.-UJIHJST l!l/l
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES.
PAINT AND ALLIED PRODUCTS
AND
PRINTING INK INDUSTRIES
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 2O460
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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 ;he
National Technical Informa'ton Sei'occ, Springfield, Yirpinu
22151.
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EPA-230/1 -74-052
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
PAINT AND ALLIED PRODUCTS
AND
PRINTING INK INDUSTRIES
Report to
U.S Environmental Protection Agency
Office of Planning and Evaluation
Washington, D.C. 20460
August 1974
«t*i Protection Agency
US Environmental Krow
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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 ("EPA 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 alternative approaches in terms of product
price increases, effects upon employment and the continued viability of affected plants.
effects upon foreign trade and other competitive effects.
The study has been prepared with the supervision and review of the Office of Planning
and Evaluation of EPA. This report was submitted in fulfillment of Task Order No. 27,
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.
in
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TABLE OF CONTENTS
Page
List of Tables vii
I. EXECUTIVE SUMMARY 1
A. INDUSTRY SEGMENTS 1
B. FINANCIAL PROFILES 3
C. PRICE EFFECTS 3
D. EFFLUENT CONTROL COSTS 4
E. IMPACT ANALYSIS 4
II. INDUSTRY SEGMENTS 7
A. INTRODUCTION 7
B. GENERAL DESCRIPTION OF THE INDUSTRIES 8
C. DESCRIPTION OF SEGMENTS 10
III. FINANCIAL PROFILES 19
A. PAINT AND ALLIED PRODUCTS INDUSTRY 19
B. PRINTING INK INDUSTRY 25
IV. PRICE EFFECTS 27
A. SIC 2851 -PAINT AND ALLIED PRODUCTS 27
B. SIC 2893-PRINTING INK 28
V. METHODOLOGY 31
A. APPROACH 31
B. PRICE EFFECTS 32
C. PLANT CLOSURE EFFECTS 32
VI. EFFLUENT CONTROL COSTS 35
A. CURRENT TREATMENT PRACTICE 36
B. EFFLUENT CONTROL COSTS 38
VII. IMPACT ANALYSIS 41
A. PRICE EFFECTS 41
B. FINANCIAL EFFECTS 42
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TABLE OF CONTENTS (Continued)
Page
VII. IMPACT ANALYSIS (Continued)
C. PLANT CLOSURE EFFECTS 50
D, PRODUCTION CURTAILMENT 51
E. EMPLOYMENT EFFECTS 51
F. COMMUNITY EFFECTS 51
G. INDUSTRY GROWTH 52
H. INTERNATIONAL TRADE 52
VIII. LIMITS OF THE ANALYSIS 53
A. ACCURACY 53
8. RANGE OF ERROR 53
C. CRITICAL ASSUMPTIONS 54
APPENDIX A - INDUSTRY SUMMARIES 55
VI
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LIST OF TABLES
Table No. Page
1 General Description of Trade Sales Paint Plants 11
2 General Description of Industrial Finishes Plants 14
3 General Description of Miscellaneous Paint Products
Plants 15
4 General Description of Printing Ink Plants 17
5 Financial Profile of Model Plants — Trade Sales Paints 20
6 Financial Profile of Model Plants — Industrial Finishes 21
7 Financial Profile of Model Plants — Miscellaneous Paint
Products 21
8 Financial Profile of Model Plants - Printing Ink 22
9 Net Income, Return on Sales, and Returns on Invested
Capital for Model Plants 23
10 Annual Cash Flows for Model Plants 24
11 Wastewater Treatment Costs for Both Paint and Ink
Plants 35
12 Incremental Effluent Control Costs for "Typical"
Paint and Allied Product Plants 36
13 Current Status of Paint and Allied Products Waste
Treatment Practices 37
14 Industry Summary of Current Treatment Practice
Paint and Allied Products Industry 38
15 Current Status of Printing Ink Industry Waste Treat-
ment Practices 38
16 Operating Parameter for Model Paint and Ink Plants 39
17 Effluent Control Costs for Paint and Ink Plants to
Meet the Proposed Effluent Control Guidelines 40
18 Price Increase Required to Pay for Incremental
Effluent Control as a Percent of Sales 41
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LIST OF TABLES (Continued)
Table No. Page
19 Pre-Tax and After-Tax Income for Model Plants
Assuming No Price Change 43
20 Pre-Tax and After-Tax Return on Sales for Model
Plants, Assuming No Price Change 45
21 Pre-Tax and After-Tax R.O.I, for Model Plants
Assuming No Price Change 46
22 Estimated Cash Flow on Average Invested Capital
for Model Plants Assuming No Price Change 47
23 Effluent Control Investment as a Percentage of
Average Annual Capital Investment 49
24 Potential Closures 50
A-1 SIC 2851 Effluent Control Investment and Annual
Costs (BAT) 57
A-2 SIC 2893 Effluent Control Investment and Annual
Costs (BAT) 58
A-3 Industry Summary 59
Vlll
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I. EXECUTIVE SUMMARY
A. INDUSTRY SEGMENTS
The plants in SIC 2951 paint and allied products and those in SIC 2893 - printing
ink were distributed among four segments
1. trade sales paints
2. industrial finishes
i
3. miscellaneous paint products
4. printing ink
Each segment was further subdivided into plant size categories that were selected on the
basis of annual plant sales and/or the number of employees for those plants where sales
figures were not available.
1. Trade Sales Paints
Trade sales paints are those products which are sold through wholesalers and retailers
to the general public and to professional painters. Plants in this segment manufacture both
exterior and interior products available in either oil- or water-based formulations. Most
plants manufacture a limited number of standard colors along with tinting bases which can
be used with the standard colors to manufacture a wide variety of shades or hues to meet
customer's demand.
Plants in this segment fall into one of four size categories: large, medium, small and
very small. Large plants represent approximately 60% of the total annual trade sales dollar
volume and employ about 63% of the workers in this segment. Annual sales for these plants
are greater than $5 million. Production volumes average 1.6 million gallons.
Medium-sized plants represent about 30%) of the total trade sales volume and employ
about 20% of the workers in this segment. An average plant produces about 800,000 gallons
and has an average sale of SI to $5 million. These plants, like those in the larger category.
manufacture a wide variety of products but distribute them on a more regional basis.
Small plants represent about 8% of the total sales of trade sales paints and have about
10% of the trade sales employees. These plants have average annual sales of $250,000 to $1
million. The average plant produces about 160,000 gallons per year.
Very small plants represent 3% of the total sales of trade sales paint and have
approximately '"% of the total employees of the segment. These plants have a limited line of
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products and sell only locally. The average annual sales per plant are less than $250.000 and
production is generally less than 50,000 gallons per year. The number of employees varies
from 2 to 20 with an average plant having 11.
2. Industrial Finishes
Plants in the industrial finishes segment manufacture automotive and appliance finishes
and industrial maintenance coatings. The segment can be categorized by plant si/.c in a
fashion similar to trade sales paints.
Large plants manufacture many products and tend to specialize in particular types of
coatings. They have sales in excess of $5 million, account for about 65% of the industrial
finishes shipments, and employ about 58% of the work force.
Medium plants have sales of $1 to $5 million and account for 20% of the value of
shipments and about 25% of the total employees.
Small plants have sales between $250,000 and SI million, and account for about 30%
of the sales of industrial finishes and about 16% of the total employees. Very small plants,
like their counterparts in the trade sales segment, have annual sales of less than $250,000
and represent about 4% of the annual sales and 4% of total employees in this segment.
3. Miscellaneous Paint Products
In this segment there are only 21 plants which manufacture putty, shellac and other
miscellaneous paint-associated items. Large plants have annual sales in excess of $5 million
while the small plants have sales of less than $ 1 million. The annual sales of the large plants
represent 94% of the segment sales and about 90% of the total employees.
4. Printing Ink
Plants in the printing ink segment can be categorized as large, captive or small.
Large plants, representing about 62% of annual sales and 60% of the total employees,
have an average sales volume of over $1 million, and produce on the average about 2 million
pounds of ink per year.
Captive plants are those manufacturing plants physically located in or owned by a
printing company. Sales in this category represent about 15% of the segment and the typical
plant produces about P/z million pounds of ink per year and has average sales between
S500,000 and SI million. The average number of employees in these plants is 15.
Small plants have an average employment of 12, produce about 800,000 pounds of ink
per year, and ha\e annual sales of less than $500,000.
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B. FINANCIAL PROFILES
Financial models have been prepared for all of the various plant si/e categories in each
segment. Using this data, a determination of profitability in the industries has been made
showing net income, return on sales, return on invested capital, annual cash flow and cash
flow as a percentage of sales and total investment for each of the models.
Profitability is very difficult to determine in these industries because man> plants
owned by large companies have become parts of larger conglomerates and the financial data
provided bear little resemblance to the financial condition of either the paint company or
the plants it represents. In addition, there are a large number of small privately owned plants
in both industries where no financial information is available.
The profitability of both the paint and printing ink industries has shown a general
decline over the past five or six years. Average profit before taxes presently varies from
about 1% of sales for the very small plants in the paint industry to about l"r for large plants.
In the printing ink industry the average profit before taxes ranges from 3.69? for small plants
to 5.6% for large plants.
After-tax return on investment varies from 3.79? for very small plants to about 109? for
large plants in both the trade sales and industrial finishes segments. Miscellaneous paint
products plants, both large and small, average a 10% return on investment and that of plants
in the printing ink segment vary from 10% to about 12%, with the smaller plants having a
slight!) better ROI than either the captive or large plants.
Annual cash flows vary from about $1,400 for very small industrial finishes plants to
S273.000 for large trade sales plants. On the basis of percent of sales this represents less
than 1% for the very small industrial finishes plants to slightly over 4% for the large trade
sales paint plants. The extremely low cash flow position for small and very small plants in
both trade sales and industrial finishes segments becomes a critical issue in examining the
impact of effluent abatement costs on the financial condition of these plants.
C. PRICE EFFECTS
The paint and allied products industry is very fragmented and therefore highly
competitive and very price sensitive. While prices have increased somewhat since 1967. these
increases have not kept pace with the increase in manufacturing costs and thus have
contributed to the decline in profitability over this period. Large plants which manufacture
a wide variety of products may be able to pass on the abatement costs on some products.
but those plants that are in a poor competitive position or that manufacture very few
products may have to absorb these costs.
Sales of the printing ink industry are rather inelastic; that is, the usage of printing ink
tends to be independent of ink selling price. The ink industry manufactures a larger number
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of products than the paint industry where small costs for effluent abatement might be
passed on. However, the industry has tended to absorb cost increases in the past and may
continue to do so.
D. EFFLUENT CONTROL COSTS
The."Draft Development Document for Proposed Effluent Limitation Guidelines and
New Source Performance Standards" provided the cost data for the levels of treatment
required by Public Law 92-500. These costs are associated with control for best practical
control technology (BPT), best available technology (BAT), and new source performance
standards (NSPS). These costs are said to be identical for both paint and allied products and
for printing ink.
Current wastewater treatment in the industry was determined through surveys con-
ducted by trade associations in both industries. The results of these surveys indicate that
about 12% of the paint and allied products plants are discharging to surface water and will
be impacted according to BAT costs.
On the other hand, approximately 7% of plants in the printing ink industry discharge
to surface water and these will be impacted according to the costs developed for BAT.
Some plants returned questionnaires unanswered with respect to current wastewater
practice. It was assumed that these plants discharge in accordance with the current practice
of the known plants in that segment and the distribution was made accordingly. This
assumption and the assumption that the costs reported in the Draft Development Document
are accurate are critical assumptions for the development of the impact analysis.
The costs provided in the Draft Development Document have been extrapolated to
correspond with the various plant-size categories in all four segments. Data show incre-
mental investment, annual operating cost and annual costs for the various size categories in
all segments. These costs vary from $4370 per year for small ink plants to S2'>.000 per year
for the large paint plants. Investment costs vary from $17,500 for all of the print.iig ink
plants and the small and very small paint plants, to 555,000 for the medium and large paint
plants.
E. IMPACT ANALYSIS
1. Price Effects
Several criteria were used to determine whether abatement costs might be passed on
through price increases. While the price increases necessary to pay for incremental effluent
control costs as a percentage of sales are small, two factors tend to inhibit any general price
increase in either the paint or printing ink industry. First, these indr .tries are highly
competitive and tend to find ways to sell at lower prices and resist passing on cost increases
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of any kind. This fact is borne out by the general decline in profitability in these industries
over the past decade. The other factor which inhibits price increases is the large percentage
of plants currently meeting the proposed effluent guidelines. The general conclusion is that
both paint and printing ink industries will absorb effluent abatement costs out of cash flow.
2. Financial Effects
Financial effects of the impact of the proposed effluent control costs have been
determined by examining profitability and capital availability.
Profitability impacts were determined by examining pre-tax net income, after-tax
return on sales, pre-tax rate of return on invested capital, after-tax return on invested
capital, and annual cash flow. All of these show a severe impact on profitability for the very
small trade sales and industrial finishes plants. In addition the lower quartile medium-sized
industrial finishes plants are equally impacted.
While all cash flows for the model plants are positive, the impact on cash flow for the
very small plants shows a drastic reduction. Annual cash flow for plants in these categories
remains positive only because depreciation charges are included in the cash flow statement.
However, plants in these categories do not normally make the sort of investment ii
equipment for their manufacturing operations that will be required to meet the proposed
guidelines.
3. Capital Availability
Both the paint and printing ink industries invest significantly less money in capital
equipment for manufacturing than all other industries. For those plants that are part of a
large corporation, little difficulty is expected in acquiring capital for effluent control. The
small and very small plants that are privately owned may encounter considerable difficulty
in financing the capital costs for effluent control. In some cases this capital might come
from cash reserves but capital from outside private or commercial sources will not be
available. The average plant in the very small size category invests less than $5000 in new
equipment annually.
4. Plant Closure Effects
On the basis of the discharge characteristics of plants in the paint and printing ink
industries, as determined by the results of an industry survey and an examination of the
financial model of the impact of effluent control cost on the financial profiles of model
plants, potential plant closures total 88, excluding 27 baseline closures.
A number of plants in the potential closure category undoubtedly are privately owned,
do not use the usual financial benchmarks for a closure decision, and have a strong
commitmert to stay in business. Some will remain in operation by financing the investment
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for effluent control through private sources. The actual number is difficult to estimate, but
one may reasonably assume that the number of plants remaining open despite indicated
closure will be approximately the same as the number of baseline closures. On this basis the
projected closure total of 88 plants would be reduced to about 61.
5. Production Curtailment
No significant long-run curtailment in total production will result from the imposition
of the proposed guidelines. Plants which continue to operate will not reduce production to
meet the proposed standards. Total loss of production in paint and allied products amounts
to 1.8T. This production decrease can easily be assimilated by those plants which continue
to operate.
6. Employment Effects
The loss of employment due to plant closures is estimated at 2,424 or 2% of the total
paint and allied products industry. No loss of employment will be encountered by the
printing ink industry.
7. Community Effects
Plants facing potential closure are located primarily in urban areas, principally along
the eastern seaboard, the North Central States, Texas, and California. It is highly unlikely
that workers left unemployed by plant closures will be able to continue in the industry.
8. Industry Growth
No overall effect upon industry growth is expected. There will be a trend away from
the predominance of very small plants because of the higher investment costs and low
capital availability, however.
9. Balance of Payment Effects
No balance of payment effects will result from implementation of the proposed
guidelines.
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II. INDUSTRY SEGMENTS
A. INTRODUCTION
The purpose of this study was to analyze the economic impact of the costs of pollution
abatement requirements under the Federal Water Pollution Control Amendments of 1972
upon the following industries:
SIC 2851: Paint, Varnishes, Lacquers, Enamels, and Allied Products.
SIC 2893: Printing Ink.
The analysis was developed for four levels of treatment:
(1) Best practical control technology currently available (BPT) to be met by
July 1, 1977 by all plants discharging directly to surface water,
(2) Best available technology currently available (BAT) to be met by July 1,
1983 by all plants discharging directly to surface water,
(3) New source performance standards (NSPS) to be applied to all facilities
constructed after promulgation of these guidelines (approximately
November 1, 1974) and that discharge directly to surface water,
(4) New source pretreatment standards to be applied to all facilities constructed
after promulgation of those guidelines (approximately November 1, 1974)
which discharge into municipal system 5
For those segments of the industry studied, the following impacts were considered:
fc ,
• Price effects, including effects Upon an industry's suppliers and consumers;
• Profitability, growth, and capital availability;
• Number, size and location of plants that can be expected to close or curtail
production;
• Changes in employment;
• Community impacts; and
• Balance of payments effects.
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B. GENERAL DESCRIPTION OF THE INDUSTRIES
1. Industry Characteristics
The paint industry consists of about 1,200 companies operating 1,600 plants. The
industry is characterized by requiring very little capital investment for equipment and relies
on relatively simple technology. This characteristic has led to the establishment of a large
number of very small companies. The four largest companies account for about 22% of sales
while the largest 50 account for 6\f/f of sales.
The large companies operate out of a number of branch plants across the country and
many of the large companies operate their own retail stores for sale of their product directly
to the public or professional painters. The small companies on the other hand are usually
individual or single plant operations. They tend to manufacture a limited number of
products for local distribution.
Large companies tend to centralize research afid development, resin and pigment
manufacture (if any), and sales and general administration functions, etc. so that the branch
plants are almost completely satellite manufacturing operations. The small plants tend to
have no research and development staff; sales are generally conducted by company manage-
ment so that a minimum of overhead personnel is utilized. The very small plants in this
industry may have as few as 2 employees.
The industry is concentrated in highly industrialized areas. 80% of the value of
shipments in 1967 were concentrated in 10 states. The major portion of the industry is
located along the eastern seaboard, the North Central ~-\ >fos, Texas and California.
The ink industry is essentially a service industry f
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1. Large manufacturer (a) operates a basic materials preparation facility in a central
location that employs 300 people, conducts research and manages the scattered business
requirements. In addition he has 23 smaller branch plants that are servicing local areas.
These range in size from 2 to 40 employees with an average of about 17.
2. Large plant (b) operates a central facility and also maintains blending stations in a
number of the large printing establishments in addition to the local mixing or formulating
stations that it has in the major cities.
3. Large plant (c) has approximately 40 small plants scattered around the country and
in addition operates plants in Hawaii and Europe. The average size plant has 15 employees
but the range is from 2 to 40.
2. The Products
Paint and printing inks are mixtures of colored materials and resinous binders. The
resinous binder material is added to hold the color particles together and to the surface to
which they have been applied. Paint and printing ink compositions are manufactured
essentially by the same processes in the same or similar equipment and in many cases using
identical raw materials.
Paint products generally fall into one of three classifications: trade sales paints,
industrial finishes, or miscellaneous paint products. Trade sales paints are those products
which are sold through wholesalers and retailers to the general public and to professional
painters. Industrial finishes generally are specialized paints which either are applied in-plant,
to production items, or are sold directly to an industrial user. Miscellaneous paint products
are items which generally are sold through trade sales outlets and are products which are
complementary to the painting trade. Products such as putty, shellac, stains, etc., are
typical of items in this category.
In general, the majority of miscellaneous paint products and industrial finishes are of
the oil-base variety and use very little water in the manufacture of the product or during the
clean-up of equipment. Trade sales paints, on the other hand, are very likely to be of the
water-base variety because of the convenience to the do-it-yourself market. In this case, of
course, considerable amounts of water are used in processing and clean-up operations.
Several types of inks are manufactured. At the lower end of the scale, newspaper inks
are manufactured in bulk and sold at very low prices. In 1972, the average price of
newspaper ink was S.10-. 11/lb. Newspaper ink is frequently sold in tank-car or tank-truck
quantities to the large users. Letterpress inks for other printing may be sold in drums or
multiple drum lots. The smaller operator may even buy 5-lb or 10-lb pails. Inks for
commercial letterpress operations average $.50-.55/lb and at least part of this higher cost is
due to the different kinds of distribution and the amount of ink that is sold to the
individual establishments, as well as to the added cost for preparing special colors.
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Flexographic and screen inks average S.20-.25/lb. These materials are characterized In
a very fluid composition and the concentration of colored material in them may be so lou
that the price is determined primarily by the value of the solvent used as the carrier.
Lithographic inks are generally heavier in composition and represent the highest concentra-
tion of oils and pigments with a small amount of solvent used to control the viscosity.
Lithographic inks may sell for S.80 to Sl.OO/lb for the blacks and $1.15-1.25 and up for
colors or for specialties. Special colors or special inks of any sort always command higher
prices.
The overall picture of the industry, then, is one of a service organization for the
printing trades that prepares a variety of products for the different printing processes on a
local service basis, primarily in urban areas where the printing industry is located and where
quick supporting response from the printing ink formulator is needed. Some of the ink
companies supply only flexographic and gravure inks; others supply only news inks, but
most make all kinds. Only a few deal solely in bulk operations, as for newspaper ink.
The most widely manufactured types of ink are the lithographic and the letterpress
ink, and in most cities these are small local shops that may be run on essentially the same
basis as the branch plants of the larger establishments. Generally they do less volume of
business than a branch of a big company and they do not have the financial resources that
the big corporation could offer them.
Growth of sales in both the paint and printing ink industries has been 7-8% annually
over the last several years. The total U.S. shipments of paints and allied products in 1972
was approximately 950 million gallons at a value of S3.2 billion. Printing ink shipments for
1972 were approximately S542 million
C. DESCRIPTION OF SEGMENTS
1. Trade Sales Paints
A general summary of plants in this segment is shown in Table 1. The plants are
segregated according to location and according to whether they manufacture any water-
based products.
a. Large Plants
There are 29 companies with 136 plants in the large category. These companies have a
total annual sales of S915 million, representing 58.5''' of the trade sales shipments. They
have many relatively large plants that have a total employment of 39.540. or 63% of the
trade sales segment. With one exception, these plants are located in urban areas. They
manufacture a wide variety of products, including water-based paints, for sale through both
wholesalers and retailers on a national level. Many of these companies maintain their own
retail outlets. Many of the plants in this category are integrated back to resin and pigment
manufacture. A typical plant in this size range produces 1.6 million gallons of paint
annually.
10
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TABLE 1
GENERAL DESCRIPTION OF TRADE SALES PAINT PLANTS
Trade Sales Paints
&
a -
_J
Medium
ro
V)
"co
E
CO
£•
0)
>
Urban
Process
Rural
Process
Urban
Process
Urban
Non-process
Rural
Process
Rural
Non-process
Urban
Process
Urban
Non -process
Rural
Process
Rural
Non-process
Urban
Process
Urban
Non-process
Rural
Process
Rural
Non-process
TOTALS
No. of
Plants
135
1
-
95
45
6
2
142
38
16
2
178
42
53
14
769
Percent
17.6
-
12.4
5.6
0.8
0.3
18.5
4.9 -~
2.1
0.3
23.1
5.5
6.9
1.8
99.8
No. of
Companies
29
0
71
17
5
2
124
33
11
2
173
39
52
14
572
Total
Employees
39,290
250
9,265
2,530
365
195
5,640
1,475
525
50
2,083
407
634
128
62,837
Average No.
Percent Employees/Plant
62.5
0.4
14.7
4.0
0.6
0.3
8.9
2.3
0.8
0.1
3.3
0.6
1.0
0.2
yy.7
291
250
98
56
61
98
40
39
33
25
12
10
12
10
82
Annual Sales
($ Million)
915
n.a.
346
95.5
20.5
7.5
93
24.3
8.4
1.0
34.3
6.7
10.4
2.1
1,565
Percent
in Total
Group
58.5
- '
22.1
6.1
1.3
0.5
5.9
1.6
0.5
0.1
2.2
0.4
0.6
0.1
99.9
Average
Sales per
Plant
($ Million)
6.7
n.a.
3.6
2.12
3.4
3.5
0.655
0.639
0.53
0.53
0.193
0.159
0.196
0.147
2.04
Process = Water based
Non-process = Oil based
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b. Medium Plants
In this category there are 95 companies with 148 plants. The average plant production
is on the order of 790,000 gallons annually. The total employees in this segment represent
19.6% of the trade sales segment whereas the value of shipments is approximately 30% of
the total for trade sales paints. These companies, like their counterparts in the large
segment, manufacture a wide variety of products and product lines. Although some
companies have national distribution, the majority of plants in this category tend to
distribute their product on a regional basis. Therefore, these companies might be viewed
locally as large paint plants. Some plants may still manufacture oleoresinous vehicles and
some pigments for use in their products, although there is little, if any, integration to latex
manufacture.
Analyzing the figures in Table 1 shows that those plants in the large and medium
categories together represent approximately 89% of the annual trade sales shipments, and
about 83% of the total employees. These two segments account for the vast majority of
sales in the industry, although they account for only about 37% of the plants in the trade
sales segment. They really are the industry and tend to set the pace in terms of technology,
pricing, and probably effluent control.
The small and very small plants have the fewest number of employees, the smallest
sales, and may have the most difficulty in meeting effluent abatement requirements because
of their size, financial constraints, lack of available capital, etc.
c. Small Plants
In this category are plants having annual sales between $250,000 and $1 million. These
plants tend to be privately owned and to manufacture a restricted line of products primarily
with local distribution and a fair amount of private label production. There are very few
branch plant operations and relatively little diversification in this category. These companies
tend to furnish a particular brand of paint for local area distribution and for the most part
compete with the medium and. large companies by price cutting or by selling a large volume
of their product in a lower-quality category.
d. Very Small Plants
This category contains 287 plants representing 278 companies with about 5% of the
total employees and approximately 3% of the total sales. Companies in this category have a
very limited line of products and sell only locally.
A typical very small plant has annual sales of less than $250,000 and production of less
than 50,000 gallons. The number of employees varies from 2 to 20 with an average plant
having 11.
12
-------
2. Industrial Finishes ,
A general summary of plants in this segment is shown in Table 2.
a. Large
These plants, while manufacturing a fairly large number of products, tend to specialize
in particular types of coatings; for instance, automotive finishes, appliance finishes, coil
coating compounds, etc. In many cases the product is shipped to a relatively small number
of customers. Some of these plants are associated with companies who manufacture trade
sales paints and, therefore, some of their product is sold through trade sales outlets.
However most of their sales are to professional painters or painting companies who perform
industrial maintenance coating. This sub-segment has approximately 58% of the employees
and about 659? of the total value of shipments. Approximately 5% of these plants are
integrated to both resin and pigments supply.
b. Medium
This category contains 166 plants representing 111 companies, has about 23% of the
employees, and produces 20% of the value of shipments. Plants in this category manufactu e
a fairly wide range of products. This category also includes a number of captive plants that
manufacture coatings for the company's own use. Very few of the plants in this category are
integrated to resin or pigment supplyi
c. Small
This category is similar to the small category of trade sales paint plants in that the
companies tend to specialize in the types of finishes prepared and their distribution is on a
more regional basis. This sub-segment represents about 16% of the total employees and 30%
of the total sales in the segment. There are very few branch plants and no integration to
resin or pigment supply.
1 - ,'' Vu,
d. Very Small / " ' '• ' -
This category contains 241 plants, 4.5% of the total employees, and 3.7% of annual
sales in the segment and manufactures specialty items for local distribution.
3. Miscellaneous Paint Products
A general summary of the plants in this segment is shown in Table 3.
a. Large
This category contains 11 plants with 1570 employees, or approximately 94%, of the
segment. Annual sales are about S75 million, or 94% of the total for the segment. Most of
13
-------
TABLE 2
GENERAL DESCRIPTION OF INDUSTRIAL FINISHES PLANTS
Industrial Finishes
*
10
E
3
0)
15
E
1/5
15
w
2-
Urban
Process
Urban
Non-process
Rural
Process
Urban
Process
Urban
Non-process
Rural
Process
Rural
Non-process
Urban
Process
Urban
N on -process
Rural
Process
Rural
Non-process
Urban
Process
Urban
Non-process
TOTALS
No. of
Plants
65
63
3
67
81
11
7
52
138
32
69
85
156
829
No. of
Percent Companies
7.8
7.6
0.4
8.1
9.8
1.3
0.8
•6.3T
16.6
3.9
8.3
10.3
18.8
100.0
26
23
2
45
55
g
3
46
122
30
63
84
146
652
Total
Employees
17,380
15,720
900
4,870
6,225
755
410
1,705
5,025
736
1,164
941
1,528
57,359
Average
Percent Sales per
Average No. Annual Sales in Total Rant
Percent Employees/ Plant ($ Million) Group ($ Million)
30.3
27.4
1.6
8.5
10.9
-1.3
0.7
3.0
8.8
1.3
2.0
1.6
2.7
100.1
267
250
300
73
77
69
59
33
36
23
17
11
10
69
379
329
n.a.
83.2
101.6
14.1
5.3
28.4
83.7
12.2
19.4
15.6
25.4
1,091
34.2
30.2
7.6
9.3
1.3
0.5
2.6
7.7
1.1
1.8
1.4
2.3
100.0
5.74
5.22
n.a.
1.24
1.25
1.28
0.76
—
-
_
-
Process - Water based
Non-process = Oil based
-------
TABLE 3
GENERAL DESCRIPTION OF MISCELLANEOUS PAINT PRODUCTS PLANTS
Miscellaneous
Paint Products
en Urban
™
-1 Rural
=5 Urban
u> Rural
TOTALS
No. of
Plants
9
2
8
2
21
Percent
42.9
9.5
38.1
9.5
100.0
No. of
Companies
6
2
8
2
18
Total
Employees
1,355
215
80
20
1,670
Percent
81.1
12.9
4.8
1.2
100.0
Average No.
Employees/Plant
150
108
10
10
80
Annual Sales
($ Million)
64.9
10.3
3.8
0.96
79.96
Percent
in Total
Group
81.2
12.9
4.8
1.2
100.1
Average
Sales per
Plant
($ Million)
7.21
5.15
0.48
0.48
3.81
-------
these large plants tend to specialize in certain products, which, in many cases, arc sold
through trade sales paint retail outlets, hardware or discount stores. Plants that manufacture
shellac and floor finishes tend to specialize in these products whereas companies that
manufacture putty, caulking compound, and the like generally do not manufacture shellac
or floor finishes.
b. Small
This category contains only 10 plants with 100 employees and has total sales of almost
S5 million, or 6% of the segment. These plants generally manufacture the same product lines
as the larger plants but on a regional or local basis.
4. Printing Ink (SIC 2893)
A general summary of the plants in this segment is shown in Table 4.
a. Large Plants
There are 15 companies with 300 plants in this category. They have total annual sales
of $325 million, or 62% of the printing ink industry sales, and typically manufacture a wide
variety of products with some specialization at branch plants. Most plants are integrated to
binder production, and have central research facilities, usually at the main plant. Some may
manufacture their own pigments. A typical plant in this category is one of 20 comprising a
large corporation. It has an average of 22 employees, an annual sales volume of $1 million,
and an annual production of 2 million pounds of ink.
b. Captive Plants
This category comprises 100 plants which are wholly owned ink manufacturing
facilities of printing plants. No descriptive data concerning this category exists, but it is
estimated that captive plants produce $180 million in sales or 15% of the industry total. A
typical plant is assumed to produce about 1.5 million pounds of ink per year at a value of
5786,000. The average number of employees in each plant is estimated at 15. Most of these
plants tend to specialize in the type of product manufactured and depend in general on the
specific printing process employed at the parent company. A typical plant would "r' duce
colored ink in-house and purchase black ink from an outside manufacturer.
c. Small Plants
Plants in this category for the most part are single companies with few or no branch
operations. They tend to manufacture all ink products but some companies specialize. For
instance some plants will manufacture only letterpress and lithographic inks. Plants in this
category have an average employment of 12 and an annual production of 880,000 pounds
of ink valued at S440.000.
16
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TABLE 4
GENERAL DESCRIPTION OF PRINTING INK PLANTS
Large
Captive
Small
TOTAL
No. of
Plants
300
100
270
670
%of
Segment Companies
45 15
15
40 215
100 230
Total
Employees
6,542
1,500
3,230
11,272
%of
Segment
57
13
30
100
Average No.
Employees
22
15
12
17
Annual Sales
($ Million)
325
78.6
120
524
%of
Segment
62
15
23
100
Annual
Sales/Plant
($ Million)
1.08
0.79
0.44
0.78
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III. FINANCIAL PROFILES
A number of sources provide financial data on companies in the paint and allied
products industry. These sources include the Census of Manufactures, ''Industrial Guide to
the Paint Industry" by C. H. Kline & Co., "Annual Statement Studies" by Robert Morris
Associates, and annual reports of publicly owned companies.
Although all of the information provided in these published documents is useful it is
provided on a company as opposed to a plant basis. In this study the information was used
to formulate "model" plants showing what is believed to be a typical financial statement for
a plant of a specific size in a given segment of the industries studied (Tables 5-10). After
these models were formulated, they were cross checked with available industry data and
representatives of selected companies who have plants similar to the models in the various
size categories. On this basis it is believed that the models are representative of the
conditions which exist in a plant of the stated size.
In the printing ink industry the published data is more limited. Some very general
industry data is available from such sources as Census of Manufactures and annual reports
but it was not considered sufficient from which to prepare models. To facilitate the
gathering of financial information the National Association of Printing Ink Manufacturt rs
made its financial ratio studies available for use iri the preparation of the model plants.
The profitability in both the paint and allied products industry and in the printing ink
industry is very difficult to obtain since many of the larger companies are part of larger
conglomerates where financial information is not segregated, or they are privately owned
and no financial information is available. In addition a number of printing ink manufac-
turing facilities are wholly owned by printing plants and again no financial information is
available.
A. PAINT AND ALLIED PRODUCTS INDUSTRY
1. Profitability "'. '4 J$. l^! ?.",>%
i.i' • i\ /.')•;
In the various segments of the paint and 4Hie'd products industries, company profit-
ability varies in direct proportion to its sales, .volume. As a percentage of sales, for instance,
the profit before taxes for a large company having sales in excess of $ 10 million is about 7%,
while for companies having sales under $250,000, profit before taxes is only 1% of sales.
The paint industry's return on investment has declined steadily since about 1966. A
comparison of the paint and allied products industry with all manufacturing shows that the
return on net worth for paint and allied products is almost half the average return for all
manufacturing. The privately owned smaller companies average much smaller returns than
the publicly held companies, according to an analysis prepared by the First City National
Bank Corp.
19
-------
TABLE 5
FINANCIAL PROFILE OF MODEL PLANTS
TRADE SALES PAINTS
($000)
Large
6,700
4,555
2,190
1,720
480
240
3,610
1,030
1,241
2,072
2,270
273
21.1
10.6
33.4
307
Medium
3,170
2,040
1,130
950
178
89
1,690
384
622
992
1,006
95
17.1
8.8
6.2
109
Small
639
455
184
166
18
14
258
58
80
133
137
15
13.1
10.2
0.7
16
Very
Small
186
140
46
44
1.8
1.4
67
16
23
25
40
1.5
4.7
3.7
0.1
5.8
Size of Plant
Annual Sales
Cost of Sales
Gross Profit
Other Expenses
Profit before tax
Profit after tax
Net Assets'
Fixed Assets2
Working Capital
Net Worth3
Total Investment4
Cash Flow5
ROI - before tax %
ROI - after tax %
Annual Depreciation
Salvage Value
1. Net Assets include all current assets, inventory, receivables and
fixed assets less accumulated depreciation.
2. Fixed assets include land, buildings and equipment less accumu-
lated depreciation.
3. Net worth equals total assets less total liabilities.
4. Total investment is derived from adding working capital to fixed
assets.
5. Cash Flow equals profit after tax plus annual depreciation and
amortization.
20
-------
TABLE 6
FINANCIAL PROFILE OF MODEL PLANTS
, INDUSTRIAL FINISHES
($000)
Size of Plant
Annual Sales
Cost of Sales
Gross Profit
Other Expenses
Profit before tax
Profit after tax
Net Assets
Fixed Assets
Working Capital '
Net Worth
Total Investment
Cash Flow
ROI - before tax %
ROI - after tax %
Annual Depreciation
Salvage Value
Large
5,370
3,610
1,760
1,380
380
190
2,880
817
994
1,852
1,810
216
21.0
10.5
26.5
244
Medium
1,230
791
432
359
73
36
656
149
241
342
278
39
26.2
13.1
2.4
55
Small
494
352
142
129
13
10
199
44
62
103
106
11
12.5
9.8
0.6
12
Very
Small
170
128
42
40
1.7
1.3
62
15
21
29
36
1.4
4.7
3.7
0.1
6.1
TABLE 7
FINANCIAL PROFILE OF MODEL PLANTS
MISCELLANEOUS PAINT PRODUCTS
($000)
Size of Plant
Annual Sales
Cost of Sales
Gross Profit
Other Expenses
Profit before tax
Profit after tax
Net Assets
Fixed Assets
Working Capital
Net Worth
Total Investment
Cash Flow
ROI - before tax %
ROI - after tax %
Annual Depreciation
Salvage Value
Large
Small
6,835
4,593
2,243
1,757
485
243
3,664
1,040
1,266
2,357
2,305
277
21.0
10.5
34
320
478
341
138
125
13
10
193
43
60
100
103
11
12.6
9.8
.6
12
-------
TABLE 8
FINANCIAL PROFILE OF MODEL PLANTS
PRINTING INK
($000)
Size of Plant
Annual Sales
Cost of Sales
Gross Profit
Other Expenses
Profit before tax
Profit after tax
Net Assets
Fixed Assets
Working Capital
Net Worth
Total Investment
Cash Flow
ROI - before tax %
ROI - after tax %
Annual Depreciation
Salvage Value
Large Captive
1,080
780
300
240
60
38
500
114
250
372
364
42
16.5
10.4
3.7
34
786
567
219
176
43
23
338
77
169
164
246
26
17.5
9.5
2.5
23
Small
440
273
167
151
16
12
140
32
70
75
102
13
15.5
12.1
1.0
9.5
22
-------
TABLE 9
NET INCOME, RETURN ON SALES, AND RETURNS ON INVESTED CAPITAL
FOR MODEL PLANTS
Pre-Tax After-Tax
After-Tax Return Return Pre-Tax After-Tax
Income on Sales on Sales R.O.I.* R.O.I.
Segment and Size ($000) (%) (%) (%) (%)
Trade Sales
Large 240 7.2 3.6 21.1 10.6
Medium 89 5.6 2.8 17.7 8.8
Small 14 2.8 2.2 13.1 10.2
Very Small 1.4 1.0 0.78 4.7 3.7
Industrial Finishes
Large 190 7.1 3.5 21.0 10.5
Medium 36.5 5.9 3.0 26.2 13.1
Small 10.4 2.7 2.1 12.5 9.8
Very Small 1.3 1.0 0.78 4.7 3.7
Miscellaneous Paint Products
Large 243 7.1 3.6 21.0 10.5
Small 10 2.7 2.1 12.6 9.8
Printing Ink
Large 37.7 5.6 3.5 16.5 10.4
Captive 23.5 5.6 3.0 17.5 9.5
Small 12.4 3.6 2.8 15.5 12.1
*Total investment.
23
-------
TABLE 10
ANNUAL CASH FLOWS FOR MODEL PLANTS
Cash Flow as
Cash Flow as Percent of
Annual Cash Flow Percent of Sales Total Investment
Segment and Size (S OOP) (%) (%)
Trade Sales
Large 273.0 4.1 12.0
Medium 95.2 3.0 9.5
Small 14.8 2.3 10.8
Very Small 1-6 0.84 3.9
Industrial Finishes
Large 216.0 4.0 12.0
Medium 38.9 3.2 14.0
Small H-0 2.2 10.3
Very Small 1-4 0.84 4.0
Miscellaneous Paint Products
Large 277.0 4.0 12.0
Small . 10.6 2.2 10.3
Printing Ink
Large 41.4 3.8 11.4
Captive 26.0 3.3 10.6
Small 13.4 3.0 13.1
24
-------
Tables 5, 6 and 7 show financial profiles, including profit both before and after taxes.
of model plants for the various size categories. It must be stressed that these are average
values for all of the plants in that particular size category and that profits in each group
cover a tairly broad range. For instance, in the trade sales segment the profit before taxes
for large plants is 7.1% of sales but the range is from 5.2 to 8.69' (Table 5). For
medium-sized plants the range is much greater, varying from 2.3 to 10.19? of sales. For small
plants the variation is 0.9% to 4.79?, while for the very small plants it ranges from -0.5% to
3.9%. This variation in profitability must be kept in mind when examining the guidelines
impact because some plants for which the impact is not significant as measured by the
average figure, will be impacted severely if one uses the profitability for those plants in the
lower quartile of the particular size category.
2. Capital Availability
The paint and allied products industry invests little in capital equipment and struc-
tures. Capital investment for the industry averages only 2.2% of sales compared to 3.5% for
all manufacturing and 5.9% for chemicals and allied products. It must be recognized that the
capital investment in new equipment and plants is basically a luxury of the large- and
medium-sized plants. Many of the small and very small plants will buy only used equipment
if it is available and serviceable. Indeed, if one applies the 2.2% figure to all plants in each
segment one finds that the average capital investment for plants in the very small category is
only about $4000 annually, although few if any plants in this category actually invest this
amount.
The industry also has a large number of single-plant firms, many of which are family
owned and operated. These plants most likely would be inclined to finance any additional
capital project themselves as opposed to seeking public or outside private financing. This is a
very important consideration in determining the impact, particularly on companies in the
small and very small category.
B. PRINTING INK INDUSTRY
1. Profitability
Profitability in the printing ink industry has also declined over the past five or so years.
Profit before taxes for all companies has declined from an average of 7.6% in 1969 to an
average of 4.1% in 1972, even though sales increased approximately 79? during this same
period.
The model plants (shown in Table 8), as in the other cases, are based on averages
generated for each size category. The range of profitabilities is similar to those for paint and
allied products. For instance, the profit before taxes for large printing plants varies from
3.3% to 6.6% based on sales, while those for small plants vary from 1.9% to 9.0%.
-------
2. Capital Availability
The ink industry, like the paint and allied products industry, spends relatively little
money on new capital equipment and buildings. The same rate as for paint and allied
products of 2.2% of sales can be used as an average figure for the printing ink industry. Most
of the new capital investment is made by the large and captive plants while the small plants
tend to purchase used equipment.
The industry is comprised of many small privately owned single-plant firms. These
plants probably would self-finance any capital investment necessary to meet effluent
guidelines. Captive plants and large plants which are part of large corporations would appear
to have little difficulty in obtaining capital for this purpose.
26
-------
IV. PRICE EFFECTS
A. SIC 2851 - PAINT AND ALLIED PRODUCTS
The paint industry, with a few exceptions in specialized areas, is extremely competi-
tive. Prices, therefore, are most frequently set to meet the competition. Companies will
often calculate the lowest possible (break-even) selling price on the product and try to
"walk a fine line" between this price and a profitable one in an attempt to beat competi-
tion. Sometimes small paint companies will sell products at break even or even below simply
to keep their equipment running and their personnel busy.
Paint is sold on a volume (gallon) basis though the weight of a gallon of paint may vary
from approximately 7 to as much as 27 pounds. According to Bureau of Labor statistics,
prices of trade sales paints have been rising for the past eight years at about the same rate as
the average of all industrial commodities. The increase in prices of industrial paints has been
somewhat greater than that for trade sales paints. The wholesale price index of trade sales
and industrial paints from 1967 through 1971 is as follows:
Trade Sales Industrial
1967 100.0 100.0
1968 101.0 103.9
1969 102.6 108.9
1970 105.0
1971 108.7 107.6
The average 1967 price was S3.34 per gallon for trade sales and $2.66 per gallon for
industrial paints at manufacturers' levels.
Some large trade sale suppliers and industrial suppliers of specialty coatings are able to
set their prices according to the value of their product (value pricing), such as trade sales
suppliers who have their own retail specialty paint outlets. In addition specialty coating
manufacturers with proprietary products can follow these same pricing tactics. Also, larger
companies which are profit oriented and which need not be particularly concerned with
simply keeping their plant in operation are more likely to price their product to generate a
reasonable profit and risk losing the business rather than pricing too low. However, the paint
industry, being a commodity industry, generally prices to meet or beat the considerable
competition.
The above pricing philosophy, which has resulted in general low profitability and
therefore an unwillingness on the part of small paint manufacturers to invest in capital
equipment, has caused many small companies to slowly become non-competitive and drop
out of business. The industry segment, i.e., trade sales or industrial, has little bearing on the
situation; the competitive nature of the specific sub-sector is the key issue.
27
-------
1. Price Changes
The paint industry is predominantly an industry of small plants and to a somewhat less
but still significant extent an industry of small companies. Some of these companies find it
difficult to merely stay in business from year to year as competition takes its toll. Many
companies find it impossible to pass increased costs of any kind on to the customer.
The cost of meeting effluent guidelines will undoubtedly vary widely from plant to
plant. Moreover, it is unlikely that all paint companies will be equally able to pass along the
increased costs of meeting the guidelines. Those who presently are value pricing their
product will be most able to pass costs along, but manufacturers in an extremely com-
petitive field will find it impossible to do so. Plants in a marginal condition may close
somewhat sooner because of the impact of the effluent guidelines. The small and very small
plants will resist capital expenditure for as long as possible. When absolutely forced to
comply or close down they will make a decision. Since for small and very small plants there
is little margin for absorbing increased costs of effluent control, and competition will not
allow a proportionate increase in prices, many of these companies will go out of business.
Larger plants and smaller profitable ones, on the other hand, may have already
installed at least a portion of the equipment needed to meet the guidelines. Furthermore,
they are better able to bear the additional costs of capital equipment. These companies may
be able to choose whether to pass on the costs of meeting the guidelines or to absorb them.
When the per-gallon costs for pollution abatement investment are low, absorption may be
selected for some products and passed-on-costs for others. Thus large companies with a
broad product line and specialty producers who are more profitable than the average should
be able to cope with problems of additional costs.
Those companies which are able to pass on increased costs because of a favorable
product position or because their competition will also pass on costs probably will not
create secondary effects. Paint and coatings generally make up a very small portion of the
total cost of a product and for that reason the additional costs should be absorbed relatively
easily by customers of the paint industry. At worst, a very small increase in product price
would result.
B. SIC 2893 - PRINTING INK
Since the ink industry is a supplier to the printing industry, the product of one is raw
material for the other, and the cost of ink is very rarely a significant item in the cost of the
finished printed product. Demand in the industry is inelastic, that is, the number of pounds
of ink sold per year ;s reasonably independent of price.
In spite of the apparent competitive situation on prices and the price structure that
exists in the newspaper, flexographic, lithographic, and letterpress portions of the printing
business, there is an opportunity for the independent ink manufacturer to provide service
28
-------
and to provide materials under circumstances that allow him to compete with the bigger,
more highly organized companies. For those that are well managed and well organized, the
opportunities to make a reasonable margin of profit are good; for those that are not well
organized the borderline between profit and loss may be tenuous.
At present the cost of most raw materials used by the printing ink manufacturers is
rising and the amount of increase that might be tolerated in the face of this kind of increase
in raw material prices is open to question. For those plants that manufacture a variety of
products and that specialize in service as opposed to manufacturing a con modity item,
there will be more opportunity to pass on increased costs imposed by the guidelines.
29
-------
V. METHODOLOGY
A. APPROACH
To determine the economic impact of effluent control in the paint and printing ink
industries, the following factors were assessed:
1. Price Effects
Price increases V
Secondary effects
2. Financial Effects
Profitability
Capital availability
3. Production Effects
Production curtailments
Plant closures
Industry growth
4. Employment Effects
From production curtailments
From plant closings
From changes in industry
5. Community Effects
Location of plant closures
Number and location of seriously impacted regions
Probability of new plants being built in seriously impacted areas
Probability of dislocated employees being absorbed into local
work force
Secondary effects resulting in further unemployment
6. Industry Growth
Trends
Capital availability
7. Balance of Payment Effects
Imports
Exports
Balance of trade
31
-------
B. PRICE EFFFCTS
The ability of firms operating in these industries to pass on cost increases to consumers
is largely a result of total market supply/demand in the industry.
Thus, any determination of price effects will be heavily influenced by a consideration
of market influences on each industry segment. The factors considered included:
(1) Capacity Utilization - If the industry begins to operate at lower ut-lization rates
because of capacity increases or decreases in demand for product the ability to increase
prices will be jeduced,
(2) Individual Product Price Elasticity - For those product areas which are extremely
price sensitive, increased prices could result in reduced demand, lower operating rates, less
profitable operations, and plant closures.
(3) Specific Geographic Market Effects A marginal producer for special reasons
could have a protected market position in a local area or demand could be strong nationally
but weak in the specific local market, making it difficult for a local producer to pass on cost
increases.
(4) Importance of the Product in its Secondary Markets - If certain of these products
represent a significant cost component in the manufacturing of derivative products, for
instance, coi! coating on container stock, and if the users have relatively more market
leverage (are much larger or consume a significant portion of the primary producer's
output), price increases will be more difficult to pass on.
(5) Industry Growth Rate - Price increases are most likely in rapidly growing markets
as opposed to static or declining markets.
Whether or not cost increases can be passed on to consumers depends upon the
magnitude of the abatement costs and the price elasticity of the product. Price increases are
unlikely if: (1) treatment cost is a high percentage of selling price, for instance, 10-15% or
higher; (I) products are readily substitutable; (3) capacity utilization is low; (4) demand
growth is low; (5) foreign (or low-cost) competition is high; (6) abatement cost difference1
among plants are large; (7) the market is fragmented; for instance, many producers, each v .'
modest market shares.
C. PLANT CLOSURE EFFECTS
To determine the numbers of plants which will be shut down and the resultant
employment eflects, model industry plants were examined on the basis of their financial
characteristics and the financial effects incurred by abatement cost increases. For plants in
each category a financial profile was developed (Tables 5-10).
32
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Plants were categorized as having a high probability of closure if their financial
performance was less than the industry target performance measure. Financial performance,
in turn, was determined primarily on the return on sales, the return on investment, and the
cash flow analysis. Plants also were categorized as having a high probability of closure if
their financial position prevented them from raising the capital required to meet the
proposed guidelines, for example, if effluent control investment is a high percentage of
current net assets, or capital availability is difficult. These last two points are particularly
significant in examining those segments of the paint and printing ink industries represented
by very small privately held companies where fixed assets a re usually very lo.v and profit-
ability is generally at a minimum. In many cases these privately held com, ani s show no
profit and use other criteria as the basis for evaluating their performance. Analysis of these
factors has to be tempered based on the specific characteristics of the individual industry
segments.
The sheer magnitude of net cash flo\f' is the important lyoie to many privately held
firms, whereas a publicly 1 eld corporation generally defines successful performance and
make a closure decision b..-^d on profitability ratios such as return on investment.
Furthermore, for list >rical and emotional reasons, a founder-owned and managed firm is
likely to have ; ^in-i.ger commitment to continue o[ w ms of a given plant than would
absentee ownership/ professional management firms.
The present value • retried of discounted cash flow compared to plant salvage value is
sometimes used as a bi\ is k>r predicting plant closures. In these industries this method for
asses ug investment •. >portunities is not used except b. the very largest companies. Many
of the smallest plants stay in operation even with an apparent negative income. Any general
analysis based on model plants would be very misleading since it would probably show that
all small and very small plants have a DCF below the salvage value without including the
effluent control costs. If these are included then a major portion of the industry might be
predicted to close. Doing a DCF analysis would overstate the case and predict more closures
than it is believed will occur.
Finally, the following factors also were analyzed to determine the likelihood of plant
closures:
( 1 ) Salvage Value of Assets — An old technically obsolete plant could have a high
salvage value - for instance, as valuable warehouse space, useful for the operation of a
contiguous plant - or it could have a low salvage value because of out-of-date equipment
that is not reusable.
(2) Degree of Integration - Both forward integration into marketing channels such as
retail trade sales stores and backward integration into raw materials (for instance, pigments
and resins) may influence the likelihood of a plant closure.
(3) Multiplant Operations - Some unprofitable plants could be kept on-stream if their
products are essential to the marketing strategy of the corporation as a whole.
33
/•
(L
-------
(4) Technological Obsolescence If technology has changed substantially since the
equipment was installed, a shutdown might be likely.
(5) Corporate Commitments - There may be an emotional commitment to continue a
marginal plant to maintain employment in a one-industry region (particularly if tax
incentives are offered).
Plants were considered likely to close if (1) treatment cost is a high percentage of
after-tax net income; e.g., 10-15% or higher; (2) cash flow is negative (after deducting
treatment costs); (3) ratio of investment in treatment facilities to fixed net investment is
high: (4) the plant is not part of a larger integrated manufacturing complex (5) they face
other environmental problems (e.g., OSHA); (6) they are owned largely by multiindustry
firms: (7) there is no emotional commitment to continue operations.
34
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VI. EFFLUENT CONTROL COSTS
The Draft Development Document for Proposed Effluent Limitation Guidelines and
New Source Performance Standards provides cost data for the four levels of treatment
required by public law No. 92-500. The document describes the control treatment for best
practical control technology, best available technology and new source performance stan-
dards as being identical; therefore, the costs developed for each of these levels of treatment
are identical. For brevity, these costs are referred to as BAT in the balance of this report.
These same costs are proposed for both SIC 2851, Paint and Allied Products, and SIC 2893,
Printing Ink. The costs to meet the guidelines for all three of these levels are shown in
Table 11. Table 12 shows the incremental costs for control for "typical" plants as shown in
the Development Document.
TABLE 11
WASTEWATER TREATMENT COSTS FOR BOTH
PAINT AND INK PLANTS1
Large Small
BAT BAT
(Alt. 1) (Alt. 1)
Investment ($) 55,000 17,500
Annual Costs ($)
Capital 5,500 1,750
Depreciation 5,500 1,750
Operation and Maintenance 9,000 1,920
Energy and Power 3,000 10
TOTAL 23,000 5,430
Daily Production
Paint (gallons/day) 5,000 2,000
Ink (Ib/day) 45,000 18,000
Daily Waste water Discharge
Paint (gallons/day) 500 200
Ink (gallons/day) Not Not
Specified Specified
Dr^ft Development for "Proposed Effiue.it
Guidelines and Nev: Source Perf-~Tr-:>A
Standards fcr Paint and Ink Formulation
and Printing," April 197-. Nati.nal field
Investigations Center-Denver, Denver, Colo,
35
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TABLE 12
INCREMENTAL EFFLUENT CONTROL COSTS FOR
"TYPICAL" PAINT AND ALLIED PRODUCT PLANTS1
Control to Meet BAT
Investment
($)
17,500
55,000
Annual Operating
Costs ($)
1,930
12,000
Annual
Costs ($}
5,400
23,000
Plant Size
Small
Large
1. Draft Development Document.
A. CURRENT TREATMENT PRACTICE
The Development Document indicates that only one plant in the United States is
discharging to navigable waters and that approximately 80% of the plants are discharging to
municipal systems. This data is in serious disagreement with the results of an inquiry made
by questionnaire to approximately 92% of the paint plants in the United States by the
National Paint and Coatings Association (NPCA).
Out of a total of 1619 paint plants queried, completed questionnaires have been
received from 304, or slightly more than 18% of the total. This is a far better response than
was obtained by the questionnaire which provided the data base for the information
contained in the Development Document. The information contained in the NPCA ques-
tionnaires is believed to be reliable since the information on size of plant, production
figures, and other data, appears to check fairly well with industry averages. The data derived
from the NPCA survey suggests that approximately 32% of the industry is already meeting
the guidelines either by treating process clean-up water prior to discharging to a municipal
system or by drumming their waste and disposing of it in a sanitary landfill operation, or by
practicing no discharge in some undisclosed fashion. 12% of the industry apparently is
discharging to surface water. These plants probably will have to install the equipment and
incur the costs associated with BAT.
Table 13 contains extrapolated data based on the NPCA survey showing the curre-f
status of waste treatment practices for the various segments of the paint and allied produce
industry. Table 14 is a summary for the entire industry. About 10% of the questionnaires
were returned with no information concerning current waste treatment practice. These
"unknowns" were therefore allocated to a particular treatment category according to the
distribution of "known" plants in each segment. The number of unknowns was low for large
and medium plants (2-3%) but higher for both small and very small plants (10-15%). The
greatest chance of error is with the industrial finishes segment where nearly 30% of the very
small plants were in the "unknown" category.
36
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TABLE 13
CURRENT STATUS OF PAINT AND ALLIED PRODUCTS1
WASTE TREATMENT PRACTICES
Large
Trade Sales
Municipal System Treated
Municipal System Un-
treated
Surface Water
Landfill, etc.
Total
Industrial Finishes
Municipal System Treated
Municipal System Un-
treated
Surface Water
Landfill, etc.
Total
No.
55
41
22
18
136
2
94
31
4
131
_%_
40.4
30.1
16.2
13.2
1.5
71.8
23.7
3.0
1 Large
Miscellaneous Paint Products
Municipal System Treated
Municipal System Un-
treated
Surface Water
Landfill, etc.
Total
fJo.
0
11
0
0
11
J*L
0
52.4
0
0
52.4
Medium
No.
57
60
10
21
148
9
100
32
25
166
_%_
38.5
40.5
6.8
14.2
5.4
60.2
19.3
15.1
Small
No.
0
10
0
0
10
JL
0
47.6
0
0
47.6
Small
No.
39
113
6
40
198
6
196
46
43
291
Ji
19.7
57.0
3.0
20.2
2.1
67.3
15.8
14.8
Very Small
No. %
59 20.6
163 56.8
6 2.1
59 20.6
287
23 9.5
123 51.0
46 19.1
49 20.4
241
Total
No.
210
377
44
138
769
40
513
155
121
829
%
27.3
49.0
5.7
17.9
4.8
61.9
18.7
14.6
*
Total
No.
0
21
0
0
21
A
0
100
0
0
100
1. Based on Survey conducted by National Paint and Coating Association.
37
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TABLE 14
INDUSTRY SUMMARY OF CURRENT TREATMENT PRACTICE
PAINT AND ALLIED PRODUCTS INDUSTRY
No. of Plants % of Industry
Municipal Systems Treated 250 15.4
Municipal Systems Untreated 911 56.3
Surface Water 199 12.3
Landfill, etc. 259 16.0
Total 1,619 100.0
Table 15 presents the same information for the printing ink industry. A major
assumption with these plants is that the distribution of "captive" plants is the same as that
for large plants. No survey was possible for these plants.
TABLE 15
CURRENT STATUS OF PRINTING INK INDUSTRY
WASTE TREATMENT PRACTICES
Large Captive Small Total
NfL JL N°' Ji N£: JL No. %
Municipal System Treated 32 10.7 10 10.0 8 3.0 50 7.5
Municipal System Untreated 217 72.3 72 72.0 227 84.1 516 77.0
Surface Water 31 10.3 10 10.0 5 1.8 46 6.9
Landfill, etc. 20 6.7 8 8.0 30 11.1 _58 8.7
Total 300 100.0 100 100.0 270 100.0 670 100.0
B. EFFLUENT CONTROL COSTS
Costs for effluent control contained in the Development Document were rp '';r ,ed
utilizing the industry segmentation described in Section I and the results of the NPCA and
NAPIM surveys. Table 16 shows operating parameters for model paint and ink plants. The
data lists daily production as well as estimated daily effluent. The Development Document
estimated effluent on the basis of 10 gallons of product produced one gallon of effluent. No
estimates were made for ink plants. The daily effluents of plants, based on the same ratio,
are shown in the table.
38
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TABLE 16
OPERATING PARAMETER FOR MODEL PAINT AND INK PLANTS
Printing Ink
Daily Production
Wastewater Flow
gals/1000 sales gals
Average Wastewater
Flow (gals/day)
Paint and Allied Products
Large Medium Small V. Small Large Captive Small
(gals/day) (Ib/day)
6,000 3,000 600 180 8,300 6,000 3,500
100 100 100 100 n.a. n.a. n.a.
600 300 60 18 n.a.* n.a.* n.a.*
"Estimated at less than 200 gpd.
Extrapolating the cost data provided in the Development Document to fit the plant
sizes selected in the Segmentation section, the costs for effluent control have been de-ived
and are shown in Table 17.
Where the effluent is small, say 50 gallons/day, one might choose to drum the entire
effluent and transport it to an approved landfill. The costs for such a procedure turn out to
be almost the same as those shown for "small" plants in the Development Document. This
then turns out to be a minimum cost for effluent control for all plants producing about
1000 gallons of paint per day or less. The same probably holds true for ink plants producing
less than 1000 pounds of ink per day.
In the determinations of annual costs the same assumptions were made as in the
Development Document, that capital costs are spread over 10 years at 10% interest. Labor
rates of $ 10 per hour were used.
39
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TABLE 17
EFFLUENT CONTROL COSTS FOR PAINT AND INK PLANTS TO
MEET THE PROPOSED EFFLUENT CONTROL GUIDELINES
(Dollars)
Paint and Allied Products Printing Ink
Effluent Control Level Cost Items Large Medium Small V. Small Large Captive Small
BAT investment 55,000 55,000 17,500 17,500 17,500 17,500 17,500
Annual Operating Cost 15,000 7,200 1,300 1,000 2,170 1,520 870
Annual Cost 26,000 18,200 4,800 4,500 5,670 5,020 4,370
-------
VII. IMPACT ANALYSIS
A. PRICE EFFECTS
Several criteria used to determine whether abatement costs might be passed on through
price increases in both industries suggest a favorable condition for passing these costs
forward. For instance, the cost for treatment as a percentage of sales is low, as shown in
Table 1 8. In addition there are relatively few, if any, low cost substitute products, plant
capacity utilization is high, foreign competition is insignificant, and market share distri-
bution tends to be concentrated in a rather limited number of companies. Moreover, the
inelasticity of demand in the printing ink industry suggests that the demand for printing ink
will be relatively independent of pricing.
TABLE 18
PRICE INCREASE REQUIRED TO PAY FOR
INCREMENTAL EFFLUENT CONTROL
AS A PERCENT OF SALES
Type and Size of Plant BAT
Trade Sales
Large 0.39
Medium 0.54
Small 0.75
Very Small 2.41
Industrial Finishes
Large 0.48
Medium 1.38
Small 0.97
Very Small 2.65
Miscellaneous Paint Products
Large 0.38
Small 1.00
Printing Ink
Large 0.53
Captive 0.64
Small 0.99
However, two overriding factors suggest that incremental cost increases for effluent
treatment will not be passed forward. The data in Table 18 show that the costs for the
smaller plants in each segment are several times higher than those for the larger plants. Since
the large plants control about 60r/r of sales in both the paint and printing ink industries it
would appear that large plants would encounter little difficulty in raising prices. However,
41
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the price increase necessary to satisfy the incremental costs for effluent control for large
plants will do little to offset the cost incurred by the smaller plants. In addition the number
of large plants impacted is considerably smaller than the number of small and very small
plants impacted. The competition factor in both of these industries is extremely severe and
since the small and very small plants in the paint and allied products industries and the small
printing ink plants must necessarily compete with the large plants they cannot stay
competitive if they increase prices. Therefore no general price increase is expected in either
industry. Note, however, that the larger plants in both industries, and particularly in the
printing ink industry where a wider variety of products are manufactured, have more
opportunity to pass on costs than do the small and very small plants in both industries and
especially those in the industrial finishes segment of the paint and allied products industry.
Another factor supporting the contention that price increases will not occur is the
pricing history in both the paint and printing ink industries. Several articles in trade journals
and interviews with representatives of trade associations and individual manufacturing
companies concur that over the past five to six years product prices have been fairly stable
while manufacturing costs for both raw materials and labor have increased dramatically.
This is one of the contributing factors to the sharp decline in profitability in both the paint
and printing ink industries, and it supports the contention that effluent abatement costs will
be absorbed out of cash flow as opposed to being passed on.
B. FINANCIAL EFFECTS
The primary financial effects were determined by analyzing profitability and capital
availability in order to assess the financial impacts of the proposed effluent control costs on
the model plants.
Profitability impacts include:
(1) Pre-tax net income,
(2) After-tax return on sales,
(3) Pre-tax rate of return on invested capital,
(4) After-tax rate of return on invested capital, and
(5) Annual cash flow.
1. Pre-tax Net Income
The impact of effluent treatment costs on pre-tax net income for model paint and
printing ink plants is shown in Table 19. Pre-tax income in both trade sales and industrial
finishes for the very small plant category shows a negative value. Pre-tax income for small
42
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TABLE 19
PRE-TAX AND AFTER-TAX INCOME FOR MODEL PLANTS
ASSUMING NO PRICE CHANGE
($000)
Type and Size
of Plant
Pre-Tax Income
Baseline
BAT
After Tax Income
Baseline
BAT
Trade Sales
Large
Medium
Small
V. Small
480
178
18
1.8
457
160
13.2
(2.6)
240
89
14
1.4
214
70.8
9.2
(1.5)
Industrial Finishes
Large
Medium
Small
V. Small
380
73
13.3
1.7
354
54.8
8.5
(2.8)
190
36.5
10.4
1.3
164
12.3
5.6
(1.6)
Miscellaneous Paint Products
Large
Small
485
12.9
459
8.1
243
10.1
217
5.3
Printing Inks
Large
Captive
Small
60
43
15.8
54.3
38.0
11.4
37.7
23.5
12.4
32.0
18.5
8.0
43
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trade sales plants a.id small and medium industrial finishes plants has been reduced
considerably but is still positive Ali other plants show a reduction in pre-tax income but the
reduction is not considered critical.
2. After-tax Net Income
The impact of effluent control on after-tax income for model paint and printing ink
plants is also shown in Table 19. After-tax income was calculated by using a tax allowance
of 50% on plants having pre-tax income in excess of S25,000. For those plants having
pre-tax income less than $25,000 a tax rate of 22% was used.
Table i 9 shows that serious impact results from meeting BAT requirements for small
and very small plants in both the trade sales and industrial finishes segments. After-tax
profits of small miscellaneous paint product plants and small printing ink plants will decline
about 50%.
3. Return on Sales
Pre-tax and after-tax returns on sales for model plants are shown in Table 20. In
general they show the same pattern as the impact on net income. The very small plants in
both trade sales and industrial finishes segments show a negative pre-tax and after-tax
return.
The low baseline return on all of the very small plants and even on the small plants
indicates that average plants in these size categories are presently operating in a marginal
condition. Any increase in cost will have a serious effect on pre-tax income and pre-tax
return on sales.
4. Return on Invested Capita!
The pre-tax and after-tax returns on investment for model plants are shown in
Table 21. This table shows information similar to the return on sales and income trends due
to the impact of effluent control costs. After-tax return on investment for BAT control for
both trade sales and industrial finishes plants in the very small category is negative, and very
serious reductions in after-tax return are shown for all of the small plants.
The baseline after-tax return on investment again indicates that the very small plants in
the trade sales and industrial finishes segments are operating in a marginal condition and
could be in serious financial trouble with any large erosion of profits.
5. Cash Flow
Estimated cash flows, calculated by adding depreciation to after-tax income for the
mode! paint and printing ink nlants. are shown in Table 22. Note that the depreciation
44
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TABLE 20
PRE-TAX AND AFTER-TAX RETURN ON SALES FOR MODEL PLANTS,
ASSUMING NO PRICE CHANGE
Type and Size
Of Plant
Pre-tax Return
Baseline
BAT
After-Tax Return
Baseline
BAT
Trade Sales Paints
Large
Medium
Small
V. Small
7.2
5.6
2.8
1.0
6.8
5 1
2.1
(1.4)
3.6
2.8
2.2
0.8
3.2
2.2
1.4
(0.8)
Industrial Finishes
Large
Medium
Small
V. Small
Miscellaneous Paint Products
7.1
5.9
2.7
1.0
6.6
4.5
1.7
(1.6)
3.5
3.0
2 1
0.8
3.1
1.4
1.1
(0.9)
Large
Small
Printing Ink
Large
Captive
Small
7.1
2.7
5.6
5.5
3.6
6.7
1.7
5.0
4.8
26
3.6
2.1
3.5
3.0
2.8
3.2
1.1
3.0
2.4
1.8
45
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TABLE 21
PRE-TAX AND AFTER-TAX RETURN ON INVESTMENT FOR
MODEL PLANTS ASSUMING NO PRICE CHANGE
Type and Size
Of Plant
Pre-Tax Return
On Investment
Baseline
BAT
After Tax Return
On Investment
Baseline
BAT
Trade Sales Paints
Large
Medium
Small
V. Small
21
17.7
13.1
4.5
20
16.0
9.6
( 6.6)
106
8.8
10.2
3.2
9.4
7.2
6.7
(38)
Industrial Finishes
Large
Medium
Small
V. Small
21
263
12.5
4.7
19.6
19.7
80
( 7.7)
10.5
13 1
9.8
3.6
9.1
9.8
53
(4.4)
Miscellaneous Paint Products
Large
Small
21.0
12.5
19.9
7.3
10.5
9.8
94
5.0
Painting Ink
Large
Captive
Small
16.5
17.5
15.5
14.9
15.4
10.2
10.4
9.5
12.1
8.8
7 5
78
46
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TABLE 22
ESTIMATED CASH FLOW ON AVERAGE INVESTED CAPITAL
FOR MODEL PLANTS ASSUMING NO PRICE CHANGE
Type and Size
of Plant
Baseline
($000)
BAT
($000)
Trade Sales
Large
Medium
Small
V. Small
273
95.2
14.8
1.6
12.0
9.5
10.8
3.9
258
88
13.5
0.6
11.4
8.8
9.9
1.5
Industrial Finishes
Large
Medium
Small
V. Small
216
38.9
11.0
1.4
12.0
14.0
10.3
4.0
201
31.7
9.7
0.4
11 1
11.4
9.2
1.1
Miscellaneous Paint Products
Large
Small
277
10.6
12.0
10.3
262
9.3
11.4
9.0
Printing Ink
Large
Captive
Small
41.4
26.0
13.4
11.4
10.6
13.1
39.2
24.5
12.5
10.8
10.0
12.3
47
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figures used include depreciation on the newly installed effluent control equipment. With-
out this depreciation factor the cash flow after abatement for the very small trade sales and
industrial finishes plants would be negative.
All cash flows for model plants are positive although the cash flows for very small
plants in both trade sales and industrial finishes segments are drastically reduced and are
almost negative. The percentage of cash flow on average invested capital in these same size
categories is also reduced dramatically.
6. Capital Availability
One of the most serious considerations in analyzing the effect of effluent abatement
costs in these industries is the availability of capital to make the initial investment in
effluent abatement. Both the paint and printing ink industries have a much lower than
average annual investment in manufacturing equipment compared to other industries. In
Appendix A the capita! expenditures for direct dischargers are shown as a percentage of
average annual investment. For the printing ink industry and for miscellaneous paint
products segments these values are low. For trade sales and industrial finishes segments the
values are very high.
These values are somewhat misleading, however, because they are average values of the
investment for large plants as well as for very small plants. It has been shown that new
capital investment is made principally by the large- and medium-sized trade sales and
industrial finishes plants. If one uses the industry averages the average annual investment for
a very small trade sales or industrial finishes plant is S4000. If the capital investment for
effluent abatement for these plants is 517,500 the percentage of average annual investment
is extremely high, over 4009r. This same relationship holds true for the small industrial
finishes and trade sales plants but to a lesser degree. (Table 23.)
Large- and medium-sized plants will have little difficulty in financing effluent abate-
ment costs from working capital, private financing, or commercial lending agencies. Because
capital costs represent an extremely high percentage of average annual investment for the
small and very small plants, these plants will not be able to obtain the necessary capital from
commercial lending agencies. Instead they will have to resort to either private financing or
pay for the investment from cash flows.
In the preceding section the impact of effluent abatement costs on after-tax income,
after-tax return on sales, and after-tax return on investment has been shown. In every case
the very small trade sales and industrial finishes plants report a negative position. On this
basis it is believed that no financing either commercial or private will be available and these
plants will be forced to close. In the case of the small trade sales and industrial finishes
plants the after-tax income, return on sales and returns on investment are positive but have
been reduced by as much as 50^. Cash flows are still positive and some of these plants may
be able to finance effluent abatement investment themselves. However, no public or
48
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TABLE 23
EFFLUENT CONTROL INVESTMENT AS A PERCENTAGE OF AVERAGE ANNUAL CAPITAL INVESTMENT
($000)
Segment
Control
Investment
Fixed Assets
Control Invest.
as a Percent of
Fixed Assets
Average Annual
Capital
Investment
Control Invest.
as a Percent of
Ave. Cap. Invest.
Trade Sales
Large
Medium
Small
Very Small
55
55
17.5
17.5
1,030
384
58
16
5.3
14.3
30
109
147
70
14
4
37
78
103
438
Industrial Finishes
Large
Medium
Small
Ver, Small
55
55
17.5
17.5
817
149
44
15
6.7
37
40
117
118
27
11
3.7
46
203
159
473
Misceellaneous Paint
Products
Large
Small
55
17.5
1,040
43
5.3
41
150
10.5
37
167
Printing Ink
Large
Captive
Small
17.5
17.5
17.5
114
77
32
15.4
23
55
24
17
9.7
73
103
180
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commercial financing will be available. For medium industrial finishes plants, the impact is
severe enough on after-tax income, return on investment, etc., to estimate that one-third of
these plants will be seriously impacted as a result of the proposed effluent guidelines.
C. PLANT CLOSURE EFFECTS
The financial analysis in the previous section showed limited availability of capital and
poor or negative profitability for the small and very small plants in both rrade sales and
industrial finishes segments as well as for the lower quartile of the medium-sized industrial
finishes plants. The resulting potential closures are shown in Table 24. No closures are
anticipated for the miscellaneous paint products segment or for the printing ink segment.
TABLE 24
POTENTIAL CLOSURES
BAT Baseline Net
Trade Sales
Large - — _
Medium - — —
Small 624
V. Small 624
Total 12 4 8
Industrial Finishes
Large — - -
Medium 11 - 11
Small 46 10 36
V. Small 46 13 33
Total 103 23 80
SIC 2851 Totals 115 27 88
50
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Baseline closures were estimated as follows: in the paint and allied products uutustn,
approximately 160 establishments go out of business each year. Most of those arc single-
plant companies so the assumption has been made that annual baseline closures m the
industry total 160 plants. However, not all of these plants cease operation. About half arc
acquired by some other company and continue operating as before. The remaining 80 plants
either go out of business completely or are acquired by some other company which transfers
part of the equipment and part of the labor force to some other location. Of the impacted
plants 27 fall in the baseline category, 4 in trade sales and 23 in industrial finishes as shown
in Table 24. The total potential closures for BAT are 115. Deducting the 27 baseline
closures leaves net potential closures of 88 plants.
Because of the marginal financial operations, particularly in the very small trade sales
and industrial finishes plants, it is assumed that an additional 27 plants will remain in
business since the closure decision in this case would not be influenced by the usual
financial benchmarks such as after-tax income, return on sales or return on investment.
Capital availability for these plants probably would come from within the company family
or by reducing working capital and no outside financial assistance would be sought.
Subtracting this from the potential closures gives a net of 61 plants with a high probability
of closure.
D. PRODUCTION CURTAILMENT
No significant long-run curtailment in total production will result from the imposition
of effluent control costs. Those plants which continue to operate will do so at their current
volume and will not reduce production to meet the proposed standards.
It is estimated that the industries are now operating at 85% of capacity. On this basis,
existing plants will be able to cover any production loss from plant shutdowns. Table A-3,
Appendix A, shows the percentage of reduction in segment production due to closures. For
trade sales paints, this amounts to 0.2% of production and for industrial finishes the value is
3.4% of production. For miscellaneous paint products and printing ink segments there is no
loss of production because there are no plant closures. The total loss of production in the
paint and allied products industry amounts to 1.8%.
E. EMPLOYMENT EFFECTS
The loss of employment due to plant closures, also shown in Table A-3, amounts to
200 in the trade sales paint segment and 2224 in the industrial finishes segment. The total.
2424, represents about 2% of the total employees in the paint and allied products industry.
F. COMMUNITY EFFECTS
The plants with potential closures are located primarily in urban areas, principally
along the eastern seaboard, the North Central States, Texas and California. It is highly
51
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unlikely that plants which are closed would be restarted by another group in the same
location. The sales lost by the plants which close would be absorbed by competitive plants
meeting the guidelines. These plants could probably assimilate the production without
increasing their present labor force. Therefore, it is highly unlikely that the workers left
unemployed by plant closures would be able to continue in the industry.
G. INDUSTRY GROWTH
Because of the low capital investment necessary for entry into these industries, they are
characterized by a large number of very small plants. If the investment for control or for
pretreatment is added to the start-up costs then the trend will shift gradually away from a
predominance of very small to small- and medium-sized plants. No significant impact on
overall rate of growth in either industry is expected due to implementation of the proposed
guidelines.
H. INTERNATIONAL TRADE
The amount of trade sales paint and industrial finishes imported is negligible. There-
fore, no balance of payments effects will result from the implementation of the proposed
guidelines.
52
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V!!!. LIMITS OF THE ANALYSIS
A. ACCURACY
All data gathered for the Impact Analysis numbers of plants, numbers of employees,
segmentation of the industry, geographic location, etc. — were derived from Census of
Manufactures data, industry association cl;:ta, the ''Paint Redbook," the "Industrial Market-
ing Guide to the Paint Industry" by C. H. Kline & Co., Robert Morris Associates, the
National Paint and Coatings Association, tiie National Association of Printing Ink Manufac-
turers, and ADL data. The financial data were accumulated from Census of Manufactures,
corporate annual reports, private sources, and ADL estimates. We believe all of these data
are reliable and we estimate them to be 90-95'/r accurate. Data relating to the numbers of
plants connected to municipal systems vs. the number of plants discharging clean-up or
process water by some other means wen- derived from the questionnaires sent out by both
trade associations.
The cost data were provided by EPA through the Draft Development Document. These
cost data were extrapolated to correspond with the plant sizes described in this study. All of
the economic analyses were performed using these modified cost data. The costs cortained
in the Development Document are based on a smaller amount of clean-up water tha \ that
generally estimated by the industry. If one doubles the annual operating costs forefiluent
control and applies these data in the economic impact, there is very little change in the
estimated closures presented in Tab!'.1 24. The percent margin of all plants is lower and the
abatement cost as a percentage of net income is, of course, much higher. However, it is not
significantly different from the data presented and it is not believed that increased operating
costs will cause any significant change in the estimate of the number of possible plant
closures. On the other hand, any significant error in the investment costs would have a
drastic effect on the number of potential plant closures since the availability of capital for
investment might well depend on the relationship between the capital investment and fixed
assets. If this ratio is significantly increased a large number of medium-sized plants might
face closure.
B. RANGE OF ERROR
It is believed that no more than 88 olants in SIC 2851, paint and allied products, will
close. This number might be significantly reduced because of the number of privately held
firms which do not evaluate thrr financial well-being by sophisticated techniques, but
rather are operating from their g;ov, maigm. It is possible that as many as 27 plants would
stay in business, reducing the number of potential closures to approximately 61. While this
is a significant drop, there arc appioximatdv 30 plants in the medium-size category of the
trade sales segment operating under margin,u conditions. If they were to make the invest-
ment shown in BAT, there is a senous question as to whether they might also close.
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C. CRITICAL ASSUMPTIONS
In generating this economic analysis, it has been necessary to make a number of
assumptions. The most critical assumption is that plants which returned industry survey
questionnaires unanswered regarding the present method of discharge could be distributed
in accordance with the distribution of known plants in each segment. If plants identified as
dischargers or as not pretreating are now meeting the guidelines, the number of plants
described as potential closures would be reduced.
It is assumed that the industry averages for financial data are adequate for the
description of plants in the various segments identified. To check this assumption, a number
of paint companies in the various categories have been exposed to the financial profiles used
in this analysis for review. No serious criticism has arisen.
The greatest degree of sensitivity of these assumptions lies in the number of plants
currently meeting the proposed effluent guidelines. Data used in this analysis were derived
by an examination of questionnaires returned from more than 18/f of the plants in the
industry. If the number of plants discharging to surface water is significantly different from
the v.mple or, conversely, if the number of plants currently meeting the guidelines is
signit:. antly increased, this obviously will have a major effect on the number of potential
plant closures and the general economic impact to both the printing ink and paint
industries.
c/i
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APPENDIX A
INDUSTRY SUMMARIES
55
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TABLE A-1
SIC 2851 EFFLUENT CONTROL INVESTMENT AND ANNUAL COSTS
(BAT)
Rant Group
Trade Sales
Very Small
Small
Medium
Large
Total
Industrial Finishes
Very Small
Small
Medium
Large
Total
Miscellaneous Paint Products
Small
Large
Total
Industry Total
Number of
Rants
with Direct
Discharge
6
6
10
i-22
Total
Fixed
Investment
($ Million)
0.24
0.82
10.0
50
Incremental Investment
Required for
Effluent Control
(% of Fixed
($ Thousand) Investment)
105 44
105 18.3
550 5.5
1,210 2.4
Total
Annual
Sales
($ Million)
1.1
3.8
31.7
147.4
Annual
Cost for
Effluent Control
($ Thousand)
27
28.8
182
572
(% of Sales)
2.5
0.8
0.6
0.4
''44
155
61.1
75.3
1.970
5,075
3.2
184
6.7
236.4
810
1,816
0.4
46
5*46
32
31
1.7
4,9
12.5
56.2
BOS
805
1,760
1,705
47.4
16.4
14.1
3.0
7.8
22.7
39.4
166.5
207
221
582
806
2.7
1.0
1.5
0.5
0.8
0
0
0
199
0
0
0
136.4
0
0
0
7,045
0
0
0
5.2
0
0
0
420.4
0
0
0
2,626
0
0
0
0.62
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TABLE A-2
SIC 2893 EFFLUENT CONTROL INVESTMENT AND ANNUAL COSTS
(BAT)
00
Plant Group
Printing Ink
Large
Captive
Small
Industry Total
Number of
Plants
with Direct
Discharge
31
10
5
Total
Fixed
Investment
($ Million)
11.3
2.5
0.5
Incremental Investment
Required for
Effluent Control
(% of Fixed
($ Thousand) Investment)
534 4.8
175 7
87.5 17.5
Total
Annual
Sales
($ Million)
33.5
7.9
2.2
Annual Cost for
Effluent
($ Thousand)
176
50.2
21.8
Control
(% of Sales)
0.5
0.6
1.0
46
14.3
805.5
5.6
43.6
248
0.6
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TABLE A-3
INDUSTRY SUMMARY
Trade Sales Paints
SIC 2851 Paint & Allied Products
# Plants m Segment 769
# Plants Direct Discharging 44
% Total Plants in Segment 5
# Plants with BPT Treatment In Place 348
% Total Plants in Segment 45
Cost of Effluent Abatement
Capital Costs for Segment
($000)
Total Capital Cost 1,970
Total Capital Expenditures
as % Average Annual Investment 48.7
Total Capital Expenditures
as % Total Capital in Plant 3.2
Annualized Costs for Segment
Total Incremental Increase
Including Capital Charges 810
Total Incremental Increase
Excluding Capital Charges 416
Total Incremental Increase
as % of Sales 0.4
Expected Price Increase Due to Effluent Control none
Plant Closures
Total Closures Anticipated 8
% Reduction of Segment Capacity
due to Closures 0.2
Employment
Total $ of Employees Affected 200
% of Total Employees in Segment 0.4
Comrminity Effect none
Impact on Industry Growth none
Balance of Trade Effects none
59
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TABLE A3 (Continued)
Industrial Finishes
SIC 2851 Paint and Allied Products
# Plants in Segment 825
# Plants Direct Discharging 108
% Total Plants in Segment 13
# Plants with BPT Treatment In Place 161
% Total Plants in Segment 19.4
Cost of Effluent Abatement
Capital Costs for Segment BAT
($000)
Total Capital Cost 5,075
Total Capital Expenditures
as % Average Annual Investment 98
Total Capital Expenditures
as % Total Capital in Plant 6.7
Annualized Costs for Segment
Total Incremental Increase
Including Capital Charges 1,816
Total Incremental Increase
Excluding Capital Charges 801
Total Incremental Increase
as % of Sales 0.8
Expected Price Increase Due to Effluent Control none
Plant Closures
Total Closures Anticipated 80
% Reduction of Segment Capacity
due to Closures 3.4
Employment
Total # Employees Affected 2,224
% of Total Employees in Segment 3.9
Community Effect none
Impact on Industry Growth none
Balance of Trade Effects none
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TABLE A-3 (Continued)
Miscellaneous Paint Products
SIC 2851 Paint and Allied Products
# Plants in Segment 21
# Plants Direct Discharging 0
% Total Plants in Segment 0
# Plants with BPT Treatment In Place 0
% Total Plants in Segment 0
Cost of Effluent Abatement
Capital Costs for Segment BAT
($000)
Total Capital Cost 0
Total Capital Expenditures
as % Average Annual Investment 0
Total Capital Expenditures
as % Total Capital in Plant 0
Annualized Costs for Segment
Total Incremental Increase
Including Capital Charges 0
Total Incremental Increase
Excluding Capital Charges 0
Total Incremental Increase
as % of Sales 0
Expected Price Increase Due to Effluent Control none
Plant Closures
Total Closure Anticipated 0
% Reduction of Segment Capacity 0
Employment none
Community Effect none
Impact on Industry Growth none
Balance of Trade Effects none
61
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TABLE A-3 (Continued)
Printing Ink
SIC 2893 Printing Ink
# Plants in Segment 670
# Plants Direct Discharging 46
% Total Plants in Segment 6.9
#Plants with BPT Treatment In Place 108
% Total Plants in Segment 16
Cost of Effluent Abatement
Capital Costs for Segment
($000)
Total Capital Cost 806
Total Capital Expenditures
as % Average Annual Investment 7.0
Total Capital Expenditures
as % Total Capital in Plant 5.6
Annuahzed Costs for Segment
Total Incremental Increase
Including Capital Charges 248
Total Incremental Increase
Excluding Capital Charges 86.8
Total Incremental Increase
as % of Sales 0.6
Expected Price Increase Due to Effluent Control none
Plant Closures none
Employment none
Community Effect none
Impact on Industry Growth none
Balance of Trade Effects none
-------
II CIINK Al Rl I'ORT
DAI A I'ACil
I Report No.
EPA-230/1-74-052
3. Recipient's Accession No.
4 lillc.md Suhlitle
Economic Analysis of Proposed Effluent Guidelines - Paint and Allied Products
and the Printing Ink Industries
5. Report Date
August 1974
6.
David W. Levering, Thomas L. Doorley, Henry L. Buccigross,
John W. Rafferty
8. Performing Organization Kept. No.
C-75927
IVrtorinmn Organization Name and Address
Arthur D. Little, Inc.
Acorn Park
Cambridge, Massachusetts 02140
10. Project/Task/Work Unit No.
Task Order No. 27
11. Contract/Grant No.
68-01-1541
12. Sponsoring Organization Name and Address
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D.C. 20460
13. Type of Report & Period Covered
Final
14.
15. Supplementary Notes
16. Abstracts
An analysis of the economic impact on paint and printing ink industries of proposed effluent gu felines.
Impacts were found to be concentrated on small plants in trade sales and industrial finishes segmei ts. For
these plants capital investment required for abatement will force many to consider plant closure. In toto,
however, abatement cost to the industries is not severe and price increases if any are expected to be
minimal.
17. Key Words and Document Analysis. 17a. Descriptors
Effluent Abatement
Economic Impact Analysis - Paint and Allied Products
Printing Ink
17b. Identifiers/Open-Ended Terms
17c COSATI Held/Group
18. Availability Statement
U.S. Environmental Protection Agency
Information Center, Room W-327
Waterside Mall, Washington, D.C. 20460
19. Security Class (This
Report)
UNCLASSII II D
20. Security Class (This
Pace)
UNCLASSII MD
21. No. of Pages
70
22. Price
I OKM NTIS-35 (RI;V. 3-72)
•)/
USCOMM-DC 14952-l
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