EPA-230/l-76-029a
November 1976
ECONOMIC ANALYSIS OF
PRETREATMENT STANDARDS
FOR THE
WOOD PRESERVING SUBCATEGORIES
OF THE
TIMBER PROCESSING POINT SOURCE CATEGORY
Prepared for
Office of Water Planning and Standards
Economic Analysis Staff
U.S. Environmental Protection Agency
Washington, D.C. 20460
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This report has been reviewed by the Office
of Water Planning and Standards, 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 reconvmendation for use.
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PREFACE
The attached document is a contractor's study prepared for the Office of
Water Planning and Standards 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 pretreatment standards to be
established under section 307(b) of the Federal Water Pollution Control
Act, as amended.
The study supplements the technical study, "EPA Development Document,"
supporting the issuance of interim final regulations under section 307(b).
The Development Document surveys existing and potential waste treatment
control methods and technology within particular industrial source cate-
gories and supports interim final promulgation of pretreatment standards
based upon an analysis of the feasibility of these standards in accordance
with the requirements of section 307(b) 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 technologies. This study investigates the effect of alternative
approaches in terms of product-price increases, effects upon employment and
the continued viability of affected plants, effects upon foreign trade and
other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Planning and Standards of EPA. This report was submitted in
fulfillment of Contract 68-01-4156 by Arthur D. Little, Inc. Work was
completed as of November, 1976.
This report is being released and circulated at approximately the same time
as publication in the Federal Register of a notice of interim final rule
making under Section 307(b) of the Act for the subject point source cate-
gory. 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 interim final
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 repre-
sents the views of the contractor who studied the subject industry. It
cannot be cited, referenced, or represented in any respect in any such
proceeding as a statement of EPA's views regarding the subject industry.
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TABLE OF CONTENTS
List of Tables
List of Figures
I. EXECUTIVE SUMMARY
A. SCOPE OF WORK 1
B. CONCLUSIONS 1
1. Industry Subsegments 2
2. Financial Profiles 2
3. Pricing 2
4. Methodology 3
5. Costs of Compliance 4
6. Economic Impact Analysis 4
II. METHODOLOGY 9
A. GENERAL APPROACH 9
B. PRICE EFFECTS 9
C. PLANT CLOSURE EFFECTS 10
D. MODEL PLANTS 12
III. INDUSTRY STRUCTURE 13
A. INDUSTRY DESCRIPTION 13
1. Products 13
2. Production 14
3. Substitute Products 17
4. Future Demand 17
5. Ownership 17
B. INDUSTRY SEGMENTS 20
1. Types of Firms 22
2. Types of Plants 23
3. Financial Profile 29
4. Industry Pricing 31
C. MODEL PLANTS 39
1. Model Inorganic Plants 39
2. Model Organic Plants 41
3. Models of Plants Treating with Both Organic
and Inorganic Preservatives 43
4. Model Financial Statements 43
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TABLE OF CONTENTS
(Continued)
IV. EFFLUENT LIMITATIONS, TECHNOLOGIES AND COSTS 48
A. LAND 48
B. EFFECTS OF EQUIPMENT ALREADY IN PLACE 50
C. TREATMENT PHASE C 54
D. SCALE EFFECTS 54
E. INDUSTRY ESTIMATES 54
V. ECONOMIC IMPACT ANALYSIS 56
A. ANALYSIS AND PROJECTION OF PRICE EFFECTS 56
1. Industry Factors Governing Price Increases 56
2. Price Increases Required to Cover Abatement
Costs 59
3. Probable Price Increases for the Inorganic
Subsegment 59
4. Probable Price Increases for the Organic
Subsegment 63
5. Probable Price Increases and Projection of
Price Effects for Plants Using Both
Inorganic and Organic Preservatives 65
6. Secondary Effects of Price Increases 66
7. Effects on Substitutes 66
B. FINANCIAL EFFECTS 66
1. Inorganic Plants 66
2. Organic Plants 68
3. Plants Which Treat with Both Preservatives 70
4. Capital Availability 70
5. Production and Employment Effects 72
6. Resultant Community Effects 80
7. Balance of Payments Effects 80
VI. LIMITS OF THE ECONOMIC ANALYSIS 81
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LIST OF TABLES
Table Page
II-B-1 Price Increase Analysis Matrix 10
II-C-1 Plant Closure Analysis Matrix 11
III-A-1 Wood Treated with Preservatives 15
III-A-2 Preserved Wood Products and Their Substitutes 18
III-A-3 Concentration in Wood Preserving Industry for
1963, 1967, 1970 and 1972 19
III-A-4 Ownership Organization of the Wood Preserving
Industry, 1972 21
III-B-1 Ownership of Wood Preserving Plants Discharging
into POTW Compared to Total Industry 23
III-B-2 Comparison of Plants Using POTW's and Total
Industry by Preservative Used 25
III-B-3 Distribution of Plants Using POTW by Number
of Cylinders and Type of Preservative 25
III-B-4 Data of Construction of a Randomly Selected
Sample of Plants Utilizing Publicly Owned
Treatment Works 27
III-B-5 Regional Distribution of Plants Discharging to
POTW Compared to Total Industry 28
III-B-6 U.S. Corporate Profits (After Taxes) as a
Percent of Sales 30
III-B-7 Cost of Production Factors: 1967 and 1972 32
III-B-8 Selected Operating Ratios for the Wood Preserving
Industry: 1958 to 1973 33
III-B-9 Expenditures for New Plant and Equipment by the
Wood Preserving Industry 34
III-B-10 Wood Preservatives—Price History 36
III-B-11 Prices of Selected Preserved Wood Products 37
III-B-12 Material Treated in 1974, by Region, and United
States Total 1973-1974 38
III-C-1 Model Inorganic Treating Plants 40
III-C-2 Model Organic Treating Plants 42
III-C-3 Model Inorganic and Organic Treatment Plants 44
III-C-4 1972 Census Statistics by Employment Size of
Establishment 46
III-C-5 Representative 1972 Income Statements for
Model Plants 47
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LIST OF TABLES
(Continued)
Table
IV-1 Capital and Operating Cpst Estimates of
Pretreatment for Organic Preserving Plants 49
IV-2 Summary of Pollution Control Status 51
IV-3 Summary of Abatement Costs 53
V-A-1 Price Increase Analysis Matrix 57
V-A-2 Price Increases Required for Industry Subsegments 60
V-A-3 Number of Plants in Each Cost Impact Group 61
V-A-4 Minimum Price Increases Required for Industry
Subsegments 62
V-B-1 Pro Forma Income Statements for Model Plants—
Inorganic Preservatives 67
V-B-2 Pro Forma Income Statements for Model Plants—
Organic Preservatives 69
V-B-3 Pro Forma Income Statements for Model Plants—
Both Organic and Inorganic Preservatives 71
V-B-4 Plant Closure Analysis Matrix 73
V-B-5 Financial Ratios for Inorganic Preserving Plants 74
V-B-6 Financial Ratios for Organic Preserving Plants 76
V-B-7 Financial Ratios for Plants Which Treat with
Both Types of Preservatives 78
V-B-8 Employment Impacts 79
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LIST OF FIGURES
Figure Page
1 Wood Preserving Plants in the United States 16
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I. EXECUTIVE SUMMARY
This is a summary of the Contractor's final analysis of the economic
impact on the Wood Preserving Industry (SIC 2491) to meet the Effluent
Pretreatment Guidelines.
A. SCOPE OF WORK
The industry segment analyzed is the group of Wood Preserving plants
which discharge to Publicly Owned Treatment Works (POTW1s). This segment
was separated into three subsegments:
• Plants which treat only with Inorganic Preservatives,
• Plants which treat only with Organic Preservatives, and
• Plants which treat with both Organic and Inorganic Preservatives.
All of these subsegments were studied to define the structure of the
industry and to estimate the nature and severity of the costs of compli-
ance.
B. CONCLUSIONS
It is necessary to consider the three Wood Preserving Industry
subsegments separately because they face different costs of compliance.
The sectors vary in their business characteristics; e.g., they are in
differing states of growth. Products are similar among some of the
subsegments, however, so competition among them must be considered.
Further, some of the companies may be active in more than one subsegment.
Therefore, although separate economic impact analyses are required, some
attention must be given to how the impacts on one subsegment will affect
the others.
In general, the costs of compliance as reported in the Development
Document are not overwhelming for these industry subsegments. Since
they do not utilize large amounts of process water, the incremental
capital and operating costs necessary to meet abatement Guidelines are
not large. However, within specific plants the effect on operations
can be significant, especially for the small, independent business which
is quite sensitive to relatively small cost increments.
There will be essentially no impact on total production for the
industry. Where plants will close, they will be few in number, and will
be smaller firms with relatively little impact on total industry output.
In addition, these industry sectors are characterized by moderate levels
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of capacity utilization, e.g., 40-70% of total capacity. Thus, any
production deficiency resulting from plant closures will be offset by
the remaining facilities.
Small price increases will occur in all subsegments as a result of
pretreatment requirements and plants will absorb the remaining pollution
abatement costs. Profit margins of smaller plants will be significantly
affected.
Unemployment effects will be distributed around the South, North
Central, and Northeast. However, the total effect of unemployment will
not be large; no one community will be affected by nore than one plant
closure.
Abatement costs will not affect balance of trade; export trade is
minimal.
1. Industry Subsegments
The objective of dividing the industry into subsegments was to
group plants into categories which might be affected differently by
effluent control requirements. For these industry subsegments, the
costs of compliance can be directly related to the type of process used.
Each of the three groups studied performs different operations and has
different effluent practices, and thus faces different costs of compli-
ance. Segmentation was based on operating characteristics of plants
within the subsegments and representative model plants were developed
for each.
2. Financial Profiles
Five financial profiles were developed to represent model plants
within the industry. These model plants have widely-ranging character-
istics as follows:
• Annual Sales: $150,000 to $6,000,000
• After Tax Income: $6,000 to $240,000
• Net Assets: $100,000 to $1,000,000
• Number of Employees: 2-50+
3. Pricing
Pricing dynamics vary somewhat within the subsegments. Basically,
however, they are characterized by negotiated or bid prices which are
set in response to industry-wide average price levels. Most products
do not maintain brand loyalties, and price competition is high. The
products face strong competition from similar treated products, untreated
wood products and non-wood substitute products (e.g., steel, concrete,
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aluminum) which creates a ceiling for price increases. However, prices
have increased considerably in the past three years as a result of
increased costs for raw materials.
Inorganically treated products are in a state of growth, in contrast
to the essentially zero growth of demand for organic products. As a
result, inorganic products experience greater pricing flexibility in
some markets.
4. Methodology
To accomplish the economic impact analysis we have developed data
on the structure of these industry sectors and an analytical model to
focus on the following two central issues:
• The probability that costs of compliance will be passed on to
consumers via increased end product costs or will be absorbed
by operators, resulting in a lower level of profitability;
and
• If costs cannot be passed through, the extent to which the
effect on financial condition and limitations of capital
availability will force plant closures, thus causing
unemployment and community effects.
Since there are many small, privately-held firms in this industry
for which data is not generally available on operations or financial
position, we had to develop new data on the various industry segments
through surveys of firms within the individual subsegments plus inter-
views with industry associations and others knowledgeable of industry
practice. This was supplemented by background and interpretive data
which we have accumulated over time.
The conclusion that prices are likely (or not likely) to be able to
be passed on is a relatively straightforward economic analysis. Table
II-B-1 (p. 10) presents the price increase analysis matrix which we used
to derive price increase conclusions. However, if prices are not
likely to be increased and costs are absorbed with relatively well-
documented financial effects, it is more difficult to reach conclusions
regarding plant closures. The plant closure analysis matrix which we
used to structure these decisions is presented in Table II-C-1 (p. 11).
This analysis is complicated by the fact that small, family-owned and
operated, one-plant firms which are common in these industry sectors,
show remarkable "staying power" in the face of significant negative
financial effects. The extent of subjective commitment to the business
is an extremely difficult factor to measure and assess. Standard
business reasoning, such as effect of abatement costs on key profita-
bility ratios (e.g., return on net assets, profit margin) can be used
to focus on the key issues, but the factors related to the nature of
the small firms in this business were used .necessarily as subjective
elements to supplement the objective analysis.
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5. Costs of Compliance
Capital costs of compliance vary dramatically among the subsegments,
ranging from $50,000 to $238,500. The cost burden is significant for
many of the small plants in each category.
6. Economic Impact Analysis
The wood preserving plants use small volumes of process water for
the most part. However, capital expenditures are usually low and asset
values small, so the costs of compliance may cause financial setbacks to
some plants. Even so, the plants which will be most affected are small,
thus the costs required to meet effluent guidelines will not cause a
severe dislocation in the industry in total.
• Price Effects. Implementation of Pretreatment Guidelines
will result in price increases of about two percent for the
11 inorganic plants, one percent for 23 organic plants,
and one percent for 15 plants treating with both types of
preservatives. This will allow the larger plants to
maintain present rates of return on sales.
• Financial Effects. Since some plants will not be able to
fully pass along cost increases, they will suffer a
decrease in profitability. For about three inorganic
plants, two organic plants, and two plants treating with
both preservatives, this will mean a high probability
of closure.
• Production Effects. Seven plants may close (14 percent
of total in POTW segment). However, this loss in capacity
is small, probably less than one percent of the industry
and would be counterbalanced by increased production in
other plants.
• Employment Effects. About 60-70 workers (approximately
seven percent of the total) could be unemployed.
• Community Effects. The plants with high closure probability
are located in different geographical areas. At least three
are part of other wood-related operations on the same site
which may be able to absorb the workers.
• Balance of Payments Effects; Zero.
7. Limits to the Analysis
The two key problems limiting the accuracy of the present analysis
are based on:
• A limited availability of data; and,
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• The nature of the industry.
We conducted representative surveys of the industry and discussions
with industry members to enable us to deal with the data limitation
factor. The consistency of our data suggests that this can be accom-
plished within a relatively narrow band of error.
The second problem, the nature of the industry, makes it difficult
to project plant closures, as noted above. However, since some of the
costs are modest and even small firms may be able to bear the burdens,
the difficulty of accurately projecting plant closures is less important.
If new Guidelines would cause increased costs to be borne by companies
in this sector, then this would be a more sensitive issue.
Thus, although data was somewhat limited and the nature of the
industry forced us to use subjective as well as objective analysis, we
believe the analysis as presented is accurate within a fairly narrow
band of error (±10%).
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INDUSTRY SUMMARY
Wood Preserving Industry
SIC 2491
# Plants in segment 49
% Total plants in industry 12%
// Plants discharging to municipal system 49
% Total plants in segment 100%
Total capital cost $5,040,000
Total annual incremental increase including
capital charges 1,744,000
Total annual incremental increase excluding
capital charges 1,217,000
A. Subsegment I; Plants treating with inorganic preservatives
# Plants in subsegment 11
% Total indirect dischargers 22%
Pretreatment
Cost of Pollution Abatement
Capital costs for subsegment
Total capital cost $550,000
Total capital expenditures as %
average annual investment 167%
Total capital expenditures as %
of total capital in place
(book value) 17%
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Annualized costs for subsegment
Total incremental increases including
capital charges $130,000
Total incremental increase excluding
capital charges 65,000
Total incremental increase including
capital charges as % of sales 1.0 - 6.7%
Expected Price Increase 2.0%
B. Subsegment II; Plants treating with organic preservatives
# Plants in subsegment 23
% Total indirect dischargers 47%
Pretreatment
Cost of Pollution Abatement
Capital costs for subsegment
Total capital cost $2,632,000
Total capital expenditures as % of
average annual investment 462%
Total capital expenditures as % of
total capital in place (book value) 13%
Annualized costs for subsegment
Total incremental increase including
capital charges $1,004,000
Total incremental increase excluding
capital charges 743,000
Total incremental increase including
capital charges as % of sales 0.9 - 10.5%
Expected Price Increase
Expected increase due to pollution control 1%
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C. Subsegment III: Plants treating with organic and inorganic
preservatives
15
31%
Pretreatment
# Plants in subsegment
>t
% Total indirect dischargers
Cost of Pollution Abatement
Capital costs for subsegment
Total capital cost $1,858,000
Total capital expenditures as % of
average annual investment 628%
Total capital expenditures as % of
total capital in place (book value) 17%
Annualized c_os_ts_ for subsegment
Total incremental increase including
capital charges $610,000
Total incremental increase excluding
capital charges 408,000
Total incremental increase including
capital charges as % of sales 0.9 - 7.2%
Expected Price Increase
Expected increase due to pollution control 1%
D. For Total Segment
Plant Closures
Total closures anticipated % reduction of
plants in segment 14%
Employment
Total # of employees affected 63
% of total employees in segment 7%
Community Effects small
Impact on Industry Growth none
Balance of Trade Effects none
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II. METHODOLOGY
A. GENERAL APPROACH
Information concerning general industry trends were gathered from
a variety of sources including the contractor's previous work in the
industry, Commerce Department statistics on the industry and interviews
with knowledgeable industry sources. Information on specific plants
discharging to POTW's was obtained from the Development Document and
contractor interviews in person, by phone and through a mail questionnaire
with selected plants. Estimates of the cost of effluent abatement were
obtained from the Development Document contractors. Other estimates
provided by industry sources will be considered in the report in the
form of sensitivity analyses. All of the above information will be
used to evaluate the likelihood of price increases due to the pretreat-
ment standards and, subsequently, the possibility of plant closures for
the affected segments.
B. PRICE EFFECTS
The analysis of price effects of the pretreatment guidelines is based
upon consideration of both changes in industry average price levels and
the ability of individual firms to change their prices.
Firms which are able to change prices sufficiently to fully recover
the costs of pretreatment requirements will experience little or no
economic impact, assuming there are no capital availability constraints.
Changes in average industry prices could result in changes in total
demand for preserved wood products, depending upon price elasticity of
demand.
The elasticity of demand varies to some extent by individual product.
The demand for those products which face less competition from substitute
products will not decrease significantly with an increase in price.
Railroad ties are an example. Other products face more severe competition
from untreated wood and/or substitute construction materials and so have
greater price elasticity.
A more serious price constraint is the inability of individual firms
to charge prices very different than the industry average. Therefore,
firms experiencing significantly higher pretreatment costs than the
industry average or price leaders in the industry, will not be able to
charge prices sufficient to fully cover their added costs.
If products are sold on the basis of price rather than quality of
service, as is true in the wood preserving industry, then individual
firms must price their products at industry-wide levels. Similarly,
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since market shares are generally small for any individual firm or
plant, then price competition is high and cost increases of individual
producers are more likely to be absorbed.
There are a number of factors which influence the ability of
individual firms to increase their prices. These are outlined in
Table II-B-1. In Section V each of these factors will be further
described and examined for each industry subsegment to determine the
degree to which plants in the subsegment may be expected to be able
to pass along cost increases.
The ability for firms in this industry to pass on cost increases
is to a significant extent a macroeconomic consideration, i.e., heavily
influenced by the total supply/demand balance. In a strong market,
demand may be strong enough to accept substantial price increases.
Conversely, in a weak market, firms may have to absorb most cost
increases. Thus, the final determination of price effects is heavily
influenced by analysis of supply/demand factors.
TABLE II-B-1
PRICE INCREASE ANALYSIS MATRIX
Parameter Condition for Constraint
Annualized Cost as a Percent of Net Sales Higher than 10%
Substitute Products High occurrence; ready substitution
Industry Capacity Utilization Low; e.g., operating rate less
than 80%
Demand Growth Low; e.g., less than GNP
Foreign Shipments High
Abatement Cost Differences Unequal distribution of costs
Within Industry
Price Elasticity of Demand High
Basis for Competition Price
Market Share Distribution Fragmented
C. PLANT CLOSURE EFFECTS
If costs of abatement cannot be passed on to consumers or if capital
is not available, then the management of individual plants must decide
whether to continue operations at lower levels of profitability, or to
shut down. This decision depends on the magnitude of financial impact
on operations. The factors incorporated into our analysis of plant
closures are listed in Table II-C-1.
Three of the parameters in Table II-C-1 deserve specific attention.
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Extent of integration—If a plant is part of an extensive
lumber, plywood or other wood processing operation, it is likely
to be kept open even if financial impacts or capital
requirements are relatively severe.
Other facilities on a common site—An isolated plant is
most vulnerable for the reasons described in the integration
discussion above.
Ownership—A large, publicly-owned firm would tend to make
a shutdown decision based on "rational" business analysis,
such as effects on profitability. Such a firm would likely
have specific criteria for each of its operating facilities
to meet. However, a private owner tends to have greater
"staying power," a greater personal commitment to staying
in business even if profitability is substantially reduced.
This is true for such subjective reasons as pride in
successive family ownership, but also for such specifically
economic reasons as the fact that this may be a particular
family's sole or primary source of income.
TABLE II-C-1
PLANT CLOSURE ANALYSIS MATRIX
Parameter
After Tax Treatment Cost—%
Net Income
Cash Flow
Capital Cost of Abatement—%
Gross Fixed Assets
Extent of Integration
Other Facilities on Common Site
Ownership
Condition for Closure
High, e.g., greater than 30%
Negative
High, e.g., greater than 30%
None—Low
Isolated Plant
Large, publicy-owned firm
To accomplish the impact analysis, these factors are assigned
different orders of importance based on the specific characteristics
of individual subsegments. That is, a small privately-held firm has
different profitability criteria than a large, multi-industry, publicly-
held firm, e.g., magnitude of cash flow is the important issue to a
privately-held firm. Further, the management of such firms is not
likely to perform a discounted cash flow analysis as part of its stay-
open/shutdown decision making. And, cash flow has a different meaning
for such a private, internally-held enterprise which frequently elects
to pay higher salaries and more encompassing fringe benefits rather
than reporting profits on its income statement. Profitability ratios
can be used as a guide when analyzing such firms, but certainly do not
define the final story.
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D. MODEL PLANTS
In order to determine the economic impact of pretreatment guidelines
upon an industry which includes plants of highly diverse nature, a
number of model plants are developed for the analysis. These model
plants, further described in Section IV, are developed based upon
assumptions of operating and financial characteristics which have been
reviewed with industry members. The resultant "models" are used as
bases over which the price increase and plant closure analyses criteria
are applied.
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III. INDUSTRY STRUCTURE
A. INDUSTRY DESCRIPTION
1. Products
The wood preserving industry in the United States has developed
based on the need for prolonging the life of wooden structural products.
Historically, railroad ties, telephone poles, and pilings treated with
creosote have been the major products of the industry. In recent years,
lumber and plywood treated for fire retardancy and rot resistance have
experienced rapid growth.
As defined in Standard Industrial Classification (SIC) 2491, the
wood preserving industry "comprises establishments primarily engaged
in treating wood, sawed or planed in other establishments, with creosote
or other preservatives to prevent decay and to protect against fire and
insects. This industry also includes the cutting, treating, and selling
of poles, posts, and piping, but establishments primarily engaged in
manufacturing other wood products, which may also treat with preservatives,
are not included."* The industry's products include:
Bridges and trestles of wood, treated
Creosoting of wood
Crossties, treated
Flooring, wood block, treated
Mine props, treated
Millwork, treated
Piles, foundation and marine construction, treated
Piling of wood, treated
Poles, cutting and preserving
Poles and pole crossarms, treated
Posts of wood, treated
Railroad cross bridge and switch ties, treated
Structural lumber and timber, treated
Vehicle lumber, treated
Wood products, creosoted
The industry can be segmented in several different dimensions
corresponding to size, product, technology, and location. Roughly
speaking, the firms are located in the South, treating Southern Pine,
and in the West, treating Douglas Fir. Most treating is performed in
pressurized cylinders, although some of the firms use nonpressure
processes. The pressure processing uses oil-borne (organic) or water-
borne (inorganic) preservatives. The products made with oil, such as
piling and railroad ties, have a distinct odor and "oiliness," which
Standard Industrial Classification 2491.
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makes them unsuitable for use where odor is objectionable. The water-
borne preservatives are used for preserving plywood and lumber, and
especially for treating with fire retardants.
2. Production
From 1960 to 1974 the volume of wood treated with preservatives
increased from 216.1 million cubic feet to 274.7 million cubic feet
(+27%), with a peak production of 286.4 million cubic feet in 1967
resulting from shipments to Vietnam. Table III-A-1 shows the historical
production data by product category. The industry has experienced sub-
stantial swings in its production levels over a long period of time with
a peak level of 356.6 million cubic feet in 1947.
Figure 1 shows the national distribution of wood treatment facili-
ties. There are no statistics available on the geographical distribution
of final sales. In terms of volume, the major production components are
poles and crossties, which would follow the railroad and telephone pole
distribution pattern, and lumber and timber, which would have its heaviest
demand in humid areas, such as the South and the Northwest.
In addition to plants in the wood preserving industry, a number of
railroads and utility companies operate their own wood preserving plants.
However, these captive plants are not considered part of the industry
under SIC 2491 and are not included in this report.
The value of shipments rose from $344.2 million (1967) to $557
million (1973).* The price of preserved wood has increased substantially
since 1973. This is due in large part to the increases in raw wood and
chemical prices.
The levels of exports and imports of preserved wood are ambiguous
since, for the most part, wood products are not classified as preserved
or not. The value of exports and imports are very small and are mostly
transactions with Canada.
Preserved wood is largely a commodity market modified by transporta-
tion costs which give regional advantages to some producers. Pricing
mechanisms appear to be quite varied. For some products, wholesalers
and commission firms conduct continuous pricing and bidding between the
preserving plants and the final customers on the telephone. Some of
the preserved lumber is sold from price lists. On the other hand, most
piling and railroad ties are sold through formal bids for specific
projects. Some large consumers, such as utilities, deal directly with
the wood preservers. Purchase decisions are made on the basis of price
and delivery of future production, since most preservers only keep small
inventories and make the products only on order.
*
Annual Survey of Manufacturers, 1967-1973.
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TABLE III-A-1
WOOD TREATED WITH PRESERVATIVES
Ui
i
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
(D
(2)
(3)
Crossarms
4.3
4.7
4.6
3.4
3.6
3.7
3.6
3.5
3.4
3.6
4.9
5.5
4.6
3.3
3.2
3.5
3.1
2.4
2.6
(D)
Data for 196<
fire-retardai
WOOD BLOCKS:
MISCELLANEOU!
Crossties
85.9
83.2
101.5
73.9
52.1
57.2
55.8
42.9
47.4
55.7
63.
70,
80,
78.
71.3
79.4
87.0
85.9
67.6
(D)
Fence
Posts
16.2
12.8
13.4
14.9
15.7
13.5
15.0
17.1
18.2
18.6
18.4
19.7
21.0
16.5
15.7
15.1
16.7
18.2
15.2
(D)
By
(millions
Lumber &
Timbers
39.4
41.0
41.9
38.4
39.9
39.5
38.8
42.6
43.5
47.3
50.3
60.4
62.2
62.6
59.6
55.7
59.9
64.0
68.9
77.8
Product
of cubic
Piling
13.9
16.8
16.3
16.2
14.7
16.1
14.3
17.8
15.9
16.5
17.8
21.1
16.6
17.4
14.7
15.1
13.7
14.3
13.0
(D)
feet)
Poles
74.8
85.8
84.0
73.8
78.3
75.1
76.4
78.7
77.0
80.6
83.9
87.1
84.3
76.2
74.4
76.8
74.4
74.5
75.4
73.1
Switch
Ties Miscellaneous Total
7.3 3.8 248.4
8.1 3.6 257.9
8.1 4.8 274.5
6.7 5.6 232.8
4.5 5.7 214.5
4.9 6.0 216.1
4.7 6.6 215.4
4.3 6.9 213.9
5.3 6.7 217.4
6.8 8.0 237.0
7.5 9.2 255.7
7.8 8.6 280.6
8.3 8.9 286.4
7.9 9.4 271.9
6.4 8.2 253.5
7.9 6.9 260.3
6.2 7.7 268.6
6.0 7.2 272.6
5.0 6.9 254.4
(D) (D) 274.7
Data for 1966-1971 are not comparable with previous years because they include wood treated with
fire-retardant chemicals under each category rather than under MISCELLANEOUS.
Data for 1957-1969 are included in MISCELLANEOUS.
: Includes all wood products treated with fire-retardant chemicals in 1955-1965.
In 1965, 2.8 million cubic feet of wood were treated with fire retardants.
(D) Data not shown to avoid disclosure of individual company data.
Source: WOOD PRESERVATION STATISTICS, U.S. Department of Agriculture, Forest Service and American
Wood-Preservers Association.
-------
FIGURE 1 WOOD PRESERVING PLANTS IN THE UNITED STATES
O Plants Which Discharge to POTW
Source: American Wood Preservers Association and ADL estimates.
-------
A few wood preservers own forests. These companies are less likely
to sell preserved wood when it is more profitable to sell the wood in
other forms. Therefore, the range of possible prices for preserved
wood is limited to some extent by the prevailing prices of other wood
products.
3. Substitute Products
Preserved wood products face continuing competition from non-wood
products such as steel, concrete, and aluminum. As in most such situa-
tions, there are advantages and disadvantages to each product in addition
to price differentials. However, prices of wood products are strongly
influenced by the prices of substitute products and tend to be set
slightly below the substitute if there is strong competition.
Table III-A-2 lists some of the preserved wood products and their
potential substitutes. There is more competition for some uses than in
others. Wood piling, for example, is only used for loads up to 50 tons.
In some applications, such as building shingles, the aesthetic quality
of the wood makes it a premium product which can be sold above the
price of competitive products. Railroad ties experience little competi-
tion from substitutes.
4. Future Demand
Total production in the wood preserving industry is the sum of
products variously experiencing growth and decline. It would appear
that production for the whole industry will continue to have little
long-term growth—less than the GNP growth rate. Some products will
be exceptions to this slow growth rate. Growth of demand for railroad
ties will continue to be strong because of tightened federal railroad
safety regulations and the Northeast Railroad Reorganization and
Revitalization Act. Treated dimensionalized lumber and plywood will
experience growth higher than the GNP rate, subject, of course, to
fluctuations in the construction market. Products treated with organic
preservatives (creosote, oil, pentachlorophenol) have experienced little
annual growth and even a decline in recent years. Inorganically treated
products (using inorganic salts), although a small portion of all treated
products, have recently had rapid growth, even up to 20% per annum.
5. Ownership
The wood preserving industry has a large number of small firms,
although it is moderately concentrated in terms of market share held by
the largest firms. Table III-A-3 shows that the concentration in the
industry did not change significantly from 1963 to 1972.
There are basically two different patterns of ownership and manage-
ment in the industry. In the first category are plants owned by corpora-
tions which may or may not have wood preserving as the primary activity.
These plants are managed by individuals with little or no equity in the
-17-
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TABLE III-A-2
PRESERVED WOOD PRODUCTS AND THEIR SUBSTITUTES
Preserved Wood Product
Substitute
Piling
In-place concrete
Driven concrete
Steel piling
Hollow I beams
Marine piling
2 x 4's, etc.
Plywood
In-place concrete
Driven concrete
Interlocking iron sheets
Metal tubing
Concrete
Cinder block
Fire-retardant lumber, plywood, etc.
Asbestos
Gypsum
Metal sheets
Poles
Metal tubing
Precast concrete
-18-
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TABLE III-A-3
CONCENTRATION IN WOOD PRESERVING INDUSTRY FOR 1963, 1967. 1970 AND 1972
Value of shipments
Percent accounted for by —
SIC
Code
2491
4
largest
Industry and Year companies
Wood Preserving - 1972 35
- 1970 34
- 1967 35
- 1963 34
8
largest
companies
44
NA
44
44
20
largest
companies
60
NA
63
64
50
largest
companies
78
NA
84
84
Source: U.S. Bureau of Census, Annual Survey of Manufacturers, 1972, 1970, and 1967.
-------
corporation. Plants following the second pattern are owner-managed.
They may have even been owned by the same family for several generations.
The operation is probably incorporated, but the corporation is privately-
held. Table III-A-4 lists the organizational breakdown of companies
in the industry as of 1972, the most recent census information available.
The ownership and management patterns in an industry are important
for an assessment of how the industry will be impacted by pollution
control costs. Profitability requirements are very different between
an owner-manager who is receiving a good salary and a corporation which
more critically views the return on equity from one of many plants.
One may accept an increase in abatement costs as a necessity for staying
in business. The other may decide that the increased cost is not justi-
fied by the expected returns. As shown in Table III-A-4, there are 117
multiunit companies in the industry with 20 or more employees; all but
one are corporately held. The 117 produce $129.1 million (73%) of the
$175.8 million of value added by the entire industry. The remaining 282
will tend to have older technology, less financial resources, and higher
unit costs of production.
Size of the plant is also important in determining abatement impacts.
On the basis of per unit of production, the costs of pollution control
tend to fall more heavily on smaller plants because they have less pro-
duction base over which to spread the increased abatement costs.
Thus, the firms and wood preserving plants may behave differently
under the new pretreatment requirements; i.e., some may consider closure,
while others favor consolidation and still others are relatively un-
affected. The behavioral differences will be determined by the competi-
tive advantages or disadvantages which each perceives. These expected
behavioral differences and their determining factors will be further
discussed throughout this report.
B. INDUSTRY SEGMENTS
The wood preserving industry is composed of a large number of
small, privately-owned plants and a few larger establishments owned by
corporations not primarily in the wood preserving industry. The larger
companies include Koppers Corporation, Kerr-McGee Corp., J. H. Baxter &
Co., American Creosote Works, Inc., and Southern Wood Piedmont Co.
Each of these firms operates at numerous locations.
There are approximately 400 wood preserving plants in the country,
some 49 of which are known to discharge their wastewater effluent to
publicly-owned treatment works (POTW's). These 49 do not appear to
differ in any significant way from the plants in the industry as a
whole. The exception is that the indirect dischargers tend to have
lower availability of land. This observation is related to the fact
that the plants must be in or near towns and cities in order to discharge
into POTW's, and such locations usually do not provide opportunity for
acquisition of adjacent land.
-20-
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TABLE III-A-4
OWNERSHIP ORGANIZATION OF THE WOOD PRESERVING INDUSTRY, 1972
Item
Establishments
With 20
employees
Total or more
(number) (number)
Value
added by Value of
Employees manufacture shipments
(number) ($ Million) ($ Million)
(1,000)
Wood Preserving. Total
Type of operation
Multi-unit companies,
total
Corporate ownership
Non-corporate ownership
Single unit companies,
total
Corporate ownership
Non-corporate ownership
(399) (168)
(11.3)
(175.8)
(475.8)
149
148
1
250
156
94
117
116
1
51
47
4
7.6
(D)
(D)
3.7
(D)
(D)
129.1
(D)
(D)
46.7
(D)
(D)
339.9
(D)
(D)
135.9
(D)
(D)
Legal form of organization
Corporate 304 163
Non-corporate, total 95 5
10.8
0.5
170.0
5.8
460.4
15.4
(D) Information withheld to avoid disclosures of individual firms.
SOURCE: U.S. Bureau of Census, Annual Survey of Manufacturers, 1972.
-21-
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As was described in the Development Document for the wood preserving
plants which discharge into POTW's, most of the characteristics of the
plants which are indirect dischargers, such as size, age, and process
technology differ very little from the overall industry patterns. The
following segmentation of the industry reflects the opinion that the
major basis for differentiation of wood preserving plants with respect
to the impacts they will face as a result of the pretreatment standards,
is the difference between the inorganic salts and organic (creosote,
oil, pentachlorophenol) types of preserving. The boultonizing and
steaming conditioning processes, as distinguished in the Development
Document, have not been used here as a basis for segmentation of the
industry because they do not have any inherently different wastewater
flow rates, technology requirements or other characteristics which will
result in significantly different costs of effluent abatement.
1. Types of Firms
Based on a series of surveys from 1972 to 1975, there are assumed
to be 61 plants discharging to POTW's.* Fifty-eight plants are
identified. The number of plants currently discharging or planning to
discharge to POTW's may actually be somewhat different. We find two
plants closed and six not discharging to sewers. Two more are impossible
to locate. One additional POTW discharger has been identified, bringing
the total number of known plants to 49. For the purpose of this analysis,
49 plants will be used.
a. Size—The 49 plants which are identified are owned by 35 companies.
These companies vary considerably in both sales and number of wood pre-
serving operations. Available information shows that total annual sales
of these companies including operations not related to wood preserving
probably range from about $200 thousand to over $1 billion. This range
is based upon reported sales figures for about half of the 35 companies.
A breakdown of ownership of POTW users into single and multi-plant
as compared to the total industry is shown in Table III-B-1.
As can be seen from the table, there is a similar pattern in single
and multi-plant ownership between POTW users and the industry in general
except that the total industry has a larger percent of single plant
companies.
Of the 13 multi-plant firms in the POTW user category, four own two
plants (in total), Koppers owns 26 and the rest are in between. This
includes wood preserving plants which are direct dischargers. Five
companies, Koppers, Kerr-McGee, Escambia Treating Company, Langdale
Company, and Southern Wood Piedmont have more than one plant using POTW.
These companies together own 20 of the plants using POTW's; fourteen
treat with organic preservatives only; six treat with both organic and
inorganic preservatives.
*
Burns & Roe, 1976.
-22-
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TABLE III-B-1
OWNERSHIP OF WOOD PRESERVING PLANTS DISCHARGING INTO POTW1
COMPARED TO TOTAL INDUSTRY
Companies Plants
No. Using % of % Total No. Using % of % Total
POTW's Segment Industry POTW's Segment Industry
Single plant
ownership 22 63 90 22 45 59
Multi-plant
ownership 13 37 10 27 55 41
Based on Wood Preservation Statistics, 1974.
p. Integration—The wood preserving companies tend to have very
little vertical integration. Some of the plants in the POTW category
are part of a lumber operation or associated with a company's sawmill.
Seven of the 11 inorganic plants are affiliated with lumber yards.
In such cases the wood preserving operation is an additional service
for lumber customers. Plants in the organic segment appear to have
much less involvement with other wood or lumber-related activities.
c. Product Diversification—On the basis of preliminary data, we
do not vote any variation in product mix within the POTW plants compared
to the total wood preserving industry. Inorganic users treat mostly
dimensionalized lumber, posts and poles for rot resistance and fire
retardancy; organic plants treat primarily poles, posts, pilings and
railroad ties with some other products such as cross arms and bridge
timber. Only the largest plants have extensive product diversification.
d. Ownership—Both privately and publicly-held companies are repre-
sented in the industry segment. About 78% of the plants are privately
held; this includes all of the inorganic treating plants. In general,
single plant companies are small and privately held.
2. Types of Plants
The Development Document provides data on plants within the wood
preserving industry which discharge their effluent into POTW's. We
have used the Development Document information in preparing this report
supplemented by other published information and the results of surveys
of about 90% of the plants in the sector. The subcategorization which
we have elected to use in assessing economic impact is based on the
types of preservatives used. The three subcategories are:
-23-
-------
• plants treating with organic materials, oil, pentachlorophenol
and creosote
• plants treating with waterborne inorganic salts principally
zinc, copper, arsenic and chromium
• plants treating with both organic and inorganic preservatives.
a. Process—The basic wood preserving processes are 1) organic
treatment with either pentachlorophenol in a petroleum solvent or
creosote, and 2) treatment with aqueous solutions of inorganic salts
of zinc, chromium, arsenic and copper. The effluent from these two
processes vary in biodegradability and potential for reaction in a POTW.
In the Development Document the inorganic and organic methods of
preserving wood were further subcategorized by process type as follows:
Subcategory Type of Preservative
Wood Preserving Salt-type
Wood Preserving—Steam subcategory Organic
Wood Preserving—Boultonizing subcategory Organic
Steaming or boultonizing is used to pre-condition wood in wood
preserving plants. The choice of conditioning is largely governed by
the physical characteristics of the wood. During the conditioning
process extraneous oils and water soluble materials are extracted from
the wood. Direct steaming, where oils are received and water recircu-
lated, is used by a number of plants. Inorganic treatment can also be
preceded by steaming. Boultonizing (boiling-under-vacuum) is a milder
conditioning process used with woods like Douglas Fir which are easily
damaged by the higher temperature of the steaming process. This process
is used only with organic preservatives.
For the purposes of this economic analysis, no distinction has been
made between the steaming and boultonizing subcategories. These
processes have no significant differences in wastewater characteristics
or abatement costs which merits separate analysis.
The plants using POTW's do not vary significantly in the process
used from the industry as a whole (Table III-B-2).
Fifteen plants have facilities for treating with both organic and
inorganic solutions. Cylinders may be reserved for a particular solu-
tion or used interchangeably.
b. Number of Cylinders—The size distribution of plants in the
segment, based on number of cylinders, is shown in Table III-B-3. For
the purpose of this analysis the number of cylinders includes pressure
and non-pressure cylinders and vacuum tanks. Considerable difference
-24-
-------
TABLE III-B-2
COMPARISON OF PLANTS USING POTW'S AND TOTAL
INDUSTRY BY PRESERVATIVE USED
Type of Plants Using POTW Total Industry
Preservatives No. Plants % Total % Total
Inorganic 11 22 28
Organic 23 47 53
Both 15 31 19
Sources: (1) Letter from Dr. W. Thompson to R. Williams—EPA,
August 5, 1976.
(2) Wood Preservation Statistics, 1974.
(3) ADL industry survey.
TABLE III-B-3
DISTRIBUTION OF PLANTS USING POTW BY NUMBER OF
CYLINDERS
Inorganic
Number of No. %
Cylinders Plants Total
1 9 82
2 2 18
3
4
5 or more
Total 11
& TYPE
OF PRESERVATIVE
Organic
No.
Plants
1
10
8
1
3
23
%
Total
4
43
35
4
13
Both
No.
Plants
0
3
1
5
6
15
7
to
Total
0
20
7
33
40
Total
No.
Plants
10
15
9
6
9
49
%
Total
21
28
16
7
13
Total(3)
Industry
37
29
17
7
10
Sources: (1) Letter from Dr. W. Thompson to R. Williams—EPA, August 5, 1976.
(2) Wood Preservation Statistics, 1974.
(3) Draft Supplement to Burns & Roe Development Document Table 403.
(4) ADL Industry Survey.
-25-
-------
is found among the three types of plants, the inorganic segment is
limited to one or two cylinder operations; where both types of preserva-
tives are used, a large percentage (40%) of the plants have five or more
treating units. About 43% of the plants using organics have two cylinders.
A comparison of POTW users and the total industry, based on number of
cylinders shows that POTW users are typical of the total industry. The
breakdown of the total industry was taken from the analysis made by
Dr. Thompson using 1972 data.*
c. Production—There are no published data on individual plant
capacities or production. Although the numbers of cylinders and types
of processes used are known, there is no correlation between these and
either plant capacity or production. Sales figures are known for about
50% of the companies, as was discussed above, but these sales figures
cannot be directly related to production because of a lack of knowledge
of the specific products sold from each plant. Some industry members**
reported that a typical 80 ft. cylinder, operating with an organic
process, has an output of 30-45 thousand board feet per day (based on
15,000 board feet per charge, 2 or 3 charges per day). Reported annual
rates (time used for treating as a percent of total time available for
treatment, not including loading and unloading time) for the industry
range from 40-70%.
d. Age of Plants—The Development Document shows the average age
of a randomly selected sample of plants using POTW's to be 43 years old
(Table III-B-4). The plants sampled were built 17 to 70 years ago and
all use organic preservatives or a combination of organic and inorganic.
Telephone interviews with several inorganic plants (using POTW) show
that these plants are newer—built about 1 1/2 to 25 years ago. There
is no reason to assume that plants discharging into POTW's differ
markedly with respect to age compared to the industry in general.
e. Location—Figure 1 shows the location of plants in the wood
preserving industry; POTW users are circled. The regional distribution
of plants by process, in this segment and in the total industry is
shown in Table III-B-5. The distribution pattern for total POTW users
is similar to that for the industry in general, especially for the
organic treatment plants and plants with both types of processes. The
distribution of inorganic plants differs significantly from the industry.
Table III-B-5 shows that there are a high percentage of POTW inorganic
plants in the Northeast, and a low percentage in the South Atlantic
region.
It is assumed that plants discharging to POTW's are located in an
urban environment to have access to the sewer. This also implies a
limitation on land available for effluent treatment, as was confirmed
In recent telephone interviews.
* Burns & Roe Development Document, Supplement 1976.
**
As reported by AWPI in private conversations.
-26-
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TABLE III-B-4
DATA OF CONSTRUCTION OF A RANDOMLY SELECTED SAMPLE OF
PLANTS UTILIZING
Plant Identification
Conroe Creosoting Co.
Koppers Co. , Inc.
Sentinel Wood Treating Co.
Koppers Co . , Inc .
Wood Treating Corp . , Inc .
Kerr-McGee Chemical Corp.
Kerr-McGee Chemical Corp.
Southern Wood Piedmont Co.
Dickson Treating Co.
Langdale Co.
McCormick and Baxter
J. H. Baxter and Co.
W. C. Meredith
Kerr-McGee Chemical Corp.
Koppers Co., Inc.
Average Age
PUBLICLY OWNED TREATMENT
Plant
Location
TX
FL
MO
TX
MS
MS
WI
GA
MS
GA
CA
CA
GA
MS
AL
WORKS
Year
Constructed
1946
1914
1959
1936
1946
1926
1906
1922
1946
1946
1944
1927
1922
1928
1926
43.2
Source: Burns & Roe, 1976.
-27-
-------
TABLE III-B-5
REGIONAL DISTRIBUTION OF PLANTS DISCHARGING TO POTW COMPARED TO TOTAL INDUSTRY
Inorganic Treatment Organic Treatment Organic & Inorganic Treatment Total Plants
POTW
Region No
Northeast
North Central
South Atlantic
South Central
West
Unidentified
Total U.S.
.Plants
4
2
1
3
1
11
% Total
36
18
9
27
9
% Total
Industry
10
13
44
24
8
POTW
No. Plants
0
4
6
13
0
23
% Total
0
17
26
57
0
% Total
Industry
5
15
21
42
17
POTW
No. Plants
1
0
7
4
3
15
% Total
7
0
47
27
20
% Total
Industry
8
8
36
25
23
POTW
No. Plants
5
6
14
20
4
49
% Total
10
12
29
41
8
% Total
Industry
7
13
30
34
16
*
Based on U.S. Census regional breakdown
Sources: (1) Letter from Dr. W. Thompson to R. Williams—EPA, August, 1976
(2) Wood Preservation Statistics, 1974.
-------
f. Employment—Employment in plants discharging to POTW's is
assumed to be typical of the industry as a whole. Plants contacted
which use inorganic salts reported from one to 12 employees including
on-site management on a regular basis for a one or two cylinder opera-
tion. Some part-time help is also used. Organic treatment plants,
especially those with several cylinders, tend to have more employees.
Plants which operate in conjunction with a lumber yard or a saw-mill
often pool labor.
Size distribution for the wood preserving industry in 1972 is
shown below:
Number of Employees Number of Plants
1-4 116
5-9 48
10-13 67
20-49 90
50-99 57
100-249 20
250-499 1
Source: 1972 Census Annual Survey of Manufacturers.
These data are also indicative of the large number of the small-
scale operations characteristic of this industry.
g. Level of Exposure to New Technology—There have been very few
recent technological changes or innovations in the wood preserving
industry. The process itself is simple, the raw materials (wood and
chemicals) and basic plant equipment are typical of those used 40-50
years ago. Typical of the changes which have taken place have been in
the inorganic treatment plants which have directed their efforts towards
a closed system. This was dictated primarily by process economics and
currently by the need to achieve zero discharge.
Beyond this, there has been limited incentive for technological
growth. Competition for markets from other materials, e.g., steel and
concrete, although it exists, has not seriously eroded existing markets.
Competition exists within the industry for markets but this too has
produced no technological advances in the basic process or products made.
3. Financial Profile
An industry such as the wood preserving industry with a large number
of mainly small firms, frequently privately held, utilizing a variety of
production technologies and producing several different end products,
is not readily profiled in a financial sense. Thus, financial data
presented here is a blend of total industry (macro) and individual
(micro) data. The following information is based upon information
-29-
-------
received through a survey of about 90% of the POTW dischargers, as well
as upon other published information as cited. These sources have
revealed the following aspects of the industry segment's financial status.
This information has been verified and revised through discussions with
industry members.*
a. Profitability — The profitability of the wood preserving firms
appears to have remained fairly constant over the years. Recent reports
of a number of the larger firms indicate that after tax return on sales
was in the range of 6 to 10% for 1974 or 1975. This is an unrepresentative
sample of the entire segment segment because it is a small sample and does
not show profitability of the smaller companies. The reports were also
representative of years when inventory profits were high. For the same
companies, profits were 3-6% for 1972 or 1973. The 6 to 10% range is
higher than average return relative to trends in U.S. Corporate Profits.
Table III-B-6 shows recent increases in profitability for All Manufacturing
and for Lumber & Wood Products. From these statistics, a profitability
factor of 4% was chosen for this analysis as a good long term average
for wood preserving facilities.
TABLE III-B-6
U.S. CORPORATE PROFITS (AFTER TAXES)
AS A PERCENT OF SALES
Lumber and
Year All Manufacturing Wood Products
1965 5.6 3.9
1966 5.6 3.8
1967 5.0 3.4
1968 5.1 5.3
1969 4.8 4.8
1970 4.0 2.5
1971 4.2 4.4
1972 4.3 5.1
1973 4.7 6.3
1974 5.5 n.a.
1975 6.6 n.a.
Note: Before tax profits are approximately double after tax profits.
Source: Quarterly Financial Report for Manufacturing Corporations,
Federal Trade Commission — Securities and Exchange Commission.
Discussions were held with several members of the AWPI.
-30-
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It is important to remember that the costs of wood and chemicals
account for a majority of the sales price. When profitability is
measured against net worth or stockholders' equity rather than sales,
the profits are much stronger. The firms examined generally have little
or no long-term debt. They have made substantial capital expenditures
in the last two or three years relative to previous years. These
expenditures have generally been made out of cash flow. As might be
expected, it appears that firms which are the most profitable are the
ones which have made the greatest capital expenditures. The bottom
quartile of firms with lower before tax profits have less leeway for
existing with increased costs due to abatement, especially if industry
demand slackens.
Tables III-B-7 through III-B-9 describe this industry on the macro
scale. Key factors characterizing this industry include:
• Cost of materials (including raw materials, part, containers,
resales, contract work, and energy) exceeds 60% of value of
shipments. Wood and chemicals are the major expenses.
(Table III-B-7)
• Value added, in total dollars has greatly increased,
measured both in value added per employee and value added
per hour of production work. (Table III-B-8)
• The amount of new capital committed to the industry is low,
though growing somewhat. Largest expenditures have been for
new machinery and equipment as opposed to new structures or
additions. (Table III-B-9)
In short, the industry is a mature industry, attracts relatively
little new investment, and anticipates a low rate of demand growth.
The inorganic preserving subsegment is less mature than the industry
as a whole and has experienced more rapid growth of demand and greater
new investment in recent years.
4. Industry Pricing
A critical issue to resolve in determining how the industry will be
affected by pollution control costs is how the industry establishes its
prices and, following from that, whether the industry will be able to
raise prices sufficiently to cover the costs of pollution control. It
is important to remember that the pattern for the industry as a whole
may not be representative of many individual firms. Thus, we will factor
individual company and plant characteristics into our analysis. The
data presented in this section covers some of the important industry
price information which is necessary for determination of price effects
of pollution control expenditures. It is believed that the industry
segment which discharges into POTW's is representative of the performance
of the entire industry in terms of price setting mechanisms.
-31-
-------
TABLE III-B-7
COST OF PRODUCTION FACTORS: 1967 AND 1972
i terns
Kstablishments, total
With 1 to 19 employees
With 20 to 99 employees
With 100 employees or more
Ml employees, average for year
Payroll for year, all employees
Production workers:
Average for year
Units
Number
do
do
do
1,000
million dollars
1,000
Wood Preserving (SIC' 2491)
1967 £1
375
198
149
28
12.2
61.9
10.3
18.0
1972
399
231
147
21
11.3
74.5
9.2
15.7
Wages
millLon dollars
I
OJ
to
I
Cost of Materials, etc., total do
Materials, parts, containers,- etc.consumed do
Cost of resales do
Fuels consumed do
Purchased electric energy do
Contract work do
Value of shipments, including resales do
Value of resales do
Value added by manufacture do
Manufacturers' inventories:
Beginning of year, total do
Finished products do
Work in process do
Materials, supplies, fuel, etc. do
End of year, total do
Finished products do
Work in process do
Materials, supplies, fuel, etc. do
Expenditures for plant and equipment, total do
New plant and equipment, total do
New structures and additions to plant do
New machinery and equipment do
Used plant and equipment do
SOURCE: Census of Manufactures, 1967, 1972.
% of value of shipments.
47.
214.
198.
8.
4.
1.
1.
344.
10.
135.
1
5
4
7
3
7
5
2
9
6
13
62
57
2
1
0
0
3
39
.7
.3
.6
.5
.2
.5
.4
.2
.4
54.
303.
278.
13.
5.
3.
3.
475.
17.
175.
4
6
0
4
8
0
5
8
6
8
11.
63.
58.
2.
1.
0.
0.
3.
36.
4
8
4
8
2
6
7
7
9
71.3
37.4
9.1
24.8
77.0
41.7
10.7
24.5
11.3
10.7
1.4
9.3
.5
3.3
3.1
0.4
2.7
0.1
94.1
53.8
9.4
31.0
94.7
46.6
20.2
27.9
21.0
14.8
2.2
12.6
6.2
4.4
3.1
0.5
2.6
1.3
-------
TABLE III-B-8
SELECTED OPERATING RATIOS FOR THE WOOD PRESERVING INDUSTRY: 1958 TO 1973
Year
1973 ASM
1972 Census
1971 ASM
i
w 1970 ASM
i
1969 ASM
1968 ASM
1967 Census
1966 ASM
1965 ASM
1964 ASM
Payroll
per
employee
(dollars)
7,436
6,593
6,593
6,108
5,587
5,175
5,068
4,712
4,330
4,336
Production
worker as
percent of
total
employment
Ipercent)
83
81
82
81
83
84
84
85
84
84
Annual
man-hours
per
production
worker
(number)
2,131
2,043
2,100
2,082
2,089
2,085
2,105
2,141
2,107
2,064
Average
hourly
earnings of
production
workers
(dollars)
3.08
2.89
2.72
2.56
2.45
2.29
2.17
1.99
1.86
1.86
Cost of
materials
per
dollar of
shipments
(dollars)
.67
.64
.64
.63
.64
.61
.62
.63
.64
.63
Cost of
materials &
payrolls
per dollar
shipments
(dollars)
.80
.80
.82
.81
.81
.79
.80
.80
.81
.81
Value
added
per
employee
(dollars)
18,446
15,557
13,800
12,017
11,818
11,540
11,103
10,479
9,050
8,788
Payrolls
as percent
of value
added
(percent)
40
42
48
51
47
45
46
45
48
49
Value
added per
man-hour of
production
worker
(dollars)
10.41
9.35
7.94
7.14
6.78
6.58
6.25
5.74
5.10
5.08
SOURCES; Census of Manufactures, 1967, 1972, and Arthur D. Little, Inc., estimates.
Annual Survey of Manufacturers, 1973.
-------
I
U)
TABLE III-B-9
EXPENDITURES FOR NEW PLANT AND EQUIPMENT BY THE WOOD PRESERVING INDUSTRY
Number
of
Plants
375
399
Year
1967
1968
1970
1971
1972
1973
Total New $
Expenditures Per Plant
(millions of
current dollars)
10.7 $28,533
9.3
8.4
10.4
14.8 $37,093
11.6
New Structures and
Additions to Plants
(millions of current
dollars)
1.4
(1.4)
1.4
.5
2.2
2.0
New
$ Machinery &
Per Plant Equipment
(millions of
current dollars)
$3,733 9.3
(7.9)
7.0
9.9
$5,514 12.6
9.6
$
Per Plant
$24,800
$31,579
( ) Standard error is greater than 15%.
Source: U.S. Bureau of the Census, Annual Survey of Manufacturers—1967, 1968, 1970, 1971, 1972, 1973.
-------
The two major factors affecting the price of preserved wood
appear to be the price of raw materials and the price of substitute
products (untreated wood, steel, concrete, aluminum, and other non-wood
products). The price range for treated wood is set on the upper end by
the price of substitute materials. If the cost of raw materials or the
cost of production forced the cost of the product beyond the competitive
range, then the user would switch to substitute products. Clearly, the
pressure for substitution is more important for some preserved products
than for others. The lower limit on the price range is set by the prices
for other uses of the wood. If prices fall below this point, preserved
wood is not produced. Both ends of the price range move in an absolute
and a relative sense.
Table III-B-10 shows the price history of wood preserving chemicals.
The price of preservatives remained fairly constant over a long period
of time but has increased dramatically since 1973.
Rising labor costs are an important phenomenon in the wood
preserving industry. Wages per employee rose by 21% between 1970 and
1973 (Table III-B-8).
In recent years much of the industry's capital expenditures have
gone to pollution control equipment. Firms which have not been making
the expenditures to reduce labor costs are thought to have been progres-
sively less profitable. Their lower earnings will make it most difficult
for them as opposed to other firms to finance major capital expenditures
for pollution control or any other requirement.
Tables III-B-11 and III-B-12 show recent price and production
figures. Two important relationships arise. The first is the ability
of the industry to change its prices when the cost of producing the
product is changes. (Can the industry raise prices to pass on the added
cost of pollution control?) The second relationship is the degree to
which individual plants are affected by the changes in price levels.
(Will increased prices reduce the total number of plants or total
industry production?) These issues will be further addressed in the
economic impact analysis.
The wood preserving firms generally view treating as a service
rather than treated wood as a product independent of untreated wood.
They establish prices by adding a fixed charge to the cost of raw
materials. In the past the basis for price determination has been the
price of raw wood. However, with the large increase in the cost of
preservatives, the price of preserved wood products is still parallel
to raw wood prices but at a higher margin of added value.
Higher wood and chemical prices and the resulting higher prices
for preserved wood could tend to reduce the demand for preserved wood
relative to substitute products, although products such as concrete
and steel are experiencing rapid cost increases, perhaps even greater
than the preserved wood products. Pollution control costs could raise
-35-
-------
TABLE III-B-10
WOOD PRESERVATIVES - PRICE HISTORY
creosote oil, tanks pentachlorophenol, drums
_{cent_s per gallon) (cents per pound)
1960 24.0 22
1961 24.0 22
1962 24.0 22
1963 24.0 22
1964 24.0 22
1965 24.0 21
1966 24.0 21
1967 24.0 21
1968 24.0 21
1969 24.0 18
1970 24.0 18
1971 27.0 18
1972 27.0
1973 27.0 19
1974 46.0 19
1975 55.0 38
1976 54.9 42
(1) Prices are list prices taken on or near July 1 of each year.
Whenever a range of prices was given in the source, the lowest
was used.
(2) CREOSOTE OIL, TANKS: Prices are for crude, coaltar creosote.
Price bases are:
1960-1972 Works, freight adjusted
1963-1972 Works, freight equalized
1973-1976 Works, freight equalized
(3) PENTACHLOROPHENOL, DRUMS: Price bases are:
1955-1963 Carlots, truckloads, freight equalized, works
1964 Carlots, truckloads, delivered
1965-1966 Carlots, truckloads, works
1967-1971 Carlots, truckloads, freight equalized
1972-1976 50 Ib. bags, freight"equalized
SOURCE; Chemical Marketing Reporter (formerly Oil, Paint, and Drug Reporter),
-36-
-------
TABLE III-B-11
PRICES OF SELECTED PRESERVED WOOD PRODUCTS
UJ
Date
Aug., 1976
July, 1976
March, 1976
Dec., 1975
Oct., 1975
July, 1975
May, 1975
Feb., 1975
Nov. , 1974
Aug., 1974
April, 1974
Jan., 1974
Sept., 1973
April, 1973
March, 1973
Feb., 1973
Oct., 1972
July, 1972
April, 1972
Nov., 1971
July, 1971
April, 1971
Jan., 1971
Sept., 1970
June, 1970
March, 1970
Jan., 1970
Oct., 1969
July, 1969
April, 1969
Jan., 1969
Oct. , 1968
Piles: 12-3 ft
Ties: 6"x8"x8
Untreated
($/ft.)
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.24
1.08
0.98
0.98
0.94
0.90
0.90
0.85
0.78
0.78
0.72
0.72
0.72
0.72
0.72
0.72
0.72
0.72
0.72
0.67
0.67
. from butt 7
"6", Chicago,
Piles
Treated
($/ft.)
3.15
3.15
3.15
3.15
3.15
3.15
3.15
3.15
3.15
2.75
2.00
2.00
2.00
2.00
2.00
1.80
1.80
1.70
1.70
1.64
1.64
1.64
1.56
1.56
1.56
1.56
1.56
1.49
1.38
1.38
1.38
1.20
in. 40
Red Oak
Difference
($/ft.)
1.91
1.91
1.91
1.91
1.91
1.91
1.91
1.91
1.91
1.51
0.76
0.76
0.92
1.02
1.02
0.86
0.90
0.80
0.85
0.86
0.86
0.92
0.84
0.84
0.84
0.84
0.84
0.77
0.66
0.66
0.71
0.53
to 50 ft. , Truck
, Carload lots.
Untreated
($ each)
6.90
6.90
6.90
8.00
8.00
8.00
8.00
8.00
8.00
8.00
7.75
4.50
4.45
4.00
3.95
3.95
3.25
3.25
3.00
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.55
3.50
3.35
lotto.
Ties
Treated
($ each)
10.75
10.75
10.75
11.25
11.25
11.25
11.25
11.25
10.75
10.75
9.75
7.50
7.00
6.70
6.70
6.70
5.80
5.80
5.50
5.40
5.40
5.40
5.40
5.40
4.95
4.95
4.95
4.95
4.95
4.95
4.80
4.70
Difference
($ each)
3.85
3.85
3. .85
3.25
3.25
3.25
3.25
3.25
2.75
2.75
2.00
3.00
2.55
2.70
2.75
2.75
2.55
2.55
2.50
1.85
1.85
1.85
1.85
1.85
1.40
1.40
1.40
1.40
1.40
1.40
1.30
1.35
Source: Engineering News Record.
-------
TABLE III-B-12
MATERIAL TREATED IN 1971, BY RIGION, AND UNITED STATES TOTAL 1971-197!
(THOUSAND UNITS)
NOKi'H SOUTH ROCKY TOTAL PLANTS
NORTHEAST CENTRAL SOUTHEAST CENTRAL MOUNTAIN PACIFIC 1973 1974 REPORTING
USUAL UNITS OF MEASURE
I
CO
00
POLES
CROSSTIES
LUMBER AND TI PEERS
FENCE POSTS
PILI NC
SWITCH TIES
CROSSARMS
PLYWOOD
OTHER
NUMBER
NUMBER
BOARD FEET
NUMBER
LINEAR FEET
BOARD FEET
NUMBER
SOUARE FEET
CU8IC FEET
60
2811
52619
392
4229
12269
42
3800
431
485
7502
76699
2321
710
21263
244
4439
2971
2110
4109
322317
6695
5470
214S3
789
9062
821
1990
6488
322631
16431
10102
18236
239
5970
SOS
212
1448
2071 1
763
74
3084
0
516
305
422
1527
178112
284
1704
1916
1176
23234
1264
4879
20569
1012154
23384
21139
60409
2528"
49890
4786
5279
23885
973289
26887
22290
78221
2490
47021
6700
147
90
264
133
82
69
24
49
66
CUBIC FEET
POLE S
CROSSTIES
LUMBER AND TtCBERS
FENCE POSTS
PILING
SWITCH TIES
CROSSARMS
PLYWOOD
OTHER
TOTAL
871
9589
3632
433
2430
1022
47
180
431
6158
22114
5519
1681
453
1730
295
144
2971
21039
13584
29358
3798
3080
1788
713
259
821
30859
20972
25404
10647
6025
1511
215
231
908
3109
4703
1572
505
27
271
0
25
305
11075
4908
12030
240
1300
178
1146
926
1264
75379
67603
66851
15168
12978
5006
2592
2079
4786
73112
75870
77760
17304
13315
6501
2416
1766
6700
18836
41064
74481
96771
10517
33074
254443 274744
NOTE- COMPONENTS CAY NOT ACC TC TOTALS DUE TO RCUNDING.
Source; American Wood-Preservers Association
-------
preserved wood prices. The requirements to finance pollution control
equipment costs could be a major problem for small, marginal firms.
In summary, the history of cost changes in the industry suggests
that when demand is strong, increased variable costs (e.g., raw wood
and preservatives) may be passed along in the form of price increases.
However, the nature of the pollution abatement cost is predominantly
fixed rather than variable. If fixed costs can be passed along at all,
it is likely that the cost per unit of production for a larger, more
efficient plant, will set the maximum amount of price increase. This
assumes, as stated in the Development Document, that there is relatively
little economies of scale in abatement costs for the industry.* Since
the effluent abatement cost per unit of production will be greater for
smaller plants, smaller plants may not be able to pass along the whole
cost increase. Market factors will determine whether this cost increase
may be passed along as price increases or will be absorbed by reducing
profits.
C. MODEL PLANTS
Because the wood preserving industry includes a large diversity of
plant types and sizes, a series of model plants for each of the industry
subsegments have been developed and reviewed with the industry for use
in analysis. Although characteristics of actual plants may vary, these
models are representative of the average.
The models were developed according to size of plant—measured in
annual sales. For each size of plant in each subsegment, representative
operating and financial characteristics are used. The result is three
model inorganic plants, four model organic plants, and four models of
plants treating with both inorganic and organic preservatives.
1. Model Inorganic Plants
Table III-C-1 lists the operating characteristics assumed for the
three model inorganic plants. These plants vary little with respect to
size. Employment does increase with sales. The other characteristics
remain fairly constant for the subsegment.
Inorganic plants generally produce treated dimensionalized lumber
for use in construction. As such, their primary forms of competition
It is recognized that some scale effects may occur depending partly
upon the type of equipment installed. However, wastewater volumes
are so small that all the plants are within a similar range with
respect to volume dischargers in other industries. Nevertheless, the
majority of the analysis provided in Section V is somewhat conservative
in that it recognizes no decrease of abatement cost with increased
production and therefore shows a somewhat greater impact upon the
smaller plants than may actually be the case.
-39-
-------
TABLE III-C-1
MODEL INORGANIC TREATING PLANTS1
Total Gross Sales per Plant 150,000 500,000 1,000,000
Number of cylinders 1 1 2
Employment 1-5 6-12 12-20
Products dimensionalized lumber dimensionalized lumber dimensionalized lumber
Substitute products untreated wood, other construction materials
Imports and Exports negligible negligible negligible
Capacity utilization 40-60% 40-60% 40-70%
Demand Growth GNP rate GNP rate GNP rate
Price elasticity of demand low low low
Basis for competition price price price
Market share distribution regional, fragmented regional, fragmented regional, fragmented
i Extent of vertical integration some^ some^ some^
o Other facilities on common site few few few
Ownership private private private3
Abatement cost relative to all
inorganic sewer and stream
dischargers similar similar similar4
These are representative models: characteristics of actual plants may vary.
2
Seven out of 11 plants examined were owned by lumber companies.
3
Private refers to closely held, i.e., family corporations.
4
Assuming all inorganic plants will have to reach zero discharge, whether they currently discharge
to stream or sewer.
Source: Discussions with industry members; survey of industry; Census information.
-------
are untreated lumber, "do-it-yourself" products, and other non-wood
construction materials. Imports and exports of inorganically treated
products are negligible.
Capacity utilization is slightly lower than the American industry
average. The smaller two categories have plants with utilization factors
ranging from 40-60%, while the largest group may range up to 70% capacity
utilization.
The growth of demand for inorganically preserved products is greater
than for the total wood preserving industry. It has recently paralleled
the growth of GNP, therefore the GNP rate is used for a representation
of demand growth for all inorganic plants.
Inorganic products are sold on the basis of price and consequently,
price competition is high. Prices are relatively inelastic, however,
as indicated by the recent growth of demand despite several increases
in wood and chemical costs. Markets are usually regional, extending
through the four or five surrounding states. As is true for the whole
industry, markets are quite fragmented. Seldom do as few as five companies
have claim to 50% of the market.
Many of the inorganic plants are owned by lumber companies. Although
these companies are seldom widely diversified, they do offer some degree
of vertical integration to the treating plants. Only a few, however,
have preserving plants co-located with other lumber operations. Owner-
ship is nearly always private—most often a small, family-held company.
The inorganic plants discharging to POTW's will have a similar
abatement cost to all inorganic plants in the industry. All inorganic
plants will have to meet zero discharge requirements. Therefore the
POTW segment will not incur an inequitable cost burden with respect
to its immediate competition.
2. Model Organic Plants
Table III-C-2 lists operating and market characteristics of the four
model organic plants. These four plants span a range of sales larger
than the range of inorganic plants. The characteristics of the organic
plants vary by size more than do the inorganic plants. While products
and market characteristics remain similar, ownership and integration
factors are variable with sales.
Organic treaters produce a wide variety of products; the major
ones are poles, posts, pilings and railroad ties. Major competitive
products are steel and concrete. Foreign trade in all products is
negligible.
*
Measured as the amount of time treating is conducted as a percent of
available time, not including time for loading and unloading of
cylinders.
-41-
-------
TABLE III-C-2
MODEL ORGANIC TREATING PLANTS
•e-
N>
I
Total Gross Sales per Plant
Number of cylinders
Employment
Products
Substitute products
Imports and Exports
Capacity utilization
Demand growth
Price elasticity of demand
Basis for competition
Market share distribution
Extent of vertical integration
Extent of horizontal integration
Other facilities on common site
Ownership
Abatement cost relative to all
organic sewer and stream
dischargers
500,000
2
6-12
poles, posts,
1,000,000
3,000,000
6,000,000
private"
lowH
2 23
12-20 21-50 50+
ties, cross arms, pilings, bridge timber, lumber
steel, concrete
negligible
40-70%
none
high2
price
regional,
fragmented
limited
some
significant ,
private/public"3 private/public"
., concrete
tegligible
40-60%
none
high/
price
regional,
fragmented
limited
none
none
steel, concrete
negligible
40-70%
none
high/
price
regional,
fragmented
limited
some
none
steel, concrete
negligible
40-70%
none
high/
price
regional,
fragmented
limited
some
none
private"
low
low
xhese are representative models: characteristics of actual plants may vary.
2
Railroad ties have lower price elasticity than other products.
3
Private refers to closely-held or family-held companies; public refers to public corporations with
more diverse distribution of ownership.
4
Assumes biological treatment not required for POTW discharges.
Source: Discussions with industry members; survey of industry; Census information.
-------
Like the inorganic subsegment, the organic plants have low capacity
utilization relative to other U.S. manufacturing. The smallest plants
have the lowest utilization, from 40 to 60 percent, while larger plants
range up to 70 percent. Growth of demand for organic products is very
low; in fact, demand has fallen off for some products in recent years.
Competition is high in this subsegment, especially against substitute
products. Price serves as the major basis for competition within the
segment. The competition with steel and concrete create a ceiling for
prices which aggravates the price competition among wood preservers.
It also causes price elasticity to be very high. Markets are regional,
extending through a four to five state area, and fragmented. Never do
less than six firms control a majority of the market.
Ownership and integration characteristics vary with the volume of
sales of organic plants. The majority of plants are privately held,
but some in the larger two groups are public. The plants in the
$500,000 per year sales category have very little product diversification,
while the larger plants have some diversity. None of the plant sizes
show more than limited integration with other wood-related activities.
The effluent abatement costs which the organic POTW dischargers
will face are somewhat smaller than the costs faced by direct dischargers.
This fact is attributable to the likely requirement that direct dis-
chargers, but not POTW dischargers, will have to install biological
treatment. The cost differential will be narrowed somewhat by the
higher land costs that sewer dischargers may face in obtaining land for
abatement equipment.
3. Models of Plants Treating with Both Organic and Inorganic
Preservatives
Table III-C-3 lists the characteristics of model plants in the
third wood preserving subsegment. These plants are similar to the plants
in the organic treating group. The only exception is that they produce
dimensionalized lumber for construction purposes and therefore compete
with producers of other construction materials such as untreated lumber,
aluminum, and vinyls.
This subsegment will have a higher abatement cost than the organic
POTW subsegment because of the requirement to obtain zero discharge for
inorganic effluent. However, the cost will be lower than for stream
dischargers which treat with organic and inorganic preservatives because
it is expected that pretreaters will not have to install biological
treatment.
4. Model Financial Statements
In order to analyze the economic impacts of the pretreatment
guidelines on different categories of plants, model financial statements
have been developed for five sizes of model wood preserving plants which
-43-
-------
TABLE III-C-3
MODEL INORGANIC AND ORGANIC TREATMENT PLANTS
Total Gross Sales per Plant
500,000
Number of cylinders using organic 1
Employment 6-12
Products poles, posts, ties,
Substitute products
Imports and exports
Capacity utilization
Demand growth
Price elasticity of demand
Basis for competition
Market share distribution
Extent of vertical integration
Extent of horizontal integration
Other facilities on common site
Ownership
Abatement cost relative to
wood preserving direct
discharges
untreated lumber,
negligible
40-70%
none
high
price
regional,
fragmented
limited
none
none _
private
low
1,000,000
1
12-20
cross arms, pilings,
steel, concrete and
negligible
40-70%
none
high
price
regional,
fragmented
limited
some
none „
private
low
3,000,000
6,000,000
1 1
21-50 50+
bridge timber, dimensionalized lumber
other construction materials2
negligible negligible
40-70% 40-70%
none
high
price
regional,
fragmented
limited
some
none „
none
high
price
regional,
fragmented
limited
some
some
public/private public/private"
low
low
These are representative models: characteristics of actual plants may vary.
2
Including vinyls, aluminum and other non-wood construction materials.
3
Private refers to family-held or closely-held companies; Public refers to public corporations with more
diverse distribution of ownership.
4
Assuming no biological treatment required for POTW discharges.
Source: Discussions with industry members; survey of industry; Census information.
-------
are believed to be representative of the POTW discharging plants
(Table III-C-5). These statements are models only; they are based on
industry-wide averages and have been verified through discussions with
the industry and comparison with actual financial statements.
There are five model financial statements in Table III-C-5—one
for each of the sales levels shown in the tables of model wood preserving
plants. Although operating characteristics vary between organic and
inorganic preserving plants, the same financial statements can be used.
For all three subsegments, costs are roughly the same percentage of
sales, that is, margins (as a percentage of sales) are similar. Thus,
these five model financial statements can be applied by sales level to
the previously described model plants, resulting in eleven complete
models.
The latest composite industry statistics available by employment
size of establishment are to be found in the 1972 Census of Manufacturers.
Relevant 1972 statistics are presented in Table III-C-4. Since that
time, due primarily to inflation of wood costs and preservative costs,
the cost of wood preserving products has more than doubled. Thus, as
a rough approximation, the 1972 value of shipments by employment size
of establishment is doubled to obtain approximate 1976 value of ship-
ments comparisons. As illustrated in Table III-C-4, the costs of
materials and payroll as a percentage of shipments varied from 76% to
82% for various sizes of establishments with a total industry average
of 80% in 1972.
Table III-C-5 was derived using an average profit margin after tax
of 4% of sales. Using a 50% tax rate, a before tax margin of 8% of
sales was typical for the industry in the recent past. Since the
average cost of materials and payroll is 80% of sales, and depreciation
is 2% of sales, approximately 10% of sales is due to corporate overhead
allocation.
The figures for gross fixed assets were determined through discus-
sions with the industry. In the three largest plants, gross fixed
assets are 40% of sales. In the two smaller plants, assets are a larger
percentage of sales, reflecting the fact that a minimum amount of equip-
ment is necessary for treating the wood. The smaller plants have lower
capacity utilization, which explains the difference in the assets to
sales ratio. In all cases, net fixed assets are measured as 40% of
gross fixed assets.
These financial statements will be used as a basis for further
evaluation in Section V as the effects of the abatement costs for each
subsegment are applied to these model financial pictures.
-45-
-------
I
-p-
TABLE III-C-4
1972 CENSUS STATISTICS BY EMPLOYMENT SIZE OF ESTABLISHMENT
Number of Employees
Number of Establishments
% of All Establishments
% of Industry Shipments
PER ESTABLISHMENT ($1,000)
Shipments
Production Wages
Payroll
Materials Cost
Value Added
Capital Expenditure
Inventories (Year End)
1-4
ments 116
ents 29%
ents 1.7%
5-9
48
12%
3.5%
10-19
67
17%
9.0%
20-49
90
23%
26.5%
50-99
57
14%
33.7%
100-499
21
5%
25.5%
TOTAL
399
100%
100%
69.0
8.6
11.2
41.4
27.5
1.7
12.9
345.8
29.2
41.7
227.1
122.9
6.2
58.3
640.3
55.2
82.1
422.3
216.4
10.4
97.0
1,402.2
147.8
208.9
941.1
443.3
41.1
275.6
2,815.8
350.9
468.4
1,705.3
1,189.5
110.5
608.7
5,790.5
719.0
957.1
3,704.8
2,123.8
166.7
1,161.9
1,192.5
136.3
186.7
760.9
440.6
37.1
237.3
SELECTED RATIOS
Materials/Shipments
Payroll/Shipments
Wages/Shipments
Inven t o ry/Sh ipment s
Materials & Payroll/Shipments
0.600
0.162
0.125
0.187
0.762
0.657
0.120
0.084
0.169
0.777
0.660
0.128
0.086
0.152
0.788
0.671
0.149
0.105
0.197
0.820
0.606
0.166
0.125
0.216
0.772
0.640
0.165
0.124
0.201
0.805
0.638
0.157
0.114
0.199
0.795
Source: U.S. Department of Commerce, Census of Manufacturers.
-------
TABLE III-C-5
REPRESENTATIVE 1976 INCOME STATEMENTS FOR MODEL PLANTS
Total Gross Sales
Materials (64% of Sales)
Payroll (16% of Sales)
Depreciation (2% of Sales)
Operating Margin
SG&A (10% of Sales)
Profit Before Tax
Taxes (@ 50%)
Profit After Tax
Cash Flow
150,000
s) 96,000
24,000
.les) 3,000
27,000
15,000
12,000
6,000
6,000
9,000
250 000
100,000
500,000
320,000
80,000
10,000
90,000
50,000
40,000
20,000
20,000
30,000
300,000
120,000
1,000,000
640,000
160,000
20,000
180,000
100,000
80,000
40,000
40,000
60,000
400,000
160,000
3,000,000
1,920,000
480,000
60,000
540,000
300,000
240,000
120,000
120,000
180,000
1,200,000
480,000
6,000,000
3,840,000
960,000
120,000
1,080,000
600,000
480,000
240,000
240,000
360,000
2,400,000
960,000
Gross Fixed Assets
Net Fixed Assets
(40% of Gross Fixed Assets)
*
Includes plant and equipment dedicated to wood preserving operations; based on original cost.
Source: Census information, ADL estimates.
-------
IV. EFFLUENT LIMITATIONS, TECHNOLOGIES AND COSTS
The basis for the economic impact analysis described in this
report is the estimates of capital costs and operating costs provided
in the Development Document for the various levels of pretreatment.
In that Document, "model" pretreatment costs for the segment of the
industry using organic preservatives were developed. For plants using
inorganic preservatives, a cost of $50,000 per cylinder was assumed
to obtain zero discharge status. No detailed estimate of the capital
costs or operating costs (if any besides depreciation and capital
charges) were provided for the inorganic treaters.
The costs of compliance with the EPA guidelines are of course
dependent upon the stringency of those guidelines. This economic
analysis is based upon the following levels of treatment:
• Inorganic treatment plants will have to achieve zero
discharge, including containment of drainage from
drying wood after treatment.
• Organic treatment plants will have to install Treatment
Phases A and B (oil separation, flocculation, filtration
and pH control).. Few, if any, plants will be required
to install Phase C (biological treatment).
• Plants which treat with both organic and inorganic
preservatives will be required to have zero discharge
of all inorganic effluent and install Treatment Phases
A and B for control of organic effluent.
The Development Document estimates of model plant capital costs
and operating costs for organic plants are summarized and presented
in Table IV-1. These costs, based upon installment of Treatment
Phases A and B are the base costs used in this analysis. A number
of variables which may cause these figures to be different are dealt
with as additional sensitivity analyses. These variations in cost
estimates are described below.
A. LAND
The reader of the Development Document is cautioned that certain
costs such as land, equipment such as holding tanks and labor rates
will vary from location to location. Land is by far the greatest
variable. The price of an acre of land, as reported in the Development
Document, can vary from $4,000 to $150,000 per acre. Industry sources
quote one instance of land costing $235,000 per acre, however, this
was prime ocean front property and not a common location for wood
preserving plants. The price used in this analysis is $5,000 per acre.
-48-
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TABLE IV-1
CAPITAL AND OPERATING COST ESTIMATES OF PRETREATMENT
FOR ORGANIC PRESERVING PLANTS
Capital Costs:
Equipment
Land(@ $5000/acre)
Engineering
Site Preparation
Contingency
Total Investment
Credit Existing Equipment
New Investment Required
Annual Costs:
Interest** (10%)
Depreciation (10 yr or 5 yr)***
Labor
Maintenance and Repair
Energy and Power
Sludge Disposal
Supplies
Total Annual Cost
USING LAND COSTS OF $150,OOP/acre:
New investment required
Adjusted annual cost
Development
Document
Estimates
$138,500
$ 52,480
$283,500
66,980
Industry
Estimates
$158,500
$ 71,830
Industry
Estimates,
Smallest
Plant
$ 97,400
5,000
13,000
28,700
14,400
$158,500
20,000
$117,400
5,000
13,000
28,700
14,400
$178,500
20,000
$ 58,700
5,000
10,400
14,350
14,400
$102,850
10 , 000
$ 92,850
$
13
13
14
3
1
1
3
,850
,350
,770
,690
,060
,920
,840
$ 15,
30,
14,
3,
1,
1,
3,
850
700
770
690
060
920
840
$ 9
17
14
3
1
1
3
,285
,570
,770
,690
,060
,920
,840
$ 52,135
* For oil-water separation, flocculation, filtration and pH control
(Treatment Phases A and B).
** An annual interest charge of 10% of the new investment required
is assumed.
*** Does not include value of land. Depreciation is on a 10-year
basis in the Development Document and a 5-year basis for industry
estimates.
-49-
-------
However, to show the effect that varying land prices can have on the
cost of abatement, Table IV-1 indicates the additional annual cost which
would result from land costs of $150,000/acre. Total capital costs
would increase to just over double. Annualized costs, however, would
increase by less than 30%.
B. EFFECTS OF EQUIPMENT ALREADY IN PLACE
The cost of pretreatment will vary even within industry subsegments
because of the different levels of pretreatment facilities already in-
stalled.
As described in the Development Document and ascertained from a
recent survey, the pollution control equipment in place in 1974 in the
plants discharging to POTW's includes the following:
• Plants using waterborne inorganic chemicals are currently
recycling most process water (see Table IV-2). Runoff and
spillage is collected in pits or tanks and put back into the
system. Discharge from these single or 2-cylinder operations
is small, probably less than 50-100 gallons per day. Pollu-
tion control needs are represented by new piping or drainage
systems and attempts to collect all liquid, including runoff
from rainfall, to produce essentially pollution-free plants.
There is little difference in the approach being taken by POTW
users and by the industry in general except that outside
storage of treated wood, which may result in considerable runoff
especially in areas of high rainfall, appears to be of more
immediate concern to non-POTW users.
• Plants using organic preservatives vary widely in the degree to
which they have installed pretreatment facilities. According to
information obtained from Dr. Warren Thompson, eleven plants
(about 30%) of the total organic treaters discharging to POTW's
have already purchased and installed the equipment to achieve
a primary treatment consisting of oil-water separation, floccu-
lation, filtration and pH adjustment. In addition, two of these
plants have the technology in place to provide additional
biological (secondary) treatment if necessary.
* Plants which use both organic and inorganic preservatives reuse
as much of the process water as possible and use the conventional
treatment (separation, flocculation) for discharge from the or-
ganic process.
-50-
-------
TABLE IV-2
SUMMARY OF POLLUTION CONTROL STATUS
Inorganic
Plants
Total Number of Plants 11
Number of Plants That Recycle
Most Inorganic Effluent 11
% of Total 100%
Number of Plants With
Adequate Oil Separation n.a.
% of Total
Number of Plants With
Adequate Filtration-Flocculation n.a.
% of Total
Number of Plants With
Adequate Secondary Systems n.a.
% of Total
Organic
Plants
23
n.a.*
4
17%
4
17%
2
9%
Plants With
Organic and
Inorganic
15
15
100%
7
47%
7
47%
0
0
* n.a. - not applicable.
Source: Industry survey, discussions with Warren Thompson, Arthur D.
Little, Inc., estimates.
-51-
-------
The adequacy of existing primary treatment facilities is rated fair
to poor at 80% of plants in the industry by Burns & Roe in the Develop-
ment Document.
Table IV-3 summarizes the estimated additional pretreatment costs
that would be required by the guidelines for each of the three industry
subsegments.
All of the 11 plants using only inorganic preservatives follow
general industry practice and recycle most discharges from the preserving
cylinder, although it is not believed that any of these plants have
achieved zero discharge. Some may have installed concrete bases on the
approach track to the cylinder. Few, if any, have installed storage
sheds capable of collecting drippings from treated wood. Thus, using
the estimates provided in the Development Document, the total capital
cost of achieving zero discharge is $50,000 for a plant with one cylinder.
While costs for a two-cylinder plant would not be exactly double those
for a one cylinder plant, they would be close to double so an estimate
of $100,000 for the capital cost of zero discharge for a two-cylinder
plant is conservatively estimated. Any savings in cost would be due to
the possible sharing of a storage tank, although, if different inorganic
preservatives are used, a plant may want to keep the preservatives
separated. Using a ten-year straight-line depreciation schedule and
capital recovery at 10% over ten years, annual operating costs are esti-
mated at $10,000 for a one cylinder plant. This estimate assumes no
significant increases in labor, materials or energy costs resulting from
the pretreatment operations.
Of the 15 plants using both inorganic and organic preservatives,
seven currently have adequate oil separation facilities, so there is no
added organic effluent abatement cost impact to them due to the pretreat-
ment standards unless biological treatment is required. There is a cost
impact for inorganic effluent abatement due to the pretreatment standards.
The remaining eight plants have inadequate oil separation facilities.
Assuming a savings of $20,000 in capital costs due to the use of existing
facilities at these plants, the capital cost and operating cost as revised
from the phase A and B model plant are $138,500 and $52,480, respectively.
The cost groups are further divided between those with one and two inor-
ganic cylinders. The plants with two inorganic cylinders and inadequate
A and B treatment will incur a total annual cost of $72,480.
Of the 23 plants using only organic preservatives, two have adequate
oil separation and biological treatment, two more have adequate oil
separation and 19 have inadequate oil separation. The two plants that
have installed biological treatment were required to do so because of
inadequacies in the treatment system of the POTW which was receiving
their effluent. It is expected that few, if any, of the other plants
may be in this situation, so the number of plants which may be required
to install biological treatment is assumed to be small. The total abate-
ment cost, therefore, includes installation of phases A and B only.
-52-
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Type of Preservative
Plants using only
inorganic preserva-
tives
Plants using both
organic and inorganic
preservatives
Plants using only
organic preserva-
TABLE IVr-3
SUMMARY OF ABATEMENT COSTS
Present Level
of Treatment
All have some recycling
of salts discharged from
cylinders
Adequate oil separation
Inadequate oil separa-
tion
Use of Cylinders
One cylinder
Two cylinders
One inorganic
cylinder
Two inorganic
cylinders
One inorganic
cylinder
Two inorganic
cylinders
Zero Discharge
of Inorganic Type A and B
Preservatives Organic Treatment Total Cost
Capital
$50,000
$100,000
$50,000
$100,000
$50,000
$100,000
Annual Capital
$10,000 N.A.**
$20,000 N.A.
$10,000 0
$20,000 0
$10,000 $138,500
$20,000 $138,500
Annual Capital
N.A. $50,000
N.A. $100,000
0 $50,000
0 $100,000
$52,480 $188,500
$52,480 $238,500
Annual
$10,000
$20,000
$10,000
$20,000
$62,480
$72,480
Additional Cost
of C-l Treatment
Capital
N.A.
N.A.
$140,300
$140,300
$140,300
$140,300
Annual
N.A.
N.A.
$47,000
$47,000
$47,000
$47,000
Adequate oil separa-
tion
$140,300
Inadequate oil sepera-
tion
N.A.
N.A. $138,500 $52,480 $138,500 $52,480 $140,300 $47,000
* Development Document cost estimates have been used in preparing this Table. Industry sources debate the validity of these estimates, saying that
acutal costs are about double those shown in the EPA estimates.
** N.A. is not applicable.
Source: Development Document, ADL estimates.
-------
Another cost variation may arise for plants which do not treat with
both creosote from pentachlorophenol and so do not have to separate them
in the effluent. The Development Document estimates include the cost of
this separation step. Plants which do not treat with both substances may
experience a 20-25% saving from the estimates shown. *
C. TREATMENT PHASE C
In the event that Treatment Phase C may be required for some plants,
it is included here as an additional cost of abatement. Three types of
C treatment are identified in the Development Document: C-l is biological
treatment by activated sludge; C-2 is biological treatment by aerated
lagoon; C-3 is biological treatment by soil irrigation. Because the POTW
dischargers are generally located in more urban areas, land would not
likely be available for the soil irrigation and aerated lagoon methods.
While some plants would be able to use these less expensive biological
treatments, plant surveys indicate that most would not have sufficient
land available for this purpose. Therefore, Phase C-l alone is considered.
The additional cost above the base case in shown in Table IV-3.
D. SCALE EFFECTS
As stated in the Development Document, the capital cost of abatement
in organic plants does not vary significantly with the volumetric rate of
flow. The implication of this finding is that smaller plants with a lower
volume of sales will be bearing a higher effluent treatment cost burden
per unit of production than larger plants. Industry sources have stated
that some slight scale effects could occur in that the smallest plants
might be able to install smaller scale separators and other equipment.
Industry sources estimate that the smallest plants, at $500,000
annual sales, would have 50% lower equipment costs, 50% lower site
preparation costs and 20% lower engineering costs than industry estimates.
These reductions result in an overall annual abatement cost which is
lower by 40%, as shown in Table V-l. The effect that this would have
would be small relative to other variations which could occur in land
costs. In the analysis shown here, the most conservative cost figures
from the Development Document are used reflecting no economies of scale.
E. INDUSTRY ESTIMATES
Conversations with industry contacts indicate that many persons in
the industry believe that the cost estimates provided in the Development
Document are generally too low. The capital cost of zero discharge at
plants using inorganic preservatives is estimated by industry sources
to be $100,000 to $135,000 rather than the $50,000 estimate provided in
the Development Document. This increase is due to the inclusion of a
covered shed and additional concrete for spur tracks for containment of
drainage from drying wood, and of higher estimates for holding tank
costs at the plants. Operating costs for inorganic preserving plants
were not included in the Development Document. It is believed that
-54-
-------
capital recovery and depreciation charges, at the least, would be
incurred for an estimated $30,000 annually for a one cylinder plant and
$60,000 annually for a two cylinder plant (depreciated over a five-year
period).
Industry estimates of costs at plants using organic preservatives
are also higher than the Development Document estimates. Industry
sources also state that capital recovery and depreciation are generally
taken over five years rather than the ten years used in the Development
Document, a change which would approximately double the annual operating
costs of pretreatment from those estimated in the Development Document.
In addition, the cost of a dehydrator estimated by the industry at $20-
30,000 was not included in the capital cost. It may be legitimate to
exclude this item because many plants are reported to already have it.
A summary of the industry's cost estimates in shown in Table IV-1.
The effects of such changes in cost estimates and depreciation techniques
will be handled by a sensitivity analysis.
-55-
-------
V. ECONOMIC IMPACT ANALYSIS
A. ANALYSIS AND PROJECTION OF PRICE EFFECTS
The economic impact analysis presented here is based upon the
premise that average prices of preserved wood products reflect changes
in production costs throughout the industry. That is, cost increases
faced by the entire industry or by industry price leaders are in general
passed on as price increases. This has been illustrated in the recent
price increases following the rise of material costs. However, on an
individual plant basis, when selected plants have additional production
costs which are not experienced by the rest of the industry, these plants
will not be able to pass along full cost and still remain competitive
because the average industry price has not risen as greatly. They
therefore will have to absorb the rest of the cost difference. Specific
product differences also have to be examined. Those with stronger
competition from substitute products may have more difficulty in passing
on cost increases.
In the wood preserving industry, there are three categories of
pretreaters as have been defined earlier in this report: plants which
treat with organic preservatives, plants which treat with inorganic
preservatives, and plants which treat with both organic and inorganic
preservatives. These three categories will have somewhat different
proposed effluent guidelines, and hence somewhat different abatement
costs. For this reason, price effects on the three categories are examined
separately based upon how the degree of cost impact for each segment measures
against the impacts of the rest of the industry. In addition, each preserved
product competes in a unique market so the pricing effects of each market
within the industry categories are also assessed.
The pricing impact analysis is an elaboration of the pricing decision
criteria outlined earlier in Table II-B-1 and re-presented here as Table
V-A-1. These criteria are applied to each of the industry categories
defined in Table IV-3. The reader is advised to follow these tables
throughout the following discussion.
The price analysis consists of two parts: first, an evaluation of
the maximum amount of price increases which would be allowed by general
industry sectors; and second, how much, if any, price increase will occur
in each industry subsegment.
1. Industry Factors Governing Price Increases
Because of price elasticity in the timber products industry, we
estimate that a 5% to 10% increase in price (annualized cost as a
percent of net sales) is the maximum allowable to cover increased pro-
duction costs. This overall price increase can occur when all plants
within the industry face the same additional production costs and when
-56-
-------
TABLE V-A-1
PRICE INCREASE ANALYSIS MATRIX
Parameter
Annualized Cost as a Percent of
Net Sales
Substitute Products
Industry Capacity Utilization
Demand Growth
Foreign Shipments
Abatement Cost Differences
Within Industry
Price Elasticity of Demand
Basis for Competition
Market Share Distribution
Condition for Constraint
Higher than 10%
High occurrence; ready substitution
Low, e.g., operating rate less
than 80%
Low, e.g., less than GNP
High
Unequal distribution of costs
High
Price
Fragmented
-57-
-------
prices of substitute products remain stable. The ceiling on this price
increase is primarily the result of the strict competition from substitute
products.
In the wood preserving segment of the timber industry, competition
from substitute products exerts a strong pressure on preserved wood
prices. This is especially true for organically preserved products;
inorganically preserved products and railroad ties have less strong
competition from the substitutes. The whole industry, however, is
affected by the unequal distribution of abatement costs. Some wood
preserving plants are already bearing the cost of abatement to meet
requirements for oil separation, etc. They therefore will not have to
increase prices to cover further abatement costs. Plants which do not
currently have adequate pretreatment will still have to compete with
these plants; thus, the 5% to 10% ceiling may be optimistic for the
industry segment.
Price increases are further constrained by the low industry capacity
utilization. Operating rates for this segment are seldom higher than
60% or 70%, Growth of demand is another constraint, especially for
organic preservers. With a growth rate less than GNP, and low operating
rates, the organic sector will have difficulty in passing on an industry-
wide price increase. The inorganic plants will have somewhat less diffi-
culty because demand is high and growing.
Foreign shipments of wood preserved products are negligible so do
not act as a constraint on price increases.
Price elasticity does serve as a price increase constraint. For
the organic treaters especially, demand tends to fall off greatly with
an increase in price. This is related to the strong competition with
substitute products and to the fact that price is the basis for compe-
tition. Inorganic products have a lower price elasticity so price
increases would be somewhat less constrained. Price, however, is still
the basis for competition so inorganic treaters face their most strict
ceilings on price increases from their immediate competitors. The
market share distribution in all segments of the wood preserving industry
is extremely fragmented, with many competitors operating within the
same market. This fact increases the constraints upon price increases
because all plants have to compete with average industry price levels
which are set by the largest, most efficient plants.
In summary, it is doubtful whether the POTW wood preserving plants
would be able to pass along a full 10% increase in prices. A 5%
increase would probably be the maximum for industry average prices.
However, individual plants will have to compete against the price
increases set by their competitors. The effect of this competition
and actual price increases expected in each of these three wood preserving
subsegments will be further examined below.
-58-
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2. Price Increases Required to Cover Abatement Costs
If we assume that wood preserving companies would recover as much
of the abatement costs as possible through price increases, and that
these price increases would be uniform for all of the plant's products,
then the amount of price increase required can be calculated as follows
for each plant:
Total Cost Impact (annual) „ . . ,
T _r, * - = % price increase sought
Annual Sales r e
This ratio can be calculated for each model plant and for each cost
category from Table IV-3, The results are shown in Table V-A-2.
Table V-A-3 shows the number of plants which occur in each category.
For two POTW discharging plants, sales figures were not available. One
of these is a non-commercial plant (treating wood for internal uses)
for which the decision to remain in business would depend on the cost of
producing treated wood versus costs of purchasing the wood and for which
no price increase/financial impact is expected. The other plant is an
organic treater which is reported to have adequate phase A and B treat-
ment, so would experience no impact.
A similar table of price increases sought can be calculated based
upon the industry's higher estimates of abatement cost. Using the
industry cost estimates, as described in Section IV-E, annualized costs
are divided into annual sales to derive the percentage price increases
necessary to cover the abatement costs for each industry subsegment.
The controlling price increases derived from such a calculation are
shown in Table V-A-4, The controlling increases are those which are the
lowest in each subsegment. The difference in required price increases
between industry and Development Document cost estimates is considerable
in the inorganic subsegment. The inorganic plants would require a
minimum of one to two percent by Development Document costs, and four
percent by industry estimates. In the organic subsegment the difference
is one to 1.2 percent, respectively.
3. Probable Price Increases for the Inorganic Subsegment
The amount of price increase which may occur among inorganically
treated products from POTW dischargers will be determined by the
respective prices of competing products, primarily from inorganic
plants which are not presently discharging to POTW's.
The distribution of abatement costs for inorganic preservers
throughout the entire industry is expected to be fairly even, that is,
there will be essentially no difference between abatement cost impact
on the inorganic wood preservers which discharge to POTW's and those
which do not discharge to POTW's. Both categories have to achieve zero
discharge and they have a similar level of recirculation equipment
already installed. The resultant cost increases for all inorganically
-59-
-------
TABLE V-A-2
PRICE INCREASES REQUIRED FOR INDUSTRY SUBSEGMENTS
Sales 150,000
500.000
1.000.000
3.000.000
6.000.000
-> Adeq. A & B
5
•C
\ Inad. A & B
j
3
\ Two cylinder
5
^ Adeq. A & B
One cylinder
Adeq. A & B
3
* Inad. A & B
H
3 Inad. A & B
Price Increase Price Increase Price Increase Price Increase Price Increase
o o n o
10-52 5.2% 1.7% o.9%
6.7% 2% 1% ~ -
13.3% 4% 2%
2% 17 n oy n
w • ' /0 v . j /o
12.5% fi ?7 9 1 °/ i no/
J-i.J/o D.Z/o Z.l/i 1.0%
14.5% 7 27 9 /, 7 T TV
J--+.J/0 /.Z/o Z.'f/'o 1.2/4
*Based upon Development Document Estimates.
-------
TABLE V-A-3
NUMBER OF PLANTS IN EACH COST IMPACT GROUP
Organic
Plants
Inorganic
Plants
Inorganic
i
^ and
i
Organic
Plants
Total
Number of
Plants
Annual Sales:
Adequate A&B
Inadequate A&B
One cylinder
Two cylinders
Adequate A&B
One cylinder
Adequate A&B
Two cylinders
Inadequate A&B
One cylinder
Inadequate A&B
Two cylinders
$150,000 $500,000
1
3
2 4
0 2
0
0
0
0
2 10
$1,000,000
0
9
2
0
3
0
2
0
16
$3,000,000
0
6
-
-
2
1
2
0
11
$6,000,000
2
1
-
-
0
1
1
2
7
Source: Reported Industry statistics and ADL estimates.
-------
TABLE V-A-4
MINIMUM PRICE INCREASES REQUIRED FOR INDUSTRY SUBSEGMENTS
(Based upon Industry Cost Estimates)
Annual Abatement Cost Price Increase (%) Required
Annual Sales by Largest Plants
Inorganic subsegment
40,000 = 4.0
1,000,000
1.2
Organic subsegment
71.830
6,000,000
Both preservatives subsegment
111,830 =
6,000,000 1>8
-62-
-------
treated products will therefore be able to be passed on according to the
average increases in production costs. Individual firms will be impacted
differently from the average, depending upon market conditions, efficiency
and size of plant, and capacity utilization.
Where a given market is served by one or more large-scale plants, the
larger or the more efficient plant would be more likely to be able to pass
on all additional costs. Smaller or less efficient plants in the same
market would have to compete within the price increases set by the larger
plant.
This phenomenon is demonstrated in Table V-A-2. The largest inorganic
plants would require only a one percent price increase to cover incremental
abatement costs. There are only two large plants in this position; because
markets are so fragmented, these plants could not compete in all areas;
therefore, the next smallest price increase, two percent, may be controlling
in some areas. We will assume a two percent price increase for the inorganic
subsegment throughout the remainder of this analysis.
The smaller plants, to remain competitive, would have to sbsorb the
differential between the percentage increase required and the percentage
allowed competitively. This differential is quite large in some cases.
For a two-cylinder plant with $150,000 in sales, 11.3 percent (13.3 minus
2.0) would have to be absorbed. We can see, however, from Table V-A-3
that there are no plants in this category. The maximum percentage penalty
would be 4.7 percent for the one cylinder plant which has sales of $150,000.
In summary, the cost impact is expected to affect all POTW and non-
POTW inorganic wood preservers equally. Distribution of the price impact
will be primarily dependent upon the specific market within which each
plant is situated, that is, whether or not it faces extreme competition
in its regional or local area and upon the size of the plant. Larger
plants will have a large production base over which to spread abatement
costs than will smaller plants, and so the per unit price increase will
be smaller, probably a maximum of two percent. The smaller plants faced
with the competition from the larger plants will have to absorb the
difference in costs. Average price increases for inorganically treated
wood products set by the industry price leaders are therefore expected
to be relatively small.
4. Probable Price Increases for the Organic Subsegment
The distribution of abatement costs between POTW and non-POTW
dischargers appears to be more uneven in the organic preserving segment
than is true for the inorganic segment. Non-POTW dischargers will be
required to install a considerable amount of secondary treatment equip-
ment. POTW dischargers are not expected to have to install biological
treatment, and thus are offered a cost advantage. On the other hand,
plants not discharging to municipal sewers are more likely to be located
in rural areas where land is less expensive. POTW dischargers will have
a slight cost disadvantage because they will be forced to pay more for
land which is needed for additional pretreatment.
-63-
-------
Within the group of POTW dischargers, the primary plant characteristic
which will determine price increases for this subsegment is level of treat-
ment already installed. There are 23 plants using only organic preserva-
tives.
Four of these plants have adequate Phase A and B treatment already
installed. The remaining 19 plants will have to upgrade their pretreat-
ment facilities. Depending upon market conditions, efficiency and size
of plant and capacity utilization, these plants will require different
price increases. The largest or most efficient plants will be more likely
to be able to pass on all incremental costs. Smaller or less efficient
plants in the same market(s) would have to compete with these price
increases.
Table V-A-2 shows that the largest organic plants require only a
0.9 percent price increase. There is only one plant in this category,
and it is unlikely that one plant could set price levels for the entire
country, so other plants would probably help to set price levels. The
plants which treat with both organic and inorganic preservatives do
compete with organic-only plants in some product markets. The smallest
price increase required by the dual-preservative plants which have to
install pretreatment technology is about one percent. Therefore, we may
assume that organic plants may be able to pass on price increase of only
about 1%.
The smallest organic only plants require a 10.5 percent increase.
Therefore, the three plants in this category would have to absorb the
difference of 9.5 percent of sales.
Specific price increase patterns may vary by product. Railroad
ties, for example, have a relatively low price elasticity of demand
because the material characteristics of wood are well suited to
railroad tie use, providing virtually no substitute products. The
railroad tie market is characterized by fragmented market share distribu-
tion, demand growth lower than the GNP growth rate and price competition
between firms. Several railroads own captive wood preserving plants to
produce their own ties. Railroad tie producers, therefore, have a
greater possibility of passing through effluent abatement costs in the
form of price increases, but competition among tie producers may still
make such price increases difficult.
The piling and utility pole markets do compete with other products,
notably steel and concrete, and their primary advantage over substitute
products is price. Higher prices could induce consumers to utilize
substitute products having different material characteristics. Therefore,
price increases for these products would be more limited.
In summary, it is generally expected that most POTW dischargers will
have lower costs than direct dischargers, because they will not have to
install biological treatment, whereas the non-POTW dischargers will
experience this cost impact. However, for those POTW discharging plants
-64-
-------
which do have to install treatment requiring land, costs will be higher
because there is generally less land available. Further, those plants
with adequate equipment already installed will face lower incremental
costs to meet the effluent guidelines. The heaviest cost impacts and
likelihood of price increases within the industry subsegment therefore
falls upon those pretreators that have less equipment already in place.
In addition, as with the inorganic treaters, the larger plants will be
more likely to be able to spread abatement costs over their larger
production, resulting in an average price increase of about one percent.
The smaller plants which will have to compete with the larger 'plant
price limits may be unable to pass on price increases sufficient to
cover their full abatement cost.
5. Probable Price Increases and Projection of Price Effects for
Plants Using Both Inorganic and Organic Preservatives
Fifteen plants in the POTW discharge category use both inorganic
and organic preservatives. The cost impacts upon these plants will
depend on whether they already have oil separation facilities for their
organic treatment discharges, and whether they have one or two cylinders
for inorganic treatment.
The form of price increases that will occur will be most dependent
upon the market position of each producer with respect to both organic
and inorganic products. This relationship is expected to be similar to
those discussed for the separate segments above, that is, the larger
plants can be expected to be able to pass on most cost increases, while
smaller plants will have to meet the large plant price limit, except
for those rare occasions where a single small plant is virtually the
only source of supply of a particular product in a given market.
As discussed in the previous section, the average expected price
increase among producers of organic and inorganic products will be one
percent. The smallest and most impacted plant in this subsegment
(Table V-A-2) requires a 6.2 percent price increase so would have to absorb
the differential 5.2 percent.
Even more so than the other two subsegments, the plants using both
types of preservatives compete in different products for each of their
products. Price for each product will be established according to average
industry price increase for that product. Hence inorganically treated
products from this subsegment may be able to have price increases of two
percent and still be competitive with other inorganic plants.
In summary, price increases from this subsegment are expected to be
variable according to product/market sector. The largest plants will still
tend to establish new price levels with which smaller plants must compete,
but the price increase will be small, averaging about one percent, with
up to two percent for inorganic products.
-65-
-------
6. Secondary Effects of Price Increases
Generally, for both organic and inorganic preserved wood products,
no significant price increases in major market areas are anticipated.
If significant price increases did occur, they would impact such
industries as construction and utilities. It is likely that such
increases would be passed along to consumers in the form of higher
utility bills, more expensive homes, etc., although such price increases
would be minor because the cost of preserved wood is generally a very
small component of the costs of the construction and utilities industries.
7. Effects on Substitutes
Since no major price increases are expected, substitute products will
not be affected. If price increases were to occur, it is unlikely that
demand for substitute products would increase substantially. Generally,
the major preserved wood products are bought because of their relatively
lower price; however, a price increase of one to two percent would not
cause significant changes in demand.
B. FINANCIAL EFFECTS
Following the price increase assumption from Section A, profitability
and capital availability impacts are now analyzed.
The purpose is to project the effects that abatement costs will have
on individual company financial statements. The model financial statements
first shown here in Section III are used as the pre-abatement cost base
case financial situations to which incremental changes resulting from
abatement are added.
Two versions of cost estimates are used, first those costs shown in
Table IV-3 based upon the Development Document, and second, the cost
estimates provided by industry sources. Thus, the differences in impacts
between the two groups of estimates can be visualized.
1. Inorganic Plants
Table V-B-1 shows the results of the financial analysis of inorganic
preserving plants which will have to meet zero discharge requirements.
Since the expected price increases are small, two percent in the industry
subsegment, the effluent abatement costs will result in a decrease in
profitability of the smallest plants which have the highest abatement cost
per unit of production.
In Table V-B-1, the income statement based upon Development Document
estimates assumes a two percent price increase. It also allows for capital
recovery at a rate of 10% over 10 years. The effect is similar to financing
the effluent treatment facilities completely with debt at a 10 percent
interest rate due in equal installments over ten years (actually, the
interest cost may decrease after the first year as the principal is paid off)
-66-
-------
I
CTv
TABLE V-B-1
PRO FORMA INCOME STATEMENTS FOR MODEL PLANTS - INORGANIC PRESERVATIVES
MODEL PLANT 1
Sales
% Price increase
Materials
Payroll
Depreciation
Depreciation-Pretreat-
ment Equipment
Other Annual Pre-
treatment Expense
Operating Margin
S.G&A
Profit Before Tax
Taxes
PROF-IT AFTER TAX
Cash Flow
CHANGE IN CASH
Base
Case
150,000
96,000
24,000
3,000
27,000
15,000
12,000
6,000
6,000
9,000
Dev.Doc.
Costs
153,000
2.0
96,000
24,000
3,000
5,000
5,000
20,000
15,000
5,000
2,500
2,500
10,500
1,500
Industry
Costs
156,000
4.0
96,000
24,000
3,000
20,000
10,000
3,000
15,000
(12,000)
0
(12,000)
11,000
2,000
MODEL PLANT 2
Base
Case
500,000
320,000
80,000
10,000
90,000
50,000
40,000
20,000
20,000
30,000
Dev.Doc.
Costs
510,000
2.0
320,000
80,000
10,000
5,000
5,000
90,000
50,000
40,000
20,000
20,000
35,000
5,000
Industry
Costs
520,000
4.0
320,000
80,000
10,000
20,000
10,OOQ
80,000
50,000
30,000
15,000
15,000
45,000
15,000
MODEL PLANT 3
Base
Case
1,000,000
640,000
160,000
20,000
180,000
100,000
80,000
40,000
40,000
60,000
Dev. Doc.
Costs
1,020,000
2.0
640,000
160,000
20,000
10,000
5,000
190,000
100,000
90,000
45,000
45,000
75,000
15,000
Industry
Costs
1,040,000
4.0
640,000
160,000
20,000
40,000
10,000
190,000
100,000
90,000
45.000
45,000
105,000
45,000
FLOW
Capital Investment
Required
50,000 100,000
50,000 100,000
100,000
200,000
-------
The income statement based upon the industry estimates uses a price
increase of four percent. This larger price increase is derived by
dividing the industry's annual abatement cost estimates of the largest
plants ($40,000) into the largest sales ($1,000,000) as shown in Table
V-A-4. A five-year capital recovery period is assumed.
This exercise demonstrates the effects of scale upon reduction in
profitability and indicates a severe impact upon the profitability of the
smaller plants in each segment. As shown in Table V-A-3, there are two
plants in the smallest category. These one cylinder plants will face
significantly reduced profits under the Development Document assumptions.
They will suffer even more severely if industry estimates are true. There
are six plants in the middle size category, four of which have one cylinder
and would have no change in profitability. Two of the plants have two
cylinders so would have a decrease in profitability. The additional
cylinder would account for a profit decrease of approximately five
thousand dollars, using Development Document estimates, and 15 thousand
dollars by industry estimates. This impact could cause problems for these
plants, although cash flow could not be affected.
The two plants in the largest category will experience an increase
in profitability.
2. Organic Plants
Table V-B-2 shows the results of a similar financial analysis for
plants which treat only with organic preservatives. Again, the smallest
plants will feel the greatest impact because they will be able to pass
on only a small portion of their abatement costs as price increases.
The Development Document cost column assumes a price increase of 0.9
percent. As shown in Table V-A-2 and described in Section V-A-4, price
increases for this subsegment may actually be slightly higher, an
adjustment which would decrease the financial impact. The pro forma
statement based upon industry cost estimates assumes a price increase
of 1.2 percent as defined in Table V-A-4.
There are four organic plants in the smallest sales category, one
of which has adequate treatment so will face no incremental abatement
cost. Of the remaining three plants, two belong to large, multi-plant
companies, which would be expected to either consolidate wood preserving
operations to reduce total abatement costs, or spread the price increases
over other activities to fully recover costs. In other words, although
the plants could be closed, the companies would not be seriously impacted.
This leaves only one $500,000 plant which would be impacted by a severe
reduction of profitability.
In the one million dollar sales category, there are nine plants all
with inadequate Phase A and B treatment. Seven of the plants are part of
large multi-plant companies and so those firms would not be severely
impacted, leaving two single plant firms which would face significant
reduction in profitability and fairly significant capital needs in order
to comply with pretreatment requirements.
-68-
-------
Sales
% Price Increase
Materials
Payroll
Depreciation
Depreciation - Pre-
treatment Equipment
Other Annual Pre-
treatment Expenses
Operating Margin
S,G & A
Profit Before Taxes
Taxes
PROFIT AFTER TAXES
Cash Flow
CHANGE IN CASH FLOW
Capital Investment
Required
TABLE V-B-2
PRO FORMA INCOME STATEMENTS FOR MODEL PLANTS - ORGANIC PRESERVATIVES
Model Plant 2
Base
Case
500,000
320,000
80,000
10,000
90,000
50.000
40,000
20.000
20,000
30,000
Dev.Doc. Industry
Costs Costs
504,500 506,000
0.9 1,2
320,000 320,000
80,000 80,000
10,000 10,000
13,350 30,700
39,130 41,130
42,020 24,170
50.000 50,000
(7,980)(25,830)
0 0
(7,980)(25,830)
15,370 14,870
(14, 630) (15, 130)
Model Plant 3
Base
Case
1,000,000
640,000
160,000
20,000
180,000
100,000
80,000
40,000
40,000
60,000
Dev.Doc.
Costs
1,009,000
0.9
640,000
160,000
20,000
13,350
39,130
136,520
100,000
36,520
18,260
18,260
51,610
(8,390)
Industry
Costs
1,012,000
1.2
640,000
160,000
20,000
30,700
41,130
120,870
100,000
20,870
10,435
10,435
61,135
1,135
Model Plant 4
Base
Case
3,000,000
1,920,000
480,000
60,000
540,000
300,000
240,000
120,000
120,000
180,000
Dev.Doc.
Costs
3,027,000
0.9
1,920,000
480,000
60,000
13,350
39,131)
514,520
300,000
214,520
107 ?fin
107,260
180,610
610
Industry
Costs
3,036,000
1,920,000
480,000
60,000
30,700
41,130
504,170
300,000
204,170
1«2 08^
102,085
192,785
12,785
Model Plant 5
Base
Case
6,000,000
3,840,000
960,000
120,000
1,080,000
600,000
480,000
240,000
240,000
360,000
Dev.Doc.
Costs
6,054,000
0.9
3,840,000
960,000
120,000
13,350
39.130
1,081,520
600,000
481,520
240.760
240,760
374,110
14,110
Industry
Case
6,072,000
3 ,840, TOO
960,000
120,000
30,700
1,080,170
600,000
480,170
240,085
240,085
390,785
30,785
138,500 158,500
138,500
158,500
138,500
158,500
138,500 158,500
-------
The largest two sales categories contain six and three plants,
respectively. These plants will have little or no decrease in profita-
bility. Cash flow in fact will increase.
3. Plants Which Treat with Both Preservatives
Table V-B-3 shows the financial results for the plants which treat
with both organic and inorganic preservatives. In the Development
Document cost estimates column, a price increase of one percent is
assumed. For industry estimates, prices are assumed to increase by 1.8
percent, as determined by Table V-A-4.
The smallest sales category of plants will have negative profits
as a result of abatement requirements. However, there are no plants in
this group.
In the million dollar sales category, there are five plants, three
with adequate A and B treatment. Both of the remaining plants are
part of large, multi-plant companies and would be expected to consolidate
in order to avoid allowing individual plants to be severely impacted.
None of the plants in the largest categories are expected to be
severely impacted by the decreases in profitability assumed. Cash flow
will increase in both categories.
In summary, there are three or four inorganic plants, one to three
organic plants, and two plants which treat with both types of preserva-
tives which could be heavily impacted.
4. Capital Availability
There is very little information available concerning capital availa-
bility of plants under consideration, although credit reports from some
sources indicate that capital will generally be available to the larger
firms. In general terms, one may consider two sources: equity and
debt. Capital availability may also be discussed in terms of ownership
characteristics: smaller, closely-held firms and larger, publicly-held
firms.
Equity financing may take two forms: new capital infusions and
operating cash flow. If the estimate of a 4% after tax margin on sales
is correct, and depreciation is approximately 2% of sales, one year's
cash flow from an inorganic preservative plant with sales of $1 million
and one year's cash flow from an organic preservative plant with sales
of $3 million is sufficient to finance zero discharge from a one-cylinder
inorganic preserving plant and oil separation, filtration, pH control,
and flocculation for an organic preserving plant using Development
Document capital cost estimates. If industry capital cost estimates
were used, about two years' cash flow would be required for an inorganic
plant of this size and one year's cash flow for an organic plant of this
size. If biological treatment were required for an organic plant of $3
-70-
-------
TABLE V-B-3
PRO FORMA INCOME STATEMENTS FOR MODEL PLANTS - BOTH_J)RGANIC AND INORGANIC PRESERVATIVES
Sales
7, Price Increase
Materials
Payroll
Depreciation
Depreciation-Pretreat-
ment Equipment
Other Annual Pretreat-
ment Expense
Operating Margin
S.G&A
Profit Before Tax
Taxes
PROFIT AFTER TAX
Cash Flow
CHANGE IN CASH FLOW
MODEL PLANT 2
Base
Case
500,000
320,000
80,000
10,000
90,000
50,000
40,000
20,000
20,000
30,000
Dev.Ooc. Ind.
Costs Costs
505,000 509,
1 1.
320,000 320,
80,000 80,
10,000 10,
18,350 50,
44.130 51,
42,520 (2
50,000 50,
(7, 480) (32
0
(7, 480) (32
20,870 7
(9,130) (22
000 1
8
000
000
000
700
.130
,830)
OOP
,830)
0
,830)
,870
,130)
MODEL PLANT 3
Base
Case
,000,000
640,000
160,000
20,000
180,000
100,000
80,000
40,000
40,000
60,000
Dev.Doc.
Costs
1,010,000 1
1
640,000
160,000
20,000
18,350
44,130
127,520
100,000
27,320
13,760
13,760
52,110
(7,890)
Ind.
Costs
,018,000
1.8
640,000
160,000
20,000
50,700
51,130
96,170
100,000
(3,830)
0
(3,830)
66,870
6,870
MODEL PLANT 4
Base Dev .Doc .
Case Costs
3,000,000 3,030,
1
1,920,000 1,920,
480,000 480,
60,000 60,
18,
44,
540,000 507
300,000 300,
240,000 207
120,000 103
120,000 103
180,000 182
2
000
000
000
000
350
,130
,520
000
,520
,760
,760
,110
,110
MODEL PLANT ^
Ind . Base
Costs Case
3,054,
1.
1,920,
480,
60,
50,
,000 6,000,000
8
000 3,840,000
000 960,000
000 120,000
700
51,130
492
300,
192
96
96
206
26
.I70 1,080,000
000 600,000
>170 480,000
,085 240,000
,085 240,000
• 785 360,000
,785
Dev.Doc
Costs
6,060,000
1
3,840,000
960,000
120,000
23,350,
44,130
1,082,520
600,000
482,520
241,260
241,260
384,610
24,610
Ind.
Costs
6,108,000
1.8
3,840,000
960,000
120,000
70,700
51,130
1,086,170
600,000
486,170
243,085
243,085
433,785
73,785
Capital Investment
Required
188,500 258,500
188,500 258,500
188,500 258,500
238,500 358,500
-------
million annual sales volume, then two years' cash flow would be required.
For the smaller plants in each subsegment, the investment required is a
significant proportion of annual cash flow. For the larger plants, the
investment may often be less than one year's cash flow.
New capital infusions are the other source of equity financing. For
the smaller, closely-held firms, the owners are likely to have little
access to capital markets and would be dependent upon their own savings.
Their savings may be nonexistent or tied up in the business already.
Conceivably, if inventories are high or accounts receivable are slow,
attempts could be made to pare inventory and speed up collection of
receivables. Inventories and receivables may often be 30-40% of annual
sales volume in this business. However, it is often difficult to reduce
inventories or speed collection of receivables. Also, stretching out
payments of accounts payable could jeopardize the credit rating of the
firm. For the larger, publicly-held firms, the amount of investment
required may not be large enough to justify a new issue of stock. Funds
may be available from other portions of the business if management decides
to continue operation of the plant. This decision is likely to be based
on estimates of the return on equity of the plant over the long term.
Debt financing may be pursued in the form of a commercial loan.
The lender is likely to be concerned about the credit worthiness of the
firm over the term of the loan. Such considerations as the future
profitability of the firm, the cash flow to interest coverage ratio and
previous relations with the firm will determine availability. In the
present business environment, only the more credit worthy firms may be
expected to obtain loans over as long as a three- to four-year term. In
general, it is likely that smaller firms will have more difficulty in
obtaining loans.
Whether debt, equity or a combination of debt and equity financing
are available will depend upon estimates made of the future of the
business by the owner and/or the lender. In addition to such quantifiable
factors as profitability, cash flow and other business opportunities, many
closely-held firms will be influenced by their attachment to the business.
Often, a closely-held business provides employment to the owners and
they may be willing to accept a less profitable income statement than a
publicly-held firm. This intangible factor is more difficult to predict
in attempting to analyze which plants will be able and willing to raise
the necessary capital.
In summary, the largest plants would have the least problem in
obtaining either debt or equity capital. Unfortunately, this aggravates
the impact differential between small and large plants in that the
smaller plants, with greater relative capital requirements may have the
least new capital available.
5. Production and Employment Effects
a. Analysis of Closure—Based upon the financial effects shown in
the previous tables, and closure decision criteria shown in Table V-B-4,
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an analysis can be made to discover how many plants are likely to close
as a result of the effluent abatement costs.
This analysis assumes that organic plants will not have to install
biological treatment equipment. Addition of such equipment would increase
abatement costs by approximately 100%. Representatives of several plants,
large and small, have suggested to us that they would seriously consider
closure if biological treatment is required.
TABLE V-B-4
PLANT CLOSURE ANALYSIS MATRIX
Parameter Condition for Closure
After Tax Treatment Cost—% High, e.g., greater than 30%
Net Income
Cash Flow Negative
Capital Cost of Abatement—% High, e.g., greater than 30%
Gross Total Fixed Assets
Extent of Integration None—Low
Other Facilities on Common Site Isolated Plant
Ownership Large, publicly owned firm
Impacts on Inorganic Preserving Plants. All of the eleven plants
treating with only inorganic preservatives have some effluent recycling
facilities in operation. However, to meet zero discharge requirements
they will have to make additional expenditures of approximately $50,000
per cylinder.
The effect that this will have on profitability and cash flow was
shown in Table V-B-1. Table V-B-5 shows the following ratios for each
model plant size: after tax abatement cost as a percent of net income,
and capital cost of abatement as a percent of gross fixed assets.
From Table V-B-4 we see that an after tax treatment cost which is
greater than 30% of net income is used as a criteria for closure.
Similarly, capital cost of abatement greater than 30% of gross fixed
assets is condition for closure.
From this standpoint, it appears that plants in the smallest plant
category and possibly plants in the $500,000 sales category could close.
There are two plants in the $150,000 group and six plants in the middle
size group.
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TABLE V-B-5
FINANCIAL RATIOS FOR INORGANIC PRESERVING PLANTS
Annual Sales
After Tax Abatement Cost
as a % of Net Income
Capital Cost of Abatement
4
as a % of Gross Fixed Assets
$150,000
83%
20%
$500,000
25%
17%
$1,000,000
12.5%
12.5%
*Book value.
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The two small plants will experience a significant reduction in
profitability, but a slight increase in cash flow. One plant is the
only one the firm has, and might be forced to close. The other is part
of a company with some other wood preserving operations. This plant
could also be a likely closure, but could be consolidated with the
company's other operations.
Of the six larger plants, four have one cylinder and, as shown
in Table V-B-1, would have little, if any, decrease in profitability.
Perhaps the most important factor for this subsector is capital
availability because it affects several of the analysis factors in
Table V-B-4. Provided that capital is available, cash flow for this
group would increase considerably. It can be expected, therefore, that
these plants would not close.
The other two plants have two cylinders, and will face a larger
abatement cost, as shown in Table IV-3. Both plants are part of lumber
companies. Therefore, the closure decision would be based upon analysis
of the relative costs of producing versus purchasing treated wood. We
expect that because of significantly reduced returns on the wood
preserving operations resulting from the pretreatment requirements, at
least one of these plants may close.
Impacts on Organic Preserving Plants. Of the 23 plants treating with
organic preservatives, only four have adequate phase A and B treatment.
The others will have to install further effluent abatement equipment.
Table V-B-6 shows the relationship of the incremental abatement
costs to net income and gross fixed assets. The smaller two plant sizes
have large abatement costs relative to net income and assets. Table
V-B-2 shows that the smallest group has a significant decrease in both
profitability and cash flow. The $1 million sales group which contains
nine plants also has decreases, but is not expected to be impacted to
the point of closure, although many of the plants belong to large wood
preserving companies and could be consolidated to improve returns.
There are four plants in the small group, one of which has adequate
oil separation, flocculation, pH control and filtration equipment
already in place and so would experience little impact. Of the remaining
three, one has a strong possibility of closure. It is the only plant of
a small firm which has wood preserving as its only activity and although
it may choose to remain in business for personal reasons, it appears
unlikely that it can remain liquid. The other two plants are part of
much larger and more diversified firms. Because the closure decision,
again, would be based upon internal economic decisions, it is assumed
that at least one of these plants may be closed or consolidated.
Impacts on Plants Which Treat with Both Types of Preservatives.
Some of the plants in this subsegment face a higher average abatement
cost than plants in the other subsegments because in effect they must
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TABLE V-B-6
FINANCIAL RATIOS FOR ORGANIC PRESERVING PLANTS
Organic Preservers
Annual Sales $500,000 $1,000,000 $3,000,000 $6,000,000
After Tax Abatement Cost
as a % of Net Income 131% 66% 22% 11%
Capital Cost of Abatement
as a % of Gross Fixed
*
Assets 46% 35% 11.5% 5.8%
*Book value
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comply with two different effluent standards. Of the 15 plants in this
category, seven have adequate Phase A & B treatment. Their cost impact
will be considerably less than that shown in Table V-B-3. These plants
are not expected to seriously consider closure.
The eight remaining plants face abatement costs of from about $190,000
to $240,000. The costs relative to net income and gross fixed assets are
shown in Table V-B-7 for each of the model plants. Again we see that
plants in the smallest sales categories are most subject to closure. From
Table V-B-3, it is apparent that cash flow will become negative for the
$500,000 and $1,000,000 sales categories.
However, there are no known plants in the smallest category. Two
plants in the million dollar size category have inadequate Phase A
and B treatment. One is the only plant in the company. Both are part
of large U.S. companies and would likely be shut down based upon the
reduction of profitability.
Summary of Closure Impacts
A high probability of closure has been identified for three
inorganic preserving plants, two organic preserving plants, and two
plants which treat with both preservatives. This conclusion is based
upon the abatement costs cited in the Development Document. If industry
estimates of abatement costs or the actual land costs prove to be higher
than estimated, then the number of plants which close could be signifi-
cantly higher, possibly double.
b. Production Curtailments and Employment Reduction
Because demand growth is low for wood preserved products in general
and capacity utilization is also low, closure of some plants is not
likely to affect total industry production. Plants which remain in
operation might be expected to increase production to replace supplies
from those plants which close. In some cases, closure of one plant within
a multi-plant company could result in make-up production from the other
plants within the same company. The small plants, which are most likely
to close, have such low production and the product markets are so
fragmented that any shift in production levels at remaining plants would
be very small.
Employment reductions as a result of plant closures are shown in
Table V-B-8.
In many of these plants which are part of other operations such as
lumber yards, the employees could be absorbed into these other operations.
At least two of the plants fit this category. Even without this mainten-
ance of current employees, the total employment reduction is small rela-
tive to the entire industry.
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oo
1
TABLE V-Z-7
FINANCIAL RATIOS FOR PLANTS WHICH TREAT WITH BOTH TYPES OF PRESERVATIVES
Annual Sales $500,000 $1,000,000 $3,000,000 $6,000,000
After Tax Abatement Cost
as a % of Net Income 156% 78.1% 26% 13%
Capital Cost of Abatement
as a % of Gross Fixed
Assets* 62% 47% 15,7% 7.9%
*Book value
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Subsegment
Inorganic
$150,000 size
$500,000 size
$1,000,000 size
Organic
TABLE V-B-8
EMPLOYMENT IMPACTS
Number of
Plants % of ^
Closing Plants
2 4
1 2
0
Average
Employment
per Plant
3
9
15
Total Employment
Reduction
6
9
Q_
$500,000 size
$1,000,000 size
$3,000,000 size
$6,000,000 size
Both Preservatives
$500,000 size
$1,000,000 size
$3,000,000 size
$6,000,000 size
2
0
0
0
0
2
0
0
Total employment reduction
Subtotal
Subtotal
9
15
35
75
Subtotal
15
9
15
35
75
18
0
0
0
18
0
30
0
0
30
63
*
As percent of 49 wood preserving plants which discharge to POTW s.
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c. Industry Growth and Modernization
The capital cost of effluent abatement facilities for the plants
discharging to POTW's may be greater than the annual capital expendi-
tures of the whole industry in recent years ($10 million per year).
The industry is generally characterized by slow growth and under-
utilization of capacity. It is believed that much of the industry
capital spending in recent years has been for water pollution control.
Many of the organic preserving plants are very old. Since it appears
that smaller plants are those most impacted by the proposed standards,
total industry capacity is not expected to be seriously decreased.
Depending on market conditions and profitability, some of the older,
larger plants may also be impacted by the standards.
d. Competitive Posture
The proposed standard does increase the relatively low barriers
to entry into the industry. The unequal distribution of cost suffered
by smaller plants versus larger plants will decrease margins for the
smaller plants more than for the larger plants.
6. Resultant Community Effects
Out of nine plants which will be severely impacted, seven will
probably close due to the pretreatment standards. Of the nine, four
are located in the South, and five in the Northeast-North Central region.
No city is expected to have more than one impacted plant. It is not
expected that new plants will be built in these areas. However, if the
impacted plants were forced to close, existing wood preserving plants
serving the same markets would experience increased sales. Of the
seven plants which are likely closures, three use inorganic preservatives
and employ less than 10 persons. It is not known whether these employees
could be absorbed in local workforces. For the remaining four plants,
it is estimated that fewer than 20 or 25 employees are working at each
plant. Again, it is not known whether these employees could be absorbed
in the local workforce. Although the wood preserving plants may be
buying timber from small local landowners, it is expected that this
timber could be sold for other purposes or to other wood preserving
plants.
7. Balance of Payments Effects
Imports and exports of treated wood products represent a very small
proportion of the industry. No significant balance of payments effects
are anticipated.
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VI. LIMITS OF THE ECONOMIC ANALYSIS
The analysis provided in this report has been limited by two key
problems:
• A limited availability of data; and,
• The nature of the industry.
We conducted representative surveys of the industry to enable us to
deal with the data limitation factor. However, some industry sources
were concerned about the confidentiality of the information requested
and so were reluctant to supply financial information which might be
considered proprietary. To overcome this data problem, we developed
model financial information from a variety of sources, including publicly
available statistics and financial data which was supplied for some of
the firms. The resulting model financial statements were then confirmed
through discussions with industry members. The consistent accuracy of
our data suggests that this approach can be accomplished within a
relatively narrow band of error.
The second problem, the nature of the industry, makes it difficult
to project plant closures. Some family-owned plants have remarkable
"staying power" even in the event of significant negative financial
occurrences. Objective closure decision criteria therefore had to be
measured against the subjective commitments to business. However,
since some of the abatement costs are modest and even small firms may be
able to bear this one-time cost, the difficulty of accurately projecting
plant closures is less important. Nevertheless, if new Guidelines
would increase the abatement costs to be borne by companies in this
industry, then the projection of closures would be a more sensitive
issue.
The analysis is based most heavily upon the abatement cost estimates
provided in the Development Document. Reported differences between
industry and Development Document estimates have been noted and a
sensitivity analysis conducted to indicate the resultant differences in
economic impact. If the Development Document cost estimates are proven
to be inaccurate, the analysis would have to be adjusted accordingly.
*U.S. GOVERNMENT PRINTING OFFICE: 1977- 241-037:24
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