EJjects' Since many firms in
        this sector are very small, they are particularly sensitive to  small increments
        of cost. In general, there is  relatively little effect on the industry at levels of
        capital .investment up to the SI0-15.000 range. Beyond that level,  the effect
        becomes severe. Similarly, the balance shifts toward significant impact at a
        level  of 55,000 incremental  annual operating costs.  Since the proposed
        technologies have costs associated  with them  close to these balance points,
        Table S.I is presented to demonstrate  the effect on the industry  of varying
        levels of compliance costs. As the table demonstrates for the proposed
        effluent regulation (Guideline Option II). 2 plant closures will result with 40
        persons unemployed.  The higher cost Guideline  Option III,  which  was
        evaluated during the course of this analysis, would represent a severe impact
        on plants in sector (i.e.,  20  plant closures, 990 persons unemployed).
        However,  even  in that case,  although 22% of the container grade veneer
        manufacturers would withdraw  from production, the remaining plants could
        compensate for the lost production, since  the industry  is operating at about
        75%  of capacity.

    •   Regional Effects' Based on the relatively mature average age of employees,
         we would expect  that only 30% of the persons unemployed would be able
         to find other comparable employment. These plants and  the  unemployed
         persons are located 
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                                                     TABLE  S-l
                      HARDWOOD PLYWOOD AND VENEER - PLANT CLOSURE AND EMPLOYMENT EFFECT
                                      FOR VARYING LEVELS OF COMPLIANCE COSTS
Guideline Option

  I.-  Process Changes Only

     (Maximum Cost: capital = $5,500
                   yearly «= $3.0001


 II.  I + Recirculation from Wet Decks*

     (Maximum Cost: capital = $14,100
                   yearly = $3,870)


III.  II + Scieening from Wet Decks and Log Ponds

     (Maximum Cost: capital = $24,100
                   yearly = $3,870)
Sector
V
0
Total
V
0
Total
V
0
Total
No. Plant
Closures
0
_0
0
2
0
2
11
_9
20
No. Employeas
Displaced
0
H
.0
0
40
i
0
40
220
770
990
No. Employees
in Sector

, _
0
4%

0 1%
22%
'*'•/:
24X
V * Commercial Grade Veneer
0 = Other Sectors
'Proposed Guideline
Source: Arthur D. Little, Inc., estimates.

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     •   Price Effects: Prices in this industry are established as a  function of supply
         and  demand  and are not directly impacted by shifts in cost of manufacture.
         Thus, prices  will not be increased  to  reflect incremental costs of effluent
         abatement,

     •   Financial Effects: The average cost of compliance is minimal, e.g., incre-
         mental annual costs are less than O.I// of annual sales. The industry will not
         face  a capital  availability  problem, since compliance can  be reached by
         expending approximately 1% of annual capital investment.

     •   Production  Effects:  There will be no  plant closures or  reduction in
         production.

     •  . Employment Effects: Zero.

     •   Regional Effects: Zero.

     •   Balance of Payment Effects: Zero.

     d.  Sawmills and Planing Mills, General

     Compliance with effluent Guidelines will not impact firms in  this industry. The firms
are  able to comply with  Guidelines  for  mill operations  with no additional capital  invest-
ment; the investment necessary to meet the Guidelines for log storage activities is not  severe.

     •   Price Effects: End product prices are highly competitive, and the costs of '
         abatement are  unequally distributed  throughout the industry.  Thus, the
         industry  will not pass on compliance costs  through higher end  product
         prices.

     •   Financial Impacts: Absorption of  costs  of compliance  will reduce profit-
         ability between  2.8% and 8.6%, depending upon the size of the mill and its
         operating characteristics. This is not a serious impact.  Further, there will not_	,
         be   a  capital  availability   problem,  since the necessary level  of capital
         expenditure represents approximately 5% of the annual capital expenditures
         the industry will make for productivity improvements.

     •   Production Effects: Zero.

     •   Employment Effects: Zero.

     •   Regional Effects: Zero.

     •   Balance rf Trade Effects: Hero.

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     e. Other Sectors

     1. Hardwood Dimension and Flooring Mills

     a. Hardwood Flooring

     Firms in this sector will have to make effluent abatement investment only if they also
operate sawmills. Further, only those firms also utilizing wet deck log storage will  have to
make the maximum investment ($8,600 capital costs; $3,000 annual costs). Only  the larger
firms in this  industry will have to make this investment. For the firms affected, capital costs
represent less than 2% of total  assets; annual  operating costs are less than 0.1%  of sales
revenues. These  firms will be able to make this  investment; thus, there will be no impact on
this sector.

     b. ftardwood Dimension

     Dimension  producers are potentially subject to water pollution abatement  costs only if
they also operate sawmills employing wet storage techniques or if they engage in extensive
gluing activities.

     In each  case, only a small number of firms in this sector are likely to be affected and
those affected will either be financially  able to bear the burden or have alternate means of
complying.

     •    Price Effects: Since the costs of compliance are unequally distributed across
          the firms  in this  industry sector,  it will  not be  possible to pass  on  cost
          increases due to effluent abatement.

     •    Financial Effects: To all but  the  smallest firms  (i.e., those less than  20
          employees), the absorption of the costs of compliance is  negligible.

     •    Production Effects: No plants are likely to be forced to close.

     •    Employment Effects: Zero. ;

     •    Regional Impacts: Zero.

     2. Special Product Sawmills

     The key group of manufacturers in this section to focus upon are  those companies
producing shakes and shingles. Wlu'le there are many small mills in this sector, the companies
only face the costs of compliance for log handling and storage. Incremental annual costs will
represent 0-15% of annual cash flow and 0-3%  of annual sales revenues; incremental capital
costs will be  0-9% of net assets. Thus, the companies will invest, and there will be no impact
on the sector.

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     The other manufacturers incorporated in this sector, those companies which produce
cooperage stock (the  material from  which barrels and kegs are produced) do not use wet
storage practices. Thus, there is no effluent pollution problem, no cost of compliance, and
no impact.

     3. Particlcboard

     Particleboard is manufactured by a dry process and utilizes very little process water.
The  product is in high demand,  i.e., output should increase at between  10-15f/' per year
through 1980.

     The costs of compliance are insignificant. Capital costs of effluent abatement represent
0.49c of the necessary  investment to build a new plant of minimum economic size. Further,
total yearly costs represent 0.15% of the average selling price (1972) achieved by the plant
with the lowest unit  selling price. Much higher levels  of cost could be  passed on through
price increases.

     There will be no economic impact of effluent abatement in this sector.

     4. Alillwork

     Operations in the various milhvork subsectors do  not include sawmilling, nor do they
include extensive gluing operations requiring water for cleanup.  Further, the firms are
relatively  large, in good financial position,  and generally tied into  municipal  treatment
plants.

     There is no noticeable economic impact in this sector.

     5.  Prefabricated Wood Structures

     Although extensive gluing is encountered in the  production of laminated beams, the
manufacturing process is quite capital intensive. Thus, the maximum costs of $2,000 for
capital investment and $480 in total yearly costs, represent insignificant ratios to capital
invested in operations (<19c) and other operating costs (<1%).

     There will be no economic impact due to effluent abatement in this sector.

 7.  Limits to the Analysis

     The two key problems limiting the accuracy of the present analysis are based on:

     «    A limited availability of data; and,
     •    The nature of the industry.
                                          10

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We conducted  representative surveys of the industry to enable us to deal with the data
limitation factor. Since there  arc thousands of firms in the industry, many of them not
identified by industry associations.  Department of Commerce or other sources, we have
focused on those firms most likely to be impacted. The consistency of our data suggests that
this can be accomplished within a relatively narrow band of error.

     The second problem, the nature  of the industry,  makes it  difficult to project plant
closures, as noted  in  Section  I.B.4 above. However, since  the costs are modest and even
these small firms can  bear the burdens, the difficulty of accurately projecting plant closures
is less important. If new Guidelines would cause increased costs to be borne by companies in
this sector, then this would be  a more sensitive issue.

     Thus, although data  was  somewhat limited and the nature of the industry forced us to
use subjective as well as objective analysis, we believe the analysis as presented is accurate
within a fairly narrow band of error (±10%).
                                          11

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                              II.  INDUSTRY SEGMENTS

A.  INSULATION BOARD

1. Industry Structure

     a.  Product Definition1

     Insulation board is a form of fiberboard, which in turn is a generic term applied to
sheet materials constnicted from ligno-cellulosic fibers. (The terms "insulation board" and
"fiberboard" are used interchangeably by industry and in this report.) It can perhaps best be
classified on the basis of density, and most broadly as "compressed" and "noncompressed."
Compressed fiberboards (hardboards)  have a  density  over  25 lb/ft3  and noncompressed
fibcrboards (insulation  boards) have a density  of less than 25 lb/ft3. Insulation boards are
usually  manufactured  in thicknesses between 3/8  and one  inch. On a basis of density,
insulation  board may  be subdivided into  semi-rigid insulation  board and rigid insulation
board with densities of 9.5 lb/ft3 and  9.5 to  25 lb/ft3, respectively. Semi-rigid insulation
board is normally used only for insulation purposes  while  rigid insulation board may  be
used for sheathing, interior paneling, and as a base for plaster or siding.

     Due  to increased demand for insulation board and its varied uses, there are now  10
basic types of insulation board products as cited by the Acoustical and Insulating Materials
Association. The principal types include:

     1.    Building board - General purpose product for interior construction.

     2.    Insulating roof deck — A three-in-one component which provides roof deck,
          insulation, and finished inside ceiling. (Insulation board sheets are laminated
          together with waterproof adhesives.)

     3.    Roof insulation - Insulation board designed for flat roof decks.

     4.    Ceiling tile —  Insulation  board embossed and decorated for interior use. It is
          also useful for acoustical qualities.

     5.    Lay-in-panels  — A ceiling tile used for suspended ceilings.

     6.   Sheathings —  Boards  used extensively in  construction due to its insulative,
          bracing strength, and  noise control qualities.
1. Product Definition as contained in the Development Document.
                                        13

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     7.   Sound deadening insulation board  -  Special product designed explicitly for
         use in buildings to control noise level.

     The American Society for Testing and Materials sets standard  specifications for the
above categories and others.

     b.  Production and Shipments of Insulation Board

     According to  the  Acoustical and Insulating Materials  Association, the principal trade
association representing manufacturers of insulation board in the United States, product
shipments  on a  1/2"   basis  reached an all-time higji of 3.7 billion square feet in  1972.
(Table II.A.I) Shipments data  for the  past ten years, with an estimate for  1973, indicate
little  change throughout the period until 1971.  The past  three years indicate significant
growth but this impression  must be tempered by reference to the levels of housing starts and
general'construction experienced in the United States in the same years. In fact, a  closer
examination  of the data indicates that  the market share of insulation board remained fairly
level through the  1960's but then began to erode  in 1968 and now may be stabilizing at the
lower level.


                                     TABLE II.A.1

                           INSULATION BOARD SHIPMENTS,
                                     1967-1973
                             (million square feet — 1/2" basis)
                          1964                      2582
                          1965   •                   2642
                          1966                      2456
                          1967                      2454
                          1968                      2715
                          1969                      2682
                          1970                      2634
                          1971                      3222
                          1972                      3707
                          1973 (estimate)              3500

                          Source: Acoustical and Insulating Ma-
                                 terials Association.
     At an average mill  net value of S60 per thousand square feet,  1/2"  basis, for all
 products, the approximate value of shipments was $220 million in 1972.

     Exports  of insulation  board, mainly to adjacent foreign countries, are shown in
 Table II.A.2. Exports represent an insignificant proportion of total production, less than 2%
 on a tonnage basis. Imports of insu' tion board are about the same order of magnitude.
                                          14

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                                    TABLE II.A.2

                     EXPORTS OF INSULATION BOARD,* 1970-1972
                   1970
                   1971
                   1972
OOO's Tons
  19.2
  24.6
  25.8
$ Million
  4.6
  6.5
  6.3
                   *Made from wood or vegetable fiber and having a density
                   of less than 31 pounds per cu ft.
                   Source:  Dept. of Commerce Schedule "8".
     Apparent consumption of insulation board is shown in Table II.A.3. Measuring con-
sumption  on a per new dwelling unit (conventional and  mobile  home) basis confirms the
sharp drop in market share since new dwelling units together account for more than half of
insulation board demand, with new residential  units  taking at least  40f/c. (Of the balance,
209f-309r is used in residential remodeling; about 10% in new and  remodeled non-residential
construction and the remaining 57c or so in miscellaneous and industrial uses.)
                                     TABLE II.A.3

              APPARENT CONSUMPTION OF INSULATION BOARD, 1964-1972
                                  (thousands of tons)
                                                   Apparent
            Domestic Production  Exports    Imports   Consumption

     1964           1215           19       23          1218
     1965           1258           16       23          1265
     1966           1155           18       24          1161
     1967           1176           16       25          1185
     1968           1333           17       36          1352
     1969           1352           24       34          1362
     1970           1219           19       35          1235
     1971           1446           25       35          1457
     1972           1548           26       35          1558
                               Consumption
                             Per New Dwelling
                                  Unit

                                  0.71
                                  0.73
                                  0.82
                                  0.76
                                  0.73
                                  0.71
                                  0.66
                                  0.57
                                  0.53
     Source: U.S. Forest Service.

     c.  Applications

     Table II.A.4 displays the production of insulation  board by type for the period 1968
to 1972. (It should be pointed out that the totals indicated in this table are higher than
                                         15

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                                                                                       TABLE M.A.4

                                                                          PRODUCTION OF INSULATING HOARD
                                                                           (density less than 31 pounds per cu. ft.*)
   SIC
   Cods
 2661111

 2661113

 2661115

 2661121
 2661123
 2661129
2661131
2661133
2661135
2661136
2661138
2661151
2661153
2661155
2661157

2661159
Structural insulating board, total
   Insulating boards for the retail trade or for use
    directly in building construction, total
    Interior products, total
      Building hoard, 7/16  or thicker, mostly
       painted or factory finished
      Wallboard, under 7/16   thick, except
       shinglebacker
      Sound-deadening board, nominal 1/2 thick,
       natural finish
      Tile, except acoustical
      Acoustical  tile and lay-in panels, acoustical
      Other (including plank, trim, moldings, and
       other insulating board for retail or for use
       directly in interior building construction)
    Exterioi  products, total
      Sheathing board
      Shinglebacker
      Roof insulation board, preformed above deck
      Insulating roof deck              /
      Insulating fiberboard formboard  )
   Insulating  boards for industrial uses (for further
    manufacture, processing, or assembly), total
    Insulating siding base
    Trailer board
    Backer board for siding made of  metal
    Insulating board for processing into expansion
     joint strips
    Insulating board for all other industrial uses
     such as automobile industry, furniture
     industry, etc.
1972
Short
Tons
1,528,534
1,265,721
486,371
162,828
(D)
40,412
196,027
59,942
(D)
779,350
631,489
23,150
122,057
2,654
262,813
(D)
157,081
51,525
22,017
(D)
Thousand
sa. ft.
1/2' basis
3,917,742
3,199,710
1,285,782
397,859
(D)
113,882
530,440
171,780
;D)
1,938,461
1,607,572
62,479
261,482
6,928
718,024
(D)
418,811
1 50,693
61,662
(D)
1971
Short
Tons
1,445,835
1,196,334
470,183
130,909
23,247
36,399
204,807
63,579
1 1 ,242
726,151
559,902
17,168
145,610
3,471
249,501
18,160
161,906
69,435

Thousand
set. ft.
1/2' basis
3,838,953
3,147,684
1,251,552
327,439
57,829
100,683
554,996
177,605
33,000
1,896,132
1,438,930
46,782
401,560
8,860
691,269
47,094
444,061
200,114

1970
Short
Tons
1,218,531
1,004,667
386,830
112,926
28,756
28,555
154,448
50,922
11,223
617,837
436,306
18,004
1 59,943
3,584
213,864
14,947
117,234
81 ,683

Thousand
so. ft.
1/2' basis
3,193,714
2,608,405
1,021,376
282,996
70,492
79,980
413,256
143,173
31 479
1,587,029
1,074,829
47,008
455,786
9,406
585,309
36,396
307,194
241,719

1969
Short
Tons
1,352,314
1,163,875
455,502
152,932
30,040
34,712
158,477
63,480
15,361
708,373
469,770
31,035
202,084
5,484
188,439
7,483
1 18,982
61,974

Thousand
sa. ft.
1/2' basis
3,594,675
3,068,502
1,201,352
367,554
74,933
95,697
436,685
181,315
44,668
1,867,150
1,169,164
78,204
605,629
14,153
526,173
21,821
342,449
161,903

1968
Short
Tons
1,333,305
1,157,218
435,735
132,518
28,990
32,839
153,927
70,942
11,519
721,483
491,872
28,684
193,255
7,672
176,037
7,616
95,804
72,667

Thousand
sq. ft.
1/2" basis
3,476,067
2,996,804
1,135,197
302,653
71,265
89,351
43<~ r;6l
20i,'jJ5
32,972
1,861,607
1,180,347
73,256
591,936
16,068
479,263
22,368
276,463
180,432

•25 pounds per cu. ft. and under represented 78%, 75%, 82%, 84% and 95%, respectively in 1968 to 1972 on a square foot, 1/2 basis.
Source: U.S. Oept. of Commerce Current Industrial Reports "Pulp, Paper, and Board" - M26A (69).

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those shown in Table II.A.I  as  there is no  precise overlap.) This table refers to board
products  with  a density  of  31  pounds  per cubic foot or less  but  the proportion of
production in the density range 25 to 31 pounds per cubic foot i< reducing and amounted to
5','r oi the total  in 1972 on a square foot basis.

     Interior products account for about  1/3  of the total (on a 1/2"  basis) and are mainly
acoustical  tile  and  lay-in  panels  and  factory-finished  buildinr: board.  Exterior products,
principally sheathing board and roof  insulation, represent 50,   of the  total; the  balance
includes mobile home and other industrial boards.

     Future shipments of insulation board will show little growth  over the remainder of this
decade  and will, in  fact, lose some of their current volume in r',e -,h ->it term. The short term
loss  will  be  primarily because  the  product is  dependent on t >.e size and growth of the
residential building sector and it is unlikely that housing starts will reach the record level set
in 1972 "before the end of this decade. In the long term, the n arket share that insulation
board  will retain  must depend on a  careful  analysis of its relative competitiveness on a
performance and cost basis with  alternative materials.  In  that ^oiitext, insulation board is
threatened both by  changing  performance requirements and by  improved  and/or  more
economic  products which are available,  e.g.  integral siding,  glass  fiber acoustic tiles and
gypsum wallboard.

     The functional aspects of sheathing  are declining in importance and with this decline
fiberboard is losing some  of its  advantages. Sheathing is a sheet material fastened to the
outside of a frame  structure to provide rack resistance, thermal insulation, and extra cover
between the outside and inside of the structure. It  is never exposed to the elements or to
sight: the outside is covered with masonry or siding and the inside by insulation and interior
finish. As insulation standards become  more stringent, alternative products such as fiberglass
become more  practical and economic. Nor is the  strength of sh> athing as important as it
once was.  More and more codes permit the exterior siding, such  as plywood or hardboard,
to provide the  required rack resistance. Thus, the builder is abk to reduce the construction
labor component by utilizing one composite product where two had been traditional.

     Insulation board fiberboard  ceiling' tiles  and lay-in panels are  being restricted increas-
ingly to residential repair and remodeling uses  as flame spread lequirements become more
stringent in the non-residential building  sectors. In the cornni -rcial building sector, fiber-
board tiles and panels are restricted to light commercial  const Action but even these uses
will  be incorporated into code and fire  requirements. Residen'  ' applications  during the
next few years, however, are unlikely  to be affected within the .oreseeable future, although
some minor errosion of market share  will take  place as alternatr •• materials take advantage
of the promotional emphasis on brand  name, ease of maintenance, etc.

     Fiberboard applications  in the mobile home  include rumbleboard, bottomboard and
ceiling  board. In all three applications, fiberboard is being replaced by other materials or the
application is being eliminated altogether. Rumbleboard, founu only in relatively high-cost
                                          17

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mobile homos, fits between the ceiling and the metal shelf of the unit and serves to reduce
the tin can type rumble from vibrations  during high wind and  rain storms. Most units that
presently  use it  are  eliminating its use altogether but some substitution is taking place by
paper/polystyrene sandwich panels in order to reduce material costs. Bottomboard, required
by industry standards, fits underneath  the joists of the unit to prevent dust, insects,  etc.,
from  rising off the ground into the home and offers a minor insulation function. Increas-
ingly, however, fiberboard is being replaced  either by lower cost materials, such as heavy-
duty paperboard or foam core paper/polystyrene sandwich.

     The  third  application of fiberboard in  the  mobile homes is as a ceiling panel. Fiber-
board is also  threatened in this application because of the potential fire hazards it presents
but, to date,  there are no practical, economic alternatives for viable substitutes. It is likely
that the design of the mobile home will  change in  the immediate future to allow for better
fire detection and protection devices and additional means of egress in order to improve the
fire performance of the home, reducing the immediate pressure to replace fiberboard.

     Thus, the fiberboard usage in mobile homes is likely to decrease in market  share but,
because the number and size of units manufactured will increase steadily in the foreseeable
future, fiberboard products will experience a modest growth in this application.

     Perhaps  the largest loss in both market share and absolute volume will occur in  roof
deck insulation applications. This type of insulation is usually in the form of a rigid board
applied to the top of the structural deck of flat roof buildings and is then covered with a
built-up asphalt and  felt roof. Historically, roof deck  insulation has been made of wood
fiber  or rigid fiberglass but  in recent  years fiberglass and perlite  board products  have
aggressively taken over much of this market while fiberboard has been decreasing rapidly. We
anticipate this trend to continue and possibly even to accelerate as the growing demands for
improved  insulation  (given added  impetus by the energy crisis) allow a  growing  market
opportunity for plastic roof deck insulation such as urethane and styrene.

     On balance, therefore,  we expect the trend in insulation board shipments  to decline
relative to 1972.

     d.  Distribution

     The  products used  in  new construction are distributed through retail and wholesale
outlets  serving  the homebuilders  a^d  non-residential contractors. The principal  ouMeis
include the nia/.uiacturers'  .vnrriiotMcs  a»4 retail building materials (^-Icrships. Sales to
mobile home manufacturers and  other industrial v^.;rs, SUch as metal siding  manufacturers
>vho  use  fiberboard  as a  backer,  are on a direct shipments  basis  much as many OEM
products  are. Finally, the  repair and  remodeling sector, including t\w homeowner and
do-it-yourselfer, is served through the traditional mass merchandise and retail store channels.
                                         18

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2. Industry Segments

     The Development Document  adopted a unit process approach to segment the timber
processing industries under analysis. The categorizations considered include:

     •   Process variation.
     •   Nature of raw materials.
     •   Plant size and age.
     •   Nature of water supply.
     •   Plant location and land availability.
     •   Water usage.

     After  considering  these  factors,  the  industry was  segmented on  the basis of the
potential impact produced by the most  critical of these subcategories.

     With  respect to  the  manufacture  of insulation board, the following unit  process
segments were isolated.

     1.   Wet decking of logs.

     2.   Log storage in ponds.

     3.   Manufacture of insulation board  with no steaming of raw material  furnish
         and no hardboaid production.

     4.   Insulation board  production which employs steaming or has hardboard
         production.

     5.   Finishing operations which employ water soluble materials.

3. Types of Firms

     Thirteen companies operate the 18 production facilities, only one of which is privately
held. The  remaining companies  are all major diversified corporations, frequently  with a
heavy concentration  of sales and assets  in the  forest products industries  sector.  Conse-
quently, the  fiberboard proportion of  each  company's sales is relatively small,  although the
product is  important to an individual company since it allows that company to offer a more
complete  building materials package  to  the marketplace and permits  the  efficient and
profitable utilization of wood wastes.
                                           19

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     Based  on reported data, the companies having a significant share of industry capacity
are:
                               Firm
                       Celotex
                       Boise Cascade
                       Armstrong Cork
                       Weyerhaeuser
                       United States Gypsum
                       Temple Industries
                              Total
                        Industry Capacity
                                19
                                13
                                12
                                 8
                                 8
                                 7
                                67%
4. Types' of Plants

     Insulation board is manufactured  in 18  plants throughout the  U.S. with  a heavy
concentration  in the South. Table II.A.5 lists these plants and Table II.A.6 summarizes their
                                    TABLE II.A.5

                INSULATION BOARD PLANTS IN THE UNITED STATES
     Company
  Abitibi        m
  Armstrong Cork
  Boise Cascade

  Celotex
  Celotex
  Celotex
  Celotex
  Flintkote
  Huebert Fiberboard
  Johns-Manville
  Kaiser Gypsum
  National Gypsum
  Simpson Timber
  Temple Industries
  United States Gypsum
  United States Gypsum
  United States Gypsum
  Weyerhaeuser
Plant Location
Blounstown, Fla.
Macon, Georgia
Internat'l Falls,
Minnesota
Dubuque, Iowa
Marrero, La.
L'Anse, Michigan
Sunbury, Pa.
Meridian, Miss.
Boonville, Mo.
Jarratt, Virginia
St. Helene, Oregon
Mobile, Alabama
Shelton, Washington
Diboll, Texas
Lisbon Falls, Maine
Greenville, Miss.
Pilot Rock, Oregon
Craig, Oklahoma
   19721
  Capacity
(MMSF-1/2")
    110
    500
    520

    130
    440
    155
    175
    220
    48
    180
    124
    260
    100
    300
    100
    90
    80
    325
Other Products Manufactured
Mineral Board    Harclboard
  1. Insulation Board only. These insulation board capacities are approximate only as most plants
     can convert production to manuf act' 're other products.
  Sources:  1973 Directory of the Forest Products Industry and Arthur D. Little, Inc., estimates.
                                           20

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                           TABLE II.A.6

   SUMMARY OF INSULATION BOARD PLANT CHARACTERISTICS
                         (total plants - 18)

                             Location
Location                                           Number of Plants
Northeast                                                   2
North Central                                               4
South                                                      9
West                                                       3

   Total                                                  18
                         Capacity Categories
Capacity                                           Number of Plants
0-199 Tons/Day                                             7
200-299                                                    4
300-399                                                    4
400 and above                                               3

   Total                                                  18
                         Process Categories
Process                                             Number of Plants
  I — Little or no steaming of furnish; no hardboard               8
 II - Extensive steaming of furnish; no hardboard                 5
111 — No steaming of furnish; produce hardboard                 1
IV - Steam furnish; produce hardboard                         4

   Total                                                  18
                            Product Mix
Product                                            Number of Plants
Finished interior fiberboard                                 14
Structural fiberboard                                       18
Hardboard                                                  5
Mineral Board                                               5

   Total                                               Not Additive
                         Age of Equipment
Age                                                Number of Plants
0-9 years                                                   1   •
10-19 years                                         '        9
20-29 years                                                 6
30 and over                                                 2

   Total                                                  18
                         Employment Level
Number of Employees                                Number of Plants
0-99 employees                                             2
100-199 employees                                          3
200-299 employees                                          5
300-399 employees                                    ,      3.
400 and over                                       '• .,,      5  •, •/• $ ,

   Total                                         J     •  i  18V    'f;


                               21

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principal characteristics. (A nineteenth producer presently has only a small proportion ofits
total production in wood fiberboard and has indicated its withdrawal from this sector in the
near-term future.)

     In addition to manufacturing fiberboard, five of these facilities also produce mineral
board (not covered by  this study) and five plants manufacture hardboard.  This economic
impact analysis covers those facilities having the  capability  to manufacture hardboard as
these facilities have the alternative to convert production between fiberboard and hardboard
manufacture.  In  fact,  the  insulation  board capacities shown  in  Table II.A.5 are only
approximate as this option of conversion implies that management will respond to market
demand in formulating the product mix. Only one plant —  that of United States Gypsum at
Greenville, Mississippi — produces all three  products.  In  terms of  process sub-category,
which  is important for evaluating the economic impact, 9 plants steam  their raw material
furnish.

     The average fiberboard capacity for the industry is approximately 310 million square
feet, 1/2" basis, per plant with only four of the 18 facilities larger than this. The average age
of equipment in each facility is generally high compared to most manufacturing industries;
the average for all plants is 19 years, and the newest, Abitibi's, just started up after complete
renovation.  However, Weyerhaeuser  has announced  the construction of a new plant at
Plymouth, North Carolina for start-up in 1976. Its capacity is planned at 260 MMSF, and is
part of an integrated pulp and paper/forest products complex.

5. Financial Profile

     The  financial profile of a typical  insulation  board plant, including its production of
mineral board and hardboard, is shown in Table II.A.7.

                                      TABLE II.A.7

                             TYPICAL FINANCIAL PROFILE,
                               INSULATION BOARD PLANT

                        Net Sales                       100.0%
                           Cost of Goods Sold      80.0
                           GS&A                10.5
                                                        90.5
                        Operating Profit                    9.5
                        Other Charges                     0.2
                        Provision for Income Tax             4.4
                         Net Income on Sales                4.9%
                         Return on Net Assets                10.5%
                         Source:  Arthur D. Little, Inc., estimates.
                                         22

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The variation among plants in the industry is:

     •    Asset-net values vary from S2.0MM to over S15MM, depending on age and
          size. (Mean = S7.2MM)

     •    The  returns on  net assets range from  2%  to  over 209f, but  average about
          10.5% (after tax).

     •    The cost of goods sold varies from 70% to 87% of net sales.

     •    Net  profits  after  tax  range  between  2% and  15% of  net sales.
          (Mean = 4.9%)

     Table II.A.8 shows the  recent investment profiles of the public corporations and the
relationship of annual  investments (1971 and 1972) to  net  assets. On  average, a company
reinvests approximately 15 cents each year for every dollar of net assets.
                                      TABLE II.A.8
                      INVESTMENT PROFILES OF PUBLIC COMPANIES
                               1971 (S Million)
                                    1972 ($ Million)
  Abitibi
  Armstrong Cork
  Boise Cascade
  Celotex (Jim Walter)3
  Flintkote
  Johns Manville
  Kaiser
  National Gypsum
  Temple Industries
  United States Gypsum
  Weyerhaeuser

     TOTAL
                        Investment1   Net Assets2     %4    Investment1   Net Assets2    %4
 10.9
 38.5
115.6
 18.7
 29.6
 51.9
  8.5
 11.4
  6.6
 27.4
319.5
638.6
225.6
300.1
588.5
293.2
209.0
306.1
114.5
206.7
45.8
339.1
1056.9
4.8
12.8
19.6
6.4
14.2
17.0
7.4
5.5
14.4
8.1
30.2
9.5
40.6
53.6
61.0
39.1
74.4
10.2
14.3
9.5
33.4
193.2
230.4
290.4
460.1
352.6
212.7
377.0
115.8
202.3
50.5
346.4
1134.7
4.1
14.0.
11.7
17.3
18.4
19.7
8.8
7.1
18.8
9.6
17.0
3685.5
17.3
538.8
3772.9
14.3
  1.  Land, plant, equipment, buildings, etc., but not including timberlands.
  2.  With allowances for accumulated depreciation.
  3.  Fiscal years ending August 31, 1972 and 1973.
  4.  Annual Investment -r Net Assets

  Source: Company Annual Reports.

     Assigning alphabet letters  to  specific plants  in  the industry,  the following is  the
dispersal of the 18 plants in terms of net assets per employee:
                                           23

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                        Less than SI5.000  -   A, B, P
                        SI 5-20.000            D, F, II
                        $20-30,000        -   C. H, K. S
                        S30-40.000        -   G,J,L,M
                        Not available       -   N. Q, R, T
     Net assets per dollar of sales revenues ranges from 0.3  to  1.0 for those plants which
made data available.

6. Pricing

     Fiberboard product prices are quoted on a dollars per thousand square feet basis f.o.b.
the shipping point with full  freight allowed to the destination. Dealer prices for a 1/2" 4' x 8'
insulatirlg board on a  carload basis  will range from $56  per  MSF to  S82 for the more
expensive building board. A typical price for 1/2"  asphalt-coated insulating sheathing is
$60; ceiling  tiles  will  vary greatly in price depending on the acoustical and aesthetic
treatment but range from SI00 to S200 per MSF.  On a full netback basis, after allowing
for  freight  and  discounts,  finished  board  prices averages  S100/MSF  and  structural,
S50/MSF. Prices for products being marketed to the  industrial and mobile home sectors
(OEM  sectors) will be negotiated directly with the customer.  While prices have increased
relative to 1967,  the  rate  of increase has  been in  line  with  the movement  of the all
commodities  price index.

     Direct price comparisons with  competing materials is difficult to make. Historically,
fiberboard has been more economic  for certain defined performance requirements but now,
in the  midst  of a  changing situation, the insulating and structural functions fiberboard has
provided traditionally  are being  offered more efficiently by other products (for example,
glass fiber  insulation in residential  construction) or is  being eliminated altogether (as in
mobile  home  applications). Therefore, while it is still an economic product, fiberboard is
losing its market position on the basis of performance value.
                                        24

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B. PLYWOOD AND VENEER

     Plants incorporated into SIC 2435-hardwood and SIC 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
economic impact analysis sections (Section V.B. Hardwood and Section V.C. Softwood).

     This is an industry of many small operations, most of them owned and operated by
family interests.  Department  of  Commerce  information  is sketchy,  and data  generally
available on the industry' concentrates on  the operations of large manufacturers. Our first
analysis in this area (August 1973) demonstrated that the impact was most likely to fall on
smaller operations.

     Thus,  it was necessary to  develop new background information through surveys of the
industry distributed and collected for us by the Hardwood Plywood Manufacturers Associa-
tion and the American Plywood Association. The data from the surveys represents, accord-
ing to industry sources, the most comprehensive body of data available on the industry.

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 product 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
hardwood plywood can be used as tongue  and groove flooring or can be made 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.
                                       25

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     b.  Markets

     Markets for  hardwood  plywood products are furniture, interior  wall paneling, other
decorative  applications, and  flooring. These markets utili/e the  liaulwood  p!v\\ood  pii-
marily as a decorative  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  hardwood  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 less so than the previous categories. However, new residen-
tial  construction  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.B.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.
                                          26

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                                     TABLE II.B.1

                                Nl:'W HOUSING STARTS

                      Year             Starts           Change
                                      (1.000)            (%)
                      I960             1,300
                      1961             1,360           + 5.3
                      1962             1,500           + 9.3
                      1963             1,640           +10.0
                      1S64             1,560           - 4.9
                      1965             1,510           - 3.3
                      1966             1,200           -20.8
                      1967             1,320           +10.5
                      1968             1,540           +16.9
                      1969             1,500           - 2.9
                      1970             1,470           - 2.2
                      1971             2,080           +42.1
                      1972             2,400           +14.2
                     Source: U.S. Department of Commerce

     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. Hie major
product categories  relate to the type of  adhesive used (designed for  interior or exterior
conditions), the finish of the sheet (rough for construction and indusirial use, smooth for
interior, cabinetry and finish work), and the appearance of the face (such as the lumber and
size of knots  and cracks, and the thickness of the sheets).  The products are giaded 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  futures  . mtracts on the  Chicago Commodities  Exchange. Other forest
products commodities,  such as pulp, are also  traded on the Exchange. Specialty products,
such as special;  papers and pre-finished plywood panels, are not traded  as futures.

     Fi::ure II.B.I depicts plywood distribution channels.  A captive warehou:e is a ware*
house owned  by the  producing mill. Georgia-Pacific, Champion International (U.S. Ply-
wood),  and Weyerhaeuser are examples of three firms which own captive warehouses. An
independent warehouse  refers to a  wholesaler which is  an independently-* wned firm,
performing the same activities as a captive warehouse, but handling a i umber of producers'
products.  An  office  wholesaler  is generally a small,  independently-owned firm which
operates as a  midd;eman between the mill and retailers or other lar;e 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.
                                       27

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                                          Producing Mill
       Wholesale
       Level
       Retail
       Level
 Captive
Warehouse
Independment
 Warehouse
                                             Retailer
                                            End User
                                            Builder
                                            Consumer
                                              etc.
  Office
Wholesaler
                          Source: American Plywood Association

                         FIGURE II.B.1  PLYWOOD DISTRIBUTION PATTERNS
     The  distribution pattern is in practice considerably  more  complicated than  that
depicted in Figure II.B.l. For example, some retailers have joined together to form coopera-
tives  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 contractors,
either acting in concert or independently, can also buy directly from the producing mill.

     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%
                                          28

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Approximately 15-209r of the total value  of shipments went directly from the producing
mill to the retailer  and end  use'-. The  pritnar\  trend which  is developing in terms of
distribution patterns is the  increasing  impoitaiKe of captive warehouses, the lessening cf
importance  of oft'iee wholesalers, and the increasing capability of the  producing mil! to
service the retailer or end user directly.

     d. Substitute Products

     In a  genera!  sense, the following sort of subs?  i tut ion chain applies: ph wood substitutes
for lumber, and  composition wood products  (particleboard. hardboard, and  softbcxmi)
replace plywood. H^weve., the residential construction industry is particularly  traditional in
its  use of materials and  adopts  substitutes only gradually. More  specifically, hardwood
plyv. ood used in  furniture faces competition from solid wood in high-quality markets, from
plastics and plastic laminates in low-moderate qu ihty markets, and from composition board
;• ,' hicts with a hardwood or printed veneer. In other decorative uses, hardwood plywood
 ..es generally the same competitive rrix.

     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  subititution  threat.  However,
softv\ood  plywood  used in  siding faces substantial competition from plastics (vinyls and
vinyl-clad products), aluminum, steel and liardboard  and solid wood (clapboard) siding, the
product plyv ;od has  replaced. In sheathing applications,  softwood plywood can be sub-
stituted by  softboard  (insulation-board), gypsum beard; 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
mture,  barring a major  change in building technology.  In industrial applications, which
include shipping  and  pnckaing containers, the  competition  is plastics and solid wood
products,  on purely pi  ,,e-uasej factors.

     e   r  oduction

     Softwood plywood production is outlined  in  Table II.B.2. As  this table indicates,
softwood  plywood  production over the period  1958-1972 has risen by 190%. or a 9%
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
commodity  nature of these products. For example, an 84% operating rate  in 1970 relates to
a S57/MSF  price for standard, exterior wade Douglas Fir plywood, 3/8" basis. The same
product sold for SI 02 in 1968 at a 95% operating rate, and at SI05 at a 100% operating rate
in! 972. By  February/March of 1973, the same product sold in the range of S145-S155, and
the industry's operating rate was well in excess of rated capacity.
                                        29

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                                     TABLE II.B.2

                    DOMESTIC PRODUCTION OF SOFTWOOD PLYWOOD
                                                                 Year
                              Domestic             %              End
                             Production           Total            Price
              Year           (MMSF-3/8")        Capacity          (S/MSF)
              1958              6,340              83
              1965             11,680
              1966             13,140              -               49
              1967             12,960              80               60
              1968             14,810              95              102
              1969             14,205              88               60
              1970             14,960              84               57
              1971             16,408              98               80
              1972             18,303             100              105
              per cent change + 190% = + 9%/yr.

              1. Based on Standard Douglas Fir, Exterior Grade Plywood, 3/8" basis.

              Source: American Plywood Association; Crow's Plywood Guide, 1973.
     The softwood veneer industry is concentrated in the states of California, Oregon, and
Washington. Technically it is necessary to distinguish  between mills which produce only
veneer for sale or use elsewhere and mills which also make plywood at the site. The latter type
of producer is covered under our analysis of softwood plywood mills.

     The 1972 Preliminary Report of the  Census of Manufactures indicates that shipments
of veneer that year  equalled 5.2 billion square feet (3/8" basis) with a value of $303.1
million. This is an average value of S58.64 per thousand square feet.

     Estimates of the total number of mills producing veneer only vary widely. The Census
data reports a total  of 227 establishments operating in the softwood plywood and veneer
industry and we are aware  of  192 firms  which produced softwood plywood. This leaves
(apparently)  35 firms which  produced veneer only.  However,one knowledgeable  trade
source has identified 38 mills producing veneer only (in 1973) while another source believes
there may be as many as 70 such producers. In the absence of any  better data we use  the
estimate of 38 producers as the best approximation of industry size.

     During 1972 the 38  known producers  are estimated to have produced  2.8 billion
square feet (3/8" basis) of veneer as follows:
                                         30

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            Product                £ Producers                 Output

       Green Veneer Only              30 mills              2.133.2 million fi.
       Dry Veneer                     8 mills               6S5 0 million ft.
                                      38 mills              2,818.2 million ft.

       Value of all mills output = SI 65.3 million (2,818.2 million ft. x S48.64/thousand)
       Average output per mill = 74.6 million feet
       Value of output of average mill = (74.6 million ft. x S58.64/thousand) = S43 million

     The balance of the softwood  veneer shipped by  the  softwood plywood  and veneer
industry  (2.4 billion feet) is believed to have been shipped by plywood  mills which were
"balancing  out" their veneer supplies and inventories to meet production needs. In effect
these mills were "trading" veneer within the industry since many bought  as well as sold in
ord r to meet their needs.

     All of the 38 softwood veneer mills identified  are located in the Northwest and for the
purpose of analyzing efficient discharge, their operating characteristics and conditions faced
are identical to those of Northwest  softwood plywood  mills except no glueing takes place.

     Domestic  production  of hardwood plywood,  as depicted  in  Table II.B.3  has  not
increased dramatically  in the past 20  years. Domestic production has increased by 60% in
the 20-year period 1951-1971, a 2.5%/year  annual  rate. However, total consumption of
hardwood plywood has risen substantially, by 360%  in the  same p *nod, 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 1971, have accounted  for the major portion of the increase.

                                     TABLE II.B.3

                        DOMESTIC PRODUCTION AND IMPORTS OF
                                HARDWOOD PLYWOOD
                                   Domestic                  Net
                                  Production               Imports
                 Year             (MMSF-3/8")             (MMSF-3/8")
                 1951                1,197                     49
                 1955                1,355                    442
                 1960                1,102                    715
                 1965                2,049                   1,047
                 1966                2,076                   1,254
                 1967                1.916                   1,244
                 1968                2,009                   1,896
                 1969                1,869                   2,107
                 1970                1,758                   2,047
                 1971                1,930                   2,545

                 per cent change       + 60%                  51-71: +5,200%
                                                           65-71: + 240%
                 Source:  U.S. Department of Commerce.

                                         31

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     Table II.B.4 depicts hardwood plywood and veneer production by product category.
The  basic  data  for  the  table comes from two  sources,  namely, the 1IPMA  survey and
supplementary data  from the Department of Commerce. This table segments the industry
into  four  sectors.  The  two  major categories  are  veneer  manufacturing and hardwood
plywood and veneer manufacturing. Each of these major categories is then divided into two
subcategories, each based on the fact that firms in these categories produce either specialty/
semi-specialty products or standard/lower value-added products.

     For Sectors I & II Veneer, the commercial grade products are sometimes referred to as
"fancy face" veneers and are used in high-quality applications, such as furniture top and side
panels. Container grade  veneer is  of lower quality,  and is used for packaging  application
where appearance is not paramount.

     In Sectors III  &  IV, the  semi-specialty  and specialty  grade  products are higher
value-added products, requiring more hand labor, sold in varying sizes and shapes, including
curved shapes, and are generally finished or semi-finished products. Stock panels are those
products generally produced in a relatively standard range of sizes, with little or  no final
finishing.
                                    TABLE II.B.4

                 HARDWOOD PLYWOOD AND VENEER PRODUCTION BY
                                PRODUCT CATEGORY
                                              Estimated Production - 1972
                 Category                      SxlO6          ft4 x106
            I. Commercial Grade Veneer             145              4,175
           II. Container Grade Veneer               10               420
                                               155              4,595

          III. "Stock" Plywood Panels              260              1,760
          IV. Specialty Plywood Products           115               440
                                              $375              2.200
                   Total                       $530            not additive
          Sources: Department of Commerce, HPMA Survey, Arthur D. Little, Inc.,
                  estimates.

     Distinctions between  manufacturers  of commercial  or container grade  veneer  are
straightforward  in  terms of product mix, and in terms of economic factors. For  the
manufacture of plywood there is  more of a gray area where the product line  from stock
panel producers  overlaps  with the product line of  semi- and specialty-grade products.
However, in spite of this overlap, the industry segments do describe basic operations within
the industry and do yield an analytical framework appropriate to assess impact.
                                        32

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     f. 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 development  is possible due to rapidly
rising prices tor 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,
3. id daily basis. Certainly, month-to-month or quarter-to-quarter graphs of these prices show
wide  variation. As  noted  in  Section II.B.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
cycles, 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 1960'sand early 1970's. We project increasing usage of softwood plywood in
residential construction  in all categories, including single family h-unes, mobile and modular
housing, and multi-family homes. These increases in consumption of plywood will enhance
the abilit;. for softwood plywood to  grow at a rate greater than the residential construction
activity growth rate for the period.

2. Types of Firms

     The hardwood pi -wood and veneer industry is best characterized as a small-company
business. There are nearly 500 firms active in the hardwood industry sector versus about
half thrt many softwood 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 sector of the  United States, both North and South, which is \> here
the hardwood timber species predominate.

     Table II.B.5  illustrates  the concentration in this industry. While 152 firms have less
than 20  employees,  these  152 firms represent only 3% or the  total value of shipments.
Similarly, while 246 establishments (37% of the total number) have 100 or more employees,
they account for 63% of the total value of shipments.
                                       33

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                                   VABLR: H.B.S
                           PLYWOOD INDUSTRY !SSC 2432)
                            CONCENTRATION PATTERNS
Nurntje' of
Piu-iblishmsnts
152
269
246
667
Totai Shipments
1967 1966
26 24
37 33
50
65
Vdlue of Ship.
in%
3
34
63
1CO

1963
23
31
42
58
               Plant Sire ?atterr,j - 1987
                Number of
                Employees
               1-19
               20-39
               100 and over


               Concentration Ratios —
               4 largest firms
               8 largest firms
               20 largest firms
               50 Idtgfcsi fiims

               Source:  1907 Census of Manufactures
     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 conoemration in the industry, which will continue.

     The toncentration  pi  Miv;  within the hardwood  plywood industry sector indicate a
considerably less concentrated industry than for softwood plywood. Table II.B.6 indicates
market  shares for the major firm-; in each industry, Georgia-Pacific, which  accounted for
20r of the domestic hardwood  plywood  production in  197T,  is  clearly  the leader in this
segment. The companies that follow trnl b>  substantial  market shares. The companies
beneath Borst-Cascace,  ^hkh  is  the fifth  largest  in  the  industry with only a 2%  market
siv.ue. exhibit market shur -,  .if  l-i/>;'- .: u l;-ss.

     The picture is difierent than this for softwood plywood. Again. Georgia-Pacific is the
leader with a 1 o% market shure, bat  the i^-t> cigin fin.:;, account for a 50%  market share, the
to;- 10, 5"'/'-. There- are eight fivnr here wh'b a 1^ market share or more, double the  number
pre...'r.i IA the hardwood  plvwocd inJusiry.

     ,-,.iC'J  -i'  ii io' '.•>  .;;••'  i:  r out  of  i"?  five major  hardwood plywood producers
:t-.A  •;•!!;,.  Rcrsv'hurj''-;,:,;; th^u JV.T, '[it-(K.eiin;i distribution  \captive warehouse)outlets. All
•i'-: of t3ie leading hj< awood luanaiacru-rcfs r",  ;:iteg!:!ted to wood fiber. Similarly, the four
;.>;"hi -.  -,u!r-vc-oa plywood proA'i_'.ir; al) :;,ive oapJve ;:u'koting outlets, and al! of the top
             •u  i.1,- ^r.-g.a1  -.-.  "c • !oodlancs, This degree ot a tegration affords the majors
                                        34

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                                     TABLE lt.B.6

                      PLYWOOD INDUSTRY MARKET SHARES - 1972

                            Hardwood Plywood        Percent

                              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: Arthur D. Little, Inc., estimates.
greater  control over volume produced  and sold. For example, hr.ving  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.

3. Types of Plants

     The typical hardwood  plywood plant is a small, privately-owned mill producing 5-10
miiiion square feet of product per year. This is in contrast  to the production pattern in the
soitwood plywood sector, which is typified by a mill of 100 million square feet output per
year. Based on our survey results, the  mean pioduction of softwood plywood plants was'
95 MMSF 3/8" (1973). Based on an arithmetic average of  1972 production, the "typical"
plant produced:

     •    hardwood plywood: 11.6 MM square feet 3/8"
     •    softwood plywood: 95.3 MM square feet 3/8"
                                        35

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f i.; tiier,  soiuvixxi  ph'v/ooJ  plan!   tend U) be part of multi-plant opera ions owned by
brojJ-huscd forest products cotvpa ,ies.

     Milk ;.roc'iicng  veiKvr  fur sale only are  believed to be confined e>clusivdy to the
,'.;- "•- No/ th'-\ .•>'. TK-ir operat;ons ar- centered in Oregon although some mills are located
T!  Ujshinuton and California. The phy.ical operations of a veneer mill arc identical to those
 •1  j Northwest  softwood plywood  producer with two important exceptions- (1) veneer
r,i  -L- do not o'iie up plywood and 'heri.'fon: do not have glue discharges and (2)  most veneer
mills (.an estimated 79',£) sell green vci'eer only and will not  have effluent discharges from
veneer dr>er wasndown water. The costs of compliance for veneer snills will be considerably
lower than for softwood plywood mills as a result of these differences.

     Table ll.B.7a  depicts the operating characteristics of plants within the four hardwood
 pKwood and veneer  segments. Table H.B.7b presents an extrapolation of nw data from our
 survey of plant  sizes within each of our four categories. As the table indicates,  container
 grade veneer mills tend to be quite small and have a low value of net assets per plant (60% have
 less than $500,000 in value of assets). Commercial grade veneer manufacturers tend to be
 significantly larger \t-A'/>. have net assets of greater than S500,000). Hardwood  plywood and
 veneer manufacturers are more evenly distributed.
                                          36

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                                                                          TABLE II.B.7a

                                                 HARDWOOD PLYWOOD AND VENEER MANUFACTURING1
                                                                     INDUSTRY STRUCTURE
                                                                                    Productivity Ratios
Category
Veneer Mfgrj.
A. Commer. Veneer
B. Container Grade
Total Veneer
#
Plants

250
50
300
#
Empls.'

16,500
1,000
17,500
19:2 $ Assets/Plant Prod'n./Plant #EmpJ
Ei«:d Protfn. 1$ x 103) (Ft.2x106) Plant
$MM H.2 x 106 Ave. Range Ave. Range Ave.

145
1?
155

4,175 1,365 125-8,000 48 1.25-163 65
420 235. 105-600 2.5 0.75-5.75 20
4,595
$A/103 Ft.2
Ave. F ange

39 8-180
165 88-333

Hardwood Plywood Manufacturers
U) A. "Stock" Panels
-J
B. Semi- and Spec.
Grade Panels
Total Plywood
GRAMD TOTAL
75
115
190
490
9,000
14,750
23,750
41 ,250
260
115
375
530
1,760 2,100 300-7,000 83 1.5-273 175
440 1,750 200-10,000 16 0.8-60 293
2,200
Not Additive
48 36-70
218 37-875

                                                                                                                                           Comments


                                                                                                                                  High quality product; S35/103 ft.2 ^'average"
                                                                                                                                  selling price.
                                                                                                                                  Lower quality product; $24/10  ft.
                                                                                                                                  "average" selling price.
                                                                                                                                - Standard products; "average" selling price
                                                                                                                                  $250/103 ft.2 (3/8" basis).
                                                                                                                                  Specialty products, including finishing,__
                                                                                                                                  curves; "aver
                                                                                                                                  (3/8" basis).
                                  3  1
curves; "average" selling price $400/10' It.
1. HPMA Survey - March/April 1974.
2. Ratio Production Emp./Total Empl. — 0.83 (1967 Census of Manufactures/.
Source:  HPMA, ADL estimates; Note:  Productivity ratios and other 1974 survey data believed to be skewed toward larger plants.

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                                     T/.RLE il.B.7'b

                            NIB J TiON OF PL AMIS - NET ASSETS BASIS

                                                           Wet Assets $x 103
 C'-,tesorv
    L\ Com..Ire' Giac's


 :l. • •»;/> Jwood Plywood aiTl Veneer Manufacturing
    A. Stock wanels

    B. Semi and Specialty Grade


 J.  Exttor-olr.pd irf .r, Stnv  •;.

 Sources:  HPMA Survey, March-April, 197<1, Arthur D. Littlt, Inc., estimates.

'."j Segrrent
% Segmen*
-J;' Plants
ic Turing
% Segment
r* Plants
% Segment
ft fonts
1-30-500
36%
90
60%
30
18%
14
21%
24
500-1,000
75
20%
10
27%
20
41%
47
1,000 and Over
34%
85
20%
10
55%
41
38%
44
4. Financial Profiles

     The  task of developing a financial profile :a this industry is complicated by the large
number of mills of varying sixes snd technological sophistication, and a substantial variation
in produc'  line The individual firrn can produce only veneei, or only plywood, or both
products. 5;mi]ariy. part of a plant's opeiations can b-'> the production of semi-finished or
pre-firnshed  products, ?uch  as  tongue and groove  hardwood  flooring.  It  is  difficult  to
separate  Hie costs of th'i production of the finished  product irom the cost, of manufacture
of !.'--e >».-  ' • product.

     Table  II.C.8  pn;v,-i,t- U;c l'ir,^ni"'v-! i>rofi!e  of a soitwood plywood and veneer mill jf
constructed  at the e-id of 1972. Tue mill's capacity was put at !2S million square feet, 3/8"
biuis. A price Jevel w;-.s v.3iutnecj 10 be S^CXV'MSF. As  the ircoine statement indicates, at that
 .r --- ' v.'  -»e*  profit1;,  ft ". ••- v, were °»8("0 nOO  on .1 t< -al n-'^vnue base of S12.6 million, or
6.;% of net sale>

     ^  '.Vabint'  is ?x- r  -e!>  ,:'-i,-'tive ic the assv.ned pr'c;.- level. For example, at a price
oi vi," ;/M,'"F, -- -,ii;c • Ifv-1 'v»ii.   \,";-, .u anic  co-'t?, net orofitp after tax would have
been $4/1 million, or 22 A  of net sales. Corviv,'!}.  t3\3 mil! would be only breaking even at a
pnce level of S90/MSF

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                                   TABLE II.B.8

                                FINANCIAL PROFILE:
                      SOFTWOOD PLYWOOD AND VENEER MILL
        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:

          Net Sales
             Cost of Sales
               Operating Expenses
               Cost of Goods Sdd
               GS&A

          Operating Profit
          Other Charges
          Profit Before Income Tax
          Provision for Income Tax
          Net Profit
          Return on Net Assets

        Source: Arthur D. Little, Inc., estimates.
             %
            100.0
          $MM
          12.6
76.7
11.6
88.3
 9.7
 1.3
11.0
             11.7

             11.7
              5.6
              6.1
              6.0
            1.6

            1.6
            0.8
            0.8
     That these profitability figures are representative  of the softwood 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 S100/MSF.

     Table III.B.9 presents comparable financial data on veneer and  plywood mills during
the year 1971, as compiled by Robert Morris Associates. In this case, profits before taxes
were 2.9% for mills with assets of Sl-10 million, and 3.6% for mills in all size  categories.

     Tables II.B.10 through II.B.I3 present financial profiles for representative firms within
each of the four hardwood plywood and veneer segments as described above. These profiles
have been developed to represent operations within these sectors and tend to be somewhat
smaller  than  the average mill as computed  from our survey data. This is  an attempt to
account for the underrepresentation  in the  survey  of smaller  sized firms.  As these tables
demonstrate, none  of the representative operations in these segments are unusually profit-
able. However,  with the exception of a container  grade veneer  (Table  II.B.I 1) while the
plants show modest  profitability (return  on net  assets  raging from  4% to  8.8%), the
companies do  have a reasonable amount of financial  strength, particularly  as  compared
against the expected cost of compliance (cash flows ranging from 567,500 to  $100,000).
                                          39

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                           TABLE II.B.9

                       FINANCIAL PROFILE:
                VENEER AND PLYWOOD MILL, 1971
                                               Assets
                                  S1MM-S10MM
                                 Income Statement        All Sizes

Net Sales                                100.0             100.0
Cost of Sales                              89.0              87.6
Gross Profit                               11.0              12.4
Other Expenses, Net                         8.1               8.8

Profit Before Income Taxes                   2.9               3.6

Sourde:  Robert Morris Associates, 1972.
                           TABLE II.B.10

                       FINANCIAL PROFILE:
              HARDWOOD VENEER MFG. -SEMI AND
                        SPECIALTY GRADE
                                       %              $x103
     Net Sales                         100.0             1,500
        Cost of Goods Sold               86.0             1,290
        GS & A                         10.0               150

                                       96.0             1,440
     Operating Profit                     4.0                60
     Provision for Income Tax              2.0                30
     Return on Net Assets                        4.0%
     Cash Flow                                $67,500
     Net Assets:                               $750,000
     No. of Employees:                           60
     Annual Production:                      45,000,000 ft.2
                                          (surface measure)

     Source:  Arthur D. Little, Inc., estimates.
                               40

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                     TABLE II.B.11

                 FINANCIAL PROFILE:
   HARDWOOD VENEER MFG. - CONTAINER GRADE


                                  %               $ x 103
Net Sales                          100.0               90
   Cost of Goods Sold               88.0               79
   GS & A                          7.0              _6

                                  95.0               85
Operating Profit                      5.0                5
Provision for Income Tax              2.5                2.5
Net I ncome                         2.5                2.5
Return  on Net Assets                        2.0%
Cash Flow                                $8,750
Net Assets:                               $125,000
No. of Employees:                           10
Annual  Production:                      3,000.000ft.2
                                      (surface measure)

Source: Arthur D. Little, Inc., estimates.
                     TABLE II.B.12

                  FINANCIAL PROFILE:
      HARDWOOD PLYWOOD AND VENEER MFG.
                    STOCK PANELS
                                                  $x103
 Net Sales                         100.0
   Cost of Goods Sold               84.9
   GS& A                         10.0
                                  94.9
 Operating Profit                     5.1
 Provision for Income Tax             2.5
 Net I ncome                         2.6
 Return on Net Assets                        8.8%
 Cash Flow                                $69,000
 Net Assets:                               $500,000
 No. of Employees:                            35
 Annual Production:                      7,000,000 ft.2
                                        (3/8" basis)

 Source: Arthur D. Little, Inc., estimates.
                          41

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                                   TABLE II.B.13

                                FINANCIAL PROFILE:
                     HARDWOOD PLYWOOD AND VENEER MFG. -
                     SEMI-SPECIALTY AND SPECIALTY PRODUCTS

                                                %              $x103
               Net Sales                        100.0            2,000
                  Cost of Goods Sold              83.0            1,660
                  GS & A                      JJJ)              220
                                               94.0            1,880
               Operating Profit                    6.0              120
               Provision for Income Tax             3.0               60
               Net Income                        3.0               60
               Return on Net Assets                        7.5%
               Cash  Flow                             $100,000
               Net Assets:                             $800,000
               No. of Employees:                          60
               Annual  Production:                    5,000,000 ft.2
                                                    (3/8" basis)
               Source: Arthur D. Little,  Inc., estimates.

     Container grade veneer manufacturers are very small firms in tenuous financial posi-
tion, unless they are owned by a container manufacturer or other captive user. The cash
flow for the representative firms is only $8,750 per year; the return on net assets is 2.0%.

5. Pricing

     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 softwood ply-
         wood,  tluctuates  sharply both annually and seasonally. Since efficient pro-
         duction must be  accomplished at  a relatively level output, and since  large
         inventories are costly, it is  difficult for producers to compensate for short-
         term demand changes.
                                         42

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     As a  result, softwood plywood prices have historically varied considerably 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.

     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 softwood 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.
                                       43

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C. SAWMILLS AND PLANING MILLS, GENERAL

     For 1972 the U.S. Department of Commerce reported there were 8,018 establishments
in the United States falling into this category. Of this group 31% had 1 to 3 employees, 21%
had 4 to 7 employees, and 25% had 8 to 19 employees. 1694 firms employed 20 or more
persons.

     However, the most  extensive listings we have  secured identifying industry participants
aggregate  fewer  than  2,000  firms which are estimated to  account  for well  over 90% of
production. Trade sources believe  the Commerce  Department totals are  swelled by the
inclusion of seasonal and part-time operators who perform minimum processing operations
either from owned woodlots (farmers, perhaps) or with portable equipment transported by
truck from site to site. We are unable to verify this fact as there is no known accounting of
these allegedly transient  firms. Thus, this section will necessarily focus upon those produc-
ing units  listed in the  trade directories and/or who  are members of the  principal  trade
associations.

     The  industry is readily divided into segments by type of product, markets served,
geographic area of production, and producer group. The most important division is between
softwoods  and hardwoods which have historically accounted for  approximately 80% and
20% of production respectively. These products are largely used by  different markets and
produced in different geographic areas by a different group of companies.

1. Industry Structure —  General*

     a.  Production

     The production of lumber in the United States in 1972 totaled 38.035  billion board
feet, up 3" from 1971. Total industry  production, shown  in Table Il.C.l, has tended to
remain relatively stable for the last two decades and has averaged 36.221 billion board feet
since 1965.

     Despite its substantial volume of production,  the United States is a large net importer
of lumber, chiefly of softwoods from Canada. In 1972 imported softwood is estimated to
have supplied  23% of U.S. domestic consumption. That same year imports of hardwoods
supplied 6%. of domestic  consumption.

     Softwoods from Canada represented 99% of U.S. imports and hardwoods from that
country totaled  34% of imports. Canada purchased 24% of softwoods and  57% of hard-
woods exported while Japan purchased 349? of U.S. softwood exports.
 "For both softwood and hardwood species.
                                       44

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                                    TABLE II.C.1

                              U.S. LUMBER PRODUCTION
                                  (billion board feet)

                     Year    Total     Softwoods     Hardwoods
1972
1971
1970
1969
1968
1967
1966
1965
1960
1955
38.035
36.998
34.668
35.597
36.473
34.741
36.492
36.762
32.880
37.380
31.222
30.039
27.530
28.281
29.285
27.311
28.754
29.295
26.650
29.815
6.813
6.949
7.138
7.316
7.188
7.430
7.738
7.467
6.230
7.565
         Average-1965-1972  36.221      28.965        7.254

         Source: U.S. Department of Commerce, Current Industrial Reports, Lumber Pro-
                duction and Mill Stocks, Series MA-24T.
     Net imports of lumber have increased by 86% since  1965 although most of the gain
occurred in 1971 and 1972. Substantial increases in new residential construction during
those two years  had a dramatic impact  on demand and prices  for lumber, and pushed
imports up. U.S. imports and exports of lumber are shown in Table I1.C.2.

     In  1971  shipments by companies  classified in  SIC 2421 had a dollar value of S4.5
billion and 169,700  persons were  employed  by these producers.  The  industry is quite
susceptible to changes in the level of construction activity in  the United States; thus 1971
shipments were 20^ higher in value than 1970 which itself was 11% lower than 1969. Dollar
statistics tend to be  misleading, however,  since prices fluctuate widely and it is more
common to discuss production in units. Lumber, the main product, is measured  in board
feet (a 12" x  12" x 1" unit of measure) which is the industry standard.

     The production of lumber in one form or another is  the main activity of sawmill and
planing  mill operators. Rough and dressed lumber produced in 1971 represented 80% of the
dollar value  of shipments of  SIC product class  2421.  "Wood chips," the second largest
product category, totaled 8%  of the value of products  shipped and all other products
equalled 12%.

     Wood chips are produced from  waste generated in the manufacturing process and are
used in  the production of paper, particleboard, and  hardboard. Chips are produced almost
exclusively as a  by-product, and, although important in value, are  usually not  produced
directly from logs.

                                         45

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                                     TABLE II.C.2

                     IMPORTS AND EXPORTS OF LUMBER, 1965-1972
                                   (billion board feet)
              Year

              Imports

                 1972
                 1971
                 1970
                 1969
                 1968
                 1967
                 1966
                 1965

              Exports

                 1972
                 1971
                 1970
                 1969
                 1968
                 1967
                 1966
                 1965

              Net Imports

                1972
                1971
                1970
                1969
                1968
                1967
                1966
                1965
 Total
 9.426
 7.619
 6.116
 6.304
 6.156
 5.146
 5.200
 5.233
 1.424
 1.097
 1.291
 1.135
 1.159
 1.134
 1.024
0.922
8.002
6.522
4.825
5.169
4.997
4.012
4.176
4.311
               Softwoods
 8.977
 7.246
 5.769
 5.849
 5.808
 4.798
 4.776
 4.895
 1.196
 0.927
 1.152
 1.018
 1.025
 0.955
 0.860
 0.777
7.781
6.319
4.617
4.831
4.783
3.843
3.916
4.118
                 Hardwoods
 0.449
 0.370
 0.339
 0.449
 0.346
 0.344
 0.421
 0.334
0.228
0.154
0.116
0.106
0.107
0.159
0.148
0.125
0.221
0.216
0.223
0.343
0.239
0.185
0.273
0.209
             Source:  Fingertip Facts and Figures, National Forest Products Association,
                     February 1972 and 1973.
     Probably  the  largest single "NSK" product of sawmills and  planing mills would  be
products made from bark. This too is a by-product, normally removed prior to the sawing of
the log. Most bark is sold for landscaping use either for commercial and public buildings (the
largest volume market)  or  for  residential  homes  and gardens. Some sawdust is sold for
miscellaneous uses but in  general it is burned (as is some bark) or presents a disposal
problem.  Cut stock is lumber cut to nonstandard, customer specified sizes. The kitchen
cabinet industry is the largest user  f softwood cut stock. (See Table I1.C.3.)
                                          46

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                                   TABLE II.C.3

                        VALUE OF SHIPMENTS OF SIC 2421:  1971

                                                 Value of Product
                                                    Shipments
                                                  (million dollars)

                                                       1971       Percent

             2421   Sawmill and Planing Mill Products     $4,500.7        100

             24211   Rough Lumber and Sawed Ties         949.5         21
             24212   Dressed Lumber                    2,644.0         59
             24215   Wood Chips                         364.4          8
             24217   Softwood Cut Stock                  130.7          3
             24218   Softwood Flooring and Other
                      General Sawmill Planing Mill
                      Products                           61.6          1
             24219   Contract or Custom Sawing of
                      Logs Owned by Others                45.6          1
             24210   Sawmill and Planing Mill Products,
                      N.S.K.                            305.4          7

             Source: Annual Survey of Manufacturers, 1971.
     b.  Regionally

     Geographically, 70% of  softwoods are produced  in  the  western United States (see
Table II.C.4), with the South  accounting for another 27% of domestic production.  During
1972, production from the states of California, Oregon, and Washington represented  80% of
western softwood production  with the balance spread throughout the Intermountain states.

     The principal species cut in the west are Douglas Fir, Ponderosa Pine, and Redwood.
Other species harvested include Western White Pine, White Fir, Sugar Pine, Spruce, Hem-
lock. Larch, and Cedar. Douglas Fir is mainly produced on the western slopes of the Cascade
Mountains  in Oregon, Washington, and California and this area is sometimes referred to as
the "Douglas Fir" or "Coast" region. The  area east of the  Cascades  including the Inter-
mountain states is termed  the  "Western Pine"  or "Inland" region while production of
Redwood occurs in Northern California.

     The most  important species cut in the South is Southern Pine, which accounts for 96%
of southern softwood produced. This area of the country is usually  termed the "Southern
Pine Region." Production in the South is more evenly spread than in the West. The leading
states are Alabama, Arkansas,  Georgia, North Carolina, and Texas which together accounted
for 61% of 1972 production.
                                          47

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                                     TABLE II.C.4

                         U.S. LUMBER PRODUCTION BY REGION
                                      1972 vs. 1955
                                     (billion board feet)
         All Species

            1972
            1955
            1972 %

         Softwoods

            1972
            1955
            1972 %

         Hardwoods

            1972
            1955
            1972 %
                         U.S. Total
38.035
37.380
 100%
31.222
29.815
 100%
 6.813
 7.565
 100%
              West1
22.125
20.703
  58%
21.986
20.647
  70%
 0.139
 0.056
   2%
            South2
12.624
13.270
 33%
 8.291
 7.976
 27%
 4.333
 5.292
 64%
                Total
            West and South
34.749
33.973
  91%
30.277
28.623
 97%
 4.472
 5.348
 66%
         1. States of Montana, Idaho, Wyoming, Colorado, New Mexico, Arizona, Utah, Nevada,
            South Dakota, Washington, Oregon, California, Alaska, and Hawaii.
         2. States of Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida,
            Kentucky, Tennessee, Alabama, Mississippi, Arkansas, Louisiana, Oklahoma, and
            Texas.

         Source: U.S.  Department of Commerce, Current Industrial Reports, Lumber Production
                and Mill Stocks, Series MA-24T.
2. Softwood Lumber

     a.  Industry Structure
                                                                                      !
     (1) Softwood Markets. The market  for softwood lumber is dominated by  the U.S.
construction industry which consumes in excess of 75% of softwood lumber produced. Of
this amount, over half moves directly into new or maintenance construction usage and most
of the balance is "remanufactured" into millwork, kitchen cabinets, prefabricated structures
or some other  intermediate product before going into construction use. About 25%  of
softwood lumber  is used by  other  manufacturing industries. Table II.C.5 identifies the
distribution of shipments  for SIC 2421 and 2429 during 1975.                            *

     Table II.C.5A identifies the i .ajor segments of the construction industry. Residential
construction represents 44% of the total and this market sector is the largest user of lumber.
                                          48

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                                       lABLt ll.C.b

                            1972 Disrmr.UTiOM or cinr-ir.r
                    SIC 2421 SAVYiVm LS AND PLAMIMG MILLS, GENF.RAL
                                           AMD
                       SIC 2429 GENERAL PURPOSE SAWMILLS. NLC
                                                                          Percent of
Buyers                                                                    Purchases

Iron Ore Wining                                                                 .1%
No:i'3i ious Ore Mining                                                           .4
Coal Mining                                                                     .4
Crude Oil & Product Mining                                                      —
Chemicei! & Fort Mutiny                                                         —
Mnialc'n.inr.i' fJuni'riict'ea                                                     14.S
Lorj.-jinn Camps & Contractor                                                     2.7 *
Savvmili & PMnhvj !V-illi                                                       1?.?*
Haidwood Dimensions &• Flooring                                                3.B
MilKvork Pldnts                                                                9.3*
Veneer & Plywood Plants                                                        1.9*
Prefibricatud Wood Products                                                     3.0*
Wooden Containers                                                             2.4
XVooci Preservative & r/hsceiloneouG Products                                       B.5
Ho'jseb.cld Furnitui'p                                                           6.1
Office Furniture                                                                1.4
Pulp Mills                                                                      -9
Paper (,'litls, Excludinq Building Products                                          2.7
Faperbo.ird Mills                                                                3.2
Coatr-d & Converted Papn Products                                               —
Buildtr.g Pap-r, Allied Mills & Wall Paper                                           .4
Fiber Cf.ns                                                                    —
Paints & Allied Products                                                        —
Gum  & Wood Chemicals                                                        1.1
Other Agricultural Chemicals                                                    —  -
Printing Ink                                                                   —
Gasoline, Jet Fuel, Kerosine                         •            '                 ~
Distillate £ Residual Fuel Oil                                                    -
Lubi looting Oi! & Greases                                                       —
Tire & Inner Tubes                                                             ~
Miscellaneous Rubber Products                                                   ~
Fabric Plestic Products                                                         —
Shoes & Other Leathers                       •                                   -1
Glass, Except Containers                                                         -4
Glass  Containers                                                                 -1
Hydrpulic Cement                                                             ~
Brick £ Structure Clay Tile                                                      -
Ceiamic Wall & Floor Tile                                                       —
Clay & Monday Refractory                                                      —
Other Stuiciurc Clay Products                                                   —
Vitreous Flumbinrj Fixture                                                      —
Miscellaneous Pottery & Porcelains                                               —
Concrete Block & Brick                                                         ~
Other Coi-.ciete Products                                                         -2
Ready-Mixed Concrete                                                          «1
 * All uses  estimated  to  principally end  in new  or maintenance
   construction.   Total 50.1% of shipments.

                                     49

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                                            '[ I » I • ff -I
                                         TABLE II.C.5  (Continued)
Buyers
                                                                            PCI cent of
                                                                            Purchases
L imc
Gyp.-.tim Products
Cut Stor.c & Stono Products
Acbesio; Products
Minoia! Vi'ool '
Abrasive & Other IViincrels
Iron & Steal
Motel CoiUnincrs
Enr.m Gunitory & Plumbing
Heat Equipment, Except E'ectiic
Fcb'icatL'd ^U'jcure Stcol & Metal Doors
Fabricated i'inte-.vork
S'i.-et. Archittctiiic. Miscellaneous Metal Work
Stemp Si fk-re\ ' Morliinc Products
Hardwr-.re, rioting, Wire Products
Valves, Pipo Fittings
Sxeam Engines ot Turbines
Internal Combustion Engine NEC
Faim Equ'pment
Construction Equipment
Mining
     g t\';3chinery
Materidl:- Handling Equipment
f/i-jchinc1 Tools — Cutting
Machirc- Tool: — Forming
Dies, Toci; & Accojsories
MctalViOikinn Eqjij.'mcrt — We'ding
Food Products Machin-jry
Textilfi Equipment 2: Machinery
Woodwork Equipment & Machinery
Pap^r Equipment £ Macninery
Printir.n Equipment & Machinery
Specis! Industry Machinery
Pumps & Corr.rjressors
Bloweis & Exhaust Fans
General Industry Machinery — Fans, Filters
Nonelectric Machine Shop  Products
Computers Si Calculating Machines
Duplicating fk Other Office Machines
Vendintj £v Airconditionmg Equipment
Electric. Apj.-lii.nces & Motois
l-iouseliold Refiicierntors & Freezers
Household Laundry Equipment
fclcctric Light & Wire equipment
Telephone & Telegraph Equipment
Radio & TV Commur.icpticns Equipment
Battery, X-ray, Elcciric Equipment
Truck & Bus Bodies
Truck Trailers
Aircraft
Ship Building & Ropair
Bodt Building
                                                                                 .1%
                                                                                 .5
                                                                                 .2
                                                                                 .3
                                                                                 .2
                                                                                 .2
                                                                                 .1
                                                                                 .1
                                                                                 .1
                                                                                 .2
                                       50

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                                       TABLE II.C.5  (Continued)
Buyers
Percent of
Purch.ises
Locomotives & Railioad Cars
Mobile Homes & Ca:iip(.-is
Car Tiyil^rs, Snowmobiles
L:Mj;ncc. in i  ?-• Lj.boaitory  Instruments
Meclinnit.il l/iojsuiing Instruments
Ajtonic'iiC lompcrsturo Ontiol Instruments
Orthopedic & Surgery Appliances
Match-s, Clocks, & Parts
Optical, Photocopy, Pho'.t'ijiaphic
Jewelry, Toys, Sport, Miscel'arieous
Electric Utilities
Wholesale 6, Retail Trade
Real Estate- &'Rental

     Total

Components

Inventory
New Construction
Federal Defense
Competitive Imports
Exports

     Total

Category
     .8
    1.0
     .1
     .9
   81.8%
     .4%
   27.2

  -12.4%
   18.2%
Single-Family Residential
Two to Four Unit Residential
Garden Apjrtments
High-Rise Apartments
Alteration? & Additions
Nonhousckceping Units
Industrial
Office & Warehouse
Stores. Restaurants, Garages
Religious
Private Educational
Hospital & Institutional
Other  Nonrcsidsntial
Farm, Including Residences
Oil & Gas Well Drilling
Railroad
Telephone & Telegraph
Electric Utilities
Gas & Petroleum Pipelines
All Othei Private
Highway
Military
Conservation
Sewer Systems
   14.0%
    1.3
    2.7
     .2
    3.4
     .3
     .1
    3.3
     .3
     .1
     .1
     .1
     .1
     .5
     .1
     .1
     .2
    1.1

     .1
    1.1
                                         51

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                                  TABLE II.C.5  (Continued)

                                                                    Percent of
Category                                                             Purchases
     Systems                                                           —
I'ubl.c Residential                                                          .1%
Public. In'lustriu!                                                          —
Public Educational                                                         .4
Public Hoinit:,!                                                           -
Otli^; Pub'.c Stfiictures                                   '                  .2
Miscellaneous Public Construction                                           _ .2
     Total                                                             27.2%

 Source: Arthur D. Little, Inc., input-output model.

 New single family units and new, low-rise multi-family units require substantial quantities of
 lumber mainly,  for structural  and framing purposes. In the past lumber  was also used
 extensively  for  subflooring, exterior  siding, and roof decking but  these uses have moved
 heavily toward  composite materials  such as  plywood,  particleboard,  and  hardboard. In
 addition lumber has lost markets to metal products such as aluminum siding, steel studs and
joists.  However, softwood lumber still accounted for over 23% of the materials bill for new
 single-family construction in 1969  as reported by Construction Review.

     The  U.S. construction market is extremely sensitive to interest rates and year-to-year
 construction activity  is inversely correlated  with  the cost  of  money. Table II.C.6 lists
 housing starts   and  mobile home production from 1965  through 1972  and shows the
 substantial annual variations which occur.

     (2)  Shipments.   As housing is the  major softwood  lumber market,  followed by
 manufacturing,  shipments show a  concentration of movement from producing regions into
 the states where construction activity is strongest and where manufacturing operations using
 lumber are concentrated. Further, since freight costs are a major factor in the delivered cost
 of lumber,  producing  areas serve  those regions where relative freight costs are lowest or
 where competitive costs are equal.

     Table II. C. 7 shows  new housing construction by area during 1972 and reveals that the
 South  and  West  were  the leading  housing  areas  with  41% and 25% of  total activity
 respectively. Table II.C.8 lists manufacturing use of all lumber by region in 1960. Again the
 South is the leading consumption area at  32%, followed by the  North  Central states with
 29% of usage.

     Table II.C.9  shows shipments of softwood lumber by destination during 1972 from
 mills  of western  origin  and selected Southern Pine mills.  Producers located in the West
 shipped 45% of their product into that same  region with the North  Central and  South
 receving 26% and  16% of western output.  Those Southern Pine mills reporting shipped 77%
 of their output to users in the South, the nation's largest consuming area.
                                         52

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                                 TABLE II.C.5A

                        VALUE OF CONSTRUCTION - 1972
                                 (billions of dollars)
                                                 Amount                   Percent

Total Construction                               $123.836                     100%

   Private

     Residential
        New Single-family                          27.669                      22
        New Multi-family Units                      17.067                      14
        Additions and Alterations                    7.420                       6
        Non-housekeeping                           2.030                      __2_

           Subtotal                             $ 54.186                      44%

     Nonresident! al
        Industrial                                   4.676                       4
        Commercial                                13.462                      11
        Hospital and Institutional                    3.172                       3
        Other                                      2.726                      _2
           Subtotal                             $ 24.036                      19%

     Farm                     '                     .902                       1
     Public Utilities                                13.575                      11
     All Other Private Construction                    .941                       1
           Total Private                          $ 93.640                      76%
   Public
      Buildings                                    11.500                       9
      Highways and Streets                          10.448                       8
      Military Facilities                              1.080                       1
      Conservation and Development                  2.172                       2
      Other Public Construction                      4.996                      _£
           Total Public                           $ 30.196                      24%
Source: Construction Review, U.S. Department of Commerce.
                                        53

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                                 TABLE II.C.6

                NEW HOUSING IN THE UNITED STATES, 1965-1972
                              (thousands of units)
                   Conventional Starts

1965.
1966
1967
1968
1969
1970
1971
1972
Total
Conventional
1,510
1,196
1,322
1.545
1.450
1,469
2.085
2.379
Single-
family
965
780
845
900
811
815
1,153
1,311
Multi-
family
545
416
477
645
639
654
932
1.068
Mobile Home
Production
216
217
240
318
413
401
497
576
Total
All Types
1,726
1.413
1,562
1.863
1,863
1,870
2,582
2,955
Source: Construction Review, U.S. Department of Commerce.



                                TABLE II.C.7

               NEW HOUSING CONSTRUCTION BY REGION - 1972

                          West                    25%
                          North Central             19
                          South                   41
                          Northeast                14
                                                 100%

               Source: Construct  in Review, U.S. Department of Com-
                      merce.
                                    54

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                                   TABLE II.C.8

                 LUMBER USED IN MANUFACTURING BY REGION - 1960
                               (hardwoods and softwoods)

                              West                   17%
                              North Central            29
                              South                  32
                              Northeast              _23
                                                   100%

                Source: Regional Wood Use by Manufacturing Industries, U.S.
                       Forest Service Research Note WO-7, December 2,  1965.
     Truck movement of lumber predominates in the South while rail shipments are more
common in the West. Table II.C. 10 shows the regional differences which are chiefly due to
the distance between production and consumption areas.

     (3) Lumber Distribution.  Producers of softwood lumber do not control the wholesale
and  retail distribution of their products. Instead, independent wholesalers and retailers
dominate  the movement of these materials between producers and users. Table II.C. 11
shows the distribution channels used by western mills during 1972. The pattern for southern
softwood mills is quite similar.

     The U.S. County Business Patterns reports there were more than 12,000  wholesalers
and  20.000 retailers of lumber and  building materials operating in the United States in
1971. We  estimate softwood lumber is handled by at least half of the wholesalers and more
than 90% of the retailers reported.

     Although wholesalers purchase most softwood production, they  do not  take actual
delivery of most of  the material.  The wholesaler performs mostly as a sales and financing
intermediary and the actual physical movement of most lumber is direct from the producer
to the retailer, factory, or company-owned distribution yard.

     b.  Types of Firms

     During 1972 the top ten U.S. producers of softwoods manufactured almost 8 billion
board feet of lumber, just over 25% of 'total industry production. These companies are listed
in Table II.C.12 along with the number of U.S. mills operated and their estimated output.
The Weyerhaeuser Company was the nation's largest producer accounting for 8% of the U.S.
domestic production. In second place at 4% was Louisiana-Pacific, a newly-created firm
spun off from Georgia-Pacific, now the country's six largest producer.
                                        55

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                                 TABLE II.C.9
                SHIPMENTS OF LUMBER BY DESTINATION - 1972
                                   Western Mills
                              Coast Region
Inland Region
Total
West
North Central
South
Northeast
Export
47.5%
21.4
16.5
8.9
5.7
42.5%
30.6
16.1
10.1
.7
44.8%
26.3
16.3
9.5
3.0
                                  100.0%
   100.0%
100.0%
                                Southern Pine Mills
              (125 reporting mills producing 3.2 billion board feet in 1972)
                          West

                          North Central

                          South

                          Northeast

                          Export
  19.4%

  76.9

   2.5

   1.2

 100.0%
Sources:  Western Wood Products Association, 1972 Statistical Yearbook; Southern Forest Products
         Association, Distribution o* Southern Pine Shipments 1972.
                                       56

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                                     TABLE II.C.10

                   SHIPMENTS OF SOFTWOOD LUMBER BY RAIL, TRUCK,
                                  AND WATER -1972

                                                         125 Southern
                                     Western Mills          Pine Mills
                   Rail                   60.3               28.7
                   Truck                  33.5               71.3
                   Water                   6.2                -
                                        100.0              100.0

                   Source: Western Wood Products Association, 1972 Statistical
                          Yearbook; Southern Forest Products Association, Dis-
                          tribution of Southern Pine Shipments, 1972.
                                    TABLE II.C.11

               DISTRIBUTION CHANNELS FOR WESTERN SAWMILLS- 1972

                                                         Percent of
                                                         Shipments

                Direct to User                                 6.2
                Direct to Retailer                              12.7
                Wholesaler                                   60.5
                Company-owned Distribution Yards               10.6
                Factory, for Further Manufacture                 10.0
                                                           100.0

                Source: Western Wood Products Association, 1972 Statistical
                       Yearbook.
     The  term "integrated production" refers to a  company's   ability   to make many
different products from the tree, not necessarily to production of different products on the
same site. The most important products besides lumber produced from the tree are pulp and
paper,  followed by plywood, particleboard, hardboard, and insulation board. The ability to
use as  much of the log as possible for  its best application is an important element in the
profitability of a forest products company. Of the top ten U.S. lumber producers in 1972,
seven were  also pulp and paper manufacturers and  an eighth  was the leading hardboard
producer.

     However,  the material demands of  plants depending on waste wood are great and very
few lumber  mills generate enough waste to fully supply these plants. Pulp and papermills in
                                         57

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                                     TABLE II.C.12

                 TOP TEN U.S. SOFTWOOD LUMBER PRODUCERS - 1972

                                Number          Estimated           Percent of Total
                                of Mills           Production             Production
                                              (billion board feet)

    Weyerhaeuser Company          22               2.392*                 7.7
    Louisiana Pacific                26               1.266                  4.0
    Boise Cascade                   19               0.864                  2.8
    U.S. Plybood                   16               0.628                  2.0
    Potlatch Forests                 15               0.603                  1.9
    Georgia-Pacific                  26               0.555                  1.8
    Pack River                     12               0.501                  1.6
    Edward Hines Lumber            11               0.400                  1.3
    St. Regis Paper Company          5               0.398                  1.3
    Masonite Corporation            11               0..389                  1.2
       Total                       163               7.996                 25\6
       Total Softwood Produced-1972                31.222

    "Includes very small amount of hardwood not reported separately.

    Sources:  Forest Industries, op cit.;  Forest Products Industry Directory; and Arthur D. Little,
             Inc. estimates.
particular use enormous volumes of waste wood and must depend on a wide geographic area
for chips  in  order to  supply  their needs.  Chips are,  of course,  a by-product  of mills
and, in areas  where very small timber prevails, wood fiber is ground directly from logs as
well.

     Perhaps  the  most integrated  producer of  forest  products in the United States is
Weyerhaeuser Company with 20 domestic sawmills currently operating. Of this group, 7
mills  are totally isolated from other facilities while the  other 13 mills share common sites
with  11  plywoo'i  mills. 5 pulp  mills, 3 particleboard plants, and one hardboard plant.
Weyerhaeuser's emphasis on  common site production  is substantially stronger than  the
balance of the industry. Table II.C.I3 indicates  „ total number of establishments counted
as sawmill, -.ivl planing mills (SIC  2421), pulp and  paper mills (SICs 261 and 262), and
veneer ;>,'< . plywood mills (SIC 2432) during 1971 in Oregon, Washington, and California.
Based on these statistics and a survey  of more than  200 mills listed in trade directories, we
estimate nearly 90% of Western sawmills are independent units and do not share the mill site
with another principal producing facility.

     Sawmills operating in the South are also largely independent units, perhaps more so
than in the West. This is because Southern mills are smaller and more numerous.

     In the future, new western mills are expected to be built as isolated units and the trend
in construction is toward building "satellite" mills closely proximate to the timber source.
                                         58

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                                   TABLE II.C.13

       NUMBER OF ESTABLISHMENTS BY SELECTED SIC CODES AND STATES - 1971

                                      Number of Establishments
SIC 2421
Sawmills and Planing
Mills, General
331
215
260
806
SIC 261 and 262
Pulp and
Paper Mills
12
23
22
57
SIC 2432
Veneer and
Plywood Mills
123
47
33
203
         Oregon
         Washington
         California
           Total

         Source:  County Business Patterns 1971, U.S. Department of Commerce.

The trend in timber utilization has consistently been toward removing more and more of the
total tree from the forest for conversion to various products. The economics of transporta-
tion favor smaller mills closer to the forest.

     A current trend  in the South, however, is to build sawmills at pulp and paper plants
where whole logs have previously been ground to pulp. New sawmilling equipment allows very
small logs to be economically processed into lumber and chips; producers are adapting to
this change. We do not expect this trend to materially affect the balance between indepen-
dent and common site facilities. In general, therefore, sawmills cannot be expected to share
effluent disposal facilities and expenditures with other forest products plants.

     c. Types of Plants

     The size of the softwood producing units located in the western United States and in
the Southern Pine  region are listed in Table II.C. 14. The West is clearly dominated by larger
units with almost half of the mills producing more than 50 million board feet annually. In
contrast  slightly more than one-third of the Southern Pine mills are estimated to produce
less than 10 million board feet annually while only about 6% produce more than 50 million
board feet per year.

     The most important factor influencing mill sizes in the South versus the West is the size
and species  composition of the woodlands supplying timber to the mills. Western forests,
unlike those in the South, tend to be large and homogeneous in species composition. "Clear
cutting"  is commonly practiced in the West. This practice entails harvesting all of the trees
on a given area of land at one time rather than selectively harvesting only some species or
sizes. During 1972 western producers  depended on federally-owned timber for over 50% of
the lumber produced  (see Table II-C-15) and access to the immense forests under govern-
ment ownership is an important facet of the western industry.
                                       59

-------
                                       TABLE II.C.14
                   SOFTWOOD LUMBER PRODUCTION BY MILL SIZE - 1972
                                       Western U.S. Mills
Size (annual production in board feet)
Under 10 Million Feet
10 to 25 Million Feet
25 to 50 Million Feet
Over 50 Million Feet
Not Reported
Total

Size (annual production in board feet)
Under 10 Million Feet
10 to 20 Million Feet
20 to 30 Million Feet
30 to 50 Million Feet
Over 50 Million Feet
Not Reported
Total --
Number
of Mills
49
102
78
284
82
595
Southern Pine Mills
Number
of Mills
154
116
30 \
> 64
34 J
29
88
451
Percent of Estimated
West Total Production
(billion bd. ft.)
8%
17
13
48
14
i

20.741


100%

Percent of Estimated
South Total Production
(billion bd. ft.)
34%
26
14
6
20


' 5.637


100%
                                                                                          26.378
Western U.S. Mills
Southern Pine Mills
                              Average Production per Mill per Year
34.86 million board feet
12.56 minion board feet
Sources:  Forest Industries. Mav 29.1973; Southern Pine Inspection Bureau Roster. July 1.1973. Listing
         believed to cover 7iq/£ of Southern Pine production. Arthur1 D. Little, Inc. estimates.
                                          60

-------
                                   TABLE II.C.15

            SOURCES OF TIMBER FOR LUMBER PRODUCED - WESTERN MILLS

                               Inland Region    Coast Region      Total
                                   (%}            (%)         (weighted
                                                           average, %)
              Company Owned       18.7          38.4           27.8
              Federal               65.7          34.5           51.2
              Other                15.6          27.1           20.9
                                 100.0         100.0          100.0

              Source: Arthur D. Little, Inc., estimates.

     In contrast Southern mills must depend almost exclusively on privately owned wood-
lands for  their timber base since government ownership of timber acreage in the South is
estimated at only  about 10% of usable  forest land.  Further, southern forests are largely
mixed in  species content  and it is far more difficult to  assemble a large timber supply to
justify construction of a large mill.

     Lumber  mills do  not  normally maintain large  stocks of finished  or semi-finished
products.  Lumber is  a  product which  must be  kept dry and, because of its  bulk,  an
enormous investment in storage space and sheds would be necessary to store much finished
product. Table II.C.16 shows year-end inventories of lumber and contrasts them with annual
production. Inventories  are usually at a higher level in the winter  months since demand is
seasonally lower then.

     Mill  stocks of lumber move inversely with  demand although, as can  be  seen, gross
inventories are not sufficient to cope with annual shifts in demand. Unfilled orders for
lumber mills usually average about 40% of gross inventories for softwood and slightly higher
for hardwood producers. Thus, actual "free" stocks available to cope with demand swings
are lower still.

     Cutting of timber  for lumber production is also difficult to adjust in the short run.
Western producers, who depend on government timber, are  tied to cutting contracts which
normally average about  three years in duration. Government sales  are budgeted in advance
and, although some allowance is made for increased sales in periods of high demand, the
logistics of getting the logs cut and out of the forest hinder efforts to adjust production. In
the last several  years hardwood producers  have also been severely impacted  by adverse
weather and domestic production has fallen while prices have gone up.

     d. Financial Profiles

     Profits of softwood sawmills are difficult to separate from the overall performance of
integrated producers or  are closely guarded by the many privately held concerns which make
                                        61

-------
                                      TABLE II.C.16

        GROSS INVENTORIES OF SOFTWOOD AND HARDWOOD LUMBER AT YEAR END
                                       1965-1972
                         Softwoods
Year            Inventory
            (billion board feet)
 Inventory
  as%of
 Domestic
Production
                                  Hardwoods
    Inventory
(billion board feet)
 Inventory
  as % of
 Domestic
Production
1965
1966
1967
1968
1969
1970
1971
1972
4.539
4.652
4.351
4.166
4.704
4.848
4.282
3.593
15%
16%
16%
14%
17%
18%
14%
12%
1.066
1.033
1.400
.838
.650
1.478
.984
.387
14%
13%
19%
12%
9%
21%
14%
6%
Source: Arthur D. Little, Inc., estimates.


up the bulk of production. It is also difficult to identify the costs and profit contribution
resulting from sawmill processing, waste product utilization, and timber production. Finally,
given the dramatic swings in price which occur from year to year, it is extremely misleading
to look at costs and profits without taking into account these large cyclical swings in price.

     Table II.C.17  presents operating data  for a group of 60 Southern Pine mills for 1972.
Examination of this data clearly shows the wide  variability between costs of different
operations both large and small.
                                          62

-------
                                                                                                TABLE II.C.17
                                                                             COST TO PROOUCE, SHIP AND SELL SOUTHERN PINE LUMBER

                                                                                            For lh« Cnmndr,' Ol Fnc»l tin 1072
                                                                                            Arrayed (rom Low lo Hlfjh Production
ON
U)
NOTES
Co»i C«ittf r»fi«ts «nb^ Costi fw
a&o* (^''V.rrc' Labor (J\ Sup-
'•fi {-If C'p* Snop «ic Include*: m
lndif*it L«tK3t
N B Not HpporW-d— Co»tC**iWT
1 H«M no Cj*ant
V,,-^-9
(0 To'JI
Dep'co,«i,0n of J 16 08 mc'ud#d
* Col C*rit*rs reposed do nol »dd-»
P*aM Crfifal »nd CVp'ec ation ol
$lf f c ,n, iy.1Pd to TtMj!
1 Cosl Coilcri repoT-d do nol add—
Su^d-> o* S4 C3 melted in Total
* Coi' C*- Own Tirnt^, *t fair
H'i Vf; . f c'firmtsf jtfuaf
C0>t Ol li ' !•«•' cut
(C) LJtx.)' Celt Ltckidt-5 Lodging.
S-»tltng i General Adinirtn!r»t,v»
** Cost Cert fr ri repo*i of CompJi'ts Reporting
Numtwr ol Mills ntprrsrn'ed
RANGE HIGH
LOW
MEAN AVERAGE
Mtjn Aic-tne — Oo><« Log Scale
Compjnw 9 rtpofltig >., f^r Log Seal*
Vean Average — Scribrnr Log bc«Ic
Prrducuoo
"»7j
MBd Fl
0 to 10
M 'lion Ft
7 00?
255?
4 400
4 3X)
a BL*Q
5 103
6 ."-J
6 130
7 232
7,918
9482
8501
B 702
9057
9 7bS
10 to 20
Million Fl
o 260
0 716
0 80?
s/r
047
(.14
OfO
1 M
6000
7 o:c
JO ID 30
Million Ft
25251
26 309
aa ?ao
30 lo *0
Million Fl
30 000
30 066
34 375
34 495
37 056
33 E.CQ
3) QS4

40 ?:s
•is cno
4'. ,V 
StumpagA
$ 60 00
77 00
4SOO
8000
60 00
79 80
6000
64 12
7074
7296
N R
9000
ssoo
67 42
$467
61 00
7S 00
7594
60 00
4898
7277
73 18
7345
103 92
4769
7899
56 71
70 CO
BE. ro
64 3$
7259
68 00
75 18
46 83
72 23
N n
49 08
50 TO
75 00
58 20
J3 76
60 00
6456
73 US
113 00
44
51
113 00
4500
68 02
28
7249
11
6505
logging
»nd
Hauling
t 3000
38 00
30 00
75 00
43 00
4221
29 00
31 10
4369
J602
N R
2051
2500
3000
3212
3747
3000
25 51
4000
3460
3455
31 44
24 55
31 54
32 00
2575
37 78
3787
2B92
3056
3496
30 00
2721
23 57
30 00
N 0
43 J8
27 75
44 05
2980
2372
2040
3031
3? 18
2570
44
51
4405
2051
31 14
28
41 55
11
3070
LOG
TOTAL
$ 80 00
110 00
75 00
10500
103 00
12201
6900
9522
t)4 43
9fl98
N n
nosi
83 00
87 42
8679
108 55
10S 00
101 45
100 00
83 62
10732
9462
t8 00
13*p 4fl
60 29
104 74
94 49
10787
t14 92
95 Ot
10755
99 00
102 39
70 40
102 2J
N R
97 46
77 75
119 05
8800
72 4S
68 40
94 «J7
10523
138 70
44
51
13870
7040
99 16
26
104 04
11
95,75
S C A L L ~ ^
Logs
S "5 00
110 00
/5 00
78 83
8700
10000
8fl 06
BO 00
10000
69 04
98 92
N H
7500
11225
7500
105 00
9562
75 BO
105 19
10000
91 40
10000
83 52
10693
97 65
135 1C
N n
SS15
N R
(*,' 00
101 35
113 66
103 14
N Fl
t?6 03
100 43
1 la 81
7502
70 7,1
905?
97 Bfl
11'j 25
38
43
13516
70 71
96 09
24
93 44
11
9333
t n w it
tipcnn
t 500
275
200
218
N H
1 15
426
258
3 CO
1 00
300
162
10 00
1 52
1 91
238
21 65
1 36
1 44
494
N n
N R
270
3 00
1 89
N n
-53
231
187
8 BO
S06
1
Sold

6214
N R
7704
03 45
BO 00
T\ 18
-
(409)
N R
r
N R
1900
6687
111 92
TOTAL

t ! 0 ' i
?'> (<0
78 M
fly ;s
ins oo
1C') OU
110 71
80 00
100 00
'.M ?b
114 43
99 C9
PI 17
lOfi .17
1)4 fl£)
BG 90
102 '.0
B7 (-0
76 80
1',
9C, fjT
13923
60 29
10^ 01
9'j "3
10732
Jt7 06
95 01
107 55
9550
102 01
70 1J
Bl ',0
10502
N R
124 15
8 I ' 9
119 03
8fl 00
73 6 J
8ft 17
9645
1 IB 04
142 62
Add

500
300
4 11
1 50
N R
1 25
N R
5 00
N n
N n
294
500
705
N R
N Fl
N R
250
1 25
1 bO
2 21
3 i,")
2 99
5 00
N M
M R
273
1 74
815
N R
305
39S
220
N R
N R
250
17 4&
10 27
7 bO
263
N R
713
3G8
261
3 58
404
335
1.9B
N R
7 16

TOTAL

11L 00
7BOO
P2 94
91 25
105 00
106 25
1 '0 71
85 00
100 00
91 25
117 37
104 69
6822
10fl 47
114 f)B
fib 08
10000
en '*s
7H 10
107 16
10 1 <")
ID'J 23
11501
0? 15
107 26
9926
140 97
82 44
102 01
98*3
111 28
J20 Tfi
95 01
10755
yijyo
1 1 ^ 05
80 07
92 10
107 7C
N n
13* 46
fl3 -^
121 64
91 59
77 55
91 52
9843
1 10 04
150 CO
"" M "
53
15000
77 65
102 12
33
10500
13 !
»Sd2 j
0
20
30
0
46
34
?0
40
47
3
78
N R
39
19
30
N Ft
32
30
10
20
31
35
27
10
11
14
50
57
0
55
48
54
49
42
35
40
3S
5'
31
43
N P
N n
52
43
23
1
5*
21
S4
46
V £ H 0
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
N n
IV fl
X
X
X
X
U ~N ^- 1"6~
X
X
X
X
X
X
X
X
X
X
X
X

z
N R
X
Inter

_
z
I
E

X
N R
X
X
Decimal
C

X
X
X
-
I
	

-
N R
^
33 13 3 3

7
-
-
~~

-
5
-
i
TO r/,_
Lvji to
S 75 "J
PP ",
7E ^J
S'> 44
*.? *-*
«> n
75 V5
5i 'si
eve,;
y> 'A
8'1 OS
8532
ee 35
57 e*.
ice 4?
77 *A
*7 21
94 V)
71 CH
W TJ
C* '•*
R-, **,
7C • J
m oo
72 7S
93»<)
« '«
_.
e* M
65 '»i
£5 '4
72 U
79 1C
« '«1
602fl
'S •>?
V. ' 'i
M Vj
*,3 V4
7' 15
(7 ';
76*5
W il
&4 62
70 70
7S 43
81 62
f/t 01
60
115 OQ
S403
775»
i' ,- fl - PL^
(t, L'Jl
SB i o*
S 1TV)
11 CO
1 03
,;;
i -a
v
u
1 V3
30 9?
10 V4
973
32 *r
17 15
55i
17 CO
11 03
8S6
t i'
5 "/]
'.: 1.5
12 '0
42 32
4' 94
581
6 W
2* 3C
as 10
*C3
IS '2
64S
12 j4
'4 ^7
3 4O
7 01
13 4*
\ P5
17 11
25?
37 S2
>5 (5
5 70
12 *6
21 70
2Z f*>
24?5
7 'y3
15 79
51
55
42 32
54
15 16
V I ; : i '
^
L->;i to
i %i 00
7' '/}
*900
',? i4
;; "
e/ ri
5- U
7", '.0
4- r;
*.'i 8
5-: *C
77 ri
56 U
75 MJ
v. n
t1 *^
77 'S>
V. ' 5
*C *t
7'. ~f>
V. '-•*
9- JO
y 43
5i 91
6? 37
« 78
** 17
49 3J
i> :2
V- -2
ti M
W 72
1- '.4
M M
61 M
;;:;
**, 23
*A 27
4'a 20
4C 75
52'3
72 34
4^00
rr *t
t, '^
« n
t' -i
6* i5
52
60
9COO
3C43
62 71


-------
         TABLE II.C.17 (Continued)
COST TO PRODUCE, SHIP AND SELL SOUTHERN PINE LUMBER


NOUi
Cott Cenfnr rrlects entire Cotti lor
thai «"•«' "Xlud'ncj (MOtt^cl
LaOO' (2' !nd"M1 Labor, (3| Sup-
pi ft .1] t PCIMC P0w*f of Gas Pur-
chas'd i5l Of pTC>a1>on and (6)
Injurjoc* Sur^po 'or Maintenance.
Mjch n* $^op ttc . 'ncluded In
Ind.npcl LabOf
Cc-'*1'''n«(J-Nol availaDle, tic
Ulrtf"^
* Hern-o Davanl
• YSp.C^i'ig
• Ccsi Cpmtni reported (So not add
DffwJI.on o' S16 06 Included
T Co*' C'-iei rrrfifd do not add —
pi in! Gi if r jl a"ij Ot'frcialion of
116 US .nciu«dm To'.al
• Coil Cf^ieT 'ppo-led do not add —
Sund'j ol SI 03 included in Tola*
• Cosl CffMets •fpc'r'e>1 do not add —
f>r'fc ation ot S4 70 indudrd >n
Toul
'• Cojl Onlfn reported do not add—
SunC"> ot $.7 .'->9* Sawdust
,t> Lsbddonotadd —
Overhead of S7 02 included In lotal
TOTAL PRODUCTION tor the $2 Companaie
representing 60 m.Ha amounled lo
1 640 61 J M Board Feet
Nu"ib*r ol Companies Reporting
Number ol Wills Represented
RANGE HIGH
LOW
Company* reporting Doyle Log Seal*
M«an Average — Do>le Log Sell*
Companies reporting Scribner Log Sot*
Mean Average — Seribncr Log Scale
Production
1972
MBdft
~oT5T5 	
Million Ft
2 000
2 552
4.400
4 eoo
4 800
5 100
6 2r'3
6 900
? is:
7918
• 48}
8 501
8 733
9057
9.768
10 to 20
Million Ft
10 2SO
10 719
10 602
11 577
1 1 947
14 6J4
15 000
15 114
16000
17028
70 10 30
Million Ft
35251
26 309
28200
23778
301040
Million Ft
30 000
30 006
34375
34455
37086
38600
33954
401050
Million Ft
40 225
45 500
45 ftS6
46 153
501075
Million Ft
52516
58357
61 792
71 093
73 60S
75 Million
Fl 4 Ovtr
78 004
78 840
01 671
85332
B9 041
100 615
52
60
100.635
2.000
31.550

Sawmill
$ 2500
1200
2700
1778
21 00
28 00
11 30
17 61
35 00
14 G8
1501
1628
1441
26 30
2829
2552
1929
2402
1780
23 62
17 77
1983
8 12
2200
25 13
2(49
1224
1803
925
1«20
9 26
1394
1537
1884
1322
N R
1672
1« 10
1075
6 46
1723
lt> 12
7521
20 17
1290
11 16
3377
11 16
1092
1720
1326
17 41
NOTE.

Gn>«n
Chain
S 700
800
4 00
454
300
N R
N R
421
4 00
451
N R
N R
N R
5 18
538
N H
N H
597
1 00
5 70
269
11 26
1 68
429
H R
N R
N fl
N R
261
200
325
N R
N Fl
1 29
391
N R
756
N H
1 21
N R
1 10
708
N R
20
333
265
247
253
353
250
233
461
Orenn
Stacking
J 5 00
4 00
4 00
N R
200
N R
6 53
203
725
N R
N R
966
N R
632
N R
N R
N R
2 38
1 50
205
1 18
373
1 87
274
N R
N R
N R
N R
1 18
290
1 62
2 12
N n
1 15
N R
N R
N R
N R
201
65
3 14
N R
N R
1 71
N R
1 7»
564
235
N fl
1 45
1 32
3 10
D (
Kiln- Air
Ory'nj
J 8 00
800
3 00
4 44
N R
N R
2?0
4 IS
NOSE
N n
1999
796
S 89
439
N R
N R
N R
299
1 25
26b
298
5 00
595
4 10
233
3228
21 IS
766
5 14
1 17
3 05
233
405
242
6 59
N R
570
5 86
294
1 65
524
N R
N H
300
5 44
369
247
102
599
324
352
1 96
> A R 1) M t A
Shed-Yard
Inventory
S 10 00
4 00
300
322
N R
N H
3 75
4 55
1 00
N R
N R
5 96
405
5 13
N R
1535
972
358
201
2 13
875
N R
309
N R
859
N R
N H
N H
738
347
N R
N R
524
1351
N R
N R
492
N R
333
26
N R
N R
N R
06
324
693
211
275
1 19
505
652
1 99
Planing
Mil!
I 13 00
5 00
1300
834
7 00
21 00
5 50
8 00
1200
16 (it>
1027
1096
870
1054
812
929
909
1791
1255
857
7 51
772
5 34
689
962
N F)
N Fl
730
788
634
815
589
666
775
5 96
38 19
13 14
750
619
459
9 01
10 26
987
429
605
10 29
1801
559
670
802
661
12 14
t. n M f E E
Shipping
$ N R
6 00
N R
6 1
N
N
9 0
N
7 0
9 8
7 1
N R
5f,>
308
N R
13 14
N R
224
12 43
N R
324
N R
2 91
2 16
768
N n
N Fl
1 57
258
299
N R
289
N R
357
2 54
750
N R
N n
651
1 25
2 19
N R
N R
91
292
2 53
535
4 38
840
1 16
235
201
No •tt«mp! hal b««n mitdo to formulate averages liom coal Information reported
or "Coal Cenltri" of Sawmill through Shipping because ol inconsistency of
•eaponaea. such aa, "combining of departmente' ' not available.' etc
	 TSTil 	
Leg
Mfg & Ship
$ 133 00
1 1 26 CO
11300
9688
8644
131 00
100 68
1 120 04
145 35
93 02
111 61
105 22
1?044
119 07
11769
12355
9836
13659
108 64
90 19
1J219
123 10
97 19
140 15
*375
11066
9579
"110 36
94 48
102 24
74 97
83 99
7934
•123 17
•11501
07 63
104 92
9282
' 122 12
• 9735
85 14
101 71
134 28
• 7500
66 51
•118 64
11682
'•115 46
97 71
9535
9712
130 14
52
60
14525
7497
107 89

— SSK.VJ " Tourcgrr-
t Gsn— otLOr
Admin I Shipped
S 1 CO
1 00
CO
1 18
50
1 00
;5
39
25
1 96
2 83
3 86
C9
963
509 ;
17 78
6 04
61
32 70
5 16
8 '8
2021
26 27
8 00
1590
N R
10 97
3 78
1533
1375
25 24
34 15
1 69
7 72
1 90
497
13 12
10 04
14 «
4 00
12 99
2 30
1 PO
565
N R
7 73
7 68
400
1947
9 65
529
253


| 111 00
141 CO
121 00
11306
92 94
11<< CO
104 13
178 43
in '.0
107 98
11*44
140 C8
121 53
121 70
1?; 78
141 33
101 40
13720
14t 34
9% 35
131 17
141 64
121 46
140 16
94 6S
1 1C 66
10676
111 14
109 79
11589
ICC 21
lie 4i
81 23
130 69
11691
102 SO
118 01
lOi »5
13f, 97
101 35
98 13
101 01
13S08
• 8001
8651
126 37
126 50
1 19 18
117 18
105 00
102 7'
13267
52
to
14950
too-,
118 35


S«t:incj
Pnce
(Optional)
t 1!,', 00
113 Sg
1 jl 00
12584
1«,!M
110 01
119 50
105 M
141 £9
132 *>7
1-18 4«
m 13
11865
147 88
11650
12912
185 K
15481
126 »1
117^5
1 r> 67
mes
lie 07
133 75
121 79
138 63
112 63
J 	 ,
13300
111 52
111 41
lifc 59
115 :2
_
13685
12495
134K
125 OS
| 	 ~ 	
1ncom«
Or L<*18
(Option*1)
t 7~/l
3 :0
12 'A
12 79
2300
1 59
NO'lt
12 121
173!
42)
1-, 70
3380
1425
10 fA
5?1
r «5>
42 12
015
2127
•0T9
15 ',3
rjyt
17 W
12 31
40 56
7 74
TO 19
14 9fl
31 'A
11 'S.\
•,524
1719
10 49
(1 55)
1502
2005

Ic)
Labor
Coil (Ttr M
t r> w
n :
23 r!'1
H R
1V61
H R
H n
?o yy
»4J
29 57
V. '-7
37 71
19 '7
VI '4
27 'fl
231S
N R
25 51
30 1".
3', on
21 '."^
N R
20 60
23 72
H H
i: '^
2f <2
N R
V^'.-j
i; 37
11 i'j
23 40
X R
15 i5
31 11
22 35
7 87
75 69
19 59
15 ',5
H Ci
12M
20 2O
32 97
««
21 73
23 11
11 '*
1452


-------
     Table M.C.18 presents estimates of "typical" operating costs for a large western mill
for 1970 and 1971. The swings in prices and costs again highlight the difficulty of relying on
any one year's results to base a decision.

                                    TABLE II.C.18

        ESTIMATED COSTS FOR A "TYPICAL" LARGE WESTERN MILL: 1970 AND 1971
                                (S per thousand board feet)

                                                         1970      1971

            Stumpage                                     $ 80      $ 40
            Logging and Hauling Costs                          30       30
             Delivered Log Cost to Mill                       $110      $ 70

            Log Cost Corrected for 33% Realization Overrun        82       52

            Sawmill Conversion Costs                           30       30
             Total Costs                                   $112      $ 82
             Realization (price)                             $ 80      $100

            Source: Arthur D. Little, Inc., estimates.
     Table II.C. 19 presents a comparison of all U.S. manufacturing activities and lumber and
wood products  manufacturing activities in terms of profit on sales and equity since 1965.
The return on  sales  and equity  for  this  industry  is  slightly  lower  than  for  all U.S.
manufacturing industries and in each case, the standard deviation (measure of fluctuation) is
greater.

     "Investment" in the industry is also difficult to measure. The lumber industry has been
the slower growing portion of the forest  products industry for several decades and many
producing  units have  been in the same location for 30  or more years. Because most mills are
constantly maintained with equipment replaced and upgraded, neither the age of the facility
nor the book value of the investment fairly reflects the economic usefulness of the plant.

     Industry sources estimate  the  capital  cost  of  a  new 50 million  board foot  mill
(excluding land and timber resources)  in  the Western United  States  to be approximately
S5-6 million. Of this amount, about $3-4 million would be for the sawmill, planing mill, and
dry  kilns  with  the balance allocated to log storage,  sorting, and handling facilities.  The
investment in a minimum size  facility producing a limited product line (20 million feet of
studs, chips, and bark) would probably be about $2 million distributed  as follows:
                                         65

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                                  TABLE II.C.19


                         CORPORATE PROFITS AFTER TAXES
                                      1965-72
                             As Percent of Sales
   As Percent of Stockholders Equity
1965

1966

1967

1968

1969

1970

1971

1972



Mean

Standard Deviation
All U. S.
Manufacturing
5.6%
5.6
5.0
5.1
4.8
4.0
4.2
4.3
4.8
.6
Lumber and
\Vood Products
3.9%
3.8
3.4
5.3
4.8
2.5
4.4
5.1
4.2
.9
                                                                All U.S.
                                                             Manufacturing
                    Lumber and
                   Wood Pioducts
13.0%
13.5
11.7
12.1
11.5
9.3
9.7
10.6
10.0%
10.0
8.6
14.6
13.2
5.9
11.3
15.9
       11.4

        1.5
11.1

 3.1
  Source: Western Wood Products Association, 1972 Statistical Yearbook.
         Log Handling, Sorting, and Storage Facilities
         Sawing Facilities
         Kilns
         Planer Mill
         De-barking and Bark Handling Facilities
         Chipping and Chip Handling Facilities
            Total (not including land or transit links such
                  as railroad spur, etc.)
S  400-  450,000
   400-  450,000
         500,000
         200,000
         250,000
	100,000

$1,850-1,950,000
       Capital investment in the entire sawmill and planing mill industry has not been great in
  recent years. Table II.C.20 lists capital expenditures since 1965 for SIC 2421. Expenditures
  tend to coincide with profitability and showed a substantial upswing in  1971 and continued
  during 1972.
                                           66

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                                    TABLE II.C.20

              CAPITAL EXPENDITURES FOR SAWMILLS AND PLANING MILLS
                                      (S millions)

                                               SIC 2421 Sawmills
                                                     and
                                                 Planing Mills

                          1965                     $172.8
                          1966                       163.5
                          1967                       129.4
                          1968                       180.3
                          1969                       210.5
                          1970                       189.1
                          1971                       232.2

                          Mean                       182.5

                          Compound Growth                  5.05%

                Source:  Industry Profiles, U.S. Department of Commerce.
     e.  Pricing

     The market for softwood lumber is notoriously volatile with significant swings in price
occurring in short periods of time. Construction activity in regions suffering severe winters
such as the Midwest, Mountain States, and East is quite seasonal and prices vary accordingly.
Similarly, larger shifts in price resulting from annual variations in housing demand overlay
cyclical  swings on the normal seasonal pattern.

     Table  1I.C.21  shows price indexes of Douglas Fir, Southern Pine, other softwoods, and
selected other construction materials since  1966. Lumber has varied more in price than the
index of all construction materials and, as shown by the standard deviations of the indexes
from  1966 through 197"., was also the most volatile  of the wood-based building materials.

     This price volatility results directly from the inability of lumber producers to  adjust
production levels to meet the wide  swings in housing demand which occur. Table II.C.22 •
presents  indexes and standard deviations (measures  of variability) of conventional and all
types of housing produced  in the United States from 1966  through 1972. The  standard
deviation of annual activity  for this sector is greater  than the same measure of fluctuation
for softwood lumber  prices and demonstrates the problem  lumber producers face in
forecasting and coping with demand.

     There  are several factors inherent  in the supply of raw material (timber) which further
curtail the  ability of the industry to cope with large shifts in demand and these will be
discussed in more detail. In  analyzing this  sector of the forest products industry, however,
one must be aware that  the free market, economic supply-demand niechanism for de-
                                        67

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                                                                TABLE H.C.21

                                      INDEXES OF WHOLESALE PRICES OF MATERIALS USED IN CONSTRUCTION,
                                                    BY SELECTED GROUPS AND COMMODITIES
                                                                 (1967 = 100)
                                                                                             Millwork
00
        Period
1966
1967
1968
1969
1970
1971
1972
        1972
          January
          February
          March
          April
          May
          June
          July
          August
          September
          October
          November
          December
 98.8
100.0
105.6
111.9
112.5
119.5
126.6
                123.2
                124.2
                124.9
                125.7
                126.2
                126.6
                127.2
                127.8
                128.0
                128.3
                128.4
                128.5
Douglas
Fir
96.8
100.0
120.3
131.7
108.8
137.6
161.1
148.2
151.4
153.6
156.3
159.1
160.8
165.4
166.8
167.3
167.9
168.1
168.3
Southern
Pine
100.2
100.0
113.7
126.0
114.5
133.8
151.1
142.4
145.7
148.5
150.9
151.6
151.6
152.2
153.3
154.4
154.8
156.3
156.3

Other
97.5
100.0
123.5
139.0
115.1
145.3
177.0
161.3
166.0
168.3
171.4
173.1
175.8
178.3
132.9
184.5
186.3
187.2
189.3
Selected
Hardwood
Lumber
Annual Averages
116.2
100.0
107.7
127.7
116.8
114.4
130.4
Monthly Indexes
120.6
121.5
121.7
126.6
129.1
132.7
134.6
135.0
135.3
135.3
135.8
136.5
Prefabricated
Group
Index

98.0
100.0
105.8
117.8
116.0
120.7
128.4

124.9
125.5
125.8
126.6 ,
127.6
128.4
129.6
130.0
130.2
130.7
130.9
130.7
General
Miltwork

9B.7
100.0
105.8
117.6
115.6
121.4
129.1

126.0
12G.O
12G.7
127.7
128.9
129.8
130.5
130.5
130.8
130.9
131.0
130.9
Structural
Members

94.8
100.0
107.8
119.2
118.0
117.5
124.9
•
119.4
122.8
121.6
121.6
121.6
122.0
125.1
127.5
127.5
130.0
130.0
129.7
Plywood
Group
Index
104.0
1CO.O
115.7
122.5
108.5
114.7
130.7
120.2
125.1
123.9
123.9
130.3
131.7
132.9
135.9
134.6
134.6
133.3
132.3

Softwood
106.1
100.0
129.2
139.2
113.6
127.2
154.9
137.9
145.8
153.3
153.3
155.6
157.9
160.5
162.1
159.7
159.7
157.4
155.2

-------
                                                        TABLE II.C.21 (Continued)
                                                                                              Millwork
Period
1973
   January
   February
   March
   April
   May
   June
   July
   August
   September
   October
1966-1972
1966-1972
    All
Construction
  Materials
                                      Softwood Lumber
   129.4
   132.3
   136.2
   139.1
   140.8
   140.1
   138.6
   138.9
   140.1
   140.4
   110.7
    10.1
Douglas
Fir
169.5
188.3
208.5
214.1
219.8
217.2
212.6
216.1
223.9
216.9
Southern
Pine
156.9
164.5
171.5
181.4
186.6
194.9
191.8
198.4
203.5
202.7

Other
190.1
204.9
220.7
237.7
248.7
243.7
234.3
226.4
232.6
229.2
122.3
 23.0
120.0
 18.6
128.2
 28.0
Selected
Hardwood
Lumber
Monthly Indexes
140.2
158.7
169.3
180.3
188.1
192.5
194.3
222.1
227.6
229.0
Prefabricated
Group
Index
(continued)
131.4
133.4
134.8
141.2
146.5
147.7
148.3
148.3
149.0
• 149.4
General
Millwork

131.7
133.4
134.7
138.5
144.8
146.3
147.1
147.2
147.9
148.4
Structural
Members

130.0
133.5
135.4
154.2
154.2
154.2
153.9
153.6
154.1
154.1
                                                                                                                            Plywood
                                                                          Mean
 116.2
112.4
Standard Deviation

  10.6            11.3
112.5
           11.5
111.7
           11.1
                                                                                       Group
                                                                                       Index
                                                                                       134.1
                                                                                       149.4
                                                                                       176.8
                                                                                       132.5
                                                                                       177.7
                                                                                       154.9
                                                                                       133.0
                                                                                       140.1
                                                                                       133.2
                                                                                       134.6
113.7
                 10.7
                                                                                                                                 Softwood
                                                                                        1G0.5
                                                                                        186.1
                                                                                        245.6
                                                                                        252.6
                                                                                        242.2
                                                                                        183.5
                                                                                        153.7
                                                                                        163.9
                                                                                        159.5
                                                                                        153.5
124.3
            19.3
Source:  Construction Review, U.S. Department of Commerce; Arthur D. Little, Inc., calculations.

-------
                                    TABLE II.C.22

               INDEX OF NEW HOUSING IN THE UNITED STATES: 1966-1972
                                    (1967= 100.0)
                                             Total   f^P      Total
                                          Conventional         All Types
                1966                          90.5              90.5
                1967                         100.0             100.0
                1968                         116.9             119.3
                1969                         109.7             J19.3
                1970                         111.1             119.7
                1971                         157.7             165.3
                1972                         180.0             189.2
                Mean                         123.7             129.0
                Standard Deviation               32.6              35.4
                Source: Construction Review, ADL calculations.

termining price works. Lumber prices are not set by a concentration of a few suppliers or
customers nor are cost increases simply "passed along." In the long term, industry produc-
tion levels are adjusted to balance timber costs and supply, processing costs, and prices. In
the short term producers and customers endure wide swings in price and profits rise or fall
for suppliers, distributors, and users accordingly.

3. Hardwood Lumber

     The  hardwood lumber industry  is distinct from the softwood  industry in several
important respects, namely:

     •    Scale of operating mills — hardwood producers are much  smaller companies
          running small plants.

     *    Fnd use markets  served — hardwood producers serve  mainly the furniture
          and industrial (mainly shipping usage) markets, not construction.

     •    Greater vulnerability  to displacement products.

     a.  Industry Structure

     (I) Production.  Total  production of hardwood lumber  in the  United States has been
declining  almost steadily for seven years. The recent  high was  in  1966 when production
totalled "7.738 billion board feet. By 1972 production was off 12% to 6.813 billion  board
                                        70

-------
feet and preliminary data for 1973 indicate the decline may have accelerated. Prospects for
1974 rfre also regarded as clouded as the industry continues to suffer from a shortage of logs
due to  floods and rains which have impaired logging conditions.

    On  a regional  basis,  647r  of production  occurs  in the South. The  second most
important producing area is the Northeast and Northcentral Regions with 34% of industry
output. Table I1.C.23 shows hardwood production by region and lists the principal species cut.
                                    TABLE II.C.23

           HARDWOOD PRODUCTION BY PRINCIPAL REGION AND SPECIES, 1972

                                         Northeast and
                                     North Central Regions     South Region

           Species                           1972                1972

           Hardwoods. Total                   2,341                4.333
             Ash                               64                  84
             Basswood                          50                  16
             Beech                             97                  85
             Birch                             85                  17
             Cotton wood and Aspen              196                  77
             Elm                               85                  64
             Gum, Black  and Tupelo               11                 308
             Gum, Sweet (red and sap)              8                 336
             Hard Maple                        358                  77
             Soft Maple                        142                  51
             Oak                              973                2,160
             Yellow Poplar                      76                 552
             Walnut                            39                  16
             Other Hardwoods                   157                 490

           Source:  Op cit. Current Industrial Reports.
     Commerce Department statistics lump hardwoods and softwoods together making it
difficult to determine precisely the value of hardwood shipments. However, trade sources
estimate  an average  price of  SI60 per  thousand board feet could be applied to 1972
production and this would indicate a value of shipments of about $1.1 billions or just over
20% of SIC 2421.

     It is extremely difficult to secure an accurate count  of the number of hardwood mills
in operation.  Trade association membership covers fewer  than 200 producers and the most
comprehensive trade directory located listed only 675 hardwood mills. Sources familiar with
the industry believe nearly twice this number of firms operate regularly and perhaps another
500 to 1,000  produce seasonally or intermittently.
                                        71

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     (}.)  End-Use Markets.  Two uses account for the  bulk of the  market for hardwood
himbc'  - furniture and  industri jl  shipping. Other  markets include stock for hardwood
:;im-'ru: and transportation  equipment such as truck trailers, etc. Table H.0-24 indicates the
          dis'ribution of saJes by market segment.

                                     TABLE II.C.24

                        HARDWOOD LUMBER END-USE MARKETS

                           Furniture                    34-45%
                          Shipping
                           Pallets                      15-20%
                           Boxes, Crates and Cases        10-15%
                          Transportation
                           Equipment                   5-10%
                           Flooring                      3- 5%
                           Miscellaneous                 balance

              Sources: Hardwood Lumber Manufacturer's Association National
                      Oak Flooring Manufacturer's Association. The Outlook for
                      Timber in the Unite:) States and Arthur D.  Little, Inc.,
                      estimates.
     b.  Types of Firms

     Producers of hardwood lumber are generally small, independent, family-owned com-
panies.  The markets served  require specialized (short production run) products, and are
highly regional, creating a business  environment more appealing to this type of producer.
This contrasts  with  the softwood sector in which the major forest product firms are most
active.

     c.  Types of Plants

     Table II.C.25  lists the  breakdown of  mill sizes  reported for the  675 producers
identified. Using the previously mentioned average price of SI60 per thousand board feet
for 1972, we estimate 70' <•• of the mills identified would have had sales less than $1.2 million
in  1972  and  30% would  have had sales under $400,000. Clearly  hardwood lumber  is
manufactured  in much smaller plants  than is softwood  lumber.  Table  II.C.26  lists the
locations of these mills by state.

     d.  Financial Profiles

         Investment  and Operating Costs. Haidwood  lumber mills, as  previously men-
tioned, are much srnalJer than softwood mills. Consequently, the total capital invested in the
Industry is much lower proportionally than  for hardwood producers. Furthermore, the
                                         72

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                             /          TABLE II.C.25
                             /

                       675 HARDWOOD PRODUCERS BY MILL SIZE. 1972


                            Estimated
   Board Feet               Dollar Sales                Number of                Percent of
    Produced                  Mange                    Firms           •         Firms
  (million fact)              (million dollars)

    0  to 2.5               $0  to$ .4                  203                     30%
   2.51 to 5.0 .                .4 to   .8                  204                     30

   5.1  to 7.5                 .8 to  1.2                   74                     11

   7.51 to 10.0                1.2 to  1.6                   61                       9
  10.1  to 15.0                1.6 to  2.4                   45                      7

  15.1  to 30.0                2.4 to  4.8                   25                      4

  30.1  to 50.0                4.8 to  8.0.                 16                      2

   Over   50.0                 Over 8.0                    6                      1
  Not Reported                  -                       41                       Q
   Source:  Hardvvoou Purchasing Handbook 1974, National Hardwood Magazine, Inc., Memphis,
           Tennessee.
equipment and  facilities required for a  successful hardwood  operation  are  much less
extensive. Hardwood  mills generally  do  have debarking  and  chipping equipment, but
because much of the product (perhaps more than 50%) is shipped rough, most mills have
not invested in dry kilns or in planing facilities.

     The membership directory of the Southern Hardwood Lumber Manufacturers Associa-
tion indicates 44 of the 79 plants covered or 56% had dry  kilns which are expensive to
acquire. These mills are reflective of the larger producers but in aggregate we believe less
than 30% of regular producers have invested in this equipment.

     Trade sources estimate the investment in a new hardwood mill could range from a low
of less than SI00,000 for a very small unit performing minimal processing steps up to about
$750,000 for a facility capable of producing 8 million board  feet per year.
                                        73

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                                    TABLE II.C.26
State
               675 U.S. HARDWOOD  LUMBER  MANUFACTURERS

                               BY STATE
Number of Plants
    put State
Alabama
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Illinois •
Indiana
Iowa
Kansas
Kentucky
touiyana
Mains
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
New Hamprhite
New Jersey
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhnde Island
SodV Ca'o'tna
Tennessee
Texas
Vermont
Virginia
Washington
Yifcst V.rginia
Wisconsin
       30
       27
        1
        1
        1
        2
       20
       21
       37
        9
        6
       36
       28
       10
       10
        5
       22
       11
       22
       22
        4
        2
       36
       37
       37
        2
        9
       57
        1
       11
       56
        9
       13
       21
        5
       26
       29
 licnst'cu: Op. cit., Hardwoc'J Purchasing Handbook 1974.
                                       74

-------
     Table II.C.27 based on industry credit evaluations, lists the estimated financial strength
for 104 randomly selected hardwood lumber producers. Again this data points out the small
size of producing units as 45% of the firms are estimated to have "financial strength" under
S500.000 and an additional 38% are unaccounted for.
        Net Worth
           TABLE II.C.27

ESTIMATED FINANCIAL STRENGTH OF
104 HARDWOOD LUMBER PRODUCERS

                Number of
                   Firms
Percent
        Under $35,000
        S 35,000 to S  125,000
        5125,000 to $  500,000
        5500,000 to $1,000,000
        Over $1,000,000
           Net Worth Undetermined
             Total
                     6
                    18
                    23
                     5
                    12
                    40

                   104
   6
  17
  22
   5
  12
  38

 100%
         Sources:   Op. cit., 1974 Hardwood Purchasing Handbook (names selected at
                  random) and The Lumbermen's Redbook, Spring 1973, Lumber-
                  men's Credit Association, Inc., Chicago, Illinois.
     e.  Pricing

     There is considerably  more stability  to  the demand  for hardwood lumber than for
softwoods. Furniture sales are correlated with new construction  but the relationship is not
direct; furniture demand is more closely tied to long-term demographic characteristics of the
U.S. population such as age and income distribution, rate of family formation, etc. The
outlook  for  the  furniture industry is for  steady increases in real  demand through 1980
averaging as much as 6% per year and furniture represents an increasingly important market
for producers.

     Flooring demand  has  been declining almost steadily  for over a decade and  now
accounts for  such a small  part of consumption it is not an important factor. Oak and maple
                                        75

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floors are losing market share to wall to wall carpeting although  the latter  is shorter
     Demand for hardwoods for shipping use is tied to industrial output and to materials
handling technology. Pallets are the  largest shipping usage and their use has broadened as
more warehousing and shipping rely on mechanical means of materials handling.

     Hardwood lumber used for shipping and manufacturing applications generally does not
have to be finished nor does it  have to be kiln dried.  As a result much  hardwood  is air
dried and is not run through a planer mill.

     Imported hardwoods  now account for  about 6% of domestic demand, chiefly for
furniture  use. Furniture producers have  been forced to seek other sources of supply due to
hardwood lumber  shortages.  In  addition  furniture producers have shifted  to  alternate
materials, chiefly particleboard,  softwood lumber (Eastern White Pine and Ponderosa Pine),
and  plastics (frames for  upholstered chairs and sofas). We estimate softwood lumber now
accounts for about 25% of total furniture/lumber usage.

     Some  material  shifts are due  to  style  factors or labor economies (e.g.,  use of
plastic molded decorated parts instead of carved wood) but hardwood shortages have forced
most of the switch. Industrial users can switch even more  readily to softwoods for pallets,
crates, dunnage, etc. and have done so.

     In essence,  the presence of imports  and the ready substitutability  of other materials
and products for hardwood lumber acts as a severe constraining effect on hardwood lumber
prices.
                                         76

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D. HARDWOOD DIMENSION AND FLOORING MILLS

     This section deals with mills producing hardwood flooring and hardwood lumber cut to
a specified dimension for use in household furniture. Also included are hardwood frames for
furniture  use  and lumber  cut to size  for a variety  of  miscellaneous manufacturing uses.
During 1972, 585 plants operated in this industry and employed about 26,000 persons.

1. Industry Structure

     Table II.D.I lists shipments in this SIC code for 1967 and 1971.  Dollar sales actually
declined over that period with a substantial drop occurring in the flooring sector.
                                  TABLE II.D.1

                             SHIPMcfJTSOFSIC 2423
                  HARDWOOD DIMENSION AND PLCORilMG MILLS
                                 1067 Af.'D 1971
                                   (S million*)
                                                                      Percent of 1971
   product                                     1S67           1971        Shipments

   H?:dwoocl Mooring                          $129.2         $ 91.2           28%

   Hardwooc1 Dimension Stock:

        Furniture                                176.3
                                                             219.8           66
        Oths: Industrial                            53.6

   Hardwocd Dimension and
    Flooring, n.s.k.                                ?4.3           20.6          	§

        Total                                 $370.2         $331.6          100%

    Sources: 1967 Census of Manufactures; 1971 Annual Survey of Manufacturer.
     Table II.D.2 presents the end use markets for this sector during 1972. New construc-
tion and maintenance construction together accounted for 43.9% of purchases while the
                                         77

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                                        TABLE II.D.2
                             197k WSnilPAJ- !ON UF bl'il'
                              SIC 242G H/vHU'.VOOO D.r.'. r.T.IOM
                                    AND FLOORING MILLS
Buyers
                                                                            Percent of
                                                                            Pt.'rctmses
Mr.intcnnnco Construction
Ctrinoncc
Lodcinn Carr.ps Si Contractor

Hatdvvo-'d Dimension; & Flooring
Miilwoik flams
Wooden Containers
\VooJ Pies-erv^uve — Miscellaneous Products
Household FuM-.ittire
Oifi'je F:urr.iture
Gor. & Vi'crod Chemicals
Fabric F-l^stic Products
Rea'-V-I/i'xeci Concrete
("?'. rn Equipment
E!-;;r;iric: Light & Wire Equipment
Motor Vehicles
JcwUry, Toys, S|-ute& Rental

      Total

Components
                                                                               4.D%
                                                                               3.4
                                                                                 .1
                                                                               5.5
                                                                                 .4
                                                                               1.5
                                                                                 .1
                                                                               6.2
                                                                              3o.5
                                                                               3.2
                                                                                 .1
                                                                                 .6
                                                                               6.3%
 Inventory
 fJew Construction
                                                                                 .2%
                                                                              39.0
                                                                                  r*

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household  and office  furniture industries purchased 39.7% of output. The balance of
production (adjusted for imports and exports) went to miscellaneous manufacturing indus-
tries and is properly regarded as "dimension stock" also.

    The apparent disparity between shipments of flooring (289? of shipments) and pur-
chases of  flooring (44% of purchases) is explained  by industry members as an error in the
census data. Trade sources believe dimension shipments are overstated somewhat due to the
categorization of  some hardwood flooring as "dimension" when it is shipped by a company
whose principal business  is dimension  manufacture. Although  there is some overlap, the
flooring and dimension businesses are largely separate.

    The  flooring industry in the United States is not prospering. Sales of oak flooring
declined 787  in  the 17  year  period from  1955 through 1972 and partial data for 1973
indicates the rate of decline increased  that year. Table II.D.3 lists orders, production, and
shipments of oak flooring for  that period. Oak is estimated to supply over 90% of the U.S.
usage  of hardwood flooring with maple  providing the balance.

                                   TABLE II.D.3

                            TREND Or OAK FLOORING
                       (stiin tvr.e — ijoth fir.iohcc.' cV.d im'iniohc-c!)
Yesr

1955
1960
1965
1956
1S37
1950
1969
1970
1971
1972
1973
(11 mo.)
Source: National Oak F
Orders
(thousand feet)
1.18S.7F.1
827,454
818,338
618,090
047,048
493,533
33C,C?9
304,436
223,301
268,194
169.0G1

looring Manufacturers Asi
FsoiJuction
(thot'ssnd fjet)
1,220,204
878,931
77S.CB6
G85.r.43
051,220
459.236
393,107
315,189
306,603
2-',4,787
174,363

ociation, Memphis,
Shipments
(thousand feet)
1,207,164
8-17,388
783,299
654,368
552,218
485,093
387,778
306,736
3?0,921
261,147
173,725

Tennessee.
                                         79

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     Flooring is  sold through bulk'ing materials wholesalers and  retailers.  It is the largest
serior of tiie hardwood lumber industry going directly into construction (mostly residential)
but  it  has not benefited from recent increases in housing  demand.  Table II.D.4  lists the
'iistpbution of shipments by region.
                                      TABLE ll.D.4

                             OAK I'LUOrUMG CHiP^FNTS CY
                                 GLOGRAPiun REGION
                                          1971
                                                                         Percent
            New Gr.nl'ncl                                                    10.9?
            '.'iddij Atlantic                                                  27.6
       North Con a 3!
            E<-,si North Centra!                                               17.9
            \Vtst Worth Central                                                4.0
       South
            Svjih Atlantic                                                   26.1
            East South Central                                                6.2
            V.'Vst South Centrcl                                                1.9

       Wesi

            Mountain                                                         .7
            Pacific                                                          3.2

       Export                                                               1.5

       Source:  Op. cit., National Oak Flooring Manufacturers Association.
     Hard'vood dimension is sold either directly to furniture and industrial plants (about 75
to 80"  of shipments) or to  wholesalers. Dimension producers tend  to  be  located close to
t'.., ;nw material they depend on which is where the wood furniture industry is located.

     'T"ne exception is p-oducrrs of frames which arc more evenly distributed according to
p'K>M'M:?r   Mir-y  *ramer ;'~e  sold  to  firms  which finish  them  by adding  cushioning  and
u/'i -.i".tt"->' 'c  produce covered  furniture.  Frames and upholstered furniture are bulky to
s .-j  .<'„ jre pioduced closL to  consuming areas.
                                          80

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2. Types of Firms

     Firms which are active in the segment arc primarily small, independent operators. No
manufacturer  dominates the  industry.  For example, firms with one  or two flooring ma-
chines have about  two-thirds of capacity currently operating. Table II.D.5  indicates the
industry to be utilizing only about 609o of equipment in place.

                                    TABLE II.D.5

        OAK FLOOR ING MANUFACTURERS: DISTRIBUTION OF PRODUCTION CAPACITY
                          AND CURRENT OPERATING STATUS
     Number of
     Machines

          1
          2
         3-5
          Total
 Number
Of Firms

  36
  11
  _£
  51
Total Number
 Of Machines
  In Group

    36
    22
    16
    74
   Number of
Machines Currently
   Operating

       24
       10

       I2.
       46
 Percent
Operating

   67
   45
   75
   62
3. Types of Plants

     Table II.D.6 lists the number of plants and employees participating in SIC 2426 during
1972 by state.  Based on the number of known flooring mills we have also estimated the
number of plants principally engaged in dimension manufacture by state.  Using the sales
data presented in Tables II.D.I and II.D.2 we calculate the average sales per flooring plant in
1971  to have been  about $2.5 million and the average dimension sales per plant to have
been about 5500,000. The average number of employees per plant is 45.

     The hardwood business is extremely fragmented.  The 1972  distribution of firms by
employment size for SIC 2426  indicates almost half  of the plants had  fewer than  20
employees.
                        Hardwood Dimension and Flooring Mills
              No. of Employees

                   1-  3
                   4-  7
                   8- 19
                  20- 49
                  50- 99
                 100-249
                 250-499
                   500+
                  Total
                    No. of Mills

                        80
                        78
                       125
                       127
                       101
                        65
                         7
                       _2
                       585
                          Percent of
                            Mills

                             14
                             13
                             21
                             22
                             17
                             11
                              1

                           100%
              Source:  Op Cit, County Business Patterns 1972.
                                        81

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                                       TABLE II.D.6


                    1972 DISTRIBUTION OF PLANTS AND EMPLOYMENT
                    SIC 2426 HARDWOOD DIMENSION AND FLOORING
                                   No. of          No. of       No. of Known  No. of Estimated
State                              Employees    Reporting Units   Flooring Mills  Dimension Plants

U.S. Total                          26,082           5851            59             428

Alabama                               813             15              5              10
A!as\a                                               -             -              -'
Arke"                               2,557            39              9              30
Califom.a                              473            20              0              20
Colorado                              —              —              —              —
Connecticut                            —              —              —              —
Delaware                              —              —              —              —
District of Columbia                     —              —              —              —
Florida                                292             6              1               5
Georgia                                784            18              3              15
Hawaii                                —              —              —              —
Idaho                                 -
Illinois   .                             387            21              2              19
indiana                               (D)             19              0              19
iowa                                  —              —              —              —
r'.ansas                                —              —              —              —
Kentucky                            1,889            25              2              23
Louisiana                             (D)             11              0              11
Maine                                 —              —              —              —
Maryland                              —              —              —              —
Massachusetts                          —              —              —              —
Michigan                             (D)             22              2              20
Minnesota                             —              —              —              —
Mississippi                           1,789            19              1              18
Missouri                               866            23              6              17
Montana                              —       .       —              —              —
Nebraska                              —              —              —              —
Nevada                                —              —              —              —
Mew Hampshire                        101             7             —               7
New Jersey                            151            10              1               9
flaw Mexirc                            —              —              —              —
New York                            (D)             21              1              20
North Carolina                       3,379            69              2              67
North Dakota                          —              —              —              —
Ohio                                  414            11              0              11
Oregon                                346             9              0               9
Pennsylvania                           —              —               1              —
Rhode bland                           —              —              —              —
Sc-jfh CrrjJina                        (D)             11              0              11
Svt-tr, D?k«*ta                          —              —              —              —
Ttr.  v: .;.;,.                            3,742            60             13              47
 ,  v-                                 193            11              0              11
                                             82

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                                 TABLE 11.D .6 (Continued)
                                    No. of         No. of      No. of Known  No. of Estimated
   State                           Employees    Reporting Units Flooring Mills  Dimension Plants

   Utah                               -
   Vermont                            —             —            —             —
   Virginia                           1.889           25            8            17
   Washington                          227            606
   West Virginia                         394            909
   Wisconsin                           —             —            2             —
   Wyoming                            —             —            —             —

   1.    Includes Guam, Puerto Rico, and U.S. Territories.

   Sources:  1972 County Business Patterns, Maple Flooring Manufacturers Association, and National Oak
           Flooring Manufacturers Association.
     Among producers the principal difference in operations is whether or not the producer
also operates a hardwood lumber mill. Out of the 59 flooring producers identified, 18 (30%)
are believed to operate lumber mills as well. The balance buy lumber and produce flooring
from it.

     Assuming the same proportion of these mills (40%) have wet decks as do hardwood
lumber mills in general, the total number of firms  likely to be impacted would be only
about 8 to 10 mills.

     If 40% of those harawood dimension producers with sawmills employ wet decks or log
ponds  (this is the same proportion of hardwood lumber manufacturers using this method of
log handling), then only 4-6% of all hardwood  dimension producers would be faced with
pollution control expenditures for log handling and storage purposes.

     A second  important distinction concerning dimension producers is whether they are
engaged  in extensive gluing activities. An analysis was made  of a trade directory listing of
255 hardwood  dimension producers  which identified the principal products and equipment
of each plant. The plants listed were sorted according to whether they had "extensive gluing
activities" or not. For this purpose, operation of edge gluers, electronic gluers or production
of panels and  doors are examples of  "extensive  gluing  operations" while utilization of
finger joint machines are not.
                                         83

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     The analysis showed 29% of the 255 plants fell into the category of chose engaged in
"extensive gluing operations."  Listed below arc the employment si/e categories of the two
groups:

                                No. of Plants            No. of Plants Without
                              With "Extensive           "Extensive Gluing     Total
     No. of Employees          Gluing Operations"            Operations"        Firms

           0-15                     1                        41            42
          16-30                    20                        33            53
          31-50                     7                        36            43
          51-99                    24                        28            52
          100+                     22                        17            39
       Not reported                  _^                        26            26
          Total                     74                       181            255
     Source: Op Cit, 1974 Hardwood Purchasihg Handbook.
     These  74  plants  would  be the  number expected to  be affected  by the Effluent
Guidelines.

4.  Financial Profiles

     Table  II.D.7 presents an estimate of total assets for a group of firms in the industry.
Our analysis for financial strength continues as follows: The average capital expenditure per
employee made  in 1972 was S501.66. This means that a firm employing ten persons if it
followed the industry average for new  capital expenditures would have spent about S5,000
in  1972, Our analysis of those firms with extensive gluing activities in terms of employment


                                       TABLE II.D.7

     ESTIMATED FINANCIAL STRENGTH OF OAK AND MAPLE FLOORING MANUFACTURERS
                            WHO ALSO OPERATE SAWMILLS

                                          Number of            Percent of
             Estimated Net Assets         Manufacturing Firms          Total

             Over $1,000,000                    8                  44
             $500,000 to $ 1,000,000             2                  11
             $ 125,000 to $  500,000             2                  11
             S 35,000 to $  125,000             1                   6
             S    500 to S   35,000             0                   0
             Net Assets Undetermined             5                  28
                                             18                 100%
     Sources: Op.cit., National Oak Floorinq Manufacturers Association, Maple Flooring Manufacturers
             Association, and Lumbermen's Redbook.
                                           84

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size shows only one firm employing 0 to 15 persons which falls into the category of being
an extensive gluer. The next group is 20 firms with 16 to 30 employees. At an average of
S500  of capital  expenditures per  employee the  20  firms  would have expended  from
$8,000-515,000 each for new capital equipment in 1972. All other firms with the exception
of the one small firm would be above that category and we feel it is reasonable to expect the
larger firms spent more than SI5,000 in 1972.

5. Pricing

    Prices are determined  by the cost of raw material (lumber in most cases, timber in
some) which are affected more by industrial demand than by shifts in housing, and by the
cost of converting the product. Due to decreased hardwood log supplies, prices have moved
up in recent years.

    There is no index of dimension prices because there are no standard products. Prices
reflect the cost of lumber and converting costs tempered by demand. During the last several
years, shortages of lumber and strong furniture demand have pushed  prices up sharply.
                                        85

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E. SPECIAL PURPOSE SAWMILLS

     This section deals principally with producers of two products - shingles and shakes
(hereafter referred to as "shingles") and cooperage stock (the material from which barrels and
kegs are  produced). In 1967 firms in this category shipped SI 15.6 million of goods but by
1971 shipment? had dropped to $99.3 million.

1, -nci'jstry' Segments

     The U.S. County Business Patterns reported  452 firms in this category in 1971 and
total industry  employment of 6,185  persons. Small firms dominate the industry in terms of
employment as reflected in the distribution of firms by employment  size shown below:


  Employment Size
  Category             1-3    4-7    8-19    20-49   50-99   100-249    250-499   500+
  Number  of Reporting
  Units                138     83     136       71       20         4         -
  % of Reporting Units    31%    18% 	  30%     16%      4%        1%
                              79%
  Source:  1971 County Business Patterns.


     The industry should be  segregated into  categories  according  to principal product
manufactured for the following reasons:

     1.   Shingle producers do not manufacture cooperage nor vice versa.

     2.   The manufacturing technologies are quite different.

     3.   Shingle  manufacture is centered  in  the West (Oregon and Wi. '-ington had
          457o of the units reported  in SIC  2429 in 1971) while cooperage is produced
          in the Eastern U.S.

     4.    Shingles are made from softwood (mainly cedar) while cooperage is  made
          from hardwood (mostly oak).

 2.  Shingle Producers

      During 1967, shingles shipped  had an aggregate value of S60.9 million and domestic
 industry production  totalled about  3.5 million "squares" which is the unit of production.
 This kvel  of production  was estimated to  equal about 50> of U.S. consumption with the
 balance imported entirely from Canada (British Columbia). Red cedar is the raw material for
 93% of  the shingles produced.
                                        86

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     Shingles are sold almost exclusively for usage in new construction and for maintenance
(roof repair). As a result, prices tend to be volatile depending upon the building cycle. In
addition old growth  Red  Cedar, the  principal raw material, is not in plentiful supply and
total U.S. production capacity is limited by  this decreasing resource.

     Sales are generally made to wholesalers or sales agents as very few producers are large
enough to control their own distribution.  Consumption  is regional and during 1971 four
states accounted for over  67'','1 of consumption.The lead ing consuming states were California
(34%), Texas (19%), Washington (9%), and Oregon (4%).

     a.  Types of Firms

     Firms active in  this industry  sector  are small,  independent and family-owned and
operated. This is a specialized, low-barrier to  entry, low-margin business sector. The active
firms have been in  the business through  several generations and are managing  to continue
operations in spite of the declining market.

     b.  Types of Mills

     Shingle producers are distinguished  most by their very small size. The industry trade
association is the Red Cedar Shingle and  Handsplit Shake  Bureau and  their 1973 member-
ship roster lists 226 firms operating in Oregon, Washington, and Idaho. These producers are
believed to represent over 90%  of U.S. production, implying average sales per firm are only
S200.000-S250,000.  About  30% of shingle producers or  75 firms will be affected by the
proposed regulations. Of this group,  10% operate using log or mill ponds.

     Most shingle mills may not be affected because they  utilize dry decks only for log
storage. An inventory of association members showed 160 mills (71%)  used dry decks only,
44  mills (19%)  used wet decks, and 22 mills  (10"r) have log or mill ponds. This means only
29% of producers will be affected if the proposed regulations are put into effect.

     Table II.E.I presents the  same analysis of  estimated  plant value for the 66  firms
identified who would be affected by the proposed regulations.

     c.  Financial Profiles

     The most  important equipment shingle producers  utilize is  shingle  machines and
shake resaws. The current cost of these machines is about S20.000 and  SI0,000 respectively
and such equipment usually represents about 40% of the total value (exclusive  of land) of a
mill. Table J1.E.2 below is a distribution of the estimated replacement cost  and estimated
total value of plant (exclusive of land) for  the association  member mills. Using this method
of estimating assets employed, we calculate over 70% of producers have a replacement value
of plant under $100,000 indicating the very small scale of operations which prevail.
                                         87

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                                     TABLE II.E.1

                    DISTRIBUTION OF AFFECTED SHINGLE MILLS BY
                         ESTIMATED REPLACEMENT VALUE OF
                                TOTAL PLANT ASSETS
Estimated Replacement Value
of Total Plant Assets

Up  u i 50,000

f, 51,000 to Si 00,000
 No. of Mills        No. of Mills With
With Wet Decks      Log or Mill Ponds       Total Percent

      11                  3                   21%

      11                  5                   24
31 01, 000 to $200,000
8201,000 to 3500,000
Over $500,000
Not Reported
15
4
1
2
8
5
r
_
35
14
3
3
     Total
                                              44
                         22
 *Has both wet deck and log pond.
 Sources:  On. cit., Arthur D. Little, Inc., estimates and Red Cedar Shingle and Shake Bureau.
       d. Pricing

       There is no pattern of price leadership by any single dominating firm. Prices are set
      d 'v  market demand for and supply of competitive materials, e.g., aluminum and vinyl
       iiiHng, or plywood and hardboard exterior paneling. The individual producer of shingles
      v'u rually no influence on the price of its end product.
            jga Producer-,
       C"-   CTSJC mills are located mainl.v in the Eastern states near sources of oak lumber.
   '1;>nv mills in fact are  actually portable facilities which are moved from site  to site rather
  1   i:1, :  T:rM.i.~nt!y situated.

                                           88

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                                    TABLE II.E.2

                        DISTRIBUTION OF SHINGLE MILLS BY
                        ESTIMATED REPLACEMENT VALUE OF
                  PRINCIPAL MACHINERY AND TOTAL PLANT ASSETS
Replacement Cost of Shingle                Estimated Total Value        No. of            Percent of
and Shake Machines                          of Plant Assets            Firms               Firms
                                        (exclusive of land)

Up to $20,000                              Up to $50.000            118                 52%

$21.000 to $  40.000                      $  51,000 to $100.000         45                 20

$41.000to$  80,000                      $101,000 to $200.000         34                 15

$81,000 to $200.000                      $201,000 to $500,000         12                  5

Over $200.000                              Over $500.000              2                  1

Not Reported                                    -                  15                	7_


     Total                                                        226                100%

Sources: Arthur D. Little, Inc., estimates and Red Cedar Shingle and Shake Bureau, Seattle, Washington.
       Staves are produced from bolts or billets which are logs that have been bucked to the
  desired length. They ar.- not debarked prior to sawing nor is the residue usually chipped.
  Very few mills are believed to wet deck logs and none are known to use log ponds.

       Whiskey producers are the largest market for barrels and are estimated to consume over
  three  fourths  of industry  production. The other important markets utilize barrels for a
  variety of industrial shipping purposes.
                                         \
      Klost cooperage producers make staves and heading (barrel ends) only and do not carry
  the manufacturing process forward to also make barrels and kegs. Table II.E.3 indicates the
  proportion of cooperage producers estimated to make various cooperage products.
                                          89

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                                    TABLE II.E.3

                           % OF 69 COOPERAGE PRODUCERS
                            MAKING SELECTED PRODUCTS

                                                  #              %

                   Tight Staves and Heading           44            75
                   Tight Barrels and Kegs             16            27
                   Slack Staves                      3             5
                   Slack Heading                     2             3
                   Slack Barrels and Kegs             _4_            _7

                     Total                         69            n.g.

                    Source: The Associated Cooperage Industries of America
     The  estimated financial strength of 69  cooperage producers identified is shown in
Table II.E.4. Because of their small  size and  the mobile nature of the industry, very few
producers are rated by financial reporting services.

                                     TABLE II.E.4

                       ESTIMATED FINANCIAL STRENGTH OF 69
                               COOPERAGE PRODUCERS

                   Net Assets                       #            %

                   UptoS35,000                     2             3
                   $35,000 to SI25,000               4             7
                   $125.000 to $500,000              3             5
                   $500,000 to $1,000,000
                   Over $1,000,000                   7            12
                   No Net Assets Determined          14            24
                   Not Reported                    28            48
                                                  58
                   Source:  The Associated Cooperage Industries of America. St.
                          Louis, Missouri, Op Cit, Lumbermen's Redbook.

     Cooperage production does not involve use of wet decks or log ponds and therefore no
water pollution is known to result.
                                         90

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F. PARTICLEBOARD

1. Industry Structure

     a. Product Definition*

     Particlcboards are board products Which differ from conventional fiberboards in that
they are composed of distinct particles of wood or other ligno-cellulosic materials which are
bonded together with an  organic binder.  The "particles" vary in size and must be distin-
guished from the fibers used in insulation and hardboard. Other terms used for particleboard
include chipboard, flakeboard, silverboard, shaving board, and wood waste board.  Particle-
board is a highly engineered product which can be formed to  meet varied specifications. As
a result of its being produced in wide density ranges, it is usually divided into categories of
low  density (0.25 to 0.40 g/cm3) (15 to 25 lb/ft3), medium  density (0.40 to 0.80 g/cm3)
(25 to 50 lb/ft3), and high density (0.80 to 1.20 g/cm3) (50 to 75 lb/ft3).

     Low  density particleboards are manufactured specially for their lightness of weight for
use either as panel  material, where heat or sound insulation is important, or as a core in
veneered  constructions  where  weight savings  are important.  These  boards are usually
manufactured in thicknesses of no greater than 2.5 cm (1 inch).

     Most of the particleboard currently produced can be  classified as medium density
board  having a density  some 10 to 20 percent higher than that of the species of  wood or
material used. This density range yields the most desirable properties per unit weight and is
easiest to produce.  The mat-formed board may be homogeneous throughout its thickness
with respect to the particles used; or it!may be composed of two or three different layers.
Extruded  particleboard,  however,  must  use  the same type of  particle  throughout its
thickness because of the nature of its production.

     High density particleboard is quite similar to hardboard in density, appearance, and
application, the basic difference being one of bond.  It is usually produced in the same
thicknesses as conventional hardboard, and the small  sized particles  which are used may
approach wood fiber in  site.

     b. U.S. Production and Shipments

     Production and shipments of  particleboard  have  experienced  a  faster rate of growth
than any other forest product over the past decade. For example,  production (3/4" basis)
has increased from 496 million square feet in 1963 to  a high of 3117  million square feet in
 1972, an annual increase  of 22%. Every year in this period has shown an increase over the
previous one and, although the rate of growth  has slowed with time,  it is still a great deal
 "As contained in the Development Document.
                                        91

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Million
Square Feet
(3/4" basis)
883.2
1050.9
1371.2
1615.3
1662.2
2299.6
3013.4
Average Value
(S/MMSF)
$ Million
88.7
97.1
141.9
200.8
159.4
206.3
289.6
Actual
100
92
104
124
96
90
96
Relative*
108
92
103
140
74
67
69
                                      TABLE II.F.1

                        SHIPMENTS OF PARTICLEBOARD, 1966-1972
               Year

               1966
               1967
               1968
               1969
               1970
               1971
               1972

               'Relative to All Commodities price index, 1967 = 100.

               Source: U.S. Department of Commerce "Current Industrial
                      Reports" Series MA-24L.
faster than the growth being experienced by its  consuming industries. The  shipments of
particleboard in the period 1966-1972 are shown in Table II.F.I. The value of shipments, in
current dollars, indicates a declining trend in average value per thousand square feet of board;
this decline is all the more significant when viewed on a constant dollar basis, i.e., relative to
the all commodities price index.

     Historically, the western region of the United States has been the principal producing
area. Particleboard  plants were established to utilize waste from saw mills and other forest
product  operations. The regional distribution  of production, shown in Table II.F.2, in-
dicates that the recent growth  in production has been much more rapid  in the southern
states, especially the West  South  Central  region  which  includes  Arkansas, Texas  and
Louisiana.  For example, Western states' production of particleboard decreased from 55% of
the total in 1968 to 44%  in 1972; production in the  West South Central  states increased
from  10.5% to 18.5% in the same period.
                                      TABLE II.F.2

                 PRODUCTION OF PARTICLEBOARD, BY REGION 1968-1972
                                  (1000 sq.ft., 3/4" basis)

                           1972        1971        1970        1969        1968
      East
      South Atlantic
      t .st South Central
      West South Central
      West
      TO FAL U.S.
      Source:  U.S. Department of Commerce "Current Industrial Reports" Series MA-24L.

                                         92
210,902
605,635
i47,3S4
574,361
1,378,955
3, 117,24;
178,899
420,578
258,654
402,990
1,132,638
2,393,760
153,197
315,644
169,436
238,990
886,281
1,763,548
164,023
289,248
155,186
226,232
881,370
1,716,059
132,449
242,980
122,034
150,539
776,986
1,424,988

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     Floor underlayment  board,  used as  a  base to  carpeting and  resilient flooring in
residential construction, represented nearly 40??-of the 1968 production but this proportion
dropped  to  307<  in  1972, despite  the considerable growth experienced by the residential
sector (+60?<) during that period. (Table II.F.3) The growth rate of 14.5% compares to that
of about 279c for industrial grades; the latter increased their  proportion of the total from
6\c/'< to 709r. Floor underlayment grades are predominately in  the 5/8" si/e while industrial
board for furniture and other manufacturing industries is distributed between many thick-
nesses with  an even concentration in the 3/4" and  5/8" si/.es. It is anticipated that the
proportion of underlayment grades will continue to decline and will thus result in a higher
average unit value on a constant dollar basis.

                                      TABLE II.F.3

                  PRODUCTION OF PARTICLEBOARD BY TYPE, 1968 & 1972
                                    {MMSF, 3/4" basis)

                                          1968                1972
                    Product           MMSF      %       MMSF      %
               Total                  1391     100       3117     100
               Floor Underlayment       547      39.4      941      30.1
                  5/8" board            384      27.6      644      20.6
                  3/8" board             82       5.9      130       4.1
                  Other                 82       5.9      168       5.3
               Industrial and Other       844      60.6     2176      69.8
                  3/4" board           N.A.       -        708      22.7
                  5/8" board           N.A.                676      21.6
                  1/2" board           N.A.                238       7.6
                  Other               N.A.       -        553      17.7

               Source:  U.S. Departme it of Commerc; "Current Industrial Reports"
                       Serins MA-24L

     It  is significant to note that particleboard manufactured by the mat forming process
represents all but  38 million square feet of total 1972 production of 3.1  billion square feet.
Extruded board has not enjoyed any long-term growth and, in fact, decreased from a total
of 49 million square feet  in  1965 to  38 million square feet in 1972. This extruded board is
almost  entirely of captive production by  furniture manufacturers in the Southern states,
although one new  plant came on stream in California in 1972.

     Domestic  trade  in particleboard between the  U.S.  and foreign countries  has been
negligible and  is  mostly  with bordering countries.  As Table II.F.4  shows,  exports have
increased considerably in the period 1970-1972, from  11.8  million square feet to 53.8
million  square feet, but still  represent an extremely small proportion of total U.S. produc-
tion (1.7%). The value of exports "free alongside ship" totalled 6.3 million dollars in 1972.
Imports have also  grown in  recent years but still represented less than 1% of the value of
apparent consumption in  1972.
                                         93

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                                      TABLE II.F.4

                       EXPORTS AND IMPORTS OF PARTICLEBOARD

                                   Exports             Imports
                      Year     MMSF     $MM      MM Lbs.   $MM
                      1970       11.8      1.6        10.2     0.6
                      1971       23.9      3.2        23.9     1.4
                      1972       53.8      6.3        33.8     1.9
                      Note:  Export value "free alongside ship." Import
                            value is market value in foreign country, ex-
                            cluding, freight, insurances, taxes, duties.
                      Source: U.S. Department of Commerce Schedule "B".


     c.  Applications

     Particleboard's rapid growth  has been due in  part to the overall growth of industrial
and  construction activity in  the past few  years, but mainly  to its displacement of other
materials  in  both of these  markets.  The  product that  is threatened most severely  by
particleboard is softwood plywood, but hardwoods are also  being displaced in furniture
applications.  This displacement has  been  taking  place on  the  basis of  more  favorable
economics but  the particleboard industry has  at the same time been improving the quality
of various grades. For example, underlayrnent grades have improved  performance and are
gaining acceptability in the past five years; these have rapidly displaced softwood plywood
in residential and mobile home construction as  prices for the  latter have continued to
increase. In furniture applications, industrial  corestock grades have also improved in per-
formance  and  furniture  manufacturers are  able to work the board into various forms
without affecting its structural integrity.

     The  largest single application of particleboard is in underlayrnent, both  conventional
and  mobile home decking. These  two applications represent  approximately 30% of total
particleboard consumption.  An additional  5%  also serves the construction industry, but
mostly  for interior applications such as shelves, partitions and doors. The furniture and
cabinet  applications  represent  approximately 55% of consumption with kitchen and other
cabinet  manufacturers and household  furniture each taking approximately 20% and com-
mercial  and institutional  furniture applications, the remainder. The balance (10%)  of U.S.
consumption is mostly in industrial, do-it-yourself and miscellaneous applications.

     Much of recent particleboard market growth has been stimulated by the growth of the
consuming industries. For example, housing starts increased from  1.5 million units in 1970
to 2.4 million units in 1972, an aggregate growth of 60%, in comparison to the growth of
particleboard  at  80%.  Although  future  growth will  still be largely dependent on that
anticipated in the construction, cabinet and furniture industries, particleboard will continue
                                         94

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to grow at a much more rapid rate than the customer industries and will be used increasingly
in newer applications.

     Housing starts are unlikely to reach the levels set in 1972 before the end of the decade
and  so  considerable downward pressure  will  be placed on the underlayment sector of the
particleboard industry.  However, the U.S. Forest Service has projected  unit demand for
particleboard in residential construction to grow as follows:

                           (Square Feet, 3/4" Basis)
               Year     1-and 2-Family    Multifamily   Mobile Homes
               1970          250              55            560
               1980          420              70            650
               1990          590              85            715

               Source:  U.S. Department of Agriculture: Outlook for Timber
                       in the U.S.

     The growth of the furniture industry will range from 47c for household furniture to 8%
for commercial and institutional  and 10% for the cabinet  industry, but the growth of
particleboard  consumption in these sectors is likely to be at least twice these rates. In
summary, we anticipate that the unit growth in particleboard consumption will average 12%
to 15% per year for the remainder of this decade.

     The  medium density fiberboard  (40  to  45 Ibs./cu. ft.) proportion of particleboard
shipments, currently representing about 12% of total production, will grow very rapidly as
much of new plant  additions and capacity expansions are in this specialty type of board
serving the furniture corestock industry.

     d.  Marketing and Distribution

     The  distribution  channels  used to market  particleboard are  mainly dependent on
whether new construction, O^M or remodeling markets are being served. Particleboard used
as underlayment in  new construction is distributed through building materials wholesalers
and retailers and sold to homebuilders. Physical distribution  from the plant to the whole-
salers is mainly by rail,  with some local truck shipments. A similar channel of distribution
serves the remodeling and do-it-yourself purchasers but the unit sales at the retail level are in
considerably smaller volumes.

     OEM markets, principally the cabinet, furniture and mobile home industries, are served
by direct shipments after prices and contractual details are established between the mills and
the customers.  A large proportion (perhaps one-half) of the industrial board is cut-to-size to
customer specifications by the manufacturer before shipment and edge banding may also
take place. Some distribution is carried out through wholesalers, especially in the case of
kitchen cabinet manufacturers and other small industrial customers which do not qualify for
                                        95

-------
the volume quantities demanded for direct shipments. Some pooling of shipments can also
take place for these users.

2.  Types of Firms

    Manufacturers  of particleboard span the  spectrum of industrial firms in  terms of
size, diversification, assets and form of ownership. The following principal groupings can be
identified:

    •   Major integrated forest products companies, such as Champion International
         and  Weyerhaeuser, who operate many facilities and who utilize waste from
         their other operations in making the board.

    •   Other major forest products corporations, such as Masonite and American
         Forest Products, with only one facility.

    •   Small firms which are divisions or subsidiaries of larger corporations, such as
         Kirby Lumber and Wickes Forest Industries.

    •   Furniture companies which operate a particleboard plant largely for captive
         consumption, such as Bassett  and Broyhill.

    About 38 companies operate the 75 plants, with Georgia Pacific owning 6 locations
with  a  total  capacity of 416 million square  feet  (11% of industry). The largest four
companies  operate 36% of capacity.

3.  Types of Plants

    The particleboard industry presently consists of 74 manufacturing facilities, 67 produc-
ing a  mat  formed board and the remainder, an extruded type. These plants are listed in
Table II.F.5, together with the capacity, product trade names and uses for each.

    Total  industry  capacity was approximately  3.3 billion board feet in 1972 and capacity
utilization  approximately 91%. Medium density  fiberboard and other  specialty boards
represented about   20%  of  total capacity. Announced   capacity  additions,  listed in
Table II.F.6 (including 11 new  plants), will increase industry capacity to approximately 4.7
billion square  feet by 1976; capacity utilization in 1973 through 1976 will be lower than
the 1972 level, especially in the West, but will reach 90% shortly.

    The geographic distribution of manufacturing capacity is shown in Table II.F.7. More
than half of the plants are located in the South with only 8 in the East and the remainder in
the West.  The principal manufacturing  state is Oregon, with  North Carolina having the
second  largest concentration of facilities. Future additions  to  capacity are dispersed but
again  with heavy concentration in the South and West.
                                        96

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                                                               TABLE II.F.5

                                           PARTICLEBOARD PLANTS (MAT FORMED) - U.S.A.
   Company
   Location
 American Forest Products Corp.    Martell, Calif.
 Basset Furniture                 Bassett, Va.
 Boise Cascade Corp.              LaGrande, Oregon
 Broyhill Furniture
 Carolina Forest Products, Inc.

 Cascade Fiber Co.
 Champion International
Champion International

Champion International

Champion International

Cladwood Co.
Cladwood Co.

Clear Fir Products Co.
Lenoir, N.C.
Wilmington, N.C.

Eugene, Oregon
Redding, Calif.
Gaylord, Michigan

North Oxford, Miss.

South Boston, Va.

Virginia, Minn.
Sweet Home, Oregon

Springfield, Oregon
    Capacity
(MMSF-3/4" basis)
       100
       20
       170
       30
       12

       52
       43
       98

      104

       70

       13
       10

       10
   Tradenarnes
BCC underlayment,
BCC industrial
BCC mobile home decking

Shav-Bond, Dina-Shav

Firlok, Fircraft
Fiber Face Novoply,
Novowood, Novodeck,
Corteza
Novoply, Novowood,
Novodeck
Novoply, Novowood,
Novodeck
Novoply, Novodeck

Cladwood
Cladwood

Custon-Carv Plantons,
Denswood, Castwood
              Uses
                                                                       Corestock, furniture
Corestock, furniture
Furniture, toys, lumber banking,
custom routing & shaping
Underlayment, furniture core
Doors, Cabinet and furniture, stock.
shelving, games, underlayment,
store fixtures
Core stock, furniture, shelving,
cabinets, coach floor, doors
Core stock, furniture, shelving,
cabinets, coach floor, doors
Core stock, furniture, shelving,
cabinets, coach floor, doors
Exterior siding & building board
Siding for  home and industrial uses;
soffet, gables and all ext. use.
Shelving, decorative material,
door panels

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                                                                   TABLE II.F.5 (Continued)
vo
oo
           Company
        Collins Pine Co.
         Evans Products Co.
         Florida Plywood
         Georgia Pacific Corp.

         Georgia-Pacific Corp.
         Georgia Pacific Corp.
         Georgia Pacific Corp.
        Georgia-Pacific Corp.
        Georgia-Pacific Corp.
        Giles & Kendall Inc.
        Golden State Building Products
   Location
Chester, Calif.
Missouia, Mont.
Greenville, Fla.
Crossett, Ark.

Ukiah, Calif
Vienna, Ga.
Louisville, Miss
Taylorsville, Miss.
Russellville, S.C.
Maysville, Ala.
Redlands, Calif.
        Hambro Forest Products Inc.      Crescent City, Cal.

        Humboldt Flakeboard             Arcata, Calif.
         International Paper Co.
Malvern, Ark.
     Capacity
(MMSF-3/4" basis)
        24
        /o
        10
        33

        85
        85
        55
        90
       100
         7
        30

        23

        85

        70
   Tradenames
Collins Flakeboard,
Collins Coreboard,
Collins Door-core
Evans, Evans Dyna-Bord

Georgia Pacific
Particleboard

G-P Particleboard
G-P Particleboard,
G-P floor underlayment,
Georgia-Pacific Mobile
Home Underlayment

G-P Particleboard
Cedarline
Econline, Edgetite

Cresdek, Crestflake,
Creslay
Humboldt Flakeboard,
Mobil-dek, X-57 Modular
Long-bell, Flakelock,
Filcote
              Uses
Core stock, door stock


Industrial core stock, underlayment

Underlayment & core
Core stock & underlayment
Core stock & underlayment
Underlayment & core stock
Closet lining & decorative paneling
Floor underlayment, furniture core,
spec, applications
Mobile home decking, industrial,
underlayment
Cabinets, furniture laminates,
shelving, mobile home flooring
Industrial core stock, cabinets,
countertops, fixtures, partitions,
underlayment

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                                                         TABLE II.F.5 (Continued)
   Company
 International Paper Co.
 International Paper Co.
 Kroehler Mfg. Co.
 Louisiana Pacific Corp.
 Louisiana Pacific Corp.
 Masonite Corp.

 Mexwood Products Inc.
 Nu-Woods Inc.

 Olinkraft Inc.

 Pack River Co.

 Permaneer Corp.
 Permaneer Corp.

 Permaneer Corp.
Permaneer Corp.
Permaneer Corp.
Permaneer Corp.
   Location
Greenwood, S.C.
Longview, Wash.
Meridian, Miss.
Urania, La.
Corrigan, Texas
Waverly, Va.

Albuquerque, N.M.
Lenoir, N.C.

Lillie, La.

Sandpoint, Idaho

Hope, Ark.
Black Mountain, N.C.

Brownsville, Oregon
Dillard, Oregon
White City, Oregon
Jackson, Texas
    Capacity
(MMSF-3/4" basis)
        75
        12
        18
        72
        90.
        65

        30
        22

      102

        20

        18
        18

        27
        34
        45
        18
   Tradenames
Long-bell, Flakelock,
Filcote

Long-bell
Maxi-Board
Georgia-Pacific Particle-
board, G-P Flakeboard,
G-P mobile home decking

Presdflake, Masonite
Underlayment

Lignabond, Homo,
Super 3/Layer
Tuf-flake

TENEX, Ranch N'Cabin
Dor-Core
              Uses
Industrial corestock, cabinets,
countertops, fixtures, partitions,
underlayment, gen'l. const.
Underlayment, gen'l. const.
Furniture mfg.
Core stock & underlayment
Furniture, toys, mobile home &
commercial const & underlayment
Underlayment, core stock
Furniture

Underlayment, mobile home-decking,
industrial
Interior wall paneling ceiling tile,
utility board
All output used internally
Output used internally; Dor-Cor &
drawer sides sold externally
All output used internally
All output used internally
All output used internally
All output used internally

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                                                                 TABLE II.F.5 (Continued)
o
o
   Company
Rodniann Industries Inc.
Roseburg Lumber Co.

The Singer Co.
Southwest Forest Industries

Stoors Wood Products

Temple Industries
Temple Industries
Temple Industries
Tenn- Flake Corp.

Tenn-Flake Corp.

Timber Products Co.
        Union Camp Corp.
        Ward Industries Inc.
        Westvaco Crop.
        Weyerhaeuser Co.

        Weyerhaeuser Co.
        Weyerhaeuser Co.
                                           Location
                                        Marinette, Wise.
                                        Roseburg, Oregon

                                        Trumann, Ark.
                                        Flagstaff, Ariz.

                                        Evanston, Ind.
    Capacity
(MMSF-3/4" basis)
        20
      300

        21
        24

        17
Thompson, Ga.
Diboll, Texas
Pineland, Texas
Middlesboro, Ky.
Morristown, Tenn.
Medford, Oregon
Franklin, Va.
Miami, Okla.
Tyrone, Pa.
Adel, Ga.
Broken Bow, Okla.
Klamath Falls, Oregon
100
85
10
50
g
60
61
31
4
35
100
56
   Tradenames
Resincore
Resin-tite
Kachinaboard

Trimwood
                                                                                     Tenn-Flake

                                                                                     Tenn-Flake

                                                                                     Thundcrboard,
                                                                                     Totemboard,
                                                                                     T.P. Board
                                                                             Cedarfresh
                                                                             Timblend, Versabord
                                                                             Versabord, Timblend
              Uses
Furniture
Furniture core stock, industrial
applications
Furniture Parts
Printing, laminating, furniture,
cabinets, drawer parts
Corestock, furniture stock, cut-to-
size, door stock, dinette seats
                                                Core mat'l for vinyi, high pressure
                                                laminates, printing and embossing
                                                Core mat'l for vinly, high pressure
                                                laminates, printing and embossing
                                                Industrial
                                                Closet lining, decorative paneling
                                                Furniture parts, core stock, floor
                                                underlayment, mobile home decking

                                                Furniture core, floor underlayment

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                                                          TABLE II.F.5 (Continued)
    Company

 Weyerhaeuser Co.

 Weyerhaeuser Co.

 Wickes Forest Industries
 Willamette Industries, Inc.

 Willamette Industries, Inc.

 Willamette Industries, Inc.

 American of Martinsville
 Dixie Chipboard Co.
Georgia-Pacific Corp.
Williams Furniture Div.
Jasper-American Mfg. Co.

Lane Co., Inc.
Lenoir Chair Co.
Pacemaker Div.
Broyhill Industries
Woodcore. Inc.
                                                              Capacity
Location
Springfield, Oregon

Marshfield, Wise.

Chowchilla, Calif.
Ruston, La.
Albany, Oregon
Bend, Oregon

Martinsville, Va.
Rural Hall, N.C.
Sumter, S.C.
Henderson, Ky.
(MMSF-3/4" basis)
90

50

35
70
160
103

10
12
12.5
7
Tradenames
Versabord, Timblend
Vinylhue
Timblend, door core,
mobile home deck

Duraflake South
Duraflake
Alpine, Korpine,
Florpine
Particle Board


Stylemasters
Altavista. Va.
Newton, N.C.
Scottdale, Pa.
15
 4
 1.2
                                                                              Lanewood
                                                                              Scotbord

Source: 1973 Directory of Forest Products Industry, July 1973 issue of Forest Industries.
              Uses

 Underlayment, industrial, mobile
 home underlayment, vinyl substrate
 Furniture corestock, door core,
 floor underlayment

 Industrial, furniture decking,
 countertops, underlayment
 Industrial and furniture requirements,
 decking underlayment
 Industrial corestock for furniture
 and cabinet requirements
 Core stock in wood furniture
 Corestock, lumber banded furniture
 stock, cut-to-size panels, tubular
 partitions and door cores

 Furniture parts
 Lumber edge banded, table tops,
 kitchen cabinet doors, door cores
 Furniture, core stock
Furniture
Core stock

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                       ANNO! i;"ZED ADDITIONS AND EXPANSIONS •
                                 i'ARTICLEBOARD PLANTS
               Blandm V>'o^' f'".' C,nr\s
               Champion ihtt msl i. 'i~>=;
               Chjrnpion hu.f-r< juc.'-.l
               FibreboatrJ S-r^i'ucU
               Georgia-f'3crfic
               Georgia 1- ;;c !•":"
               Golden Stat'-  ^••'ifiirQ Products
               Holly H.ii i.umt.---'
               Kirby Lu'rii;.^
               Louisiana-Pacif'f
               MacMilian BU-joc1'-!
               Medfc-ro
               Olinkrp.fi
               Plum Creek Lt.'f. jei
               Pennantes
               Willam-'-ts3 'nctu'ifn?'"
        Grand Rapids, Minn.   —new
        Gnylord, Mich.
        R'^nner, Mont.         — new
        Rocklin, Calif.         — new
        Whiteville, N.C.        - new
        Montacello, Ga.        — new
        Fiedland, Calif.
        Holly Hill, S.C.        -new
        Siisbee, Tex.
        Oroville, C;ilif.         — new
        Pine Hill, Ala.         - new
        Medford, Ore.         -new
        Monroevilte, Ala.       — new
        Columbia Falls, Mont,  —new
        Hope, Ark.
        Send, Ore.
                                       TAE?!.E il.F.7

            GEOGRAPHIC DICTR'BUTiON OF U.S. PARTICLEBOARD PLANTS
              Middle Aticncic
              East North Cenc^!
              West North Centra!
              South A'ciantic
              East South Cei' rai
              West Sout'-, Centra!
              Mountain
              Pacific
Mat Formed
     1
     4
     1
    14
     1
    13
     4
   J23
    67
Extruded
   1
  5
  1
     Plant  capacities  r.'nu'C from 7  million  square feet, 3/4"  basis, to the  largest at 300
million square feel (Roicbiiri1, Lumber in Rcseburg, Oregon). The largest concentration is in
those  facilities sued at b^vveen  25 and 100 million square feet  of annual capacity. The
average unit capacity is approximately 45 million square  feet, 3/4" basis, but newer facilities
are constructed at about 70 million square feet each.
                                          102

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4. Financial Profiles

     In 1972,  the average mill net price for particleboard  in the  United Slates, after
appropriate discounts, was approximately  $93. A typical plant with an annual capacity of
approximately 70 million square feet, 3/4" basis, would have a net asset  value of about $9
million and annual net sales of S6.0 million.  Table II.F.8  illustrates  the typical financial
profile for such a facility.


                                    TABLE II.F.8

                   FINANCIAL PROFILE- PARTICLEBOARD PLANT

                                                                    $
                                                     %            (1,000)
              Net Sales                               100.0           6,000
                Cost of Goods Sold        63.0                3,780
                G.S. &A.                10.0                 600

                                                    73.0           4,380
              Operating Profit                          27.0           1,620
              Provision for Income Tax                   13.5            810
              Net Income on Sales                       13.5            810
              Return on Net Assets                       9.1

              Net Assets:  $9,000,000
              Annual Capacity:  70,000,000 SF (3/4" basis)
              Employees: 200

              Source: Arthur D. Little, Inc., estimates.

      1972 represented a good "typical" year for analyzing the financial performance of the
 industry; 1973 undoubtedly was more profitable. A combination of lower capacity utiliza-
 tion  rates, especially  in the West, and steeply increasing raw materials and resin costs will
 dampen performance to 1971-72 levels in the period 1974-1976. It is thus important to base
 the economic impact analysis on 1972, a representative year.

 5.  Pricing

      Price setting in the particleboard industry depends very largely on  the product being
 considered. Underlayment  and  mobile home decking are regarded as commodities and the
 products are priced to reflect market demand, the costs of substitute materials and capacity
 utilization rates. Underlayment  and mobile home decking products thus vary greatly in price
 from year to year, even from week to week. The average selling price in constant dollars,
 however, has declined steadily over the past decade until 1972 but has increased sharply since
 then. The  steady decline in prices resulted primarily from increased efficiency  in the
                                        103

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industry  as  manufacturing processes became more  sophisticated  and automated  (the in-
dustry is relatively young) but also as additions to capacity shrunk the competitive radius
for a particular mill  to a regional, rather than  a national one. Two levels of prices are
prevalent in the United States today — those representing plants located in  the South and
East and those for the West.

     Consumption of  underlaymcnt is  largely related  to housing starts and  thus  it is
concentrated in the more  populous regions,  especially  the  Northeast  and Midwest where
product acceptability  and house design have been favorable. Thus, freight equalization from
regional manufacturers takes place and f.o.b. mill prices for Southern suppliers are a great
deal lower than for those  in  the Northwest. Delivered prices, however, will generally be
equivalent.

     Tha  following f.o.b.  mill prices, after  appropriate discounts, existed in December,
1972, and December,  1973 for underlayment grades:

                       5/8" Particleboard Underlayment (S/MSF)

                                         West            South
               December 1972              53              38
               December 1973              120             100

     The steep increases in prices to some extent reflected price decontrols but also resulted
from the relative unavailability of  plywood (many customers  were on allocation during
1973) and the  resulting strong demand for particleboard by furniture manufacturers. These
price levels will not be maintained during 1974; prices should drop to about S80 and .$65
for the West and South, respectively, reflecting the steep decline in housing starts this year,
then remain relatively stable but reflecting the cyclically of housing starts.

     The pricing for corestock and  industrial grades  is very different from  that of underlay-
ment, and historically more stable.  The product is  used in various structural applications
where physical characteristics and  performance (such  as  wear, durability, screwholding,
abrasive resistance, tensile strength, smoothness, etc.) are  extremely important. Customer
requirements will vary depending upon the end use of the  product and thus a great deal of
product differentiation,  and even the use of brand  names,  takes place. A furniture manu-
facturer, for example, will examine and test a range of boards before selecting those that
meet  his specifications. He will then negotiate a contract to reflect price, quantities and
delivery schedules with the suppliers. Any manufacturer wanting its particleboard to  be
selected by a  potential  customer  must thus  submit  the  product for performance and
economic evaluation.

      Thus,  although product  prices fall  in a number of general ranges to reflect different
levels of quality, there is no quoted market price for corestock grades and most prices are
negotiated directly to reflect both  the performance standards and the services (cutting to
                                        104

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shape, edge banding, etc.) that the manufacturer will provide. Prices for corcstock grade are
higher than for underlayment.

     Table II.F.9 shows the actual average selling prices prevalent for underlayment and
corestock grades originating in both the West and South during 1972 and developed in our
surveys at  that time. It is interesting to note the reversal in the relationship between these
prices  from each  region. For example, underlayment  grade from the West is 50% more
expensive than from the South on a mill net value after appropriate discounts. The reverse is
true for the corestock grades. Southern products are more expensive. This pricing strategy
reflects in  part the  principal  concentrations of demand  for each type of product. Underlay-
ment grades are largely being shipped to the Midwest and Northeast while corestock grades
will  serve  the  furniture  industry concentrated in the  South. Thus,  in  order  for  the
Western mills  to  compete with the  South for the corestock grades, a larger allowance for
freight  must be made. In addition, however, the southern mills have the capabilities to
produce a higher quality, and thus a more expensive product than plants in the West.
                                    TABLE II.F.9

                  PARTICLEBOARD PRODUCTION AND VALUES, 1972
                        (3/4" basis, mill net values after discounts)
                     Underlayment
                      Corestock & Other
                                          Total
                  MMSF  S/MSF  SMM   MMSF  $/MSF  SMM   MMSF  S/MSF  $MM
    West
    South and East
    United States
320
621
941
54
38
43
17.3
23.6
40.9
1059
1117
2176
 90
130
111
 95.3
145.2
240.5
1379
1738
3117
82   112.6
97   168.8
90   281.4
   Source:  U S. Department of Commerce "Current Industrial Reports," Series MA-24L,  and
           Contractor estimates.
                                        105

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G. MILLWORK

     This sector  covers  producers  of millwork products  which includes  mainly window
units, parts, and farms; doors; finished wood mouldings;and cabinet work and architectural
millwork. Table II.G.l lists the principal millwork product categories shipped during  1967
and 1971.

                                    TABLE II.G.1

              MILLWORK SHIPMENTS BY TYPE OF PRODUCT: 1967 AND 1971
                                     ($ million)
                                                 1967             1971
               Windows, parts, and frames             246.0            351.6
               Doors                              404.9            547.8
               Finished wood mouldings              195.7            365.6
               Cabinet work to be built in
                and architectural millwork             249.5            415.1
               Millwork N.S.K.                     241.0            260.1
                   Total                        1,337.1          1,940.2

               Sources: 1967 Census of Manufactures, 1971 Annual Survey of
                      Manufacturers.

     These firms are not  likely to be affected by the proposed regulations because:

     a.    They do not use glue extensively.

     b.    Many are small "garage shop operators" or ancillary to other activities (i.e., a
          door shop owned by a retail lumber dealer) and

     c.    Almost all  firms  are located  within cities  and have access  to  city waste
          disposal facilities.

 1. Industry Structure

     A  large number of firms  participate in the millwork industry. During 1972 the U.S.
 County Business Patterns reported  there were 2,729 firms employing 78,153 persons in the
 United  States in this industry. Table II.G.2 shows the distribution of firms and employment
 by state. Although the states which  are producers  of lumber have  a sizable  share of
 employment, the industry is fairly broadly dispersed across the United States.

     An analysis of industry shipments shows the dependence of  millwork  producers on
 new construction.  The  Arthur D. Little, Inc.  input-output model  analysis shows 82% of
 demand associated with  new construction and an additional 4% with maintenance construc-
 tion (see Table II.G.3). Within the construction sector,  67.2% is the result of new residential
 construction, a highly cyclical industry.

                                       106

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                                      TABLE II.G.2


                    1972 DISTRIBUTION OF FIRMS AND EMPLOYMENT
                                SIC 2431 MILLWORK AND
                     SIC 2433 PREFABRICATED WOOD STRUCTURES
State

U.S. Total

Alabama
Alaska
Arizona
Arkansas
California
Colorado *
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Millwork
SIC
No. of
Employees
78.153
1,478
1.434
283
8,052
(D)
409
(D)
(D)
3,568
997
221
792
2,911
1,799
2,032
489
687
1.077
f
. 1.267
1,252
1,505
3,406
661
1,577
387
357
660
1,873
(D)
3,333
1.395
(D)
895
4,495
106
(0)
954
(D)
1,528
6,767
2431
No. of
Reporting Units
2,729
50
35
9
382
27
37
2
5
163
51
10
19
132
49
15
30
18
42.
«_
41
75
84
69
27
50
9
20
18
102
21
184
63
75
30
77
14
13
35
10
47
179
                                                               Prefabricated Wood Structures
SIC
No. of
Employees
33,848
1,275
613
301
2,366
370
165
1,596
1,230
(D)
941
2,289
(D)
181
244
(D)
(D)
1.514
701
509
469
117
160
706
(D)
(D)
1,863
1,210
(D)
2,819
203
389
215
311
(D)
430
950
2433
No. of
Reporting Units
703,
24
11
6
55
8
9
47
28
6
19
36
17
4
8
8
11
42
18
8
12
6
9
5
5
3
32
14
2
43
9
12
4
10
2
13
32
                                         107

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                               TABLE II.G.2 (Continued)
                                	Millvvork	    Prefahriciti-d Wood Structures
                                        SIC 2431                    ~SUT2433
                                  No. of         No. of         No. of          No. of
 State                           Employees   Reporting Units     Employees   Reporting Units

 Utah                              369           24             148            6
 Vermont                           —             —             —             —
 Virginia                           2.868           48           1,671           18'
 Washington                        3,057           99             887           27
 West Virginia                        —             —             —             —
 Wisconsin                          —             —             —             —
 Wyoming                           —             —             —             —
 Sources:  1972 County Business Patterns, Maple Flooring Manufacturers Association, and National Oak
         Flooring Manufacturers Association.

     The industry  can be segregated into three categories for purposes of determining the
impact of the proposed water pollution control standards:

     •   manufacturers of mouldings

     •   manufacturers of doors and windows

     •   local  producers and assemblers of door units, window units, and cabinetry.

     Moulding production is the most concentrated of the  sectors and this product repre-
sents about  207f of  millwork industry production. Ponderosa Pine is the species of wood
used most commonly and is estimated to represent 85% of production.

2. Types of Firms

     The industry  is  quite fractionated with the 8 largest companies producing only 13% of
output in 1970. Among producers of moulding,  35 companies are believed  to possess 80%
of industry capacity but none of these firms are dominant.

     Moulding producers  purchase rough lumber to process and although many producers
are owned by companies which also  produce lumber,  most moulding plants are separate.
The "shop" and "moulding and better" grades  used to make mouldings represent only a
small fraction of the lumber produced from a log. No moulding plant would use the entire
output of one sawmill. For this reason if a moulding plant  and sawmill do share a site, the
larger producing unit wculd be  the sawmill.

                                       108

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                                        TABLE II.G.3

                             1972 DISTRIBUTION OP SHIPMENTS
                                    SIC 2431 MILLY'.'Cr.K
                                                                           Percent of
Buyers                                                                     Shipments
                                      i

Maintenance Construction               ,                                         3.0%
Lorjyinfl Camps & Contractor                                                     —
Srivvmil! c* Planing h'.iils                                                          1.2
Hardwood Dimr.nsions & Flooring                                                 -
Millwoi-k Plants                                                                  .4
Veneer & Plyvvoocl Plonts                                                         1.0
Prefabricated Wood Products                                                      .4
Wooden Containers                                                               .3
Wood Hiest-vvetive & Miscellaneous Products                                         .2
Household Furniture                                                            1.1
Office Furniture                                                                 .4
Fiber Cans                                                                      —
Fabric Pla;tic Products                                                           —
Brick C: Structure Clay Tile                                                       -
Conrrov Piock & Brick                                                          —
Fabricated Structure Steel & Metal Doors                                           .4
Fabrcetcd Platework                                                            —
Sheet, Architecture, Miscellaneous Metal Work                                     —
Stomp h Screw Muctvne Products                                                 —
Hardv.-src, Plating, & Wiie Products                                                .3
Dicvvcrs & Exhaust Fans                                                         —
Nonelectric Machine Shop Products                                               —
Venclir.g & Airt.ondition equipment                                               —
Other Household Appliances                                                     —
Electric Light & Wire Equipment                                                  —
Boat Building                                                                    .8
Mobile Homjs  &. Campers                                                        4.3
Surgical & Medical Instruments                                                   —
Jovvdlry, Toys, Sport, Miscellaneous                                                .5
Wholesale & Retail Trade                                                         2.6
Real Estate & Rental                                                           	.2.

      Total                                                                    18.3%

Components

Inventory                                                                       .4%
New Construction                                                              81.9
Competitive Imports                                                            —
Exports                                                                       	.3_

      Total                                                                    81.7%

Category

Single-Family Residential                                                        42.8%
Two to  Fo;:r Unit Residential                                                     1.2
Gaiden  ArMitnients                                                              7.5
High-Ris'.! Ajiau-nents                                                           1.3


                                        109

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                                    TABLE II.G.3 (Continued)
                                                                          Prrcnnt of
    Categoty                                                              Shipments
    Ahcioticns & Adv
    Nonhousskeepim; Units                                                      1.9
    Industrial                                                                   .-1
    Cl i ice >x Warehouse                                                         1.2
    Strrcs, Rtsta.irants, Garages                                                  1.0
    Rjli'jous                                                                   .5
    Piivoto Educational                                                           .3
    no.pi'.cil & Institution;)!                                                      1.0
    Oiht/r Norne'.idonlial                                                          /
    Farm, ir.f lijdiny Residences                                                   1.2
    Railroad                                                                   —
    Telephone & Telegraph                                                       .1
    Electric Utilities                                                              .1
    G-t-, & Petroleum Pipelines                                                    —
    All Otrmr Private                                                             .1
    Military                                                                   —
    Conservation                                                                .1
    Sewer Systems                                                             3.0
    VVatc. Sy-tams                                                             —
    Public RcciiJer.tial                                                            .3
    Public Industrial                                                             —
    Public Ed'.icational                                                          2.0
    PlillltC Hospital                                                              .3
    Ot^:r Public Structures                                                       .8
    M:$c°liar:-jous  Public Cf;nstruction                                             	._2_

         Total                                                                SI.9%


    Source: Arthur D. Little, Inc., input-output model.


     Gluing  operations  in moulding  plants are confined  to the  "finger joining" of small
pieces of lumber and are not conducted on a large scale. We believe moulding plants do not
use wash water  as  described in the  proposed regulations and will not be affected. Most
moulding plants  are located within the city limits of incorporated communities and have
city waste disposal facilities available.

     Local producers of windows and door units and cabinetry are small operations. In the
trade they are  referred to as "door shops" and "cabinet shops."  Door shops typically buy
sets of door jambs  and premanufactured doors which are then  assembled by mechanical
means into "pre-hung" units for sale to contractors or to retailers. They also produce garage
doors on a local scale and some produce custom doors such as louvered doors.


     Cabinet shops produce a variety of miscellaneous  cabinetry such as book shelves,
built-in  closets,  bathroom  and kitchen cabinetry, commercial cabinetry  for store  and;
industrial use,  etc. They are almost  custom furniture manufacturers and their operations
involve mostly mechanical means of assembly with only nominal glue usage. No sawmilling
is undertaken for either group and lumber and plywood are the principal raw materials used.


                                         110

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     Local producers of doors during 1972 may have produced from $400 to S500 million
in product that year.  Locally produced  cabinetry and  architectural millwork probably
equalled this amount bringing the total for the two to between $800 million and $1  billion
in sales or roughly 40-50'< of the entire industry.

3. Types of Plants

     Table  1I.G.4 shows the  distribution of plants by  employment size for millwork. This
table shous that 70/c of the producers have fewer than 20 employees.
                                   TABLE II.G.4

                    DISTRIBUTION OF MILLWORK PRODUCERS BY
                                EMPLOYMENT SIZE
               No. of Employees            No. of Plants           % Plants
               1-3                         684                  25
               4-7                         510                  19
               8-19                        709                  26
               20-49                       475                  17
               50-99                       188                   7
               100-249                     119                   4
               250-499                      35                   1
               500 and over                 	9_                  -

                  Total                    2,729                 100
     Plants producing  wood  windows and doors are the category  most affected by the
proposed standards. Although not engaged in sawmilling activities (hence not subject to log
handling pollution  problems) these  producers  do employ glue; however,  the  plants are
generally large  with a wide  product line.  Table II.G.5 lists  the product offerings of 69
millwork manufacturers who are  members  of the National Woodwork Manufacturers As-
sociation.  Besides the products these firms produce 75% also provide  prefinishing services
such as water repellant treating, factory prefinishing and priming.

4.  Financial Profiles

     Table  II.G.6 lists the distribution  of estimated financial strengths for the 69 millwork
producers who are members of the National Woodwork Manufacturers Association. 45% of
these firms  fall into the "over $500,000" category.
                                       Ill

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                              TABLE H.G.5

             PERCENT Oi- 09 WOODWORK MANUFACTURERS
                    PRODUCING VARIOUS PRODUCTS

                                                        Percent of Total
                                Number of                 Number of
Product                        Manufacturers              Manufacturers


Frames. Doors                       22                        46.4%
Frames:  Windows                    22                        31.9
Doors Hnrdwood                    37                        536
Doors'  Softwood                    33                        47.8
Sash                               28                        40.6
Window Units                       29                        420
Services                             53                        76.8
Source:
                              TABLE II.G.6

ESTIMATED FINANCIAL STRENGTH OF 69 WOODWORK MANUFACTURERS
                                         Number of
       Estimated Net Assels             Manufacturing Firms           %
       Ovei 51,000,000                        25                   36
       S500,000 to 31,000,000                   6                    9
       S1250GO to S500.000                   12                   17
       $35000 tc 3125,000                      4                    6
       Net Assets UP .^tenr.lned                 22                   32
         Total                                69                  100

       Sources:  Oo  cit.. National Woodw<      'ufacturrrs Association and
               L .-1- .crmer's Pedbook.

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5.  Pricing

     Prices in the millwork industry in general are determined by the cos! of raw materials
and the cost of converting tempered by demand. The main cost  is lumber and the price of
this material varies widely. Although the grade of Pine used is consumed principally by the
millwork  industry,  the  price of  this material is  affected by construction  lumber prices.
Millv.ork  producers (and industrial users)  must pay  enough for the product  to prevent it
being diverted into structural use, and this causes Pine prices to fluctuate with construction
lumber prices.

     Profits in the industry move coincidentally  with prices.   During  periods of strong
demand producers usually experience difficulty in securing adequate raw material supplies
 but  are  able  to  secure high prices  for their products. During  slow housing construction
 periods,  raw materials are readily available but overcapacity is the rule and prices and profits
 are low.

     More than most sectors of the wood based  building materials industry, millwork has
 been under attack from a variety of displacement products. Wooden windows have already
 largely been displaced by aluminum windows and are estimated to have only about 30% of
 the market currently. Mouldings, particularly prefinished mouldings, have very recently lost
 substantial  market share  to extruded plastics. Hardwood flush doors are  losing share to
 printed hardboard and particleboard faced doors while plastic window parts and cabinetry
 parts (including plastic doors)  are being accepted.  The impetus for this displacement has
 been recent high prices in millwork.

 H.  PREFABRICATED WOOD STRUCTURES

     This section  deals with the  manufacture of prefabricated wood structures which is
 chiefly comprised of glue laminated  beams, roof trusses, and housing component parts such
 as wall sections, etc. Truss  and component producers will be unaffected by  the proposed
 regulations, because they are not engaged in sawmilling and the method of manufacture
 commonly used employs  mostly  mechanical fasteners. Producers of glue-laminated beams
 are affected due to their use  of glue.

 1. Industry Structure

     In previous years,  up to 1972, this  category also included producers of pre-cut and
 prefabricated wooden buildings. Their output accounted  for 65/"£ of 1967  production in
 SIC 2433 and  in  1971, we  estimate prefabricated buildings represented about the same
 proportion of output although industry production had more than doubled.
                                     t
     For  the 1972 Census of Manufactures, this SIC code was  changed to delete prefabri-
 cated and precut  buildings..It is this SIC definition which we are using for this report; hence
 it  is  necessary to recast  prior years' census data to allow for  this  change. Table II.H.I
 presents  the estimated breakdown of production of prefabricated structures for 1967 and
 1971.

                                       113

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                                    TABLE II.H.1

                   SHIPMENTS OF PREFABRICATED WOOD STRUCTURES
                                    19G7 AND 1971
                                      (S Million)

                                                1967       1971

                 Glued Laminated Lumber          S 39.3
                 Sawn Lumber                       5.9
                 Combination of Glued
                   Laminated and Sawn Lumbrv       17.8
                 Roof Trusses made of Saw
                   Lumber; Light Construction        41.6)
                 Other Wood Components             49.9 I
                 Ready Cut and Prefabricated
                   Buildings1                     291.2      600.0

                     Total                     S447.8      956.2

                 1. Omitted from consideration in this section.

                 Sources:  19G7 Census of Manufactures, 1971 Annual Survey
                         of Manufactures, Arthur D. Little, Inc., Estimates.
     Producers of prefabricated structures can be divided into three categories according to
type of product produced. Manufacturers of glue-laminated beams are the most identifiable
due to the uniqueness of their product. Glued beams consist of pieces of lumber glued and
pressed together to carefully engineered and specified measurements meeting rigid strength
requirements.  Beams  60  feet long,  several feet  thick  and wide, are common  and make
striking architectural/structural components.

     Beams are produced  to  customer order and not normally inventoried in quantity. The
new construction market, both residential and nonresidential, takes virtually all of industry
production.

     Beams are expensive  to ship long distances because of their unusual dimensions and
plants tend to be spread across the country. However the style of construction  employing
glue laminated beams is more popular in the West and there is a  concentration of plants in
Oregon and Washington.

2. Types of Firms and Plants

     The investment in equipment and facilities to produce beams is substantial and many
of the producers are large  concerns.  Included are important lumber producers such as Boise
Cascade, Bohemia  Lumber,  Koppers Company, Potlatch Forests, Roseburg Lumber, and
Weyerhaeuser Company.
                                        1 14

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     The second important category of prefabricated wood structure product is roof trusses.
These are fabricated structural members most  commonly used  to support the roof of a
single family or low-rise residential dwelling. Tiusses can be fabricated on the site and in
fact, the only real distinction between a "manufactured" truss and those produced on site is
the locus of production.

     Trusses are fastened together mechanically with the joining done with nails or with
metal plates. The most inexpensive approach to truss manufacture requires only a "jig" in
which to lay precut lumber  to shape, a saw  to cut the lumber to length, and a hammer or
nailing machine. A more expensive facility for larger production might automate the process
of joining the lumber.

     Because of the low capital  investment needed and the broad  market acceptance of
trusses,  many building  materials retailers  have entered into production themselves. A 1971
study showed 15% of  building materials retailers  engaged in the manufacture of trusses,
prehung doors,  or prefabricated  buildings.  That same study  also showed the market
acceptance of such components indicating trusses,  prehung doors, and prefabricated  build-
ings were handled by 50%, 10%, and 15% of dealers respectively.

     The third important category of prefabricated wood structural product is components
such as  wall sections,  floor and  roof sections, etc. This group  of products are  also sold
exclusively to new construction and  are a step closer to the prefabricated house since most
are made to customer order.

     Joining of these components is also done mechanically and the required investment to
enter this   business is small,  ranging  from  55-10,000  for a simple operation  up to
S200-300.000 for a highly automated facility.

3.  Financial Profiles

     Table   II.H.2  presents  the estimated financial strength of a  group  of producers of
beams,  trusses, and components. This distribution indicates  mat both very small and very
large concerns compete in this business.

4.  Pricing

     Prices  of prefabricated wood structures are  strongly influenced by lumber  costs. On
average  we estimate material costs are at least 60% of the FOB plant price of components
and trusses,  and somewhat  less for beams.  Since producers must pay the market price for
their raw material, shifts in the housing market cause prices to fluctuate.
                                        115

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                   TABLE II.H.2

ESTIMATED FINANCIAL STRENGTH OF PRODUCERS
     OF PREFABRICATED WOOD STRUCTURES

                                        #      %

Trusses
Under 535,000                             1      2
$35,000-5125,000                        1      2
5125,000-5500,000                       8     20
5500,000-51,000,000                     2      5
Over 51,000,000                          13     32
Net Assets Undetermined )
    _      .           f                 10     -3*7
Not Reported           J                 	    	

          Total                          41    100
Laminated Beams
Under 535,000                            -
535,000-5125,000                        2      6
5125,000-5500,000 ,                     3      9
5500,000-51,000,000
Over 51,000,000                          12     35
Net Assets Undetermined )                 17     «5n
Not Reported           j                	    	

          Total                          34    100
Prefab Housing Components
Under 535,000                              1      2
535,000-5125,000                        3      7
$125,000-5500,000                      10     24
5500,000-51,000,000                     3      7
Over 51,000,00                            8     19
Net Assets Undetermined \                 17     40
Not Reported           j                 	    	
          Total                          42    100
TOTAL (Trusses, Laminated Beams
        and Prefab Housing Components)
Under $35,000                              2      2
535,000-$125,000                         6      5
5125,000-5500,000                     23      19
5500,000-51,000,000                      5      4
Over $1,000,000                          33      28
Net Assets Undetermined 1
 Not Reported
          Total                          119    100
                      116

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                                III.  METHODOLOGY

     All of the sectors covered under this assignment were studied to define the structure of
the particular  industry and to estimate the nature and severity of the costs of compliance.
Based upon the levels of cost to comply, it was clear that for five of the industry sectors, the
effects of effluent abatement were minimal. These sectors are:
     •   Particleboard
     •   Millwork
     •   Hardwood Dimension and Flooring Mills
     •   Special Product Sawmills
     •   Prefabricated Wood Structures

That these  industry sectors would be only minimally impacted is demonstrated by the fact
that:

     •   Particleboards  are manufactured  by a dry process, utilizing little process
         water. Capital costs of abatement represent QArr of the necessary investment
         to build a new plant of minimum economic size; total annual costs represent
         only  Q.5','r of the average 1972 selling price achieved by the plant with the
         lowest unit selling price.

     •   Millwork operations  do not include sawmilling nor wet log  handling and
         storage practices  nor  extensive gluing operations: therefore,  cost  of com-
         pliance and impact is essentially  zero. Capital costs are 1-2% of net  assets;
         Annual costs <0.\f/c of sales revenues.

     •   Most hardwood dimension and flooring manufacturers do not also operate
         sawmills. Only the larger firms operate sawmills and utilize wet log storage
         and handling processes; only those firms will be affected. These firms are in
         strong enough  financial position to make necessary investments, since capital
         exists are 1 -2% of net assets and annual costs are <1 % of sales revenues.

     •   Special product sawmills do not generally use wet storage practices and can
         readily make  the investments  to comply with process changes, since the
         maximum annual  cost if <0.5% sales revenues, and capital costs are <9% net
         assets.

     •   Prefabricated wood structures manufacture require extensive gluing only in
         the  production of laminated beams,  a very capital-intensive process. The
         capital  costs of abatement  ($2,000) are insignificant  as compared to total
         capiral  investment in  operations  (<\7c)  annual costs  ($480) are similarly
         insignificant  (<1%).

                                        117

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A. SURVEY TECHNIQUES

     Approaches to data gathering had to he developed specifically for each of the sectors
studied since the sectors vary considerably in terms of data available and number of firms
involved, e.g., 18 insulation  board manufacturers vs. more than 8,000 sawmill operators.

1. Insulation Board

     Since  only 18  mills  are covered under the  proposed Guidelines, it was possible  to
interview either in person, by phone, via a mail questionnaire or through a combination of
these devices, each of the  1 8 mills.  Thus, the financial profiles, abatement cost effects, and
profitability effects were determined for each of the firms and plants in the sector.

2. Hardwood Plywood and  Veneer

     Many  of the 490  manufacturers of hardwood  plywood  and veneer are small firms
operating small mills. Information on these small operators is generally incomplete.Thus,
we  prepared a survey which  was distributed by  the Hardwood  Plywood  Manufacturers
Association to  all  known manufacturers of hardwood plywood and veneer, irrespective  of
their membership in  the HPMA.*  During March and April 1974, approximately 490 surveys
were distributed.  We received 142 responses  to the survey, representing  29% of the total
industry.

     Respondents  were  generally willing to  answer  questions and provide the necessary
background data. However, although nearly 30% of the firms in the industry responded and
many very  small firms responded:

     •   The survey data  suggests that very small firms are underrepresented in our
         sample.

For  example, an arithmetic average  of 1972 production of 2.2 million square feet (3/8-inch
basis) and  190 producing plants, suggests that a typical plywood plant would produce 11.6
million square feet. Arithmetic averages from our survey indicate an average plywood plant
to be closer to 40 million square feet in annual production. Thus, although we have used the
survey to structure our sector generalizations, we do focus upon the  problems of the very
small firms and have  attempted to adjust our analysis to incorporate such firms.

     Basically, the survey intended to identify for individual facilities:

     •    Operations performed and product mix.
 *HPMA membership tends to consist of larger manufacturers.
                                        118

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     •   Location.

     •   Capacity and annual production.

     •   Capital investment.

     •   Other facilities on a common site.

     •   Access to municipal sewers.

     •   Log handling practices.

     •   Land availability.

     Using  this data  we were able to develop a detailed structure of the industry and its
several subsegments.  According  to industry sources, the data represents the most complete
information ever collected  on the industry.

3. Softwood Plywood and Veneer

     The analysis  of economic  impact  in this sector is based on an  intensive survey of
softwood  plywood and veneer  mills  conducted during April and May 1974, based on a
survey prepared by  the  contractor and conducted  through personal  mill visits by the
American  Plywood  Association. The survey was distributed to  150 mills (75% of the
operating  units).  The  completed questionnaires were processed  and tabulated under the
contractor's supervision. One hundred fourteen usable questionnaires were returned.

     Data  was gathered regarding operating parameters of the individual mills, such as 1973
capital expenditures  and  production. In addition, the questionnaire gathered data on the
current effluent practices and the costs of compliance which mills estimate they would have
to bear to meet proposed Guidelines.

4. Sawmills and Planing Mills — General

     To improve upon the extant data base, we conducted a survey of 195 softwood and
hardwood sawmills by telephone during March 1974. The mills surveyed were selected at
random from trade directories, and an effort was made to make the sample as representative
as possible. The number of mills interviewed by state is shown in Table III.A.I.

     A total of 144 softwood mills and 51  hardwood mills were interviewed. The sample of
softwood mills equals approximately 10% of the total  number  of mills estimated to be
                                         19

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                        TABLE IH.A.1

     SURVEY SAMPLE BY TYPE OF MILL AND LOCATION

                                      Softwood    Hardwood
Area                                    Mills         Mills
Northwest
  California                                21           -
  Idaho                                    8           -
  Montana                                 8           -
  Oregon                                  28           -
  Washington                              12          _2
   Subtotal                                77           2
Other U.S.
  Alaska                                   2           -
  Alabama                                 6           5
  Arizona                                  1           —
  Arkansas                                 4           5
  Colorado                                 3           -
  Florida                                   1           —
  Georgia                                  8           1
  Maine  -                                 1           —
  Michigan                                 4           4
  Mississippi                                6           1
  New Mexico                              2           —
  North Carolina                            4           3
  Louisiana                                 2           —
  Maryland                                 —           3
  Kentucky                                —           5
  Ohio                                    -           2
  Pennsylvania                              —           7
  South Carolina                            5           4
  Tennessee                                 1           4
  Texas                                   8           —
  Virginia                                  6           2
  Wyoming                                 2           —
  Wisconsin                                 1           2
  Missouri                                 -            1
    Subtotal                               67           49
    Total Sample                           144           51.
                             120

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operating in the industry; the sample of hardwood mills equals approximately 5'' of those
mills known to be operating.* These samples are sufficient for statistical reliability.

B. PRICE EFFECTS

     The analysis  of the  ability  to pass  cost increases  on  to  consumers  is based  on
consideration of the parameters listed in Table III.B.I.

     If the annual treatment cost (before tax) represents  a significant percentage of the
selling price, it will be difficult to pass  this on to consumers. This is particularly true in an
industry  which is characterized by high price elasticity of demand. In price  insensitive
industries, a  15%  price increase can be readily passed on. In the Timber Products Processing
Industry  sectors,  a ratio  of before  tax treatment costs  to selling price of 10% seriously
hampers the ability to pass on the cost increase.

     The existence of readily-substituted products will limit the  ability to pass on price
increases.

     Similarly, a low demand growth rate implies a mature industry sector, with established
consumer purchasing patterns. Particularly if demand is elastic, the ability to  pass on price
increases will be limited.

     A  uniformly low operating  rate  within the industry would also constrain such in-
creases.  Companies with low operating rates are more likely to absorb cost increases in an
attempt to maintain present rates or increase them rather than attempting to  pass through
cost increases.

     A critical factor in this analysis is the extent to which plants within the industry have
to absorb comparable abatement costs. If costs are unequally distributed throughout an
industry,  producers which do not  have to  make an  investment or can make less  of an
investment,  obtain a strategic cost  advantage.  A  low-cost producer will tend to  absorb
abatement costs, particularly  if the abatement costs to the low-cost producer are smaller
than  for  the  industry as  a  whole, to  put the  other  plants  in the industry at  a cost
disadvantage.

      If  products are  sold within  an industry on the basis of price  rather than quality of
 service, then cost increases are likely to be absorbed rather than passed through. Similarly, if
 market  shares are generally small  for any individual firm or plant, then price competition is
 likely to be severe and cost increases are likely to be absorbed.
  We estimate approximately 1,000 hardwood mills are operating full-time and are identifiable; industry
  sources  estimate there may be an additional 1,000 mills which operate at various times but are not
  identifiable through conventional sources. Similarly, although approximately 5,000 softwood sawmills are
  reported by the Department of Commerce, only about 1,500 are operating full-time and are identifiable.
                                           121

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                                     TABLE III.B.1

                          PRICE INCREASE ANALYSIS MATRIX

              Parameter                     Condition for Constraint
              Before Tax Treatment
               Cost-% Selling Price            High, e.g., greater than 10%
              Substitute Products             High occurrence; ready substitution
              Industry Capacity Utilization     Low; e.g., operating rate less than 80%
              Demand Growth               Low, e.g., less than GNP
              Foreign Shipments              High
              Abatement Cost Differences      Unequal distribution of costs
               Within  Industry
              Price Elasticity of Demand       High
              Basis for Competition           Price
              Market Share Distribution        Fragmented
     The ability for firms in these  industries to  pass on cost  increases is to a significant
extent a macroeconomic consideration, i.e.. heavily influenced  by the total supply/demand
balance. In  a strong market, such as the last halt" of 1972 or first quarter 1973  demand was
generally strong enough to accept substantial price increases. Conversely, in a weak market
(1971  and  the first half 1972)  firms had  to absorb most cost  increases. Tims, the final
determination of price effects was heavily  influenced by analysis of supply/demand factors.

C. PLANT CLOSURE EFFECTS

     If costs of abatement cannot be passed on to consumers or if capital  is not available,
then the management of individual plants must decide whether to continue operations at
lower levels  of profitability, or to shut down. This decision  depends on the magnitude of
financial impact on operations. The factors incorporated into our analysis of plant closures
are listed in  Table III.C.l.

     Three of the parameters in Table III.C.l deserve specific attention.

     •    Extent of integration — If a plant  is part of an extensive woodlands opera-
          tion,  it is likely  to   be  kept  open even if financial impacts or  capital
          requirements are relatively severe.  For  example, an insulation board manu-
          facturing plant can be an efficient consumer of otherwise low-value waste
          product (sawdust, shavings,  etc.) from a sawmill  or planing mill located on a
          common site.

     •    Other facilities on a common site — An  isolated  plant is most vulnerable for
          the reasons described in the integration discussion above.
                                          122

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     •    Ownership —  A large, multi-industry firm would  tend  to nuke a shutdown
          decision  based on  "rational"  business  analysis,  such  as effects on profit-
          ability.  Such  a firm  would  likely  have specific  criteria for each  of its
          operating facilities to meet. However, a  private owner  tends to have greater
          "staying  power," a greater personal commitment  to staying in business even
          if  profitability  is substantially reduced.  This is  true  for such subjective
          reasons as pride in successive family ownership, but also for such specifically
          economic reasons  as  the  fact that this may be a  particular family's sole or
          primary source of income.
                                      TABLE III.C.1

                           PLANT CLOSURE ANALYSIS MATRIX

               Parameter                          Condition for Closure
               After Tax Treatment Cost-%          High, e.g., greater than 15%
                Net Income
               Cash Flow                          Negative

               Capital Cost of Abatement-%          High, e.g., greater than 30%
                Net Assets
               Extent of Integration                 None - Low
               Other Facilities on Common Site        Isolated Plant
               Ownership                          Large, multi-industry firm
     To accomplish  the  impact  analysis,  these  factors were assigned different orders of
importance based on the  specific characteristics of individual industry sectors. That is, a
small privately-held  firm  has different profitability criteria  than a large, multi-industry,
publicly-held  firm, e.g., magnitude of cash flow is the important issue to a privately-held
firm. Further, the management of such firms is not likely to perform a discounted cash flow
analysis as part  of its stay-open/shut-down decision making. And, cash flow has a different
meaning for a private enterprise which frequently  elects  to pay higher salaries and more
encompassing fringe  benefits  rather  than reporting  profits on its income  statement.
Profitability ratios can be used as a guide when  analyzing such firms, but certainly do not
define the final story. Thus, whereas  insulation  board manufacture  is dominated  by large
plants,  large  firms,  and manages as a publicly-held enterprise,  hardwood, plywood and
veneer manufacture is the province of the small,  privately held firm; plant closure decisions
in the two segments are likely to be based on substantially different criteria.
                                         123

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                           IV.  COSTS OF COMPLIANCE


     The  costs  of compliance  vary considerably union;; these several sectors. Costs  of
effluent control are estimated in the Development Document based on the following unit
processes:

     •    Wet log storage and handling, i.e., ponding and wet  decking

     •    Processing operations, e.g., sawmilling or veneer drying

     •    Finishing operations, e.g., gluing, application of surface coatings, and appli-
          cation of sealers, stains, dyes, primers, and fillers.

In addition, since insulation board manufacture represents a distinctly different process and
generates  large volumes  of process  water, guidelines and attendant costs were developed
specifically for the  manufacture of insulation board. Further, since particleboard manufac-
ture is  also a  different  manufacturing  procedure, distinct  guidelines  and costs were de-
veloped for this product as well.

     The details of abatement costs are  presented and discussed for the specific industry
sectors  within the specific economic impact analysis  in  Section V. However, Table 1,
prepared by the EPA from this  Contractor's estimates, presents a summary of the potential
incremental pollution control costs for operations within the sectors under consideration.

     As Table IV-1 indicates, the level of costs associated with the proposed guidelines is
generally modest,  even for small operations which are typified by manufacturers of con-
tainer-grade veneer. In no  other sector  does the  annual cost represent more than 4% of
annual sales revenues. For container-grade veneer  manufacturers, and one insulation board
mill, capital costs of abatement represent a significant percent of net  assets, i.e., 11% for
container  grade veneer,  267r  for the one insulation board  mill. In all other cases, capital
costs of abatement represent less than 10% of net assets.
                                         125

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                                                                      TABLE IV-1

                                                POTENTIAL INCREMENTAL POLLUTION CONTROL COST

Total
No. Plants
18

7,323b
1,400
1,000
250
50
75
115
230
59
526

452
74
2,729
236

Plants
No. Affected
8


285
120
142
28
32
48
84
5
11

75
74
680
75
Capital
Cost
(OOO's)
$400-3,500
132

3-8.6
3-8.6
3-14.1
3-14.1
3-16.2
3-16.2
3-44
8.6
3-14.1

3-8.6
13.4-35
2
2


% Alet Assets
3-26
1

Less than .1%e
Less than .14e
.4-1.9
2.4-11
.6-3.2
.4-2
Less than .4
1.7e


3-8.6
.4-e
1-2d
Less than d 1

Annual Cost
(OOO's)
0-800
20

1-3
1-3
1.-3.9
1.-3-.9-
1-4.4
1-4.4
1-11
3
1-3.9

1-3
4.8-14
.48
.48


% Sales
.5-4
- .1

.01-4
.5-3.3
.05-.25
.9-4.3
.05-.25
.05-.22
Less than
.1
.2-. 8
.5-1.5

Less than
Less than
Less than












.1




.15
0.1
0.1
                         Segment

            Insulation Board BPT
                           BAT
            Sawmills
              Softwood
              Hardwood
         Hardwood Plywood & Veneerc
            Commercial Grade Veneer
            Container Grade Veneer
f3          Plywood & Veneer Stock Panels
°^          Plywood & Veneer Semi & Speciality Grade
            Softwood Plywood & Veneer0
            Hardwood Dimension & Flooring
              Hardwood Flooring
              Dimension

            Special Purpose Sawmills
            Particle Board
            Millwork
            Fiefabricated Wood Structures
         a.  BPT and NSPS costs are the same. BAT effluent limitations are identical to BPT (zero discharge) except in the case of Insulation Board.
         b.  1971 Census of Manufactures (more than 10 employees).  Most of these mills are seasonal or part time operations, and are not likely to be affected by
            wet log storage guidelines. The 2400 mills shown represent well over 90%of industry capacity.
         c.  Includes costs associated with Phase I guidelines.
         d.  As percent of toal assets
         e.  As percent of new plant
         Sntirftf  PPA  Arthur D I ittlo  Inr  octimatjx

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                         V. ECONOMIC IMPACT ANALYSIS

A. INSULATION BOARD

1. Cost of Compliance

     After examining the  potential subca'tegorization of the insulation board plants in the
United  States,  the Development Document concluded (hat  such factors as plant age,
location, product  mix, plant capacity, etc., were  not sufficiently variable  to  result  in
identifiable differences in  effluent quality. Thus, the principal subcatcgorization adopted
was based on process technology in use and the 18 manufacturing facilities were classified as
follows:

     •  > Little or no steaming of furnish  and no hardboard production — 8 facilities.

     •   Steaming or hardboard production  — 10 facilities.

     Most of these facilities produce mineral board  and/or hardboard in addition to the
insulation board and the total capacity on a tons-per-day basis for each facility includes that
for all three  products. However,  most  facilities  do not separate the effluent deriving from
each product and thus the  analysis of water quality did not differentiate among products.

     Examination of the treatment  technology  presently in  use for each of the eighteen
facilities shows  that five  plants discharge  into municipal systems  or expect to do so by
July  1, 1977  (BPT), two plants either have or will implement a closed system by that date,
two plants practice spray irrigation as a means of water disposal, and of the remaining eight
plants, one  plant  uses bagasse as its raw material and is not covered by the proposed
Guidelines.  Two already meet BPT control  and  treatment technology but would have to
make additional investment to satisfy BAT, and the other six must do both. The eight plants
are:

                       National  Gypsum;  Mobile, Alabama
                       Johns-Manville; Jarrett, Virginia
                       Armstrong Cork: Macon, Georgia
                       Kaiser Gypsum; St.  Helene, Oregon
                       Boise Cascade; International  Falls, Minnesota
                       Simpson  Timber: Shelton, Washington
                       Weyerhaeuser; Craig, Oklahoma
                       Temple Industries; Diboll, Texas
                                        127

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     The approach in conducting the economic analysis was thus to examine the technology'
in use at each of the remaining eight facilities and decide on what equipment and processes
must be installed to meet  the proposed Guidelines. The  resulting investment  and operating
costs were then used to measure the potential economic impact. Many of the criteria used in
assessing impact incorporate the implications of conversations held with industry executives
on options and likely actions open to individual firms.

     Certain assumptions were made in this analysis:

     •    The  cost and efficiency of  the  equipment  selected is  as shown  in  the
          Development Document.

     •    The size and  cost of equipment required  by  an individual  plant would be
          directly  related to that needed  for  the  model plant of 300 ton-per-day
          capacity, using linear  escalations  based on  flow  rates  to estimate both
          investment  and  operating costs. In practice, of course, some economies of
          scale can and would be achieved, but we have not been  given data on the
          effect of scale, and, further,believe such data  would not alter the substance
          of our conclusions.

     •    It  is probably possible to reduce the process  water  flow rates in order to
          limit the required treatment  investment but the conditions under which this
          can and would be done will  be unique to each plant and depend on product
          mix, equipment layout, and other factors. We have  thus not assumed any
          reduction in  the quantities of process water used, except where companies
          gave us specific data in this regard.

     •    All estimates  of required price increases assume that  the current returns on
          net assets will  be maintained by each producer to  recover the full incre-
          mental costs.

     •    Investment and operating cost estimates are in mid-1973 dollars and are  25%
          above the  August,  1971, costs used in the Development Document. This
          factor allows for both the  effects  of inflation and  the increased costs of
          construction. The recommended alternative technologies, capital investment
          requirements and total yearly costs  for the model  plant with a capacity of
          300 tons per day and  a flow  rate of 3,120 gallons  per ton,  are  shown in
          Table V.A.I.

 2. Price Effects

      Implementation of the BPT Guidelines (1977) would result in price increases ranging
 from 0.57 to 47 for the eight plants, based on  1973 fob selling  prices and assuming that the
 current return  on  net  assets is maintained (Table V.A.2). The full range is equivalent to
                                         128

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                           TABLE V.A.1

MODEL PLANT - INVESTMENT AND YEARLY COSTS OF COMPLIANCE
                           (Mid 1973$)

Plant Capacity - 300 Tons/Day
Flow Rate - 3120 Gallons/Ton

                                  BPT( 1977) and
                                    New Source         BAT (1983)

Subcategory I
   Guideline Alternative                  C-1                 D-2
   Technology                     Activated Sludge      Removal of SS
   Total Investment Cost (OOO's)           1193              1325
   Total Yearly Cost (OOO's)               378               398
Subcategory II
   Guideline Alternative                  C-1                 D-2
   Technology                     Activated Sludge      Removal of SS
   Total Investment Cost (OOO's)        1370-1451           1502-1583
   Total Yearly Cost (OOO's)             453-490           473-510

Source: Development Document.
                            TABLE V.A.2

                  SUMMARY OF ECONOMIC IMPACT

                                     Total           Total
                                  BPTM977)      BAT (1983)
    Investment Required
      Range (SMM)                  0-  1.5        0.1-  5.7
      % of Net Assets                0-28          1-32
    Total Yearly Costs
      Range (SMM)                  0-0.8        0  -  1.1
      Price Increase %                0-4         neg. —  4.5
      Max. Price Increase (S/MSF)     0-2          0  -  2.25

    Source: Arthur D. Little, Inc., estimates.
                              129

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SO.25 to S2  per  thousand square feet,  1/2"  basis; we  believe tluit price  increases can be
made without any  reduction in the  future market  size or late of groulh discussed earlier.
These price increases are solely attributable to the water pollution control expenditures and
do not reflect other price increases that  ma\ be necessitated In air pollution contiol costs,
increases in raw materials or labor costs, or other reasons.

     Price increases to cover the costs  of implementing  ll>83 Guidelines will range up to
4.5'' (S0.50  to S2.25 per thousand square feet) if (he current returns on net assets are to be
maintained.  We conclude  that  price increases of  this order of magnitude \\ill be  imple-
mented,  although plants do have the opportunity of changing their product mix in order to
sell relatively more of the finished products which enjoy higher average  revenues and profits.
No other secondary price effects are anticipated.

3. Financial  Effects

     a. Potential Effects on Profitability

     If competitive conditions  for an individual facility  are such that  the above mentioned
price increases  cannot  be achieved, water pollution  control costs would have to be absorbed
and  thus would reduce profitability. For both  BPT and BAT requirements, the direct effect
of cost absorption would be to make two plants marginally profitable on the basis of return
on net assets.

     Because we project a full  pass through of costs of compliance profitability will not be
affected.

     b.   Availability of Capital

     The total  capital  required to  implement BPT Guidelines would be in excess of S6
million  among  the eight plants. Relative to  net plant  assets, individual plant investment
requirements range from 0  to 28". If a plant is operating in isolation of any other forest
products operations and if that company has no unusual pressures on its capital availability,
it is probable that any capital required for pollution control expenditures ranging up to 15%
 or 20%  of current net plant assets would be provided. In  the  range of  20% to 40%, the
 company would look very closely at other potential expenditures, realizable product prices,
 future demand, and competing alternatives for capital utilization. Beyond  407&, the chances
 are  very good  that a  company would consider closing a plant or curtailing  capacity.  It
 should be pointed out that the required water pollution control investments are sometimes a
 large proportion of what a company might typically invest in any one year,  and are often
 considered "non-productive" investments.

     On the basis  of  these  criteria and other considerations, such as product mix and the
 availability  of  raw materials,  two  plants can be  regarded  as marginal; one of these  two
 facilities is  part of an  integrated  forest products  complex, considerably  lessening the
 likelihood of closure. The second marginal plant  will probably have to review its options
 more closely before reaching a decision; we estimate that a 507( probability of closure exists
 lor that facility.

                                         130

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     By 1983, the total capital required to implement BAT Guidelines, would be in exeess
of S10 million. As the  incremental investment requirements to meet BAT Guidelines (S4
million total)  are minimal, it  can be concluded that no incremental  impact due to capital
requirements is anticipated by  1983.

4. Production Effects

     a. Curtailment of Production

     Pollution abatement costs are unlikely to result in curtailment of total production by
the insulation board industry.

     b.  Plant Closures

     Based on the analysis  presented in previous paragraphs, (V.B.3.b)  we estimate that
plant closures  would represent about 4$ of insulation board production in the United States
today.

     c. Industry Growth

     Independent  of the market environment and its  impact on future industry growth,
discussed earlier, price  increases as a result of water pollution abatement costs are likely to
result in little or no incremental effect. Obviously, however, the volume of industry sales
will be reduced in proportion  to the withdrawal of capacity as a result of plant closings but
the loss will be compensated for in part by market trends away from insulation board and
also by the start-up of a new facility in 1976 (by Weyerhaeuser).

5. Employment and Regional  Effects

     Closure of the one marginal facility in the West could result in  the unemployment of
up to 200  workers.  Almost  all of these  workers can  be classified as  plant hourly  or
non-relocatable supervisory personnel  who would have to seek new employment locally. It
is unlikely  that new insulation board plants would be  built at or near the present location
although it is possible that another type of forest products operation could be located there.

6. Balance of Payments Effects

     Even  with the eventuality of plant closures,  it is unlikely that the present balance of
payments position will be affected. The new plant which will be built by 1976 by Weyerhaeuser
will compensate for the possible shortfall in production  that might be  necessitated  by a
reduction in  capacity  and thus eliminate the need for incremental imports. In addition,
current manufacturers may enjoy better  prices with less available United States capacity and
thus be encouraged  to  maintain their current production levels of insulation board rather
than to convert to alternative products.
                                         131

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 B.  HARDWOOD PLYWOOD AND VENEER

 1.  Costs of Compliance

     Table V.B.I presents the costs of compliance for a representative hardwood plywood
 mill. (The costs are as presented in the Development Document.)

     The technology recommended*  here is recirculation to contain wet  deck water. An
 estimated capital  investment of S8,dOO plus a total yearly cost of S3,000 is the estimated
 cost  level for compliance. These  costs will be borne  by any veneer or plywood manu-
 facturing mill which utilizes wet decks for its log inventory. Companies utilizing dry decking
 are  not  controlled.  Ponds are controlled to the extent that large floatable solids  must be
 "screened out." This can be accomplished by using a submerged weir. All mills using pond
 storage are believed to  have  a weir or other techniques to achieve this level of control; thus,
 no incremental abatement costs are incorporated for ponds.

     Table V.B.I a describes  the log handling  practices  for  firms in  these segments. There
 appears  to be  no pattern within  the  two major segments to differentiate  specialty vs.
                                       TABLE V.B.1

                     HARDWOOD PLYWOOD MILL COSTS OF COMPLIANCE

                                     For Mill Operations
 Manufacturing
   Location

Log Vats
Glue Washwater
Dryer Washwater

TOTAL
Wet Decks
  Recommended
   Treatment

Lagoon Treatment
Recycle
Lagoon Treatment
 Lbs./Day
BOD Load

  47
   0
   0.60
  Capital
Investment

  $3,000
   2,000
     50
 Land
 Cost

$2,500
 Yearly
Operating
  Cost

  $600
   300
    50
                                 $5,050    $2,500

            For Log Handling and Storage Operations
Recirculation
              S8.600
                                   $950
                      $3,000
 Total
Yearly
 Cost

$  870
   480
	50

$1,400
                     $3,000
Based on a 5 MMSF/Yr. hardwood plywood mill (3/8" basis)
  "See Development Document for details.
                                          132

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                                              TABLE V.B.Ia

                           PLYWOOD AND VENEER1 LOG HANDLING PRACTICES

                                                      Access to
                                                  Municipal Sewers                     Log Handling
        Category

 I. Veneer Manufacturers
   A. Commercial Grade
   B. Container Grade

II. Hardwood Plywood &
   A. "Stock" Panels
   B. Semi & Specialty Grade / # plants'
                                                  154       336
1.  Extrapolated from Survey.

Source:  HPMA Survey - March-April 1974; Arthur D. Little, Inc., estimates.

| % plants
J # plants'
jer Manufacturers
1 % plants
/# plants'
No
33%
99

29%
55
Yes
67%
201

71%
135
Dry Deck
47%
141

47%
89
Wet Deck
36%
108

18%
35
Ponds
17%
51

35%
66

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non-specialty product  producers  on the basis of these factors.  Similarly, there does not
appear to be a definitive trend based on the size of plant related to these factors. Thus, in
distributing  costs across the industry, the information on log handling practices can be
applied directly to the industry sectors and does not need to  be  corrected for the smaller,
unrepresented  firms.  Our survey data indicates that 67% of veneer manufacturers (this
extrapolates to 201  plants within the industry sector), and 71% of the plywood  and veneer
manufacturers (this extrapolates to 135 plants), presently have access to municipal sewers
and can thereby save  the costs necessary to introduce process changes, such as recycling of
dryer washwater, related to mill operations. The companies which will have to  absorb the
major  portion of the impact are those companies which do  not have access to municipal
sewers and practice wet decking for log handling. It is interesting to note that 36% of veneer
manufacturers (108 plants) use wet decks, whereas one half as many - 18% (35 plants) —
hardwood plywood  and veneer manufacturers use wet decks. But, in  both cases, major
portions of the industry have no costs to bear at all; they are already in compliance.

     Figure  V.B.I distributes the costs of compliance  across the various industry segments.
Cost factor A  equals costs due to process changes.  Cost factor B refers to costs to meet log
handling guidelines. As  the figure   indicates, only 12%  (36  plants) of the veneer manu-
facturers are forced to absorb the maximum level of costs, which is:

     •    Capital = S 14,100

     •    Annual = $ 3,870

Similarly, only 5% (10 plants) of the hardwood plywood and veneer manufacturers have to
absorb the maximum level of costs, which is:

     •    Capital = S16,150

     •    Annual = $ 4,400

Further, 43% (129 plants) of the veneer manufacturers have no cost of compliance, and 58%
(111 plants) of the hardwood plywood and veneer manufacturers also have a zero cost of
compliance.

2.  Price Effects

     The likelihood of cost increases being passed on as increased prices for consumers is
analyzed in Table V.B. 1 b. the methodology of this analysis is discussed in section III above.
Our conclusion based on this analysis for all segments is:

     •   There will be no increase in end product prices  due to compliance with
          effluent  guidelines; rather,  costs of compliance will  be absorbed by the
          manufacturers.
                                         134

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Industry Segment






Veneer
Manufacturers



Municipal Sewer Cost Factor A Log Handling Practices
Tie-In (Process Changes)
Capital Annual

Dry Decks
€^/ or Ponds

-------
ON
                                                             TABLE V.B.Ib




                                                   PRICE INCREASE ANALYSIS MATRIX

Factor
Ratio of BT Treatment*
Cost to Sell ing Price (%)
Substitute Products
Capacity Utilization
Captive Usage
Demand Growth
Foreign Competition
Abatement Cost Differences
Price Elasticity of Demand
Basis for Competition
Market Share Distribution
Number of Producers
Condition for
Constraint

High
High occurrence
Low
Low
Low
High
Unequal
High
Price
Fragmented
Many
Commercial Grade
Veneer
Low
< 1%
Moderate
Moderate
High
Low
High
Unequal
Moderate
Quality, Price
Fragmented
Many
Container Grade
Veneer
Model ate
4.3%
High
Low
Low
Low
None
Unequal
High
Price
Fragmented
Moderate
Stock Plywood
Panels
Low
< 1%
High
Moderate
Moderate
Low
High
Unequal
Moderate
Price
Fragmented
Many
Semi-Specialty
Plywood
Low
s* 1 (v
<- 1 /o
Moderate
Moderate
Low
Moderate
High
Unequal
Moderate
Quality, Price
Fragmented
Moderate
               'Maximum level of expenditure.

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For 3 out of the 4 segments (container grade veneer is the exception), the ratio of before tax
treatment cost to selling  price is a  low,   insignificant amount (less than  1%). Thus, for
those segments, the need  to increase prices is negligible.  However, for  manufacturers of
container grade veneer, the ratio of treatment cost to selling price is significant (4.3%).

     For container grade veneer, the price increase analysis matrix indicates that for every
factor, except two, container grade veneer meets the condition for constraint. For the other
two  factors (ratio of treatment cost to selling  pi ice = moderate; number of producers =
moderate), container grade veneer scores in  the moderate category, rather than in the high
category. Clearly the balance of evidence indicates that no price increase is likely.

     The  most important  factors inhibiting a price  increase for container grade  veneer
include  the  fact that  abatement  cost  differences  will  not  be absorbed equally by  the
industry, i.e., 43% of the segment will absorb no costs at all, 12% of the industry will absorb
the maximum expenditure. There are substitute products, and demand is quite price elastic,
indicating that product acceptance and sales volume is  quite sensitive to price increases.
Further,  the  basis for  competition, among  suppliers of  container grade  veneer, as well as
among other competitive packaging  materials, is price; since there is little if any product
uniqueness the lowest cost material will be used.

     Thus, prices will not be increased to reflect the rising operating costs due to pollution
control.  Rather, these  costs will  affect the  financial condition of firms operating in these
segments.

3. Financial Effects

     Each segment of the industry has been  discussed above and a representative financial
profile has been developed, and discussed, in Section II.B (Tables II.B. 10-13). Since the cost
of compliance will  have to be absorbed by firms operating in these segments, the income
statements and balance sheets have been reanalyzed to compute the effect  of this absorption
of cost. Tables V.B.2a and 2b assess  the financial impact on firms due to the absorption of
costs of compliance.

     Commercial grade veneer manufacturers are not seriously impacted by the absorption
of the cost of compliance. For example, the net profit margin (net after tax income — % net
sales) decreases only by 0.1%, to absorb the maximum cost burden. Similarly, profitability,
expressed as return  on  net assets, decreases by only 0.3%, to  go from no  cost to maximum
cost. It is worth noting that treatment cost  does represent a significant percent of net after
tax income (13.4% in the maximum case). However, even in the most severe case, cash flow
remains at a  level of $65.600 per year, and  the necessary capital investment in abatement
equipment represents a  small percentage of net assets  (2.7%). Thus, the impact on  the
financial  condition of mills with commercial grade veneer operations is not serious.
                                        137

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                                                           TABLE V.B.2a




                                                 FINANCIAL IMPACT ASSESSMENT




                                                         Veneer Manufacture
Commercial Grade
Code
Cost Factor
Capital
Annual
# Plants
% Total
# Employ
Net Income - % Sales
RON A1 -%
V, V2
0 $8,600
0 $3,000
108 60
43% 24%
7,095 3,960
2.0% 1.9%
4.0% 3.9%
Treatment Inv./Net Assets - % - 2.0%
Treatment Cost/Net Inc
Cash Flow ($1,000)
Key: Sector
V,,VS
V2,V6
V3,V7
. - % - 10.3%
$67.5 $66.5
Discharge Characteristics
V3
V4 Total
$5,500 $14,100
$ 870 $
52
21%
3,465
2.0%
4.0%
0.7%
2.9%
$67.0

3,870
30 250
12% 100%
1,980 16,500
1 .9%
3.7%
2.7%
13.4%
$65.6

vs
0
0
22
43%
440
2.5%
2.0%
—
—
$8.75

Container Grade
V6
$8,600
$3,000
11
24%
220
1.1%
0.8%
6.9%
60.0%
$7.25

V7
$5,500
$ 870
11
21%
220
2.3%
1.7%
4.4%
34.8%
$8.32

VR
$14,100
S 3,870
6
12%
120
0.6%
0.4%
11.3%
77.4%
S6.81

Total
	
—
50
100%
1,000






Municipal System; Dry Decking or Pond Storage
No Municipal System; Dry Decking or
Municipal System; Wet Decking
Pond Storage













                    No Municipal System; Wet Decking
1. Return on Net Assets = Net Income T Net Assets.
Source: Arthur D. Little, Inc., estimates.

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U)
                                                                   TABLE V.B.2b
                                                         FINANCIAL IMPACT ASSESSMENT
                                                           Plywood and Veneer Manufacture
                                                          Stock Panels
Semi/Specialty Products
Cost Factor Code
Capital
Annual
# Plants
% Total
^Employ
Net Income — % Sales
RONA1 -%
Treatment Inv./Net Assets — %
Treatment Cost/Net Inc. - %
Cash Flow
Key: Sector Discharge
PI , PS Municipal
P.
0
0
34
58%
5,220
2.6%
8.8%
—
_
$69.0
Characteristics
P:
$8,600
$3,000
19
13%
1,170
2.5%
8.6%
3.0%
7.0%
$68.0

PS
$7,550
$1,400
14
24%
2,160
2.5%
8.6%
1.5%
3.2%
$68.8

P4 Total
$16,150
$ 4,400
8 75
5% 100%
450 9,000
2.4%
8.3%
4.5%
10.2%
$67.3

PS
_
—
53
58%
8,550
3.0%
7.5%
—
_
$100.0

P6
$8,600
$3,000
29
13%
1,915
2.9%
7.4%
1.9%
5.0%
$99.0

Pv
$7,550
$1,440
21
24%
3,540
2.9%
7.4%
1.9%
2.3%
$99.3

PS
$16,150
$ 4,400
12
5%
735
2.9%
7.2%
2.8%
7.3%
$97.8

Total
_
-
115
100%
14,750






System; Dry Decking or Pond Storage
                            No Municipal System; Dry Decking or Pond Storage
                            Municipal System; Wet Decking
                            No Municipal System; Wet Decking
        1. Return on Net Assets = Net Income -r Net Assets.

        Source: Arthur D. Little, Inc., estimates.

-------
     Iii  contrast,  container grade veneer manufacturers face a  serious, negative effect on
their financial condition due to absorption of costs of compliance. For example, net profit
mar:in drops  from 2.5r,'c in the base case  (Vs = /ero cost  of compliance) to 0.6^ in the
maximum case. Further, cash  How,  which was a marginal S8,750 in the base case, drops to
even closer to the breakeven point,  S6,810, in the  maximum case (V8). The fact that the
capital investment in  abatement equipment represents more than 1 \7c  of net assets, and
perhaps as much as 30-40'; of net fixed assets, in the worst case, indicates a serious impact.

     Container grade veneer  manufacturers which have to invest significant  capital for
abatement (categories V6 and  V8) will not be able to finance abatement investments out of
cash flow. Those  firms which are not sufficiently liquid will be forced to resort to debt to
cover capital  investment needs. Being in tenuous financial condition, with such investments
in non-productive equipment representing a substantial percentage of the value of net plant
and equipment, these firms are likely  to confront a capital availability problem.

     Thus, firms in container grade categories V6 and V8  (34^ of the plants, 17 plants, 340
employees) will be most seriously affected.

     Generally manufacturers  of plywood  and veneer, either of stock  panels or specialty
products, have a  strong enough  financial condition to absorb costs of compliance with no
serious financial impact. In fact, firms in this sector of the industry could finance the capital
appropriation necessary out of cash flow,  and would not have to face capital markets to
raise the necessary funds.

     Thus,  with the exception of firms in container grade  veneer categories V6 and V8,
plants in this industry will not be severely impacted, financially,by absorbing the costs of
compliance.

4. Production Effects

     Since there is relatively little advantage to be gained  by  reducing output at a hardwood
plywood or veneer plant, production  effects will evidence  themselves in plant closures rather
than  production limitations. The magnitude of plant closures is dealt with  as a three-stage
process, namely;

     •   to  determine those segments in  which plant  closures are likely based  on
         financial impact;

     •   from that financial impact analysis,  to  develop  a preliminary number of
         plant closures, allocating plants into a high probability of impact category;
                                         140

-------
     •   to refine the preliminary closure analysis by deducting baseline closures* and
         determining the  type  and number of plants within high impact categories
         which would invest in abatement rather than shutdown.

     Table  V.B.3 summarizes the financial impact discussed in the previous section in terms
of the  plant  closure analysis.  As  the  table indicates,  only for container grade veneer
manufacturers is the resultant financial condition poor enough to suggest a  relatively large
degree of plant closures. Cash flow, at S6,810 (Table V.B.2a), is essentially  at a breakeven
level. The ratios of  treatment cost to net income,  and abatement investment to net  fixed
investment, are high enough to indicate a  capital availability problem.

     Based on Tables V.B.2 and 3, Table V.B.4a, an estimate of the number of plants which
would fall into a high probability of impact category was developed. For the container grade
manufacturers (segment I.B.), segments V6  and V8  are  those segments identified as most
tenuous  financially.  With this first level  analysis, all the  plants in those  two categories are
considered preliminary plant closures.

     Table  V.B.4b takes the preliminary analysis to the  final step, i.e.. a determination of
the net plant closures.  To  accomplish this step, an estimate of baseline closures was made
based on discussions with  the  industry,  and the development of a list of known closures
during the last  five years by the HPMA.  There is some tendency for plants  to come in and
out of production depending upon prevailing prices, but this is not nearly as strong a  trend
as is true in softwood plywood manufacture, or in lumber production.

     As Table V.B.4b demonstrates, the  only impact will be on  manufacturers of container
grade veneer. Plant closures here  will represent  27c of the number of plants and persons
employed (2 plants, 40 employees).

     To  graphically  illustrate the  point  that plants in  this industry would be impacted
at a very modest additional increment of  compliance cost (e.g., S 10.000 incremental capital)
the following Table  V.B.5  is presented as extracted  from a prior analysis of economic im-
pact. Of course, most of the plants (11 out of 20; 55%) categorized as likely closures are con-
tainer grade veneer manufacturers.
   ' Baseline closures refer to those operations which are economically marginal and would be forced to
    close based on low profitability or operating losses, independent of the requirement to meet effluent
    guidelines.
                                         141

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                                                   TABLE V.B.3

                                       PLANT SHUTDOWN ANALYSIS MATRIX
           Plant Shutdown Decision



Condition for Commercial Grade
Factor
Ratio of AT Treatment*
Cost to AT Net Income (%)
Cash Flow
(Including Treatment Costs)
Shutdown

High

Negative
Veneer

12.9%

Positive

Container Grade
Veneer

77.4%

Breakeven

Stock Plywood
Panels

10.8%

Positive
oyec. ex
Semi-Specialty
Plywood

7.3%

Positive
Ratio of Investment in
  Treatment* Facilities to
  Net Fixed Investment (%)
High
2.7%
11.3%
4.5%
2.6
'Maximum level of expenditure.

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                             TABLE V.B.4a

           PRELIMINARY PLAINT CLOSURE ANALYSIS MATRIX
     Sector

 I. Veneer Mfg.
   A. Commercial Grade
   B.  Container Grade
     V6,V8 (100% of sector)

        Subtotal

II. Plywood & Veneer Mfg.
   A. Stock Panels
   B. Semi & Spec. Plywood

        Subtotal

          GRAND TOTAL
# Plants
%     # Employees
17
17
0
0
0
17
35%
35%
0
0
0

340
340
0
0
0
340
                             TABLE V.B.4b

                NET PLANT CLOSURE ANALYSIS MATRIX

       Sector                         £ Plants    %      i Employees

 I. Veneer Manufacture
  A. Commercial Grade
     Preliminary Estimate
     less:  Base-Line Closures
          Net Closures - I.A.
  B. Container Grade
     Preliminary Estimate
     less:  Base-Line Closures

     less:  85% — invest, in abatement
          Net Closures - I.B.
     Subtotal Net Closures - I.A.B

II. Plywood & Veneer Manufacture
  A. Stock Panels
     Preliminary Estimate                   0                   0
     less:  Base-Line Closures                3                 360
          Net Closures-11.A.             ~~0                   0
  B. Semi & Specialty Plywood
     Preliminary Estimate                   0                   0
     less:  Base-Line Closures              _3_                 390
          Net Closures-I I.B.             ~0                   0
          Net Closures - II.A,B              0                   0
     TOTAL NET CLOSURES - I & II        2     .4%          40
0
0
0
17
2
15
13
2 4%
2 1%
0
0
~6
340
40
300
260
40
40
                               143

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                                     TABLE V.B.5
               HARDWOOD PLYWOOD AND VENEER - PLANT CLOSURE AND
           EMPLOYMENT EFFECT FOR VARYING LEVELS OF COMPLIANCE COSTS
                                    Sector

                                      V
                                      O
                                     Total

                                      V
                                      O


                                     Total

                                      V
                                      O


                                     Total
 - Plant
Closures

   0
   0
• Employees
 Displaced

     0
     0
TT Employees
  in Sector
    2
    0
   11
    9
   20
    40
     0
    40

   220
   770


   990
    0

    4%



    0.1%

   22%
    2%


    2.4%
      Guideline Option

       I. Process Changes Only
             (Maximum Cost:
               capital = $5,500
               yearly = $3,000)

      II. I + Recirculation from
          Wet Decks1
             (Maximum Cost:
               capital = $14,100
               yearly = $  3,870)

      III. II + Screening from
          Wet Decks & Log Ponds2
             (Maximum Cost:
               capital = $24,100
               yearly = $  3,870


      V = Commercial Grade Veneer
      0 = Other Sectors
      1.  Proposed Guideline
      2.  Guideline requiring a significant amount of screening of very small particles.
      Source: Arthur D. Little, Inc..estimates.

     We  do  not anticipate secondary effects on users of container grade veneer. There is a
certain amount of underutilized capacity in the industry which could be employed to make
up this loss  of production. Further, users have options of using other packaging materials  to
accomplish their objectives.

5. Employment Effects

     Plant closures will cause 40 employees to be displaced as indicated in Section V.4.

     Not all of the persons displaced will be unable to find comparable employment. These
mills tend to employ a relatively high percentage of older, relatively low-skill employees; we
estimate that  approximately 30% of the employees will be able to find other comparable
jobs.  Approximately two-thirds of the administrative  employees should  be able to  find
comparable  employment, while only about a quarter of the production workers will be able
to do so.*
'Approximately 20%  of  total  employment represents administrative employees.

                                        144

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     Our estimate that 707c of the employees will  be unlikely to find  other comparable
employment is a relatively high ratio. It is so high due to the older age distribution and lo\\
skil! level of the employees. Additionally, many  of these operations are located in small,
remote  communities  in  which there  are  not   a  lot  of  readih-available  employment
alternatives.
6. Resultant Regional Effects

     Since only  two plant closures  are  likely, there will  be no  noticeable community
impacts due to plant closures and subsequent unemployment.

     However, Table V.B.6 presents an estimate of the regional distribution of employee
displacement  if other  Guidelines  were  implemented at higher levels of costs, yielding
significant impacts.  As  the  table demonstrates,  47f,'  of  the plant closures and  dislocated
persons would be  located  in the  states  of  the mid-South, i.e., the  Carolinas, Virginia,
Kentucky, and Tennessee. Most of the plant closures would be located in rural communities.

     Our  prior studies of investment patterns in the forest products industry in the United
States suggest that for  several reasons,  including wood availability and generally  lower
operating costs, the domestic forest products  industry will  be investing relatively more
heavily in the states of  the South and Southeast than  in any other region. This suggests that
workers displaced from  these plants could be utilized  in new plants. However, the lead time
from investment decision to plant start-up for a pulp and paper mill is 3-5 years; it is about
12-18  months for a large saw mill  or veneer and plywood mill.  Thus, while there will be
some new opportunities available in these regions, they will not  be available immediately.
Further, rather than being located in a number of small communities distributed throughout
the region, they will tend to be concentrated as larger complexes in fewer communities.

     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  high-skill  occupations.  However,  the bulk  of the  operations
performed in a plywood mill can be readily learned. Thus, employees displaced from plants
will  generally not  have  skills so specific they  could only find employment  in another
plywood plant, nor  would they be in demand as highly-skilled labor.
                                        145

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                                   TABLE V.B.6

            POTENTIAL REGIONAL EMPLOYEE DISPLACEMENT DISTRIBUTION

                                                 Plant
                              Region               %

                            Mid-South              47
                            North Central            21
                            Southeast               16
                            Northeast               11
                            Rest                  	5
                                                 100
     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. The closure
of a small  veneer mill will probably not imply displacement of logging personnel as well.
Also, many of the  persons who supply logs to plywood  and veneer mills are  farmers and
other  landowners  who cut logs to augment their income but are not sclely dependent on
logging fees to support  their families.  Further,  in  the case of the container grade veneer
segment where  there  is loss of production, there are alternative  sources of packaging
materials and additional container grade veneer capacity  to avoid secondary impacts due to
loss of supply.

7. Balance of Trade 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  past 20 years there  has never been a substantial  export of domestically-produced
hardwood plywood. We do not anticipate a shift in this basic trend.

     We anticipate no effect on balance of payments  due to pollution abatement cost
requirements.  Only two plant closures  are projected; 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. Further, both plants are
container grade veneer manufacturers, a product for which exports and imports are virtually
nonexistent.

     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 the balance of trade here than do environmental control
costs.
                                        146

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C. SOFTWOOD PLYWOOD AND VENEER

     Tliis  analysis  is based on an intensive survey of softwood plywood mills conducted
during April  and May 1974.  The survey was presented to 150 softwood mills and was
administered  by the  quality control  inspection  field  service  of the American  Plywood
Association. The questionnaire was prepared  by  Arthur D. Little and the completed ques-
tionnaires were processed under oiir supervision. 114 questionnaires were returned and were
usable. In addition, since some veneer mills lire not integrated with plywood manufacturing
(38 mills)  we  contacted these isolated mills separately.

     The  purposes of these surveys was  to determine the effluent practices of these mills
and  to enable us to estimate the specific compliance costs which these mills must bear in
order to  meet the proposed Guidelines. In addition data was gathered about  1973 capital
expenditures  and 1973 production  (million square feet 3/8ths inch basis)  to allow us to
estimate the economic affects of compliance.

1. Costs of Compliance

     a. Industry Survey Results

     The survey results have been cross tabulated  by the following characteristics:

     •    Mill Size
          Each question is separately tabulated by the volume of 1973 production in
          million square feet 3/8ths inch basis. The categories used are small (under 40
          million square feet), medium (40 to 99 million square feet), and large (over
          100 million square feet). •

     •    Type of Operation
          Responses are shown separately for plants producing plywood products only
          versus plants located at sites where other wood processing activities occur.

     •    Water Pollution Impacts
          The tabulations are divided  into three categories: mills with no impact, mills
          with impact due to log handling and storage, and mills with impacts resulting
          from manufacturing processes.

     •    Geographic Area
          Tabulations were made separately for Western mills and Southern mills.
                                       147

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     b. Capital Expenditures Pattern

     Plywood  mills spent heavily for  capital  improvements for pollution control as well as
plant expansion during  1973.  Out of 100 mills responding to the question of their 1973
expenditures,  76 made  expenditures for air pollution, 62 made  expenditures for  water
pollution, and 86 made expenditures for safety (under the Federal OHSA requirements).
Interestingly only 59 mills made capital expenditures  for the purpose  of improving plant
productivity during that year indicating  the higher priority which was attached to pollution
and safety expenditures.

     For the plants responding, a total of $127,345,000 in expenditures were made in 1973
by 95 of the plants.  Of these funds, 80% were expended for new or replacement productive
facilities while the remaining 20%- were used to control air and water pollution or to increase
plant safety. Air pollution was a priority item during 1973 as it received 14% of the money
spent.  In  comparison water pollution expenditures equalled only  3% of the  total as did
safety expenditures.  These results are consistent with our prior analyses  - that  air pollution
control was a  far more serious problem than water pollution or safety. However,  the results
also  showed that water pollution and safety  are not totally overshadowed by  air pollution
requirements and together amount to a  sizable portion of capital equipment expenditures.

     A breakdown  on a regional  basis shows that the Southern plants tended to  spend
considerably  more  funds for  pollution control and  safety  as compared to productive
facilities  than did plants in  the West.  However, the  results  for  the  Western  plants are
somewhat  misleading as  there were  several  large new  mills constructed in the West and a
laraer portion  of the cost of  a new plant tends to  be for  productive facilities than for
pollution control or safety.

     For  the  three plants constructed during 1973, the  total capital expended  was
564.800,000 and of this total, only 7%  was  expended for pollution control or  safety, while
93% went to construction of productive  facilities. In comparison a total of 562,545,000 was
spent at  92 existing  plants and fully 1/3  of this was spent for pollution control  or safety. At
these existing  plants air pollution expenditures were 23% of the total, more than twice the
level expended for water pollution and safety which received 5% each.

     The capital costs of compliance for the 63 mills not in compliance are estimated to be
51,175,000. This compares to  $43,860,000 reported  spent by those mills in 1973 for all
capital equipment and is equal  to 3% of that sum. The average Western mill is expected to
spend $18,000 for equipment and $4,000 for operating  expenses while the average Southern
mill will spend $20,000 for equipment and $4,000 for operating expenses. For each group the
total capital costs of compliance are equal to 3% of the funds actually expended  for new facil-
ities in 1973. We feel there is no significant difference in the likely impact on mills in the
 South as opposed to the West; they  can be  treated  as a group.
                                        148

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     Examination of the capita! spending patterns of the 63 mills not in compliance showed
the following expenditures reported were made in 1973:

                     Type                    Amount     Percent
            Air Pollution Control             S11,793,000      27
            Water Pollution Control             2,168,000       5
            Safety                             1,952,000       4
            New Productive Equipment         27,947.000     _64
            Total                            543,860,000     100

     c. Findings

     The findings are further summarized in Appendix  A to this report.

     d. Softwood Veneer

     Table V.C.a.  estimates the incidence of direct discharging and the costs of compliance
to reach  BPT for veneer mills. The 21 mills expected to be affected represent 55% of the
total number of plants (38) estimated to be in operation.

2. Price Effects

     Prices in the  plywood industry are established as  a function of supply and demand and
are not directly impacted by increases or decreases in production costs. Any change in cost
will have an  impact  first on supply and second on price but only in the long run. However,
the expected change in operating costs for  the incurring violations is so small hi our
estimation as to be almost completely negligible. The typical annual costs of compliance are
a matter  of  only  a  few cents per thousand square feet produced. This is equal  to 0.1% of
annual mill sales.  This change in  cost will not have any measurable impact on  supply nor
ultimately on price.

     Table V.C.I  presents the price increase analysis matrix for softwood  plywood and
veneer. The   evidence is not  strong for a cost  pass-through price increase.  Therefore we
anticipate no price increases due to the added costs of complying with the proposed effluent
Guidelines.
                                       149

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                                          TABLE V.C.a.

        MILLS EXPECTED TO BE AFFECTED AND CORRECTIVE COSTS - SOF TWOOD VENDER
          Effluent Practice

  I.  Wet Deck Discharges to
     Stream or River
 II.  Log Pond Discharges to
     Stream or River
III.  Veneer Dryer Discharges
     (8 mills only)
IV.  Log Washing Effluent Discharges
 V.  Hydraulic Debarker Discharges
VI.  Treatment Pond  Discharges

        Total

1. Total # mil Is in industry = 38.

Source:  Arthur D. Little, Inc., estimates.
— of Veneer
Mills Likely
Impacted
2
12
2
2
3
21'
Capital Cost
of
Corrective
Measures
S 8,600
3,000
1 1 ,300
15,000
3,000
$40,900
Totiri
Sector
Capital
Cost
S 17,200
36,000
22,600
30,000
9,000
$114,800
Annu,il
Operating
Cost
$ 3,000
500
3,280
3,000
500
$10,280
Tot.tl
Sector
Operating
Cost
$ 6,000
6,000
6,560
6,000
1,500
$26,060
                                           TABLE V.C.I
           PRICE INCREASE ANALYSIS MATRIX FOR SOFTWOOD PLYWOOD AND VENEER
             Parameter

      BT Treatment
        Cost-^Selling Price
      Substitute Products
      Capacity Utilization
      Captive Usage
      Demand Growth
      Foreign Competition
      Abatement Cost Differences
      Price Elasticity of Demand
      Basis for Competition
      Market Share Distribution
 Condition for
   Constraint
High
High Occurrence
Low
Low
Low
High
Unequal
High
Price
Fragmented
       Plywood
Low; < 0.1%
Moderate
High
Low
Moderate — High
Low — None
Moderately Unequal
Moderate
Price
Moderately Fragmented
     Veneer
Low; < 0.2%
Moderate
High
None
Moderate — High
None
Moderate
Moderate
Price
Fragmented
                                              150

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3. Financial Effects

     a. Effect on Profitability

     Absorption of costs of compliance will not have any notable or measurable impact on
either industry profits or profits for the average mill.

     b. Effect on Availability of Capital

     Our findings  indicated that 63  out of 114 softwood plywood mills reporting would
require investment to reach BPT. This number represents 55% of the group. However, their
total capital  expenditures  in  1973  represented only 34% of the total expended in the
industry. This is because these mills tended to be existing mills while a sizable  portion of
industry  capital  expenditures are made for the construction of completely new mills. The
mills not in compliance were  expected to have to spend an amount equal to 2% of their
1973 capital expenditures to bring them into compliance with the recommended Guidelines;
therefore the likely capital  drain on  the entire industry to make such expenditures is equal
to approximately  1% of the total industry capital expenditures. This level of expenditure
will not have a measurable  effect on the availability of capital for the entire industry or for
those units affected.

     It is necessary to examine the  situation faced by individual mills to determine if the
burden for any single producer will be too great and/or whether producers will be able to
technically comply with the proposed regulations.

     Our first measure to determine whether a mill might encounter financial difficulty is
based on estimated profitability.  To estimate profitability for 1973 we used  the average
selling price for 3/8ths inch standard exterior Douglas Fir plywood as reported by Random
Lengtlts  Yearbook which was SI 12  in  1973 and multiplied that figure by  our projected
profit before income taxes attained in 1972  as described  in  Section II.B. This yields an
estimated net profit before income taxes for our typical mill of 11.7% of sales. Multiplying
these two figures indicates the average mill should produce a profit of about S13.10 per
thousand square feet of production and it is against this standard  that we measured possible
economic impact.

     The calculation  showing  dollar costs of  compliance per thousand square feet of
production for the 63 mills not in compliance shows only two mills which will be required
to expend  more than S1 of capital  for each thousand feet of production. These are mills
which respectively are expected to spend $7.50 and $1.36 per thousand  feet produced  in
1973. AH other mills are expected to spend under $1.00 of capital per thousand  square feet
of production or less  than 1% of their 1973 sales.
                                       151

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     The two mills which  appeared  to  be financially vulnerable were  contacted  by tele-
phone. The first mill suffered from a log pond overflow and expected to spend SI5,000 to
screen  these discharges. In fact the manager of that  mill reported that the mill actually had
two log ponds, the second of which was being converted to a catch basin for the first and
that  when this conversion was complete (expected to be finished by late summer 1974) no
more overflows would reach a stream or river. Therefore this mill would, at that time, be in
compliance with the proposed Guidelines and would not be required to expend funds for
compliance purposes.

     The second mill considered to be financially impacted produced 11 million square feet
of plywood in 1973. This mill also suffered from  a  log pond overflow and was also taking
steps to bring discharge  under control  by alternate  means. The mill manager reported the
principal source of water for this pond was  clear cooling water discharged from the mill.
This producer  was constructing ditches around  the  pond  to divert  that cooling  water
elsewhere  and stop overflows from  this  one acre  pond, thereby bringing the mill into
compliance.

     These were the only two  mills  considered to  be vulnerable on a  financial basis and,
based on our further interviews with the managers, we do expect closure. (It is interesting to
note as well that the steps these mills were taking to  bring themselves into compliance could
be used by a number of  their mills; thus lowering the expected total costs of compliance to
the industry.)

     For veneer  mills the  analysis  yields the  same conclusion.  The  maximum capital
expenditure for a veneer mill would represent only 2% of net assets. Most mills could readily
finance That amount out  of cash  flow. Further, the annual increase in operating costs is only
0.2Tf of sales revenues, at maximum.

4. Production Effects

     The only other basis  which might preclude  compliance would be a lack of land to
construct  lagoons for  log  conditioning water discharges. Six  mills were discharging log
conditioning overflows to  a stream or river.  The questionnaire for each was examined to
determine if the mill either had a log or treatment pond to which conditioning waters could
be diverted or if land was owned or available to construct a treatment pond. Of the six mills
suffering from this problem 4 had log ponds  or treatment ponds where we assume the log
conditioning water could be discharged and the remaining two reported they were able to
purchase more than 1 8  acres of land adjacent to the  mill sites which  could be  used for
lagoon construction. Since  less than one acre of land is estimated to be required for lagoon
construction this is clearly sufficient to bring the  mills into  compliance. Therefore, on a
technical basis, we conclude no  mills would be required to  close due to a lack of ponds to
accept log conditioning discharges or due to a  lack of land to construct such ponds.
                                         152

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     Since  we  concluded above  that  financial  effects where  minimal,  there  will be  no
closures of  mills resulting from  institution  of  the  recommended guidelines. Table V.C.2
summarizes the plant closure circumstance for the segment as a whole.

     Therefore, there will be no lost production, no plants closed, and no measurable effect
on industry growth.

                                      TABLE V.C.2

                           PLANT CLOSURE ANALYSIS MATRIX
                           SOFTWOOD PLYWOOD AND VENEER
                                       Condition for          Softwood Plywood
               Parameter                  Closure                 Segment
          AT Treatment
             Cost-^ AT Net Income         High                Low; 0-4%
          Cash Flow                     Negative            Positive, Strong
          Degree of Integration            Low                Moderate
          Abatement Investment-:-
             Net Fixed Investment         High                Low;<1%
          Other Facilities on Common
             Site                       Isolated             Moderate
          Ownership                    Large, Multi-industry  Large, Multi-industry
 5. Employment Effects

      There will be no losses of jobs due to implementation of the proposed guidelines.

 6. Resultant Regional Effects

      There will be no difference between regions of the country in terms of the measurable
 effects of the proposed guidelines.

 7. Balance of Payments Effects

      The  effect of the proposed guidelines is so  minimal that there will be no measurable
 effect on the U.S. balance of payments.
                                          153

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D. SAWMILLS AND PLANING Ml LLS, GENERAL - SIC 2421

     This section estimates  the economic effect  on  the hardwood and softwood  sawmill
industries of  complying  with  recommended effluent  control  standaids. The suggested
standards are developed for  discharge of waste waters from "mill operations" and from "log
storage activities." Our analysis indicates the industry will be fully able to comply with the
required  standards for mill operations, since essentially no processing changes or investment
in equipment will be required.* However, to control waste water from log storage activities,
a number of firms will be required to invest in abatement facilities. This analysis focuses on
these standards.

1. Costs of Compliance

     It is assumed that mills employing more than one form of wet log storage (i.e. ponds
and wet  decks) will be able  to channel the effluent from both sources into one facility. It is
also  assumed  that the  required expenditure  per violating mill will be 38,600  capital
investment; $3,000 annual charges.* Some mills will be  able to employ smaller installations
and  will  not  be required to spend  the  full sum. To the extent this  occurs  this  analysis
represents a "worst case" calculation.  Finally there will undoubtedly be  some mills which
will be able to comply with the required standards without  installing any facilities through
the use of water collection or diversion systems or by changing their method of operation.
Presumably a  mill will follow an alternate course only when that course  is less costly than
that required  by the proposed screening technology. Again to the extent this occurs this
analysis represents a "worst case" situation.

     To  improve  the available data base, we conducted a survey of 195 softwood  and
hardwood sawmills by telephone during March 1974. The mills surveyed were selected at
random  from  trade directories and an effort was made to make the sample as representative
as possible. The number of mills interviewed by state is shown in Table V.D.I. A total of
 144 softwood mills and  51  hardwood  mills were interviewed. The sample of softwood mills
is roughly equal to 10% of the total number  of mills estimated  to  be operating in the
industry while the sample of hardwood mills is equal to about  5% of those mills known to
be operating.**  We feel  a 10% sample  of  the  softwood mills is sufficient  for statistical
reliability and a 5% sample  of the hardwood mills known to be operating is also sufficient.
 *See Development Document for details.
**We estimate approximately 1,000 hardwood mills are operating full time and known to be identifiable;
  industry sources estimate there may be an additional 1,000 mills who operate at various times but are
  not identifiable through conventional trade sources.
                                         154

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              SAWMILL SURVEY
                TABLE V.D.1

SURVEY SAMPLE BY TYPE OF MILL AND LOCATION

  Area            Softwood Mills      Hardwood Mills
Northwest
California
Idaho
Montana
Oregon
Washington
Subtotal
Other U.S.
Alaska
Alabama
Arizona
Arkansas
Colorado
Florida
Georgia
Maine
Michigan
Mississippi
New Mexico
North Carolina
Louisiana
Maryland
Kentucky
Ohio
Pennsylvania
South Carolina
Tennessee
Texas
Virginia
Wyoming
Wisconsin
Missouri
Subtotal
TOTAL SAMPLE

21
8
8
28
12
77

2
6
1
4
3
1
8
1
4
6
2
4
2
-
-
—
—
5
1
8
6
2
1
-
67
144
                                        2_
                                        2


                                        5

                                        5
                                        4
                                        1
                                         3
                                         5
                                         2
                                         7
                                         4
                                         4
                                        49
                                        51
                    155

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     Our survey  shows there will be  significant regional differences in the impact of the
proposed regulations.  For example, as shown in Table V.D.2,  53','r of the softwood  mills
surveyed in  the  Northwest  could be affected by  the  proposed log handling and storage
regulations.*  In contrast  only 13% of the softwood mills operating in the balance of the
United  States are expected  to be  affected. None of the hardwood  mills operating in the
                                       TABLE V.D.2

                          LOG STORAGE METHODS EMPLOYED

                        Northwest         Other           Northwest           Other
                        Softwood   %.  Softwood   %    Hardwood    %    Hardwood    %
Mills Potentially Impacted:
  Ponds Method
     Ponds Only              55------
     Pond, Wet Deck
      and Dry Deck           68------
     Pond and Wet Deck       45____2         4
     Pond and Dry Deck      _L      _!    -H      _Z      —        -       -        ;_
                           16      20     -       -       -        -        2         4

  Other Wet Methods
     Wash Logs and Dry
      Deck                  1       1    -       _____
     Wet Deck Only          23      30      4       6       -         -       6        12
     Wet Deck and Dry
      Deck                 _7_    '  _9    _5      _7       _-        -_      _4_         8
                           31      40      9       13       -        -       10        20

  Subtotal                 47      61      9       13       -        -       12        24

  Mills Not Impacted
     Dry Methods          JO     _39    58_      87      _2_       100      37        76
  Total                    77     100    67      100       2       100      49       100
  'I.e., these mills use wet handling and storage techniques. Since the EPA has suggested that wet decking
   operations be "decontrolled," only those firms operating pond will be impacted, i.e., 21% of Northwest
   softwood mills.
                                          156

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Northwest  will be affected (there  are very few hardwood mills in that area) while 24% of
those operating in the balance of the  U.S. operate in a fashion which would cause them to
be affected by the log storage regulations.


     Table V.D.3 shows additional detail on the operations of mills employing wet deck log
storage. Most  significant is the fact that the majority of mills  employing wet deck storage
already recirculate log spray water. In the Northwest  19 of 40 mills reporting (48% of the
group)  have  installed  systems for recirculating  log spray water;  among softwood mills
operating elsewhere  in the United States,  fully 89%  presently recirculate log spray water
while; 50% of the hardwood mills do so as well.

     It  is also significant that the use  of log spray  equipment tends  to  be a seasonal
operation.  Northwest softwood mills spray logs an average of only 4.8 months per year (the
median producer reported spraying for  12 months). Among hardwood mills the mean and
median number of months logs were sprayed was the same, seven months.


                                    TABLE V.D.3

                               WET DECK OPERATIONS

                                   Northwest          Other U.S.         Other U.S.
                                    Softwood          Softwood          Hardwood
                                     Mills              Mills              Mills
     Number of Mills                     40                 9                12
     Sze in Acres
       Range                        2-100.0         0.5-10.0          0.5-10.0
       Mean                          13.5               3.6               3.2
     No. Months Deck is Sprayed
       Range                        2-12             1-12              3-12
       Mean                           4.8               8.3                7.0
       Median                          4.0               12.0                7.0

     No. of Mills Who Recirculate
     Spray Water                       19                 Q                  Q

     Percent Recirculating Spray Water      48%               89%              50%
     Table V.D.4 provides additional information on operators using log or mill ponds for
storage. Among Northwest softwood mills 7 out of 18 reporting indicated their ponds never
overflowed  while  only  1  had a  pond which always overflowed. The balance incurred
occasional  or seasonal water  discharges.  Among other  U.S.  softwood  mills 3 out of 7
                                         157

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                                     TABLE V.D.4

                                   POND OPERATIONS

                                      Northwest          Other U.S.         Other U.S.
                                      Softwood          Softwood         Hardwood
                                        Mills               Mills               Mills

     No. Log or Mill Ponds1                  15                -                 2

     Size in Acres:
       Range                           1/4-40             -                NR
       Mean                             7.2                 -                NR

     No. Oxidation/Sedimentation
     Ponds                               18                  7                 6

     Size in Acres:
       Range                            1-15           1/4-1           1/2-1
       Mean                             4.3   '             .75                .75

     Do Ponds Overflow
       Always                           1   )              -                 —
       Occasionally                       8   >    11         3                 1
       Seasonally                         2   '              —                 —
       Never                            734
       No Answer                        —                  1                 1
                                       18                  7                 6
     NR = Not reported
     1.  Excludes mill using inland lake.
reporting indicated no overflows; one did not answer; and three had occasional overflows.*
Only one out of six hardwood mills with an  oxidation-sedimentation pond stated that facility
overflowed  while four  reported theirs did  not.  We assume  mills employing oxidation-
sedimentation ponds only will not require  additional investment to meet effluent guidelines.
In that case  we note that 40% of mills reporting will apparently not be required  to install
screening equipment for log ponds.

     Table V.D.5  analyzes the  mills reporting according to whether or not other wood
converting facilities  were located and operated at the site of the sawmill. In the Northwest
only 38% of the softwood  mills expected to be affected were  located at sites where other
wood converting facilities operate. In the  balance of the United States 33% of the softwood
mills affected shared their  sites  with other wood converting operations. The opposite was
 "This data applies to oxidation-sedimentation ponds only since no softwood mills operating outside the
 Northwest used log or mill ponds for log storage.
                                          158

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1/1
Northwest Softwood




Other U.S. Softwood




Northwest Hardwood




Other U.S. Hardwood
                                                               TABLE V.D.5




                                    HARDWOOD AND SOFTWOOD MILLS WITH MULTIPLE FACILITIES AT SITE
Mills Potentially Impacted
Total
iod 47
>od 9
x>d —
ood 12

Number With
Multiple
Facilities
18
3
-
8

Percent Total
38 30
33 58
2
67 37

Mills Not Impacted
Number With
Multiple
Facilities
16
25
1
15

Percent
53
43
50
41

Number
of
Mills
77
67
2
49
195
Total Mills
Number With
Multiple
Facilities
34
28
1
23
86

Percent
44
42
50
47
44

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true for the  hardwood mills expected  to  be affected, however, with 67',' of those mills
sharing  common mill  sites.  In  total,  for  ;ill mills  reporting (both those expected to be
affected and  those not expected to be affected), 56',' were stand-alone operations and 4>\'"c
shared the mill site with some other facility.*

     Mills sun-eyed were asked to report their total  1973 lumber production in board feet.
One hundred sixty-one mills answered this question  and 34 did not. Table V.D.6 shows the
results for those mills reporting. The answers indicate that  mills affected by the proposed
regulations tend to be somewhat larger than the  average. In the Northwest, for example, the
mean production in  1973 for mills expected to be affected was 50,000,000 board  feet while
the average for  those not affected was  41,000.000 board feet. In this situation we do not
view the difference  in unit production to  be significant for economic impact purposes.  In
the  balance  of the  United States,  however,  the  mean production for softwood mills
expected to be. affected was 35,000,000 board feet  in 1973 while the mean production for
those not expected  to be affected  was  only  16,000,000 feet. In this  case we believe
significance can be attached to the difference  in unit production; it reflects the fact that
larger mills are  more complex in their operations and more  inclined to invest in spraying
equipment to protect larger log inventories.

                                    TABLE V.D.6
                              1973 REPORTED PRODUCTION
                                  (million board feet)

                               Mills Impacted	 	
                    Mills Not Impacted
                        Number
Production
Number
Production
                        Reporting  Range  Mean Median  Reporting  Range Mean Median
     Northwest Softwood
     Other U.S. Softwood

     Northwest Hardwood
     Other U.S. Hardwood

     w = withheld to prevent accidental disclosure
40
7
_
10
6-198
15-

3.5-
7,5
—
32
50
35
—
13
40
32
—
8
29
45
2
28
7-112
.2-

1.5-
48
w
15
41
16
w
6
40
10
w
6
      A similar pattern is found among hardwood lumber producers with those affected re-
 porting a 1973 mean production of 13,000,000 board feet as compared to an average of only
 6,000,000 board  feet for those not expected to be affected. In the case of the hardwood
 mills, however, the  median mill size was only 8,000,000 board feet for those affected as
 compared to 6,000,000 board  feet for those not expected to be impacted. We  caution,
 again, that in the hardwood situation a number of unidentified,  smaller producers will be
 affected  as well.
"The implication of the data relates to our opinion that mills with multiple operations on a single site will
 be more resistant to pressure for closure, vis-a-vis "stand-alone" facilities.
                                          160

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2.  Price Effects

     The industry will absorb the increased costs due to expenditures required for water
pollution control, it will not be able to pass these costs along to consumers. The rationale
for this conclusion is:

     •   Fewer than half of the total/producers operating in  the industry will be
         required to  make such expenditures.  Because of the extremely competitive
         nature of the business we do not expect  these  producers  to be able to
         increase their prices without losing business to their competitors.

     •   Prices in the industry are historically established by the relationship between
         supply and  demand and not by  the  cost of production. As costs go up or
        > demand  declines prices and sup"pl^ are adjusted to reflect the new economics
         of the industry.  Because of this pricing mechanism the results of a small cost
         change such as this cannot be directly  traced  to any specific shift in price.

     •   The level of expenditure involved in this situation is  so small as to make
         virtually no impact on  very large producers;  while   it  may  have  some
         impact  on the smaller firms their prices are not established independently
         and they would be unable to  adjust  their prices without coming under
         increased competitive pressure.

     For these reasons we feel there will be no directly measurable price effects as a result
of these regulations.

3.  Financial Effects

     Table  V.D.7  reports  capital  equipment expenditures made in 1973.  On average the
annual capital equipment expenditures reported  were significantly larger than those required
under the proposed regulations. For example, for Northwest softwood mills which made air
pollution  control  equipment  expenditures in  1973  (16 mills), the mean cost of these
facilities was 5151,000; for those  making  water pollution control equipment expenditures
(18 mills),  the  average cost was 5184,000; and for producers purchasing new production
equipment, the mean cost was $1,083,000. A much lower expenditure level prevailed among
softwood mills operating  elsewhere  in the United States although again the figures were
considerably  higher than the 58,600 maximum  expected under the proposed regulation.* A
similar pattern exists for hardwood mills.

     Table V.D.8 presents a summary of the capital expenditures we estimate will be required
to control water pollution among sawmills.
*See Development Document for cost details and rationale.
                                        161

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                                   TABLE V.D.7
Air Pollution Control
Equipment:
   No. Reporting Expense
   Mean Cost ($1,000)
Other Pollution Control
   No. Reporting Expense
   Mean Cost ($1,000)
Capital Equipment:
   No. Reporting Expense
   Mean Cost ($1,000)
Other Pollution As Percent
Total Capital Expenditures
                         CAPITAL EXPENDITURES IN 1973
                                     (all mills)
Northwest
Softwood
Mills
16
$151
18
$184
6
$1083
Other U.S.
Softwood
Mills
2
NR
$14
3
$222
Hardwood
Mills
2
$200
6
$ 70
2
$115
All
Mills
20
$156
24
$156
11
672
                               15
38
19
                                   TABLE V.D.8

SUMMARY OF ESTIMATED WATER POLLUTION CONTROL CAPITAL EXPENDITURE
                    REQUIREMENTS FOR SAWMILL INDUSTRY
Total Mills Operating
Percent Potentially Impacted
No. Potentially Impacted
Estimated Total Capital Investment Re-
quired ($ million)2

Estimated Total All Mills

Average Annual Capital Expenditures for
Sawmills and Planing Mills (1965-1971)
($ million)

Water Pollution Capital Expenditures as
Percent Total Annual Capital Expenditure
Northwest
Softwood
650
521
338
$2.9
~— —

Other U.S.
Softwood
750
13
98
$0.8
—— 	 ''v^- •*
$ 5.8
Other U.S.
Hardwood
1.000
24
240
$2.1
^ , i —
^^^••Ml
                                                       $182.50
                                                         0.9%
1.  Adjusted for Northwest softwood ponds which do not overflow.
2.  No. mills x $8,600 each.
                                     162

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     Based  on the  results of our survey we have estimated that 52' '<  ot" the approximately
 650 softwood mills operating in  the Northwest  will  be obliged to  spend $8.600 each. For
 the  group this represents a total of $2.9 million to be  expended by  338 plants. For the
 balance ot" the softwood industry, 13/7 of the group (98 mills) aie expected to spend  $0.8
 million.  In  the case of hardwood mills we are estimating expenditures will be required by
 240 mills for a total of $2.1 million.

     In aggregate all mills operating in the United States are expected to spend $5.8 million
 for  water pollution control equipment. In  comparison the entire industry  has averaged
 annual capital expenditures of $182.5 million during the period  1965 to 1971. This means
 the  estimated required expenditures  for water  pollution control  equal only Q.9%  of the
 average capital expenditures made by the industry each year.

     On  the  basis of this factor we conclude  the proposed standards  will not have a
 significant  impact  across the  industry  as  a whole, or  at least not  as measured against
 historical capital expenditures. However,  because  the  costs  of compliance  fall unevenly
 across the industry, i.e., not all mills will be forced to make expenditures, it is, necessary to
 carry the analysis further and compare the required expenditure against estimated sales and
 profits for the mills impacted.

     a.  Northwest Softwood Mills

     Table V.D.9 estimates the financial impact of the proposed log storage regulations on
 the Northwest softwood  mills reporting in our survey. The two columns of the  table
 estimate the  results of the required expenditure on the average size mill reported expected
 to be  impacted and the smallest mill reporting expected to be impacted. In the first case the
 average  mill produced 50 million board feet in  1973, and we have estimated sales for that
 mill at S6.3 million with after tax profits of $265,000. In this case  the required expenditure
 of $8,600 represents 0.1 % of 1973 sales and 2.8% of estimated 1973 after tax profits.

     The parameter of abatement expenditure as a percent of after  tax income was used as a
; closure decision criterion, because:

     —   Net value of assets data was unavailable;

     —   The industry practices rapid write-off of such expenditures;

     —   Showing the impact on the income statement of expensing the abatement
          expenditure is a "worst case" analysis which, as noted above, will yield the
          maximum impact; to the exent there is an impact, actual impact will be less.
                                    i
     In  the case of the smallest Northwest softwood mill reported  expected to be impacted
 1973, production was 6 million board feet with  estimated dollar sales of S760,000. We have
 estimated after tax profits for that mill at  $32,000. The estimated investment of  $8,600
 represents 1% of 1973 sales and 237c of estimated after tax profits.

                                         163

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                                    TABLE V.D.9
           FINANCIAL IMPACT OF LOG STORAGE REGULATIONS ON NORTHWEST
                                  SOFTWOOD SAWMILLS
                                                 Average Mill          Smallest Mill
                                              Reported Impacted    Reported Impacted
     Sales in Thousand Board Feet 1973                 50,000                6,000
     Estimated Dollar Sales (S million)1                  $6.300               $0.760
     Estimated Dollar Profits After After Taxes2             .265                 .032
     Required Expenditures as Percent of Sales                 1%                1.0%
     Required Expenditures as Percent of After
     Tax Profits                                         2.8%               23.5%

     1. B,asf>d on 1973 average prices for Douglas Fir studs as reported in Random Lengths.
     2. Based on 1965-1972 average of 4.2% of sales from Western Wood Products Association and
       Commerce Department Reports.

     In neither case will the expenditure have a serious impact on these mills. In the case of
the  average mill reporting  in  the Northwest this expenditure  is so small as  to be incon-
sequential.  In  the  case of the smallest mill  expected to be  impacted  the  expenditure
represents a sizable portion  of one year's estimated after tax profits but it is not greater than
the  mills  likely capability  to pay.  Although  we  do not  have cash flow information on
Northwest softwood mills we  note that most mills charge the cost of logs into the mill at a
"market" price  and to the  extent that mills own fee timber they enjoy additional cash floW
from that as well.

     b. Other Softwood Mills

     Table V.D.10  estimates the economic impact of the proposed regulations on softwood
mills operating  elsewhere in  the  United States.  These are essentially Southern Pine  mills

                                     TABLE V.D.10
              FINANCIAL IMPACT OF LOG STORAGE REGULATIONS ON OTHER
                                  U.S. SOFTWOOD MILLS
                                                    Average Mill        Smallest Mill
                                                 Reported Impacted   Reported Impacted
     Sales in Thousand Board Feet                         35,000             15,000
     Estimated $ Sales (million)1                           $5.010             $2.150
     Estimated S Profits After Taxes2                         .210               .090
     Required Expenditure as Percent of Sales                 . .3%                .3%
     Required Expenditure as Percent of After Tax
     Profits                                              3.5%                 8%
     1. Based on 1973 average  prices for Southern Pine studs.
     2. Based on 1965-1972 average reported profit of 4.2% for Lumber and Wood Products Com-
       panies, op cit.
                                         164

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operating in the southeastern United  States.  Again the results are reported for the average
mill expected to be impacted  as well as the smallest mill  expected to be impacted. The
average producer in  1973 manufactured  35 million board feet of lumber with an estimated
sales value of S5.010 million. We have estimated  its after tax profits at 5210,000 and the
required expenditure represents only  0.1% of estimated sales and  3.5% of after tax profits.
This expenditure level will not seriously impact the average mill reporting.

     In the case of the smallest softwood mill operating in  the southern United States the
production in 1973  was  15 million board feet with an estimated sales value of 52,150,000.
We have estimated after tax profits at 590,000 and the required expenditure is 0.3% of sales
or 8% of after tax profits. This expenditure will not seriously impact this producer.

     Table V.D.ll   provides additional, operating data for small Southern  Pine  sawmills
based on a 1972 survey undertaken by the Southern Forest Products Association. The data
presented is for 11 mills producing 0 to 10 million board feet each of lumber and the results
are reported for the average producer (6.225  million board feet) and  as well as for the  range
of producers. Annual sales revenues for the average producer were 5868,000 and net income,
was 558,000. In this  case  the required expenditure of 515,000 represents 0.8% of the
producer's sales and  13%  of producer's profit. This expenditure is bearable, even for the very
small Southern Pine producer.

     It  should  be noted  that among the operating results shown for the 11 Southern Pine
mills one mill did  suffer an operating loss  of 52.32 per thousand board feet produced.
Obviously, if a mill is presently operating at  a loss a requirement that an additional 58,600
be  expended  for water  pollution  control contributes to the financial instability of the
                                     TABLE V.D.11

                1972 OPERATING RESULTS FOR 11 SOUTHERN PINE MILLS
                           PRODUCING 0 TO 10 MILLION FEET
     Production (million feet)
     Sales Price Per Thousand
     Total Costs Per Thousand
     Net Income Per Thousand
     Sales for Average Producer
     Net Income for Average Producer
     Required Expenditure as Percent of Average Producer's
     Sales
     Required Expenditure as Percent of Producer's Profit
    Range
   ' 2.0-9.8
$105.66-$168.00
$107.98-3149.50
($2.32) -$ 25.70
$868,014
$58,764

     0.8%
      13%
Average
  6.225
$139.44
$130.00
$  9.44
                                        165

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 producer. That mill can reasonably be expected to close in a short period of time anyway;
 such  a  mill would be considered a  base line closure; the necessity to spend for pollution
 control would not he the central factor causing mill closure. Such firms, considered "base
 line closures," are subtracted from any  gross closure estimate to yield a net closure figure
 due to effluent abatement.

     c.  Hardwood Mills

     Table V.D.I 2 presents an  estimate of the financial impact of the proposed regulations
 on U.S.  hardwood producers. During  1973 the  average  mill expected  to be impacted
 produced 13  million board  feet of lumber  with an estimated sales value (based on 1972
 prices)  of S2.080 million.  We  have estimated that the required expenditure of  $8,600
 represents only 0.4% of estimated 1973 sales and 10% of estimated aftertax profits which
 were  $87,000. For the  average hardwood mill  we  believe  the cost of complying with the
 proposed regulations will not be too large a burden to bear.

     The analysis indicates a  greater  impact  on  the  smallest hardwood  mill reporting
 expected to  be  impacted.  In  1973  this mill produced 3.5  million board  feet with  an
 estimated sales value of $560,000. We estimate the profits after taxes for this producer were
 $23,000. The required expenditure for pollution control facilities represents 1.5% of this
 producer's  sales   and  37% of  its after  tax profits. However, even  the  small hardwood
 producers will be  able to comply with the proposed regulations without suffering exces-
 sively.

     d. Total Industry

     On an industry-wide basis  the $10 million we have estimated will be required to bring
 all producers into compliance  is not an overwhelming burden.  As previously noted this
 expenditure  level represents only  about  5%  of  the  annual amount the industry  has
 historically  expended on new capital equipment; this is not a serious diversion of capital.

i
                                     TABLE V.D.12

                  FINANCIAL IMPACT OF LOG STORAGE REGULATIONS ON
                              U.S. HARDWOOD PRODUCERS

                                                  Average Mill         Smallest Mill
                                                Reported Impacted    Reported Impacted

     Sales in Thousand Board Feet (1973)                    13,000            3.500
     Estimated Dollar Sales (million)1                      $2.080           $0.560
     Estimated Dollar Profits After Taxes                     .087              .023
     Required  Expenditure as Percent of Sales                0.4%            1.5%
     Required Expenditure as Percent of After Tax Profits         10%             37%

     1.  Based on 1972 average estimated sales price of $160 per thousand board feet.

                                         166

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4.  Production Effects

     We  estimate there will  be no loss of production due  to  implementation of these
regulations. We do not expect any mills to close as a result of these standards; the diversion
of capital involved is significant enough to seriously slow industry growth.

5.  Employment Effects

     Based on the conclusion there will be no plant  closures there will be no employees
displaced as a result of these standards.

6.  Resultant Regional Effects

     We anticipate no regional affects due to implementation of the proposed standards.

7.  Balance of Payments

     No  measurable impact is anticipated on the  United  States  balance of payments as a
consequence of these regulations.
                                       167

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E. OTHER SECTORS

     These sectors  are those portions of the Timber Products processing industry  not
expected to be affected,  based  on the analysis of industry structure; i.e., the issues were
obvious enough at that level of analysis to obviate tiic need lor a detailed examination of
economic impact.

1. Hardwood Dimension and Flooring Mills

     There are a total of 585 hardwood dimension and flooring mills reported by the Census
of Manufactures in 1967. We are able to identify 59 flooring producers leaving a maximum
of 526 firms which could be hardwood dimension mills.

     a. Hardwood Flooring

     Firms in this sector will have to make eftluent abatement investment only if they also
operate sawmills. Further, only  those firms also utilizing wet deck log storage  will have to
make the maximum investment  (58,600 capital costs; $3,000 annual costs). Only the larger
firms in this industry will have to make this investment. For the firms affected,  capital costs
represent less  than  2% of total assets; annual operating costs  are less than 0.1% of sales
revenues. These firms  will be able to make this investment; thus, there will be no impact on
this sector.

     b. Hardwood Dimension Manufacturers

     /. Costs of Compliance

     Dimension producers are potentially subject to water pollution abatement  costs only if
they also operate sawmills employing wet storage  techniques or if they engage in extensive
gluing activities.

     In each case, only a small  number of firms in this sector are likely to be affected and
those affected will either be financially able  to bear the burden or have alternate means of
complying at lower cost.

     2. Wet Decks

     A survey of the Hardwood Dimension Manufacturers Association revealed 32% of the
members of this association also operated hardwood  sawmills. However, firms which are
members of the Hardwood Dimension Manufacturers Association tend to be much larger
than  the average producer, and we estimate that no  more than 10-15% of all hardwood
dimension  manufacturers also operate sawmills. Figure V.E.I graphically depicts the ensuing
analysis which indicates that 5 plants (1% of total)  will be affected.
                                        168

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Total in
Industry
Operate
Sawmills
 Wet Deck
Log Storage
Presently
Recirculate
 Direct
Discharge
            NET
Number of Plants
  Not Affected
Number of PI;
    Affected
    526 Plants
                           fl»^460 pits.
                               (No Effect)
                         /•i^Nk.
                          p%*-66 pits.
                                                     ne>°lV 50 pits.
                                                       ^(No Effect)
                                                           16 pits.
                                                                                       8 pits.
                                                                                          Effect)
                                                                                                                    3 Pits.
                                                                                                                       Effect)
                                                                                      8 pits.
                                                                                                                                            521
 Source:  Arthur  D.  Little, Inc., estimates.
                                     FIGURE V.E.I   PLANTS AFFECTED BY PROPOSED EFFLUENT GUIDELINES
                                                      FOR  LOG HANDLING AND STORAGE - HARDWOOD DIMEN-
                                                      SION MANUFACTURERS

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     A survey of hardwood sawmill operators showed only 24f,' employ wet decks for their
Sou storage. Multiplying 24',i x 10-15%= 2-4'', of the total number of hardwood dimension
plants which jKo have wet decks.

     Our analysis of hardwood sawmills with wet decks showed 509? were already recircu-
lating their spray  water. If 50% of the hardwood dimension mills  with wet  decks  do
ai'-u-m!} recirculate spray water this would lower the total number of hardwood dimension
n-ip, \vhitii would be impacted from 2-4% to 1-2%.

     Finally,  our   analysis of  Southern  plywood operators showed that of mills  which
operated in the South and did not  recirculate their spray water, 1/3  allowed the unrecir-
culated spray water to run into a pond or on to dry land while 2/3 allowed it to run into a
stream or river. This means that of the hardwood dimension manufacturers still potentially
impacted, 1/3 would  probably  not be affected because the water from their operations is
likely to go somewhere other than to a stream or river and 2/3 of those might be allowing
their imrecirculated spray water to run into a stream or river. However, 2/3 of  1-2% means
that only about \c'( of the total hardwood dimension manufacturers are likely to be affected
by the proposed regulations.

     The expenditure expected to be required to install recirculating equipment for a mill
presently spraying  the wet deck but not  recirculating is $8,600. Most hardwood dimension
mills do not operate sawmills.  In order for a dimension manufacturer  to be in  the sawmill
business, it must be  considerably larger than the average hardwood dimension plant. This
means it has  more  assets  and a bigger  business base to draw on for the funds necessary to
make an S8.600 investment. The mills that  are still impacted  have the financial strength
required to invest $8,600 in a recirculating system.

     The recently released 1972 Census of Manufactures covering hardwood dimension and
flooring indicates that in  1972 firms manufacturing both hardwood dimension and flooring
expended SI5.1 million on new capital expenditures that year.  This is out to an average of
$1 o.OOO per firm. Obviously  the larger firms spent more and the hardwood dimension plants
opcrniiv: sawmills  would  fit into the larger category. This means that for  the 1% of the
firms affected,  the capital expenditure requirement is much less  than 50% of the likely
amount they  exper.drct in 1972, perhaps as little as 10-20%.

     3.  Gluing

     The capital cost  of  compliance  for firms with extensive gluing operations which  are
direct discharging  is estimated at $9,000. (This is the cost level estimated for the smaller
"model" plans as contained in the Development Document.)

     A survey of hardwood  dimension manufacturers showed 29% were engaged in exten-
sive j/iuing operations. Our analysis of those firms with extensive gluing operations, in terms
of employment si?e, showed lhat firms that did extensive gluing are much larger firms than
                                        170

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the industry average.  The industry  average showed that half the firms had fewer than ?U
employees; our analysis showed that 2/3  of those with extensive gluing activities had more
than 30 employees, a significant difference in firm size.

     Besides expending the required funds as a means of compliance, the options to a firm
entzaszed in eluina also include:
  1 i_fc» w-.\.
     •   The firm  could drop the product line which requires the extensive  gluing.
         Since a wide variety of products are offered for sale from hardwood  dimen-
         sion plants, it  is quite  possible some firms could stop gluing .md still not
         damage their businesses materially.

     •   The firm  could reduce its consumption  of water used in glue makeup and
         glue washing as  some  producers  in the softwood plywood  industry have
         done.  This  would  mean  they  would not  be obliged to install  expensive
         recirculating equipment nor would they be obliged to  install evaporating
         ponds; rather they could collect  a small amount of water whit h is used  in
         washup and makeup and dispose of it at land fill sites.

     The majority of firms  will be successful in  changing their operations to avoid the
necessity to install glue control equipment. The balance of the firms which are engaged in
extensive gluing activities have the financial strength to comply with these requirements;
capital investment for abatement is less than 27< of net assets, annual costs are less than
0.3Tc of sales revenues.

     •   Price Effects: Since the costs of compliance are unequally distributed across
         the  firms in this industry  sector, it will not be possible to pass on  cost
         increases due to effluent abatement.

     •   Financial  Effects: The absorption of the costs of compliance is negligible,
         since only large firms face these costs.

     •   Production Effects: No plants are likely to be forced to close.

     •   Employment Effects: None

     •   Regional Impacts: None.

2. Special Product Sawmills

     The key group of manufacturers in this section to focus upon are those companies
producing shakes and shingles. While there are many small mills in this sector, the companies
only face the costs of compliance for log handling and storage. Incremental annual costs will
                                         171

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represent 0-1 S7c of annual cash flow and 0-3'/< of annual sales revenues; incremental capital
costs will be 0-9T  of net assets. Thus, the companies will invest, and there will be no impact
on the sector.

     The  other manufacturers  incorporated in this  sector, companies which  produce
cooperage stock (the  material from which barrels and  kegs are produced), do  not use wet
storage practices. Thus, there is no effluent pollution problem, no cost of compliance, and
no impact.

3. Particleboard

     Particleboards are manufactured by a dry process and utilize very little process water.
The  product is in  high demand,  i.e., output should increase  at between 10-15% per year
through 1980.  •

     The costs of compliance are  insignificant. Capital costs of effluent abatement represent
0.47c of the necessary investment to build a new plant of minimum economic size. Further,
total yearly costs represent 0.15% of the  average selling price  (1972) achieved  by  the plant
with the lowest unit  selling price. Much  higher levels  of cost could be passed on through
price increases.

     There will be  no  economic impact of effluent abatement in this sector.

4. Millwork

     Operations in the various millwork subsectors do  not include sawmilling, nor do they
include extensive  gluing operations requiring water for  cleanup. Further, the  firms are
relatively  large, in good  financial position,  and generally tied into  municipal  treatment
plants. Thus, costs of  compliance  are essentially zero.

     There will be no  noticeable economic impact in this sector.

5. Prefabricated Wood Structures

     '\lthough extensive gluing is encountered in the  production of laminated beams, the
manufacturing process  is quite capital intensive. Thus, the maximum costs of $2,000 for
capital investment and $480 in  total  yearly costs, represent  insignificant ratios to capital
invested in operations (< 1%) and  other operating costs (< 1%).

     There will be no economic impact due to effluent abatement in this sector.
                                         172

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                          VI.  LIMITS OF THE ANALYSIS

     Tliis analysis faces a generic problem common to all forward looking analyses, i.e., the
difficulty of projecting future events.  In addition, the two central problems limiting the
accuracy of the present analysis are:

     •   A limited availability of data in suitable form; and

     •   The nature of the industry segments.


A.  DATA LIMITATIONS

     Data on these  industry sectors is generally present only in a broad, descriptive format.
What information is available of a detailed nature tends to focus on the operations and
characteristics of larger firms and their large  plants.  However, these industry sectors  are
typified by small, privately-owned firms which are more likely to be affected by effluent
guidelines  than their larger counterparts. Thus, as noted  in Section III on methodology, it
was necessary  to gather new data through a series of industry surveys.

     Since  insulation  board  manufacturers are  few in number  (18), it  was  possible to
contact each  of the operations individually and to develop specific data on a plant-by-plant
basis. The  operators were quite cooperative, and we believe the data accurately represents
the operating and financial  characteristics of the sector.

     However, in  the  other  sectors there were  too  many firms (e.g., more than 8,000
sawmills) to contact each installation separately. Thus, we performed representative surveys
of the industry rather  than a comprehensive survey as done for insulation board.  The data
developed  from these  surveys represents what we believe is an  accurate description of the
industry segments.

     For example, while we were able to identify only 2,500 sawmills in operation, out of
more than 8,000 reported by the Department of Commerce (1972 Preliminary Census of
Manufactures), our surveys suggest that the 2,500 firms are those firms operating full time in
this industry  sector,  and  those  firms which  will  be  affected by the proposed Effluent
Guidelines. The remaining  firms are largely seasonal operators or  other part-time operators
not really  affected by the proposed Guidelines.

     Similarly, the hardwood plywood and veneer survey was intended to cover all manu-
facturers in this industry, and it was distributed to all known manufacturers. However, the
useful responses came  mainly from the medium-sized and large-sized producers. Thus, it was
necessary  to  adjust our representative plant models to incorporate smaller firms.  This
adjustment was made  based  on the characteristics of those small mills which did respond,
and specific discussions with industry sources in terms of the characteristics and problems of
the small mills.

                                         173

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     Excepting the  insulation board manufacturing sector, these industries are composed of
small, privately-held, famih-managed firms, which is an additional data limitation. Due to
the fragmented nature  of the industry and the fact that privately-held firms do not publish
as much data as  do publicly-held firms, it is difficult to get accurate financial data.  Even
where financial data is available, that data is  not always directly comparable to similar data
from publicly-held firms, since  a small firm may choose to pay its principals higher salaries
and fringe benefits, rather than reporting such earnings as net income, which is the  more
standard practice for a publicly-held corporation. As  such, net income and,  more impor-
tantly, annual cash flow may be understated for these firms.

     However, the  costs of compliance are relatively  modest and the  technological  alter-
natives  relatively  straightforward.  Further, the consistency  of our data within the vaiious
industry sectors gives us confidence that is indeed representative. Thus  the analysis can be
used to judge the  economic impact of proposed Effluent Guidelines on the industry.

B.  NATURE OF THE  INDUSTRIES

     The most difficult  issue to analyze in these sectors is the likelihood of plant closure. A
larce, multi-industry, publicly-held firm such as those active in insulation board manufacture
tends to make a  shutdown decision  based on objective business analysis, such as effects on
profitability or importance  of a product line to overall corporate strategy. Such a firm
would  likely have  specific criteria for each  of its operating facilities to meet. However, a
private owner tends to have  a greater subjective commitment to staying in  business even if
profitability is substantially reduced.  This  is true for  such factors as commitment to a
facility which has  been operated by the family for generations,  and for such specifically
economic reasons as the fact that this may be a particular family's sole or primary source of
income.  Further,  the  privately-held firm considers  the magnitude of cash  flow  as the
important issue,  rather than profitability ratios. The management of such firms is not likely
to perform a discounted cash flow analysis as part of its shutdown decision-making.

     Thus, the factors listed in the plant closure analysis matrices  (see Table 1II.C.1) can be
used as a guide  and to highlight the central issues related  to plant closure, but must be
assigned different weights when analyzing the decision-making process and the likelihood of
closure for a publicly-held firm versus a private enterprise. Where costs approach a level of
significance,  such  as  for hardwood plywood and veneer  (particularly commercial grade
veneer manufacture) the plant closure analysis becomes more suggestive than  definitive. On
 balance, however,  the costs of compliance are relatively modest, not relatively high, and the
 plant closure decision  is more straightforward.
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C. RANGE OF ERROR ESTIMATES

     Table VI.C.l suggests the range of error for the different portions of this analysis. The
parameter used to measure range of error is what we term "substantive" range of error, i.e.,
it  covers the range of error for  those sensitive issues which critically influence the final
conclusion on economic impact. Thus, for example, while the range of error in terms of
number of sawmills actually in  operation  is at  least  moderate (± 2090 and likely broad
(>± 209c),  we do know about the firms most likely to be affected, and the conclusions on
economic impact  for  those  operations are quite accurate. The substance of the analysis
would not change even if the "unknown" producers were identified.

                                     TABLE VI.C.1

                             RANGE OF ERROR ESTIMATES
   Industry Segment
   Insulation Board
   Hardwood Plywood & Veneer
   Softwood Plywood & Veneer

   Sawmills
   Other
Substantive Range of Error1
       Narrow
       Narrow
       Narrow

       Narrow
       Narrow
  Most Variable Portions
    of the Analysis

Price Increase Analysis
Plant Closure Analysis
Number of V'jneer Mills in
 Operation
Number of Mills in Operation
Number of Mills in Operation
   1. Narrow:  ±10%; Moderate: ±20%; Broad: >±20%.
   Source:  Arthur D. Little, Inc., estimates.

     For  insulation  board, the most variable portions of the analysis relate to the price
increase analysis. In this case we project that individual plants will be able to implement
specific price increases  and thereby will  maintain their present  returns on investment.
However,  since  firms  have the option,of  changing their product  mix or absorbing cost
increases  to gain a strategic advantage vis-a-vis regional competition,  we cannot with full
confidence indicate the the firms will increase prices; rather, our analysis suggests they can
increase prices if they desire to, and most will probably elect to do so.

     At the present levels of costs of compliance, hardwood plywood and veneer manufac-
turers will not be significantly impacted. However, the small, privately-held firms, particular-
ly those manufacturing  container grade veneer,  could  be impacted by modest abatement
investment cost increases (an additional 510,000); thus,  in the case of increased costs the
plant closure analysis would become a far more sensitive issue. At present levels of cost, the
plant closure analysis and the entire economic impact analysis is accurate within a narrow
band of error (± 10%).
                                         175

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     For none of the other sectors does the fact that our information is not comprehensive
regarding  numbers of mills in  operation  affect  the  substantive range of  error. We have
identified  and focused  upon those firms  and plants most likely to he affected. The total
number of mills in operation is an interesting piece of data for completeness, but is not a
crucial factor to determine the economic impact.
                                         176

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                                   APPENDIX A

                    SOFTWOOD PLYWOOD SURVEY FINDINGS

     (1)  Sample  Analysis: The  sample .response, 76% of those contacted,  corresponds
reasonably well with the known distribution 9f mills by production size. For example, eight
mills producing under 40  million square feet  annually in  1973 responded to  the question-
naire and during 1972 it was estimated there  were only 12 mills in the country producing
less than 40 million square feet of softwood plywood. Sample respondents also appear to be
reasonably distributed  geographically.  Eight-five  mills responded in  the Western  United
States out of an estimated  131 mills operating in that area. This is equal to 65% of the units.
In the South 27 mills responded out of ari estimated 61 operating in that area or 44% of the
universe. In each case the proportion of mills responding is felt to be sufficient for statistical
validity.  .

     It is significant that of the 114 mills, responding 37% performed plywood operations
exclusively while 63%  were located at sjtes where other  wood  processing activities were
performed. Obviously to the extent mills are  capable of sharing pollution control facilities
with other converting activities they will seek to  do so, and our survey response indicates
this might be possible for a large proportion of the  industry.

     The survey sample also strongly indicates that mills with log storage or log processing
operations will be likely to spread the costs of pollution control across other facilities. This
possibility is indicated by the extent of the usage of common log yards. For example, 58
plywood mills were located at sites where sawmills  were also located and of that group 52 of
the sawmills used the same log yard as the plywood mill; 4 plywood mills were located at
pulp mill sites and two used the same log  yards; 6 plywood mills were located at plywood
prefinishing plant sites  and 2 used the same log yard; 26 plywood mills were located at sites
where log sorting and merchandising took place and 19 used the same log yard; and 12 mills
were located at sites where other operations took  place with 9 of these mills using the same
log yard.

     (2)  Usage of Public  Sewers:  Usage of public sewers does not appear to be a viable
discharge option for plywood mills. Out of 111 mills answering this question only 48 were
served by public sewers at their sites and of this group only 18 were allowed to use public
sewers for waste water from manufacturing operations.

     (3)  Log Storage Methods:  Ninety-nine  of the  105 mills responding to this question
stored  logs at the plywood mill  site. Of the 105  responding only 21 used dry decks
exclusively while 84 employed some form of wet storage.

     (4)  Frequency of Pond Overflows: The responses to this question indicate that mills
employing ponds are likely to encounter an overflow although usually only on a seasonal or
occasional basis. Out of 39 mills reporting they  had ponds only 8 indicated those ponds
                                       177

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never overflowed while 20 showed seasonal overflows. Three showed occasional overflows,
and 8 ponds overflowed constantly. Cross tabulation for the geographic area indicates that
all of the ponds identified were located in the West and no plywood mills in the South em-
ployed pond storage.

     Further,  mills employing  ponds as a method  of storage generally do  suffer from
overflows  which would be identified  as water pollution violations. Twenty-six  of the 31
reporting overflows indicated these waters flowed into a stream or river.

     (5) Wet Deck Usage: A  total of 36 mills responded  to the question  "how many
months is the wet deck sprayed?" Only 6 mills sprayed for the full  12 months and 4 of
these were located in the South. The  median  number  of months that wet decks  were
sprayed was  5 months although there  was a slight difference between  the  Western and
Southern mills reporting with the Western mills indicating a median of 5 months of spraying
and the Southern mills indicating a median of 6 months per year of spraying.

     There is a mixed pattern with respect to the usage of spray water recirculating systems.
Eleven of the  35 mills reporting indicated they recirculated all of the  log deck spray water
while 16 of the mills recirculated none of these waters.  The balance of the operators fell
somewhere  in between. On a  regional basis  the Southern  mills were more  likely  to
recirculate some portion of the spray water than the Western mills but overall there does not
appear to be a significant difference.

     However, unrecirculated spray water tends  to be diverted away from streams or rivers.
Of 24 mills responding  to this question  only  8 allowed unrecirculated spray water  to flow
into a stream  or river while 7 diverted these waters to treatment ponds or log storage ponds
and  9 diverted them on to dry land.

     (6)  Log  Washing Operations:  Log washing was performed only  by Western mills. In
total only 7 out of 103 reporting indicated that logs were washed at the mill site, and of this
group 2 mills recirculated all of the log  wash water. Further analysis of the disposal of
unrecirculated log wash water indicated  only  1 mill discharging unrecirculated log wash
water to a stream  or river. The others disposed of this effluent in a log  storage  pond or onto
dry land.

     (7) Hydraulic Debarking: The practice of hydraulic debarking  was somewhat wider
spread than anticipated. Thirteen out of 109 mills reporting (12%) indicated using hydr^'Mc
debarking equipment. Eleven of these were in the West although 2  Southern mills indk,....
using hydraulic methods exclusively. Effluent from this source was generally not recircu-
lated. Of the  9 mills indicating the disposal of unrecirculated debarking water, 5 discharged
into a stream  or river while 4 discharged into a log storage pond.

     (8) Log Conditioning:  Log  conditioning,  in  one form  or another, is  practiced by
almost 60% of the ;ndustry although there is a significant disparity between  the West and
                                         178

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the South. Forty-four out of 76 reporting in the West (58% of the group) reported they did
not condition logs while 26 out  of 27 mills reporting in the  South did condition logs. This
result is consistent with our earlier findings and basically represents a difference in the
species of log used in plywood mills. These results tend to confirm the industry claim that
Southern Pine logs must almost  always be conditioned prior to peeling while many Western
species do not have this requirement.

     Only 15 out of 60 mills answering indicated they were currently able to recirculate all
of their log conditioning water  and  more than half (32 out of 60) presently recirculated
none of this discharge.

     However,  only  6 out of 45 mills reporting discharged log conditioning waters into
streams or rivers. The balance discharged to some intermediate point such as a treatment
pond, log storage pcnd, or used dry land disposal techniques.

     (9)  Veneer Dryers: Veneer dryers were used by 110 of the 114 plywood mills. Of this
group  16 mills  were equipped  to recirculate all veneer dryer  wash water while 87  were
currently  equipped to handle none of it. Only 22  of  88 mills responding indicated their
veneer dryer wash down water  discharged to a stream or river while the other 66  mills
utilized some other method of disposal.

     (10) Glue Operations:  One hundred ten out of 112 mills responding to this question
engaged  in  some form of gluing activity. A surprisingly large  percentage of those  mills
responding (55 out of 109) indicated they presently recirculated all glue wash waters. Of the
remainder 31 mills claimed they recirculated none of it while the balance recirculated some
portion but not all. These results indicate a relatively high degree of existing compliance.

     Only 7 out of 53 mills responding indicated using sewers  for glue wash water disposal
and none of the mills  dumped  glue wash water into  streams or rivers. Six of the seven
violating mills were located in the Western United States.

     (11) Treatment Ponds:  Ninety-nine producers responded to this  question. Out of the
group, 47 had no facility for treating waste water in  any way at the plant  site while the
balance used a variety of sources. The most commonly used treatment technology was some
form of oxidation-sedimentation pond  and 34 of the producers reported having such ponds
at the  plant  site. In addition 13 producers  used some  form of dry land disposal, 6 used
chemical treatment, and another 6 had some other form of waste water treatment facilities.

     Only 15 out of 32 treatment ponds for which  results were reported did not overflow.
Of the balance 7 overflowed constantly while the remainder overflowed  seasonally or
occasionally. Mills in both the West and South suffered from overflow problems although a
slightly higher percentage  of the Southern mills  appeared able to completely control
treatment pond overflows.

     Fifteen out of 16 responding mills indicated their treatment ponds overflowed into a
stream or river.

                                        179

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APPENDIX B


 INDUSTRY
 IMPACT
 SUMMARIES
    181

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                                                                TABLE B-1
                               HARDWOOD PLYWOOD AND VENEER - PLANT CLOSURE AND EMPLOYMENT EFFECT
                                               FOR VARYING LEVELS OF COMPLIANCE COSTS
oo
10
Guideline Option

 I.-  Process Changes Only

     (Maximum Cost: capital = $5,500
                   yearly = $3,000)


 II.   I + Recirculation from Wet Decks*

     (Maximum Cost: capital = $14,100
                   yearly = $3,870)


III.   II + Screening from Wet Decks and Log Ponds

     (Maximum Cost: capital = $24,100
                   yearly = $3,870)
Sector
V
0
Total
V
0
Total
V
0
Total
No. Plant
Closures
0
0
0
2
_0_
2
11
_9
20
No. Employees
Displaced
0
0
0
40
0
40
220
770
990
No. Employees
in Sector


0
4%

0.1%
22%
_2%
2.4%
         V = Commercial Grade Veneer
         0 » Other Sectors
         'Proposed Guideline
         Source: Arthur D. Little, me., estimates.

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                                     TABLE B-2

                                INDUSTRY SUMMARY
Industry:  Insulation Board Only - SIC Code 2661

No. of Plants in Segment                                          18
Percent Total  Plants in Industry                                    85%

No. of Plants Direct Discharging                                     9
Percent Total  Plants in Segment                                    50%

No. of Plants with BPT Treatment in Place                           2
Percent Total  Plants in Segment                                    11%

                                                                BPT          BAT

Cost of Pollution Abatement

   Capital Costs for Segment
   Total Capital Cost                                              12.7          19.2
   Total Capital Expenditures as Percent of Average Annual           n.a.          n.a.
    Investment
   Total Capital Expenditures as Percent of Total Capital              10           15
    In Place
   Annualized Costs for Segment
   Total Incremental Increase Including Capital Charges                3.9           4.9
   Total Incremental Increase Excluding Capital Charges               3.0           3.5
   Total Incremental Increase Including Capital Charges                1.8           2.2
    as Percent of Sales

Expected Price Increase

   Expected Increase Due to Pollution Control                        2.0%         4.0%

Plant Closures

   Total Closures Anticipated                                       1            —
   Percent Reduction of Segment Capacity Due to Closures            4.0%         —

Employment

   Total Number of Employees Affected                                          —
   Percent of Total Employees in Segment                                        —

Community Effects                                               —            —

Impact on Industry Growth                                         —            —

Balance-of-Trade Effects                                           —            —
                                        183

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                                TABLE B-2 (Contined)

                                INDUSTRY SUMMARY

Industry:  Hardwood Plywood and Veneer - SIC Code 2435

No. of Plants in Segment                            490
Percent Total Plants in Industry                      100%

No. of Plants Direct Discharging                      251
Percent Total Plants in Segment                       51%
                                                                          BPT, BAT
                             t in Place
Percent Total Plants in Segment
No. of Plants with BPT Treatment in Place                                       239
                                                                         (Sx106)
Cost of Pollution Abatement                                               gp-j-

   Capital Costs for Segment
   Total Capital Cost                                                          2 5
   Total Capital Expenditures as Percent of Average                                ^ j%
    Annual Investment
   Total Capital Expenditures as Percent of Total                                  Q 7^
    Capital In Place
   Annualized Costs for Segment
   Total Incremental Increase Including Capital                                   Q Q
    Charges
   Total Incremental Increase Excluding Capital                                   Qg
    Charges
   Total Incremental Increase Including Capital                                   Q ^
    Charges as Percent of Sales

Expected Price Increase

   Expected Increase Due to Pollution Control                                    _

Plant Closures

   Total Closures Anticipated                                                    2
   Percent Reduction of Segment Capacity Due                                  Q •]%
    to Closures

Employment

   Total Number of Employees Affected                                         4Q
   Percent of Total Employees in Segment                                      0.1%

Community Effects                                                            1
Impact on Industry Growth                                                      _   '
Balance-o;  "rade Effects
                                        184

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                                TABLE B-2 (Continued)

                                INDUSTRY SUMMARY

 Industry:  Softwood Plywood and Veneer - SIC Code 2436

 No. of Plants in Segment                               192 plywood, 38 veneer
 Percent Total Plants in Industry                         100%

 No. of Plants Direct Discharging                         122
 Percent Total Plants in Segment                          53%

 No. of Plants with BPT Treatment in Place
 Percent Total Plants in Segment                          48%

                                                                       BPT, BAT
 Cost of Pollution Abatement

   Capital Costs for Segment
   Total Capital Cost                                                     ^2,095,000
   Total Capital Expenditures as Percent of Average Annual  Investment              0.9%
   Total Capital Expenditures as Percent of TotaJ Capital In Place                 < 0.1%

   Annualized Costs for Segment                                                     „	n
   Total Incremental Increase Including Capital Charges                      $  250,000
   Total Incremental Increase Excluding Capital Charges                      <  250,000
   Total incremental Increase Including Capital Charges as Percent of Sales            0.1%

 Expected Price Increase

   Expected Increase Due to Pollution Control                                   _

 Plant Closures

   Total Closures Anticipated                                                  _
   Percent Reduction of Segment Capacity Due to Closures                        —

 Employment

   Total Number of Employees Affected                                        —
   Percent of Total Employees in Segment                                       —

Community Effects                                                           —

 Impact on Industry Growth                                                   —

Balance-of-Trade Effects                                                       —
                                        185

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                               TABLE B-2 (Continued)

                                INDUSTRY SUMMARY

Industry: Sawmills and Planing Mills - SIC Code 2421

No. of Plants in Segment                               2,500
Percent Total Plants in Industry                           100%

No. of Plants Direct Discharging                           635
Percent Total Plants in Segment                            25%

No. of Plants with BPT Treatment in Place               1,875
Percent Total Plants in Segment                            75%

                                                                       BPT, BAT
Cost of Pollution Abatement

   Capital Costs for Segment
   Total Capital Cost                                                     S3,795,200
   Total Capital Expenditures as Percent of Average Annual Investment              2.1%
   Total Capital Expenditures as Percent of Total Capital in Place                <  0.1%

   Annual ized Costs for Segment
   Total Incremental Increase Including Capital Charges                      81,000,000
   Total Incremental Increase Excluding Capital Charges                    < 1,000,000
   Total Incremental Increase Including Capital Charges as Percent of Sales          0.1%

Expected Price Increase

   Expected Increase Due to Pollution  Control                                  —

Plant Closures

   Total Closures Anticipated                                                 —
   Percent Reduction of Segment Capacity Due to Closures                      —

Employment

   Total Number of Employees Affected                                       —
   Percent of Total Employees in Segment                                     —

Community Effects                                                         —

Impact on Industry Growth                                                  —

Balance-of-Trade Effects                                                     -
                                         186

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                                    TABLE B-3

                     INDUSTRY SUMMARY - OTHER SECTORS

Industry:  Hardwood Dimension and Flooring
SIC Code: 2429

No. of Plants in Segment                                   585
% of Total in Segment                                     100%

No. of Plants With BPT Treatment in Place                    569
%of Total Plants in Segment                                97%

Cost of Pollution Abatement                                          BPT, BAT
   Capita) Costs for Segment
     Total Capital Cost                                             <$100,000
     Total Capital Expenditure as % of Average Annual Investment              1.0%
     Total Capital Expenditure as % of Total Capital in Place                 <0.1%

Annualized Costs for Segment
   Total Incremental Increase Including Capital Charges                 <   50,000
   Total Incremental Increase Excluding Capital Charges                <   50,000
   Total Incremental Increase Including Capital Charges as
     % of Sales                                                         <0.1%

Expected Price Increase                                                   —

Plant Closure                                                           -

Unemployment                                          •               —

Community Effects                                                      —

Impact of Industry Growth                                                —

Balance-of-Trade Effects                                                  —
                                       187

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                             TABLE B-3 (Continued)

                     INDUSTRY SUMMARY - OTHER SECTORS

Industry: Special Purpose Sawmills
SIC Code: 2429

No. of Plants in Segment                                    452
% of Total Plants in Industry                                100%

No. of Plants Direct Discharging                              66
%of Total Plants in Segment                                 15%

No. of Plants with BPT Treatment in Place                    386
% of Total Plants in Segment                                 85%

Cost of Pollution Abatement                                           BPT, BAT
   Capital Costs for Segment
     Total Capital Cost                                               $450,000
     Total Capital Expenditures as % of Average Annual Investment           < 1.0%
     Total Capital Expenditures as % of Total Capital in Place                < 0.1%
   Annualized Costs for Segment
     Total Incremental Increase Including Capital Charges                 $150,000
     Total Incremental Increase Excluding Capital Charges               <150,000
     Total Incremental Increase Including Capital Charges as
        % of Sales                                                        0.5%

Expected Price Increase
   Expected Increase Due to Pollution Control              •                —

Plant Closures
   Total Closurss Anticipated
   % Reduction of Segment Capacity Due to Closures                        -

Employment
   Total No. of Employees Affected
   % of Total Employees in Segment                                      —

Community Effects                                                      —

Impact on Industry Growth                                              —

Balance-of-Trade Effects                                                 —
                                         188

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                               TABLE B-3 (Continued)

                               INDUSTRY SUMMARY

Industry:   Prefabricated Wood Structures
SIC Code:  2433

No. of Plants in Segment                                      236
% of Total Plants in Industry                                   100%

No. of Plants Direct Discharging
% of Total Plants in Segment                                  Negative

No. of Plants with BPT Treptment in Place                       161
% of Total Plants in Segment                                     68%

Cost of Pollution Abatement                                            BPT, BAT
   Capital Costs for Segment
      Total Capital Cost                                              <$25,000
      Total Capital Expenditures as % of Average Annual Investment          < 1.0%
      Total Capital Expenditures as % of Total Capital in Place               < 0.1%
   Annualized Costs for Segment
      Total Incremental Increase Including Capital Charges               <  50,000
      Total Incremental Increase Excluding Capital Charges               <  50,000
      Total Incremental Increase Including Capital Charges as
        % of Sales                                                     <0.1%

Expected Price Increase
   Expected Increase Due to Pollution Control                              ~

Plant Closures
   Total Closures Anticipated
   % of Reduction of Segment Capacity Due to Closures                     —

Employment
   Total No. of Employees Affected
   % of Total Employees in Segment                                       —

Community Effects                                                      —

Impact on Industry Growth                                               —

Balance-of-Trade Effects                                                 -
                                        191

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  II I  IIMI  \l Rl PORI         I  I  Keport No.
      DA I \ PAM
                               EFA  2
                                                                2.
  4  1 iliV arid Subtitle
       Economic Analysis of Proposed Effluent Guidelines - Timber Products
       Processing Industry  -- Phase II
  7  Aiitlioils)
               Thomas L. Doorley, Karl P. Pagans, Ronald Levy,   Lauren S. Ward
  'J  lYilcirinmi; Oij-'.ini/ation Name and Address

       Arthur D. Little, Inc.
i       Acorn Park
       Cambridge, Mass. 02140
I  12  Sponsoring OiL-am/alion Name and Address
       Office of Planning and Evaluation
       Environmental Protection Agency
       Washington, D. C. 20460
                                                                                     X  Recipient's Accession No.
                                                                                     5.  Report Hate
                                                                                             August 1974
                                                                                     8.  Performing Orpini/ation Kept. No.
                                                                                       C-75917
                                                                                     10.  Project/Task/Work Unit No.
                                                                                       Task Order No. 17
                                                                                     11.  Contract/Grant No.

                                                                                       68-01 -1541
                                                                                     13. Type "1 Report &. Period Covered
                                                                                        Final
                                                                                     14.
      Supplemental) Notes
      Abstract1;

      An analysis of the economic impact on certain timber products processing industry sectors (insulation board, hardwood
      & softwood plywood  & veneer,  general purpose sawmills, special  purpose sawmills, hardwood dimension & flooring
      mills, particleboard, millwork, and prefabricated wood structures), to meet 1977 and 1983 Effluent Guidelines. Only
      modest impacts are expected  at present levels of cost and proposed standards. Effects are  concentrated on insulation
      board  manufacturers,  small hardwood  plywood and veneer producers, and small sawmill  operators. For  smail firms,
      abatement capital and operating  costs are not severe, but at modest increments (e.g., $10,000 additional investment),
      many plant closures are  likely to result. As is, plant closures are few  (3 of  10,000+), and price increases to consumers
      minimal (only likely for insulation board and particleboard products).
 !  17.  Key Words and Document Analysis.   17a.  Descriptors
       Effluent Abatement
       Economic Impact Analysis - Timber Products Processing
   17b.  Identifiers/Open-Ended Terms
   I7c COSAII Held/Croup
   IK. Availability Statement
ironmental
n Center; Rm. W327,
.C. 20460
19. Security Class (This
Keport)
lINfl ASS1M1 1)
20. Security ( lass ( 1 his
Papo)
UNO. VSSil II D
21. No.ot'Pajtes
204
22. Price
   I (MM N1IS-.15 (RI'V. 3-7
                                                                                                                        l'7-'

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