/I
EPA-230/2-76-D45
JANUARY 197B
Do not remove. This document
should be retained in the EPA
Region 5 Library Collection.
ECONOMIC ANALYSIS OF PROPOSED AND
INTERIM FINAL EFFLUENT GUIDELINES
FOR
THE BLEACHED KRAFT, GROUND WOOD, SULFITE
SODA, DEINKED AND NON-INTEGRATED PAPER
SECTORS OF THE PULP AND PAPER INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
w
IS
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This document is available for inspection through
the U.S. Environmental Protection Agency, Public
Information Reference Unit, Room 2404, Waterside
Mall, 401 M Street, S.W., Washington, D.C. 20460
Persons wishing to obtain this document may write
the Environmental Protection Agency, Economic
Analysis Division, Waterside Mall, 401 M Street,
S.W., Washington, D.C. 20460 Attn: Distribution
Officer (PM-220).
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ECONOMIC ANALYSIS OF PROPOSED AND INTERIM FINAL EFFLUENT GUIDELINES
FOR THE BLEACHED KRAFT, GROUNDWOOD, SULFITE, SODA, DEINKED AND
INTEGRATED PAPER SECTORS OF THE PULP AND PAPER INDUSTRY
Office of Planning and Evaluation
U.S. Environmental Protection Agency
January 1976
EPA-230/2-76-045
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TABLE OF CONTENTS
Page
List of Tables ix
List of Figures xiii
I. EXECUTIVE SUMMARY 1
A. INTRODUCTION 1
B. FINDINGS AND CONCLUSIONS 2
1. Industry Segmentation 2
2. Economic Characteristics 2
3. Financial Performance 5
4. Competitive Characteristics of Phase II Product Sectors 6
5. Methodology Overview 6
6. Costs of Compliance 10
7. Economic Impacts 10
8. Limitations of Economic Impact Analysis 13
II. INDUSTRY DESCRIPTION 17
A. TOTAL INDUSTRY PROFILE 17
1. Distinguishing Characteristics 17
2. Links to Major Supplier and Customer Industries 19
3. Definition of Industry Sectors to be Analyzed 21
4. Geographical Distribution 23
5. General Economic Characteristics 24
6. Financial Performance 39
B. CHARACTERISTICS OF STUDIED MARKET SECTORS 48
1. Product Sectors and Process Relationships 48
2. Market Pulp 50
3. Printing, Writing and Related Papers 60
4. Bleached Board and Bristols 64
5. Tissue 74
6. Newsprint and Uncoated Groundwood Paper 81
in
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TABLE OF CONTENTS (Continued)
Page
III. METHODOLOGY 89
A. ANALYTIC FRAMEWORK AND OVERVIEW 89
1. Procedural Framework 89
2. Price Effects 90
3. Effect Upon Quantity Demanded 98
4. Mill Closures (Capacity Effects) 98
5. Balance of Trade 100
6. Sensitivity of Results 102
B. ECONOMETRIC ANALYSIS 103
1. General Formulation 103
2. Product Sector Models 108
3. Technical Notes 117
C. MILL CLOSURE ANALYSIS METHODOLOGY 118
1. Introduction 118
2. Screening Analysis 118
3. Direct Industry Contact 120
4. Financial Analysis 120
5. Assumptions/Inputs Used in Financial Analysis 12t
D. DISCOUNTED CASH FLOW ANALYSIS 121
E. COST-OF-COMPLIANCE METHODOLOGY 124
1. Unit Cost Estimates 124
2. Application of Unit Costs 127
F. PROCESS ECONOMICS METHODOLOGY 128
1. New Mill Manufacturing Costs 128
2. Existing Mill Manufacturing Costs 129
IV
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TABLE OF CONTENTS (Continued)
Page
IV. COST OF COMPLIANCE 135
A. WATER EFFLUENT CONTROL DATA BASE 135
1. Industry Categorization 135
2. Specified Standards 135
3. Treatment Technology 135
4. Costs Estimated for Specified Technology 136
5. Presentation of Cost Estimates 138
B. ADJUSTMENTS TO THE DEVELOPMENT DOCUMENT
DATABASE 139
C. NSPS COSTS FOR NEW CAPACITY 140
1. Application of Water Effluent Control Costs 140
2. Application of Air Control Costs 142
3. Application of OSHA Costs 142
D. EFFLUENT CONTROL COSTS FOR EXISTING MILLS 142
E. SUMMARY OF COST OF COMPLIANCE BY PROCESS
CATEGORY 145
1. Basis of Data 145
2. Water Effluent Control - Phase II Categories 145
F. PROCESS-TO-PRODUCT TRANSFORMATION 146
V. ECONOMIC IMPACTS 151
A. SUMMARY OF FINDINGS 151
B. PRICE AND OUTPUT PROJECTIONS 152
1. Long-Run (1983) Price Effects 152
2. Price Elasticity of Demand 152
3. Short-Run (1977) Price Effects 156
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TABLE OF CONTENTS (Continued)
Page
V. ECONOMIC IMPACTS (Continued)
C. FORECAST SHORT-RUN DEMAND/CAPACITY
RELATIONSHIPS 159
1. Bleached Board and Bristols 159
2. Printing and Writing Paper 159
3. Tissue 159
4. Newsprint 161
5. Bleached Market Pulp 163
6. Dissolving Pulp 167
D. ESTIMATED IMPACT ON MILL CLOSURES 170
1. Summary 170
2. Su Ifite Sector Closures 174
3. Groundwood Sector Closures 182
4. Deinking Sector Closures 184
5. Nonintegrated Tissue-Sector Closures 184
E. BALANCE-OF-TRADE EFFECT 188
1. Competitive Status of U.S. Pulp and Paper Industry 188
2. Effluent Control Cost Differentials 191
3. Impact on Exports 194
4. Impact on Imports 194
VI. LIMITATIONS OF ANALYSIS 201
A. COST OF COMPLIANCE 201
1. Technology and Mill Site Variability 201
2. Estimating Accuracy 201
3. Base-Line Definition 202
4. Land Costs 202
5. Water and Air Quality 203
6. Implications 203
VI
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TABLE OF CONTENTS (Continued)
Page
VI. LIMITATIONS OF ANALYSIS (Continued)
B. APPLICATION OF ECONOMETRIC MODELS 203
1. Existence of Competition 203
2. Long-Run Price Elasticity 203
C. LIMITS OF CLOSURE ANALYSIS 204
1. Mill Size and Diversity 204
2. Variability of the Decision-Making Frame of Reference 204
3. Environmentally Related Closures Versus Closures
for Other Reasons 204
4. 1983 Guideline Impact 204
D. DATA 205
APPENDIX A - ECONOMETRIC MODEL EQUATIONS 207
APPENDIX B - MILL AND PROCESS CHARACTERISTICS 227
APPENDIX C - CURRENT TECHNOLOGY CHANGES 251
APPENDIX D - CRITERIA FOR ASSIGNING MILLS TO
PROCESS/PRODUCT SECTORS 261
APPENDIX E - SUPPORTING MATERIAL FOR COST OF
COMPLIANCE AND MILL MODELS 265
APPENDIX F - FIELD INTERVIEW GUIDE FOR MILL
CLOSURE ANALYSIS 323
vn
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LIST OF TABLES
Table No. Page
1-1 Definition of Phase II Paper Industry Sectors 3
I-2 Competitive Characteristics of Major Phase II
Product Sectors 7
I-3 Relative Profitability of Major Phase II Product Sectors 8
I-4 Water Effluent Control Costs-Phase II Categories 12
1-5 Estimated Incremental Price and Output Impacts on
Phase II Sectors 14
11-1 Sales to Assets Ratios for Paper and Other Manu-
facturing Industries, 1974 18
II-2 Magnitude of all Pulp, Paper and Paperboard
Sectors-1972 22
II-3 Regional Distribution of Phase II Mills-1975 26
II-4 Capital Expenditures and Capacity Expansions for
All Pulp, Paper and Paperboard Mills, 1965-1975 30
II 5 Bleached Kraft Pulp Mill
Investment Decision Made in 1964 and 1974 32
II-6 Major Corporations Diversified into the Paper Industry 34
II-7 Price Changes and Price Increases in Selected Paper
Grades 38
II-8 Changes in Paper and Allied Products Industry
Capital Structure, 1970 1974 46
II-9 Relative Profitability of Selected Phase II Product
Sectors 47
11-10 Process/Product Relationships Woodpulp
Consumed by Type, 1973 49
11-11 Pulp and Paper Industry, Phase II Product Sectors 51
11-12 Free World Dissolving Pulp Demand by Major
Application, 1973 53
11-13 U.S. Bleached Market Pulp End Uses, 1973 54
11-14 Concentration in North American Market Pulp Supply 57
11-15 Concentration in U.S. Printing and Writing Paper Supply 63
11-16 1973 U.S. Boxboard Production
By Major Grades and Uses 67
11-17 Folding Carton End-Use Breakdown
by Tons and Dollars Shipped, 1974 68
II-18 Leading U.S. Solid Bleached Board Producers 71
11-19 Leading U.S. Recycled Boxboard Producers 72
11-20 Bleached Paperboard and Recycled Boxboard Price Trends 73
11-21 1974 Tissue Production by Product 77
IX
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LIST OF TABLES (Continued)
Table No. page
11-22 1974 Sanitary Tissue Shipments Consumer vs.
Industrial Market 78
II-23 Major U.S. Tissue Producers 80
II-24 Capacities ot Major North American Newsprint
Suppliers, 1974 85
11-25 Capacities of Major U.S. Uncoated Groundwood Paper
Suppliers, 1974 86
111-1 Pulp and Paper Industry Commitments for Net New
Capacity 1S75 - 1983 (000 Tons Per Year) 94
111-2 Existing Mill Incremental Pollution Control Cost for
Compliance with H977 Standards Fixed and
Variable Costs 96
111-3 Economic Scenarios 104
III-4 Value of Shipments and Envantories Paper and
AiSied Products 106
III-5 Characteristics of iVIifls identified as Possible Closure
Candidates in the Groundwood Process Category 130
IV-1 Costs for New Source Performance Standards
Phase 8« Ca«egorje^ 141
IV-2 Effluent Control Costs to the Existing Industry for EPT
and BAT - Phase III Categories 143
IV-3 Water Effluent Control Costs - Phase li Categories 147
IV-4 Percentage of Product Sector Production by
Process Category 148
IV-5 Percentage of Process Category Production in Each
Product Sector 149
V-1 Long-Run Price Effects Economics of New Mills
Without Pollution Controls 153
V-2 Long-Run Price Effects Economics of New Mills
in Compliance with New Source Performance
Standards 154
V-3 Price Elasticity of Demand Phase II Product Sectors
and Total Paper and Paperboard 155
V-4 Price Effect of 1977 Guidelines Assuming Full
Cost Pass-on By Existing Mills 157
V-5 Short-Run Price Effects Assuming Profit Maximization
and Marginal Cost Pricing 158
V-6 Forecast of Bleached Board and Bristols Production
and Capacity 160
V-7 Bleached Board and Bristols Two Standard Deviation
Range of Demand Forecast 161
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LIST OF TABLES (Continued)
Page
Table No.
V-8 Forecast of Printing and Writing Paper Production
and Capacity 162
V-9 Printing and Writing Paper Two Standard Deviation
Range of Demand Forecast 163
V-10 Forecast of Tissue Production and Capacity 164
V-11 Tissue Two Standard Deviation Range of Demand
Forecast 165
V-12 Forecast of Newsprint Production and Capacity 166
V-13 Newsprint Two Standard Deviation Range of Demand
Forecast 167
V-14 Forecast of Bleached Market Pulp Production and Capacity 168
V-15 Bleached Pulp Two Standard Deviation Range of Demand
Forecast 169
V-16 Results of Closure Screening Analysis 171
V-17 Closure Impact of 1977 Guidelines by Process Sector 172
V-18 Closure Impact of 1977 Guidelines by Market Sector 173
V-19 Closure Impact of 1983 Guidelines by Process Sector 175
V-20 Long-Term Closure Impact of 1983 Guidelines by
Market Sector 176
V-21 Economic Profile of Dissolving Sulfite Closure
Candidates 178
V-22 Economic Profile of Paper Grade Sulfite Mill
Closure Candidates 179
V-23 Financial Comparison of Closure Alternatives for
Alaskan Dissolving Sulfite Pulp Mill Model 180
V-24 Financial Comparison of Closure Alernatives for
Paper Grade Sulfite Pup! Mill Model 181
V-25 Economic Profile of Groundwood Paper Mill
Closure Candidates 183
V-26 Financial Comparison of Closure Alternatives for
Small Groundwood Pulp Mill Model 185
V-27 Economic Profile of Deinking Mill Closure Candidates 186
V-28 Financial Comparison of Closure Alternatives for
Small Deinked Pulp Mill Model 187
V-29 Economic Profile for Noniritegrated Tissue Mill
Closure Candidates 189
V-30 Financial Comparison of Closure Alternatives for
Nonintegrated Tissue Mill Model 190
V-31 Inter-Country Comparison of Water Pollution Control
Expenditures 192
V-32 Assumed Inter-Country Water Pollution Control Cost
Differentials 1977-1983 193
XI
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LIST OF TABLES (Continued)
Table No. Page
V-33 Bleached Softwood Kraft Pulp Cost Differentials
Landed in Germany from Southeast U.S. and Sweden 195
V-34 Suit'ite Dissolving Pulp Cost Differentials Landed in
Germany from Southeast U.S. and Sweden 196
V-35 Newsprint Cost Differentials in U.S. Midwest from
Southeast U.S. and Western Canada 198
V-36 Bleached Softwood Kraft Pulp Cost Differentials in
U.S. Midwest from Southeast U.S. and Western Canada 199
XII
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LIST OF FIGURES
Figure No. Page
1-1 Procedural Framework for Estimating Economic Impact 11
11-1 Major Pulp and Paper iVianufacturing Sector Suppliers and
Customers 20
11-2 Year-end Capacities for Virgin Puip and Papermaking
by Region - 1973 25
II-3 Paper and Paperboard Wholesale Price Index vs.
Capacity Utilisation ara-tS all Commodity Price Index 35
II-4 Percent sMet Prof5; .- *icer fan to Net Saies 41
I-5 Pei-cant Net Prof:. Alter Tax to Net Vi/orth 42
il-6 Percent Mat Worth to Total CapitaS 45
11-7 Steadied Paper Puip Market Price Versus Capacity
Utilization 58
lf-8 Dissolving Pulp ii/sarket P tea Versus U.S. Capacity
Utilization 59
119 Printing and Writing Paper Market Price
Versus Capacity Utilization 65
11-10 Bleached Boards and Bristois Market Price
Versus Capacity Utilization 75
11-11 Tissue IViark£\ !lnce Versus Capacity Utilization 82
II-12 Newsprint Market Price Versus Capac't" Utilization 88
II1-1 Procedural Framework, 'or Estimating Economic
Impact 91
Ill-l? Procedure for Estimating Price Effects of Compliance
with 1977 Standards (BPT) 93
Ill-c Procedure tor Estimating Price Effects of 1983
Standards (BAT) 97
III-4 Procedure for the Mill Closure Analysis 99
III-5 Procedure for Estimating Balance-Of-Trade Effects 101
111-6 Econometric Model Supply and Demand Functions
Bleached Boards and Btistois 110
III-7 Econometric Model Supply and Demand Functions
Printing and Writing Paper 111
111-8 Econometric Model Supply and Demand Functions
Tissue 112
III-9 Econometric Mode! Supply and Demand Functions
Newsprint 114
111-10 Econometric Model Supply and Demand Functions
Bieached Market Pulp 115
111-11 Econometric Model Supply and Demand Functions
Dissolving Pulp 116
111-12 Alternative Treatment Systems 126
xiii
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PREFACE
The attached document is a contractor's study prepared with the supervision and
review of the Office of Planning and Evaluation of the U.S. Environmental Protection
Agency (EPA). Its purpose is to provide a basis for evaluating the potential economic impact
of effluent limitations guidelines and Standards of performance established by EPA pursuant
to sections 304(b) and 306 of the Federal Water Pollution Control Act.
The study supplements an EPA technical "Development Document" issued in conjunc-
tion w:th the promulgation of guidelines and standards for point sources within this
industry category. The Development Document surveys existing and potential waste treat-
ment ard control methods and technologies within this category and presents the invest-
ment and operating costs associated with various control technologies. This study supple-
ments that analysis by estimating the broader economic effects (including product price
increases, continued viability of affected plants, employment, industry growth and foreign
trade) of the required application of certain of these control technologies
This study has been submitted in fulfillment of Contract No. 68-01-2841, Task No. 12
by Arthur D. Little, Inc. Work was completed as of January 1976.
This report represents the conclusions of the contractor. It has been reviewed by the
Office of Planning and Evaluation and approved for publication. Approval does not signify
that the contents necessarily reflect the views of the Environmental Protection Agency. The
study has been considered, together with the Development Document, information received
in the form of public comments on the proposed regulation, and other materials in the
establishment of final effluent limitations guidelines and standards of performance.
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CHAPTER I
EXECUTIVE SUMMARY
A. INTRODUCTION
Under the Federal Water Pollution Control Act Amendments of 1972, the Environ-
mental Protection Agency has proposed effluent guidelines for new mills and standards to
be achieved by existing mills by 1983; it has also promulgated interim final standards for
1977 for selected sectors of the U.S. pulp and paper industry. These sectors, referred to in
this report as the Phase II sectors, include the following pulping and papermaking processes:
Bleached Kraft
Groundwood
Sulfite
Soda
Deinked
Nonintegrated Paper (Printing, Writing, and Tissue)
The Phase II sectors include primarily bleached and groundwood pulp, paper and
paperboaid products. The Phase I sectors, for which water effluent guidelines have been
promulgated previously, encompass the industry's unbleached paper and paperboard prod-
ucts. Several industry sectors are not covered in the Phase I or II sectors: coarse papers
(e.g., bag and industrial papers) made in mills not integrated to pulp, pulp and paper made
from cotton, molded pulp products (e.g., egg cartons) and all converting operations (e.g.,
boxes, bags, stationery) that are separated from the paper mills.
The erTJuent guidelines that have been proposed or promulgated define three levels of
technology best practicable technology currently available (BPT), to be met by 1977; best
available technology economically achievable (BAT), to be met by 1983; and new source
performance standards (NSPS), to be applied to all new facilities (which discharge directly to
navigable waters) constructed after the guidelines' promulgation.
The purpose of this report is to assess the potential economic impacts of the incre-
mental costs of these guidelines on the Phase II industry segments they affect and on the
economy as a whole. The impacts it specifically addresses are:
Price Effects
Closure and Production Effects
Short-Term Capacity Constraints
Ba ance of Trade
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B. FINDINGS AND CONCLUSIONS
1. Industry Segmentation
The entire paper and allied products industry had sales of $31 billion in 1974, ranked
tenth among the 15 major U.S. manufacturing industries and accounted for about 4% of the
total shipment value of U.S. manufacturing output. This industry encompasses not only the
primary production of wood pulp, regenerated wastepaper, and paper and paperboard
products, but also the conversion of these products into end products such as boxes, writing
stationery and sanitary tissue. It employs 718,000 people, 0.9% of the total U.S. working
force, and the book value of its total assets is $22 billion. The industry is the third largest
user of water mainly for the primary processing of pulp, paper, and paperboard and
accounts for roughly 14% of the water used by all manufacturing establishments.
In 1972, the industry's primary production sectors (i.e., excluding converting opera-
tions separated from mills) encompassed 787 pulp, paper and paperboard mills which
employed 221,000 people and had gross fixed assets of $14 billion. The Phase II segment
includes 270 of these mills which account for about 45% of the industry's primary product
production and employ 120,000-130,000 people including those associated with converting
tissue and coated paper on-site.
For purposes of establishing water effluent limitations, the EPA has categorized the
Phase II according to pulping and nonintegrated papermaking processes so as to group mills
that have similar water effluent problems. In assessing economic impacts, however, it was
necessary to analyze the products produced and markets served by these processes. Table 1-1
shows the product/process relationships in the Phase II sectors.
2. Economic Characteristics
The most important economic characteristics of the paper industry considered in the
impact analysis were as follows:
Demand
Industry is mature; growth has paralleled GNP and may grow more slowly
because of price increases and substitution.
Price elasticity of demand (intermediate term) is low (Phase II sectors cluster
around 0.5); paper's utilitarian uses and low share of disposable personal
income are key factors.
Substitute materials affect only three Phase II products, bleached board,
bleached packaging papers and tissue; however, price cross-elasticities are not
statistically significantly because prices have generally changed at about the
same rates.
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TABLE 1-1
DEFINITION OF PHASE II PAPER INDUSTRY SECTORS
Sector
Number of
Mills
Bleached Kraft Pulp, Paper and 80
Paperboard
Primary Products Produced
Market and Dissolving Pulp
Bleached Board and Bristols
Bleached Packaging Paper
Newsprint and Groundwood Paper
Printing and Writing Paper
Tissue
Sulphite Pulp and Paper
28
Market and Dissolving Pulp
Newsprint and Groundwood Paper
Printing and Writing Paper
Tissue
Groundwood Pulp and Paper
21
Newsprint
Groundwood Papers
Deinked Pulp and Paper
37
Tissue
Printing and Writing Paper
Newsprint
Soda Pulp and Paper
Printing and Writing Paper
Nonintegrated Tissue
59
Tissue
Nonintegrated Printing and Writing 42
Paper
TOTAL
270
Printing and Writing Paper
SOURCE: Arthur D. Little, Inc.
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Supply
Industry is capital intensive; in 1974 it ranked ninth (after steel) among all
industries based on sales-to-book assets of 1.43.
Capital requirements for economic size mills and woodland ownership have
risen sharply; for example, a 1974 bleached kraft pulp mill cost $280 million
versus $55 million in 1964.
Capital intensity plus scarcity of sites has limited entry to the industry to
acquisitions of existing mills.
Capacity expansion rates were significantly reduced beginning in 1970 as a
result of rising capital requirements, mill site constraints, low profitability,
high debt levels, and to some extent, redirecting capital to pollution control.
Increasing industry concentration will result from a combination of the
above factors plus closures of marginal mills.
Prices
Prices were generally stable from 1960 to 1972* because of:
Nearly continuous excess capacity as producers emphasized market
share expansion to utilize their woodland and mill resources more fully.
-- Productivity improvements that averaged about 4% per year.
Low inflation rates for raw materials, energy and labor.
Unprecedented rapid price increases (averaging 40%) in 1973 and 1974 were
caused by:
Unusually high operating rates (a surrogate for supply/demand equilib-
rium) as a demand surge coincided with a reduced rate of capacity
expansion.
Lower productivity improvement rate and accumulating cost inflation
which could not be passed on in price increases in the weak 1970-1972
markets.
*i.e., current prices; relative (real) prices declined.
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- lifting of price controls partially in March and fully in June 1974,
which allowed the producers to both recoup their cost inflation and
expand their profit margins to all-time highs.
Price movements in most sectors appear to approach a model of pure
competition. Oligopolistic price leadership behavior is indicated in the fol-
lowing Phase II products:
Dissolving pulp
Bleached paper pulp
Newsprint
Bleached board
3. Financial Performance
Paper industry profitability has exhibited a cyclical pattern which is most sensitive to
capacity utilization rates.
Throughout most of the 1960's, the paper industry's profitability was below the
all-industry average as it increased capacity at a rate that generally kept operating rates well
below maximum plant capacity. As discussed earlier, there were a number of reasons for the
over-supply pattern including a race to acquire the dwindling number of mill sites and
backup woodlands, competition for market share in markets that were beginning to mature,
and extremely low prices for market pulp mainly because of capacity over-expansion in
Canada.
In 1970 and 1971, the paper industry's after-tax return (both on sales and capital) fell
!o its lowest point since World War II. The period of over-capacity and weak prices in trie
1960's laid the foundation. Demand for paper declined slightly as a result of the 1970
recession and the industry's capacity expansions brought its capacify utili/.ation to around
90%.
Improved mill operating rates and higher prices throughout the paper industry in
1972-1974 caused an up-turn in profitability. By 1974, profitability reached its highest
point since World War II and climbed well above the all-manufacturing industry average. The
industry's operating rates approached, and in some cases, exceeded maximum sustainable
levels for such items as bleached market pulp, newsprint, linerboard, printing papers, and
tissue. The fundamental reason for the tight supply itself was that the industry began to
slow its rate of capacity expansion starting in 1970, which in turn caused the industry's
capacity to be stretched by the up-turn in demand that took place from 1972 through
mid-1974.
The recession which began in the second half of 1974 caused a decline in the paper
industry's profitability as a result of low mill operating rates as paper demand declined at a
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faster rate than GNP. However, there was very little price deterioration. Thus, while
profitability declined, it held up surprisingly well compared with previous serious recessions.
Producers took advantage of their higher profitability and breakeven points to curtail
production temporarily rather than risk price reductions which might be difficult to recoup,
especially if price controls are imposed when the economy recovers.
Between 1960 and 1974, the industry's long-term debt climbed from 17% to 32% of its
total capital. There was no net increase in equity financing. As a result, all of the industry's
increases in net worth came from retained earnings.
H. Competitive Characteristics of Phase II Product Sectors
Table 1-2 summarizes the current size, competition and price elasticity calculations for
the major Phase II product sectors. The greatest degree of market share concentration
occurs in the dissolving pulp, newsprint, and paper pulp sectors. However, extensive
competition, mainly from Canadians, counteracts in part the oligopolistic tendencies in
these markets. The bleached board and tissue markets are less highly concentrated domesti-
cally, but experience no foreign competition. Most nearly approaching tne purely competi-
tive model is the printing and writing paper sector. However, even here, a multiplicity of
paper qualities and brand name identities introduce departures from the theoretical eco-
nomic model. Chapter II details the supply/demand/price characteristics of each of the
Phase II product sectors.
Table 1-3 shows ADL estimates of the current relative profitability of the major Phase
II product sectors based on the economics of new mills on-stream in 1975. This indicates
that bleached paper pulp is clearly the most profitable sector at present. The profitability
index for printing/writing papers is deceptively high in that the mid-1975 operating rate for
this sector was about 75% rather than the 90%- rate used to standardize the analysis. Its
actual profitability is probably close to the industry median. Deinked tissue is the least
profitable sector in which new mills are likely to be built. However, existing nonintegrated
printing/writing and tissue mills are even less profitable since they are caught in a cost-price
squeeze between high pulp costs and depressed end product prices. It is unlikely that new
nonintegrated mills will be built under these conditions; hence new mill models were not
developed.
5. Methodology Overview
The methodology employed in this analysis was designed to measure the following
primary short- and long-run impacts of Federal water pollution control regulations.
Short-Run Impacts
Mill closures.
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TABLE 1-3
RELATIVE PROFITABILITY OF MAJOR PHASE II PRODUCT SECTORS
(Basis: Model of New Mills in Mid-1975)
Selling Profitability
Product Sector Price Index*
($/ton)
Bleached Softwood Kraft Pulp 335 13.8
Printing and Writing (Integrated 480 12.4
to Kraft)
Dissolving Pulp (Sulfite) 385 9.7
Newsprint (Deinked) 260 8.4
Tissue (Integrated to Kraft) 736 7.8
Bleached Paperboard (Integrated 350 7.5
to Kraft)
Newsprint (Integrated to Ground- 260 6.4
wood and Kraft)
Tissue (Deinked) 736 3.6
*Pre-tax profits divided by total capital assuming mills have annual operating
rates of 90%. Costs included estimates to meet 1977 standards for water and
air effluents and current OSHA requirements.
SOURCE: Arthur D. Little, Inc., estimates.
-------
Increase in price because of:
Potential shortages (tight capacity) from mill closures in next three
years.
- Shifts in the supply curve as a result of closures and the increase in cost
due to pollution abatement.
Reduction in quantity demanded as a result of the price increase.
Long-Run Impacts
Price increase which may be of different magnitude than that which occurs
in the short run.
Change in the balance of trade because of international differences in
pollution control requirements.
The following economic impacts are beyond the scope of this report:
Secondary effects on customers and suppliers of raw materials, pollution
control equipment, etc.
Long-run changes in demand, industry concentration, and aggregate capital
requirements.
Four disciplines were used in the assessment of the impact upon the paper industry of
compliance with water effluent guidelines:
Econometrics
Engineering
Business Analysis
Financial Analysis
Through econometrics, the parameters of a demand schedule and a supnly schedule for
the major product sectors were estimated to determine the price and output impacts due to
increased pollution abatement costs.
Engineering process economics were used to estimate the capital and operating cost
structure of new and existing mills, as well as the capital and operating costs of compliance
with water effluent guidelines, OSHA noise abatement requiremenis, and air emission
regulations.
-------
Business analysis methods were used to develop the judgmental inputs necessary in the
screening of all mills to identify closure candidates, weighing the feedback obtained from
interviewing management of potentially threatened mills and assessing inter-country pollu-
tion and production cost differential effects in the balance of trade analysis.
Financial analysis techniques were used to analyze the cash flow behavior of mill
closure prospects and the long-term price required to attract and maintain capital in the
industry.
The overall structure of the procedural framework and the interrelationship of the
disciplines employed are presented in Figure 1-1.
6. Costs of Compliance
Based on cost estimates for typical mills presented in the Development Document, the
incremental capital requirement to meet water effluent guidelines in the Phase II sectors
starting in 1974 is $1.6 billion for BPT (1977) and an additional $1.0 billion for BAT
(1983) for a total of $2.6 billion (1975 dollars). Since the Phase II sectors amount to some
40 million tons, the average capital increment is equivalent to about $65 per annual ton of
existing capacity.
Average annual operating costs for BPT (excluding depreciation and interest charges on
capital for water effluent control) range from about $3.40/ton (nonintegrated printing/
writing) to $10.00/ton (dissolving sulfite). Incremental operating costs for BAT run from
$1.80 per ton (deinked) to $4.10 per ton (dissolving sulfite).
Table 1-4 lists water effluent control costs for existing and new mills in each major
Phase 11 process sector. The impact analysis employed these cost estimates to assess the
economic impact of the Phase II sector guidelines.
7. Economic Impacts
The significant findings of the analysis of prices, output, capacity and international
trade as affected by the water effluent guidelines are as follows:
Short-term Closures Eight mills are projected to close because of 1977
pollution control requirements, resulting in the loss of 3% of bleached
market paper pulp capacity and 2.4% of printing and writing paper capacity.
Capacity removals in the four remaining Phase II product sectors is expected
to be minimal relative to total U.S. capacity. Estimated total direct unem-
ployment resulting from these closures is about 1,800 people, or 1.4% of
current Phase II sector employment.
10
-------
FIGURE 1-1
PROCEDURAL FRAMEWORK FOR
ESTIMATING ECONOMIC IMPACT
Process
Economics
Cost
Analysis
Cost
of
Compliance
Mill
Models
Economic
Scenario
Micro-Economic
Analysis
- Econometrics
Industry
Commitmen
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teristic
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Mill
Closures
Cost
of
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Quantity
Effects
Closure Analysis
- Business Analysis
- Discounted Cash
Flow
Foreign
Pollution
Control
Costs
Comparative
Cost
Analysis
Exogenous to Study
Analysis
Result
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Long-Term Closures- An additional 15 mills, representing about 1.6% of
Phase II product capacity, are projected to close if the proposed 1983
guidelines are adopted. The nonintegrated printing/writing, and tissue paper
sectors would feel the greatest impacts. These projections, however, are
much less certain than the corresponding estimates for the 1977 guidelines.
Short-Run Shortages - No water pollution-related capacity shortages which
lead to upward price pressures are expected in the next three years. Sensitiv-
ity analysis indicated that shortage conditions could exist by considering
either the optimistic GNP growth scenario or the inherent prediction ac-
curacy of the demand equations. Only in the case of bleached market pulp
did pollution-control-related closures contribute to a shortage situation in the
upper boundary of the demand forecast; in this case, the estimated total
price effect was an additional 3% over the pollution control cost effect.
Short-Run Price Effects The short-run price effect of compliance with
1977 standards is around 1% under the perfectly competitive model and
around 3% under the total cost recovery model (Table 1-5). It is difficult tc
identify which model applies better to specific product sectors.
Price Elasticities of Demand - The short-run price elasticities, for total paper
and paperboard as well as the Phase II product sectors, are low as expected.
In general, the sector demand elasticities are not significantly different from
each other. Long-run price elasticities cannot be adequately measured until
the output effects from recent large price increases become apparent.
Long-Run Price Effects The estimated long-run price effects are likely to
range between 3% and 7% depending upon the product sector.
Balance of Trade Pollution control requirements in the major paper
producing regions are comparable to U.S. 1977 effluent guidelines (although
compliance timetables are generally longer). No other foreign competitor,
however, is currently considering requirements as stringent as BAT (1983).
However, the difference in control requirements caused by the proposed
BAT guideline should not significantly change the relative cost advantage of
U.S. mills. Thus the U.S. trade balance in the Phase II product sectors should
not be changed significantly by the proposed guidelines.
8. Limitations of Economic Impact Analysis
Engineering Costs
The Phase II sectors include 270 pulp and paper mills. There is considerable
variation among these mills in size, product mix, cost structure and extent of
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compliance with water effluent standards. Therefore, specific mill costs may
vary considerably from the generalized cost models employed in this
analysis. Moreover, the effluent control cost data provided in the Develop-
ment Document is useful only in assessing overall industry costs or aggregate
costs for subcategories containing a large number of mills. When cost
estimates are applied to individual mills or small subcategories, they are
subject to a great deal of variation. The actual capital cost for an
individual mill could range from 1/2 to 2 times the gereralized cost esti-
mates. Technology developments during the forecast period could also
increase mill-to-mill cost variations while reducing average control costs.
Application of Econometric Models
The econometric models developed in this study are based upon the assump-
tion that both industry and product sectors behave competitively. Several
sectors may not meet this assumption because of supplier concentration and
pricing behavior. Under these circumstances, the price effect of pollution
control expenditures could be greater or less thai) indicated in the analysis of
these sectors.
Long-run Price Elasticity
The price increases which occurred in 1973 and 1974 have been unprece-
dented in the paper industry. The coefficients of price elasticity do not reflect
the longer term shifts which may occur in the future, because of substitution
or other price related effects.
Economic Scenarios
The impact of water effluent guidelines upon an industry is to some degree a
function of general economic conditions which prevail during the impact
period. ADL used two scenarios for the analyses contained in this report. If
actual economic conditions are substantially different from these scenarios,
the impacts will differ.
Closure Analysis
Since ADL did not specifically analyze each mill within the scope of this
study, its approach was not designed to predict and identify specific closure
candidates, but rather to estimate overall closure impact. Also, since the
majority of the mills severely impacted by pollution control regulations are
marginal operations, it is difficult to separate environmentally related
closures from closures that would have occurred regardless of pollution
control requirements.
15
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Data
In general, the paper industry statistics are better for econometric research
than those of most other industries, but there are some limitations. There
were significant shifts in technology in the paper industry during the 1950's,
so using a time period from 1950 to 1975 would mean using periods in
which the industry technologically was significantly different. For this
reason, the starting point of 1960 was chosen.
However, the industry redefined its product groups during the mid-60's.
Hence it was necessary to break down product categories before and after
that date and reaggregate them to the product groupings described above. It
also meant that prior to 1967 or 1968, for many of the product sectors,
annual, rather than quarterly, data were the only reliable information avail-
able. The change in industry reporting necessitated the use of judgment in
some cases.
16
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II. INDUSTRY DESCRIPTION
The purpose of this chapter is to provide sufficient information about the pulp, paper,
and paperboard industry to permit people unacquainted with the industry to make in-
formed judgments about its relative importance to the U.S. economy and about the
economic impact methodology and findings developed in the succeeding chapters. Essen-
tially, the objective is to describe the industry and its major subdivisions in relevant
economic terms that can be related to the methodology used for the impact analyses.
A. TOTAL INDUSTRY PROFILE
1. Distinguishing Characteristics
With sales of about $31 billion in 1974, the paper and allied products industry ranked
tenth among the fifteen major U.S. manufacturing industries and accounted for about 4% of
the total shipment value of U.S. manufacturing output. This industry encompasses the
production and sale of pulp derived from wood and other fibrous raw materials, manu-
facturing paper and paperboard products from pulp and wastepaper and converting these
products into end products such as boxes, writing stationery, and sanitary tissue. The
industry employs 718,000 people or 0.9% of the total U.S. working force (3.7% of
manufacturing industry employment) and has total assets at book value of $22 billion.
While the industry generates about 50% of its own heat and power requirements, it is
nevertheless the third largest purchaser of electricity and fuels among all U.S. industries and
in 1971 accounted for about 10% of total industrial energy purchases.
The industry was also the third largest user of water according to the 1968 Census,
accounting for roughly 14% of the water consumed by manufacturing establishments that
year. Most of the paper industry's water use is for processing of wood pulp and as the
medium for carrying the pulp to produce paper and paperboard. In contrast, most water use
in other manufacturing industries is for cooling and boiler feed where the water is not
intermingled with the product thus mitigating the associated pollution problems.
The paper industry also is one of the more highly capital intensive and vertically
integrated industries. With its sales-to-assets (book) ratio of 1.43 in 1974, the paper industry
ranked ninth highest among all U.S. industries (Table II-l). This measurement, however.
understates the true relative asset size of the paper industry. Many companies have
substantial timberland properties that are evaluated on their books at original purchase
prices which are well below present market value.
As for vertical integration, about 72% of current U.S. pulp, paper, and paperboard
production comes from mills that are integrated in three tiers: 1) control of a portion of
the woodlands required for their wood supply, 2) pulping, and 3) paper and paperboard
production operations. Nonintegrated paper and paperboard mills which do not have any
17
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TABLE II-l
SALES TO ASSETS RATIOS FOR PAPER AND OTHER MANUFACTURING INDUSTRIES. 1974
Sales/Assets*
Petroleum and Coal Products 1.15
Instruments and Related 1.16
Machinery Except Electrical 1.28
Chemicals and Allied Products 1.30
Stone, Clay and Glass Products 1.35
Nonferrous Metals 1.36
Electrical and Electric Equipment 1.42
Iron and Steel 1.42
Paper and Allied Products 1.43
Transporation Equipment 1.51
Printing and Publishing 1.55
Rubber and Miscellaneous Plastics Products 1.56
Textile Mill Products 1.72
Other Durable Manufacturing Products 1.74
Fabricated Metal Products 1.82
Other Nondurable Manufacturing Products 2.23
Food and Kindred Products 2.53
*Ratios are based on data for the second quarter of 1974, assets are at
book value.
SOURCE: Federal Trade Commission, Quarterly Financial Report for
Corporations.
18
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pulping or woodlands operations supply the remaining 28% of industry production. How-
ever, most of the integrated mills and many nonintegrated mills are further integrated to
converting their paper or paperboard to products such as stationery, tissue and boxes. Thus,
the typical paper company is integrated to three or four levels.
Considering its capital intensiveness and the apparent advantages of vertical integration,
this industry is relatively fragmented in terms of the number of companies and number of
plants that operate within it. Approximately 410 companies operate 720 pulp, paper or
paperboard mills or mill complexes. The converting sectors of the industry are even more
iVagmented. The degree of concentration, however, varies considerably among the industry's
various product sectors, as described in Section B. There has been no pronounced trend
toward increasing concentration for the aggregate production of pulp, paper, and paper-
board.
In 1973, the United States accounted for about 36% of the world's production and
39% of total world consumption of paper and paperboard products. Thus, while the country
is a large exporter (mainly pulp and kraft linerboard), on balance it is a net importer,
primarily because of the large amounts of newsprint and pulp it imports from Canada.
2. Links to Major Supplier and Customer Industries
Figure II-1 shows the SIC code designation of the primary paper industry product
sectors and their relationship to both supplier and user industries. The paper industry's
primary materials are logs and residues from sawmill and plywood operations which are used
in combination with cooking and bleaching chemicals to make wood pulp. Wastepaper is
also an important raw material, particularly in the paperboard and building paper sectors.
The chief customers of the paper and paperboard sectors are producers of paperboard
containers and boxes and a variety of converted paper and paperboard products who sell
their products primarily to the printing and publishing industry, to the producers of durable
and nondurable goods and food, and to the consumer market through wholesale and retail
channels.
Vertical integration takes a variety of forms within the pulp and paper industry. For
example, companies operating wood pulp mills usually own or control through leases a
portion of the woodlands that supply their pulpwood. The wood pulp mills also usually
employ their own logging crews and often operate sawmills and plywood mills to obtain the
highest return on their timber while controlling at least part of the pulpwood supply
required for their mills. A few companies also produce a portion of their pulping and
bleaching chemicals. Most large scale paper mills and paperboard mills are integrated to an
on-site pulp supply except for those mills that use wastepaper exclusively. Also, most paper
and paperboard producers convert some or all of their primary production into end
products such as boxes, stationery, etc. Few pulp and paper companies, however, are
engaged in printing and publishing or retail distribution of paper products.
19
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3. Definition of Industry Sectors to be Analyzed
This analysis focuses on certain sectors of the paper industry that involve the produc-
tion of pulp and primary paper and paperboard products. Converting operations are
included only to the extent that some converting (predominantly tissue and printing/writing
paper) is usually done at the paper mill site; thus, in these cases, the employment and value
added for converting is directly related to the mill's paper production level. All other
converting operations that are generally separated from the paper mills (such as containers,
boxes, and bags) were excluded. Converting operations generally have relatively minimal
pollution problems and will be subject to a different set of effluent guidelines and
regulations than the paper and paperboard sectors.
Table II-2 provides an overview of all primary sectors of the pulp and paper industry in
terms of 1972 U.S. Department of Commerce data. A total of 787 plants with gross fixed
assets of about $14 billion employ about 220,000 people to produce products worth about
$1 2 bill on annually. Since the total paper and allied products industry had sales of $23.3
billion in 1972, the primary processing sectors had a value of shipments amounting to about
half of the total industry's shipments.
The largest primary sectors are paper mills and paperboard mills. Most of the produc-
tion in both these sectors comes from mills integrated to their own on-site pulp production.
However, many mills, particularly in the paper sector, rely on purchased "market" pulp and
wastepaper for their raw material.
The so-called "market" pulp mills make either paper grade pulp, dissolving pulp, or a
combination of both. Paper grade pulp, an intermediate product, is sold primarily to
nonintegrated or partially integrated paper mills. A substantial amount of market pulp is
sold by pulp mills that are integrated to paper or paperboard. In 1972, the total value of
pulp shipped by all market pulp producers was $1.1 billion, of which $658 million, or 58%,
was shipped by plants in the pulp mills sector (SIC 2611) while the remaining 42% was
shipped by mills classified as paper mills (SIC 2621) or paperboard mills (SIC 2631).
Within the primary product segments, the specific Phase II sectors analyzed in this
report include the following pulp and papermaking processes:
Number of
Process Sector Mills, 1975 1974 Capacity
Bleached Kraft Pulp, Paper and Paperboard 80 26,400
Sulfite Pulp and Paper 28 4,100
Soda Pulp and Paper 3 290
Grouidwood Pulp and Paper 21 2,800
Deirued Pulp and Paper 37 2,400
Nonintegrated Tissue 59 1,700
Nonintegrated Printing and Writing Paper _42_ 2,400
Total 270 40,090
21
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TABLE II-2
MAGNITUDE OF ALL*PULP, PAPER AND PAPERBOARD SECTORS - 1972
a
Number of Number of Value of Gross Value Shipments/
Sector Plants Employees Shipments Fixed Assets Assets Ratio
($ million) ($ million)
Paper Mills 358 130,000 6,400 7,600 0.84
Paperboard Mills 276 68,000 4,100 4,400 0.93
Building Paper 95 12,000 470 400 1.18
and Board Mills
'Market" Pulp 58 11,000 690 1,600 0.43
Mills
TOTAL 787 221,000 11,600 14,OOC 0.83
o
1971 data; 1972 data not yet available.
SOURCE: 1972 Preliminary Census of Manufactures, U.S. Department of Commerce.
22
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The bleached kraft process is employed in all the major primary product sectors except
building paper and board and is by far the largest of t,v? Phase JI sectors. It is used to
produce dissolving pulp and paper grade puJp that in turn is employed in bleached
paperboard, bleached packaging papers, newspri il ar«d other groundv/ood content papers,
tissue and priming and writing papers.
The sulfitc process competes directly with kraft in the paper and dissolving pulp
markets and in producing newsprint, ground wooa papers, tissue and printing and writing
papers. This process is being displaced gradually by kraft. Similaily, the third chemical
pulping process, soda, has been displaced aiinost '-omplefeiy by kraft. Only three mills now
use it exclusively for printing and writing oaperi
Groundwood processes primarily are "sej to produce newsprint and both coated and
uncoated groundwood papers. A minor application, molded pulp, has been excluded from
the Phase II guidelines and analysis.
Deinking of wastepaper is finding increasing use in producing newsprint, tissue and
printing and writing papers, it is often tiie on'y feasible means foi noniritegraled mills to
become partially integrated to pulp and thus ieduce then filler costs.
For the Phase II guidelines, nonintegrated raj..er making is subdivided into two product
sectors: tissue and printing and writing papers. Coarse papers, such as bag and special
industrial papers made in nonintegrated mills, were ex,:k'ded, since the variability between
mills is so great.
Mills that produce pulp from coitori were also excluded from the Phase II guidelines
and therefore from the analysis. Cotton linters or rag pulp finds its major use in printing-
writing ana special industrial papers.
In sum the Phase II process sectors include 3'-"% of the industry's mills, and 45% of its
primary product production and employ 120,000-130,000 people including workers asso-
ciated with converting tissue and coated paper at the mill site.
4. Geographical Distribution
The U.S. pulp and paper industry began in New England1 in the 1800's with the
development of groundwood pulping, sulfite pulping, and papeimaking to supply the
growing paper needs of the Northeast. The proximity of the expanding population centers
to water and high-quality softwood pulpwood lescurces in northern New England and New
York state were key contributing factors to the early development of the industry.
Gradually, however, the need for substantial wood supplies for pulping (as well as for
lumber and plywood) outstripped the capabilities of the Northeastern area. Many of the
mills, particularly those nearest the population centers, closed their pulping facilities and
23
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turned to purchased pulp or, in some cases, deinked wastepaper for their fiber requirements.
As this trend took place, the population spread west; the pulp and paper industry also
moved its production base westward to the North Central states and then to the Pacific
Northwest and the South.
The movement to the South in the late 1930's was prompted by the commercialization
of the kraft process, which enabled mills to use the resinous wood that grows there. The
industry flourished in that region because of the availability of low-cost wood, favorable
timberland acquisitions from defunct lumber companies during the depression, plentiful
fossil fuel, and a lower cost area for new industrial construction than in the Northeast.
About 64% of the industry's pulping capacity and 49% of its papermaking capacity are now
located in the South (Figure 11-2).
Because of this pattern of development, the older, smaller, nonintegrated and generally
less productive mills tend to be located in the Northeastern and North Central states, while
the newer, larger, and integrated mills are located in the South and Pacific Northwest.
Table II-3 shows the regional distribution of the Phase II sector mills, which follows
the total industry pattern described above. Note that mills using the more modern bleached
kraft process are distributed primarily in the South and West and are generally the largest
mills. Conversely, most of the remaining Phase II process sectors tend to be concentrated
heavily in the Northeastern and North Central regions. Th:s implies that significant numbers
of older and less piofitable mills that may have difficulty in obtaining capital to meet
pollution regulations are likely to be found in these sectors.
5. General Economic Characteristics
This section deals with the salient characteristics of demand, supply, prices, and general
competitive characteristics of the pulp and paper industry.
a. Demand
As a whole, pulp and paper is a mature industry in that the total demand for its
products has grown at only about the same rate as the GNP in real terms. In fact, only a few
product sectors are growing faster than GNP. There are also indications that the industry
may have begun to grow more slowly than GNP because of recent rapid price increases,
saturation of per capita consumption potential and substitution by competing products. At
the same time, entry to the industry and expansion of capacity are becoming more difficult,
making it more likely that consumption will be constrained by capacity and that paper
prices will nse more rapidly than the wholesale price index.
U.S. demand is best determined by measuring the tons of paper and paperboard
products consumed, consumption being calculated from domestic production plus imports
less exports. For most products, producer inventories are relatively small; in any case there
24
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30
2 20
o
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15
u
10
rr~.T~!°) Virgin Pulping Capacity
'Stj Papermakintj Capacity
Northeast
F-Jortn Centra!
South
Pacific Northwest
Source: "Paper/PaperboardA/Vood Pulo Capacity," API.
FIGURE l!~2 YEAR-END CAPACITIES FOR VIRGIN PULP
AND PAPERMAKING, BY RflGION - 1973
25
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is little data that accurately measures inventory changes for paper products particularly by
customers. U.S. per capita consumption of paper and paperboard products is significantly
higher than that of any other country. In 1972, for example, U.S. annual per capita
consumption was 615 pounds; the next closest country was Sweden at 426 pounds and
Canada was third at 366 pounds. Per capita consumption in the under-developed regions is
well under 100 pounds.
Traditionally, total U.S. consumption of paper and paperboard oroducts has correlated
closely with real GNP. This is not surprising since paper and its related products are used in
virtually all sectors of the economy. As will be discussed in Section II-B, consumption
trends for some product groups have correlated better with other macroeconomic indices
such as disposable personal income and the industrial production index than with GNP.
It is generally believed that demand for most of the industry's products is inelastic or
relatively insensitive to price changes. Key supporting factors are that few substitute
products compete directly with paper and that direct or indirect expenditures on paper
products represent a small portion of the consumer's total disposable income. The eco-
nometric analysis employed in this study indicates that nearly all the Phase II product
sectors have short- to intermediate-term price elasticities of demand less than 0.5. Long-term
price elasticities were not determined because until recently there have been no large relative
price changes.
Few substitute materials compete directly with paper and paperboard products. In the
Phase II sectors, only tissue, bleached paperboard and bleached packaging papers are
affected. Tissue products have displaced reuseable cloth towels, napkins and handkerchiefs,
in achieving their relatively high rate of growth in the 1960's. The growth rate of bleached
paperboard has diminished primarily because of substitution by plastic products in pack-
aging milk and other dairy products and in disposable plates, cups, and trays. Bleached
packaging papers have been growing very slowly, primarily because of substitution by
certain plastic films and to a lesser extent, cellophane.
On the raw materials side, bleached market pulp competes with the so-called "pulp
substitute" grades of wastepaper, primarily in the production of printing and writing papers
and tissue. It also competes to a limited degree with cotton fibers in certain high-quality
writing papers. There are no direct substitutes for dissolving pulp but its primary applica-
tions, cellulosic fibers and cellophane, compete strongly with fibers and films derived from
petroleum products.
The econometric analysis of all Phase II sectors where substitute products are impor-
tant indicates, howeve;, that the price cross-elasticities were not statistically significant,
primarily because the prices of the substitute products have moved upward at about the
same rate as those of the paper industry products.
27
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Historically, paper prices actually declined relative to the wholesale price and GNP
deflator indices during 1960-72; this probably stimulated demand and the consumption
correlation with GNP might not have held had real paper prices risen. However, this stable
price pattern changed dramatically in 1973. The 18-month period from mid-1973 through
year-end 1974 saw an average increase (in current dollars) of 37% for pulp and paper
products compared with 27% for the wholesale price index. Prices of a number of individual
pulp and paper products increased by well over 100%.
The econometric analysis in this study showed only slight reductions in demand as a
result of the rapid price increases. Demand for pulp and paper products in 1975 decreased
far more than expected on the basis of GNP alone. However, it is premature to identify the
reasons underlying the reduction in demand. Because the 1973-74 price movements have
had no historical precedent, an econometric measure of the long term effects of such a rapid
price increase is still not possible.
b. Supply
Short-term supply potential in this industry can be measured by published capacity
data for each major product group and for almost each pulp and paper mill. The product
group data are derived by the American Paper Institute (API) through annual surveys of
current capacity and planned expansions of all pulp and paper manufacturers. These surveys
are compiled, published and updated occasionally each year. Thus, the capacity data can be
compared with the industry's current and projected production data to indicate average mill
operating rates in each sector.
The API defines "practical maximum capacity" as the tonnage of paper, paperboard,
or pulp of normal commercial quality that could be produced with full use of equipment
and adequate supplies of raw materials and labor, and assuming full demand. No allowance
is made for losses due to unscheduled shutdowns, strikes, temporary lack of power, etc.,
which cause decreases in actual production, but not in production capacity. Capacity of
paper machines which produce more than one grade is apportioned in accordance with
actual production patterns of plans for future operation.
As a practical matter, few product sectors can achieve full capacity utilization over a
full year. For most sectors full annual operation means a 95-96% operating rate. Chief
exceptions in the Phase II sectors are dissolving pulp and bleached board where the
producers report capacity more conservatively and thus have attained 100% annual oper-
ating rates.
Several other nuances must be recognized when interpreting the industry's capacity
and operating rate data. Future capacity is reported with a certain product mix in mind; as a
result, effective capacity is usually increased in a tight market by producing fewer grades,
and reduced in a loose market by adding more grades which reduces production run lengths
and increases downtime for grade changes. In most sectors, the operating rate generally has
28
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varied within a relatively narrow range of 85-96% from year to year; traditionally, many
mills became unprofitable when their annual operating rates fell below 85% and their
closures helped adjust the operating rates of the surviving mills to over 85%. The recent
rapid increases in pulp and paper prices have had the important effect of improving
profitability and reducing the breakeven operating rate levels to well below 85% in most
paper industry sectors.
Another key factor in the supply equation is how supply is adjusted up or down in the
short tc.m. A major consideration is that all pulp and paper mills are run on a three-shift
basis because of the time and costs associated with mill shutdowns and start-ups. For the
same reason, most mills run on a seven-day week basis, although some of the smaller mills
(typically those that are not integrated to pulp) run on a five-day-per-week schedule. Paper
machines and pulp mills require a certain amount of maintenance down-time and this is
scheduled throughout the year and factored into the capacity rating for each mill. When the
industry is straining to meet demand, a certain amount of maintenance down-time can be
foregone, although this time generally has to be made up at a later date; the mills also have
rn opportunity to simplify their product line and to emphasize heavier weight products
which effectively increases their production tonnage. When demand is weak, the industry
reduces supply by scheduling longer shutdown intervals around weekends and holiday
periods or scheduling longer shutdowns of one to tv/o weeks. During a protracted period of
oversupply, the rate of permanent mill closures also rises sharply, thus reducing supply.
There are essentially two methods for increasing capacity over the longer term: in-
cremental expansion of an existing mill, or the construction of completely new mills. An
incremental expansion is usually less than 50% of the original plant capacity and takes one
to two years to complete once plans have been laid. This is the lowest cost expansion route
because most support facilities are already in place. Construction of new mills typically
takes three to four years once the initial plans have been completed and the necessary
environmental clearances obtained. Current (1975) new mill costs typically fall in the range
of 5150.000-200,000 per daily ton of capacity.
A two- to three-year outlook for the paper industry's capacity expansion plans
subdivided into incremental expansions and new machines can be obtained from the API's
Annual Capacity Survey. This has become an increasingly accurate forecasting device for
shoit-tenn industry capacity expansion. Because of the lead times required to finance and
build new capacity, there is usually very little variation between forecasted and actual
capacity.
Table 11-4 compares total capital expenditures, capital spent for pollution control and
the net annual expansions increment for all paper and paperboard mills since 1965. It points
up several interesting factors. First, it reflects the marked reduction in capacity expansion
that has taken place since 1970 while capital expended on pollution control (water and air)
increased rapidly; this does not imply, however, that pollution control regulations were the
primary cause of the slower expansion since a number of other factors were at play, as will
29
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TABLE I1-4
CAPITAL EXPENDITURES AND CAPACITY EXPANSIONS FOR
ALL PULP, PAPER AND PAPERBOARD MILLS, 1965-1975
(Current Dollars)
Total Capital Pollution Control
Expenditures1 Component2
Net Capital
Expenditures
Net Capacity Increase
Over Preceding Year3
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
(Planned)
$ MM
827
961
1122
766
878
882
755
841
988
NR
NR
$ MM
50
65
76
93
128
187
203
339
351
523
492
% of Total
6.0
6.8
6.8
12.1
14.6
21.2
26.9
40.3
35.5
$ MM
777
896
1046
673
750
695
552
502
637
M Tons
1,823
3,337
2,569
2,262
2,131
580*
1,750*
2,861
1,785
1,727
2,823
% of Tota
3.9
6.9
5.0
4.2
3.8
1.0
3.0
4.7
2.8
2.6
4.2
Avg. Annual 2.2
Growth (%)
25.7
-2.1
3.8
*Unusually large number of mill closings significantly reduced net expansions in
1970 and 1971.
NR - Not yet released.
Sources: 1 U.S. Department of Commerce
2 National Council for Air and Stream Improvement, Inc.
3 American Paper Institute
30
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be discussed 'ater. Second, nominal capital expenditures, excluding pollution control,
actually declined on average through 1973 in spite of the high capital goods inflation rate
during this period. This trend probably would have led to even less capacity increase had
there not been a compensating shift from expansion mainly via new mills in 1965 to heavy
emphasis on incremental expansions in the mid-1970's. Finally, the table illustrates the
difficulty of correlating capital expenditures with net capacity increases. The relationship is
clouded not only by shifts in incremental versus new mill expansions, but also by different
rates of offsetting mill closures, changing product/process emphasis and fluctuating capital
allocations to woodlands ownership and other items that do not contribute directly to the
amount of capacity expansion.
Other factors that have contributed to the slowdown in capacity expansion since 1 970
include a growing scarcity of new or expandable mill sites that have an adequate economic-
supply of wood, price controls, management uncertainty over future economic cycles,
governmental regulations, operating cost inflation, and energy supply. As a result of these
factors, fewer and fewer firms have available mill sites and the financial and woodland
resources needed to make major capacity expansions.
To illustrate how capital costs have changed for new mills, Table II-5 compares the
1964 and 1974 capital requirements for minimum economic-sized bleached kraft pulp mills,
the most capital intensive of the Phase II product sectors. It shows that over this period, the
minimurr economic mill size has nearly doubled and the investment per annual ton of
capacity has more than aoubled. Selling prices in this sector have also more than doubled so
the mill investment-to-sales ratio increased only modestly. However, when the woodlands
investment required to provide what is considered a minimum level of ownership coverage is
added, one finds the total capital requirements and the investment per dollar of sales have
escalated far more significantly.
The rising capital costs for new mills coupled with the practical difficulties of finding
enough suitable supporting woodlands to acquire or lease has limited the number of firms
that are now able to make major capacity expansions. Most major expansions are now being
made by the large, well-financed firms that have already obtained substantial woodland
ownership or control at prices considerably below today's market values.
Capacity expansion is now virtually nonexistent in the Phase II paper sectors that are
not integrated to pulp, primarily because of low profitability. The present producers are
caught in a squeeze between the prices charged by integrated tissue and printing/writing
paper producers and the costs for bleached market pulp, the price of which has escalated
more rapidl\ than all other paper industry products.
The relatively slow growth of pulp and paper demand, large capital requirements for
new mills, increasing difficulty of obtaining woodlands control, and low profitability of the
nonintegrated paper industry sectors have also limited the entry of new firms into the pulp
and paper industry since 1960. Because of the above entry barriers, the entry route for
31
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TABLE I1-5
BLEACHED KRAFT PULP MILL
INVESTMENT DECISION MADE IN 1964 AND 1974
(Current Dollars)
1964
1974
Sales
Size of Mill
Price (End of Year)
Annual Sales
450 TPD/150,000 TPY
$145/Ton
$22 MM
800 TPD/27 0,000 TPY
$35/Ton
$90 MM
Mill Investment
Investment per Annual Ton
$ Investment per $ Sale
$40 MM
$267
1.8
:?70 MM
$30
1.9
Land Investment
Acres Required for
100% Coverage1
Acres Required for
20% Ownership
Cost of Land per Acre"
Total Land Investment
375,000
76,000
$200
$15 MM
540,000
108,000
$1,000
$ 108 MM
Total Investment for Mill & Land $55 MM
$ Investment per $ Sales 2.5
$278 MM
3.1
2 Cords per Annual Ton; 0.8 cords per acre in 1964,
2 Cords per Annual Ton; 1 cord per acre in 1974.
Source: Arthur D. Little, Inc., estimates.
32
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companies outside this industry typically has been by acquisition of existing pulp and paper
companies. Table II-6 shows a representative list of major corporations that have diversified
into the paper industry almost entirely by acquisition.
All of the above factors point to a slower and possibly a smoother rate of capacity
expansion in the paper industry. They also indicate that there will be increasing market
concentration among the largest firms. Pollution control regulations probably contribute to
the tendency toward increasing concentration because only the larger firms will have the
financial strength both to meet pollution regulations and to make large capacity expansions.
c. Prices
Figure II-3 shows the trends in real wholesale prices for pulp and paper products since
1963 tnd compares these with the all-commodity price index. This comparison indicates
that until 1973, the paper industry price indices demonstrated a general pattern of stability.
Real paper prices actually trended downward through 1972 more rapidly than the all-
commodity index. Between the first quarter of 1960 and 1972, for example, the pulp and
paper price index declined about 19% while the wholesale price index declined 14%. Since
1972, however, both indices have risen significantly, but paper industry prices have risen
faster.
Figure II-3 also shows that the relationship between aggregate paper industry real
prices and capacity utilization rates (a surrogate for supply/demand equilibrium) is imper-
fect. This imprecision is caused partially by the fact that the pulp/paper price index employs
list price; for a number of large commodities which do not reflect the full amplitude of true
market price swings. The econometric analysis in this study utilizes actual market prices for
the major Phase II products. However, even these prices do not track closely with capacity
utilization. This variation suggests both that the industry is not perfectly competitive and
that other causal factors contribute to the paper industry price movements.
The lelative stability and modest increases in nominal pulp and paper prices in the
1960's and early 1970's can probably be explained by a combination of factors. The slow
rate of increase can be attributed to the fact that capacity was continually being expanded,
causing an almost continuous oversupply as producers tried to expand their market share
and thus increase volume and more fully utilize their woodlands, large acreages of which had
been acquired recently. Also, primarily as a result of economies of scale, the addition of new
capacity and the improvement or replacement of old facilities, the industry was able to
improve productivity about 4% per year, which helped to stabilize costs. Finally, the
industry experienced only a modest rate of cost inflation for raw materials and energy
because of their ample supply in the 1960's.
Just the opposite set of conditions led to the very rapid price increases in 1973-1974.
First, the industry's rate of productivity increase dropped appreciably in the early 1970's as
its rate ot capacity expansion decreased sharply and as new-mill economies of scale reached
33
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TABLE II-6
MAJOR CORPORATIONS DIVERSIFIED INTO THE PAPER INDUSTRY
Packaging Products Companies:
American Can
Bemis
Continental Can
Owens Illinois
Publishing Companies:
Chicago Tribune
Chilton
Cowles Publishing
Field Enterprises
Kansas City Star
McGraw-Hill
Media Central
New York Times
Time, Inc.
Times-Mirror
Other Companies:
CIT Financial
Gulf & Western
IT & T
Eli Lilly
Litton Industries
Mobil-Marcor
3M
National Cash Register
Olin
Philip Morris
Procter & Gamble
Revlon
Tenneco-PCA
34
-------
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35
-------
practical limits. Second, raw material, energy and labor costs began to inflate at a much
faster rate than in the past, but could not be passed on through price increases in (lie weak
markets and low mill operating rates of 1970-1972. When most pulp and paper markets
rebounded strongly in 1973, prices started to climb, but the increases were held in check by
government-imposed price controls. Then as demand continued to grow and approached
maximum paper industry capacity in 1974, price controls were lifted partially in March am!
fully in July. Prices then surged to not only absorb the residual cost inflation the industry
had carried since 1969 but to bring profit margins to a post-World War 11 high.
Slower rates of capacity expansion, beginning in 1970, also added to the amount of
price increases obtained in S 973-1974 by tightening the supply/demand balances. Low
profitability and difficulty in raising capital, particularly during the 1970-1971 recession, in
turn, were the primary causes of rhe slower capacity expansion in 1972-1974.
Couoled with a profitability drop to well below the average for all industries, paper
industry debt levels increased to such an extent that many companies exhausted their
borrowing pov/er. Thus, many firms were unable to raise capital for major expansions
through cebt financing. Also paper industry earnings and stock prices were so low that
raising capital through equity financing was not an attractive option. As discussed under
supply capital expenditures for pollution control began to exceed $200 million per year.
The price stability in this industry during weak market periods, particularly during the
severe 1975 recession, is partially due to oligopolistic behavior in a number of industry
sectors. As will be detailed in Section II-B, most of the paper industry 's product sectors have
at least 30 domestic suppliers and several also face substantial foreign competition, mainly
from Canaca. In some sectors, however, a few suppliers hold a major portion of the market
and these sectors often exhibit a pattern of price leadership.
The newsprint industry has exhibited the most clear pattern of price leadeiship by half
a do/en firms. This sector differs from most others in that it is an international market and
about two-thirds of the U.S. supply is obtained from Canada. John Guthrie* has docu-
mented the newsprint price changes that have occurred between 1950 and 1970. His data
indicates that the price changes have been initiated by six companies in Canada and the
United States.
"John A. Guthrie, An Economic Analysis of the Pulp and Paper Industry, Washington State University
Press, 1972.
36
-------
The pulp market also does not resemble the purely competitive rriLrket of economic
theory since there are relatively few suppliers of the major grades. Like newsprint, pulp is
freely traded internationally, and Canadian producers currently supply about 60% of U.S.
requirements for paper grade market pulps. The dissolving pulp market has the character-
istics of a bilateral oligopoly (few suppliers sell to a small group of buyers) and transactions
are made through relatively stable contract prices. While list prices for paper grade pulp also
appear stable, actual prices are more volatile than those for dissolving pulp since there is
usual'y considerable discounting under list prices during weak markets and a greater
incidence of premium spot prices during tight markets. However, Canadian producers had a
large enough share of U.S. paper grade market pulp demand and generally better quality
pulp so they were able to price considerably above U.S. pulp prices during the price cont-ro??
in 1973-1974 and during 1975.
W th the possible exception of bleached paperboard, price leadership in other Phase II
product sectors is not as clear cut. Most other grades have a large number of competitors,
are less capital intensive, have exhibited more frequent price changes, and have achieved
faster rates of price increase than newsprint or bleached paperboard. The competitive
structure and concentration characteristics of each sector will be described in the next
section. Table II-7 shows the amount of price changes and price increases that occurred in
selected paper grades between 1950 and 1970.
d. Competitive Characteristics and Structural Changes
The analysis of the various product sectors in Section II-B will illustrate their different
competit ve characteristics. In general, they fall within the spectrum from oligopolistic on
the one hind to something approaching perfect competition on the other.
Regional barriers to competition must be taken into account in certain areas, e.g., the
West Coas", where there may be more of a tendency toward increased concentration because
high transportation costs isolate the market from competitors outside the region. Interna-
tional competition is important in only a few sectors: newsprint where the United Slates is
a substantial importer, linerboard where it is an important exporter, and pulp where it is
both a sign ficant importer and exporter.
Competition from nonpaper products is of primary importance in only three Phase II
sectors: bk ached packaging papers and bleached paperboard where plastics compete
strongly in certain markets, and tissue which competes with cloth in certain applications
However, there is substantial intra-industry product competition both between and within
product sectors.
Market share concentration in the pulp, paper, and paperboard sectors changed very
little through 1972 according to the latest U.S. Department of Commerce statistics.
However, several recent developments indicate concentration will increase. The primary
causes oV increasing concentration are mounting barriers to entry. Relatively slow growth in
37
-------
TABLE II-7
PRICE CHANGES AND PRICE INCREASES IN SELECTED PAPER GRADES
Grade
Newsprint
Grade A Book Paper
Rag Content Writing
Kraft Wrapping Paper
Kraft Linerboard
Chipboard
Number of Price
Changes 1950-1970
Percent Price
Increase 1950-1970
24
49
43
50
19
73
49
86*
82**
85
19
60
*Increase for all book paper grades.
**Increase for all writing paper grades.
SOURCE: John A. Guthrie, An Economic Analysis of the Pulp and Paper
Industry, Washington State University Press, 1972.
38
-------
demand for the industry's products, coupled with increasing capital intensiveness as plant
sizes, woodlands requirements, and capital costs rise in this industry have discouraged all but
the largest paper companies from making major expansions. Few if any firms from other
industries have entered over the past ten years other than by acquisition of existing
facilities. At present, most capacity expansion is being undertaken by the larger, more
profitable firms that have the necessary capital resources to make major expansions as well
as substantial control over the woodlands needed to assure a continuing supply of their
wood raw materials. Thus small-medium companies are likely lo lose market share.
Accelerated closures of the smaller more marginal mills by both large and small paper
companies has also contributed to increasing concentration.1 Closure rates have been
primarily a function of the paper industry's economic cycles, the most severe of which
since World War II- occurred in 1970-71. Closure rates will probably also increase around
the water effluent control implementation deadlines in 1977 and 1983 as some mills are
unable to take on the required new capital burden. Ironically, federal pollution control
regulat ons could also have the effect of extending the life of certain mills which after
making a major investment in pollution-control equipment will have higher fixed costs and
may find it disadvantageous to close in the short run. The pollution regulations will also
increase the cost for new mills through 1983 and thus will reduce their cost competitiveness
with the older mills.
Also contributing to increasing concentration in the paper industry is the fact that
there does not appear to be any major technological change in the offing which would
obsolete the ousting pulping and papermaking process. Rather, all the technological changes
that have occurred in the recent past or are now on the drawing boards involve incremental
improvements to the existing technology, and when their merits are proven, they can be
readily adopted by most existing mills. Appendix C describes the most significant current
technology changes taking place or under pilot evaluation in the pulp, paper, and paper-
board sectors.
6. Financial Performance
Very few publicly-held companies in the paper industry produce a single product line
or employ a single process. Thus no composite data are publicly available on the profitability
1. Appendix B-12, mill closure trends, discusses historical mill closures by product sector.
39
-------
of individual product or process sectors.* In general product sector profitability clusters
fairly closely around the industry average. The industry's aggregate profitability, on the
other hand, is v/ell documented and illustrates the financial consequences of the supply,
demand, and price trends just discussed.
Both the Federal Trade Commission (FTC) and the Internal Revenue Service (IRS)
publish composite data which provide the primary profitability indicators for the total
paper and allied products industry. The IRS also accumulates a composite for firms that
produce primarily pulp, paper, or paperboard (as opposed to converted products); however,
this dala is not as useful for current analyses since it is not published until several years after
the fact.
a. Total Industry Averages
Figures II-4 and II-5 compare trends in the paper industry's after-tax return on sales
and equity with those of all manufacturing industries. The FTC data indicates higher
profitabilty than the IRS data. This difference can be explained by the fact that the FTC
uses a sampling of paper companies which is heavily weighted towards large companies. The
IRS, on *.he other hand, employs a composite of all companies submitting income tax
returns that also include a balance sheet, and is more representative of the entire industry.
The chief implication from the differences in these two data series is that the smaller
companies generally are less profitable than the larger firms and tend to bring down the
industry's profitability.
Throughout most of the 1960's the paper industry's profitability was below the
all-industry average as it increased capacity at a rate that generally kept operating rates well
below maximum plant capacity. As discussed earlier, a number of reasons contributed to the
over-supply pattern including competition for the dwindling number of mill sites and
backup woodlands, vying for market share in markets that were beginning to mature, and
extremely low prices for market pulp mainly because of capacity over-expansion in Canada.
However, coincident with the profitability plunge that occurred in 1970 and 1971, the
industry's historical rate of capacity expansion was reduced despite the up-turn in profit-
ability that occurred in 1973 and 1974.
In 1970 and 1971, the paper industry's after-tax return (both on sales and capital) fell
to its lowest ->oint since World War II. The period of over-capacity and weak prices in the
1 Later in this section relative differences between product sectors will be analyzed on the basis of financial
models of typical new mills.
40
-------
FIGURE 11-4 PERCENT NET PROFIT AFTER TAX TO NFT SALES
I
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
FTC DATA:
PAPER &
AT.T.TF.T) TNT).
FTC DATA: jj
ALL MFG. INDUSTRIES |
V
IRS DATA:
PAPER &
ALLIED IND.
1.0%
o
vD
tn
41
-------
FIGURE II-5 PERCENT NET PROFIT AFTER TAX TO NET WORTH
17.5%
FTC DATA: PAPER & ALLIED
PRODUCTS
15.0%
10.0%
5.0%
1.0%
\J
\
\ /x
\
;/K >~ '
1 \ i
J 1 VV ,
/ \v i
IRS DATA:
PAPER &
ALLIED
PRODUCTS
r '
-i* /
1 1
V, /
FTC DATA: ALL MFG.
INDUSTRIES
m
42
-------
1960's laid the foundation. Demand for paper declined slightly as a result of the 1970
recession and the industry's capacity expansions brought its capacity utilization to around
90%.*
Improved mill operating rates and higher prices throughout the paper industry in 1972
caused an up-turn in profitability. Profits continued to rise through 1973 and particularly in
the first and second quarters of 1974 after price controls were parti?l!y lifted for this
industry in March of that year and fully lifted in June. The up-turn in the industry's
earnings also caused shareholder's equity to assume a larger proportion of the total capital
structure.
Tlie industry's profitability in 1974 reached its highest point since World War II and
climbed well above the all-manufacturing-industry average after holding well below this
average in the 1960's. This rapid up-turn in profitability and ranking was caused by high mill
operating rates and particularly by the very large price increases that the industry obtained
after price controls were lifted. The industry's operating rates approached, and in some cases
exceeded, maximum sustainable levels for such items as bleached market pulp, newsprint,
linerboaid, printing papers, and tissue. This tight supply condition enabled the producers to
simplify their product lines and thus achieve longer runs and more production from their
mills. However, the fundamental reason for the tight supply itself was that the industry
began to slow its rate of capacity expansion starting in 1970 which in turn caused the
industry's capacity to be stretched by the up-turn in demand which took place in 1972
through mid-1974.
The -ecvission which began in the second half of 1974 again caused a decline in paper
industry profitability starting in the fourth quarter and continuing through the third
quarter of 1975. The principal factor behind the profitability decline was low mill operating
rates as paper demand declined at a faster rate than GNP. However, although average
capacity utilization dropped to around 85%, there was very little price deterioration.
Therefore, while profitability declined, it held up surprisingly well compared with previous
serious recessions. Producers chose to curtail production temporarily rather than risk price
reductions which might be difficult to recoup when the economy recovers.
"Price discipline" in such a weak market for this length of time is new to this industry.
It is a strong indication that the financially-oriented managers who have entered the paper
industry have obtained a consensus that a higher return on assets in the short term is more
important than capturing a larger market share in view of the large capital expenditures their
companies face. It is also a sign of widespread agreement that pulp and paper demand is
'Although 9f % is not a particularly low operating rate, the market was sufficiently weak to preclude any
opportunities for the companies to increase prices to cover the accumulating cost inflation they
experienced during 1967-1971.
43
-------
price inelastic. In addition the industry's higher profitability, which reduced its breakeven
capacity utilization rate, made it easier to decide in favor of production cutbacks rather
than price discounts. And, of course, there was widespread concern that price controls
would be reestablished and industry managers were reluctant to get caught with their prices
and profits down as they did in 1972.
Figure II-6 compares the historical trend in the paper industry's capital structure with
that of all manufacturing industries since 1960. It indicates that the equity or net worth
share of total capital was rapidly displaced by long-term debt financing in the paper and
all-industry composites. However, the paper industry's debt increased faster, reaching its
highest level since World War II in 1971. With an average 33% debt and 67% equity capital
structure, and a profitability low in 1970-1971, many firms exhausted their borrowing
power. This contributed importantly to a slower rate of capacity expansion in the 1970's.
Even as profitability rose in 1972-1974 the relatively high debt level along with capital
goods inflation prevented many companies from financing major expansions through debt.
Table II-8 illustrates in more detail the paper industry's sources of capital by showing
year-to-year changes since 1960. It indicates that equity financing has not been an attractive
alternative to debt. The only significant net revenues from stock sales took place in 1961,
1969 anc 1971. More frequently, large amounts of stock were repurchased, reflecting
prevailing low stock prices. As a result, all of the industry's increases in net worth have come
from retained earnings. This is not to imply that retained earnings and long-term debt will
continue lo be the only financing modes for the paper industry. If the industry continues its
recently good profit performance, and if the general stock market recovers, paper company
stocks should benefit and eventually become an attractive financing vehicle.
b. Profitability Variations by Product Sector
Table II-9 shows estimates of the current relative profitability of the major Phase II
product sectors. Note that the purpose of the analysis is to show relative and not absolute
differences between product sectors. It employs mid-1975 prices and estimated costs for
minimum economic-sized mills assuming that they were brought fully on stream in 1975
and had a capacity utilization of 90%. Thus the analysis does not necessarily represent the
actual costs of existing mills and it is of course a snapshot of one point in time under
prescribed conditions. Appendix E-2 provides detailed data used in this analysis.
Bleachei market pulps, particularly paper grade pulp, are clearly the most profitable
product sectors at present. They acheived this position primarily because of large price
increases in 1973 and 1974 when the world supply/demand balance reached shortage
proportions. Bleached pulp is the most capital and wood intensive of the paper industry's
products and this has limited recent capacity expansions.
44
-------
FIGURE II-6 PERCENT NET WORTH TO TOTAL CAPITAL
84.0%
82.0%
80.0%
78.0%
76.0%
74.0%
72.0%
70.0%
68.0%
66.0%
FTC DATA:
ALL MFG. INDUSTRIES
IRS DATA:
PAPER & ALLIED
INDUSTRIES
FTC DATA:
PAPER & ALLIED
INDUSTRIES
\ -.
m
45
-------
TABLE II-8
CHANGES IN PAPER AND ALLIED PRODUCTS
INDUSTRY CAPITAL STRUCTURE. 1970-1974
(Millions
of Dollars)
T?*v.. 4 «-.*
Retained Earnings Stock Sales
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
197.3
1974
TOTALS
% of Total
Capital
275
255
288
286
378
461
539
405
493
569
289
94
564
1,025
1.668
7,589
39
401
(134)
(166)
40
( 93)
6
(104)
(201)
340
(196)
253
(275)
(104)
124
( 70)
Total
314
656
154
120
418
368
545
301
292
909
93
347
289
921
1.792
7,519
65%
Net Change
In Debt
110
97
234
11
3
472
657
632
463
68
555
417
(164)
100
411
4,060
35%
SOURCE: FTC Quarter Financial Report for Manufacturing Corporations
46
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The profitability index for printing and writing papers is deceptively high in that the
mid-1975 capacity utilization rate for this sector was around 75% rather than the 90% rate
employed for the comparative analysis. Until its operating rate improves significantly, this
sector's profitability is likely to remain closer to the paper industry's average as do most of
the other Phase II paper and paperboard sectors.
Table II-9 does not reflect the profitability of the nonintegrated printing and writing
and tissue paper companies. These firms are currently caught in a profit squeeze between
high market pulp prices and relatively low paper prices that are held down by integrated
producers; seeking better capacity utilization. As a result, the average profitability of these
nonintegrated paper companies is probably below that of the deinked tissue mills, the
lowest profit sector compared in Table II-9.
New mill models were not developed for the nonintegrated sectors because it is
unlikely that new mills will be built until the margin between market pulp and paper prices
widens appreciably and there is little evidence that this will happen soon, if at all.
The following section describes each of the Phase II product sectors in some detail to
elaborate on the economic and competitive characteristics which have affected their profit-
ability and growth.
B. CHARACTERISTICS OF STUDIED MARKET SECTORS
1. Product Siectors and Process Relationships
While pollution control technology and costs vary with each pulping and papermaking
process, the impacts of the costs are primarily a function of the market characteristics of the
industry's products. The paper industry is made up of a number of subindustries built
around major product categories; the latter have been classified by the American Paper
Institute and the U.S. Department of Commerce according to end use and/or pulping
process employed. Many products compete for the same end-use markets and this intra-
industry competition must be taken into account in projecting the future supply and
demand for the product category.
For this analysis, the numerous product categories were aggregated into ten major
product groups. These were selected on the basis of having common applications, primary
markets, or market characteristics for the products included; in many cases the products
within each grcup are complementary rather than directly competitive. Table 11-10 indicates
the fairly complex relationships of these product groups to the pulping processes employed
by showing 19''3 pulp consumption by type.
The processes that are used to make the various pulp and paper products are directly
related to the types of pulp that best fit the desired product properties. Certain products are
synonymous with a particular process - unbleached kraft paper and paperboard, NSSC
48
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49
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(neutral sulfite se nichemical), paperboard, bleached (kraft) paperboard and bristols. The
remaining product groups are made by a variety of processes, and usually with a blend of
different pulps. Since process characteristics and costs vary considerably, this is one factor
which causes differences in the cost competitiveness of various producers as well as in their
costs for pollution abatement. Appendix B, Mill Characteristics, describes the industry's
processes, the associated pollution problems and the regional and size distribution of its
mills.
Table li-11 shows the specific product groups included in the paper industry's Phase II
product sectors. Capacity and production data for 1974 are shown to illustrate the relative
magnitude of the sectors. Each sector is then discussed separately below to illustrate its
demand/supply/price characteristics, export/import trends, and other factors considered in
the impacl analysis.
2. Market Pulp
a. Product Description
Market pulp (i.e., pulp that is sold rather than used internally by the producer) consists
primarily of dissolving pulp and bleached paper pulps which are both made from the sulfite
and kraft processes. Market sales of the unbleached chemical pulps, groundwood pulp, and
aeinked v/astepaper are relatively small. Dissolving and special alpha pulps consist of highly
refined bleached pulps with a high content of alpha or pure cellulose fibers. These pulps are
used primarily as the raw material for rayon and acetate fibers, cellophane, and a variety of
cellulose chemicals and specialty papers. Both dissolving and paper pulps are freely traded
throughout the world; thus, the U.S. market is highly sensitive to world market conditions.
The chief quality characteristics looked for in dissolving pulp are that it be extremely
free from dir! and other impurities and have an alpha cellulose content that is appropriate
for the end-use applications. Thus, different grades are supplied for acetate, rayon, cel-
lophane, specialty papers, and cellulosic chemicals. Quality consistency is of extreme impor-
tance and thus a long period of product testing is normally required before a customer will
shift to a new dissolving pulp supplier.
The bleached and semibleached grades of kraft and sulfite pulp currently constitute
about 86% of the total pulp purchased by U.S. mills that are not integrated or only partially
integrated to en-site pulp production. The primary products produced by such mills are
printing and writing papers, sanitary tissue and related papers, mainly of a specialty nature.
Part of the supply of bleached papermaking pulps is produced by dissolving pulp mills, all
but two of whom, in the United States, currently produce both dissolving and paper grade
pulps. The paper grade pulp mills, however, are not able to produce dissolving pulp without
substantial reinvestment.
50
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TABLE 11-11
PULP AND PAPER INDUSTRY. PHASE II PRODUCT SECTORS
Number of U.S.
Suppliers
P
ig
istolrv
:d
Paper**
ilp)
board
^25
8
74
21
51
^20
^400
1974
000 Tons
3,711
1,824
11,613
5,155
4,322
5,087
1,291
33,003
66,113
47,637
Capacity
% Total
7.8*
3.8*
17.6
7.8
6.5
7.7
2.0
50.0
100.0
100.0
1974 Production
000 Tons
3,297
1,771
10,895
4,972
4,085
4,727
1,239
30,986
60,988
44,839
% Total
7.4*
4.0*
17.7
8.2
6.7
7.8
2.0
51.0
100.0
100.0
Sector
Bleached Market Pulp
Dissolving Pulp
Printing and Writing
Bleached Board & Bristol^
Tissue
Newsprint & Uncoated
Groundwood**
Bleached Packagi
Total (excluding pulp)
Total Paper & Pa
Total Pulp***
*Based on total pulp.
**Uncoated groundwood and bleached packaging papers were not included in the
econometric analysis.
***Excludes Defibrated/Exploded since product not available for this.
SOURCE: American Paper Institute.
51
-------
The chief function of the paper grade pulps is to provide a white surface appearance
and sufficient strength to make the product usable. In both printing and tissue papers, a
blend of hardwood and softwood pulps is used, sometimes in conjunction with groundwood
pulp, to provide the desired properties of surface smoothness, opacity, softness, and
strength. The short hardwood fibers are used to provide a smooth printing surface and
opacity while the long-fiber softwood pulps are used to provide most of the required
strength. Distinctions are also made between the coarse fiber softwood pulps derived from
southern pine and Douglas fir and the generally more highly sought after softwood pulp
derived from northern spruce. Generally a premium price is paid for the northern pulp
except when the supply/demand balance is extremely tight. Southern hardwood pulp also
has a somewhat lower utility than northern hardwood pulp in the eyes of many customers
because it often contains a larger proportion of oak fibers which cause problems in
papermaking.
b. Demand
Table 11-12 shows estimates of 1973 world dissolving pulp consumption (excluding
Communist countries). This indicates the dominant share of demand held by rayon and
acetate fibers. These fibers accounted for about 70% of consumption in 1973. The
remaining 30% was made up of a variety of relatively small applications. Because there are
few producers of rayon and acetate fibers, cellophane and cellulosic fibers and also relatively
few suppliers of dissolving pulp, this market probably comes closest to being a bilateral
oligopoly of any pulp and paper industry sector.
From 1960 through 1973, U.S. consumption of dissolving pulp grew at an apparent
average rate of 1% per year. However, examination of the trend shows that U.S. consump-
tion peaked in 1968 and by 1973 had declined by a total of 13%. World demand appears to
have peaked in 1970 but is declining at a slower rate than U.S. demand. Thus, dissolving
pulp represents a product that appears to have reached full maturity and is now declining.
The primary reasons for this trend are the static total demand for rayon and declining
demand for acetate fibers and cellophane, while other dissolving pulp applications are
growing only slowly. Rayon and acetate fibers are facing intense competition, particularly
from polyester fibers, and cellophane is being replaced by plastic packaging films. However,
there are no direct substitutes to displace dissolving pulp itself in any of its major
applications. The econometric analysis in this study calculated a low price elasticity of
demand of 0.49 in the U.S. market.
Table 11-13 shows estimates of the approximate U.S. end-use subdivision for bleached
market pulp in 1973. It indicates the importance of the printing-writing paper and tissue
paper markets which together constitute about 80% of the demand. In 1973, bleached
market pulp amounted to 21% of the total bleached pulp consumed in the United States,
the balance being consumed by integrated mills.
52
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TABLE 11-12
FREE WORLD DISSOLVING PULP DEMAND BY MAJOR
Application
Rayon
Staple and Tow
Regular & H.T. Filament
SUBTOTAL
Acetate and Triacetate
Filament, Staple & Tow
Cellophane
Special Industrial Papers
Cellulosic Chemicals, etc.
TOTAL
Dissolving
Pulp Used
(000 Metric Tons)
1,750
590
2,340
380
510
380
360
3,970
APPLICATION, 1973
% of Total
44.1
14.8
59.9
9.6
12.8
9.6
9.1
100.0
SOURCE: Arthur D. Little, Inc., estimates.
53
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TABLE 11-13
U.S. BLEACHED MARKET PULP END USES, 1973
Consumption
Application
M Tons
Percent of Total
Printing-Writing Papers
"issue
2,000
1,200
51
31
Other Paper Products
300
Fluffing Pulp
400
10
3,900
100
SOURCE: Arthur D. Little, Inc., estimates.
The total U.S. consumption of bleached market pulp has grown at a very steady rate of
nearly 6% per year since 1960 with only a slight reduction in the growth rate during the five
years prior to 1973. Underlying this trend were: 1) the demand for printing-writing and
tissue papers, which was itself above the industry average and 2) the ability of the
nonintegrated producers to maintain their cost competitiveness because pulp prices were
low and stable.
There has been a modest tapering of the growth rate in printing and fine paper (more
pronounced in tissue paper) but this has been compensated for in part by the extremely
rapid growth in fluffing pulp which is used for disposable diapers and bed pads. This historic
growth trend makes bleached market pulp one of the fastest growing areas in the pulp and
paper industry. However, the tight supply of bleached pulp and extremely rapid price
increases which took place in 1973 and 1974 created a cost squeeze for the nonintegrated
mills which still persists and which is causing them to lose market share. This development
could well cause much slower growth in market pulp demand, but the historic price
elasticity was only 0.46 according to the econometric analysis in this study.
54
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No other materials offer any significant direct competitive threat to bleached paper
pulp. Pulp substitute materials derived from plastics have been developed but these are
several times more expensive than wood pulp even at the new pulp price levels. The
synthetic wood pulps are being experimented with as blending puips primarily to provide
high-strength properties in specialty applications which either require high strength, water
resistance, or a combination of both.
While total demand for bleached market pulp has grown at a fairly steady rate, there
has been a dramatic shift in consumption from the sulfite to the kraft grades. Between 1960
and 1973, consumption of bleached sulfite pulp dropped in half while that of the bleached
and semibleached kraft grades tripled. This is caused mainly by the fact that bleached sulfite
pulp capacity has remained static (as a result of pollution-related closures and few expan-
sions) and increasing amounts have been diverted to captive use. Thus, the rapid shift does
not represent an overwhelming preference for kraft pulp.
The softwood grade of kraft pulp offers superior strength properties in comparison
with softwood sulfite. In balanced supply/demand markets, a price discount of $5-15/ton
for sulfite pulp reflects this disadvantage. However, sulfite does offer superior softness and
somewhat better opacity and thus is still desirable in certain tissue paper and writing paper
grades. Hardwood kraft pulp comes close to sulfite's strength and opacity properties, but
sells at a lower price. Still sulfite':* main difficulty appears to be the uncertainty of how long
its supply will be maintained in light of current state and federal water effluent regulations.
c. Supply
The mam source of supply for bleached market paper pulp consumed in the United
States is Canada, Canadian imports currently account for 53% of the bleached market paper
pulps consumed in the United States. However, they make up on!y about 1 2% of U.S.
dissolving pulp consumption.
Because their locations are so remote and because pulp can be exported duty-free while
most paper products cannot, most of the Canadian pulp mills specialize in market pulp
rather than being integrated to on-site paper production. From 1960 through 1972,
Canadian pulp producers expanded their capacity very rapidly and operated well below
capacity while providing sample amounts of pulp to the U.S. and other world markets. In
1973 and 1974, however, the Canadians operated at near-full capacity except during mill
and railroad strikes which shrunk the Canadian supply, especially during 1973.
The U.S. domestic supply of bleached market pulp comes from two sources. One is the
mills that specialize in producing market pulp but these, for the most part, primarily
produce dissolving pulp. A larger portion of the bleached market pulp supply comes from
mills that are integrated to paper and paperboard. Often during an expansion program, the
pulp mill is built larger than the paper or paperboard mill to take advantage of economies of
scale; the company then sells market pulp until it expands its paper mill to equal the pulp
55
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mill capacity. Thus, there is a continual shifting in and out of the bleached paper pulp
market as companies become more or less integrated to pulp.
The problem of changing degrees of forward integration is not present with dissolving
pulp in that all the North American mills are dedicated to this product or a combination of
this product and bleached paper pulp. However, two of the U.S. dissolving pulp mills are
partially owned by companies that produce rayon fiber and thus are integrated forward to
pulp applications not located at the pulp mill.
Table 11-14 shows the shares of North American capacity for dissolving pulp and
bleached paper grade pulp held by the major producers. It indicates that the dissolving pulp
capacity is especially concentrated. There is also a fair degree of concentration on the part of
several bleached paper grade pulp producers, namely, Weyerhaeuser, Parsons and Whitte-
more, ITT Rayonier, and Canadian Cellulose. All of these firms except Weyerhaeuser have
focused their business efforts on market pulp while many of the remaining suppliers have
diversified interests in other paper and paperboard products.
d. Prices
The substantial world trade in bleached papermaking pulps causes prices for these
commodities to follow changes in the total world ratio between production and capacity
more closely than the operating ratio within a given country. Moreover, pulp prices tend to
lead rather than follow paper prices. When the ratio of total world production to total
capacity moves up to around 92%, as it did in 1974, market pulp prices move strongly
upward and suppliers' profit margins increase. When world demand falls to 90-92% of world
supply, profit margins tend to stabilize. (That is, prices increase only if costs of the most
efficient suppliers increase.) Finally, when world operating rates drop below 90%, margins,
and often prices, tend to erode.
The econometric analysis in this study found reasonably good correlations between
U.S. bleached pulp supply/demand relationships and price and employed chis data because it
was more current and available in more detail than world data. Figure II-7 plots these U.S.
capacity utilization and price data since 1965.
Dissolving pulp prices are much less sensitive to changes in capacity utilization and
have fluctuated more gradually than paper pulp prices. With relatively few buyers and
sellers, purchase contracts traditionally have included price protection clauses and are of
longer duration than the typical paper grade pulp contract. This price change smoothing and
muted response is demonstrated in Figure II-8, which plots U.S. capacity utilization versus
price since 1963.
Paper grade pulp prices dropped to about their lowest levels of the last decade in 1971,
when world average pulp mill operating rates were around 89% of capacity and North
America, Europe and Japan were in a business recession. There were modest price increases
56
-------
TABLE LI- 14
CONCENTRATION IN NORTH AMERICAN MARKET PULP SUPPLY
V
(Percent of North American Capacity)
Company Pi s.solvlng Pulp Pleached Paper Pulp
ITT Rayonier 44 6.8
International Paper 14 4.2
Ketchikan Pulp 10
Alaska Lumber and Pulp 9.5
Proctor & Gamble 9
Subtotal 86.5
Other Producers (3) 13.5
TOTAL 100.0
Weyerhaeuser 11.3
Parsons & Whittemore 7.0
Canadian Cellulose 6.7
B. C. Forest Products 5.7
MacMillan Bloedel 5.3
Georgia Pacil'ic 4.3
Northwood Pulp & Timber 3.4
Tahsis Co. 3.2
Domtar 3.2
Cariboo Pulp & Paper 3.2
Subtotal 64.6
Other producers (13-15) 35.4
TOTAL 100.0
SOURCE: Arthur D. Little, Inc., eslimates based on Lockwood's
Directory, 1975.
57
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FIGURE 11-7
BLEACHED PAPER PULP MARKET PRICE
VERSUS CAPACITY UTILIZATION
400
$/Ton
300
200
100
Current Dollar Price
1.0
.9
.8
1965 1966 1967 1968 1969 1970 1971 1972 1973 I97«»
*Capacity Utilization calculated from Total Bleached Sulfite and Kraft
Production and Capacity.
58
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300
FIGURE II-8
DISSOLVING PULP MARKET PRICE
VERSUS U.S. CAPACITY UTILIZATION
200
$/Ton
100
U.S. Capacity
Utilization
Current Dollar Price
Constant Dollar Price
f!958 :>ollar
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
59
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of $5-15 per short ton in 1972, as the economy and operating rates began to improve. Then
in 1973 and 1974, prices increased at unprecedented rates as operating rates reached
maximum levels. For example, in North America, between the third quarters of 1972 and
1974, average contract prices for bleached softwood kraft pulp increased 100% (by
$160/ton) and those for bleached hardwood kraft pulp, 165% (by S200/ton). Dissolving
pulp prices rose aoout 87% from 1972 to January 1975 starting from a higher base of about
$220/ton. Spot prices for relatively small orders throughout the world were considerably
above contract prices in 1973 and 1974 but these differentials were removed as the market
weakened in the second half of 1974. These increases allowed the producers to cover the
accumulated cost inflation they had been unable to pass on in weak markets or under price
controls, and brought their 1974 profits to a record high level.
The lack of price responsiveness to operating rates even for paper pulp was caused
primarily by two factors. First, in the 1960's the producers were able to hold their costs
down because inflation rates were low and they were able to improve productivity steadily
by enlarging and modernizing their mills. Second, the Canadian bleached pulp industry was
expanding its capacity at about 20%/year and this influx kept prices low despite fluctua-
tions in U.S. operating rates.
e. Import/Export Balance
The United States is a net exporter of dissolving pulps and a net importer of bleached
paper grade pulps. In 1974, the United States imported 226,600 tons and exported 738,200
tons of dissolving pulp. In that same year, it imported 3.1 million tons and exported 1.5
million tons of bleached paper grade pulp, which is the largest export item in the Phase II
sectors.
The U.S. pulp export position has been based largely upon its comparatively low-cost
pulpwood and large mills. On the other hand, Canadian wood costs, on average, are only
slightly higher and they too have large mills and greater specialization in the market pulp;
this accounts for their large export volume to the United States. Thus, nearly all of the pulp
imports come from Canada which is the world's largest producer of market pulp. The
exports are largely to Western Europe, South America, and Japan.
The trend in exports has been down from a high point reached in 1970. Imports have
increased modestly from a previous high point reached in 1969. Tariffs are seldom levied on
pulp, thus facililating large scale international trade.
3. Printing, Writing and Related Papers
a. Product Description
The printing, writing, and related papers sector consists of four product group-
ings: coated printing and converting paper, uncoated book paper, writing, and related
papers. Industry statistics also include bleached bristols in this sector, but since these are
60
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produced in bleached paperboard mills, this analysis includes them in the bleached board
sector. All of the printing-writing papers employ bleached pulp and are used primarily for
printing, publishing, stationery, and a variety of paper converting applications.
The commodity grades generally are sold by the producer directly to large customers;
both commodity and specialty grades are distributed through paper merchants or other
wholesalers to small printers, publishers, and paper converters. The paper is usually finished
by the paper mill into rolls or sheets ready for final use by the printer or converter.
b. Demand
Printing and writing papers are used in a variety of applications and hence consumption
is influenced by a number of demand patterns. Coated printing paper, particularly the
publication grade, is influenced not only by the business cycle effect on advertising
expenditures but also upon the share of the advertising market th?t magazines are able to
maintain in competition with direct mail, newspapers, television, and radio. The rapid
increases in postal costs incurred by the magazine industry have caused a substantial
reduction in the weight of publication paper over the past ten years in order to reduce
magazine weight and distribution costs. Hence, measuring consumption on the basis of tons
of paper consumed, understates the growth in surface area and dollar value.
Book printing growth primarily affects the growth of uncoated book, offset paper and
coated paper that emp'oys a nongroundwood base sheet. The large school-book segment of
this market is heavily influenced by federal and state aid to education programs while
demand in the trade book segment is influenced heavily by shifts in disposable personal
income and educational levels of the population.
The general commercial printing sector of the market consumes the whole spectrum of
the printing paper grades for a wide variety of applications including direct mail advertising,
brochures, catalogs, circulars, flyers, and financial documents. This diversity of end uses
causes consumption to correlate well with the GNP. Label and wrap printing, which is a
specialized component of the commercial printing industry, also has a consumption pattern
that follows the GNP. This sector consumes primarily paper coated on one side only.
One of the largest components of the writing paper grade category is register bond or
forms bond used for a variety of business forms. As a result, consumption in this end use
fluctuates closely with the industrial production index. Other major writing applications
include business stationery, copy machine paper, and finally, personal stationery. The
combined demand for these applications also fluctuates in accordance with GNP.
U.S. consumption of all printing and writing paper grades grew at the rate of 5.5% per
year between 1960 and 1968, and 5.2% per year between 1968 and 1973, on a tonnage
basis. Within this grade spectrum, forms bond grew at about 10% per year while the growth
of coated one-side label and paper has been about 2% per year.
61
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As for nor paper substitutes, there has been some experimentation with plastic printing
papers, but these products have found only relatively smal! market niches in applications
which require high tear strength and water resistance. Examples are certain types of maps
and book covers and children's books. Thus, plastic printing papers have not threatened the
large volume applications for wood fiber papers primarily because they are considerably
more expensive on both a tonnage and surface area basis.
There has been considerable competition among the various grades cf printing p?per:
for certain applications. In magazine printing, for example, coated papers have virtually
displaced uncoated groundwood papers, which once held this entire market. More recently,
carbonless copy papers have been displacing forms bond and carbon paper ;r< business forrrs.
Obviously, these shifts created advantages for certain suppliers but th?y genersHy do not
affect the overall demand for paper in a given application outside of possibly causes a
change in the weight of paper used. Only the coated/uncoated grcundv/ood subs Tin;'km had
a significant effect on Phase II product sector demand.
Price elasticity of demand for printing and writing papers is amcTig ths lowest cv the
Phase II sectors according to this study's econometric analyses. It indicates a coefficient of
0.26. This is not surprising in light of the essential information transfer functions the
products perform and the absence of nonpaper substitutes.
c. Supply
Printing and writing papers are produced by an extremely wide variety of processes,
They may be made in paper mills integrated to all of the bleached chemical pu?ps (kraft,
sulfite, soda, and cotton fiber), to groundwood pulp and to deinked wastepaper, as well as
in mills not integrated to pulp. In general, the producers of the large volume commodity
grades are fully integrated to kraft, groundwood or sulfite pulp mills while the producers of
higher priced specialty papers are either not integrated or only partially integrated 10
chemical fiber of deinked pulp. Most of the paper machines, particularly the smaller ones.
are quite veisatile and produce a variety of printing-writing paper grades.
Table 11-15 lists the 15 major U.S. printing and writing paper producers and their share
of U.S. capacity in 1974. The market is relatively fragmented compared with rr.ost other
paper industry product sectors; the 15 largest producers, all of "vhorn are integrated to pulp
account for 66% of U.S. capacity, but nearly 60 other firms compete ir> this product sector.
A look at specific products lines within the printing and writing category, however,
reveals a much greater supplier concentration. Consolidated Papers, for example, has nearly
a 10% share of the total U.S. capacity for coated papers and an e"sn larger share of the
magazine paper market in which it specializes. Great Northern-Nskoosa is ths leading
supplier in the writing paper sector, particularly in forms bond, although it has only a 4A%
share of the total printing and writing papers market.
62
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TABLE 11-15
CONCENTRATION IN U.S. PRINTING AND WRITING PAPER SUPPLY
Company
International Paper
Champion
Mead
Great Northern-
Nekoosa
Scott
Westvaco
Hammermill
Boise Cascade
Crown Zellerbach
Consol. Paper
Union Camp
St. Regis
Georgia-Paci fie
Potlatch
Oxford
Weyerhaeuser
Kimberly-Clark
Bergstrom
Fraser
P.H. Glatfelter
Allied
Subtotal
Other Suppliers (53)
Total
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
% of
U.S. Capacity
9.6
6.1
6.0
4.4
4.1
4.1
4.0
3.8
3.7
3.7
2.9
2.7
2.6
2.6
2.5
2.3
2.2
2.1
1.8
1.7
1.6
74.5
25.5
100.0%
Cap (TPH)
3121
1989
1956
1433
1342
1317
1303
1217
1213
1195
946
876
857
846
813
749
706
670
588
540
515
No. of
Mills
8
4
4
6
4
3
6+
4
4
3
1
3
5
3
1
4
6
2
1
1
. 2
SOURCES: Arthur D. Little, Inc., estimates based on Lockwoc/d's Directory
of the Paper and Allied Trades, 1975 and corporate annual reports.
63
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The supply is considerably more concentrated on the West Coast than elsewhere with
Boise Cascade, Crown Zellerbach, Georgia-Pacific, Simpson-Lee, and Weyerhaeuser provid-
ing all of the market requirements except for some specialty grades which are shipped in
from the East. There are also concentrations of supply in the North Central and Northeast-
ern regions, but the suppliers there do not appear to be enjoying any significant monopolis-
tic advantages since the papers are shipped long distance between regions in the large East-
ern and Central markets.
d. Prices
As was the case with most other paper products, printing and writing paper prices rose
rapidly after price controls were lifted in March 1974. Throughout most of the 1960's,
however, prices were very stable in spite of several significant cycles in the supply/demand
balance. This pattern probably was caused by the entry of new producers attracted by the
relatively high growth of this sector coupled with productivity improvements which held
costs in line. The rapid price increases in 1973-74 were caused by a very tight supply/
demand balance coupled with rapidly rising costs, particularly the cost of bleached chemical
pulp for nonintegrated mills. However, producers that were not integrated to pulp produc-
tion were barely able to maintain their profit margins because market pulp prices rose faster
than the prices they obtained for their end products. Producers that were integrated to pulp,
however, were able to improve profit margins significantly. Figure 11-9 shows the trend in
printing-writing paper prices versus capacity utilization since 1967.
e. Import/Export Balance
U.S. imports and exports of printing and writing papers are small and nearly in balance.
In 1973, for example, imports amounted to 180,000 tons and exports to 229,000 tons.
Imports and exports are so low principally because these grades carry a relatively high
import duty in the United States and in most other countries. The U.S. import duty on
coated papers is so high that there have been no imports of this grade since before 1960.
4. Bleached Board and Bristols
a. Product Description
Bleached board and bristols were combined in the econometric analysis because while
they are sold to totally different markets, they are produced in the same mills, in some cases
by interchangeable machines. Thus, the capacity utilization rates of the suppliers reflect the
demand levels of both products.
Bleached paperboard, often referred to as SBS (solid bleached sulfate) is by far the
larger-volume and faster-growing product with about four million tons produced in 1974. It
is used almost entirely to produce folding cartons and paper cups, plates and trays. SBS is
produced from a combination of fully bleached hardwood and softwood pulps made by the
64
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FIGURE II-9
PRINTING AND WRITING PAPER
MARKET PRICE
VERSUS CAPACITY UTILIZATION
500->
400
$/Ton(
300
Capacity Utilization
Current Dollar Price
Constant Dollar Price
1.0
200 -t
1004
- .9
.8
1967 1968 1969 1970 1971 1972 1973 1974
65
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sulfate or kraft process. Most of this board is coated with clay pigment and/or polyethylene
film to enhance its printing characteristics and/or barrier properties.
Bleached bristols production amounted to about 1.1 million tons in 1973 and 1974.
Principal applications are tabulating and index cards, file folders and tags. Unlike SBS, these
products are usually made from semibleached pulp and are not coated. Demand for bristols
has been essentially static since 1969 primarily because of declining use of tabulating cards
as business machines are designed for greater use of tape input/output and larger internal
memory banks.
b. Demand
Boxboard applications are by far the largest and most pivotal markets for SBS; hence,
the discussion of demand characteristics focuses on these characteristics. Boxboard encom-
passes all paperboard materials used to produce folding cartons, milk cartons, cups/plates/
trays, set-up boxes and related products. Materials from two other industry product sectors
compete with SBS in many of these applications: recycled paperboard and unbleached
kraft. Boxboard accounted for nearly 30% of 1973 paperboard production and about 15%
of total 1973 paper and paperboard production. Table 11-16 shows that SBS and recycled
board are by far the most important grades with about 95% of total 1973 boxboard
production.
Recycled paperboard is generally made from mixed grades of wastepaper. The folding
type is usually pigment-coated or lined with bleached or deinked pulp to enhance its
appearance and printing characteristics. The set-up or nonfolding type, which is heavier and
stiffer, is seldom coated or made with a white liner, but often has a coated paper outer liner.
Its principal applications are shoe boxes, department store boxes, and hardware boxes.
Boxboard demand, as measured by apparent domestic consumption, was about 8.2
million tons in 1973. Total demand increased at the rate of about 1% per year from 1968 to
1973. SBS consumption increased at the rate of about 3% per year from 1968 to 1973,
while consumption of recycled paperboard declined at the rate of about 2.1% per year
during this period. SBS gained market share at the expense of recycled beard primarily
because its performance/cost relationship has been superior to that of recycled board in
many applications where they compete directly. Most of this direct competition occurs in
folding carton applications, which account for about 55% of total boxboard production in
1973.
Table 11-17 shows a breakdown of 1974 folding carton shipments by major end use.
Food packaging, both dry and wet, is the largest folding carton application.
66
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TABLE 11-16
1973 U.S. BOXBOARD PRODUCTION
BY MAJOR GRADES AKD USES
M Tons %_
Solid Bleached Paperboard
Folding Carton 1728 20
Milk Carton and Food Service 1594 19
Linerboard 128 2
Other 134 2
Exports 280 3
Total Bleached Paperboard 3864 46
Recycled Paperboard
Folding Carton 2522 30
Set-Up 465 5
Other 1191 14
Total Recycled Board 4178 49
Unbleached Kraft Paperboard
Folding Carton 455 5
TOTAL BOXBOARD 8497 100
SOURCE: API Statistics of Paper and Paperboard, 1974
67
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TABLE 11-17
FOLDING CARTON END-USE BREAKDOWN
Food-Dry
Food-Wet
Soap
Paper Goods
Beverage Carriers
Hardware
Biscuits & Crackers
Candy
Retail & Laundry
Medicinal
Perishable Bakery
Tobacco
Textiles
Cosmetics
Other
1Y TONS AND DOLLARS SHIPPED, 1974
% of Total Tons !
20.4
13.8
8.6
6.1
8.1
5.7
6.1
4.6
4.8
5.0
3.6
3.1
2.8
2.3
5.0
100
I of Total Dollars
15.1
15.1
6.9
6.1
6.7
8.2
4.0
4.6
*.l
6.9
4.6
2.4
2.9
4.6
7.8
100
SOURCE : Paperboard Packaging Council
68
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SBS dominates in applications where:
Cleanliness is important - e.g., wet/moist/oily food packaging. (The U.S.
Food and Drug Administration has prohibited the direct contact of recycled
board with wet foods.)
Aesthetics are important - e.g., high value added drug/cosmetic packaging
where high quality printing is desired and the higher cost of SBS can be
absorbed more easily.
A favorable strength/weight relationship is important e.g., beverage car-
riers (although coated unbleached kraft board is also strong in this applica-
tion).
Recycled paper board dominates in applications where:
An inner lining is used - e.g., dry cereal/crackers packaging.
Economics is the dominant criterion for the carton stock used e.g., lower
value-added packaging for soap, detergents and paper goods.
Competition from nonpaper products has also been important in most bleached board
applications. Plastics have made a significant penetration into boxboard markets. Frozen
food cartons are being threatened by plastic bags; milk cartons are being displaced by
blow-molded high density polyethylene milk bottles; and paper cups/plates/trays are facing
significant competition from polystyrene containers.
Plastics are having less of an impact in the major recycled paperboard markets.
However, plastics are being used in conjunction with recycled paperboard in applications
such as blister packaging of hardware parts mounted on a printed piece of paperboard.
In spite of the intense intra- and inter-industry competition which bleached board
faces, its price elasticity of demand is the lowest of the Phase II sectors. The econometric
analysis used in this study indicates a coefficient of 0.18 over the period 1960-74. This low
price sensitivity is probably due mainly to the fact that the cross-elasticity of demand was
insignificant over this period because the prices of all competing materials moved in the
same direction at about the same rate. In addition, packaging materials no longer are
discretionary consumption items but are fundamental to the entire U.S. distribution system.
c. Supply
Bleached board capacity was about 3.4 million tons in 1973 and it achieved an annual
operating rate of 98%. Operating rates in this sector traditionally have been higher than that
of any other paper industry sector, generally fluctuating between 90% and 100% of
69
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capacity. The bleached board producers apparently appraise their practical maximum
capacity more realistically. Another factor which smooths year-to-year fluctuations in
operating rate is that many producers use their paperboard machines to produce market
pulp when bleached board demand is weak, thus shifting their capacity to another product
sector.
Total recycled paperboard capacity (including recycled boxboard and other recycled
paperboard grades) was about 8.3 million tons in 1973, and the industry's capacity
utilization ratio was about 95%. Allocating total recycled paperboard capacity to recycled
hoxboard, is an arbitrary process since a recycled paperboard machine can readily switch to
a variety of other recycled board grades. Thus, total production and capacity of recycled
paperboard are the most meaningful numbers to use in estimating capacity utilization ratios.
There are about 20 SBS board producers in the United States, of which the six largest
accounted for approximately 52% of 1974 U.S. bleached paperboard capacity (Table
11-18). Thus, bleached paperboard is a relatively concentrated market sector. The recycled
board sector is much more fragmented. As Table 11-19 shows, seven recycled board
producers accounted for about 50% of total recycled board capacity in 1974, but at least 45
other producers accounted for the remaining capacity.
All of the leading producers of bleached paperboard are integrated to on-site pulp
producticn, and control a significant portion of the woodlands that support their pulp milis.
Most are integrated forward to the production of folding cartons, milk cartons, or other end
products.
Most of the recycled boxboard producers are self-sufficient for their fiber require-
ments, since these requirements consist primarily of mixed wastepaper. However, some
producers do purchase bleached market pulp to form a top liner on their paperboard. A few
have on-site deinking facilities. No producers have on-site chemical pulping facilities at their
paperboard mills. Most of the leading recycled boxboard producers are also integrated
forward to "he production of folding cartons and/or set-up boxes.
Most cf the bleached paperboard mills are located near their fiber resources in the
South and in the West. Most recycled boxboard mills are located in major population
centers so that they can obtain sufficient suppliers of wastepaper raw material and can be
near the major folding carton and set-up box converting plants.
d. Prices
Table 11-20 shows the recent price history of bleached paperboard and recycled
paperboard. This table points out the increasing price differential between the two products
since 1973. In 1973 the differential between solid bleached and recycled paperboard was
$58/ton compared with $70/ton by late 1974. Most of the apparent increase was caused by
a trend to reduce the weight of bleached board to make it more competitive by offering a
70
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TABLE H-18
LEADING U.S. SOLID BLEACHED BOARD PRODUCERS
(% of 1974 U.S. Capacity)
Producer % of Total
International Paper 18.7
Westvaco 9.4
Potlatch 6.4
Continental Can 6.2
Eastex 5.8
Weyerhaeuser 5.7
Top Six Producers 52.2
Others (roughly 15 companies) 47.8
Total 100
SOURCES: Lockwood's directory of the Paper and Allied Trades;
Industry Contacts; Arthur D. Little, Inc. estimates.
71
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TABLE 11-19
LEADING U.S. RECYCLED BOXBOARD PRODUCERS
(% of 1974 U.S. Capacity. )
% of Total
Federal 13.9
Container Corporation of America 11.2
Packaging Corporation of America 6.3
Whippany 5.3
Brown Paper Company 4.9
Michigan Carton (St. Regis) 4.7
Simkins Industries 4.5
Top Seven Producers 50.8
Others (roughly 45 companies) 49.2
Total 100
Includes folding and set-up boxboard.
SOURCES: Lockwood's Directory of the Paper and Allied Trades,
Industry Contacts, Arthur D. Little,Inc. estimates.
72
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Year
1973
1974
TABLE 11-20
BLEACHED PAPERBOARD AND RECYCLED BOXBOARD PRICE TRENDS
1975
January
January
March
May
September
October
November
January
($/ton)
Bleached
Paperboard
210
250
280
280
320
350
350
350
P.ecycled Boxboard
(20-Point Clay-Coated)
152
190
220
230
260
260
280
280
SOURCE: H.C. Wainwright and Company, Industry price surveys.
73
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greater area yield per ton. Since the strength and stiffness characteristics of SBS are superior
to that of recycled board at a given caliper level, a higher caliper recycled board must
typically be used to provide performance similar to that of SBS. Thus, prices for a given
application must be indicated on an area basis to truly reflect the economic competitiveness
of recycled boxboard versus SBS board. This factor plus printability advantages mean that
the current price differential reflects a competitive equilibrium between SBS and recycled
paperboard.
Competition with recycled paperboard and plastics, however, apparently limited the
price increase that the bleached board producers could obtain. Even at 1975 prices, solid
bleached board sold at nearly the same price as bleached market pulp, although it costs
considerably more to produce. Nevertheless, most producers refrained from shifting their
machines to market pulp because they believed the resulting addition to pulp supply would
undermine prices and thus "ruin" the market.
Figure 11-10 shows the bleached board and bristols price trend versus capacity utiliza-
tion since 1960. Both current and real prices trended downward until 1972. Prices rose
sharply in 1973-74, but not as much as those of many other paper products. Price
movements have not been sensitive to changes in capacity utilization. This can probably be
explained by the moderately concentrated nature of the bleached board sector coupled with
the need to maintain a price/performance equilibrium with competing products.
e. Import/Export Balance
Imports of both bleached paperboard and recycled boxboard are insignificant. There
are no significant exports of recycled boxboard since the wastepaper furnish is economically
available in all industrialized regions. However, some bleached paperboard (about 7% of
1973 production) is exported to markets where U.S. producers are competitive by virtue of
their large scale and relatively low cost of fiber resources.
5. Tissue
a. Product Description
The tissue sector of the pulp and paper industry comprises both sanitary and non-
sanitary grades of tissue paper that are sold to consumer and industrial market sectors.
Sanitary tissue grades include bathroom and facial tissue, napkins, towels, and wipers.
Nonsanitary tissue grades include waxing, wrapping, and cellulose wadding tissues. The
so-called thin papers, such as carbonizing tissue, are not included in the tissue market. They
are included in the printing-writing and related papers sector, with which they are more
closely related from a market point of view.
74
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FIGURE 11-10
BLEACHED BOARDS AND BRISTOLS
MARKET PRICE
VERSUS CAPACITY UTILIZATION
300-
$/Ton
200
100 -
Capacity
Utilization
Current Dollar Price
Constant Dollar Price
j i j i j j i i i j i i i
1960 1961 1962 1963 1964 1965 1966 1967 1963 1969 1970 1971 1972 1973 1974
75
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Table 11-21 shows 1974 U.S. tissue production by major product. The sanitary tissue
segment accounted for about 94% of total 1974 tissue production. Table 11-22 shows 1974
sanitary tissue shipments in the consumer and industrial markets. It shows that consumer
tissue accounted for about 70% of total sanitary tissue production in 1974.
All of the above tissue grades are usually made from a combination of various bleached
pulps, including sulfite and kraft (both softwood and hardwood), small amounts of ground-
wood pulp, and deinked or high-grade wastepaper.
b. Demand
Total domestic U.S. tissue consumption increased at the rate of about 6% per year
from 1963 to 1968, and about 3.2% per year from 1968 to 1973. This recent slower growth
rate indicates that this market is maturing. In the 1950's and 1960's, consumer sanitary
tissue displaced reusable fabrics in the napkin and towel product categories. During this
period, the tissue market was one of the fastest growing markets in the pulp and paper
industry averaging in excess of 5%/year. Within the last few years, however, most of this
displacement has been completed and consumer tissue consumption has increased at a lower
rate.
The demand for tissue in the industrial market also increased rapidly in the 1960's as
the fast food industry proliferated and the demand for paper disposables increased accord-
ingly. While the consumption of industrial tissue has increased at a higher rate than that of
consumer tissue in recent years, the rate of growth is now decreasing as a result of a slowing
of the growth rate of the fast food/institutional food businesses which had been the chief
growth component.
In the future the demand for tissue products is expected to relate more closely to such
factors as consumer disposable income and population growth (since tissue displacement of
reusable fabrics has subsided). As such, the tissue market will probably grow more slowly
than real GNP over the next five years. However, the consumer segment of the tissue
industry will also probably be more recession-proof and less subject to cyclical swings in
consumption levels than the pulp and paper industry or the economy as a whole.
Consumer tissue is the paper industry's primary consumer product. Tissue producers
rely heavily on consumer marketing/advertising/promotion to sell their product in consumer
markets. Consumer sanitary tissue is usually sold on a direct basis from the paper pro-
ducer/converter to the grocery chain store. Both brand name and private label products
follow this pattern.
Industrial sanitary tissue is typically distributed through paper merchants or industrial
maintenance supply houses. From this distribution level, the product is ultimately pur-
chased by the major fast food chains, as well as by hotels, restaurants, and institutional
end-users.
76
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TABLE
1974 TISSUE PRODUCTION
BY PRODUCT
Sanitary M Tons % of Total
Bathroom Tissue 1474 36
Towels 1332 33
Napkins 439 11
Facial Tissue 355 9
Wipers 43 1
Other Sanitary 176 4
Total Sanitary Tissue 3813 94
Non-Sanitary
Wrapping 56 1.5
Waxing 52 1.3
Industrial Cellulose Wadding 32 0.7
Miscellaneous Tissue 108 2.5
Total Non-Sanitary Tissue 258 6
SOURCE: American Paper Institut-
Total 1974 Tissue Production 4077 100
77
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TABLE II- 22
1974 SANITARY TISSUE SHIPMENTS
CONSUMER VS. INDUSTRIAL MARKET
(% - On a tonnage basis)
Consumer Industrial
Bathroom Tissue 81 19
Towels 60 40
Napkins 49 51
Facial Tissue 100
Wipers -- 100
Total Sanitary Tissue 70 30
SOURCE: American Paper Institute
78
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Because of the product's high bulk, it is very expensive to ship tissue over long
distances. Thus, tissue normally is distributed on a regional basis, usually within 300 miles
of converting locations (which are themselves typically located next to paper mills and
near population centers).
Other than going back to reusable cloth fabrics, there are no economical substitutes for
sanitary tissue products. However, it is possible that continued escalation of tissue prices
may cause some consumers to economize on tissue use and possibly shift back to some
extent to reusable cloth. In the nonsanitary tissue area, waxing tissue has been and
continues to be replaced by plastic film and foil materials, primarily because of the latter's
superior performance characteristics.
The price elasticity of demand for tissue calculated by the econometric analysis in this
study was 0.45 or about average for the Phase II sectors. This moderately low coefficient is
not surprising in light of tissue's essential uses, fairly low cost, and lack of significant
substitutes.
c. Supply
As noted earlier, 1974 U.S. tissue production was about 3.9 million tons and capacity
was 4.3 million tons. Thus* the average 1974 operating rate was about 90%.
Unlike other paper industry sectors, tissue production is spread evenly throughout the
country (mostly near major metropolitan areas), as opposed to being centered near the
primary fiber resource areas of the South and West. This is so because tissue products are
very bulky and hence costly to ship.
The four largest tissue producers are Scott, Procter and Gamble, Kimberly Clark, and
American Can (Table 11-23). These four producers accounted for about 56% of total U.S.
tissue productive capacity in 1974. Thus, this is a relatively concentrated market sector
compared to other paper industry markets.
In addition to having substantial financial resources, the leading tissue producers are
largely vertically integrated. The major tissue producers: (1) are integrated to pulp on a
company basis, although not necessarily on a mill-site basis*; (2) control a significant
portion of the woodlands that support their pulp mills; and (3) are fully integrated on-site
to tissue converting. The practice of these industry leaders implies that substantial vertical
integration is an important component for success in the tissue industry.
"More than half of the output of this industry comes from tissue mills not integrated on-site to pulp.
79
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TABLE 11-23
MAJOR U.S. TISSUE PRODUCERS
(% of 1974 U.S. Capacity)
Scott 24.1
Procter and Gamble 12.8
Klmberly Clark 9.9
American Can 9.0
Crown Zellerbach 6.7
Fort Howard 6.6
Georgia-Pacific 6.0
Subtotal 75.1
Others (44 companies) 24.9
TOTAL 100.0
SOURCES: Lockwood's Directory of the Paper
and Allied Trades; Industry Contacts;
Arthur D. Little, Inc. estimates.
80
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d. Prices
Most tissue paper producers convert their product at the site where the tissue paper is
made.* The amount of tissue paper sold in the form of jumbo rolls (unconverted) is very
small. Thus, the most meaningful tissue prices are converted product prices.
Figure 11-11 shows the trend in tissue prices and capacity utilization since 1963. This
figure shows that like most other paper markets, the tissue paper prices increased relatively
little during most of the 1960's. In 1973, however, a fairly tight supply/demand balance,
coupled with rising costs, began to generate significant price escalations although not nearly
as high as those in other paper industry sectors. Between November i973 and October
1974, average sanitary tissue prices increased by about 30%. Note that the price series do
not reflect promotional discounts granted the retailers particularly during weak markets and
this masks the correlation with capacity utilization. (Tissue is the only Phase II sector that
does not reflect discounts in its market price.)
When discussing prices in the tissue market, it is important to understand that there is
significant product differentiation in terms of quality and brand name identification in the
consumer market sector. Brand name tissue products, which rely strongly on consumer
advertising for product differentiation are priced higher than private label tissue products.
Also, tissue grades that utilize a large proportion of deinked wastepaper are generally
priced below products made largely from chemical wood pulp fiber. This reflects a
somewhat lower consumer acceptance for tissue made from the typical wastepaper furnish,
apparently because of the product's slightly off-white color. In the industrial market sector,
there is far le^s product differentiation and price is viewed as a key determinant of a
successful marketing program.
e. Import/Export Balance
The import/export balance is not an issue as far as productive tissue capacity is
concerned. There have been no significant imports of any tissue materials to the United
States in the last 10 years, and exports have been less than 1% of total U.S. production over
this period. Prevailing tariffs plus high transportation costs for bulky tissue products explain
this low level of international trade.
6. Newsprint and Uncoated Groundwood Paper
a. Product Description
These products were grouped in this analysis because they bovh utilize a substantial
proportion (usually greater than 50%) of groundwood pulp in their fiber make-up, and they
*ln this case, converting refers to the functions of printing, die cutting, rewinding, folding/interleaving, and
final packaging.
81
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FIGURE II-11
TISSUE MARKET PRICE
VERSUS CAPACITY UTILIZATION
Tissue
t] Capacity Utilization
!TY;.
Current Dollar Price
Constant Dollar Price
$/Ton
1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
82
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are often produced in the same mill. Other common characteristics are that both products
are uncoated and are used in printing applications that do not require long storage or reuse
since the groundwood pulp discolors when exposed to ultraviolet light. Thus, they are used
for products such as newspapers (the dominant application), telephone directories, some
mail order catalogs, and other printed articles that are generally discarded within one year.
Newsprint is by far the largest major grade in this category, with a total U.S.
consumption of about 11 million tons in 1974. It is generally made from a pulp furnish
consisting of about 80% unbleached groundwood and 20% semibleacned kraft or un-
bleached sulfite pulp (West Coast groundwood pulp is often lightly bleached). Three U.S.
newsprint mills produce newsprint entirely from waste newspapers; as a result of their
successful market penetration, this recycling trend is likely to grow in areas with high
population and wastepaper densities.
Uncoated groundwood paper is generally made from a furnish consisting of 30-50% of
bleached chemical pulp and 50-70% of bleached groundwood pulp. Its principal applications
are for telephone directories, catalogs, paperback books, low-p.'iced magazines, comic
books, and general commercial printing.
b. Demand
U.S. newsprint consumption has increased at an average rate of 2.6%/year since 1964.
This puts it in one of the slower growth categories in the paper industry. Relatively rapid
growth in the suburbs has compensated for the demise of the large metropolitan dailies and
the relatively slow growth of all metropolitan newspapers. Consumption is highly related to
growth in GNP because advertising space is the key determinant of newspaper size or lineage
and therefore significantly affects newsprint consumption. Newspaper advertising has faced
stiff competition from radio and particularly TV advertising media; thus, newsprint com-
petes with these alternative methods of advertising.
Recently, a few new applications for newsprint have begun to develop in areas where
no more than short-term use is required. The increasing price differential between newsprint
and groundwood-free papers which occurred in 1974 provided increased incentive to shift to
newsprint. One such comparatively new application is in business forms where in 1974,
approximately 100,000 tons of newsprint and uncoated groundwood paper was substituted
for the traditional forms bond paper which does not use groundwood pulp.
U.S. consumption of uncoated groundwood papers grew at the average rate of 4.2% per
year (1964-1974) making it a somewhat higher growth area than newsprint. However,
uncoated groundwood papers have been replaced by coated papers in catalogs and maga-
zines, and their consumption has also suffered from the demise of low-cost pulp magazines
and comic books. The major recent growth areas have been telephone directories and pocket
books. Demand appears to be bolstered by the fact that the price differential below
groundwood-free printing papers widened appreciably during 1974. In January 1975. for
example, there was a $205/ton differential between No. 3 offset uncoated book and
83
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catalog-grade groundwood paper, whereas a year earlier the differential was about $100/ton.
This development should increase the use of uncoated groundwood paper in a number of
commercial printing applications.
The price elasticity of demand for newsprint, as computed in this study, ranges from a
relatively high 0.85 when measured by U.S. production to a relatively low 0.22 when
measured by U.S. consumption (although the latter coefficient is not statistically signifi-
cant). The most likely explanation for this pattern is that competition between U.S. and
Canadian newsprint mills introduces a fair degree of cross-elasticity.
c. Supply
Canadian newsprint mills play a pivotal role in supplying U.S. needs and, hence, are of
prime importance in the industry's competitive structure. Canada has become the world's
largest newsprint producer by virtue of the suitability and low cost of its pulpwood supply.
Furthermore, there usually are no duties on newsprint, which enhances Canada's exports. In
1974, Canadian mills supplied about 70% of U.S. newsprint consumption and U.S. mills
supplied the remaining 30%.
Table II-24 lists the capacity of the major North American newsprint suppliers. This
does not necessarily reflect their share of the U.S. market since many of the Canadian
producers have substantial overseas exports. The recent acquisition of the Price Company by
Abitibi Paper Company has given it a dominant 17% share of North American capacity.
International Paper with a 10% share traditionally was the major supplier.
North American newsprint supply is relatively concentrated. The top 14 firms have
nearly an 80% share of the total North American capacity and about an equal total share of
the North American market, while the top five producers have about a 50% sh?re. The flow
of newsprint from Canada to the United States, as well as to other countries, is facilitated
by the fact that most countries have no import duties on this product.
Table 11-25 lists capacity of the major U.S. uncoated groundwood paper producers.
Imports of groundwood paper from Canada or elsewhere are not significant (117 thousand
tons in 1974); an import duty, coupled with the freight advantage enjoyed by U.S.
producers in shipping this product, makes it difficult for nondomestic suppliers to compete.
Traditionally, the uncoated groundwood paper market has been viewed as an alterna-
tive use for old newsprint machines that are no longer competitive in the newsprint market.
This is the route of entry used by all current suppliers. Recently, however, Great Northern-
Nekoosa and Fraser Paper have installed new machines to increase their market share. These
two companies, along with Bowater and St. Regis, are the major U.S. producers.
84
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TA*LK IT- 24
CAPACITIES OF MAJOR NORTH AMERICAN NEWSPRINT SUPPLIERS. 1974
Company
Abitibi-Price
International Paper
MacMillan-Bloedel
Consolidated Bathurst
Bowaters
Ontario Paper
Kimberly-Clark
Boise Cascade
Southland Paper Mills
Crown Zellerbach
Great Lakes Paper
Garden State & FSC Paper
Great Northern - Nekoosa
Publishers Paper
Total
Capacity (000 tons/yr) percent Q£ N{jrth
U.S.A. Canada Total American Capacity
235
243
437
420
212
474
217
372
360
360
2,179
1,156
1,380
1,043
603
731
174
317
256
439
2,414
1,399
1,380
1,043
1,040
731
594
529
474
473
439
372
360
360
17.0
9.9
9.7
7.4
7.4
5.2
4.2
3.7
3.3
3.3
3.1
2.6
2.5
2.5
78.5
SOURCE: "Newsprint Statistics", American Newspaper Publishers Assn.
April 12, 1974
85
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TABLE 11-25
CAPACITIES OF MAJOR U.S. UNCOATED GROUNDWOOD PAPER
SUPPLIERS. 1974
Rank
Capacity
% Total
No. Mills
Great Northern-Nekoosa
Bowaters
St. Regis
Fraser
Appleton
Crown Zellerbach
Total
1
2
3
4
5
6
1,132
695
512
356
236
220
27.4
16.8
12.4
56.6
8.6
5.7
5.3
76.2
2
1
2
1
1
2
SOURCE: Lockwood's Directory, 1975.
86
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d. Prices
Newsprint prices traditionally have risen in gradual steps and have declined infre-
quently even though U.S. operating rates have fluctuated sharply. One explanatory factor is
that fluctuations in world operating rates were not as severe as in the United States and
prices behaved accordingly because of the substantial amount of world newsprint trade.
Another factor is the relatively high market concentration and price leadership exhibited by
five to six of the major North American producers.
Figure 11-12, however, shows that prices increased significantly beginning at the end of
1973 and rose rapidly after U.S. price controls were fully lifted in June 1974. The increases,
led by Canadian firms trying to bolster their low profitability, were stiil not as high as in
most other product sectors, another indicator of an oligopolistic market. The western
market, where newsprint traditionally sold below eastern prices, established a price premium
in 1974; this was made possible both by tight market conditions and the fact that two
producers dominate the western market.
A similar trend of price escalation took place for uncoated groundwood paper. As
discussed earlier groundwood-free printing and writing paper prices increased even more
rapidly than those of the uncoated groundwood grades. This rapid increase indicates that
uncoated groundwood prices relate more closely to newsprint prices, with which they are
more closely related from a supply standpoint. The resulting wider price differential
between the groundwood and nongroundwood grades makes the former more price com-
petitive and should stimulate its demand.
e. Import/Export Balance
As mentioned previously, newsprint is the largest volume paper product imported by
the United States. In 1974, U.S. publishers imported 7.4 million tons, worth about $1.5
billion, almost all of it from Canada. The United States is a relatively small newsprint
exporter with a 1974 volume of about 190,000 tons, worth 555 million. Most U.S.
newsprint mills are more concerned about capturing a greater share of their own market
than with vying with the Canadians in third markets.
An import duty plus a freight rate advantage for U.S. mills has kept imports of
uncoated groundwood paper to a minimum. In 1974, imports were about 117,000 tons.
Exports were also small, about 53,000 tons.
87
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300
$/Ton
200
100
FIGURE 11-12
NEWSPRINT MARKET PRICE
VERSUS CAPACITY UTILIZATION
Current Dollar Price
Constant Dollar Price !
f n~'(19381 Dol]ja'rp)
r- 1.1
.. 1.0
0.9
Capacity
Utiliza-
tion
0.8
0.7
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
88
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III. METHODOLOGY
A. ANALYTIC FRAMEWORK AND OVERVIEW
1. Procedural Framework
The methodology employed in this analysis was designed to measure the following
primary short- and long-run impacts of Federal water pollution control regulations:
Short-Run Impacts (1977)
Mill closures.
Increase in price because of:
- Potential shortages (tight capacity) from mill closures in next 3 years
Shift in the supply function reflecting the increase in cost due to
pollution abatement
Reduction in quantity demanded as a result of the price increase.
Long-Run Impacts (1983)
Price increase which may be of different magnitude than that which occurs
in the short run.
Change in the balance of trade because of international differences in
pollution control requirements.
The following economic impacts are beyond the scope of this report:
Secondary effects on customers and suppliers of raw materials* pollution
control equipment, etc.
Long-run changes in demand, industry concentration, and aggregate capital
requirements.
Four disciplines were used in the assessment of the impact upon the paper industry of
compliance with water effluent guidelines:
Econometrics
Engineering
Business Analysis
Financial Analysis
89
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Through econometrics, the parameters of a demand schedule and a supply schedule for
the major product sectors were estimated to determine the price and output impacts due to
increased pollution abatement costs.
Engineering process economics were used to estimate the capital operating cost
structure of existing and new mills, as well as the capital and operating costs of compliance
with water effluent guidelines, OSHA noise abatement requirements, and air emission
regulations.
Business analysis methods were used to develop the judgmental inputs necessary in the
screening of all mills to identify closure candidates, weighing the feedback obtained from
interviewing management of potentially threatened mills and assessing inter-country pollu-
tion and production cost differential effects in the balance-of-trade analysis.
Financial analysis techniques were used to analyze the cash flow behavior of mill
closure prospects and the long-term price required to attract and maintain capital in the
industry.
This section describes the procedures used to apply the analytical techniques (detailed
in Sections B through F) to the calculation of economic impacts. The overall structure of the
procedural framework and interrelationship of the disciplines employed is presented in
Figure III-l.
Within the context of two economic scenarios, the costs of compliance with 1977 and
1983 water effluent guidelines and new mill cost models, along with industry expansion
commitments and the cost of capital, were used to estimate first-order price and quantity
demanded (output) effects. The analysis of mill closures was based upon the estimated price
effects, the cost of capital,1 the characteristics of mills in the industry and financial models
of closure-candidate mills. The estimated capacity lost from mill closures was then used to
arrive at the final estimate of price and quantity effects.
The comparative cost of producing paper in the United States and other countries was
analyzed, accounting for the projected cost of compliance with water effluent guidelines in
the United States and with water pollution control standards in other countries, to estimate
the balance of-trade effects.
2. Price Effects
The effects on price of compliance with water effluent guidelines were estimated using
econometric models, engineering costs, and the results of the closure analysis. The econo-
metric models were also used in conjunction with an economic scenario to produce demand
forecasts, and industry commitments were used for net capacity expansion.
1. The cost of capital was provided by another contractor to EPA.
90
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FIGURE III-l
PROCEDURAL FRA11EWORK FOR
ESTIMATING ECONOMIC IMPACT
Process
Economics
Cost
Analysis
Development
Cost
of
Compliance
Mill
Models
Economic
Scenario
Micro-Economic
Analysis
- Econometrics
Industry
Commitments
- Discounted
Mill
Charac-
teristic
Cash Flow
Mill
Closures
and
Quantity
Effects
Closure Analysis
- Business Analysis
- Discounted Cash
Flow
Foreign
Pollution
Control
Costs
Comparative
Cost
Analysis
Exogenous to Study
Analysis
Result
91
-------
In analyzing the short-run price and output effects produced by the imposition of
pollution controls, it is useful to draw an analogy with taxation theory. Because the
installation of pollution control equipment is legislatively mandated, the economic decision
to install it falls outside the purview of usual capital budgeting theory, and it is useful to
consider the attendant pollution control costs as tantamount to a tax. The cost will have two
components:
A fixed component which does not vary with plant output; and
A variable component which alters the plant's marginal cost function.
The first component is equivalent to a tax on fixed assets; the second is equivalent to a unit
tax on output. The fixed component is dominant; hence, it is unlikely that the increase in
variable costs will increase average variable cost above market price.
While a necessary condition to stay in operation is that price equal or exceed average
variable cost, the mill owner must also perceive that he will recover the investment in the
pollution capital equipment over the remaining life of the mill (i.e., the present value of
expected future net cash flow must exceed the present salvage value of the mill). Hence, the
short-run industry supply curve is altered by plant closings, which shift the supply curve to
the left, and by the increase in variable costs, which shift the supply curve upward.
a. Short-Run Analysis (BPT-1977 Standards)
Figure III-2 depicts the flow and interrelationship of the procedure used to estimate
the price effect of compliance with 1977 standards. Note that an iterative procedure is
required because of the interdependence among demand, price, operating rates, and clo-
sures. This sequence of steps is as follows:
(1) The demand equation from the econometric model and the Chase Econo-
metrics1 economic scenario were combined to produce forecasts of quantity
demanded for the years 1975 through 1978, at the current market price.
(2) The level of capacity for each year was calculated by adding industry
commitments for net capacity expansion (Table III-l) to year-end capacity
as of December 1974 and the forecast operating rate was calculated and
checked for possible price effects.
(3) ITie incremental cost of compliance by product sector2 was separated into a
fixed component and a variable component. The fixed component consists
1. Ten-year forecast prepared by Chase Econometrics, Inc., on April 23, 1975.
2. See Chapter IV, Section F for a discussion of the process-to-product relationship used to estimate the
existing mill cost of compliance with 1977 Standards.
92
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TABLE III -1
PULP AND PAPEB INDUSTRY
COMMITMENTS FOR NET NEW CAPACITY
(1975 - 1983, 000 Tons Per Year)
Bleached Boards
and Bristols
Printing and
Writing Paper
Tissue
Newsprint
Dissolving Pulp
Bleached Sulfate
Plus Bleached Sulfite
Year-End
1974
5,202
Incremental Additions
1975
-32
18,341
144
1976
161
300
1977
77
691
1978
206
11,613
4,322
3,481
1,771
149
94
115
-41
379
102
74
-2
269
98
83
0
363
42
51
5
397
SOURCE: American Paper Institute, "Paperboard, Wood Pulp Capacity,
1974-1977", October, 1975.
94
-------
of the capital investment and approximately 25% of the annual operating
costs.
(4) The short-run effect on price of compliance with 1977 standards is based
upon the assumption that the firms are profit maximizers and the supply
function would shift by the change in marginal cost. The new equilibrium
price is then determined by the intersection of supply and demand. As an
alternative to the standard competitive model, a price was calculated which
reflected the total change in cost (fixed and variable) by annualizing capital
expenditures.1 (See Table III-2.)
(5) Estimated capacity lost from mill closures was then subtracted from total
capacity and the resulting operating rate was again checked for potential
shortage price effects.
(6) A final equilibrium set of demand, closures, prices and operating rates was
derived by this iterative procedure.
The short-run price effect and total cost recovery price effect provide a range of
potential price effects due to the 1977 standards. The actual price impact realized depends
upon the pricing behavior of the industry. The short-run price effect was used in the closure
analysis because it results in a more conservative estimate of future mill profitability.
b. Long-Run Analyses
Figure III-3 outlines the steps used to estimate the effect of compliance with the
1983 standards. The procedure for estimating long-run effect of compliance with effluent
guidelines focuses on new source performance standards. As new capacity enters the
industry, the efficient producer determines long-run price. The amount of time required for
these forces to take place cannot be accurately measured but clearly depends upon the rate
of demand growth.
For each product sector, it was appropriate to use the new mill models constructed on
the basis of the most efficient process for that sector. The new mill financial structure
(discussed in detail in Section III-F and Appendix E) and engineering estimates of the cost
of compliance and the future stream of cash outflow required for operation and mainte-
nance over the life of the mill were used as the basis for calculating a price based upon a
1. The formula is:
Initial Investment x r x (1 + r)n
Annualized Cost =
(1+i-)n-1
where r = cost of capita! and n = the time period over which the equipment is depreciated (10%and 16
years, respectively, for the purpose of this study).
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target rate of return, both with and without pollution controls. (See Section III-D for
discussion of the technique used.) The target rate of return was equivalent to the cost of
capital to the industry.1 Thus, the resulting long-run price is that required to attract and
maintain capital in each product group.
Note, however, that since the new mill models are based upon representative products
for a sector and not the totality of products within a sector, the long-run price effect of
compliance with NSPS is best measured by the difference between long-run price with and
without pollution controls than by the absolute prices.
An analysis was done of the sensitivity of long-run price effects of 1983 standards to
reasonable changes in the cost of capital (±2.5%, after tax) and whether or not OSHAand
air control costs are included in the base calculation.
3. Effect Upon Quantity Demanded
Within the context of the economic scenario and demand forecasts, the change in
quantity demanded in response to changes in price was estimated by applying the elasticity
of demand indicated by the econometric model demand equation.
The elasticity of demand measures the responsiveness of quantity demanded to changes
in price. The econometric model was developed over a time frame which saw only one
radical change in price, that occurring during the 1973-74 period. Thus, the elasticity
coefficients cannot reflect any long-run impact of the 1973-1974 rapid price increases for
these paper products for it may not be fully experienced until 1976 or 1977.
The reduction in demand which would occur due to the 1977 standards was calculated
for the years 1975 to 1978 assuming that:
(a) the short-run price effect occurs;
(b) a total cost pass-through (long-run) price effect occurs.
In the case where there was a forecast capacity constraint, the change in output is a
function of the pollution control-caused shift in supply and the capacity shortage-induced
price effects.
4. Mill Closures (Capacity Effects)
The potential capacity lost due to mill closures was estimated by a multistage process
(Figure III-^). First, all the mills in the relevant process sectors were characterized and put
through a screening analysis to identify an initial list of closure candidates. Managers of
1. As provided by a separate study done for the EPA.
98
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these mills were contacted to assess extent of compliance and closure plans, resulting in a
smaller list of potential closure candidates.
For a homogeneous group of potential closures, estimates of compliance costs, oper-
ating costs, prices, and the cost of capital were combined to form the basis for a financial
analysis. The discounted cash flow technique was used to determine if the net present value
of expected cash flow generated by the closure candidate was less than the net present value
of salvaging the mill in 1976 and 1983, with and without pollution control expenditures
(BPT and BAT), to provide additional insight to the probability of closure.
The estimated capacity reduction from mill closures was used as an input to the
micro-economic analysis to assess potential impact upon price.
5. Balance of Trade
The foundation for the balance-of-trade impact estimates was a comparison of current
effluent control costs in major pulp and paper producing countries and an assessment of the
control levels that mills in these countries will attain by 1977 and 1983. The basic source of
data for this analysis was a 1972 comparative survey by the OECD (Organization for
Economic Cooperation and Development). The pollution control cost differentials derived
from this survey were then compared with ADL estimates of current inter-country differ-
ences between the major production and distribution cost items: wood, transportation, and
duties. (The analytical process is illustrated in Figure III-5.)
The water effluent control cost differential estimates for 1983 were based on the cost
estimates provided in the Development Document, assuming that other major countries
would beat BPT when U.S. mills are at BAT. ADL estimated the differential costs for wood,
transportation and duties based on a previous study conducted in 1973; this was updated by
trade data to reflect 1975 costs. To simplify the analysis, costs other than wood, transporta-
tion duties and water effluent controls were assumed to be similar in aggregate in the key
competing export regions. It was further assumed that present currency exchange rates will
be maintained. Finally, the assumption was made that inflation rates of the above cost items
would be the same in all competing regions.
Estimates of the balance-of-trade impacts were made by first examining the cost
differential among countries and then evaluating the significance of the change in cost
advantage due to anticipated pollution control cost for U.S. mills. Thus, if pollution control
costs were to eliminate or significantly reduce the current cost advantage for U.S. mills,
imports would be increased or exports reduced commensurate with the cost advantage
reduction.
The above analysis was applied to bleached kraft market pulp, dissolving sulfite pulp,
and newsprint, which are the only Phase II products that are imported or exported in
significant quantities. The analysis assumed that the inter-country water pollution control
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cost differentials would not induce trade in products not previously traded because such
products typically face relatively high tariff barriers which have already created high
inter-country cost differentials.
6. Sensitivity of Results
Several of the analyses included sensitivity analyses. In addition, two economic
scenarios were used as the basis of the demand forecasts.
a. Price Effects
The sensitivity of relative long-run price effects was examined to a reasonable (± 2.5%)
after-tax range of rates of return.
The Case 2 scenario (described in Subsection 6d), with its optimistic forecast for 1978,
was used to test an extreme case for potential capacity pressure.
b. Demand Forecast
The two standard deviation range of the demand equation forecast was calculated to
give an indication of the potential error range of the forecast due to unexplained variance in
the historic data.
c. Mill Closure Analysis
As mentioned in Section III-C and Chapter IV, the mills under consideration in the mill
closure analysis vary greatly in terms of market characteristics, product mix, average prices,
operating costs, profitability, investment requirements, etc. Also, projections of the above
factors required in the financial analysis phase of the closure methodology are subject to a
great deal of uncertainty. As a result the impact of several key variables (including cost of
capital, operating rate, margins, and pollution control expenditures) was tested in the
financial analysis. This sensitivity work was done on each generalized mill model, since the
degree of uncertainty/variability was different in each case. Also, the sensitivity impact was
quantitatively assessed only in cases where a reasonable change in a given variable had the
potential to reverse the findings of the financial model. (For example, if the financial model
indicated a closure when a 95% operating rate assumption was used, an analysis using a
lower operating rate assumption was not necessary.) For a more, detailed discussion of the
sensitivity work done in each process sector, refer to the specific financial conclusions in the
closure analysis findings given in Chapter V.
d. Eccnomic Scenarios
The severity of the economic impact of compliance with water effluent guidelines will
vary depending upon general economic conditions. This study uses two economic scenarios
to estimate the range of probable impacts.
102
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The basic aggregate economic scenario is the Chase Econometrics national income
account forecast made as of April 1975. Since the Chase forecast contains a business cycle
with a recession in 1978, ADL also used a second scenario consisting of the Chase forecast,
omitting the recession years. Table III-3 contains the levels of GNP in current and constant
dollars for each scenario, as illustrative of the economic cycle in each scenario.
B. ECONOMETRIC ANALYSIS
1. General Formulation
The potential impact of compliance with water effluent guidelines depends upon the
supply and demand characteristics of the industry's products. Econometric models, con-
sisting of a demand equation and a supply equation, were constructed for the individual
product sectors, The analysis formulated a projection of demand. However, it was not
necessary to formulate a short-term capacity growth function because industry commit-
ments for net additions to capacity through 1978 are collected and published by the
American Paper Institute. These commitments are quite firm and therefore most funding
arrangements already have been made.
The purpose of constructing econometric models is:
to estimate the elasticity of demand, which measures the responsiveness of
quantity demanded to changes in price;
to determine the shape of the short-run supply curve to identify the
relationship between capacity utilization and price pressure.
a. Demand Equation
In specifying the demand equation, the following paper industry characteristics and
factors are relevant:
(1) Demand for paper and paperboard products increased along with the general
level of economic growth.
(2) Exports and imports of newsprint, bleached paper pulp and dissolving pulp
are important.
(3) Some product sectors have substitutes for some applications, primarily
materials made of plastic. The conversion lead time to transform a produc-
tion facility from using paper to using plastic material is about two years.
(4) The paper industry was subject to price controls until mid-1974.
103
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TABLE II1-3
ECONOMIC SCENARIOS
GNP in Current Dollars GNP in 1958 Dollars
1975
1976
1977
1978
1979
1980
Case 1
1467,8
1662.3
1856.6
1975.2
2146.3
2414.0
Case 2
1467.8
1662.3
1856,6
2167.8
2435.6
2667,0
Case 1
791.8
846.6
883.5
873.4
894.8
958.8
Case 2
791.8
846.6
883.5
958.8
1015.7
1059.6
SOURCE: Chase Econometrics.
104
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(5) Historically, the industry maintains a product inventory equivalent to one
month's production, and converters keep somewhat larger inventories than
paper makers, about a I'/z month supply (see Table III-4). Therefore, the
short-run impact of a price increase should be visible within one or two
quarters.
Experimentation with various forms of demand equations produced the following results:
(1) The price of substitutes is not statistically significant in explaining paper and
paperboard consumption; plastic resin prices have moved with paper prices,
and paper prices across substitute product sectors have moved together. Any
substitution effect which has occurred is not measurable.
(2) Price in the current quarter was statistically significant in explaining con-
sumption in the current period; lagged prices had smaller coefficients, higher
standard errors, and did not fit the historic data as well.
(3) Income effects, while strong in the current quarter, are stronger when lagged
one or two quarters.
Also, logarithmic formulations of the demand equation were not superior to linear formula-
tions and hence the linear form was used.
The worid market for paper and paperboard was not modelled; thus for purposes of
this analysis, quantity exported, quantity imported, and the price of imports are considered
exogenous. The price of exports is assumed to be equivalent to the price of domestic
production plus transportation.
b. Supply Equation
Certain characteristics of the paper industry are relevant to the specification of the
supply function:
(1) For the most part, mills operate 24 hours a day, seven days a wpek. Capacity
utilization rate for the paper industry is high compared to all manufacturing
industries as a whole.
(2) In most sectors of the paper industry, as in many industries, variable cost
increases as production nears capacity and this cost pressure results in price
increases.
(3) The principal components of variable cost are fiber, labor and energy.
105
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(4) Although many mills produce more than one product, a given machine, with
certain limited exceptions, can produce only one type of product. Joint
product effects are therefore not a problem.
(5) Imports are important for newsprint, bleached paper pulp and dissolving
pulp.
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when production neared capacity was unknown, it was necessary to develop a proxy to
represent the effect. The supply function can be represented as a rectangular pseudo-
hyperbola of the general form :
m
PRICE = 2 bl (Average Factor Price x Quantity of Factor ) +
(% Idle Capacity)N
= MARGINAL COST
The reciprocal of the percent of idle capacity raised to some power serves as a proxy for the
increase in marginal cost which occurs as full capacity is neared for sectors with strong
price/capacity effects. For others, the percent of capacity that was idle correlated with the
marginal cost effect.
It was not possible to develop data series for all components of variable cost and thus
the assumption was made that changes in the major components in sum behave as the total.
Historic series were developed for the major variable cost components of labor, energy and
wood. Historic labor and wood costs were developed by using factor prices: a weighted
average of the paper mill and the paperboard mill wage rates, multiplied by manhours per
ton of product for the labor component; the price of pulpwood per cord multiplied by the
number of cords per ton for the wood component. It was not necessary to develop a price
series for each energy form used by the industry. A composite energy price index pertaining
to industrial usage in conjunction with an estimate of the energy expenditure for a ton of
paper in a base year was used to proxy the quantity and price of energy.
In the analysis, ADL discovered that the energy component of variable cost thus
developed was highly correlated with paper prices, to the extent that the wood component
became nonsignificant and the coefficient of energy price became very large. It is reasonable
to interpret this phenomenon as noncausal. Although the price increase experienced by
paper products may have been related to the same causal phenomenon as energy, it would
not have made sense to use a supply equation which excluded the principal variable cost
component. Therefore, it was necessary to combine labor and energy into one component
of the supply function.
107
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c. Data Sources and Model Development Period
Because list prices do not reflect prices prevailing in loose markets, market price
information for representative products in each sector was collected from firms in the
industry. Availability of historic market prices varied from sector to sector.
For the most part, the product sector definitions used in this analysis reflect groupings
of products currently used by the American Paper Institute and U.S. Department of
Commerce. In some sectors, historic information was available on a consistent basis
beginning in the early 1960's and for others, beginning in the mid- to late-1960's.
As a result of the use of market prices and the desire to use consistent data, the historic
development period over which the product sector equations were developed varies from
sector to sector.
2. Product Sector Models
It proved feasible to develop econometric supply/demand models for the following
sectors:
Bleached Market Pulp
Printing and Writing Paper
Tissue
Newsprint
Bleached Market Pulp
Dissolving Pulp
The same general methodology was used for each of the product sector econometric
models. The macro-economic demand variable differs from sector to sector and the relation-
ship between price and capacity utilization varies.
All of the product sector equations, along with appropriate statistics, are included in
Appendix A. The following discussion focuses on the characteristics of each sector which
distinguish it from the others in the development of an econometric model. In each case, a
figure depicts the shape of the demand and supply functions. For ease of comparison,
quantity is expressed in relation to capacity (operating rate); the price scale is a relative
index, with 1.00 equal to a 92% operating rate.
108
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a. Bleached Board and Bristols (Figure III-6)
The Bleached Board and Bristols product sector is characterized as follows:
(1) Mills generally operate at higher capacity utilization levels than the paper
industry as a whole without the same magnitude of price pressure.
(2) Plastic products and recycled paper are substitutes in some applications.
The operating rate characteristic may be explainable by the manner in which these
mills report capacity: i.e., rated capacity versus maximum capacity. Regardless of the
reason, the emergent supply function does not indicate a statistically significant effect of
increase in marginal cost as capacity is reached.
Although there are substitute products for some applications, neither the price of
substitute plastic products nor of recycled board was statistically significant in the estima-
tion of the demand equation; historically, prices of substitutes move with the market price
of bleached boards and bristols The macro-economic variable which best explained demand
shifts in this sector was GNP.
b. Printing and Writing Paper (Figure IH-7)
The printing and writing paper category of products has characteristics similar to the
aggregate of paper products, as follows:
(1) Substitutions are possible among grades within the category but few substi-
tutions outside the category.
(2) Historically, price increases have occurred in response to capacity pressure.
In addition, imports and exports are not significant for this product category and a
substantial number of mills are not integrated to pulp. Shifts in demand for this product
sector were more closely associated with variation in Industrial Production than any other
macro-variable.
As indicated in Figure III-7, severe capacity-induced price changes can occur if demand
and supply intersect at high (97%) operating rates.
c. Tissue Paper (Figure III-8)
Tissue paper product characteristics are as follows:
(1) There is very limited opportunity for product substitution.
109
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FIGURE III-6
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
BLEACHED BOARDS AND BRISTOLS
Relative
Price
Per
Ton
1.06
1.05
D
1
1.04| \
1.03
1.02
1.01
1.00
.99
.98
s
-
1
D = Demand Schedule
S » Supply Schedule
C = Capacity
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
110
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FIGURE III-7
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
PRINTING AND WRITING PAPER
Relative
Price
Per
Ton
1.06
1.05
1.04
1.03
1.20
1.01
1.00
.99
.98
D
D * Demand Schedule
S Supply Schedule
C = Capacity
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
111
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FIGURE III-8
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
TISSUE
Relative
Price
Per
Ton
1.06
1.05
1.04
1.03
1.02
1.01
1.00
.99
.98
D = Demand Schedule
S = Supply Schedule
C Capacity
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
112
-------
(2) Imports and exports are not significant.
(3) Many mills are not integrated to pulp.
Historically, there have been price increases due to capacity pressure. The emergent
price effect is not as strong, as measured by the estimated coefficients of the supply
function, and the supply function rises gradually as capacity is approached. Persona!
consumption is the most powerful explanatory variable for tissue demand.
d. Newsprint (Figure III-9)
Newsprint differs from the product categories discussed thus far, in that most of the
domestic consumption is imported from Canada. The demand (consumption) equation
incorporates imports and exports, and ADL estimated the coefficients of a similar function
for production. In both cases, GNP was the best demand shifter.
e. Bleached Market Pulp (Figure III-10)
Bleached market pulp is sold primarily to non-integrated, Phase II product sector mills.
Market pulp was 19% of total bleached sulfate and sulfite production in 1974. Canadian
imports are a substantial portion of total purchased bleached pulp, and thus imports are
relevant in the specification of the demand (consumption) equation. GNP was the macro-
variable with the best explanatory power.
Since the concept of a fixed capacity for bleached market pulp versus total bleached
pulp is specious, ADL developed a forecast of total bleached pulp production in order to
assess the potential problem of tight capacity, and to relate the supply price of bleached
market pulp to that of bleached sulfate and sulfite capacity. As indicated in Figure III-10,
the supply function rises substantially as total bleached capacity is reached.
f. Dissolving Pulp (Figure III-l 1)
The following factors are relevant to the development of an econometric model for
dissolving pulp:
(1) Dissolving pulp is not used to make paper but rather as a raw material for
products in other industries.
(2) In both the United States and the remainder of the free world, the demand
for dissolving pulp has been declining or stagnant since 1968.
(3) Each major application has substitute products and the substitution is not
necessarily conditioned on dissolving pulp prices.
113
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Relative
Price
Per
Ton
FIGURE III-9
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
NEWSPRINT
D - Demand Schedule
S - Supply Schedule
C » Capacity
D,: "Production" Demand
D_: Consumption of Domestic
Production
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
14
-------
Relative
Price
Per
Ton
FIGURE 111-10
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
BLEACHED MARKET PULP
1.06
1.05
1.04
1.03
1.02
1.01
1.00
.99
.98
D = Demand Schedule
S ~ Supply Schedule
C = Capacity
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
(Total Bleached Sulfate & Sulfite)
115
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Relative
Price
Per
Ton
FIGURE III-ll
ECONOMETRIC MODEL SUPPLY AND DEMAND FUNCTIONS
DISSOLVING PULP
1.05
1.04
1.03
1.02
1.01
1.00
.99
.98
90 91 92 93 94 95 96 97 98 99 100
Operating Rate
D = Demand Schedule
S - Supply Schedule
C = Capacity
DI US Production
D- World Consumption
116
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There was difficulty in producing credible equations for this sector; the causal demand
shift factor could not be identified. The major end use of the product is rayon fabrics and
the ratio of rayon price to substitute product price is positively correlated with dissolving
pulp production.
Since it is anticipated that future demand for this product is likely to decrease, the
purpose of estimating coefficients of an econometric model was to assess the elasticity of
demand for this product. ADL formulated demand equations and calculated elasticities on
both a U.S. and world-wide basis.
3. Technical Notes
a. Solution Algorithm
The econometric models, for both the industry and product sectors, are generally
over-identified. To overcome the problem of the upward bias in the price coefficient of
demand equations, caused by the inter-relationship between price and quantity, ADL used the
two-stage least squares technique.1
b. Autocorrelation
Some equations have low Durbin Watson statistics, indicating the existence of auto-
correlation of residual items ADL did not incorporate an additional set of parameters to
explain the pattern of residuals. For forecasting purposes, the primary interest is in
modeling the general trend and not fluctuations around trend; the standard errors of the
regression equations were sufficiently small for this purpose. The effect of not correcting for
serial correlation is that some of the coefficients, though consistent and unbiased,2 have
larger standard errors and could be not significantly different from zero.
c. Estimation of Coefficients of Non-Linear Variables
There is no simple solution for the treatment of a simultaneous equation system that is
non-linear in endogenous variables. Although some theoretical work in econometrics has
been done,3 the construction and incorporation into a computer program of a grid search or
maximum likelihood solution algorithm was beyond the scope of this study. Available
canned con puter programs are only useful for exactly identified systems. ADL therefore used
ordinary le.ist squares to estimate the parameters of the supply equations which contain the
non-linear variable. The main consequence of this procedure is the possibility that the
coefficient of the non-linear term could be misestimated and the capacity utilization rate at
1. For a detailed discussion of this and other techniques, see: J. Johnston, Econometric Methods, McGraw
Hill, 196.'}, pp. 231-295.
2. Ibid, pp. 179, 187-192.
3. Takeshi Amemiya, "The Nonlinear Two-Stage Least Squares Estimator," Technical Report No. 116,
December 1973, Institute for Mathematical Studies in the Social Sciences.
117
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which margin al cost increases and price pressure occurs could be incorrectly assessed. To
compensate for these possibilities ADL industry experts checked the results for consistency
with traditional price pressure points in the pulp and paper industry.
C. MILL CLOSURE ANALYSIS METHODOLOGY
1. introduction
The mill closure problem is complex for many reasons. First, mill closures are caused by
;i variety of factors, including general economic conditions, state and local requirements
and mill profitability. Second, the decision-making frame of reference for a private owner o.'
a small mill may be quite different from that for an analyst of a major corporation .>r
financial institution. Third, the various mills in the process/product sector categories
considered in this study vary considerably in size, product mix, average pricss, scss.
structures, etc. Thus, the mill closure decision is actually based on a specific analysis of the
characteristics of each mill studied, on a mill-by-mill basis.
Given these complexities, a methodology was developed to estimate the number of
mills and amount of capacity affected by mill closures. This methodology involves: i)
screening each Phase II sector mill to identify mills that may have difficulty ccmpJying wsth
EPA pollution control standards; 2) interviewing mill management in order to gain addi-
tional perspective on specific mill characteristics; and 3) financial analysis for categories of
mills identified as having closure potential.
2. Screening Analysis
The screening analysis began with the collection and organization of published infor-
mation on each mill, including data on mill capacity, major products produced, and external
treatment in place. Based on these data, a panel of industry experts met to review the
closure possibilities for each designated mill. Questionable candidates were identified foi
further review. In the screening process, considerable judgment was applied in evaluating the
following important factors:
Production Capacity - In most process sectors, the larger mills enjoy a
more favorable cost position. Many larger mills are newer, more efficient,
and have economies of scale that allow the mill to more easily absorb
pollution control costs. Thus, mill size is an appropriate criterion for this
screening analysis. Although size criteria were applied to each process sector
on an individual basis, mills in the lower quartile by size in each process
sector received special scrutiny.
Treatment Train Facilities In-Placc - It is reasonable to assume that mills
.hat either 1) currently comply with 1977 effluent standards or have
announced definite plans to comply, or 2) are currently so close to
118
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compliance that the mill management has (at least implicitly) demon-
strated a commitment to the mill, will not close for environmental
reasons.
Therefore, mills that do not have in-place the following pollution control equipment
were assessed more comprehensively in the screening analysis:
Secondary treatment
Chemical recovery or incineration (sulfite and NSSC mills)
Municipal treatment facility tie-in
Inputs for this part of the analysis included: 1) National Council of the Paper Industry for
Air and Stream Improvement, Inc., mill listings of the extent and type of effluent treatment
processes in-place; 2) EPA effluent load data; 3) other publicly available information
sources; and 4) ADL's familiarity with many of the mills under consideration. With this
information, a reasonably accurate base of understanding concerning a given mill's prox-
imity to compliance with 1977 pollution control standards was developed. The above
information sources were also cross-checked against each other in order to provide further
accuracy.
Process I Product Sectors The industry sectors under consideration have
varying average prices, product mixes, cost structures, and effluent load
characteristics. Thus, these process sectors will be impacted by pollution
control requirements to varying degrees. For the purposes of this analysis,
Phase II pulp and paper industry sectors are as follows:
- Bleached Kraft
Groundwood
Sulfite
Soda
Deinked
Tissue/Thin Papers Non-Integrated
Printing and Writing Papers Non-Integrated
Process sectors which have had more significant closure impact in the past
(e.g., sulfite, groundwood, and various non-integrated sectors) were assessed
more comprehensively in the screening analysis.
Knowledge of Specific Mills - The screening panel was familiar with many
of the mills ADL examined. In certain instances, this familiarity gave ADL
the opportunity to use relevant information on specific mills.
119
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3. Direct Indust'y Contact
The interview process was designed to validate and update published information, and
to develop a more accurate understanding of the position of mills identified in the initial
screening as requiring further review. A number of multi-plant companies were interviewed
to review all their mills, so it was also possible to validate the adequacy of the screening
process by determining whether any closure candidates could be identified that had not
origina'ly been identified by screening. Issues involving mill economics, pricing, pollution
control expenditure requirements, attitude and future plans of mill management, and
state/local environmental requirements were addressed in these interviews. As a result of this
r ise of the analysis, four mills were added to the potential closures list. (A copy of the
guide used in these interviews is presented in Appendix F.)
On the basis of the additional information developed via industry interviews, the mills
that survived the first screening were screened again using the criteria described above. (Note
that Table V-12 shows the number of mills requiring further review that were identified in
each of the screening phases.)
4. Financial Analysis
As a result of these two screenings, a number of mills were identified as being closure
candidates In order to assess further these endangered mills, they were grouped into
homogeneous categories by production processes, product mix, and size. Of course, due to
the unique characteristics of each mill within a particular grouping, no category could be
made completely homogeneous. On the basis of these mill groupings, existing mill models
were developed (see Chapter IV). These existing mill models are representative of typical
closure candidates within each mill category. They should not be viewed as being representa-
tive of any individual mill situations. On the basis of these existing mill models, a discounted
cash flow analysis (in constant 1975 dollars) was performed. (The basis of the DCF model
utilized is discussed in Section D.) The following scenarios were tested via DCF analysis:
(A) Operation Through 1983 (No Incremental Pollution Control Expenditures)
If the net present value (NPV) of expected cash flow generated by the mill model in
question is less than the NPV of salvaging the mill in 1976, then it is reasonable to assume
that the mill would close, even in the absence of additional pollution control requirements.
Thus, a mill closure in this category should not be classified as an environmentally related
closure.
(B) Operation to 1983 (Compliance with BPT)
If the NPV of expected cash flows under this scenario is less than the NPV of salvaging
the mill in 1976 (and Scenario A indicates that the mill is economically viable), then it is
reasonable to assume that closure resulting from BPT could be expected.
120
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(C) Operation to 1993 (Compliance with BPT and BAT)
If the NPV of expected cash flows under this scenario is less than the NPV of salvaging
the mill in 1976 (and Scenarios A and B indicate that the mill would continue to operate),
then it is reasonable to assume that closure resulting from the combined effects of BPT and
BAT could be expected. A comparison of the results under Scenarios B and C indicates the
relative contribution of BPT and BAT to the resulting closure impact.
The results of this DCF analysis were used as an additional analytical tool (along with
the screening analysis and industry interviews) in assessing closure likelihood. Considerable
judgment was used to extend findings resulting from these "typical" existing mill models to
actions that may be expected in specific mill situations.
5. Assumptions/Inputs Used in Financial Analysis
Estimates of economic parameters for mill models of closure candidates (e.g., operating
costs, pollution control costs, salvage value, working capital, maintenance expenditures) are
based on a process economics analysis of closure mill models. (The methodology and
assumptions used in this analysis are discussed in Chapter IV. The models are included in
Chapter V, Section B.)
Prices under cases with no controls are based on current transaction prices for the
specific paper grades being modeled. Short-run price increases under cr.ses with pollution
controls are based on the econometric model (Section B) and are phased in over the period
1976-1977. The long-run price increase excess over short-run price increase (based on the
new mill model price analysis) is phased in over the period 1978-1983.
The financial analysis is done in 1975 dollars.
D. DISCOUNTED CASH FLOW ANALYSIS
A discounted cash flow (DCF) analysis was used to estimate the long-term price effect
of compliance with water effluent guidelines and as part of the analysis of pollution-control
related mill closures. In the estimation of long-run price effect, the DCF technique was used
to solve for a price, with and without pollution controls, yielding a target rate of return as
indicated by the cost of capital. In the mill closure analysis, the DCF technique was used to
evaluate wKether or not the net present value of the future cash flows of the affected mill
was greater than the net present salvage value of the mill.
The b'isic equation underlying the DCF analyses is:
N /ip
NPV= Z
t=i
121
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where:
NPV = net present value
CFt = net cash flow in period t
r = discount rate = cost of funds
The structure of the cash flow before financing costs used in the DCF analyses is described
by the equation
CFt = PtQt + SALVt - COEt - INV, - TAX,
where:
Pt = product price in period t
Qt = product sales volume in physical units in period t
SALVt = salvage value of project in last year of analysis
COEt = cash operating cost in period t, exclusive of
interest and Federal income taxes
INVt = investment cash outlay in period t
TAXt = Federal income tax paid in period t
This cash flow is analyzed assuming pure equity financing at the weighted average cost
of capital for the establishment of net present values and similar quantities, a procedure
which abstracts from the details of corporate financial structure. In order to analyze
financial structure-dependent impacts, a cash flow to equity
CFE,=CFt -(1 -r)INTt
where:
T = corporate tax rate = 48%
INTt = interest paid in period t
has also been computed and used for the analysis of the impact of temporary debt financing
on the financial statements.
The methodologies used for the construction of prices, quantities, salvage values, cash
operating co'its, and capital investment schedules are described elsewhere throughout this
report, so it 4emains here only to discuss the calculation of interest and taxes.
122
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The basic form of the interest equation is
INT, = rEDE
where:
rE = rate of interest on debt, assumed = 9.5%
DL = dollar amount of debt outstanding in period t
For all analyses described in this report, debt enters the capital structure only when
internally generated cash flow, net of a dividend payout of 50% of net after tax income, is
insufficient to meet all cash needs. The debt is repaid as rapidly as possible. The dollar
amount of debt raised or retired is determined by requiring balance of the sources and uses
of funds statement.
The basic tax equation is
TAXt = T [PtQt - COEt - DEPt - TXCFt] - TXCR,
where:
r '= corporate tax rate = 48%
DEPt - depreciation deduction for tax purposes taken in period t
TXCFt ~ tax loss carryforward utilized in period t
TXCRt - investment tax credit utilized in period t
Somewhat different tax depreciation schedules are used for the new mill (long-run
price impact) and existing mill (closure analysis) models.
In the case of new mills, tax depreciation is calculated on a double declining balance
schedule, with a switchover to straight line depreciation in the first year in which the
straight line depreciation charge would exceed the double declining balance charge. Depreci-
ation lifetimes of 16 years for equipment and 33 years for buildings are used.
In the case of existing mills, tax depreciation is calculated on a straight line basis over a
period of 10 years for initial plant at book value, while assets acquired during the analysis
period are treated using the same technique as is described above for new mills.
Operating losses incurred on a tax basis are used to reduce taxable income in the
succeeding five years to the maximum extent possible.
An investment tax credit is used as a direct offset to income taxes, subject to the
restrictions that the credit not reduce taxable income by more than 50%. Since the
123
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depreciable life of all equipment considered in the analyses exceeds 7 years, the full 10%
investment credit rate is used. Unused investment credits are carried forward for a maximum
of five years.
The above variables were incorporated into the basic NPV equation and applied to the
estimation of both the long-run price effect and mill closures.
E. COST-OF-CQMPLIANCE METHODOLOGY
The costs of compliance with 1977 and 1983 water effluent guidelines provide the
reference points for the economic impact analysis. Basically these cost estimates were
provided in the Development Document.1 However, these data required adjustment for the
impact analysis because they were based upon:
19 74 dollars
Year-end 1973 level of compliance
Incomplete pollution control operating costs
Therefore, ADL made the calculations necessary to reflect mid-1975 dollars and to adjust
the additional items. The costs estimates were then reflected against our process economic
cost estimates of the cost of construction and operating costs of new mills to estimate
long-run price effects. In addition manufacturing cost models were developed for groups of
questionable mills identified as closure candidates to test the closure impact of the control
costs.
1. Unit Cost Estimates
A unit process basis v/as used in the development of all cost estimates. The Develop-
ment Docun ent defined major pulping and papermaking process categories, and in some
instances, appropriate sub-categories. Typical or average mill sizes were specified within each
sub-category for both existing and new mills. In general, small, medium, and large sizes were
specified for existing mills, with new capacity at the medium and large sizes only. The result
is an array of unit process models which can be used to characterize the entire pulp and
paper industry, both as it exists and as new capacity is added.
The Development Document specified average effluent loads for each sub-category,
independent of mill size. Effluent treatment levels were specified for each sub-category, also
independent of mill size, for three levels of control: Best Practicable Control Technology
Currently Available (BPT, proposed for 1977), Best Available Technology Economically
1. All Development Document references are to, "Development Document for Interim Final and Proposed
Rule Makinc for Effluent Limitations Guidelines and New Source Performance Standards for the
Bleached Kraft, Groundwood, Sulfite, Soda, Deinked, and Nonintegrated Paper Mills Segment of the
Pulp, Paper, and Paperboard Mills Point Source Category," U.S. E.P.A., January 1976.
124
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Achievable (BAT, proposed for 1983), and New Source Performance Standards (NSPS,
proposed for all new capacity which comes on line after acceptance of the guidelines).
Unit process control technology was specified for each sub-category and mill size
model. The specified technology included both internal process controls and modifications,
and external (end of pipe) treatment. Specification of technology included the individual
items in each treatment train (internal and external) as well as the parameters for sizing each
item. (Figure III-l 2 shows major components of the external treatment systems.)
The capital and annual operating costs for each unit process treatment train were
estimated in the Development Document. ADL made minor additions to the operating costs
in the Development Document, and updated all capital and operating cost estimates to
mid-1975 dollars.
In order to estimate the cost and economic impact of compliance with federally
imposed effluent guidelines, as well as other federal regulations, ADL also developed new
mill cost estimates for compliance with federal air control regulations, OSHA requirements,
and basic manufacturing cost estimates excluding all federal regulations. This established a
baseline for capital and operating costs, excluding all federal regulations, and cost incre-
ments for compliance with the three sets of regulations: air emissions control, OSHA, and
water effluent control.
The increments attributed to OSHA, and to external water effluent control measures,
are straightforward; that is, they are costs clearly incurred due to federal regulations.
However, internal effluent controls and air controls are much more judgmental. Many of the
items in ;luded have associated operating cost savings, and could well be installed even in the
absence of federal (or other) environmental regulations. Rather than making this judgment
in measuring total costs and impacts; internal effluent controls were treated consistent with
the Development Document and total capital costs and net operating costs were attributed
to federa' effluent controls. Air control costs have been handled in the same manner, even
though ADL estimated, in the absence of regulations, that about 50% of total capital for
internal control would be economically justified. Similarly, ADL estimated the economic
level of recovery for air emissions control at about 50% of total capital for air control.
In summary, the methodology is conservative in that it minimizes the baseline cost
without federal regulations. Any item which is required for pollution control is attributed to
federal regulations, whether or not it also has associated operating benefits. The result is
that the increment of capital required is stated at its maximum level (excluding cost
variations due to estimating accuracy) for the selected technology, while at the same time
crediting : ome operating cost savings to pollution control. For clarity on this point, the new
mill mam facturing cost models (Appendix E) are presented in the following increments:
125
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Spill Storage
Coarse
Screening
Mill Raw
Waste
_ | Alternatives^^^ _ |
Stationary
Traveling
Suspended i
Solids )
Removal J
Sludge to Disposal
BOD Removal
!
Alternatives J
Sedimentation
Lagoon
T 1
Clarifier
Filtrat
Flotatio
t:
BOD Removal
Solids
Sedimentation
or Seasonal
Discharge
Legend:
Waste Flow
Sludge
Alternatives
' * T
i
*
Aerated
Stabilization Basin
Alt*
\ i
irnatives
t__
t
Post Storage
*
Activated R.B.S.
Sludge Unit Trickling 1
t
1
Sludge
Return
1
Excess Sludg<
Clarifier ^to Disposa|
Alternatives
Alternative
Foam Trap
Chemical
Defoamer
Diffuser
Outfall
Source: Development Document.
FIGURE 111-12 ALTERNATIVE TREATMENT SYSTEMS
126
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L
(1) Baseline manufacturing, excluding federal regulations
L (-) OSHA regulations
(3) Internal effluent controls
(4) External effluent controls
(5) Economic level of air control
(6) Additional cost of air control to reach federal standards
In reporting total costs and measuring impact, ADL combined the capital and opera-
ting costs for items 3 and 4 for water effluent control, and items 5 and 6 for air centre*.
However, a case could be made for including up to 50% or more of the internal water
effluent controls and all of the economic level air controls in the baseline. The net effect
would be to lower the capital requirements but increase the operating costs attributed to
federal environmental control. The implications of this judgmental baseline arc discussed in
Chapter VI, as one source of variation in the estimated cost for compliance with fetlerai
guidelines.
2. Apolication of Unit Costs
The cost of compliance with federal regulations for existing sources is used to estimate
short-run price effects, and the cost of compliance for new sources is used for long-run price
effects. For existing sources, a number of steps were necessary to obtain the cost of
compliance in usable form. ADL first summarized existing industry capacity to correspond to
the Development Document unit process models, by sub-category and size. Extension of the
existing capacity by sub-category and size times the corresponding Development Document
unit coit estimates results in a total cost of compliance for each level of control by
sub-cate?ory and size. These data are presented incrementally, based on the definitions and
estimate.5 of technology installed by 1977 and 1973 contained in the Development Docu-
ment.
In order to be useful for price effects, the data were aggregated by major product
category. To do so an estimate was next made of the percentage of each Phase M product
sector which is made by each process category. The various process category average costs
were then applied to the estimated percentage of each product sector capacity, in order to
obtain an overall weighted average cost for each product.
Calculation of the costs for new sources was more straightforward because ADL
selected o ily the most cost effective process for each product. In effect, this means that
integration to bleached kraft pulp, groundwood pulp, or wastepaper de-inking was specified
for all new capacity. This corresponds to the current trend in new mill construction. The
approach made it possible to identify specific process/product combinations to which the
cost estinates for water effluent control were applied to estimate the NSPS costs by
product.
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F. PROCESS ECONOMICS METHODOLOGY
1. New Mill Manufacturing Costs
Manufacturing cost models were developed for new mills for each of the major Phase II
product sectors for the purposes of projecting long-run price impacts and to provide a
basis for estimating the economics of existing mills in the closure analysis. Costs used in the
analysis represent new "grassroots" pulp and paper facilities only, not incremental expan-
sion at existing mill sites. The indicated paper and pulp mill sizes represent an estimate of
probable minimum scale of operations for new capacity based on the current economics of
processing, product shipment, and raw materials supply. They do not indicate minimum
technically feasible plant sizes.
The models refer to the manufacture of a single product on a single machine operating
at full capacity. Where the paper machine is typically in balance with the associated pulp
mill, as in the production of linerboard or market pulp, the unit size of the pulp mill and
paper machine are the same, and the costs are simply totaled. In other instances, where the
unit size of the pulp mill is typically larger than that of the paper machine (e.g., printing and
writing, tissue, or newsprint), the investment and operating costs for the pulp mill are
allocated to the product on the basis of the percentage of pulp mill output that is used by
the product.
In these instances, different sizes are shown for paper machine and pulp mill. These
examples represent a single economically sized paper machine integrated to a larger econom-
ically sized pulp mill. The costs indicated are for pulping and papermaking at paper capacity
only. However, the indicated cost levels are only achievable through integration to the larger
pulp mill. For example, the costs for 300 tpd of printing and writing paper integrated to
800 tpd of bleached kraft pulp are the total capital and operating costs for papermaking,
plus an allocation of the total pulp mill capital and operating costs for 300 tpd of slush pulp
(approximately 3/8 of total pulp mill costs). The capital and operating costs for 300 tpd of
slush pulp from a 300 tpd pulp mill would obviously be much higher, since the economies
of larger scale of operation would be lost.
The integrated newsprint mill model requires special comment, since total pulp mill
capacity represents 800 tpd of kraft and 440 tpd of groundwood. The portion of kraft mill
production (about 140 tpd) used for newsprint is semi-bleached, the remainder presumed to
be fully bleached for other bleached kraft products. However, the capital and operating
costs shown include only the fraction of the kraft pulp mill costs associated with pulp to
newsprint.
The capital and operating costs indicated (excluding effluent control) were estimated
in various stages. Basic manufacturing costs, excluding all external regulations, were devel-
oped by updating existing ADL information to mid-1975 dollars or developing new
estimates, with all pollution controls removed. These capital and operating cost estimates
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were derived originally from actual mill operating data, detailed pre-engineering equipment
estimates, material and energy balances, manning tables, etc.
2. Existing Mill Manufacturing Costs
Manufacturing costs were estimated for selected types of mills io assist with the
economic assessment of their potential for closure'as a result of pollution regulations.
Specifically, ADL analyzed the increased impact of pollution control capital investment and
operating cost upon the potential profitability of a hypothetical existing mill identified as a
closure candidate through a screening process (described in Section HI-C).
a. Context of Use of Existing Mill Models
A definitive, quantitative economic analysis of the potential impact of pollution
control costs on an existing mill is impossible without detailed proprietary information
about the studied closure candidate. Such a detailed analysis was beyond the scope of this
analysis; accordingly, a number of simplifying assumptions and conditions were postulated
in making a more generalized assessment of the economic impact of pollution control costs.
The preliminary screening analysis of mills included in each of the EPA water effluent
control product/process categories revealed more than one closure candidate in most of the
Phase II process sector categories considered in this analysis. The candidate mills are
frequency quite dissimilar in a) product mix; b) type and size of equipment; c) fiber
furnish; d) existing level of investment, operating cost, or sales income, as illustrated by the
profiles of closure candidates identified in the ground wood category (Table III-5).
Therefore no single model could be construed as being "typical" of all closure
candidates in the groundwood or any other process/product sector. Accordingly, a more
generalized basis was required to apply the results of the single economic model to each
closure candidate. ADL assessed the effect upon profit margins resulting from incremental
capital rec uirements and operating costs associated with pollution control rather than
placing undue emphasis upon the absolute accuracy of operating costs or annual sales. In
other worc's, profit margin impacts may be valid, even though the individual cost/price
estimates are not precise for each mill examined. The discounted cash flew analysis method
used in this study effectively measures differences in profitability with and without the cost
of pollution control.
b. Key Assumptions Used in Existing Mill Models
In general, the economic models of the closure candidates are based upon the
investment and cost estimates derived for the new mill models described in Appendix E. A
number of key assumptions were used in transposing the estimates of a new mill model to
an existing operation:
129
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Mill Size
Mill size, or operating scale, is one of the key differences between the new mill models
and the existing mill models used in the closure analysis. Not only is the daily tonnage of
the closure candidates significantly lower than the new mill examples, but the closure
candidates usually use a number of machines to make the same tonnage typically made on a
single modern machine. Implicit in this equipment variation (e.g., eight 3-pocket grinders
used to make 50 tpd of groundwood pulp, which is now more typically made on a single
grinder) are significant differences from the new mill models as they relate to labor
requirements, energy usage, fiber yield, factory overhead, maintenance costs, etc. ADL made
all judgments necessary to adjust the new mill models to reflect the specific conditions
postulated for the closure candidate.
Product Mix
Table III-5 also illustrates the wide range of products typically made by mills identified
as closure candidates. Whereas a new paper machine is normally designed to produce one or
two specific products, the older machines included in the closure candidates are used to
produce a variety of products in order to "fill up" existing capacity. One cannot derive the
appropriate fiber furnish, operating costs, and selling price of the varying range of products
made by typical closure candidates. Hence, ADL postulated a single typical product for each
of the mill models. While this assumption is at variance with actual mill practice, it does
constitute a reasonable basis for measuring the differences in profitability resulting from
pollution control.
Implicit in the selection of products for detailed economic analysis is the appropriate
raw material composition to meet the end-use requirement of the finished product. Again,
rather than attempt to reflect the variety of fiber furnish to produce the wide range of
products made by the closure candidates, the cost estimates for these items are simplified to
a single "typical" product.
In addition, fiber furnish and cost for a particular product can vary due to mill
specifics, such as geographic variation in cost and availability of wood species, corporate
integration to timberlands, intra-company pulp transfer, accessibility of waste paper, etc.
The cost estimates used are reasonable examples based on the selected products and
specified mill conditions. However, in interpreting and using these examples, consideration
must be given to variability in the product lines, mill conditions, and actual costs under the
specified conditions.
Direct Labor and Factory Overhead
Labor schedules and factory overhead costs were derived to reflect the specified
product, process, and number of machines included in the closure candidates. Manpower
requirements are a function of production per paper machine as well as total mill output.
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Wages and labor efficiency can vary specifically from mill to mill as well as generally due to
geographic location.
In addition to these inherent variations, many overhead costs and some labor positions
are discretionary. ADL did not attempt to postulate the numerous alternative assumptions
which can be associated with each of the studied existing mill models.
Energy Consumption
Typically, many of the older mills which comprise the majority of the closure
^< didates are inefficient users of energy both steam and power. These inefficiencies
result from the characteristics of the existing equipment as well as the frequent machine
changes required to make the wide variety of end products. Accordingly, a higher unit
energy requirement was postulated for the existing mill as compared to the new mill model.
Maintenance Materials and Labor
Maintenance costs are frequently calculated on the basis of plant investment. Because
of the rapidly escalating cost of repair materials and the nominal investment shown for
existing mills (residual book value), it is not appropriate to calculate maintenance cost as a
percent of plant investment. ADL estimated an annual cost and apportioned it to units of
production. Note that the maintenance cost as reported does not include capitalized
maintenance charges; these items are shown separately.
Effluent Cost Control
The modified Development Document cost data were used as the basis for estimating
the control costs for the selected closure candidates. The reported control cost information
was modified to reflect the specific assumptions regarding the size, pulping process, and
existing treatment facilities in the studied examples. Sensitivity analysis was done on cost of
compliance to reflect the variety of the closure candidates' costs. Where more specific
effluent control cost was available e.g., the Alaska sulfite dissolving pulp mill the more
specific data were used.
c. Economic Models of Closure Candidates
Section V-B contains the resulting economic models of the selected groups of closure
candidates. With the exception of the effluent treatment costs for the Alaska dissolving
sulfite model (which was provided by a major pulp and paper company), all the examples
are based upon ADL's estimate of investment and operating cost for manufacture and ADL's
adjustment of the Development Document effluent treatment cost data to reflect the
specific conditions of the sample calculations. Accordingly, these economic analyses are not
to be interpreted as financial statements of an actual existing mill, but rather as a pro forma
analysis of how the incremental investment and operating cost may influence the profit-
ability of the mill identified as a closure candidate.
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Replacement Value, Residual Book Value, and Salvage Value
Current replacement value was calculated for each example as a means of estimating
book value, salvage value, local property taxes, and insurance. Total original investment in
dollars of the period was taken at 50% of 1975 replacement value. Taxes and insurance are
estimated at 2-1/4% per year based on original investment, and salvage value at 10% of
original investment. Book value is estimated at 40% to 60% of original investment (20% to
30% of replacement value), depending on the nature of recent investment. Thus hook value
was estimated at 50% for a mill with recent investment in primary clarification, 40% for ;i
\ nil with no major recent investments and 60% for a sulfite mill with recent investment in
primary clarification and spent liquor recovery. These figures are clearly approximations.
and should be expected to vary considerably from mill to mill.
The derivation of any of these estimates i.e., replacement, book, and salvage values
is extremely subjective and judgment was used to make these estimates. It is recognized that
the replacement value of a mill having eight 3-pocket stone grinders producing 50 tpd of
pulp is a fictitious number; no one would install such a facility today. Similarly, it is
impossible to make a precise estimate of current book value of an existing mill without
access to proprietary data. Therefore, these estimates are valuable only when considered as a
basis of economic comparison and not as absolute costs.
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IV. COST OF COMPLIANCE
This section deals with the investment and operating costs for manufacturing and for
effluent control costs for the Phase II process categories. The general methodology used to
develop these costs was presented in Section III-E. Unless specifically noted otherwise, all
costs are mid-1975 dollars, and all capacity data are at year end 1974.
A. WATER EFFLUENT CONTROL DATA BASE
Effluent control costs for the Phase II process sectors are presented in Section VIII of
Jie Development Document.1 Refer to the Development Document for a detailed discus-
sion of the estimated effluent control costs and technology. The following discussion
highlights the key points necessary to understand the interpretation and application of these
cost data.
1. Industry Categorization
Various pulping and nonintegrated papermaking process categories were defined in the
Development Document to characterize the entire U.S. pulp and paper industry. In some
instances (e.g., bleached kraft) the categories were further divided into sub-categories.
Typical small, medium, and large plant sizes were selected within each sub-category to
indicate the effect of scale of operations on the effluent control cost estimates. Thus, a range
of hypothetical models was obtained which represents typical sizes of "pure" pulping or
papermaking processes The detailed rationale for Phase II sector categorization is contained
in Section IV of the Development Document.
2. Specified Standards
Three levels of effluent control were specified: BPT (Best Practical Control Technology
Currently Available, promulgated for 1977); BAT (Best Available Technology Economically
Achievable, proposed for 1983); and NSPS (New Source Performance Standards, proposed
for all new plant construction). A description of the specified standards for each process
sub-category and level of control is presented in the Development Document.
3. Treatment Technology
An engineering approach was used in the Development Document to specify the
effluent control treatment technology to be used in estimating costs. Both internal (process
1. All Development Document references are to "Development Document for Interim Final and Proposed
Rule Making for Effluent Limitations Guidelines and New Source Performance Standards for the
Bleached Kraft, Groundwood, Sulfite, Soda, Deinked, and Nonintegrated Paper Mills Segment of the
Pulp, Paper, and Paperboard Mills Point Source Category," U.S. E.P.A., January 1976.
135
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modification) and external "end of pipe" control measures were used. The generalized flow
diagram for external treatment alternatives that appears in the Development Document is
reproduced in Section 1II-E. (A list of the applicable internal control measures is also shown
in the Development Document.)
Typical effluent loadings were specified for each process sub-category, including total
flow, TSS (Total Suspended Solids), and BOD5 (five-day biological oxygen demand). A
treatment train was then specified for each sub-category to meet each level of proposed
standards. In general, the technology selected for BPT and BAT is sequential; that is, BAT
can be met by adding additional items to the treatment train selected for BPT.
Each item in the treatment train was selected according to plant size, hydraulic load,
BOD and TSS reduction requirements, etc. The technologies chosen and the design param-
eters used are typical of those that would be expected in the pulp and paper industry. Thus,
the treatment technologies are reasonable for the conditions specified for each sub-category
model. Day-to-day variations in effluent from typical mills are discussed in the Development
Document. This daily variability has been accounted for by the application of daily peaking
factors to both the design effluent loading and to the allowable daily average effluent
limitations relative to 30-day averages.
Mill-to-mill variations from the specified typical technology can be large because of
factors unique to each mill. The major sources of variability are noted in this chapter. The
implications of variability in the cost estimates, and a summary of the sources of possible
variation, are presented in Chapter VI.
4. Costs Estimated for Specified Technology
The general methodology used for estimating capital and operating costs for the
treatment technology specified is contained in Section VIII of the Development Document.
A discussion is included for each item of internal treatment technology. Internal treatment
items are primarily process modifications, which often result in cost savings through
economies in materials and/or energy. Therefore, it is difficult to determine exactly whether
any particular item is mainly a process improvement or an effluent control step. In the
Development Document it was assumed that the capital costs for all items listed as internal
control technology are charged to effluent control, but that operation and maintenance
charges are offset by material and energy savings. Thus, there are no operation and
maintenance charges to effluent control for internal control technology. The one exception
to this assumption is for sulfite liquor incineration and recovery. Item 20, (MgO Recovery
System) is defined as a process improvement without any capital or operating cost charges
to pollution control. (Refer to Chapters III and VI for further discussion of the difficulties
of defining costs which are solely attributed to pollution control.)
The cost estimates for external treatment are described in the Development Document.
The key assumptions are described as follows:
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"Cost curves have been developed for each treatment technology outlined in this
report. The cost curves and resultant unit costs are based on 'model' effluent
treatment facilities sized for several flow capacities. These 'model' effluent treat-
ment facilities are based on assumed unit processes, yard piping layouts, methods
and materials of construction, site and soils characteristics, unit construction
costs, and operational practices. Detailed design for each unit, process and
mechanical layout is beyond the scope and time limitations of this report.
'The construction costs presented are those defined as the capital expenditures
required to implement the control technology. Included in these costs are the
traditional expenditures for such items as mechanical and electrical equipment,
instrumentation, yard and process piping, earth-work, unit construction, site
preparation and grading, equipment installation and testing, and engineering.
Items such as electrical, instrumentation, process piping, site preparation, and
engineering are included as a percentage of the base capital costs, which varies for
each applicable control technology. A 15 percent contingency is also included
with each control technology to cover miscellaneous work items not included in
the estimates."
Note that the cost of land Knot included in the estimates.
Costs have been estimated separately for treatment trains using an aerated slabili/ation
basin (ASB) or activated sludge for biological treatment. It is anticipated that some mills
may desire or need activated sludge for increased efficiency during cold weather or because
of limited land availability lor AS1J construction. While activated sludge is typically the
more costly of these two options, the exact relationship would be different if the cost or
value of land were included in the estimates.
Land requirements for various treatment technologies are tabulated in the Develop-
ment Document. These requirements are based on sludge disposal to an on-site lagoon for
BPT, and dewatering and offsite landfill disposal for BAT. In either case, the cost of land for
a lagoon or disposal site is not included.
ADL has not attempted to estimate what the cost of land might be, whether actually
purchased or only transferred from company holdings, nor made any quantitative evaluation
of the implication of omitting land costs. This cost is noted as a possible source of
variability between actual and estimated costs. In the mill closure analysis, it was assumed
(hat no additional land purchase was necessary.
The Development Document presents annual operating costs in three categories:
(1) total operating costs; (2) depreciation and interest; and (3) operation and maintenance.
Operation and maintenance costs "are the sum of the annual costs for operating labor,
maintenance labor, energy requirements, and chemicals." Note that maintenance materials
are not included.
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The following comments on cost variability are quoted from the Development Docu-
ment:
"It should be recognized that actual treatment costs vary widely from mill to mill,
depending upon the design and operation of the production facilities and local
conditions. Furthermore, effluent treatment costs reported by the industry vary
greatly from one installation to another depending upon bookkeeping procedures.
The estimates of effluent volumes and treatment methods described in this
section are intended to represent those of the sub-categories covered by this
report. However, the industry is extremely heterogeneous in that almost every
installation has some uniqueness which could be of importance in assessing
effluent treatment problems and their associated costs."
"It should be remembered that actual external treatment costs may vary signifi-
cantly from mill to mill, depending upon the climate, topography, soil conditions,
unit locations, and the design and operation of the particular waste treatment
facility."
The model approach is useful in assessing overall industry costs or aggregate costs for
sub-categories containing a large number of mills. However, in applying the cost estimates to
individual mills or small sub-categories, one must consider the possible variations in required
technology and/or site-specific cost effects. The Development Document cost estimates have
been applied as averages for aggregate costs in all calculations, with the exception of closure
analysis, where some inputs from the mills were obtained regarding their capital costs.
5. Presentation of Cost Estimates
The capital and operating cost estimates are presented in tabular form in the Develop-
ment Document. The costs are presented by mill size and sub-category, and with an
alternative of an aerated stabilization basin or activated sludge for biological treatment in
each case. The costs for internal and external treatment are shown separately for each level
of control. The costs for BPT and BAT are cumulative: that is, the costs shown are the total
for each level, and incremental costs can be calculated by difference.
NSPS guidelines for new mills meet some, but not all, of the BAT control require-
ments. While the internal technologies and costs are the same for NSPS and BAT, the
external technologies selected for post-biological treatment are not. A 10-year permit is
written for a new source so that the costs to make the transition from NSPS to BAT will not
be incurred until after 1986, which is beyond the time period considered in this study.
The costs presented in the Development Document include an estimate of expenditures
made through 1973, and the methodology for estimating technology in place. An estimate
of technology in place by 1973 is also included. "Pretreatment" is used to refer to 1973
internal technology in place. A different estimating procedure is used for internal and
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external controls. Internal treatment in place is calculated by estimating a percentage of
each item which corresponds to the percentage of mills in a category which are presumed
to have installed that item by 1973. External treatment in place is calculated by postulating
a treatment train which includes some items and excludes others for a typical mill. Thus, the
1973 internal estimates are intended to correspond to a category average, but not neces-
sarily to a typical mill model. Conversely, 1973 external estimates are intended tocorrespond
to a typical mill model.
The estimates of technology in place by 1973 appear to understate the actual external
treatment installed by the paper industry; e.g., none of the Phase II sub-categories include
any biological treatment. This would not affect total cost estimates for control, but could
overstate the incremental costs to achieve BPT (1977) control levels.
B. ADJUSTMENTS TO THE DEVELOPMENT DOCUMENT DATA BASE
The effluent control cost estimates published in the Development Document are
expressed in second-quarter 1974 dollars. In order to adjust these to mid-1975 dollars, ADL
increased both investment and operating costs by 20%. The increase in investment is
significantly higher than that reported in typical engineering cost indices, but specific
information on cost increases in the pulp and paper industry indicates that the value ADL
used is more appropriate. ADL believes that this would also apply to pollution control
equipment at paper mill sites, particularly new mill installations. The increase in operating
costs is a weighted average of the estimated increases in individual cost items, ranging from
10% on labor to 60% on chemicals.
In addition to revising the Development Document cost data to reflect inflation, ADL
has added the following operating cost items, which were excluded from the Development
Document, but which ADL believes are legitimate effluent control operating charges:
Factory overhead and general administration at 12% of the estimated direct
labor cost for pollution abatement. The Development Document operating
costs include overhead for direct labor supervision only.
Professional administration for monitoring and reporting, including relations
with regulatory agencies, estimated at an essentially fixed cost of $23,000 per
installation, regardless of size or category. The Development Document
estimates include the direct costs of measuring, sampling, analysis, and
compilation of data.
Insurance and local property taxes at 1-1/4% of total investment. This figure
is somewhat lower than is typical of pulp and paper facilities, and reflects
the probability that some level of local property tax relief will be allowed for
effluent control installations and process modifications.
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Maintenance materials at 1% of total investment.
As discussed previously, ADL has not attempted to adjust the Development Document
figures to include the cost of land, since this is such a highly variable cost item.
The aforementioned refinements did not affect the estimated total capital costs and
added about 5% to the Development Document's annual operating cost estimates.
C. NSPS COSTS FOR NEW CAPACITY
The economic analysis employed models of new mills likely to be built in each major
; roduct sector for estimating long-run price impacts of water effluent control costs. New
mill manufacturing and NSPS costs for representative Phase II products are summarized in
TableIV-1.
The pulping process or processes selected for each product are typical of current
practice, but the products are not necessarily produced exclusively by these processes.
Details of the manufacturing cost models are included in Appendix E.
1. Application of Water Effluent Control Costs
The effluent control capital and operating costs were obtained from the Development
Document base in two steps. First, the applicable process sub-category costs for typical sizes
were adjusted to pulp mill capacity where applicable, or paper machine capacity for
nonintegrated examples. Second, for examples integrated to bleached kraft, the portion of
total effluent control cost applicable to paper capacity only was calculated by direct
proportion.
The effluent control costs indicated in Table IV-1 are the allocated total for pulp and
paper effluent at paper capacity only (similar to the handling of manufacturing costs), but
the level of cost is achieved by virtue of integration to the larger pulp mill.
The complex pulp mill associated with integrated newsprint production was handled as
a 1240 tpd fine kraft mill for purposes of estimating effluent control costs. The BOD, TSS,
and hydraulic load for groundwood are all lower than for bleached kraft; thus, the
estimating procedure slightly overstates total cost. However, there is no clear method for
determining standards or applying the "pure" process data to complex pulp mills.
ADL used the NSPS cost estimates with an aerated stabilization basin for all new
capacity examples. New mills are not required to meet more stringent effluent control
standards for 10 years after the new source permit is issued. Therefore, costs for new mills
to reach BAT have not been included. The costs for a new mill to meet NSPS generally
exceed the combined costs of BAT and BPT for an existing mill in all categories except
bleached kraft pulp; yet in most categories BAT standards are slightly more stringent than
140
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NSPS. For the bleached kraft sectors, BAT includes color removal whereas NSPS does not
and the estimated costs for BAT are approximately 10% higher than for NSPS.
2. Application of Air Control Costs
On the basis of published and private communications with the National Council on
Air and Stream Improvements (NCASI), information from specialists within EPA,and ADL
industry experts, ADL estimated the cost of compliance with new source performance
standards for air control costs. (Appendix E provides a detailed description of the method-
ology and the resulting calculations.)
3. Application of OSHA Costs
On the basis of published data and a recent API survey, ADL has estimated the cost of
compliance with existing and proposed OSHA regulations for new mill installations. The
API estimates are order of magnitude only and have been based on existing mill sizes. (A
description of the cost of compliance with various OSHA requirements is contained in
Appendix E.)
D. EFFLUENT CONTROL COSTS FOR EXISTING MILLS
Total capital and operating costs for effluent control at existing mills calculated from
the Development Document by sub-category and size are summarized in Table IV-2. As with
new capacity costs, mid-1975 dollars are used throughout, and operating costs exclude
depreciation and interest. BPT (1977) costs are incremental from the year-end 1973 level;
BAT (1983) costs are incremental from BPT.
To develop total investment and operating costs by process sector, it was necessary to
estimate total capacity by process sector. The Development Document provided a listing of
mills by process and size category. In some cases, mills were reassigned to more appropriate
categories, based upon the criteria in Appendix D. Year-end 1974 capacity was then
totaled, by sub-category and size range and adjusted for mills known to be using municipal
waste treatment systems. Based on projected closures due to pollution regulations, capacity
deductions were also made for estimated closures before BPT and between BPT and BAT. It
was assumed that all closures assignable to pollution control regulations will be direct
discharge mills; all mills on municipal systems will continue through BPT and BAT without
additional treatment costs. Thus a net tonnage for treatment at BPT and BAT was obtained
by sub-category and size.
The updated Development Document costs were expressed as capital and operating
costs per ton of capacity to obtain total capital and annual operating cost for the calculated
existing tonnage in each sub-category and size range. Total sub-category capital calculated
costs reflect closures; however, mill population and production data are before closures
due to BPT and BAT. The assignment of mills to sub-categories is not precise. In particular,
142
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most large mills arc complex, both in terms of products and pulping processes, and thus
could fit more than one sub-category.
ADL categorized these to agree as closely as possible with the rationale for industry
categorization contained in the Development Document.
In order to calculate aggregate sub-category costs, ADL has specified the following
conditions and assumptions:
(1) No additional treatment costs will be incurred by mills already on municipal
treatment. All other mills will use the standard internal and external treat-
ment technologies specified in the Development Document.
(2) In the bleached and unbleached kraft, NSSC, Soda, Sulfite (paper grade),
groundwood, and construction paper categories, all mills will use ASB
biological treatment.
(3) In the dissolving sulfite, recycled board, deinked, non-integrated tissue, and
non-integrated fine paper categories, 50% of the capacity will use ASB and
50% activated sludge for biological treatment.
E. SUMMARY OF COST OF COMPLIANCE BY PROCESS CATEGORY
1. Basis of Data
The summary data presented here should be interpreted in light of the previous
discussions on Methodology (Section 1II-E) and the details of cost of compliance. In
particular, remember that the costs of effluent control indicated include all internal control
items, whether or not they might be incorporated in a mill in the absence of Federal
Environmental Regulations. Therefore, costs attributable to pollution control probably have
been overestimated.
2. Water Effluent Control - Phase II Categories
The additional capital requirement for water effluent control costs for the Phase II
process categories is estimated at $1.6 billion for BPT (1977) and an increment of $1.0
billion for BAT (1983), or a total of $2.6 billion. Since the Phase II sectors include some 40
million tons of annual capacity, the investment for water effluent control (BPT and BAT) is
equivalent to about $65 per annual ton of existing capacity.
Operating cost (excluding depreciation and interest charges on capital for water
effluent control) is estimated at $188 million annually (or about $4.80/ton) for the BPT
level of control; the incremental operating cost for the BAT level is estimated at $105
million annually (or $2.70/ton). Thus the total average operating cost is $7.50/ton.
145
-------
Table IV-3 lists water effluent control costs for the major Phase II process categories.
Table IV-3 also includes average annual control costs per ton for new capacity sources in the
appropriate process categories.
Note that as this study was being prepared for publication, the EPA eased some of the
guidelines it had proposed originally in its Development Document. EPA believes, however,
that the changes will not affect control costs significantly and are likely to fall within the
range of accuracy of the original cost estimates which this impact study addresses.
F. PROCESS-TO-PRODUCT TRANSFORMATION
In order to determine price effects, it was necessary to express effluent control costs
by product sector. Since control standards were set and costs estimated by process category,
it was necessary to first relate each total product sector capacity to the various process
categories. The percentage of each product sector capacity in the various process categories
is shown in Table IV-4.
The production from each process sector previously described (Section IV-D) was
apportioned to the major product categories used in the analysis on the basis of the
following criteria:
knowledge of the fiber furnish (i.e., the pulping process commonly used in
the manufacture of a product; and
the characteristics of mills (listed in Appendix E), which identify the
pulping process and resultant products.
This analysis is not precise; additional judgmental input was provided by API-published
capacity and by other sources. The data presented in this table are not precisely the same as
appear in Table II-9. The latter includes the pulps used (including purchased pulp) by
product category for the entire industry while Table IV-4 represents only Phase II process/
product categories, based upon the mill assignments provided in the Development Docu-
ment as modified by ADL.
Once the percentage (and tonnage) of each product capacity was distributed by
process, it was simple to calculate the percentage of each process category which goes into
each product (Table IV-5). These percentages are used directly to determine the costs by
product sector, i.e., the percentage in a process category times the total cost for that
category equals the cost attributed to the product sector from that process category. The
sum of this calculation across all process categories equals the total cost for a product
sector.
146
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TABLE IV-4
PERCENTAGE OF PRODUCT SECTOR PRODUCTION
BY PROCESS CATEGORY
Ex-ached Kraft
Sulfite
Dissolving
Sulfite
Soda
Groundwood
De-inked
Nonintegrated
Tissue
Nonintegrated
Fine
TOTAL
Bleached
Board &
Bristols
100
-
-
-
-
-
-
-
100%
Printing
&
Writing
41.4
11.8
-
2.5
9.9
13.5
-
20.9
100%
Tissue
27.3
23.1
-
-
-
10.7
38.9
-
100%
News-
print
54.3
13.4
-
-
21.5
10.8
-
-
100%
Bleached
Market
Pulp
100
-
-
-
-
-
-
-
100%
Dissolving
Pulp
44.5
-
55.5
-
-
-
-
-
100%
SOURCE: Arthur D. Little, Inc., estimates based on American Paper
Institute capacity data (Table II-9), Arthur D. Little, Inc.,
capacity analysis and industry contacts.
148
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The above analysis was mainly necessary for obtaining a reasonable distribution for the
complex products: printing and writing papers, newsprint, and tissue. ADL has made the
simplifying assumption that all bleached board and bristols and bleached papergrade market
pulp capacity (including machine-dried intra-company transfers) is in the bleached kraft
category. Products excluded from the econometric analysis (i.e., uncoated groundwood
papers and bleached packaging papers), were used to balance the calculations.
The level of accuracy of the product/process transformation was sufficient to calculate
effluent control costs by product. Estimates were prepared to tenths of a percentage point
only to facilitate cross-checking of calculations and do not reflect the precision of the data.
150
-------
V. ECONOMIC IMPACTS
A. SUMMARY OF FINDINGS
The significant findings of the analysis of prices, output, mill closures and international
trade as affected by the water effluent guidelines are as follows:
Short-Run Closures Eight mills are projected to close because of 1977
pollution control requirements, resulting in the loss cf 2.2% of tissue
capacity and 2.4% of printing and writing paper capacity. Capacity removals
in the four remaining Phase II product sectors are expected tc be minimal
relative to total U.S. capacity. Estimated total direct unemployment result-
ing from these closures is about 1,800 people, or 1.4% of current Phase II
sector employment.
Long-Run Closures An additional 15 mills, representing about 1.6%> of
Phase II product capacity, are projected to close if the proposed 1983
guidelines are adopted. The nonintegrated printing/writing, and tissue paper
sectors would feel the greatest impacts. These projections, however, are
much less certain than the corresponding estimates for the 1977 guidelines.
Short-Run Shortages - No water pollution-related capacity shortages which
lead to upward price pressures are expected in the next three years. Sensi-
tivity analysis indicated that shortage conditions could exist under the
optimistic GNP growth scenario or if one considers the inherent prediction
accuracy range of the demand equations. Only in the case of bleached
market pulp did pollution control-related closures contribute to a shortage
situation in the upper boundary of the demand forecast; in this case, the
estimated total price effect was an additional 3% over the pollution control
cost effect.
Short-Run Price Effects The short-run price effect of compliance with
1977 standards is about 1% under the perfectly competitive model and
about 3% under the total cost recovery model. It is difficult to identify
which model applies better to specific product sectors.
Price Elasticities of Demand - The short-run price elasticities, for total paper
and paperboard as well as the Phase II product sectors, are low, as expected.
In general, the sector demand elasticities are not significantly different from
each other. Long-run price elasticities cannot be adequately measured until
the output effects from recent large price increases become apparent.
151
-------
Long-Run Price Effects - The estimated long-run price effects of costs
associated with the proposed guidelines are likely to range between 3% and
7% depending upon the product sector.
Balance of Trade - Pollution control requirements in the major paper
producing regions are comparable to U.S. 1977 effluent guidelines (although
compliance timetables are generally longer). No other foreign competitor,,
however, is currently considering requirements as stringent as BAT (1983).
However, the difference in control requirements caused by the proposed
BAT guideline should not significantly change the current total cost advant-
age of U.S. mills. Thus the U.S. trade balance should not be changed
significantly by the proposed guidelines in the Phase I! sectors.
B. PRICE AND OUTPUT PROJECTIONS
1. Long-Run (1983) Price Effects
The estimated long-run price effect was based upon the long-run equilibrium price
necessary to attract and maintain capital in the industry, as measured by new, efficient mills.
The capital and operating costs for new mills without pollution controls are shown by
product sector in Table V-l. The associated long-run equilibrium prices necessary for both a
10% and a 12% after-tax return on capital are also indicated. Table V-2 contains similar
information for new mills with pollution controls in compliance with new source perfor-
mance standards. The percentage change in long-run equilibrium price with pollution
controls is also shown in Table V-2. The relative change in price due to pollution controls is
not significantly different for the 10% and 12% return on investment. Price increases ranged
from 3.0% for tissue to 11.8% for dissolving pulp. However, because U.S. consumption
peaked in 1968 and capacity is not expected to expand, it is doubtful, that new source
standards will influence dissolving pulp prices very much.
2. Price Elasticity of Demand
The demand elasticities calculated from the econometric model demand equation are
shown in Table V-3. As expected, the demand for paper products was found to be relatively
price inelastic, i.e., given a 1% change in price, the resulting reduction in quantity demanded
is less than 1% (elasticity is less than 1.00).
In the newsprint sector, the price elasticity was not statistically significant at the 95%
confidence interval for total U.S. consumption. To provide an additional estimate and range
of elasticities, the price elasticity indicated by the equation for U.S. production was also
calculated.
152
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TABLE V-1
LONG-RUN PRICE EFFECTS - ECONOMICS OF NEW MILLS
WITHOUT POLLUTION CONTROLS
Product
Sector
Bleached
Board &
Bristols
Printing
& Writing
Tissue:
Kraft
Capital
Costs
(millions of $)
$138
94
73
Operating
Costs
$/Ton
$212
276
521
Long-Ron
10% R01J
366
449
^ ,
2
Equilibrium Price
12% ROI3
401
488
r> i -»
De-inked
Newsprint:
Fine Kraft
De-inked
Dissolving
Pulp
Bleached
Market Pulp
29
119
47
145
176
599
165
165
214
174
280
355
292
311
390
218
SOURCE: "Cost for New Source Performance Standards Phase II Categories" (Table IV-1)
Air Controls, OSHA requirements and working capital are included
in costs; annual operating costs exclude depreciation and interest.
2
The new mill models do not include all products within a category but rather were
created for representative products. Relative price effects rather than
absolute price levels were used to compare short-run and long-run price effects.
3
After tax return on investment.
153
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TABLE V-2
LONG-RUN PRICE EFFECTS - ECONOMICS OF NEW MILLS IN COMPLIANCE
WITH NEW SOURCE PERFORMANCE STANDARDS
r co duct
Sector
Bleached
Board &
Bristols
Printing &
Writing
Tissue:
Kraft
Capital
Costs
(millions of $)
$154
103
78
Operating
Costs
$/Ton
$220
283
528
2
Long-Run Equilibrium, Price
10% ROI % Change 12% ROI % Change
390 6.6%
471 4.9
) -in T i r\
430
513
f\f O
7 . 2%
5.2
» 1
De-Inked 32
News; print:
Fine Kraft 128
De-Inked 61
611
169
176
295
5.4
326
4.8
Dissolving
Pulp4
Bleached
Market
Pulp
173
196
230
181
395
311
11.3
6.5
436
341
11.3
7.2
SOURCE: "Costs for New Source Performance Standards, Phase II Categories", TABLE IV-1.
Cost of air controls OSHA requirements and working capital are included
in costs. Annual Costs exclude depreciation and interest
The New Mill Models do not include all products within a category but rather were
created for representative products. Relative price effects only rather than
absolute price level are relevant in comparing short-run and long-run price effects.
After tax return on investment.
It is not expected that NSPS guidelines will influence dissolving pulp prices
because new mills are not expected to be built for this product in the United
States; hence a full pass on of the incrementla costs of BPT and BAT by existing
mills (3.9% 4- 2.1% = 6.0%) is likely to be the maximum long.
154
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TABLE V-3
PRICE ELASTICITY OF DEMAND - PHASE II PRODUCT SECTORS AND
TOTAL PAPER AND PAPERBOARD
Product Sector
Bleached Board and Bristols
Tissue
Printing and Writing
Newsprint
Bleached Kraft Pulp
Dissolving Pulp
Total Paper and Paperboard
Demand Elasticity'
.18
.45
.26
t .85 Production
Q .22 * Consumption
.46
.49 U.S.
.63 * World
.28
Derived from demand equations of econometric models. All but those marked
* are statistically significantly different from zero at the 95% level.
E = -
AQ
AP
SOURCES: Arthur D. Little, Inc., estimates.
155
-------
Two price elasticities are also shown for dissolving pulp. Although the price elasticity
for world consumption is not statistically significant at the 95% confidence interval, it is
also not statistically diferent from the U.S. production coefficient of elasticity.
These price elasticities reflect conditions which occurred during the historic period
over which the econometric model was developed, which is generally 1964-1974. They do
not measure the potential longer-run effects of the rapid price increases which occurred
during 1974, for the full impact of those price increases may not be reflected in consump-
tion for one or two years.
3. Short-Run (1977) Price Effects
Two estimates of the price effect of compliance with 1977 standards were made based
upon:
(a) Total incremental cost recovery, including a normal return on investment;
(b) Shift in supply curve based on the change in marginal cost and closures.
In the first method, it was assumed that pollution control equipment was depreciated
over 16 years on a straight time basis and that the cost of capital was 10%.' The price
increases for the Phase II product sectors indicated by this method (Table V-4) range from
2.3% to 4.2%.
For each product sector, the price effects estimated by the second method, based upon
the shift in the supply schedule (Table V-5), are less than half of the increase indicated by
total cost recovery.
The extent to which increases in cost are "passed on" to consumers is a function of the
elasticity of demand. Costs can be fully "passed on" if there is no reduction in quantity
demanded (and profit) resulting from a change in real prices, i.e., the elasticity of demand is
zero. The estimated reduction in quantity demanded, resulting from price increases equivalent
to the change in variable cost, is shown in Table V-5. Price changes that occur are a function
of the pricing behavior in the industry. As previously stated, the industry cannot be
characterized by a perfectly competitive model, nor is the industry highly concentrated and
oligopolistic. In non-competitive industries, price may not be equal to marginal cost and
changes in price may not be equal to changes in marginal cost. For those sectors which are
oligopolistic, price effects are uncertain.
1. The 10% cost of capital is based upon a study conducted by another contractor to the EPA.
156
-------
TABLE V-4
PRICE EFFECT OF 1977 GUIDELINES ASSUMING FULL COST
PASS-ON BY EXISTING MILLS
Increase in Costs Due to Pollution Controls
Product
Sector
Bleached
Board &
Bristols
Printing &
Writing
Tissue
Newsprint
Dissolving
Pulp
Bleached
Market
Pulp
Fixed
Costs
$/Ton
$ 5.52
8.56
11.02
7.19
9.37
5.58
Variable3
Costs
$/Ton
$ 3.00
4.58
5.84
3.84
5.18
3.13
Total
Increase in
Cost $/Ton
$ 8.52
13.14
16.86
11.03
14.55
8.71
Price
$/Ton
1975 1977
361 370
560 573
736 753
260 271
385 400
336 345
% Increase
2.5%
2.3
2.3
4.2
3.9
2.7
Annualized value of incremental investment from plus fixed component of operating
costs from TABLE III-2.
The market prices for the econometric model sectors in June, 1975, dollars.
The 1977 price per ton is equal to the 1975 price plus the total increase in
cost per ton to meet 1977 water effluent control guidelines.
3SOURCE: TABLE III- 2.
157
-------
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C. FORECAST SHORT-RUN DEMAND/CAPACITY RELATIONSHIPS
The potential for price pressure because of tight capacity resulting from meeting effluent
guidelines was examined for each of the product sectors in the context of the Case 1 and
Case 2 scenarios. Over the period 1975-1978, the Case 1 and Case 2 scenarios are identical
except in 1978 when the Case 2 scenario reflects an extremely optimistic growth forecast.
In the following discussion of each product sector, relevant comments are included as
specific interpretations of results for the sector. Each demand forecast includes the two
standard deviation range (boundary) to illustrate the ceteris paribus range of forecast error
indicated by the econometric model demand equation. Note that both the upper and lower
bounds are equally probable.
1. Bleached Board and Bristols
The forecast of production (Table V-6) indicates that the bleached board and bristols
sector will be operating at about 96% of capacity in 1977. Although this is high, it is lower
than the 98% annual operating rate experienced by that sector in 1973. In the past, this
sector has not evidenced strong price pressure when operating rates are in the high nineties.
However, in the optimistic demand forecast for 1978 combined with the upper bound of
the demand forecast (Table V-7) creates an operating rate in excess of 100%. Under these
conditions there could be a capacity shortage in this sector, but it is not directly related to
pollution control requirements.
The coefficient of elasticity estimated for this sector (.18) is low when one considers
that product substitutes are available. It may be underestimated due to a historic lack of
price fluctuation.
2. Printing and Writing Paper
If capacity lost from mill closures for pollution control cost reasons is not replaced, the
printing and writing paper sector could face price pressure for a short period in the high
growth Case 2 scenario. In the Case 2 scenario for 1978(1978-2), an annual operating rate
of 95.2% is indicated. Fluctuations in production during the year could cause price pressure
because the price pressure point is reached around a quarterly operating rate of 97%. Tabie
V-8 shows the forecasts.
The upper and lower bounds of the two standard deviation range of the demand
forecast are shown in Table V-9. There is no capacity problem indicated by the upper bound
of the demand forecast under the Case 1 scenario.
3. Tissue
Even if capacity lost through mill closures is not replaced, the tissue paper sector does
not run the risk of price pressure from tight capacity based upon either the Case 1 or Case 2
scenarios Table V-l 0.
159
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TABLE V-6
FORECAST OF BLEACHED BOARD AND BRISTOLS PRODUCTION AND CAPACITY
1974
1975
1975
1976
1977
1978 - 1
1978 - 2
1975
1976
1977
1978-1
1978-2
1975
1976
1977
1978-1
1978-2
Production
4954
4159**
4618
4974
5203
5139
5683
Forecast -
4611
4967
5195
5131
5674
Forecast
4599
4954
5182
5118
5660
Actual
Capacity*
5202
5173
Forecast Current Price
5173
5334
5411
5617
5617
- Short-run Price, BPT
5173
5334
5411
5617
5617
Full Cost Price. BPT
5173
5334
5411
5617
5617
Operating
Rate
95.2%
80.4
89.3
93.3
96.2
91.5
101.2
89.1
93.1
96.0
91.3
101.0
88.9
92.9
95.8
91.1
100.8
*Industry commitments announced as of September 1975,
**First 9 months annualized.
SOURCE: Arthur D. Little, Inc., estimates.
160
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TABLE V-7
BLEACHED BOARD AND BRISTOLS
TWO STANDARD DEVIATION RANGE OF DEMAND FORECAST
Upper Bound Lower Bound
Operating Operating
Capacity* Demand Rate Demand Rate
1976 5,334 5,195 97.4% 4,974 93.3%
1977 5,411 5,434 100.4 4,982 92.1
1978 - I 5,617 5,367 95.5 4,921 87.6
*Indus try commi tmen ts.
Source: Arthur D. Little, Inc., estimates based on current prices.
Nor do unreplaced pollution related clpsures result in price pressure at the upper
boundary of the demand forecast (Table V-l 1).
4. Newsprint
The forecast for newsprint production in the United States was based upon ADL's
forecast of U.S. consumption for the period 1975-1978, assuming that the U.S. mills
maintained a 33% market share. This forecast indicates a capacity utilization rate of 93% in
1977 (Table V-l 2).
Historically, tight U.S. newsprint capacity has not been accompanied by significant
price effects, and the econometrically estimated supply function is inelastic. Thus, while the
upper bound of the two standard deviation range indicates high operating rates, no resulting
price pressure could be measured by the econometric analysis (Table V-l 3). This undoubt-
edly is caused by the fact that two-thirds of the U.S. newsprint supply comes from Canada
which also actively exports throughout the world.
161
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TABLE V-8
FORECAST OF PRINTING AND WRITING PAPER PRODUCTION AND CAPACITY
(with and without pollution control closures)
Actual »«-,,. .t4_
Production Capacity*
ly,H
1975
1975
1976
1977
1978 - 1
1978 - 2
10504
8268**
8540
9955
10947
10346
11874
11613
11762
Forecast
11762
12141
12410
12773
12773
i Closures Not
Operating Cumulative Net
Rate Closures Capacity
91.5%
70.3
Current Price
72.6
82.0
88.2 294
81.0 294
93.0 294
11613
11762
12141
12116
12479
12479
Replaced
Operating
Rate
90.5%
72.6
82.0
90.5
82.9
95.2
Forecast Short-run Price, BPT
1975
1976
1977
1978-1
1978-2
8,520
9,932
10,922
10,322
11,847
11,762
12,141
12,410
12,773
12,773
72.4%
81.8%
88.0% 294
80.8% 294
92.8% 294
11,762
12,141
12,116
12,479
12,479
72.6
82.0
90.1
82.7
94.9
Forecast Full«Cost Price, BPT
1975
1976
1977
1978-1
1978-2
8,489
9,895
10,881
10,284
11,802
11,762
12,141
12,410
12,773
12,773
72.2%-
81.5%
87.7% 294
80.5% 294
92.4% 294
11,762
12,141
12, lib
12,479
12,479
72.2
81.5
89.8
82.4
94.6
*Industry commitments announced as of September 1975.
**First 9 months annualized.
SOURCE: Arthur D. Little, Inc., estimates.
162
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TABLE V-9
PRINTING AND WRITING PAPER
TWO STANDARD DEVIATION RANGE OF DEMAND FORECAST
Upper Bound Lower Bound
Operating Operating
Capacity* Demand Rate Demand Rate
1976
12,141 10,329
85.1%
9,594
79.0%
1977
12,116 11,359
93.8
10,550
87.1
1978 - 1
12,479 10,735
86.0
9,971
79.9
*Industry commitments, assuming closures not replaced.
Source: Arthur D. Little Inc., estimates based on current prices.
Care should be taken in the interpretation of the elasticity of demand estimated for
newsprint. Price elasticity could be as high as .85, based upon U.S. production. However,
when calculated on the basis of total U.S. consumption, a lower value is estimated (.21), but
it is not statistically significant. The higher value is probably more realistic if U.S. mills were
to raise prices faster than Canadian prices, resulting in a loss of market share. It is likely that
the trend towards a declining market share for U.S. producers which occurred during a
period of rising prices caused the higher (.85) apparent elasticity.
5. Bleached Market Pulp
The total production of bleached pulp was forecast in order to gauge whether a
capacity problem is likely to cause price pressure for bleached market pulp. Table V-14
indicates that only under the Case 2 scenario forecast will price pressures begin to develop for
163
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TABLE V-10
FORECAST OF TISSUE PRODUCTION AND CAPACITY
(with and without pollution control closures)
1974
1975
1975
1976
1977
1978 -
1978 -
Production
3940
3957**__
3667
3808
3938
1 3950
2 4015
Actual
Pollution Closures Not Replaced
Operating Cumulative Net
Capacity* Rate Closures Capacity
4322
4416*
ToTeca'at"
4416
4518
4616
4658
4658
91.2%
89.6
^"TTurrentT
83.1
84.3
85.3
84.8
86.2
Trice"
102
102
102
4322
4416
4518
4514
4556
4556
Operating
Rate
91.2%
83.0
84.3
87.2
86.7
88.1
Forecast Short-run Price, BPT
1975
1976
1977
1978-1
1978-2
3,656
3,796
3,926
3,938
4,003
4,416
4,518
4,616
4,658
4,658
82.8%
84.0%
85.1%
84.5%
85.9%
___
102
102
102
4,416
4,518
4,514
4,556
4,556
82.8
84.0
87.0
86.4
87.9
Forecast Full-Cost Price. BPT
1975
1976
1977
1978-1
1978-2
3,623
3,762
3,891
3,902
3,979
4,416
4,518
4,616
4,658
4,658
82.1%
83.3%
84.3%
83.8%
85.4%
___
102
102
102
4,416
4,518
4,514
4,556
4,556
82.1
83.3
86.2
85.6
87.3
*lndustry commitments announced as of September 1975.
**First 9 months annualized.
SOURCE: Arthur D. Little, Inc., estimates.
164
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L
L
TABLE V-11
TISSUE
TWO STANDARD DEVIATION RANGE OF DEMAND FORECAST
Upper Bound
Lower Bound
Operating Operating
Capacity* Demand Rate Demand Rate
1976
4,518 4,080
90.3%
3,554
78.7%
1977
4,514 4,220
93.5
3,675
81.4
1978 - 1
4,556 4,233
92.9
3,686
80.9
* Industry commitments, assuming closures not replaced.
Source: Arthur D. Little, Inc., estimates based on current prices.
bleached pulp. The resulting price increase would be about 1% in 1978. Note that market
pulp price movements historically have been much more sensitive to changes in world
bleached pulp operating rates than to the rate in an individual country. Unfortunately,
world production and capacity could not be accumulated on a quarterly basis, as was
necessary to measure effectively the effect of capacity constraints on price.
The output effects for bleached pulp are omitted because they are only relevant to
bleached market pulp quantity demanded. The effect of bleached market pulp output
reductions upon total bleached pulp capacity is insignificant.
The growth in demand for bleached market pulp is primarily a function of the growth
in non-integrated mills. If there is a tendency for a greater portion of new capacity to come
from integrated mills, then the growth in demand will be lower than indicated here.
165
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TABLE V-12
FORECAST OF NEWSPRINT PRODUCTION AND CAPACITY
1974
1975
1975
1976
1977
1978 - 1
1978 - 2
1975
1976
1977
1978-1
1978-2
1975
1976
1977
1978-1
1978-2
Production
3481
3540**
Foi
3366
3546
3714
3377
3906
Forecast
3355
3534
3726
3366
3873
Forecast
3335
3513
3680
3346
3870
Actual
Capacity*
3771
3837
recast - Current Price
3837
3911
3994
4045
4045
Short-run Price, BPT
3837
3911
3994
4045
4045
Full-Cost Price. BPT
3837
3911
3794
4045
4045
Operating
Rate
92.3%
91.8'
87.7
90.7
93.0
82.5
96.6
87.4
90.4
93.3
83.2
95.7
86.9
89.8
92.1
82.7
95.7
*Industry commitments as of September 1975.
**First 9 months annualized.
SOURCE: Arthur D. Little, Inc., estimates.
166
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TABLEV-13
NEWSPRINT
TWO STANDARD DEVIATION RANGE OF DEMAND FORECAST
Upper Bound
Lower Bound
Operating Operating
Capacity* Demand Rate Demand Rate
1976
3,911
3,871
98.9%
3,084
78.8%
1977
3,994
4,054 101.5
3,402
85.1
1978 - 1
4,045
3,686
91.1
3,094
76.4
'Industry commitments.
Source: Arthur D. Little, Inc., estimates
The upper boundary of the demand forecast creates a 97% operating rate in 1977 which
indicates potential price pressure on bleached market pulp amounting to about a 3%
increase (Table 15). This price increase, however, reduced the quantity demanded by 1.3%
of bleached market pulp or 58,000 tons which reduced the operating rate for total bleached
pulp by .3%.
6. Dissolving Pulp
Both U.S. and free world consumption of dissolving pulp has declined since 1968 and
is expected to decline further. The primary reason for this trend is substitution of rayon
fiber and cellophane (which use dissolving pulp as a raw material) by synthetic fibers and
films (which employ petrochemical raw materials). However, the econometric analysis
indicated that this secondary substitution effect has not been particularly sensitive to
dissolving pulp prices relative to plastic resin prices. In the absence of an econometric
projection it was assumed that dissolving pulp demand and capacity will remain level.
Therefore, since no mill closures are anticipated, there should be no short-term capacity
constraints as a result of price increases caused by attaining the 1977 effluent guidelines.
167
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TABLE V-14
FORECAST OF BLEACHED MARKET PULP PRODUCTION AND CAPACITY
Market Pulp Total Bleached Total Bleached Operating
Production Pulp Production Pulp Capacity* Rate
Actual
1974 3,287
1975
1975 3,270
1976 3,790
1977 4,138
1978 - 1 3,929
1978 - 2
17,276
15,454**
Forecast
15,157
16,328
17,489
17,116
18,622
18,341
18,485
Current Price
18,485
18,785
19,364
19,761
19,761
94.2%
83.6
82.0
86.9
90.4
86.7
94.3
*Industry commitments as of September 1975, reduced by 112,000 tons
from estimated BPT (1977) closures. '
**First nine months annualized.
SOURCE: Arthur D. Little, Inc., estimates.
168
-------
TABLE V-15
BLEACHED PULP
TWO STANDARD DEVIATION RANGE OF DEMAND FORECAST
Upper Bound Lower Bound
Operating Operating
Capacity* Demand** Rate Demand Rate
1976
1977
18,785 17,544
19,364 18,733
93.4% 15,196
96.8
80.9%
16,277 84.2
1978 - 1
19,761 18,391
93.3
15,930 80.8
*Industry commitments.
**Adjusted for capacity induced price effects.
SOURCE: Arthur D. Little, Inc., estimates based on current price.
169
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D. ESTIMATED IMPACT ON MILL CLOSURES
1. Summary
The closure findings shown in this analysis are based on: 1) a screening of all U.S. pulp
and paper mills within the scope of this study; 2) interviews with the management of mills
identified in the screening process as being vulnerable to closure for environmental reasons;
and 3) a discounted cash flow analysis of classes of mills in process/product sectors where
ADL's findings indicated closure possibilities. Table V-16 summarizes the results of each of
these three screening phases. Chapter III, Section C, presents details of the closure method-
ology.
a. Impact from BPT (1977) Guidelines
Tables V-17 and V-18 shows ADL estimates of future capacity removals resulting from
BPT guidelines by process and product categories respectively. In all but two process sectors
(sulfite and soda), capacity removals are estimated to be less than 3% of total sector
capacity.1 In general, it appears that most Phase II sector mills have either: (1) complied
with 1977 guidelines; (2) planned actions that will enable them to comply; or (3) already
closed.
The soda sector is unique in that it consists of only three mills. The 140 tpd (tons/day)
of soda pulp capacity and 300 tpd of printing and writing paper capacity (Table V-17) that
is removed results from one mill closure. Although removed soda pulp capacity equals about
29% of total sector pulp capacity, it is insignificant relative to total printing and writing
paper capacity of which it is a part. (Note that printing and writing papers can be produced
from kraft, groundwood, sulfite, soda, and deinked pulps.)
The sulfite sector is the most impacted sector, in terms of absolute tonnage, percentage
of total process sector capacity removed and consequent direct unemployment. ADL
considers that three sulfite mills, representing about 5% of total U.S. sulfite pulp capacity,
are closure candidates. The rationale for this estimate is discussed for the sulfite and other
sectors later in this section.
Total Phase II sector impact from BPT guidelines includes eight mill closures, 680 tpd
of pulp capacity removed and 1190 tpd of end-product capacity removed. These with-
drawals account for about 3% of the total 1975 productive capacity of those sectors
impacted and imply a layoff of some 1800 people.
1. The size of each process sector is defined by total pulp capacity for integrated sectors and total
end-product capacity for nonintegrated sectors.
170
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b. Impact from BAT (1983) Guidelines1
In general, the study's findings concerning longer-term closure impacts are less certain
than the shorter-term findings just described. The managements of many mills that were
contacted expect 1983 guidelines to be revised and are not sure what the ultimate
parameters of the 1983 guidelines will be. For this reason, as well as the long lead time,
many mills are not sure about the cost requirements to comply with 1983 guidelines and
find it difficult to speculate on their own future actions. Thus, to a greater degree than in
the analysis of 1977 guidelines, conclusions on 1983 guidelines closures are more heavily
based on financial analysis. These closure conclusions are limited by the uncertainties of the
long-run financial projections that are required for such an analysis.
Also, the fact that a mill may have invested recently in pollution control equipment to
comply with 1977 guidelines does not necessarily imply that this mill is committed to
remain open and will comply with 1983 guidelines. Industry interviews indicated that most
investment decisions for achieving 1977 guidelines were made with a payback horizon
ending before 1983. In the vast majority of cases, investments were made in 1972-1975 with
the expectation that they would be paid off before 1983.
Tables V-19 and V-20 present estimates of capacity removals resulting from BAT
guidelines by process and product categories respectively. The impact shown in these tables
is incremental and does not include BPT-related closures. The groundwood and deinked
process sectors have the highest potential closure impact with about 10% and 8%, respec-
tively, of total sector pulp capacity in jeopardy of being removed. Nonintegrated tissue,
sulfite, and nonintegrated printing and writing papers process sectors have a potential
incremental closure impact ranging from 3.5% to 2.2% of total process sector capacity.
Total Phase II sector impact from BAT guidelines includes 15 mill closures and the
withdrawal of 975 tpd of pulp capacity and 1815 tpd of end-product capacity from the
industry. These withdrawals account for about 4.4% of the total 1975 productive capacity
of those sectors impacted.
2. Sulfite Sector Closures
a. Characteristics of Closure Candidates
As mentioned previously, the greatest closure impact, in terms of both tonnage and
percentage of total capacity, resulting from 1977 pollution control guidelines is in the
sulfite sector. Three mills, representing about 5% of total sulfite sector capacity, do not
expect to comply with 1977 effluent guidelines. One of these has no recovery facilities in
1. The analysis did not attempt to estimate the effect of Section 301 (c) of the Water Pollution Control Act
which allows a plant to demonstrate individual hardship and thereby obtain a variance.
174
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place. The other two mills have partial recovery systems in place and produce lignin
by-products. None of the mills has secondary treatment. All three closure candidates have
less than 200 tpd of pulp capacity which places them in the lowest quartile of U.S. sulfite
mills ranked by size. Two additional sulfite mills are likely to close if BAT guidelines are
enacted. These are also small mills (less than 150 tpd of pulp capacity). The managements of
both these mills believe they do, or will be able to, comply with BPT guidelines.
b. Description of Analysis
Of the 28 U.S. sulfite mills examined, 11 were identified in initial screening as
requiring further review. The managements of these mills were interviewed, either by
telephone or in person, and two additional mills were screened out of the analysis. Industry
interviews also resulted in the identification of five additional mills that required further
review. To evaluate the 14 mills remaining in the analysis, 2 generalized models were
developed; these are summarized in Tables V-21 and V-22. Because these 14 mills differ
significantly in size, product mix, average prices and costs, profitability, and cost of
compliance, it was impossible for the models to be representative of alll 4 situations. Conse-
quently, considerable judgment was required to evaluate the closure likelihood of those
mills not represented by the models. The large dissolving pulp mill model was chosen
because there are several mills that approximate the parameters of this model (located both
in Alaska and in the continental U.S.) that would have a significant impact on the entire
sulfite sector if they shut down. The small paper-grade pulp mill model was chosen because
four candidate mills identified in the industry screening phase of the closure methodology
approximate the parameters of this model. (Note, however, that there are several small
paper grade sulfite pulp mills that do not fit the parameters of this model. Because of time
and budget constraints, models could not be developed to reflect every mill situation.)
Table V-23 shows the results of the DCF analysis resulting from the large Alaskan
dissolving pulp mill model. The results indicate that the model can absorb both 1977 and
1983 pollution control expenditures from the standpoint of both net present value (NPV)
and internal rate of return (IRR). This model requires total external financing of $14
million (a maximum of $8 million in external financing in any one year is required and
occurs in 1977). Internal cash flows generated by this model allow all external funds to be
repaid by 1979. In view of the model's high profitability, it should be possible to raise the
external capital required, subject to the possibility of a very tight supply/demand balance in
the capital market. Varying operating rates from 95% to 85% and cost of capital from 10%
to 20% did not change the findings. The results indicate that the large Alaskan dissolving
pulp mills have sufficient cash flow generating capability that it is unlikely that they are
vulnerable to closure from the proposed effluent control levels. Also, since previous ADL
work indicates that large dissolving sulfite pulp mills located in the lower 48 states enjoy a
manufacturing cost advantage over the Alaskan mills, similar closure conclusions were made
with regard to them.
177
-------
TABLE V-21
ECONOMIC PROFILE OF DISSOLVING SULFITE CLOSURE CANDIDATES
Product: Viscose Grade Dissolving Market Pulp
Process: Mg Base stilfite pulping with MgO recovery
Production: 600 tpd; 200,000 tpy (95% of Capacity)
Location: Alaska
Fiber Furnish 100% Whitewood (chips)
/
Power: On-site generation
Effluent Trc u-Ti^nt: Primary Clarification
Average Selling Price: $396/ton
CAPITAL CONSIDERATIONS:
Book Value: $30 Million (Assumed)
Working Capital Req'ts: $]4 Million
Additional Capital Req'ts:
a. Federal Water Regulations for 1977 BPT - $28 Million
for 1983 BAT - $15 Million
b. Upkeep $2 Million/Year.
Salvage Value: $6 Million (Assumed)
OPERATING COSTS ($/Ton)
Total Del'vd Cost, (No Controls)
(Excluding Depreciation and Interest) 287
Additional Operating Cost for:
Federal Water Regulations 1977 9
Federal Water Regulations 1983 5
Total Projected Del'vd Cost 301
with Federal Water Regulations
(Excludes Depreciation and
Interest charges)
178
-------
TABLE V-22
ECONOMIC PROFILE OF PAPER GRADE SULFITE MILL CLOSURE CANDIDATES
BASIS: Product: Bond paper, in rolls
Process: Mg base sulfite pulping with MgO recovery
Production: 150 tpd; 50,000 tpy (95% cai icity)
Location: North Central
Fiber Furnish 100% chips from roundwood (50/50 SW & HW)
/
Power: On-site generation plus purchased
Effluent Treatment: Primary clarification
Average Selling Price: $495/ton
CAPITAL CONSIDERATIONS:
Book Value: $24 million (assumed)
Working Capital Req'ts: $4 million
Additional Capital Req'ts:
a. Federal Water Regulations for 1977 BPT - $6.1 million
for 1983 BAT - 3.7 million
b. Upkeep
Salvage Value:
$0.5 million/year
5 million (assumed)
OPERATING COSTS
Total Del'vd Cost (No Controls)
(Excluding Depreciation and Interest)
Additional Operating Cost for:
Federal Water Regulations 1977
Federal Water Regulations 1983
Total Projected Del'vd Cost
with Federal Water Regulations
(Excludes Depreciation and
Interest charges)
179
($/Ton)
341
12
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181
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Table V-24 shows the results of the DCF analysis resulting from the small paper-grade
sulfite mill model. The results indicate that this model can also absorb 1977 and 1983
pollution control expenditures in terms of both NPV and IRR indices. This means that small
paper-grade sulfite mills that produce high quality printing and writing papers and otherwise
fit the model's parameters should not be vulnerable to mill closure as a result of the studied
effluent control levels.
However, as discussed previously, several small mills that survived the industry screen-
ing phase of the analysis do not fit the parameters of the small sulfite mill model and in fact
should under perform the model in profitability by a significant margin. Factors (or a
combination thereof) leading to the conclusion that these specific mills will not be able to
perform as well as the model include:
Greater capital expenditure requirements to achieve BPT or BAT guidelines
due to specific conditions at the mill site;
Small mill size (up to half the size parameters of the mill model) resulting in
higher operating costs and lower profit margins;
Lower average prices resulting from a lower-value product mix. (For example,
one small paper grade sulfite mill had an average price of $200/ton for
its product, a packaging material - less than half of the writing paper price
used in the mill model.)
Thus, despite the healthy financial position reflected by the paper-grade sulfite mill model, a
qualitative assessment of the aforementioned factors led ADL to conclude that five sulfite
mills underperform the model by a sufficiently large margin to be considered vulnerable to
closure.
3. Groundwood Sector Closures
a. Characteristics of Closure Candidates
One groundwood sector closure is likely due to BPT effluent guidelines. This mill is
old, inefficient, and small, with a capacity of 75 tpd. Three additional closures are expected
as a result of BAT effluent guidelines. Two of these mills are small (less than 100 tpd of
pulp capacity) and the third has a pulp capacity in the 225-275 tpd range.
b. Description of Analysis
In the initial screening analysis 21 groundwood mills were examined and 11 were
identified as requiring further review. These mills were contacted for further information,
which information led to the conclusion that seven of these mills were not in jeopardy of
closure. One model was developed for the financial analysis of the remaining four mills
(Table V-25).
182
-------
TABLE V-25
ECONOMIC PROFILE OF GROUNDWOOD PAPER MILL CLOSURE CANDIDATES
BASIS: Product: Uncoated Groundwood paper, in rolls
Process: Stone Groundwood (Bleached JW)
Production: 150 tpd; 50,000 tpy (95% of capacity)
Location: North East
Fiber Furnish: 70% Groundwood; 20% Waste paper; 10% Market Pulp
Power: 50% of grinder power requirement from hydro; balance
purchased electric power
Effluent Treatment: Primary Clarification
Average Selling Price: $320/ton
CAPITAL CONSIDERATIONS;
Book Value: $10 Million (Assumed)
Working Capital Req'ts: $4 Million
AdditJcnal Capital Req'ts:
a. Federal Water Regulations for 1977 BPT - $3.2 Million
for 1983 BAT - $1.5 Million
b. Upkeep $0.5 Million/Year
Salvage Value: $2.0 Million (Assumed)
OPERATING COSTS ($/Ton)
Total Del'vd Cost (No Controls) 300
(Excluding Depreciation and Interest)
Additional Operating Cost for:
Federal Water Regulations 1977 6
Federal Water Regulations 1983 3
Total Projected Del'vd Cost 309
with Federal Water Regulations
(Excludes Depreciation and
Interest charges)
183
-------
Table V-26 shows the results of the DCF analysis generated by this model. It indicates
that the mill is marginally viable in the absence of pollution control investment require-
ments with an NPV of 0 at a 10% cost of capital. Under both BPT and BAT guidelines, the
NPV becomes negative. The model's cost of capital would have to be an unrealistically low,
5%-6%, in order for the mill to continue to operate. Note also that the DCF analysis was
based on a 95% Operating Rate, virtually 100% of effective capacity and the most optimistic
condition that could be postulated. These results tend to verify signs of high closure
probabilities generated in the industry screening and interviewing phases.
4. Deinking Sector Closures
a. Characteristics of Closure Candidates
One deinking mill closure is anticipated due to BPT effluent guidelines. This mill is
very small (less than 50 tpd). Its existing treatment consists of primary clarification. The
mill does not anticipate being able to tie into a municipal treatment system. Four additional
closures are expected as a result of BAT effluent guidelines. Three of these mills are also in
the 50-tpd range. The fourth is about 200-300 tpd. These four mills anticipate that they will
be able to comply with 1977 effluent guidelines.
b. Description of Analysis
In the initial screening analysis 37 deinking mills were examined and 14 were identified
as requiring further review. Industry interviews indicated that nine of these mills were not
vulnerable to closures for pollution-related reasons. One mill model was developed for the
purposes of analyzing the five remaining mills. (Table V-27).
Table V-28 shows the results of the DCF analysis generated by this model. These
results indicate that while the mill is viable in the absence of further pollution control
investment requirements, it cannot absorb BPT- or BAT-related investments. In both cases,
the net present value of expected cash flows over current salvage value is negative. This
finding remains valid at a cost of capital higher than the 6%-8% level. Again, these results
tend to confirm signs of high closure probabilities received via mill screening and industry
interviews.
5. Nonintegrated Tissue-Sector Closures
a. Characteristics of Closure Candidates
One nonintegrated tissue mill closure is anticipated due to BPT guidelines. This mill is
very small (10 tpd). Four additional closures are expected from the impact of BAT
guidelines. These mills are in the 25-75 tpd range.
184
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TABLE V-27
ECONOMIC PROFILE OF DEINKING MILL CLOSURE CANDIDATES
BASIS: Product: Sanitary Tissue; 50% toilet, 40% towel, 10% napkins
Private Label & institutional grades
Process: Wastepaper deinking
Production: 76 tpd; 25,000 tpy (95% capacity) on 3 Machines
Location: Northeast
Fiber Furnish: 100% Waste Paper
Power: Purchased
Effluent Treatment: Primary Clarification
Average Selling Price: $650/ton
CAPITAL CONSIDERATIONS:
Book Value: $4 Million (Assumed)
Working Capital Req'ts: $4 Million
Additional Capital Req'ts:
a. Federal Water Regulations for 1977 BPT - $5.0 Million
for 1983 BAT - $0.6 Million
b. Upkeep $0.4 Million/Year
Salvage Value: $1.0 Million (Assumed)
OPERATING COSTS ($/Ton)
Total Del'vd Cost (No Controls) 582
(Excluding Depreciation and Interest)
Additional Operating Cost for:
Federal Water Regulations 1977 18
Federal Water Regulations 1983 4
Total Projected Del'vd Cost 604
with Federal Water Regulations
(Excludes Depreciation and
Interest charges)
186
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187
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b. Description of Analysis
In the initial screening process, 59 tissue mills were examined and 31 were identified as
requiring further review. Industry interviews indicated that 26 of these mills were not in
jeopardy of closure related to the effluent guidelines. One "typical" mill model was
developed for the purposes of financial analysis of the remaining five candidates (Table
V-29).
Table V-30 shows the results of the DCF analysis generated by this model. It indicates
that the mill is marginally viable in the absence of pollution control expenditures and is not
viable when impacted by BPT investment requirements. The mill model has an IRR of 8%.
Total external financing requirements are estimated to be about $1 million with maximum
financing in one year of $0.5 million (1977). The model indicates that the mill would not be
able to absorb BAT-related investments because the net present value of expected cash flows
over current salvage value for the model running through 1993 is negative. This model also
confirms inputs of low profitability and high closure potential received from the industry
interviews.
E. BALANCE-OF-TRADE EFFECT
1. Competitive Status of U.S. Pulp and Paper Industry
World production of pulp and paper products is centered in three major regions:
United States, Canada, and Scandinavia. The U.S. pulp and paper industry generally has
maintained a favorable cost position relative to foreign competition, mainly because of
economies of scale realized in extremely large mills, coupled with relatively low-cost
pulpwood delivered to the mill site. However, in the early 1970's, U.S. pulpwood prices
began to rise rapidly as competition for the available supply intensified. If this trend
continues, the industry could lose its chief competitive advantage in world pulp and paper
markets.
Pulpwood costs in Scandinavia are significantly higher because the demand now
exceeds the timber growth rate in that region. In eastern Canada, production centers heavily
on newsprint, a substantial quantity of which is produced in relatively old mills. In addition,
eastern Canadian pulpwood costs tend to be higher than those in the southern and western
United States because of the difficulties of harvesting and transporting the wood in Canada.
Western Canada, on the other hand, supports large market pulp mills and integrated pulp
and paper complexes with relatively low manufacturing costs that are similar to U.S. Pacific-
Northwest mills, but somewhat higher than in the southern United States. Other parts of the
world, such as Russia, South America, and Africa, have relatively low-cost wood reserves but
do not yet have the plant capacity to be significant factors in the world market; in most
cases, pulp/paper mills in these regions will have to incur significant transportation costs
which will at least partially offset any production cost advantages.
[88
-------
TABLE V-29
ECONOMIC PROFILE OF NONINTEGRATED TISSUE MILL CLOSURE CANDIDATES
BASIS; Product: Sanitary Tissue; 50% toilet, 40% towels, 10% napkins
Private Label Grades
Process: Non-integrated papermaking
Production: 76 tpd; 25,000 tpy (95% capacity) on 3 Machines
Location: Northeast
Fiber Furnish: 70% Purchased Market Pulp; 30% Waste Paper (Pulp
substitute Grade)
Power: Purchased
Effluent Treatment: None
Average Selling Price: $800/ton
CAPITAL CONSIDERATIONS;
Book Value: $4 Million (Assumed)
Working Capital Req'ts: $5 Million
Additional Capital Req'ts:
a. Federal Water Regulations for 1977 BPT - $2.1 Million
for 1983 BAT - $0.9 Million
b. Upkeep $0.4 Million/Year
Salvage Value: $1.0 Million (Assumed)
OPERATING COSTS: ($/Ton)
Total Del'vd Cost (No Controls) 748
(Excluding Depreciation and Interest)
Additional Operating Cost for:
Federal Water Regulations 1977 8
Federal Water Regulations 1983 5
Total Projected Del'vd Cost 761
with Federal Water Regulations
(Excludes Depreciation and
Interest charges)
189
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2. Effluent Control Cost Differentials
The degree to which water effluent control requirements will affect the U.S. balance of
payments will be determined by the differences in enforcement objectives and timetables in
the key competing export regions. A review of reports concerning current progress and
objectives for paper industry water effluent control in Canada and Scandinavia shows that
the current focus is on standards that can be met by a high level of internal control plus
primary treatment of the remaining effluent. There are exceptions to this, such as British
Columbia plus some other Canadian Provinces, and most inland areas of Sweden and
Norway, where the regulations require primary plus secondary wate/ treatment by the late
1970's. As of 1975, virtually all U.S. mills have installed primary water treatment and most
mills have installed some degree of secondary treatment as they point towards meeting BPT
(1977) effluent requirements.
The cost differentials for water effluent control reported by the United States, Canada,
and Sweden in a 1972 survey by the Organization for Economic Cooperation and Develop-
ment (OECD) for selected products (Table V-31) indicate that in general, U.S. mills are far
ahead in expenditures but Canada and Sweden, according to their projected 1975 expendi-
ture levels, are rapidly catching up.
In the absence of a more definitive assessment of foreign country paper industry
expenditures on pollution control by 1977, these data indicate that Canadian and Swedish
expenditures are likely to be less than U.S. costs Tor most export/import products, but that
the cost differences are likely to be small. Even a high degree of internal controls could
entail reaching U.S. cost levels.
Thus far, no foreign country has announced the intention of going further than the
U.S. BPT level beyond 1977. Therefore, for the purposes of this analysis, it was assumed
that when U.S. mills reach the BAT level in 1983, that competing mills in Canada and
Sweden will have reached the BPT level and that the corresponding cost differentials will
reflect the maximum cost disadvantage to the U.S. mills resulting from water effluent
regulations. This cost penalty was then compared with the current approximate U.S.
production and transportation cost advantages in selected markets to determine the degree
to which the current U.S. cost advantage may be eroded.
To simplify the analysis, costs other than wood, transportation, duties, and water
effluent control were assumed to be comparable in the key competing export/import
regions. It was further assumed that present currency exchange rates will be maintained.
Finally, the assumption was made that inflation rates of the above cost items would be the
same in all competing regions.
Table V-32 shows the estimated water pollution control cost disadvantage to U.S. mills
and the amount of 1974 U.S. trade for bleached kraft pulp, dissolving sulfite pulp, and
newsprint, the key Phase II products that are traded by or within the United States.
191
-------
TABLE V-31
INTER-COUNTRY COMPARISON OF WATER POLLUTION CONTROL EXPENDITURES
(Basis: December 1970 Dollars/Ton and Exchange Rates)
Products
United States
Canada
Sweden
Sulphite Pulp 1970
Projected 1975
2.96
14.14
0.56
10.01
2.59
9.25
Kraft Pulp and Paper 1970
Projected 1975
1.45
6.11
0.02
3.46
1.33
4.03
Newsprint 1970
Projected 1975
0.91
3.75
0.33
2.53
3.61
4.78
SOURCE: Survey of member countries by Organization for Economic Co-
operation and Development (OECD) in 1972.
192
-------
TABLE V-32
ASSUMED INTER-COUNTRY WATER POLLUTION CONTROL COST DIFFERENTIALS
1977-1983
(Basis: Mid-1975 Dollars and Incremental Costs Between BPT and BAT)
Product
U.S. Disadvantage
Versus Canada and Sweden
(Dollars/Short Ton)
]974 U.S. Trade
Imports
($MM)
Exports
($MM)
Bleached Kraft Pulp
Dissolving Sulfite Pulp
Newsprint
TOTAL TRADE
2.70
4.10
2.00
756.0
62.7
1.484.1
2,302.8
372.4
259.6
526.8
1,158.8
SOURCE: Arthur D. Little, Inc., based on assumption that Canadian and
Swedish mills will have reached U.S. BPT (1977) water effluent
control level by the time U.S. mills reach BAT (1983) levels.
Trade data: U.S. Department of Commerce.
193
-------
3. Impact on Exports
Germany was selected as the export destination because of its central location within
the European Common Market, which (including the United Kingdom) currently consumes
about 55% of U.S. bleached kraft pulp exports and 50% of U.S. dissolving pulp exports.
Sweden was selected as the competing export country for cost comparison purposes because
it is a major producer of the above products; moreover, if Swedish producers, with their
high wood costs, can obtain a competitive advantage in the Common Market by virtue of
their lower water effluent control costs, Canadian producers also would gain an advantage
over U.S. producers in exporting to other markets.
Table V-33 and V-34 show the effect that the assumed levels of water effluent control
will have on the cost of bleached kraft and dissolving pulps exported to Germany from the
southeastern United States and Sweden.1
The comparison indicates that, for both products, U.S. producers will continue to have
a significant overall cost advantage through 1983 (about the same cost advantage they enjoy
now), mainly by virtue of their lower wood costs. Thus it does not appear that water
effluent control costs as they affect production costs per ton will have a measurable effect
on U.S. exports to Europe (nor to Japan, which is seeking increased offshore pulp supplies
because of its domestic pollution cleanup problems).
4. impact on Imports
In 1974, the U.S. imported $2.3 billion worth of newsprint, bleached kraft pulp and
dissolving pulp. To estimate the effect that the cost of water effluent control would have on
increasing the imports of these and other pulp and paper products, a comparison was made
of the impact on the manufacturing cost of U.S. and Canadian mills if the assumed
difference in BAT and BPT costs prevails between 1977 and 1983. As in the export analysis,
it was assumed that costs other than wood, transportation duties and water effluent control
are comparable in both producing locations and that present currency exchange rates will be
maintained.
Bleached kraft pulp and newsprint were selected as the primary examples of future
cost trends because southern U.S. producers generally have a pulp wood cost advantage in
producing these products. If water effluent control costs were to create a significant U.S.
cost disadvantage for these key import products, imports would increase for these as well as
for other pulp and paper products that are imported in lesser amounts. Western Canada was
selected as the most likely source of future imports because this is where Canada's lowest
1. U.S. exports of these products amounted to $600 million in 1974.
194
-------
TABLE V-33
BLEACHED SOFTWOOD KRAFT PULP COST DIFFERENTIALS LANDED IN GERMANY FROM
SOUTHEAST U.S. AND SWEDEN
(1975 Dollars Per Short Ton)
Basis: Assume costs other than wood, transportation, duties, and
water pollution control are the same in both producing
locations. Control costs are based on reported averages
and ADL estimates.
U.S. Cost Advantage
1975 Differential Items Southeast U.S. Sweden (Disadvantage)
Wood 53 130 77
Transportation 32 12 (20)
Water Pollution Control ( 2)
Net Differential 55
BAT (1983)
Wood and Transportation 85 142 57
Water Pollution Control 6 (3)
Net Differential 54
SOURCE: Arthur D. Little, Inc., estimates.
195
-------
TABLE V-34
SULFITE DISSOLVING PULP COST DIFFERENTIALS LANDED IN
GERMANY FROM SOUTHEAST U.S. AND SWEDEN
(1975 Dollars Per Short Ton)
Basis: Assume costs other than wood, transportation, duties, and
water pollution control are the same in both producing
locations. Control costs are based on reported averages
and Arthur D. Little, Inc., estimates.
U.S. Cost Advantage
1975 Differential Items Southeast U.S. Sweden (Disadvantage)
Wood 61 161 100
Transportation 32 12 (20)
Water Pollution Control ( 5)
Net Differential 75
BAT (1983)
Wood and Transportation 93 173 80
Water Pollution Control (4)
Net Differential 76
SOURCE: Arthur D. Little, Inc., estimates.
196
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cost wood supply is found and where most capacity expansion has taken place recently.
Tables V-35 and V-36 illustrate the production and transportation cost differentials for
these products and compare them with the assumed pollution control cost differentials
between U.S. and Canadian mills.
The analysis indicates that at the assumed pollution control cost differentials, the cost
penalty to U.S. mills will be offset by their much lar ^r transportation and pulpwood cost
advantages. Therefore, it is not likely that a significant increase in imports will be assignable
to differences in water effluent control levels through 1983 on the basis of total cost
differentials per ton of product.
197
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TABLE V-35
NEWSPRINT COST DIFFERENTIALS IN U.S. MIDWEST FROM
SOUTHEAST U.S. AND WESTERN CANADA
(1975 Dollars Per Short Ton)
Basis: Assume costs other than wood, transportation, duties and
water pollution control are the same in both producing
locations. Control costs are based on reported averages
and Arthur D. Little, Inc., estimates.
Western U.S. Cost Advantage
1975 Differential Items Southeast U.S. Canada (Disadvantage)
Wood 34 43 9
Transportation 24 37 13
Water Pollution Control
Net Differential 21
BAT (1983)
Wood and Transportation 58 80 22
Water Pollution Control (2)
Net Differential 20
SOURCE: Arthur D. Little, Inc., estimates.
198
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TABLE V-36
BLEACHED SOFTWOOD KRAFT PULP COST DIFFERENTIALS IN
U.S. MIDWEST FROM SOUTHEAST U.S. AND WESTERN CANADA
(1975 Dollars Per Short Ton)
Basis: Assume costs other than wood, transp irtation, duties and
water pollution control are the same in both producing
locations. Control costs are based on reported averages
and Arthur D. Little, Inc., estimates.
Western U.S. Cost Advantage
1975 Differential Items Southeast U.S. Canada (Disadvantage)
Wood 53 90 37
Transportation 20 33 13
Water Pollution Control (3)
Net Differential 47
BAT (1983)
Wood and Transportation 73 123 50
Water Pollution Control (3)
Net Differential 47
SOURCE: Arthur D. Little, Inc., estimates.
199
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VI. LIMITATIONS OF ANALYSIS
A. COST OF COMPLIANCE
A number of sources of mill-to-mill variability on the cost of compliance have been
noted throughout the text and appendix material. This section recapitulates the major
variables and qualitatively discusses their implications.
1. Technology and Mill Site Variability
The models used in the Development Document were designed to reflect average
conditions for each sector. While this approach is conceptually adequate for estimating total
sector and industry capital and operating costs, it does not reflect the mill-to-mill variability
due to different process characteristics, mill site layouts, effluent loading and concentration,
etc. The mill variations can require significant changes from the specified type and scale of
treatment technology and the associated costs employed in the model mills. For example,
some mill estimates indicate costs as much as double the estimates of the Development
Document for technology similar to that specified. Conversely, many mills believe that they
are now or soon will be in compliance with BPT guidelines through the application of
simpler and less costly external technology than that specified in the models.
The Development Document did not deal with the possibility of evolutionary process
technology changes within the time framework of proposed guidelines. This is, of course, an
almost impossible task to handle quantitatively. However, one should at least acknowledge
qualitatively the possibility of new or modified pulping processes whose pollutants would be
less costly to control than current processes. This possibility could result from adoption of
less polluting processes with associated cost benefits, lower-cost treatment technology, or
combinations of each approach. It remains in the realm of speculation to project the timing,
cost, and applicability of such technological developments. However, it would be short-
sighted not to recognize the continuous evolution of new technology and that effluent
control guidelines have been and will continue to be an important stimulant to the
development of less polluting processes and more economical treatment technology.
2. Estimating Accuracy
Pre-engineering cost estimates for new construction are generally stated with a possible
variability of plus 25% and minus 10%. Since the stipulated conditions and adjustments for
the Development Document estimates are generally conservative, ADL believes that signifi-
cant low side variation is also possible, and that plus or minus 25% should be used as the
stated accuracy for new effluent control construction.
The accuracy of internal control cost estimates for existing mills is more difficult to
ascertain. Without attempting to be quantitative, note that these estimates are highly
dependent on existing mill conditions and configurations, and thus are likely to be less
accurate than other pre-engineering cost estimates.
201
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The accuracy of new mill manufacturing cost models should be taken at plus 25% and
minus 10%. ADL has not attempted to define the accuracy of manufacturing cost estimates
for existing mill models. The inherent variability of these estimates is discussed in detail in
Section III-B. However, it has already been noted that the operating margin calculation is the
significant input to cash flow analysis, and that this calculation is more accurate than the
absolute level of either selling price or manufacturing cost.
3. Base-Line Definition
ADL has noted in a number of places the difficulties inherent in defining a base-line for
estimating both incremental and total costs of compliance with federal pollution regula-
tions. Attributing some pollution control system components to pollution control vs.
cost-saving process equipment is clearly judgmental for many air control and internal water
effluent control items. ADL has chosen to assign all questionable items to pollution control.
Conceptually (i.e., within the limits of estimating accuracy), therefore, ADL has stated the
minimum baseline and the maximum incremental and total cost of pollution control.
Internal effluent control measures represent about 30% of total effluent treatment costs. If
50% of these measures are now generally employed for their cost savings advantages, then
the total capital cost of effluent control is overstated by 15%. Similarly, for air control, if
the cost-recovery level of control is 50% of the total, then the capital cost of air control is
overstated by 50%. However, ADL included operating cost savings associated with these
split-purpose investments; thus, if capital costs are overstated, then the associated annual
operating costs are understated.
Base-line data for incremental costs for any given time period are more difficult to
comment on quantitatively. Total costs for control are reliable within the overall technical
and estimating accuracy noted. However, definition of the technology and associated costs
already in place for existing mills at any given time is one of the more hypothetical areas of
this study, since it is very difficult to measure. The Development Document appears to
understate the external water effluent treatment employed by the paper industry in 1973. It
assumes that typical mills in each of the Phase II sectors have primary treatment only, while
in fact, many mills had already installed some degree of secondary treatment. This has the
effect of overstating the estimates of incremental cost to achieve BPT (1977) control levels.
4. Land Costs
The costs, and especially the availability, of land are so highly variable that they could
not be defined within the scope of this analysis. In areas where large amounts of low value
land are available, land would probably not be a major cost factor (i.e., probably less than
5% of total). However, land costs vary greatly and often land availability and proximity to
the mill will determine the type of treatment technology that must be used and how much
it will cost to operate.
202
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5. Water and Air Quality
This report addresses only the impacts of effluent control costs to meet specific
process guidelines. ADL has not correlated these guidelines with air or water quality
standards.
6. Implications
Because of the diversity of paper industry manufacturing technology, it is not possible
to make generalized quantitative calculations of these sources of variability. Presumably in
dealing with major process and product sectors and aggregate industry costs, sample
populations are large enough so that variations will tend to average out. However, there is no
way to demonstrate this conclusively other than by a plant-by-plant analysis; if it were
possible this would be such a large and complex task that its cost may not be justified.
B. APPLICATION OF ECONOMETRIC MODELS
1. Existence of Competition
In the real world there are very few examples of pure competition. Usually there is
some degree of seller concentration and/or product differentiation. Depending upon the
degree of market power held by producers, there is the possibility of a difference between
the long-run equilibrium price which would occur under pure cornpeition and the actual
price in the marketplace; price may be greater than marginal cost and plants may not
operate in the minimum average total cost range (i.e., efficiently). Thic implies that the
supply curve may not be equal to the marginal cost curve for the firm and the industry.
The pulp and paper industry does not completely fit the competitive mold. While the
number of sellers within most product sectors is fairly large, there are varying degrees of
concentration within the product sectors. Under these circumstances, the price/quantity
effect of pollution control expenditures could be greater or less than indicated by this
study.
2. Long-Run Price Elasticity
The price increases which occurred in 1973 and 1974 are unprecedented in the paper
industry in recent history. The coefficients of price elasticity calculated in this study do not
reflect the longer-term shifts which may occur due to substitution or other effects of the
1973-1974 price increases.
203
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C. LIMITS OF CLOSURE ANALYSIS
1. Mill Size and Diversity
The study included 270 pulp and paper mills, which vary by size, product mix, average
prices, cost structures, existing pollution control equipment, etc. Actual mill closure
decisions are based on analyses of the unique characteristics of each mill. Thus, closure
decisions must be made on a mill-by-mill basis. However, to analyze each of 270 mills was
beyond the scope of this study. Thus, an approach was developed that made it possible to
screen a large number of mills on the basis of generalized criteria and then to focus in
greater detail on a smaller number of endangered mills. This methodology was sufficient to
estimate overall closure impact (e.g., the number of mills and amount of capacity affected
by mill closures) in specified product/process sectors. There was still wide variability and
information gaps among the candidate mills. Although the sensitivity analysis took into
account most of the mill-to-mill variability, this approach is not designed to predict and
identify specific closure candidates. A significant amount of additional analysis of specific
candidate mills is required to achieve the latter objective.
2. Variability of the Decision-Making Frame of Reference
Many types of decision makers may have a role in a mill closure decision. The
decision-making frame of reference of a private mill owner may be quite different from that
of an analyst for a major paper company or financial institution. Judgments and analysis in
the closure study were made from the standpoint of a financially-oriented decision maker
using objective profit maximizing criteria. If objectives of preserving a family business or
maintaining local employment at a marginal profit level are considered they could have the
effect of reducing the predicted number of closures.
3. Environmentally Related Closures Versus Closures for Other Reasons
The difficult problem of separating environmentally related closures from closures that
would have occurred regardless of pollution control requirements is another complicating
issue. Previous work in this area indicates that many impacted mills would have difficulty
surviving because of various economic and competitive factors. Thus, future changes in
economic conditions (both in terms of the overall economy and specific market sectors) are
also important in affecting the closure impact results reflected in this report. These factors
could either increase or decrease the future closure level from this study's predictions.
4. 1983 Guideline Impact
In general, the longer-term (1983) findings resulting from this study are less certain
than those shorter-term (1977) findings described earlier. The managements of many mills
that were contacted expect 1983 guidelines to be revised and are not sure what the ultimate
parameters of these 1983 guidelines will be. For this reason, as well as the long lead time,
204
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many mills are not sure what the cost requirements for pollution control compliance in
1983 will be and, thus, find it difficult to speculate on their own future actions. Hence, to a
greater degree than in the short-run analysis, conclusions on 1983-related closures are more
heavily based on financial analysis. These closure conclusions are limited by the uncer-
tainties of the long-run financial projections that are required for such an analysis.
D. DATA
In general, the pulp and paper industry trade associations provide better statistics for
econometric research than are available in other industries, but there are some limitations.
There were significant shifts in technology in the paper industry during the 1950's, so that
using a time period from 1950 to 1975 would mean using periods of time in which the
industry was significantly different technologically. For this reason coupled with previous
data limitations, the starting point of 1960 was chosen.
In some cases, statistics for the industry are not clearly and e\enly reported, primarily
because the industry changed the definition of product groups during the mid-60's. This
resulted in the necessity of breaking down product categories before and after that date and
reaggregating them to the product groupings described above. It also meant that prior to
1967 or 1968, for many of the product sectors, annual, rather than quarterly, data were the
only reliable information available. The change in industry reporting necessitated the use of
judgment in some cases.
205
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APPENDIX A
ECONOMETRIC MODEL
EQUATIONS
207
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EPA: PULP AND PAPER INDUSTRY
SECTOR: AGGREGATE PAPER & PAPERBOARD
PRODUCTION
DEMAND EQUATION;
Quantity: 8056.9 - 26.8185 t'RICE + 92.0282 IIPt
+ 916.618 (WAGE PRICE FREEZE)
Right Hand Estimated
Variable Coefficient
Constant
PRICE
Index of Industrial
Production _
Wage Price Freeze
8056.9
-26.8185
92.0282
916.618
T-Statistic
4.99958
3.18289
22.2752
5.44402
R2 - .9636 Standard Error * 3.2%
Durbin Watson = 1.5404 Mean Value of Y - 12497
F Statistic (3, 48) - 439,540
Time Period: 1962 - 1974, Quarterly
Method : Two-Stage Least Squares
SUPPLY EQUATION:
Price - +4.05357 (ENERGY + LABOR COST) + 1.23264 WOOD PRICE
- 6.08991 WAGF, PRICE FREEZE + .158084 [1/(%IDLE
CAPACITY x 10) ]*
T-Statistic
16.8683
3.46227
2.30255
[1/mDLE CAPACITY x
10)8]* .158084 2.515833
R = .6960 Standard Error = 3.25%
Durbin Watson (Adj. for 0 gaps) = 1.0917 Mean of Y 142.883
F-Statistic (4,44) = Not available for equations with no constant term
Time Period: 1962-1974, quarterly
Method: Ordinary Least Squares
Right Hand
Variable
ENERGY + LABOR
WOOD PRICE
W P F
Estimated
Coefficient
4.05357
1.23264
-6.08991
*%IDLE CAPACITY = (CAPACITY - QUANTITY)/CAPACITY
209
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211
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EPA: PULP AND PAPER INDUSTRY
SECTOR: AGGREGATE PAPER & PAPERBOARD CONSUMPTION
DEMAND EQUATION;
Consumption - 9478.65 - 28.4852 Market Price + 91.1316 IIP
t~z
+ 1014.34 WAGE PRICE FREEZE
Right Hand Estimated
Variable Coefficient T-Statistic
Constajvt 9478.65 5.69886
Market Price -28.4852 -3.10989
Index of Industrial
Productiont_2 91.1316 20.5358
Wage Price Freeze 1014.34 5.58314
-- _ _ -_._._ .... __ _ _ ,_
R - .9584 Standard Error -3.1%
Durbin Watson - 1.6120 Mean Value of Y - 13728.4
F-Statistic (3, 48) - 368.7
Time Period - 1962 - 1974
Method - Two-Stage Least Squares
IDENTITIES:
1. Consumption - Production - Exports -f Imports
2. Market Price * [(Production - Exports) x Price) *
(Import Price x Imports)] * Consumption
212
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213
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EPA: PULP AND PAPER INDUSTRY
SECTOR: AGGREGATE PAPER AND PAPERBOARD
CHANGE IN CAPACITY EQUATION;
Change in Capacity - 2603.67 + 13.9470 (GNP.. - GNP_ 0)
t to
- 5578.92 (%IDLE CAPACITY^ + %IDLE CAPACITY^)
-76.9781 WEIGHTED COST OF CAPITAL
Right Hand
Variable
Constant
GNPt - GNP_ Q
t t-8
(%IDLE CAPACITY ,+
%IDLE CAPACITY 0)
t o
WEIGHTED COST OF
CAPITAL
Estimated
Coefficient
2603.67
13.9470
-5578.92
-76.9781
T-Statistic
4.0555
-4.44841
-1.14945
4.39268
R2 - .470 Standard Error - 30.9%
Durbin Watson - .6393
F-Statistic (3,44) - 14.1917
Method: Ordinary Least Squares
IDENTITY;
CAPACITYt - CAPACITY^ + CHANGE IN CAPACITY
DEFINITIONS;
1. WEIGHTED COST CAPITAL - .4 CC . + .4 CC 0 + .2 CC .,
t 1 to t*>*
2. % IDLE CAPACITY - (CAPACITY - QUANTITY PRODUCED) * CAPACITY
214
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-------
EPA: PULP AND PAPER INDUSTRY
SECTOR: BLEACHED MARKET PULP CONSUMPTION
DEMAND EQUATION;
CONSUMPTION - -486.935 - 1.63655 MARKET PRICE
+ 2.1188 GNP. _ -I- 20.9591 WAGE PRICE FREEZE
Right Hand Estimated
Variable Coefficient T-Statistic
Constant -486.935 3.68087
MARJCET^RICE 1.63655 2.55995
GNPt_2 2.1183 10.6781
W P F 20.959 .59283
R2 - .8491 Standard Error - 9.4%
Durbin Watson (adj. for 0 gaps) = 1.3243 Mean of Y " 820.318
F-Statistic (3,40) - 75.0367
Time Period: 1964 - 1974, quarterly
Method: Two-Stage Least Squares
NOTE: 1) CONSUMPTION - QUANTITY PRODUCED + IMPORTS - EXPORTS
2) MARKET PRICE * WEIGHTED VALUE OF PRICE OF DOMESTIC PRODUCTION
AND IMPORTS
SUPPLY EQUATION:
PRICE - 3.36258 WOOD + 5.50454 (LABOR + ENERGY)
-178.635 %IDLE CAPACITY
Right Hand Estimated
Variable Coefficient T-Statistic
WOOD 3.36258 6.52964
LABOR + ENERGY 5.50454 7.89451
% IDLE CAPACITY -178.635 3.01970
R2 - .5275 Mean of Y - 123.47
Durbin Watson (adj. for 0 gaps) * .3714
F-Statistic - Not available for equations with no intercept
Time Period: 1964-1974
w , , ... . . Standard Error - 10.87%
Method: Ordinary Least Squares
216
-------
EPA: PULP AND PAPER INDUSTRY
SECTOR: BLEACHED MARKET PULP PRODUCTION
PRODUCTION - -685.832 - .608792 PRICE + 1.83515GNP
t-2
- 28.6202 WPFRZ
Right Hand
Variable
Constant
PRICE
GNPt-2
WPFRZ
Estimated
Coefficient
-685.832
-.608792
1.83792
-28.6202
T-Statistlc
6.62510
1.16530
11.6545
1.03665
R - .8516 Standard Error - 11.47%
Durbin Watson - .8987 Mean Value of Y - 529.50
F-Statistic (3,40) - 76.5052
Time Period: 1964-1974
Method: Two-Stage Least Squares
217
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EPA: PULP AND PAPER INDUSTRY
SECTOR: TOTAL BLEACHED PULP CONSUMPTION
CONSUMPTION - -2.59011 MARKET PRICE + 5.70859GNP,
+ 169.998 WAGE PRICE FREEZE
t-2
Right Hand
Variable
MARKET PRICE
GNPt-2
WAGE PRICE FREEZE
Estimated
Coefficient
-2.59011
5.70859
169.998
T-Statistic
2.26267
28.1319
3.04338
R - .9429 Standard Error -3.8%
Durbin Watson = 1.3270 Mean Value of Y » 3760.05
F-Statistic « Not available for equations with no intercept.
Time Period * 1964 - 1974, quarterly
Method: Two-Stage Least Squares
IDENTITIES:
1. CONSUMPTION - PRODUCTION - EXPORTS + IMPORTS
2. MARKET PRICE * [((PRODUCTION - EXPORTS) x PRICE) +
(IMPORTS x IMPORT PRICE)] * CONSUMPTION
218
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EPA: PULP AND PAPER INDUSTRY
SECTOR: PRINTING & WRITING
DEMAND EQUATION;
*S*^
QUANTITY - -440.5 - 3.35267 PRICE + 32.6263
Right Hand
Variable
PRICE
IIPt-2
Constant
Estimated
Coefficient
-3.35291
32.6262
-440.528
T-Statistic
3.6946
14.2989
2.163
R
.8975
Standard Error - 3.76%
Durbin Watson (adj. for 0 gaps) - 1.0938
Time Period: 1967-1974 Mean of Y - 2336.41
Method: Two Stage Least Squares
-10
SUPPLY EQUATION;
PRICE « 3.984 LABOR + (.111 x 10 A")
+ .942 PULP
Right Hand
Variable
LABOR
:-Q, 20
,20
PULP
Estimated
Coefficient
3.427
.518 x 10
1.11098
"* "
T-Statistic
8.98940
3.:
11.. 2001
Standard Error: 5.89%
R = .7559
Durbin Watson (adj. for 0 gaps) - 1.2200
Time Period: 1967-1974 Mean Value of Y: 243.631
Method: Ordinary Least Squares
219
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EPA: PULP AND PAPER INDUSTRY
SECTOR: DISSOLVING PULP PRODUCTION
DEMAND EQUATION;
PRODUCTION - 371.385 - 1.31388 PRICE
Jt-2
Right Hand
Variable
Constant
PRICEt_2
HOUSEHOLDS
+ 3.6981 HOUSEHOLDS
Estimated
Coefficient
371.385
-1.31388
3.69810
T-Statlstic
2.62175 .
2.18955
3.39564
Standard Error » 5.93%
Mean of Y - 405.977
R = .5152
Durbin Watson (adj. for 0 gaps) = 1.2720
F-Statistic (2,41) = 2.15533
Time Period: 1964-1974, quarterly
Method: Ordinary Least Squares
SUPPLY EQUATION:
PRICE = .193947 WOOD + 7.954001 (ENERGY + LABOR)
-46.0835 (% IDLE CAPACITY)
Right Hand
Variable
WOOD
LABOR + ENERGY
% IDLE CAPACITY
Estimated
Coefficient
.193947
7.95400
-46.0835
T-Statistic
1,45280
14.7942
-1.15760
Standard Error » 6.87%
R^ = .3647
Durbin Watson (adj. for 0 gaps) = .4643
Mean of Y = 149.727
F-Statistic (3 , 41 ) - not available for equations with no intercept
Time Period: 1964-1974, quarterly
Method: Ordinary Least Squares
NOTE: Coefficients of WOOD PRICE and % IDLE CAPACITY are not significant.
220
-------
EPA: PULP AND PAPER INDUSTRY
SECTOR: DISSOLVING PULP
WORLD CONSUMPTION
Version 1
CONSUMPTION = 3379.4 - 14.4973 PRICE
+ 4812.94 (PRICE RAYON * PRICE SYNTHETIC
SUBSTITUTES)
Right Hand
Variable
Constant
PRICE
Estimated
Coefficient
3379.40
-14.4973
T-Statistic
4.6403
3.85864
(PRICE RAYON *
PRICE SYNTHETIC
SUBSTITUTES) 4812.94 4.64034
2 ______ _ _ - _ _
R = .7337 Standard Error = 4.75%
Durbin Watson - 1.0657 Mean Value of Y = 4195
F Statistic (2, 12) - 16.535
Time Period: 1960-1974, annual
Method: Two-Stage Least Squares
DEFINITIONS
1. CONSUMPTION * TOTAL FREE WORLD PRODUCTION
2- PRICE -[(U.S. IMPORTS x U.S. IMPORT PRICE) + (U.S. DOMESTIC
PRODUCTION CONSUMED x DOMESTIC PRICE) + [(ALL OTHER
PRODUCTION + U.S. EXPORTS) x U.S. EXPORT PRICE)] *
CONSUMPTION
3. PRICE: BASED UPON DOMESTIC PRODUCTION SUPPLY FACTORS
221
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EPA: PULP AND PAPER INDUSTRY
SECTOR: BLEACHED HOARDS & BRISTOLS
DEMAND EQUATION;
Quantity = 172.49 - 1,54 PRICE + 1.5939 GNP
t-2
Right Hand Estimated
Variable Coefficient T-Statistic
PRICE -1.54077 -1.92972.
GNP 2 1.59392 9,57283 ^
Constant 172.491 1.23087
R2 - .7626 '
Standard Error « 4
Durbin Watson (adj. for 0 gaps) = 1.5609 Mean Value of 4 » 1,134
F-Statistic (2, 29) - 46.5765
Time Period: 1967-1974
Method: 2-Stage Least Squares
SUPPLY EQUATION;
Price - 2.11 LABOR +.66 PULP - 1.4999 (^)
Right Hand Estimated
Variable Coefficient T-Statistic
LABOR 2.11 12.5007
PULP .66 15.1013
' <>£ (% idle capacity) -1.4999 -.0357
C
R2 * .7611
Standard Error « 4.73%
Durbin Watson (adj. for 0 gaps) = 1.2464 Mean ^^ ^
Time Period: 1967-1974
Method: Ordinary Least Squares
222
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EPA: PULP AND PAPER INDUSTRY
SECTOR: TISSUE
DEMAND EQUATION:
Quantity
Right Hand
Variable
712.256 - 1.68046 PRICE + 1.48279 PERSONAL CONSUMPTION
t-2
PRICE
PERSONAL CONSUMPTION
Constant
t-2
Estimated
CoeffirJ cnt
-1.68946
1.48279
712.256
T-Statistic
' 5;03400
12.4979
5.87949
R2 =
.8555
Standard Error =
Durbin Watson = 1.3100 Mean Value Y
F Statistic (2,33) = 97.7072
Time Period: 1966-1974, quarterly
Method: Two-Stage Least Squares
3.65%
908.472
SUPPLY EQUATION:
Price = 1.15026* PRICE + r,. 55377
- 148,522 ((C - Q)/C)
LABOR
Right Hand
Variable
PRICE PULP
PRICE LABOR
C - Q/C (% idle capacity
Estimated
Coefficient
1.15026
5.55477
-148.522
T-Statistic
10.6108
14.4451
1.84829
R = .4776 Standard Error = 5.25%
Durbin Watson = 1.7022 Mean Value Y = 302.958
F-Statistic (3,33) = Not Available for equations without a constant
term
Time Period: 1966-1974, quarterly
Method: Ordinary Least Squares
223
-------
EPA: PULP AND PAPER INDUSTRY
SECTOR: NEWSPRINT PRODUCTION
DEMAND EQUATION;
PRODUCTION - 500.918 - 13517 PRICE + 1.43580 GNP
Right Hand Estimated
Variable Coefficient T-Statistic
Constant 500.918 2.5945
P'RIC'E -6.13517 4.76573
GNP 1.43580 13.5086
R2 - .8597
Durbin Watson (adj. for 0 gaps) - 1.0127 Mean of Y - 769.114
F-Statistic (2,41) - 125.564 Standard Error - 6.9%
Time Period: 1974-1974, quarterly
Method: Two-Stage Least Squares
SUPPLY EQUATION;
PRICE - 2.35 (ENERGY + LABOR) + 1.05056 WOOD
Right Hand Estimated
Variable- Coefficient T-Statistic
(ENERGY + LABOR) 2.35047 19.5649
PRICE WOOD 1.05056 6.77479
R2 * .2587
Durbin Watson (adj. for 0 gaps) - .8887 Mean of Y - 4.16%
F-Statistic (2,442) - not available for equations with no intercept
Time Period: 1964 - 1974, quarterly Standard Error « 4.16%
Method: Ordinary Least Squares
224
-------
EPA: PULP AND PAPER INDUSTRY
SECTOR: NEWSPRINT CONSUMPTION
CONSUMPTION * 1130.19 - 4.19221 MARKET PRICE + 2.4307 GNP
R2-
Right Hand
Variable
Constant
MARKET PRICE
GNP
.7685
Estimated
Coefficient
1130.19
-4.19221
2.4307
Standard Error
T-Statistic
2.72043
1.38820*
10.8599
- 4.67%
Durbin Watson - 2.5036 Mean Value of Y - 2394.5
F-Statistic = 68.054
Time Period - 1964 - 1974, quarterly
Method = Two-Stage Least Squares
IDENTITIES
1. CONSUMPTION - PRODUCTION + IMPORTS - EXPORTS
2. MARKET PRICE - [(PRODUCTION - EXPORTS) x PRICE) + (IMPORTS x
PRICE OF IMPORTS)]/CONSUMPTION
Significance level = 82%
225
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APPENDIX B
MILL AND PROCESS CHARACTERISTICS
227
-------
APPENDIX B
MILL AND PROCESS CHARACTERISTICS
1. Introduction
The major paper industry process steps are pulping (the separation oi" whole wood into
a fibrous mass) and paper making (the formation of discrete fibers into a web, or sheet of
paper or paperboard). In addition the paper-making process may include additional steps
such as sizing, coating and calendering, followed by finishing steps such as slitting, rewinding
and sheeting.
Pulping and paper making utilize four basic ingredients: fiber, water, energy and
chemicals. Wood remains the dominant fiber source, followed by wastepaper and small
amounts of other fibers such as cotton and asbestos. Water is used as a diluent for the
pulping and bleaching chemicals, washing the pulp and transporting it through the mill into
the paper-making operation. All pulp and paper facilities are being pressured by increasingly
stringent water pollution control regulations to reduce their water usage rate.
Most mills' energy needs are wholly or partially filled by purchased electricity and fuel;
however, most of the integrated chemical pulping facilities fill a large portion of their energy
needs by burning the organic wastes from their pulping operations. Chemical requirements
and the ability to recover chemicals from process wastes depend upon the type of pulping
process employed.
2. Pulpwood Raw Materials
Wood is delivered to the pulp mills in various forms: as logs (generally small diameter),
as chips from off-site shipping operations, and as chip, slab or sawdust residues from
plywood and sawmills. Most companies derive at least a portion of their wood from their
own timberlands, but also rely heavily upon purchased wood from private land owners or
federal and state timberlands. Pulpwood is now delivered almost exclusively by truck and
rail, since water drives have become uneconomical or unlawful.
The industry subdivides its wood requirements into two general categories: softwood
(from coniferous or needle-bearing trees); and hardwood (from deciduous broadleaf trees)
to reflect mainly the proportional contents of cellulosic fibers and lignin (the substance
which binds the fibers together). Both types, however, vary greatly in hardness and density
from species to species.
Softwood is used primarily in products where high strength is required; namely, for
linerboard and packaging papers, and for producing groundwood pulp. Because it is
30-100% stronger than hardwood and traditionally in abundant supply, softwood has been
the dominant pulpwood source. Hardwood is used nearly exclusively in NSSC pulp and as a
229
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blending pulp in nearly all of the bleached paper and paperboard products. While its shorter
fiber length makes it weaker than softwood, hardwood has the advantage of higher density
and low lignin content which increases its pulp yield for a given volume of wood. Hardwood
also provides better smoothness and opacity than softwood - qualities which are particu-
larly important in printing papers. Finally, hardwoods have become more abundant and
lower-cost than softwoods. For all the above reasons, the industry has been increasing its use
of hardwoods.
3. Debarking and Chipping
Debarking is the first process step for all round-wood pulpwood as it enters the pulp
mill. The two principal methods are steel-drum and hydraulic debarking. The barking drum
(a large open-ended steel drum about 10-12 feet in diameter and 45 feet long) is one of the
oldest and still most popular methods. The drum rotates the logs slowly, and most of the
work is done by the tumbling of logs against one another. Thus, the power requirement is
minimized, but the drum debarkers have the disadvantage of roughing the log ends, causing
dirt to become imbedded which in turn creates dirt problems in the pulping step.
Hydraulic barkers blast off the bark under a high-pressure water jet as the log is
rotated. These are especially effective for barking the large coniferous logs found principally
in the West. However, use of the technique is likely to diminish because of its high energy
requirements, water pollution throw-off which adds to the pulp mill effluent discharge, and
because the process requires a relatively narrow range of tree diameters for optimum
efficiency.
After debarking, the logs that are to be used for chemical and certain types of
mechanical pulping are reduced to chips by a rotating knife device. Chipping improves the
rate of cooking liquor penetration during chemical pulping and is also required for the
refiner groundwood and thermomechanical pulping processes which will be described later.
The added cost (mainly energy) of chipping is avoided if the mill uses residues from lumber
and plywood mills which are generally provided in chip form. Sawdust residues from these
mills can also be used as pulpwood for certain products.
Some thin-barked wood species can be chipped with their bark on, and used in the
dark-colored products produced by the kraft and NSSC processes. Similarly, some of the
sawmill and plywood mill residues include a fairly high bark content which can be tolerated
particularly in the kraft pulping process. Uniformity in chip size is important in chemical
pulping. Therefore, before entering the process the chips are screened to separate those of
desirable size from oversize material and sawdust. The oversize material is crushed and
rescreened, and the sawdust, if it is not suitable for pulping, is normally used for fuel.
230
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4. Mechanical Pulping
Mechanical pulping is the simplest method of producing wood pulp. It consists of two
principal physical methods of producing groundwood pulps. In the older technology, stone
grinding, logs are ground on large grind stones. The newer technology which is gaining rapid
use is chip refining or refiner groundwood. The process converts pulp wood chips to
groundwood pulp, using attrition mills consisting of counter-rotating metal shearing discs.
Refiner groundwood is generally preferred over stone groundwood because it yields longer
fibers and thus stronger paper. Another mechanical process, thermomechanical pulping,
offers the potential of providing even stronger pulps than refiner groundwood; this will be
discussed later under New Technology.
Virtually all groundwood pulp is produced from softwood raw materials: spruce in the
Northeast, pine in the South and Douglas fir and hemlock on the West Coast. Aspen, a
low-density hardwood, is used for relatively small amounts of groundwood production in
the North Central region. Most groundwood is produced and consumed in integrated
pulp/paper mills.
Compared with chemical pulping, groundwood pulping requires a higher net power
consumption, and it provides a shorter pulp fiber owing to the considerable fiber damage
caused by grinding. The pulp produces a relatively weak paper that discolors easily on
exposure to light. On the other hand, groundwood provides a much higher yield, converting
some 95% of the wood into pulp, compared to about a 50% yield for the bleached kraft
pulp process. Another noteworthy advantage of the groundwood process is that it produces
virtually no on-site air pollution and generates much lower water pollution, owing to its
higher pulp yield, than the chemical pulping processes.
Groundwood's strength problem is compensated for by blending long fiber chemical
pulp prior to the paper-making stage. Its short fiber length helps to provide a smooth
printing surface for products like newsprint and uncoated groundwood printing papers, the
two principal applications.
Table B-l shows the regional and size distributions for the U.S. groundwood mills. The
Northeast (primarily Maine) ranks second to the South in capacity; both regions provide an
ample supply of softwood and relatively low-cost electricity. It should be noted that these
ingredients are also plentiful in Canada, which produces roughly twice the amount of
groundwood pulp and paper as the United States. Most small groundwood mills are located
in the Northeastern and North Central regions. These are engaged primarily in producing
uncoated groundwood papers which bring a somewhat higher price and serve smaller, more
specialized markets than newsprint. Newsprint is almost entirely produced by the larger
mills, most of which also produce bleached kraft pulp and hence are included under the
latter process category in this analysis.
231
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TABLE B-l
GROUNDWOOD PROCESS - REGIONAL DISTRIBUTION. 1975
Size tpd
30-100
101-350
351-800
Northeast
2
7
1
No. of Mills
No. Central South West
3 01
5 13
-
Total
16
Total 10 8 1 4 23
(2)
1974 % of Capacity Tonnage
26.3 13.4 43.8 16.4 100.0
Includes chemi-mechanical mills.
Includes groundwood produced in multi-process mills (API, Paper, Paperboard,
Wood pulp capacity, 1974-1977) .
SOURCES: Lockwood's Directory of the Paper & Allied Trades, 1975.
Industry Sources.
232
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5. Kraft Pulping
The kraft process represents the dominant pulping method in the United States in
terms of production tonnage. One of its chief advantages is that it can be used to pulp the
entire spectrum of wood species, including both the softwood and hardwood varieties. The
process is commonly termed the sulfate process because sodium sulfate traditionally has
been used as a make-up chemical. The kraft process employs a water solution of sodium
sulfide and sodium hydroxide to dissolve the lignin and pentasan sections of the wood while
leaving the cellulose portion. Typically, over 95% of the lignin is removed; however, the
cooking liquor also insolubilizes some of the cellulose from the wood. These losses
contribute to a relatively low pulp yield. The cooking process takes place in high-temper-
ature-batch or continuous-reactor vessels, after which the pulp is separated from the cooking
liquor and washed.
The waste liquor from the pulping step is fed to a kraft recovery furnace, which
encompasses incineration of the dissolved organic chemicals and recovery and reconstitution
of the sodium sulfide and sodium hydroxide, which are recycled to the pulping step.
Incineration, recovery of chemicals and recycle to the process are an economic necessity in
kraft pulping because of the high chemical loadings that are required. The incineration
process, however, creates the significant air pollution and odor problems associated with the
kraft mills. Pulp washing and particularly pulp bleaching, if it is included, also cause a
sizable water pollution problem.
The objective of bleaching is to produce a whiter and brighter pulp stock by removing
residual lignins and other dark-colored residues in the pulp. Kraft pulp is relatively difficult
to bleach. Bleaching involves a multistage process generally employing a series of chlorine,
chlorine dioxide and sodium hypochlorite bleaching stages, each of which is followed by a
caustic extraction step, after which the pulp is given a final wash.
Kraft pulp is used in a wide variety of paper and paperboard products including
linerboard, unbleached kraft packaging paper, printing and writing paper, tissue, bleached
paperboard and as a blending pulp with groundwood to produce newsprint and uncoated
groundwood paper.
Table B-2 shows the size and regional distribution of mills that produce only unbleached
kraft pulp. All are integrated to the production of unbleached kraft paperboard (mainly
linerboard) and/or unbleached kraft bag and sack papers. Unbleached kraft pulp mills which
also produce bleached kraft pulp were placed under the bleached category in this study,
since bleaching is the most serious cause of their water pollution problems. The table
indicates a dominant concentration of unbleached kraft mills in the South. Considering that
the distribution includes the largest mills, the total spread in mill sizes is relatively small.
This pattern is caused by the fact that the kraft pulping is a relatively new process, having
been initiated in this country in the 1930's, and that the process economics benefit
importantly from large-scale operations.
233
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TABLE B-2
UNBLEACHED KRAFT PROCESS - REGIONAL DISTRIBUTION. 1973
Size tpd
200-499
500-999
1000-1399
1400-2000
Is Producing Unbleached Kraft Without Bleach Facilities)
No. of Mills
Northeast No. Central South West
41
12 1
i 5 i
1 4
25 3
Total
5
13
6
4
MMMHMMM
28
% of Capacity Tonnage *
.3 1.2 81.5 17.1 100.0
Includes unbleached kraft produced in multi-process mills. American Paper
Institute Capacity Survey 1973-1976.
SOURCES: Locfcwood's Directory of the Paper & Allied Trades, 1975.
Industry Sources.
234
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Table B-3 shows a corresponding size distribution for bleached kraft pulp mills. The
bleached pulp mill category includes "complex" mills that produce unbleached kraft pulp
and other types of pulping, along with bleached kraft. The table indicates that these mills
are somewhat smaller and are distributed more evenly than the unbleached kraft mills. A
significant amount of bleached pulp production in the Northeast and North Central regions
primarily reflects the production of hardwood pulp for tissue and printing papers and
market pulp. With the exception of a few mills that produce market pulp exclusively, most
of the bleached kraft pulp mills are integrated to on-site paper and paperboard production.
Such products include: bleached paperboard, printing papers, tissue and newsprint.
6. Soda Pulping
Developed in 1851-1865, the soda process was the original method of chemically
pulping wood. It derived its name from the use of caustic soda as the pulping reagent. The
cost of the reagent made it necessary to recover and reuse the alkali in the residual liquor. It
was subsequently found that the presence of sodium sulfide, in addition to caustic soda in
the cooking liquor, allowed the pulping to proceed more rapidly and thus provide a less
degraded pulp. This discovery led to the sulfate or kraft process and tc a rapid decline in the
use of the soda process.
Currently, only three U.S. mills are employing the soda process; they are located in
New York, Tennessee, and Louisiana. The Louisiana mill pulps bagasse (sugar cane), while
the other two mills use mainly hardwood pulpwood. All three mills produce printing and
writing papers.
The soda process creates water pollution problems which are of about the same
magnitude as that of the bleached kraft pulp process. Its air pollution problems, however,
are significantly less because it requires no sulfur.
7. Sulfite Pulping
The acid sulfite process is also a relatively old one, having been discovered in 1874. It
became the most important chemical pulping process, until being overtaken by the kraft
process in 1937.
The original calcium base process involved burning sulfur to sulfur dioxide and reacting
the gas with limestone (calcium carbonate) to form the cooking liquor. Batch digesters lined
with acid-resistant brick are employed for the pulping, which is carried out under heat and
pressure.
Unbleached sulfite pulp, unlike other unbleached chemical pulps, has a relatively light
color and can be bleached by comparatively simple two- or three-stage bleach methods. On
the other hand, it produces a relatively weak pulp. Therefore, its cnief applications are in
bleached printing/writing papers, tissue, and dissolving pulp. Its cooking time, final
235
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TABLE B-3
BLEACHED KRAFT PROCESS - REGIONAL DISTRIBUTION 1975
No. of Mills
1
Size tpd
150-499
500-999
1000-1600
Total
Northeast
5
6
n
11
No. Central
5
2
_^VB^_
7
South
6
19
21
46
West
4
8
3_
15
Total
20
35
24
79
1974 - % of Capacity Tonnage
(API, Paper, Paperboard, Wood Pulp Capacity
1974-1977)
10.7 6.1 68.9 14.3 100.0
Total Kraft Pulp Capacity.
SOURCE: Lockwood's
Industry Sources
236
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temperature, and acid concentration are selected in relation to the final product. For
example, dissolving pulp requires cooking out most of the hemicellulose content, and this
adds to the cooking time as well as to the water effluent loadings.
The sulfite process' chemical requirements and costs are far lower than for the kraft
process; hence sulfite liquors traditionally have been discarded without treatment. With the
advent of pollution abatement regulations, however, most sulfite pulp mills have installed
chemical recovery or incineration units to either recycle their pulping chemicals, generate
energy, or both. Traditionally, relatively inexpensive calcium was the only cooking liquor
base used; but recently, sodium, magnesium and ammonia-based liquors have been em-
ployed, particularly in North America and Scandinavia. These bases cost four to five times
more per ton of pulp than calcium; but in addition to easier chemical recovery and reduced
stream pollution, these also provide reduced cooking time, more marketable by-products,
and greater brightness.
Currently, there are still 14 out of 30 U.S. sulfite mills that do not have chemical
incineration or recovery units. Since installation of an incineration/recovery unit entails a
large capital expenditure which may not be economically justifiable in the case of a small
mill, mills without chemical recovery systems received special attention in the mill closure
analysis. Four of the above fourteen mills use a substantial amount of their sulfite liquor to
produce by-products such as road binders, or raw materials to produce vanilla, yeast,
alcohol, insecticides and inks. By-product recovery both reduces their water pollution
loadings and increases the revenue. However, there is an insufficient market for the
by-products for all sulfite mills to reduce their water pollution problem in this manner.
Table B-4 shows the 1975 regional distribution of sulfite pulp mills. Two mills have
closed since 1973. Capacity is split about evenly between the West and the East, but the
average mill size is much smaller in the East.
8. NSSC Pulping
The neutral sulfite semichemical process combines a light chemical treatment to
achieve partial softening of the fibers with mechanical refining to complete the fiberiza-
tion. The process is used almost exclusively to convert hardwood pulpwood into a special
high-yield pulp for the manufacture of corrugating medium, the fluting material in corru-
gated containers. Pulp yield is high, 65-90% of the pulpwood, since only part of the lignin is
removed. The chemical pretreatment reduces the amount of power required in comparison
to groundwood pulp and increases the average fiber length and thus the strength. The NSSC
process also lends itself to use in relatively small mills, since it requires a lower capital
investment for efficient operations than either a chemical or a groundwood pulp mill.
The pollution problems associated with NSSC pulping are similar to those of the sulfite
process; however, they are not as extensive owing to the lower chemical concentrations.
Traditionally, a sodium sulfite pulping base has been used, but this is gradually being
237
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TABLE B-4
REGIONAL DISTRIBUTION OF SULFITE MILLS. 1975
Size (tpd)
80-149
150-299
300-499
500-850
Total
(No. of Mills)
Northeast North Central
0 2
1 5
1
2 1
4 8
South West
5
3
1 3
- 4
1 15
Total
7
9
5
_J
28
SOURCES: Lockwood's Directory of the Paper & Allied Trades, 1975
Industry Sources
238
-------
displaced by ammonia and magnesium which can be more easily recovered. The sodium base
has no economic recovery system, although it can be fed into the kraft recovery furnace at
an adjacent kraft mill. In some cases, specially designed incineration systems are employed,
producing an inert ash in substantial quantities which must be either sold or discarded.
There are five NSSC mills that have no recovery or incineration systems or that are not tied
into municipal treatment systems. These were given special attention in ADL's closure screen-
ing analysis, because investment in chemical incineration and recovery systems requires
substantial capital, which may not be justified if the mill is marginally profitable.
Tables B-5 and B-6 show the regional distribution of the NSSC pulp mills, all of which
are integrated to the on-site production of corrugating medium. There is a relatively even
geographical distribution compared with unbleached kraft pulp, owing to the availability of
hardwood pulpwood throughout most parts of the country. As would be expected, the
NSSC mills, combined with kraft mills, have a much larger total scale of operation and are
primarily situated in the South and West, as is the kraft pulping industry. Regionally 46% of
all NSSC pulp is produced in the South, 33% in the North Central region, 11% in the West,
and 10% in the Northeast.
9. Pulp Deinking
Deinking processes are used to convert printed forms of wastepaper to a white pulp
substitute. Printing papers, tissue and newsprint constitute the major applications for
deinked pulp. Deinking is generally carried out through the use of chemical reagents such as
soda ash liquor, lime, borax and a variety of others. Bleaching with chlorine and sodium
hypochloride usually follows the deinking operation.
The water effluent loadings of deinking mills are quite high because of the discarded
inks, lignin and chemical reagents. The effluent, however, can be handled by conventional
primary and secondary treatment techniques; chemical recovery is not feasible.
Table B-7 shows the regional distribution of deinked pulp mills. It indicates that by far
the heaviest concentration of these mills is in the Northeastern and North Central regions,
where there are heavy concentrations of printing and converting plants which provide most
of the wastepaper raw material for deinking. These mills provide a source of pulp (often
supplemental) close to the principal market centers for printing and writing papers, tissue
and newsprint.
10. Recycled Paperboard
Recycled paperboard, sometimes called combination paperboard, employs a variety of
wastepaper grades which are generally mixed together to form the pulp furnish. These
grades include old corrugated containers, newsprint, and mixed wastepaper grades. The
paperboard is used in a variety of applications including corrugated containerboard, folding
boxboard, gypsum wallboard liner and a variety of smaller volume products. The repulping
239
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TABLE B-5
REGIONAL DISTRIBUTION OF NSSC PROCESS. 1974
(No. of Mills)
Size; tpd Northeast North Central South West Total
100-200 1 2 317
201-450 1 7 4-12
451-700 1 2 1 - 4
TOTAL 3 11 8 1 23
SOURCE: Lockwood's Directory, 1975.
240
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TABLE B-6
REGIONAL DISTRIBUTION OF COMBINED NSSC-KRAFT PROCESS, 1974
(No. of Mills)
Size; tpd
600-750
751-1500
1501-2250
2251-3000
TOTAL
Northeast North Central South West Total
5
6
12
19
SOURCE: Lockwood's Directory, 1975.
241
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TABLE B-7
REGIONAL DISTRIBUTION OF DEINKED PULP MILLS. 1975
Size (tpd)
20-99
100-399
400-800
Total
Northeast
6
7
2
15
(No. of Mills)
North Central
7
5
3
15
South West
1 1
4
-. _
1 5
Total
15
16
5_
36
SOURCES: Lockwood's Directory 1975
Industry Sources
242
-------
process consists of beating the wastepaper in water, screening off foreign material such as
tape and wire, and sometimes also incorporates an asphalt removal step.
The effluent loadings from a recycled paperboard operation are quite high because of
the extraneous material introduced by the wastepaper and removed in the screening and
cleaning operations. However, the nature of the product is such that it generally lends itself
to a very high degree of water recycling, which reduces the water volumes that must be
handled in the treatment plants.
Table B-8 shows the regional distribution of recycled paperboard mills. It shows that
the heaviest concentration of mills are in the Northeast and North Central regions and that
the majority of the very small mills are in the Northeast. The distribution of recycled
paperboard capacity more or less follows the population distribution.
11. Nonintegrated Paper Mills
Nonintegrated paper mills consist of paper machine operations which exclusively
purchase pulp produced at other locations to provide their fiber requirements. Thus, the
only pulp-handling equipment prior to the refining and paper-making operations are re-
pulping tanks to disintegrate the baled pulp. The nonintegrated mills primarily produce
printing and writing papers, tissue papers and coarse papers, which include unbleached
packaging paper and special industrial papers.
Water effluent loadings of the nonintegrated mills are relatively light since there is no
on-site pulping, and the pulp that they purchase in in clean condition ready for paper
making. The pollution loadings associated with the paper-making operation consist of pulp
fines, plus chemical treatment and pigment losses during paper making. These can be
handled by conventional wastewater treatment methods.
Table B-9 and B-10 show the regional distribution of nonintegrated printing/writing
and tissue mills. (Nonintegrated coarse paper mills including special industrial paper, wet
machine board, and molded pulp were excluded from the analysis.) It indicates that by far
the heaviest concentration of these mills are in the heavily populated Noitheast and North
Central regions where it has become uneconomical in many instances to produce pulp at the
paper mill site. As is typical of other mill distributions, the smallest nonintegrated mills are
in the Northeast.
12. Mill Closure Trends
Table B-l 1 shows the number of full mill closures and the capacity removed since
1965. An unprecedented number of closures occurred in 1970 and 1971 as the paper
industry's profitability dropped to its lowest point since World War II.
243
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TABLE B-8
REGIONAL DISTRIBUTION OF RECYCLES PAPER BOARD "7.VLS, 1973
Size: tpd
5-49
50-99
100-299
300-499
500-1000
Total
(No. of Mills)
Northeast North Central South West. Total
10 4 3 - 17
18 12 5 7 42
29 31 17 9 86
5 4 1 2 12
1 2 - -.. 3
63 53 26 18 160
30.9 41.4 16.3 11.6 100.0
*Lockwood's Directory.
SOURCE: American Paper Institute Capacity Survey, 1973-1976.
244
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TABLE B-9
REGIONAL DISTRIBUTION OF PRINTING, WRITING. AND RELATED PAPER MILLS, 1975
Size: tpd
15-49
50-249
250-1000
(Number
Northeast
5
12
2
of Mills)
North Central
1
13
5
South West Total
1 - 7
1 1 27
1 8
TOTAL 19 19 22 42
SOURCES: Lockwood's Directory, 1975.
Industry Sources.
245
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TABLE B-10
REGIONAL DISTRIBUTION OF NONINTEGRATED TISSUE MILLS. 1975
(Number of Mills)
Size; tpd
TOTAL
Northeast North Central South West
7-15 7
16-100 22
101-1000 4
33
11
Total
-
7
4
2
4
3
2
3
1
11
36
12
59
SOURCES: « Lockwood's Directory, 1975.
Industry Sources.
246
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TABLE B-ll
U. S. PAPER INDUSTRY MILL CLOSURES. 1965 - 1974
(No. Mills/Annual Capacity - Thousand Tons)
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
Recycled
Paperboard
2/51
1/23
3/87
1/32
2/47
*
8/279
5/180
5/219
Paper and Pulp
Printing
& Writing
IN/ 10
IN/ 14
2N/135
2N/14
it
2N/17
4N, 11/238*
IN, 11/65
*
Mill Closures
Tissue Other
IN/5 Kraft IN/13
2N/15
2N/13 Kraft IN/53
Glassine IN/15
IN/ 8
2N/13 Kraft IN/25
Spec. Ind. IN/ 6
2N/26* Glassine IN/16
A
2N/24 Constr. Paper 1/42
Additional
Pulp Mill
Closures
1/21 (ite)
1/34 (ite)
1/21 («W)
1/21 (Soda)
2/66 (ite)
2/21 (GW)
1/14 (SC)
3/166 (ite)
3/178 (GW)
3/95 (ite)
3/63 (GW)
1/40 (SC)
3/78 (ite)
1974
3/85
1975 thru 4/ 197
June
IN/40
2N/185
Semi-Chem 11/100
Spec. Ind. IN/5
1/105(ite)
TOTALS 34/ 1200 16N,21/719
12N/104
8N,11/275
26/923
N - Nonintegrated to pulp
I - Integrated
Kraft - Mainly unbleached papers
Pulp Symbols - ite - sulfite
GW groundwood
SC - semi-chemical
* Excludes partial closures, and mills sold and later reopened in same grades.
Source: American Paper Institute
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By far the greatest number of closures have occurred in the recycled paperboard
product sector. Both small (50 tons/day) and medium (100 tons/day) mills were affected,
and the ownership was about equally divided between small and large firms. A combination
of reasons led to the closures, including essentially static demand, high-cost mill sites in
densely populated metropolitan areas, and obsolescence of the cylinder board process and
its gradual replacement by forming devices such as the Ultraformer and Inverformer.
Printing and writing paper mills had the next largest closure incidence. Most of the
closed mills were not integrated to pulp, which is indicative of the general cost/price squeeze
caused by the narrowing gap between pulp and end-product prices. Closed mill owners were
about equally divided between large and small firms.
The tissue mill closures were all nonintegrated mills that were owned by small
companies. In addition to rising pulp prices, intense competition and increasing market
share concentration on the part of the four leading producers contributed to the demise of
these relatively small mills.
Other product sectors which experienced closures include unbleached kraft, glassine
papers, special industrial paper, corrugating medium, and construction paper. All but one of
the nine affected mills were not integrated to pulp and were relatively small mills. The mill
owners were about equally divided between small and large firms.
Pulp mill closures where the paper mills continued to operate as nonintegrated or
partially integrated mills were only slightly less numerous than recycled paperboard mill
closures. Sulfite mills experienced the highest closure rate, with fully 14 out of the total 26
pulp mill closures since 1965. All of these mills lacked the costly chemical recovery or
incineration systems which were needed to meet state water pollution control requirements.
Fourteen U.S. sulfite mills still remain that do not have recovery or incineration systems,
presumably because they cannot be economically justified and/or their state requirements
do not stipulate that level of control.
There were nine groundwood pulp mill closures since 1965. These were for the most
part very small mills that utilized relatively high cost softwood pulpwood which made them
uneconomical. ADL doubts that pollution had a significant bearing on these closures, since
groundwood is the least polluting of the pulping processes.
The remaining pulp mill closures consisted of two semi-chemical (NSSC) mills and one
soda-pulp mill. These were probably pollution-related, since the processes cause significant
water pollution loadings. In the case of the NSSC mill closures, the companies shifted to a
wastepaper pulp furnish and continued to produce corrugating medium.
Methodical, accurate accountings have not been made concerning the cause of the
above mill closures or what role, if any, pollution-control regulations had in the closures.
Many of the closures were undoubtedly the results solely of unfavorable economic
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conditions. Conversely, pollution-related closures were invariably due to the combination of
unfavorable economics coupled with the need to reinvest substantial amounts of capital to
correct pollution problems, and then incur a continuing higher operating cost. Therefore,
the above closure-trend analysis points to product and process sectors that traditionally have
been most vulnerable to closures and which ADL analyzed in particular detail to assess the
probability of future closures in which federal pollution control regulations are likely to be
significant contributing factors.
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APPENDIX C
CURRENT TECHNOLOGY CHANGES
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APPENDIX C
CURRENT TECHNOLOGY CHANGES
Following is a brief discussion of pulping, bleaching and papermaking process changes
which are either in the early stages of commercial development or in large-scale pilot plant
operation and which have or might have a significant impact on the costs of meeting
air/water pollution regulations or on the economics of pulping or papermaking.
1. Pulping Systems
Oxygen Pulping. The kraft pulping system, by far the most important chemical
pulping process, contributes appreciably to both air and water pollution. Because pollution
arises partly as a result of the use of sulfur compounds used in the process, there is a high
degree of interest in nonsulfur pulping processes. One of these approaching commercial
status is oxygen pulping.
The major incentive for the use of oxygen pulping is a reduction in both air and water
pollution levels; since there is no sulfur there are no malodorous organic sulfur compounds
emanating from the system either in air emissions or water effluent from the mill.
A second important incentive for the use of oxygen pulping ccmes from the potential
elimination of the chlorination stage in the pulp bleaching system. This is important because
the conventional chlorination and subsequent alkaline extraction stages contain large quan-
tities of chlorine compounds and are difficult to recover and so pose a pollution problem.
These first two stages would be replaced by oxygen pulping. The effluent from the oxygen
treatment contains no chlorine and so can be recovered and recycled to the recovery furnace
where the organic material is burned (energy recovery) and the inorganic material is
recovered in the form of fresh pulping chemical. ADL calculations based on laboratory data
indicate that capital and operating costs for kraft and oxygen pulping will be similar. With
present technology oxygen pulp strength is lower than that of kiaft. Thus, the major
incentives for the use of oxygen pulping technology are its pollution abatement aspects.
The first commercial oxygen pulp mill in the world is being constructed by
Weyerhaeuser at Everett, Washington. If pulp strength deficiencies can be corrected, the
oxygen pulping process could gain a degree of acceptance as a substitute for the kraft
process that provides a means of reducing both air and water pollution and treatment costs.
Conversion of kraft to oxygen pulping would require a major capital investment.
Thermomechanical Pulp (TMP). Mechanical pulp (used primarily in newsprint and
other, lower cost printing papers) is conventionally made by grinding a log on a grindstone
or by subjecting chips to mechanical disintegration in a double disk refiner. Recently, it has
been discovered that a superior mechanical pulp can be made if the wood is steamed and
then disintegrated under pressure. Yields are slightly lower than for the conventional
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systems - largely because of somewhat higher dissolved wood solvents, but pulp strength
values are higher. Thus, it is usually possible to reduce the amount of blended chemical pulp
needed to strengthen the paper.
From a pollution point of view, there will be a greater problem with TMP because of
the higher quantity of dissolved organic material in the mill effluent. Counterbalancing this
is the possibility of using lower value residue wood chips and sawdust in the TMP process.
These raw materials frequently constitute a pollution problem. In the past they have been
burned or disposed of by leaving them in piles to disintegrate. Pollution problems have
arisen from wood residues being washed into rivers, and other bodies of water, causing water
contamination from leached degradation products of the wood residues and air pollution
from burners.
The TMP process is in use in several mills in North America and Europe. In addition, a
number of new installations are on order or being installed so a fairly rapid adoption rate is
indicated.
Polysulfide Pulping with Kraft. The normal kraft pulp yield of 42-45% can be increased
to as much as 49-52% (i.e., a 15% increase) if polysulfide is added to the conventional kraft
cooking liquor. This advantage is particularly important in high wood cost areas. The
process was developed in Norway and is being used in two or three Scandinavian mills. The
extra sulfur used in the system cannot be recovered and so has to be vented to the
atmosphere. The result is a significant increase in the air pollution load at the mills using
polysulfide pulping.
Recently the Mead Corp. in the United States has developed a recovery system for
polysulfide and has installed a commercial unit at their Chillicothe Mill. They are obtaining
a significant yield increase with no appreciable increase in the air pollution load. Mead Corp.
is actively seeking licensees for their patented recovery process. In areas with very high
wood costs, the use of polysulfide pulping and recovery could prove to be attractive.
Kraft-Hydrogen Sulfide Pretreatment. When wood chips are pretreated with hydrogen
sulfide, followed by a conventional kraft cooking liquor, a yield increase is obtained similar
to, or higher than, that from polysulfide pulping. MacMillan Bloedel in Vancouver, British
Columbia, has developed a recovery system for hydrogen sulfide pretreatment and has
extensive experience with a large pilot plant in their Nanaimo, B.C. mill.
MacMillan Bloedel is also actively seeking licensees for their patented pulping process.
This process is expected to have the same degree of applicability as polysulfide pulping
systems.
Nonsulfur Semi-Chemical Pulping. Most of the corrugating medium in the United
States is made with the so-called neutral sulfite semi-chemical process (NSSC). Until
recently in many mills it was the practice to simply discard the effluent from this pulping
process to the river, sewer, etc.
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A variety of NSSC chemical recovery processes have been developed and many have
obtained commercial acceptance. Most of the recovery systems go through a sulfide phase in
a recovery furnace (including so-called cross recovery or use of NSSC liquor for make-up
chemicals in a kraft recovery furnace) and so contribute significantly to air pollution.
Two U.S. companies, Westvaco and Owens-Illinois, have, independently, developed and
patented nonsulfur semi-chemical pulping processes. Both companies have made one com-
mercial installation in the United States. The process details have not been revealed by
either company. Both, however, are actively seeking licensees of their process.
Green Liquor Semi-Chemical Pulping. It has been found recently that a satisfactory
semi-chemical pulp can be made with kraft green liquor as a cooking chemical rather than
neutral sulfite liquor. The kraft green liquor is simply a solution of recovered kraft
chemicals which have not been subjected to the final recovery step (i.e., conversion of
carbonate to hydroxide). The advantage is that the effluent from the pulping process can
be recovered in conventional kraft systems. This is true also of the cross recovery of NSSC
liquors with kraft recovery system but this approach is limited by the quantity of make-up
chemical required in the kraft system. When NSSC liquor is used as a source of make-up
chemicals, the ratio of kraft with NSSC pulping production allowed in cross recovery is
about 4 kraft to 1 NSSC. As an added factor in recent years the more strict control of
atmospheric pollution from kraft mills has limited the quantity of NSSC liquor which can
be used as make-up chemical. With kraft green liquor semi-chemical pulping, there is no
limit on the production of semi-chemical pulping integrated to a kraft pulping and recovery
unit.
A number of NSSC mills in the United States have been converted to kraft green liquor
and ADL expects the trend to continue.
2. Chemical Recovery
SCA - Billerud Recovery for NSSC. One of the most recent new, large, NSSC mills
constructed (Mead Corp.'s 600 ton/day mill in Alabama) is being built with still another
modification of NSSC recovery the SCA-Billerud System. In this process the recovered
organic material from NSSC pulping is heated at elevated temperatures under conditions
such that one of the active pulping chemicals, sulfur dioxide, as well as heat and sodium
values, are recovered directly from the recovery furnace. Sulfides are not handled outside of
the recovery units and so the development of noxious sulfur compounds is lessened. There
are several such installations in Europe but Mead's is the first in the United States.
Sunoco Recovery of NSSC Pulping Liquors. Sunoco Products Company in Hartsville,
South Carolina has recently announced yet another sulfite recovery system. Theirs utilizes
the fact that certain silicate and aluminate salts are strongly acidic at the temperatures
encountered in a recovery furnace and are highly insoluble in relatively dilute water
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solutions. Thus, the NSSC pulp digestor effluent is combined with the silicate-aluminate salt
prior to its combustion in the recovery furnace. Sulfur dioxide is recovered directly from
the furnace and sodium values are recovered when the smelt from the recovery furnace is
dissolved in water and silicate-aluminate compounds precipitate. These precipitated salts are
recovered and recycled.
Sunoco is offering to license the process to interested parties. The advantage of the
Sunoco system from the standpoint of pollution abatement lies in the recovery of sulfur
dioxide directly without going through the sulfide stage. To date the only installation is the
Sunoco one although they are said to be negotiating with several interested pulp mills.
Variations in Kraft Make-Up Chemicals. When kraft mills are forced to close up their
systems and retain more of their sulfur values, the use of salt cake as a make-up chemical
becomes increasingly difficult because it provides an excess of sulfur beyond that required
by the chemistry of the pulping reaction. In addition, unwanted sulfur values are added to
the system when effluents from the tall oil recovery system and chlorine dioxide generators
are added to the kraft furnace. This has led to the substitution of caustic soda and sulfur for
salt cake and other sodium-sulfur make-up chemicals in many kraft systems. Although the
cost of the caustic is somewhat higher than the salt cake, the emission of objectionable
sulfur compounds from the recovery process is considerably lessened. There already has
been rapid displacement of salt cake in kraft pulping. ADL expects that the trend towards
the use of caustic in place of salt cake will continue.
3. Bleaching
Oxygen. Oxygen is being used commercially in pulp bleaching as a substitute for the
chlorination and extraction stages of a conventional kraft bleaching sequence. The advan-
tages and results from the standpoint of pollution are similar to those experienced with
oxygen pulping. The comparative economics of oxygen and conventional bleaching are
similar. Thus, the major incentive for oxygen pulping is pollution abatement. Because
oxygen pulp strength is sometimes lower than kraft, ADL expects that commercial use of the
process will be limited unless process changes result in pulp strength improvements.
Replacement of Chlorine with Chlorine Dioxide. Kraft pulp bleaching is conventionally
carried out in four to six stages. A typical sequence would be chlorination followed by
alkaline extraction, chlorine dioxide, alkaline extraction and chlorine dioxide. The effluents
from the first two stages (chlorination and alkaline extraction) contain substantial quantities
of inorganic and organic chlorine compounds as well as nonchlorinated organics. Thus, these
two effluent streams constitute a major pollution problem for the bleached kraft industry.
It has been found that if chlorine dioxide is added along with chlorine in the first stage
or if dioxide is added in an initial stage followed by chlorination, the quantity of chlorine
consumed can be reduced. The quantity of chlorine which can be eliminated is directly
related to the quantity of chlorine dioxide used. In principle, it is possible to substitute all
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of the chlorine with chlorine dioxide but present economics permit only a partial substitu-
tion. Chlorine dioxide has a much greater oxidizing power per chlorine atom than chlorine
and in addition the mechanism of the chlorine dioxide action is such that chlorinated
organics are not produced to the same degree as with chlorine. Thus, the effluent from a
chlorine dioxide stage is much less offensive than from a chlorination stage. There has been
a significant trend to replacement of chlorine with chlorine dioxide and ADL expects this to
continue.
Displacement Bleaching and Washing. One of the reasons the bleach plant effluent is so
difficult to handle from a pollution point of view is the high dilution of the dissolved
organics and inorganics. The high dilution arises from the need to add large quantities of
water to the pulp after each bleaching stage. A recent development by the Swedish firm,
Kamyr, gives a promise of enabling the bleach plant operator to use less water and discharge
a considerably more concentrated effluent. In the Kamyr development the pulp is washed
by displacement rather than by dilution as is in the conventional processing step. A number
of these displacement washers are in commercial operation in bleach plants.
As an added refinement of the Kamyr diffusion washing, a 150-ton-per-day pilot
bleach plant is operating in Finland with bleached chemicals as well as water being added in
the diffusion washers. The pilot plant has three stages of bleaching with washing between
each stage carried out in a single tower. Indications are that a substantial reduction of water
usage as well as higher concentration of dissolved solids in the mill effluent has been
achieved. At least one commercial unit is being constructed in the United States based on
the three-stage bleach, single tower principle.
High Consistency Gas Phase Bleaching. Similar reductions in water consumption and
an increase in dissolved solids concentration in the mill bleach effluent can be achieved with
a high consistency press and gas phase bleaching at high consistencies. This concept has been
developed at Paprican Laboratories in Montreal in cooperation with Impco-Ingersol Rand.
An Impco press is used which enables the bleach plant operator to press the pulp to a solids
content of 35-40%. A bleaching chemical such as chlorine is then applied in the gas phase.
After the reaction has taken place the pulp is dilution washed by adding water to bring the
pulp slurry to a 10% solids level and then repressing to the 35-40% solids level.
Weyerhaeuser is operating a single stage pilot plant on this principle. Results of the pilot
plant operation have not yet been made public.
4. Water Reuse
Most, if not all, pulp and paper mills have effected a substantial reduction in water
consumption, or increase in water reuse, in the past several years. The pressures and
constraints on water reuse are largely social and economic in origin rather than technical.
The engineering and chemical techniques for increased recycle of water within pulp mill,
bleach plant or paper mill are readily available.
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In the early days of the industry when water was extremely cheap and there was little
concern over water pollution, the mills made little effort to achieve a high water recycle
ratio. With increasing pressure to achieve reduction in water pollution, the mills have applied
the available techniques to increase water reuse so as to decrease the hydraulic load on
pollution abatement facilities and thus decrease capital and operating costs.
One of the major constraints of water reuse is the market-oriented factor of consumer
acceptance. High brightness levels and dirt specifications require a certain amount of water
to be rejected from the system as a purge. The quantity of purged water could be reduced
with less stringent consumer expectations as to brightness, dirt and other factors. Total
recovery processes for the purged water (e.g., distillation, reverse osmosis, ion exchange,
etc.) become prohibitively expensive.
However, more stringent effluent control regulations will cause a continuing decrease
in the net quantity of water used in pulp and paper mills through application of presently
available technology.
5. Papermaking
High Consistency Forming. In a conventional papermaking operation the pulp fiber is
suspended in a large quantity of water prior to formation into a continuous fibrous web. As
much as 1,000 Ibs of water per Ib of pulp is used. Recent developments have given promise
of making it possible to substantially reduce the consumption of water in the papermaking
and thus reduce the volume of effluent from the paper machine.
The Swedish Cellulose Research Institute in Stockholm and the Lodding Co. of the
United States have developed paper machine modifications which would reduce the water
used in suspending the fibers prior to forming to 25-50 pounds per pound of pulp. The
Swedish development has been licensed to Ahlstrom in Finland and this company is
installing equipment on a commercial machine. The Lodding equipment has been installed
on North American paper machines with varying degrees of success. The major problem
with both devices appears to be paper quality especially uniformity of formation. Broad
commercial use of these high consistency forming developments is probably several years
away.
Dry Forming. Water effluent from papermaking operations could be eliminated com-
pletely if air instead of water were used to convey the fibers prior to formation of the web.
There are several commercial examples of dry forming of paper largely in the high-value
specialty paper field. Honshu Paper Co. in Japan is making cigarette filter sheets, automotive
air filters and household wipes in their patented dry forming process. A number of U.S.
companies are making absorbent sheets for disposable diapers in dry forming operations.
Karl Kroyer in Denmark has a semi-commercial dry forming unit making sanitary tissues. In
England, St. Anne's board has installed a commercial dry forming board machine for the
manufacture of recycled boxboard. At the last report this machine was still operating on an
experimental basis.
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The major impact on water pollution would come if dry forming were applicable to
commodity grades of paper such as toilet tissues, linerboard, printing papers, newsprint, etc.
As yet, it has not been possible to reproduce economically the paper qualities found with the
commercial wet forming process with a dry forming operation. ADL expects that the
development of dry forming for commodity grades is still a number of years away.
6. Wastepaper
Recovery from Municipal Trash. About 20% of the pulp and paper discarded in the
United States is recovered and recycled to pulp and paper manufacturing. Further additional
quantities could be collected if the demand was there, and if the collection systems were
established with more emphasis on source separation or isolation of the discarded paper and
paperboard. However, a large portion of the discarded paper and paperboard is not
recoverable because it is co-mingled with garbage, tin cans, bottles, plastic as well as other
nonfibrous materials and so cannot be recovered with conventional techniques.
There are a number of development programs aimed at recovery of usable fiber from
municipal trash. One of these processes developed by Black Clawsen has been subject to
extensive pilot plant and semi-commercial trials. In this wet process the entire municipal
trash is slurried in water and the fibers separated in a series of screening and washing steps.
The recovered "garbage pulp" is at the low value end of the quality scale and can be used
only in such products as roofing felt. The sponsors of the project now agree that with the
present economics the most practical use for the recovered fiber is as a feedstock to a burner
for heat recovery.
A dry separation approach has been explored by the Forest Products Laboratory and
others. The entire municipal trash is reduced to uniform particle size and then the various
components separated by a series of screens, cyclones and air fractionation steps. The Forest
Products Laboratory representatives suggest that the recovered fiber be best utilized as a raw
material for a reconstituted, resin bonded construction board product. The economics for
this process apparently are not yet favorable in comparison with solid wood or reconstituted
wood products.
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APPENDIX D
CRITERIA FOR ASSIGNING MILLS TO PROCESS/PRODUCT SECTORS
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APPENDIX D
CRITERIA FOR ASSIGNING MILLS TO PROCESS/PRODUCT SECTORS
1. Multiple Pulp Mills
Entire complex (including paper and paperboard mills) assigned to highest polluting
component, i.e.,:
chemical plus mechanical pulp mills assigned to chemical
chemical plus deinked pulp mills assigned to chemical
deinked plus mechanical pulp mills - assigned to deinked
sulfite plus unbleached kraft pulp mills assigned to sulfite
sulfite without chemical recovery plus bleached kraft pulp mills assigned
to sulfite
sulfite with full chemical recovery plus bleached kraft assigned to bleached
kraft
unbleached kraft and NSSC pulp mills - assigned to combined kraft/NSSC
bleached kraft plus NSSC pulp mills assigned to bleached kraft
2. Single Pulp Mills
Entire complex (including paper and superbond mills) assigned as follows:
100% bleached or unbleached kraft pulp mills assigned to appropriate
process category
kraft mills producing both bleached and unbleached pulp (regardless of
ratio) assigned to bleached kraft
sulfite mills (bleached and/or unbleached) - assigned to sulfite
semi-chemical and deinked mills - assigned to appropriate process category
chemi-mechanical mills assigned to groundwood
refiner and stone groundwood mills - assigned to groundwood
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cotton fiber (rag) pulp mills and their paper mills excluded from the study
groundwood mills producing molded pulp products excluded from the study
defibrated pulp mills were not considered as a pulp category
3. N on integrated Paper and Paperboard Mills
Note: treated as integrated: paper and paperboard mills (including those
listed separately in directories) that are connected by pipeline to a
pulp mill even if the mills are owned by separate companies.
Single product assigned to appropriate nonintegrated product category
Multi product
single-mill assigned to highest tonnage product category
multi-mill - treated as separate entities when available information
indicated that these are physically separated although located in the
same community.
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APPENDIX E
SUPPORTING MATERIAL FOR COST OF COMPLIANCE
AND MILL MODELS
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APPENDIX E
SUPPORTING MATERIAL FOR COST OF COMPLIANCE
AND MILL MODELS
1. Model Mill Manufacturing Cost Estimates New Mills
This section presents the economic models for selected pulp, paper, and paperboard
manufacturing operations. Plant investment and operating cost schedules are shown for the
manufacture of selected products from virgin or secondary fiber.
a. Basis of Cost Calculations
(I) Monetary Base. ADL used end of second quarter 1975 as the dollar base for this
report, and all costs are indicated at that level. Further, because of the uncertainty of future
prices, all of the analyses are based on mid-1975 dollars without any escalation for further
inflation.
(2) Units of Measurement. English units (e.g., short tons) have been used as the
standard for this report, and all items are recorded on this basis.
(3) Selection of Economic Models. Specific paper and paperboard products were
selected from each of the principal product sectors. Table E-l indicates the products that
were selected for economic modeling.
(4) Characteristics of the Economic Models. The cost models have been developed for
a typical scale of operation. All cost models are developed for new mill installations,
representing good technical practice in 1975. None of the models represent the cost of an
actual mill.
For virgin fiber pulping, ADL has taken a relatively large capacity, considered economi-
cal by 1974 standards, but not the largest possible. For papermaking operations integrated
to virgin pulping, ADL selected the largest practical size for a single machine, which is
typical of current installations. For nonintegrated secondary fiber operation, a single
machine capacity lower than the largest practical was selected; this is representative of the
existing industry, since economic availability of secondary fiber rather than machine size
alone is the limiting factor in plant capacity.
Mill capacity was defined on a daily tonnage basis, and annual capacity as daily
capacity multiplied by net operating days per year. The latter are total days of actual mill
operation per year after subtracting scheduled down-time for holidays and estimated
maintenance shutdowns. In all cases, ADL allowed 7 days for scheduled maintenance
shutdowns, giving a net on-stream time of 354 days per year. Seven total paid holidays were
allowed and it was assumed that the mill would operate on three of them. Of the 354
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TABLE E-l
MILL MODELS AND SIZES FOR STUDIED PRODUCT SECTORS
Mill Size, Tons per Day
Virgin Secondary
Fiber Fiber
Bleached Kraft Market Pulp 800
Sulfite Dissolving Pulp 550
SBS Board 500
Newsprint 550 330
Tissue 163 76
Bond Paper 300
Book Paper 300
Bleached Kraft Softwood Slush Pulp 800
(2 locations)
Bleached Kraft Hardwood Slush Pulp 800
(2 locations)
Semi-Bleached Kraft Softwood Slush Pulp 800
Groundwood Slush Pulp 440
Source: Development Document
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on-stream days, it was estimated that commodity grades (newsprint, board products,
corrugating medium, and market pulp) would have a total productive operation of 340 to
345 days. For noncommodity grades, ADL estimated 330 productive days to reflect more
frequent clean-up and grade changes.
Plant size selections have been consistent with existing paper industry patterns. For
products where a number of geographic areas could be considered typical, ADL concen-
trated the models in one area to emphasize fiber furnish and product grade as the primary
variables in cost and profitability estimates.
A large portion of the kraft pulp sector is located in the Southeast, where costs differ
considerably from those in other areas. The typical models for bleached kraft paper grades
were located in the Northeast. Bleached softwood and hardwood kraft pulp models have
also been prepared for the Southeast to indicate the influence of plant location on the cost
of these products.
(5) Nature and Precision of Specified Conditions. To prepare cost estimates, specific
judgments regarding operating and marketing conditions for each model were made. Some
conditions are affected by plant location, such as the cost of fuel and power, the cost of
virgin and secondary fiber, and the availability of virgin fiber as roundwood or chips. Other
conditions are affected by plant size, such as whether it is more economical to generate or
to purchase power.
Some conditions are more arbitrary. Manning requirements, maintenance, utility con-
sumption, chemical usage, fiber yield, and factory overhead can vary considerably from one
mill to another for the same product and capacity. Selling price, sales expense, general
administration costs, and freight (as affected by the distribution of customers) are all
influenced by individual company characteristics. The models are based on the use of a
single paper machine; however, the same amount of a product could be made on two or
more smaller machines at significantly different cost. While every effort has been made to
select typical conditions, different but equally valid assumptions car. be made.
In addition to variations from the conditions specified, there is an inherent lack of
precision in estimating present costs, or updating historical costs, when economic conditions
are fluctuating rapidly. To acknowledge the effects of variations due either to different
assumed conditions or precision of estimates, ADL has calculated and presented graphically
the sensitivity of total delivered cost (manufacturing cost) and profitability (return on fixed
capital) to variations in selected key variables.
One of the key variables is scale of operations (plant capacity). ADL has held to a
single machine operation for all capacities.
The variability of each major production and cost item, and the treatment of these
items, are as follows:
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Product Mix
ADL selected a single typical product grade or simplified product mix for each of the
mill models. Most mills in the studied categories and size ranges (with the exception of
sulfite dissolving pulp) make a variety of product grades with a corresponding range in
selling prices. The selection of an "average value" single product or simplified grade
structure is hypothetical but adequate for estimating an example of a category.
Fiber Furnish and Other Raw Materials
The exact fiber furnish and other raw materials requirements are determined by
product specifications. Thus, cost estimates for these items are simplified to the same extent
that product mix is simplified. In addition, fiber furnish and cost for a particular product
can vary due to mill specifics such as geographic variation in cost and availability of wood
species, corporate integration to timberlands, intra-company pulp transfer, and accessibility
of waste paper. The cost estimates are reasonable examples based on selected products and
specified mill conditions. However, in interpreting and using these examples, consideration
must be given to variability in product lines, mill conditions, and actual costs under speci-
fied conditions.
Sales and Freight Costs
ADL has estimated sales and freight costs as a function of the specific product quantity
produced and sold on the open market. Consideration should be given to variability due to
actual product mix, corporate integration forward to intermediate consumers or converters,
and geographic structure of markets.
Operating and Packaging Supplies
Costs for operating and packaging supplies are estimated for specific processes and
products. They do not vary significantly except for consumer products (e.g., tissue papers),
for which packaging materials are a major cost component and are quite variable for
different products, or for the same product packaged in different format.
Direct Labor and Factory Overhead
ADL estimated direct labor and factory overhead costs on the basis of a normal
manpower complement for the specified product and process. Manpower requirements are a
function of production per paper machine as well as total mill output. Wages and labor
efficiency can vary because of geographic location or individual mill differences. In addition
to these inherent variations, many overhead costs and some labor positions are discretion-
ary. However, only the inherent variability of wages, salaries, and efficiency need be
considered. Major reductions in discretionary costs could only be made through specialized
production arrangements or markets, or at the sacrifice of product quality control and
overall technical competence. None of these conditions are consistent with the long range
viability of a mill selling on the open market.
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Energy Consumption
Steam and power usage have been estimated on the basis of normal requirements for
the process and selected product at the rates prevailing for the specified location. Geograph-
ic variation in rates for fuel and power are significant, and mill to mill variations in
consumption are considerable. On-site power generation is an option for mills with high
steam consumption, which radically affects purchased power.
Maintenance Materials and Labor (Expense)
and Upkeep Reinvestment (Capital)
ADL estimated maintenance materials, labor, and upkeep reinvestment at levels which
maintain long-range viability of an installation. Breakdown maintenance is unpredictable
and highly variable from mill to mill; preventive maintenance and reinvestment are discre-
tionary.
Effluent Control Costs
ADL used the updated Development Document data as the basis for effluent control
costs in all cases. As discussed in Chapter IV, the Development Document estimates are
reasonable as typical examples, but are subject to wide variation from mill to mill.
(6) Slush Pulp Cost. Virgin fiber kraft pulp is the basis for several paper and board
grades as well as for market pulp. Because any combination of drying and papermaking
operations may be integrated to kraft pulping, papermaking capacity for a given product is
independent of pulp mill capacity. For this reason, it was most convenient to develop a total
factory operating cost for bleached kraft slush pulp as a raw material input to papermaking
operations. This base-level slush pulp cost is related to a particular pulp mill capacity (e.g.,
800 ADT/day). ADL determined slush pulp cost by subtracting the converting and capital
costs allocated to pulp drying from total factory operating cost in the 800 ADT virgin
market-pulp models.
Associated with the slush pulp are the principal utilities related to pulp drying (steam
and power generation, water supply, and effluent treatment). Figure E-l represents these
relationships graphically. To use this potential for utility supply it is necessary to include
allocated investment and operating costs with the papermaking operation. Thus the invest-
ment and operating cost schedules for integrated papermaking include the total amounts
directly associated with forming (stock preparation, machine, dryer, and roll finishing) plus
allocated amounts for utilities and auxiliary facilities shared with the kraft pulp mill. The
investment for steam and power generation in an integrated paper mill, for example, is an
allocated portion of a larger recovery boiler, power boiler, and turbine generator.
In addition to shared physical facilities, integrated papermaking operations also have
the benefit of sharing many of the costs included with factory overhead. This advantage is
271
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reflected in the development of an overhead schedule for an 800 ADT/day market pulp mill,
which provides the basis for factory overhead costs on all models integrated to bleached
kraft pulping.
The factory operating costs for slush pulp as transferred to integrated papermaking also
include the capital-related costs for pulping, whereas the investment schedule for paper-
making includes only the capital allocated to or directly associated with the paper mill. A
portion of the pulp mill investment, proportional to the amount of slush pulp transferred,
must be added to a given papermaking operation to determine the total capital employed.
ADL estimated total capital by calculating investment per daily ADT of slush pulp for the
800 ADT kraft pulp models.
In a similar manner, virgin groundwood pulp at 440 ADT/day and semi-bleached kraft
softwood pulp at 800 ADT/day are also the basis for several paper and board grades. ADL
used the same technique of developing a slush pulp transfer cost to an integrated paper-
making operation. Thus, in calculating capital requirements, the pulp mill investment
associated with the quantity transferred to the papermaking operation was added to the
investment for the paper mill in order to obtain total capital requirements.
b. Capital Requirements
(1) Total Fixed Capital. ADL developed budget estimates for the construction of new
plants for each of the selected paper and paperboard products. These estimates are based
upon in-house information supplemented by information from Charles T. Main, Inc.
In preparing these estimates, ADL had access to pre-engineering and engineering cost
schedules for many of the studied products. Many of the estimates had to be updated to
reflect the rapid increase in construction costs which occurred in 1973/74, and to reflect
similar construction conditions namely new "grassroots" operations. As a result of
modifying these pre-engineering plant investment estimates (which generally have a preci-
sion of ± 15 to 20%), ADL arrived at a budget estimate that has a precision of + 25% to
-10%.
Total fixed capital is the total of physical plant cost plus other fixed capital. Capital
cost schedules have been developed for a typical size mill for each product studied.
ADL has not included capital costs for woodlands operations in any of its capital
estimates. Where a woodlands position exists, its capital and operating costs as well as its
profitability are reflected in the cost of wood as delivered to the mill site.
The physical plant cost consists of the direct plant cost plus the estimated costs of
construction supervision and overhead, engineering, and allowance for contingencies. Direct
plant cost is the installed cost of buildings, purchased equipment, and site work, excluding
the bare cost of land. Each plant item includes purchased equipment and building materials,
piping, instrumentation, electricals, structures, foundations, and associated labor costs.
273
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ADL has also estimated the additional capital cost items that are normally associated
with a new venture but not included in the physical plant cost (spare parts, pre-startup and
startup costs, project management, etc.).
(2) Working Capital. Experience has demonstrated that the working capital required
for raw materials, goods in process, inventory, and accounts receivable (less accounts
payable) is generally equivalent to three months' production at total factory cost. ADL
estimated working capital requirements accordingly.
(3) Capital Call-Down Schedule. Table E-2 shows the capital investment schedule
during construction which was used in computing cash flow analyses. This table also
indicates the simplified startup schedule (80% of full production in the first year of
operation) used in calculating annual sales revenue.
c. Operating Cost Estimates
ADL prepared operating cost schedules for all the products listed in Table E-l. As with
the plant investment estimates, the costs are developed for a typical size facility. As with the
investment schedule, operating costs have been developed for virgin fiber and secondary
fiber manufacturing facilities.
(1) Raw Materials Capital. Raw materials costs include all raw materials for manufac-
ture, net credit for any by-product recovery, and auxiliary materials such as chemicals for
water and effluent treatment.
Pulpwood
Requirements for pulpwood or other cellulosic raw materials are developed via a
material balance that takes into account such factors as wood densities, pulping yields, and
process losses.
Slush Pulp
The total factory operating cost of slush pulp is considered a raw material cost for any
papermaking operation integrated to a pulp mill which can provide furnish for more than
one product line.
Pulping and Papermaking Chemicals (Other Raw Materials)
The material balance also includes estimates of the pulping and papermaking chemical
requirements for the studied pulp and/or paper product. Where applicable, chemical by-
products (turpentine and tall oil) are indicated. In addition, the summary material balance
indicates the quantity of residue fuel generated in the conversion of wood to pulp (or
paper). The amount of residue fuel is subsequently used in the derivation of an energy
balance.
274
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For clarity in the material balance. ADL has shown typical fresh chemical makeup
rates to pulping and bleaching operations, but has accounted only for the fiber output from
these operations. Chemical losses are equal to chemical makeup rates minus any by-product
recovery, and no attempt was made to detail internal chemical recovery and recycling.
For papermaking chemicals, a major portion of the additives become part of the
product. ADL thus accounted for papermaking chemical losses and, by difference, paper-
making additives recovered with the finished sheet.
In addition to the pulping and papermaking chemicals that are included in the sample
material balance, other chemical raw materials are used in the manufacture of pulp and
paper products, including detergents, slimicides, antifoam agents, retention aids, pitch
control agents, water softening agents (or ion exchange resins for boiler feed water
treatment). These materials are used in small quantities, but when aggregated they consti-
tute an identifiable cost in the manufacture of a product.
For purposes of analysis, the costs of these materials are combined and reported as a
single unit per ton of product. Mill records and ADL experience have been used to estimate
the total cost.
(2) Conversion. Conversion includes all factory labor, supplies, utilities, and expenses
other than raw materials or capital-related costs.
Direct and Indirect Labor
Manning tables have been prepared for each of the studied economic models. Many
manning schedules are based on in-house information pertaining to actual mill practice;
others are based on more thorough pre-engineering cost studies that ADL has prepared for
various product areas. Total man-hour requirements are based on 2,068 man-hours per
man-year (47 weeks at 44 hours). Holidays and vacations are included in fringe benefits at
32% (included in hourly rate).
Maintenance Labor & Supplies
For new plants, the costs of maintenance labor and supplies are estimated frequently
on the basis of plant investment. A total cost for maintenance labor and supplies of about
4% of new plant investment is typical for pulp and paper manufacture. Industry experience
indicates that the total cost is split about equally between materials and labor. Use of the
4% figure is a reasonable method for deriving the maintenance cost for a new plant, but
ADL has chosen to develop a manning table for maintenance labor and to estimate
maintenance supplies at 1.5% to 2% of physical plant cost, specifically excluding any labor
or materials associated with capital improvement or replacement projects.
276
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Supplies
The operating supply item includes replaceable parts such as felts, wires, lubricating oil
and grease, rags, and fuel (for fork lift trucks). Units and unit costs for this entry are not
meaningful. In-house mill records and industry records provide the most reliable source of
information on the cost for the various pulp and paper grades.
Packaging supplies also vary widely among the paper grades selected for economic
analysis. For example, linerboard requires only a core, plus, and steel strapping; the total
cost for these supplies is $0.50 - $1.00 per ton. The supplies used in packaging tissue,
however, which included printed folding boxes and corrugated containerboard, cost about
$50 per ton. For most commodity grades, where packaging supplies are a minor item, a
single entry is shown based on industry practice. For tissue, including packaging supplies,
ADL made a separate estimate of the cost of converting from jumbo rolls to packaged
product.
Utilities
The unit requirements for fuel and power have been derived by an energy balance. The
balance indicates the consumption of these utilities by major process steps e.g., wood
preparation, pulping, bleaching, and papermaking. The source of energy (bark, black liquor,
fossil fuel) also is indicated. The quantity of supplementary fossil fuel may thus be adjusted
to reflect alternative assumptions that may apply. Only the portion of the total steam
requirement which is generated from fossil fuel represents an actual fuel cost.
Charges or credits for power represent the cost of power actually supplied from outside
sources or, in the case of integrated paper or board production, the value of power credited
as an excess in the pulping operation. Whenever total steam requirements for a product
(including the combination of pulping and the forming for integrated operations) exceed the
equivalent to 5,000 kw of power, ADL has included the cost of an extraction turbine
generator in the estimated capital requirements. All smaller operations use power purchased
from external sources.
ADL has not made a detailed study of the economics of generating power vs.
purchasing power for each model. The minimum 5000 kw for on-site power represents an
average for second-quarter 1975 conditions; this minimum would vary from one location to
another, depending on regional and local power costs, specific conditions of the mill, and
capital cost of generating facilities.
Since the capital, labor, and 'chemical treatment costs for water supply were included
in the estimates, no purchase costs are included for water.
277
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Factory Overhead
Factory overhead includes on-site management, salaried supervision, the salaries of
office clerical, technical, and laboratory staff, on-site office and laboratory supplies and
expense, and personal expenses. It excludes off-site overhead, such as corporate administra-
tion and sales expense, which are shown as separate nonfactory costs. Factory overhead is
expressed as a percentage of total direct and indirect labor, excluding maintenance labor.
(3) Capital-Related
Depreciation and Interest
Depreciation and interest are excluded from the operating cost statements, since they
vary from year to year, and they are treated as such (e.g., double declining balance for
depreciation) in the cash flow analysis of each product.
Local Taxes and Insurance
Local taxes on new facilities are typically 2 to 2-1/2% of new investment, a contribu-
tion to operating cost which can be derived readily.
(4) Cost of Sales
General Administration
General administration includes all allocated corporate (nonfactory) costs, such as
central engineering, purchasing, research, corporate management and legal staff, and office
overhead. This cost is affected by corporate structure, size of the operation, and value of the
product, and ranges typically from about 3% to 10% of the total factory cost. This cost
varies widely, however, and is strongly dependent upon the marketing characteristics of the
individual product. ADL relied upon its experience to select a typical cost for this item for
each of the studied paper and paperboard products.
Sales Expense
Sales expense is shown as a separate item, since it can be either a corporate cost for
marketing, sales staff, and expenses, or an external cost for broker's fee and commission.
This item varies widely between functional groups and within individual product categories.
The cost for this item, for example, differs between Tissue and Groundwood (functional
groups) as well as within the product categories of the Groundwood group (newsprint vs.
uncoated /youndwood paper).
Sales expense for commodity products, such as linerboard, newsprint, or bag paper, is
significantly less than that for retail-oriented products such as tissue, printing paper, and
278
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writing paper. Moreover, there is a wide variation within each major category, reflecting the
costs associated with marketing brandname or private label. ADL used its judgment to select
an appropriate value from within the range of costs experienced by the industry.
Freight
The cost of shipping the finished product has been estimated on an individual product
basis. Variations in freight rates reflect differences in product value, industry practices
wherein some board grades are exchanged between manufacturers, or distribution patterns
based on paper grades and mill size.
Again general industry averages have been used in the analysis of this economic model.
(5) Application of Air Control Cost Estimates. ADL adopted the air control cost
estimates, which were prepared for kraft process sources and combination boilers, for new
mill manufacturing cost estimates. Table E-3 is a summary of the control costs for new kraft
mill sources (excluding power boiler) for 500 and 1,000 tons/day the costs as they
apply to an 800 ton/day bleached kraft pulp mill and a 1,000 ton/day unbleached kraft
pulp mill. New mill sources were based on a conventional recovery boiler with black liquor
oxidation for TRS control. Table E-4 is a summary of the costs (including power boiler) as
they apply to the specific product grades selected for economic modeling. (See the
discussion of allocation of pulp mill costs for new mill manufacturing models.) Air control
costs have been treated the same as all other pulp mill costs, that is, a portion of total pulp
mill cost is allocated to a paper or board product directly proportional to the percentage of
pulp mill output used by that product.
In establishing the base line manufacturing cost for measuring the impact of control
costs, ADL nas reported and used the total capital and operating costs for emissions control
which is analogous to the handling of internal effluent control items. ADL has also indicated
the total costs for emissions control to an economic level (i.e., the level of control which
might be implemented in the absence of emissions control regulations). While the total cost
within estimating accuracy, is a hard number, the economic level of control is much less
precise. The value of chemicals and make-up chemical requirements at a given installation
would be particularly critical factors in establishing the economic control level. Implications
of use of total costs, and of variability in the economic level, were discussed at more length
in the Methodology Section.
(6) OSHA Cost Estimates. On the basis of private communications with the API, ADL
has estimated the cost of compliance with existing and proposed OSHA regulations for new
mill installations. The API estimates are order of magnitude only, and have been prepared
on the basis of existing mill sizes. The mill basis is a 500 ton/day pulp and paper complex,
including two paper or board machines. The API order of magnitude estimates for compli-
ance with various OSHA requirements for a 500 ton/day mill are as follows:
279
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TABLE E-3
1.
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
6.
AIR CONTROL COSTS, NEW MILL SOURCES
1000 Ton/Day Bleached Kraft
Item
Recovery Boiler
Lime Kiln
Smelt Tank
Digester and Evaporators
Black Liquor Oxidation
Brown Stock Washers & Cond.
Stripping
TOTAL
TOTAL COSTS
Capital
3,700
300
160
160
270
270
4,860
Annual
Operating
(946)
(53)
23
16
38
-
(922)
ECONOMIC LEVEL
Capital
2,780
120
30
-
-
-
2,930
Annual
Operating
(946)
(68)
(22)
-
-
-
(1,036)
500 Ton/Day Bleached Kraft
Recovery Boiler
Lime Kiln
Smelt Tank
Digester and Evaporators
Black Liquor Oxidation
Brown Stock Washers & Cond.
Stripping
TOTAL
Bleached Kraft, 800 ton/day, Total
Unbleached Kraft, 1000 ton/day, Tota
2,450
200
120
100
180
180
4,250
4,550
(426)
(29)
19
10
21
-
(730)
(820)
1,840
90
20
-
-
-
2,600
2,800
(429)
(35)
(ID
-
-
-
(830)
(930)
NOTES: 1. All costs are mid-1975 Dollars X 1000
2. Annual operating costs exclude depreciation and interest
Source: Arthur D. Little, Inc., estimates.
280
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TABLE E4
AIR CONTROL COSTS, NEW
MILL SOURCES
, BY PRODUCT
TOTAL COSTS
Product and Capacity
Integrated to 800 TPD Bleached Kraft:
Market Pulp, 800 TPD
Pulp Mill
Power Boiler
TOTAL
SBS Board, 500 TPD
Pulp Mill
Power Boiler
TOTAL
Bond Paper, 300 TPD
Pulp Mill
Power Boiler
TOTAL
Book Paper, 300 tpd
Pulp Mill
Power Boiler
TOTAL
Tissue Paper, 163 tpd
Pulp Mill
Power Boiler
TOTAL
Newsprint, 550 tpd
Pulp Mill (140 tpd Kraft)
Power Boiler
TOTAL
Other than Bleached Kraft:
Sulfite Dissolving Pulp, 550 tpd
Pulp Mill
Power Boiler
Capital
4,300
1,400
5,700
2,700
1,000
3,700
1,600
600
2,200
1,600
700
2,300
800
300
1,100
700
600
1,300
1,100
Annual
Operating
(730)
140
(600)
(460)
100
(360)
(270)
60
(210)
(270)
60
(210)
(130)
30
(100)
(130)
60
(70)
110
SECTOR
ECONOMIC
Capital
2,600
2,600
1,600
1,600
1,000
1,000
1,000
1,000
500
500
500
500
-
LEVEL
Annual
Operating
(830)
(830)
(490)
(490)
(300)
(300)
(300)
(300)
(160)
(160)
(150)
(150)
-
TOTAL
All other Phase II Products
1,100 110
No air control costs
Source: Arthur D. Little, Inc., estimates.
281
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Capital Cost ($000)
1. Noise reduction in the work place, 90 DBA
8-hour standard 2,000
2. Heat stress not to exceed WBGT 79° 1,000
3. Other existing or anticipated OSHA
general safety regulations 500
Total Capital Cost for OSHA Compliance 3,500
The API has listed a number of sources which require noise reduction, and additional
sources which require heat stress reduction. The sources are divided about evenly between
pulp mill and paper mill locations; no detailed estimates are available for specific sources.
ADL has assumed that the total cost for the 500 ton/day basis mill would be spread evenly
between pulp mill and paper mill (two machines), at $1.75 million each.
The new mill models are based primarily on an 800 ton/day bleached kraft pulp mill,
with a single paper machine for a given product. It is assumed that for new mill installations,
OSHA compliance costs are relatively independent of capacity, but will vary with number of
machines. ADL computed the new mill costs, rounded to the nearest million, at:
Pulp Mill, any capacity $2 million
Each paper or board machine or
pulp dryer $1 million
Since the new mill models are based on single machines using only a portion of total
pulp mill production, ADL has allocated the pulp mill OSHA costs proportional to the
percentage of pulp mill output which goes into a given product. The new mill models, which
are based on waste paper, assume that only the paper machine costs of $1 million per
machine are incurred.
An order of magnitude estimate for integrated mill operating costs is included at
$100,000 per year for professional and technical staff (1-1/2 men/year); measuring, testing,
and safety equipment; record keeping; and other office staff and expense. It is assumed that
operating costs for the smaller nonintegrated waste paper mills would be slightly lower;
ADL has used $70,000 per year.
d. Capital and Operating Cost Tables
Tables E-5 through E-21 show the capital and operating cost details for each studied
process sector.
282
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TABLE E-5
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
SULFITE DISSOLVING PULP
BASIS: Process: Bleached Magnesium Base Sulfite; Continuous Pulping with Chemical
Production: 550 ADT/day; 190,000 ADT/year Recovery
Mill Location: Northwest
CAPITAL REQUIREMENTS
$MM
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
130
3
133
10
3.5
24.0
f.l
161.6
11
OPERATING COST ITEM $/Ton $000/Year
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
79.8
23.0
23.1
13.5
4.2
8.3
15.5
167.4
13.6
31.4
212.4
0.5
212.9
16.1
0.6
229.6
15,160
4,370
4,390
2,570
790
1,580
2,950
31,810
2,580
5,970
40,360
100
40,460
3,060
Tin
43.630
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
283
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TABLE E-6
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
BLEACHED KRAFT SOFTWOOD MARKET PULP
BASIS: Process:
Production:
Mill Location:
Continuous kraft pulping, CEDED bleaching
800 ADT/day; 276,000 ADT/year
Southeast
CAPITAL REQUIREMENTS
$MM
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
155
3
158
12
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
5.2
15.1
2.6
3.1
184.0
12
OPERATING COST ITEM $/Ton $000/Year
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
51.6
25.8
15.8
11.9
8.0
4.7
12.7
130.5
13.6
31.4
175.5
0.4
175.9
6.9
(3.0)
0.8
180.6
14,240
7,120
4,360
3,290
2,200
1,300
3,510
36,020
3,760
8,660
48,440
100
48,540
1,900
(830)
230
49,840
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
284
-------
TABLE E-7
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
BOND PAPER (ROLLS)
BASIS: Process: Integrated to Bleached Kraft Pulp
Production: 300 tons/day; 100,000 tons/year
Mill Location: Northeast
]. Excluding Environmental Regulations
Direct. Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
$MM
84
2_
86
7
2.1
6.4
1.0
96.7
$000/Year
Fiber Cost (Slush pulp; 0.473 tons HW; 0.473 tons SW)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
126.3
18.3
11.5
15.1
15.0
5.4
9.2
200.8
35.0
31.0
266.8
0.4
267.2
7.0
(3.0)
0 9
272.1
12,630
1,830
1,150
1,510
1,500
540
920 _
20,080
3,500
1,100
26,680
40
26,720
700
(300)
90
27,210
285
-------
TABLE E- 8 _
SUMMARY OF CAPITAL AND OPERATING COSTS FOR TViE MANUFACTURE OF
BOOK PAPER (ROLLS)
BASIS: Process: Integrated to Bleached Kraft Pulp
Production: 300 ton / day; 100,000 ton / year
Mill Location: Northeast
CAPITAL REQUIREMENTS
SMM
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
82
2
84
7
2.1
6.4
1.0
1.3
94.8
$000/Year
Fiber Cost (Slush Pulp; 0.70 tons SW; 0.17 tons HW)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl . all Environmental
107.1
47.0
11.7
16.6
19.0
60
. J
9f\
. 9
217.6
35.0
31.0
283.6
0.4
284.0
7 0
/ \J
(3.0)
0.9
288.9
10,710
4,700
1,170
1,660
1,900
£ on
OjU
oon
990
21,760
3,500
3.100
28,360
40
28,400
700
(300)
90
28,890
Regulations, excl. dep. and int.
*0peratirig costs for water control (less depreciation and interest)
all for external control. Operation and maintenance for internal
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
are essentially
control nets to
286
-------
TABLE E-9
SUMMARY OF CAPITA!, AND OPERATING COSTS FOR THK MANUFACTURE OF
NEWSPRINT
BASIS: Process: Integrated to semi-bleached kraft and groundwood
Production: 550 tons/day; 187,000 tons/year
Mill Location: Northeast
CAP I TAl REQU IREMENT S
1.
$MM
Deluding Environment:
Direct Manufacturing
OSHA Regulations
Total Fixed Capital
Total Working Capita
al Regulations
Process
1 (3 months
delivered corst)
108
2
110
8
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
Fiber Cost (Slush Pulp; .778 tons GW-, .257 tons kraft)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur U. Little, Inc., estimates.
2.1
7.1
0.5
0.8
120.5
8
$000/Year
88.5
2.2
7.0
13.4
2.9
7.8
130.5
13.1
20.9
164.5
O.S
165.0
4 2
cols)
0.4
168.8
16,550
410
1,300
1,630
2,510
540
24,400
2,450
3 910
30,760
100
30,860
780
31,570
287
-------
TABLE E-10
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
RECYCLED NEWSPRINT
BASIS: Process: Secondary Fiber Pulping
Production: 330 tons/day; 112,000 tons/year
Mill Location Northeast
CAPITAL REQUIREMENTS
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
$MM
2. Plus Effluent Control Cost
Water Control - Internal
External
(De-inking)
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
53.7
12.0
12.0
12.0
33.0
8.0
139.2
13.0
1? 5
164.7
jp.6
165.4
11.3
176.7
42
1
43
5
1.6
11.3
55.3
5
$000/Year
6,010
1,350
1,340
1,340
3,700
900
o^n
15,590
1,460
i /.nn
18,450
70
18,520
1,270
*0peratirig costs for water control (less depreciation and interest)
all for external control. Operation and maintenance for Internal
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
19,790
are essentially
control nets to
288
-------
TABLE E-ll
SUMMARY OF CAPITA], AND OPERATING COSTS FOR THE MANUFACTURE OF
TISSUE PAPER, JUMBO ROLLS
BASJS: Process: Integrated to Bleached Kraft Pulp
Production: 150 ton/day; 49,500 ton/year
Mill Location: Northeast
$MM
48
CAPL'IAL REQUIREMENTS _
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
OPERATING COST ITEM
Fiber Cost (Slush pulp; 0.52 tons HW; 0.52 tons S")
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
289
$/Ton $000/Year
138.8
9.9
15.2
9.6
5.3
6.9
11.5
197.2
6,870
490
750
480
260
340
S70
9,760
-------
TABLE E-U
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURK OF
TISSUE PAPERS, CONVERTED (50% toilet 40% towel, 10% NAPKIN)
BASIS: Process: 2 Line Converting
Production: 163 ton/day; 53,800 ton/year, packaged
Mill Location: Northeast
CAPITAL REQUIREMENTS
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
OPERATING COST ITEM _____ ___ __
Fiber Cost (Jumbo rolls, 0.933 tons.net)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
184.0
34.4
43.7
6.1
19.5
6.1
293.8
160.0
69.0
522.8
0.4
523.2
7.2
(3.0)
1.2
528.5
SMM
63
65
1.2
3.6
2-5
0.6
70.9
7
$000/Year
9,900
1,850
2,350
330
1,050
15,810
8,610
3.710
28,130
20
28,150
390
(160)
60
28,440
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
290
-------
TABLE E-13
SUMMARY OF CAPITAL AND OPERATING COSTS FOR TilF MANUFACTURE OF
DEINKED TISSUE PAPER (JUMBO ROLLS
BASIS: I»I-O«'MH: Secondary Fiber De-Inking
Production: 70 ton/dny; 23,000 ton /year
Mil 1 J.orat Ion: Northeast
CAPIJ'.M.
1. Excluding Envi ronmc-nt nl Ri gul nt Ions
Direct Manufacturing Procc-si,
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
345.1
7,940
Fih«»r Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
r,S&A
Freight Out
Total Delivered Cost, Direct MTg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, Incl. nil Environmental
Regulations, exc.l. dcp. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
291
190.4
18.7
41.3
22.6
29.1
26.5
16.S
17
_$OOp_/Yoar_
4,380
430
950
520
670
610
-------
TABLE E-14
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
DE-INKED TISSUE, CONVERTED (50% TOILET, 40% TOWEL, 10% NAPKIN)
BASIS: Process: 1 Line Converting
Production: 76 ton/day; 25,000 ton/year
Mill Location: Northeast
CAPITAL REQUIREMENTS
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
Fiber Cost (Jumbo rolls, 0.933 tons net)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excli
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
$MM
ins
delivered cost)
>1
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
24
1
25
4
0.4
3.0
28.4
4
$/Ton $000/Year
ret)
Mfg.
ing Federal
covery
al Control
all Environmental
322.0
34.4
43.6
6.0
19.6
6 8
432.4
103.0
61.0
596.4
2.8
599.2
11.6
610.8
8,050
860
1,090
150
490
17Q--
10,810
2,580
1,520
14,910
70
14,980
290
15,270
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
292
-------
TABLE E-15
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
SBS BOARD
BASIS: Process: Integrated to bleached kraft pulping
Production: 500 ton/day; 165,000 ton /year
Mill Location: Southeast
CAPITAL_ REQUIREMENTS _______
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
123
2
125
9
4.1
12.0
1.6
2.1
144.8
$000/Year
OPERATING COST ITEM
Fiber Cost (Slush pulp; .42 tons HW;..63 tons SW)
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & ant)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
293
116.3
16.5
9.3
7.9
8.9
3.9
5.9
168.7
13.6
31.4
213.7
0.4
214.1
7.9
(3.0
0.8
219.8
19,190
2,720
1,540
1,300
1,470
640
970
27,830
2,240
^ 1 Pn
35,250
70
35,320
1,300
(490)
130
36,260
-------
TABLE £16
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
SOUTHERN BLEACHED KRAFT SOFTWOOD ST.TISH PITT.P
BASIS: Process: Continuous Kraft Pulping; CEDED Bleaching
Production: 800 ADT/day; 276,000 ADT/year
Mill Location: Southeast
CAPITAL REQUIREMENTS __
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
OPERATING COST ITEM
TOTAL WORKING CAPITAL
$/Ton
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, exclt
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
_$MM__
125
$000/Year
Mfg.
ing Federal
:overy
il Control
ill Environmental
51.6
28.0
11.9
6.5
2.9
3.6
11.3
115.8
14,240
7,730
3,290
1,790
800
990
3.120
31,960
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
294
-------
TABLE E-17
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
NORTHERN BLEACHED KRAFT SOFTWOOD SLUSH PULP
BASTS: Process: Continuous Kraft Pulping, CEDED Bleaching
Production: 800 ADT/day; 276,000 ADT/year
Mill Location: Northeast
CAPITAL REQUIREMENTS
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
OPERATING COST ITEM
TOTAL WORKING CAPITAL
$/Ton
$MM
125
$000/Year
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
83.0
28.5
10,4
6,5
7.2
3.6
11.3
150,5
22,910
7,860
2,870
1,790
1,990
990
3,120
41,530
295
-------
TABLE E-18
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
SOUTHERN BLEACHED KRAFT HARDWOOD SLUSH PULP
BASIS: Process: Continuous Kraft Pulping, CEDED Bleaching
Production: 800 ADT/day; 276,000 ADT/year
Mill Location: Southeast
CAPITAL REQUIREMENTS
$MM
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
OPERATING COST ITEM
TOTAL WORKING CAPITAL
$/Ton
116
$000/Year
,2
,3
,5
103.1
260
890
710
030
970
2,950
28,460
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
42.
26.
10.
6.2
3.7
3.5
10.7
11,650
296
-------
TABLE E-19
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
NORTHERN BLEACHED KRAFT HARDWOOD SLUSH PULP
BASIS: Process: Continuous Kraft Pulping; CEDED Bleaching
Production: 800 ADT/day; 276,000 ADT/year
Mill Location: Northeast
CAPITAL REQUIREMENTS
1. Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
$MM
TOTAL WORKING CAPITAL
OPERATING COST ITEM
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
$/Ton
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
297
52.6
26.3
9.8
6.2
10.7
116.4
116
$000/Year
14,520
7,260
2,700
1,720
2,150
830
2,930
32,130
-------
TABLE E-20
SUMMARY Olr CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
SEMI-BLEACHED KRAFT SOFTWOOD SLUSH PULP
BASIS: Process: Continuous Kraft Pulping; CED Bleaching
Production: 800 Tons/day; 276,000 tons/year**
Mill Location: Northeast
CAPITAL REQUIREMENTS
$MM
Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
OPERATING COST ITEM
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
$/Ton
120*
$000/Year
75.8
15.2
10.4
6.5
3.2
3.6
10.8
125.5
20,920
4,200
2,870
1,790
880
990
2,980
34,630
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep & int)
Sub-Total, Factory Cost
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
**Semi-bleached kraft to newsprint only, remainder of production fully bleached.
Source: Arthur D. Little, Inc., estimates.
298
-------
TABLE E-21
SUMMARY OF CAPITAL AND OPERATING COSTS FOR THE MANUFACTURE OF
GROUNDWOOD SLUSH PULP
BASIS: Process: Stone Groundwood
Production: 440 ADT/day; 150,000 ADT/year
Mill Location: Northeast
CAPITAL REQUIREMENTS
I '
Excluding Environmental Regulations
Direct Manufacturing Process
OSHA Regulations
Total Fixed Capital
Total Working Capital (3 months delivered cost)
2. Plus Effluent Control Cost
Water Control - Internal
External
Air Control - Economic Level
Environmental Level
TOTAL FIXED CAPITAL
TOTAL WORKING CAPITAL
OPERATING COST ITEM
Fiber Cost
Other Raw Materials
Hourly Labor
Supplies
Energy
Factory Overhead
Capital Related (less dep &
Sub-Total
int)
Factory Cost
23
GS&A
Freight Out
Total Delivered Cost, Direct Mfg.
OSHA Regulations
Total Delivered Cost, excluding Federal
Environmental Regulations
Water Control Regulations*
Air Control Regulations - Economic Recovery
Environmental Control
Total Delivered Cost, incl. all Environmental
Regulations, excl. dep. and int.
*0perating costs for water control (less depreciation and interest) are essentially
all for external control. Operation and maintenance for internal control nets to
zero; only capital-related costs apply.
Source: Arthur D. Little, Inc., estimates.
$/Ton
35
1
11
2
11
5
3
72
$000/Year
.9
.9
.3
.1
.6
.7
.8
.3
5,390
280
1,700
310
1,740
850
.. 570
10,840
299
-------
2. Air Control Regulations
Capital and operating costs to meet Federal Air Control Regulations (Kraft Mill TRS
and particulate limits, power boiler particulate limits) were estimated separately and added
to the base level manufacturing cost. Development of the air control costs is as follows.
Cost Models for Air Pollution Control in the Kraft Mills
Particulate emissions from the kraft process occur primarily from the recovery furnace,
the lime kiln, and the smelt dissolving tank. These emissions caused primarily by the
carry-over of solids plus sublimation and condensation of the inorganic chemicals consist
mainly of sodium salts but include some calcium salts from the lime kiln.
The characteristic odor of the kraft mill is caused largely by the emission of hydrogen
sulfide. The major source is the direct contact evaporator in which the sodium sulfide in the
black liquor reacts with the carbon dioxide in the furnace exhaust. The lime kiln also can be
a potential source since a similar reaction occurs involving residual sodium sulfide in the
lime mud. Lesser amounts of hydrogen sulfide are emitted with the noncondensible
off-gases from the digesters and multiple-effect evaporators.
The kraft process odor also results from an assortment of organic sulfur compounds, all
of which have extremely low odor thresholds. Methyl mercaptan and dimethyl sulfide are
formed in reactions with the wood component lignin. Dimethyl disulfide is formed through
the oxidation of mercaptan groups derived from the lignin. These compounds are emitted
from many points within a mill. The main sources, however, are the digester/blow tank
systems and the direct contact evaporator.
Air Pollution Control Standards
Under the Clean Air Act, as amended in 1970, air quality standards have been
established for the whole country. Each state is required to adopt and to submit implemen-
tation plans to the Administrator of the Environmental Protection Agency for its emission
reduction strategy and enforcement thereof to achieve national standards for particulates,
sulfur oxides, nitrogen oxides, hydrocarbons, and carbon monoxide.
The concentration of the kraft pulp mills is high in Alabama, Florida, Georgia, Maine,
Oregon, and Wisconsin. Air pollution control standards for the kraft pulp mills in the above
states are given in Table E-22.
The Environmental Protection Agency is planning to establish air pollution control
standards for the new kraft pulp mills. These standards are given in Table E-23. At the
present time, these standards are at the proposal stage and are likely to be approved in the
future (possibly with some modifications).
300
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TABLE E-22
STATE STANDARDS FOR AIR EMISSIONS FROM PULP MILLS'
Oregon
Recovery Boiler
Lime Kiln 1
Noncondensible
Stripping
Smelt Tank 0.5
Blow System
Alabama
Recovery Boiler 4
Smelt Tank 0.5
Lime Kiln 1
Florida 40
Recovery Furnace 3
Georgia
Maine
Recovery Boiler 4
Smelt Tank 0.5
Lime Kiln 1
Wisconsin
Kraft Sulf i tp
Particulate
er 4
SO^ TRS
300 (15, 0.45*)b'C
Particulate SO- TRS
*
20
4 800
(40, 0.2*)b>d.
e
f
1.2
*.h
17.5l
(17.5, 0.5*)h
40
0.2*
40
Recovery Boiler
Source: Preliminary Background Information for Standards of Performance for
Pulp and Paper Industry, EPA, August, 1975.
301
-------
TABLE E-22 (Continued)
a - The following units are used:
Particulate: ///ton of unbleached air dried pulp or opacity
(denoted by asterisk)
SOji ///ton of unbleached air dried pulp (denoted by
asterisk) or ppm (dry basis)
TRS: ///ton of unbleached air dried pulp (denoted by ,-j
asterisk) or ppm (dry basis)
b - The quantity shown is // sulfur/ton of unbleached air dried pulp
c - Starting July 1, 1978 (10, 0.3*)b
d - Starting July 1, 1978 (20, 0.1*)b
e - Noncondensibles from digester and multiple effect evaporator to be burned
in lime kiln
f - Steam or air stripping to be burned in lime kiln
g - ///rain/ton of unbleached pulp charged to digester
h - Expressed as H S (total TRS only)
i - Lbs per each 3,000 Ibs black liquor solids fed to furnace
j - ppm
302
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303
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The Environmental Protection Agency has established air pollution control standards
for the new steam-generating boilers. These standards given in Table E-24, limit the
emissions of particulates, sulfur dioxide, and nitrogen oxides. The standards for steam
generating boilers are applicable to the power boilers in the kraft pulp industry, as well as to
other power boilers that fall into the classification of 250 million Btu/hr capacity.
Federal standards are generally more stringent than stage standards for the kraft pulp
mills. Thus the federal standards will be applicable to the new kraft mills and the state
standards will be applicable to the existing kraft mills.
Air Pollution Control Cost
X
The capital cost and the annual operating cost for the control devices necessary to
meet the standards are discussed in the following paragraphs.
The cost to achieve various levels of control is presented for each of the affected
facilities for three sizes of kraft mills: 500, 1,000 and 1,500 tons per day of air dried pulp.
The value of the capital recovery used is based on a 15-year life and 8% interest. The credit
represents the value of recovered material.
A number of operating days per year equal to 325 is used to determine incremental
cost of air pollution per ton of pulp. The dollar values used in this report are June 1975
dollars.
Recovery Boiler
There are two types of recovery boiler: (1) conventional recovery boiler, and (2)
noncontact boiler. The conventional recovery furnace system employs a direct contact
evaporator using the hot flue gas from the furnace to evaporate water from the black liquor
feed to the furnace. The direct contact evaporator removes some of the particulates from
the flue gas. In addition, the physical properties of the particulate are somewhat different
from the noncontact furnace case. These factors cause the electrostatic precipitator (ESP) on
the noncontact furnace to be larger and more expensive in order to achieve the same exit
particulate concentration.
Capital costs, annual costs, and credits for recovered particulate are shown in Table
E-25 for three different cases: (1) economic recovery, (2) particulate emission control to
meet state standards, and (3) particulate emission control to meet federal standards.
Since the particulate is a valuable material (mainly salt cake), it is economical to
recover the particulate emissions up to a recovery level beyond which the value of the
additional particulate recovered is not enough to justify the additional investment. The
incremental return on the incremental investment thus drops below the acceptable level for
that company. Although a recovery level that is economical can vary, ADL has used the
304
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TABLE E-24
STANDARDS OF PERFORMANCE FOR NEW STEAM GENERATORS
HAVING CAPACITY GREATER THAN 250 MM BTU/HR
Particulate - 0.18 g/MM cal (0.1 Ib/MM Btu)
- Opacity less than 20%
SO,
NO
x
1.4 g/MM cal (0.8 Ib/MM Btu)
for liquid fuel
2.2 g/MM cal (1.2 Ib/MM Btu)
for solid fuel
-0.36 g/MM cal (0.2 Ib/MM Btu)
for gaseous fuel
-0.54 g/MM cal (0.3 Ib/MM Btu)
for liquid fuel
- 1.26 g/MM cal (0.7 Ib/MM Btu)
for solid fuels except lignite
Measured as N0r
The presence of uncombined water for failure to meet the
requirement is not a violation of the opacity standard.
Source: EPA, "Standard Support Document for Pulp and Paper,"
Draft, December, 1974
305
-------
TABLE F--25
CONTROL COSTS FOR RECOVERY BOILERS
MILL SIZE (tpd)
t;r\n
Economic Recovery
Conventional Boiler ESP (97.5%)
Capital Cost, $
Gross Annual Cost, $
Credits, $/yr
Economic Recovery
Noncontact Boiler ESP (97.5%)
Capital Cost, $
Gross Annual Cost, $
Credits, $/yr
Existing Conventional Boiler
EST (99%) State Stds.
Capital Cost, $
Gross Annual Cost $
Credits, $/yr
Incremental Capital Cost, $
Incremental Annual Cost, $
Cost per ton, $
New Noncontact Boiler
ESP (99.7%) Fed. Stds
Capital Cost . $
Gross Annual Cost, $
Credits, $/yr
Incremental Capital Cost, $
Incremental Annual Cost, $
Cost per ton, $
Basis: $35/ton is used for recovered chemicals. The electrostatic precipitator
cost estimates are based on recent quotations.
The economic recovery level of 97.5% and the weight of the recovered
materials was obtained from EPA Air Regulation, 1974.
500 1,000 1,500
1,836,000
459,000
(612,000)
2,720,000
571,000
(1,198,000)
2,040,000
510,000
(623,000)
204,000
40,000
0.246
3,400,000
714,000
(1,225,000)
680,000
116,000
0.714
2,783,000
696,000
(1,225,000)
4,122,000
866,000
(2,397,000)
3,092,000
773,000
(1,246,000)
309,000
56,000
0.172
5,153,000
1,082,000
(2,451,000)
1,031,000
162,000
0.498
3,550,000
888,000
(1,835,000)
. 5,258,000
1,104,000
(3,595,000)
3,944,000
986,000
(1,868,000)
394,000
65,000
0.133
6,573,000
1,380,000
(3,676,000)
1,315,000
195,000
0.400
306
-------
TABLE E-25 (cont'd)
CONTROL COSTS FOR RECOVERY BOILERS
MILL SIZE (tpd)
500 1,000 1,500
New Conventional Boiler
ESP (99.5%)
Capital Cost, $ 2,448,000 3,710,000 4,733,000
Gross Annual Cost, $ 563,000 853,000 1,089,000
Credits, $/yr (621,000) (1,243,000) (1,864,000)
Incremental Capital Cost, $ 612,000 927,000 1,183,000
Incremental Annual Cost, $/yr 95,000 139,000 172,000
Cost Per Ton, $/ton 0.585 0.428 0.353
Existing Noncontact Boiler
ESP (99%)
Capital Cost, $ 3,022,000 4,580,000 5,842,000
Gross Annual Cost, $/yr 635,000 962,000 1,227,000
Credits, $/yr (1,216,000) (2,434,000) (3,649,000)
Incremental Capital Cost, $ 302,000 458,000 584,000
Incremental Annual Cost, $/yr 46,000 59,000 69,000
Cost Per Ton, $/ton 0.283 0.182 0.142
Source: Arthur D. Little, Inc., estimates.
307
-------
economic recovery level of 97.5%' control efficiency, based on a survey of existing control
devices on recovery furnaces.
The capital cost of the ESP is based upon the recent quotations and the cost
information given in the IGCI report.2
The credit for recovered particulate is calculated on the assumption that all the
particulate is salt cake valued at $35/ton. The air pollution control cost is actually the
incremental cost of the particular device over the device used for economic recovery. The
incremental capital cost, the incremental operating cost, and the incremental operating cost
per ton of pulp are given in Table E-25.
The methods used to reduce TRS emissions from conventional recovery furnaces are
close monitoring and control of the process variables and oxidation of the black liquor to
eliminate the compounds that cause TRS emissions when the black liquor contacts the
furnace flue gas in the direct contact evaporator. No costs are assessed for the required
closer control of the process variables.
The control technique for reducing TRS emissions is inherent in the basic design of the
noncontact furnace system. The direct contact evaporator is not used in the noncontact
furnace. Several methods are employed to accomplish the function previously performed by
the direct contact evaporator such as increasing the economizer section to recover more heat
from the flue gas, adding a steam heated concentrator to evaporate water from the black
liquor, or using combustion air heated by the furnace flue gas to evaporate water from the
black liquor in an air contact evaporator. In general, the heat from the noncontact furnace
flue gases is less than the heat recovered from conventional furnace flue gases. The heat loss
is about equivalent to the 120°F higher temperature of noncontact furnace flue gases
compared to the temperature of the flue gases from conventional furnaces. The odor control
cost is the combined cost of the incremental loss of heat energy in the flue gas and the
incremental operating cost of the non-contact furnace over the operating cost of the
conventional furnace. These costs are not included in Table E-25.
Lime Kiln
The most common type of air pollution control device for the lime kiln is the venturi
scrubber. As in the recovery boiler, there is a certain recovery level which is based on
favorable process economics. For this affected facility the economic recovery level is
1. Particulate Matter Reduction Trends in the Kraft Industry. Technical Bulletin No. 32, National Council
of Pulp and Paper Industry for Air and Steam Improvement, Inc. 4/4/67.
2. Air Pollution Control Technology and Costs in Eight Selected Industries, Industrial Gas Cleaning
Institute, EPA Contract No. 68-02-1091, Draft Report, 1974.
308
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assumed to be the venturi scrubber with 37.5 cm (15 inches) of water pressure drop.1 Two
other venturi scrubbers with higher pressure drops are presented as alternate control devices.
The capital costs shown in Table E-26 are based on the recent quotations and on a study
done for EPA by the Industrial Gas Cleaning Institute.2
The cost attributed to air pollution control is the difference between the device in
question and the 37.5 cm pressure drop venturi scrubber. These incremental costs are
presented in Table E-26.
Proper process conditions such as the cold end temperature, the oxygen content in the
kiln, the sulfide content in the lime mud, and the pH and sulfide content of the scrubbing
water are necessary to reduce TRS emissions from the lime kiln. The cold end temperature
control is a well-defined process to control the TRS emissions. The costs given in Table E-26
are based on increasing the cold end temperature by 100° from 350°F to 450°F.
Scrubbing with a caustic solution will absorb some of the TRS emission from the lime
kiln. For most mills the caustic is part of the ordinary makeup caustic to the mill, and no
cost is associated with this alternative.
Smelt Dissolving Tank
Three control techniques are presented in Table E-27 for the smelt dissolving tank. The
demisters provide an economic recovery level. The cost of demisters, based on the
Sirrine report,3 includes the mesh pad and a water spray system. The value of recovered
particulate at $35/ton is used to determine the credits. The weight of the recovered material
is based on the emission factor given in the MRI report,2 using a collection efficiency of
80% for the mesh pad.
The packed tower with associated fan, liquid circulation pump, and control is used as
an alternative control device for the smelt dissolving tank. Credits for recovered particulate
are calculated in the same manner as for the demister case, except that the recovery
efficiency is 96%.
The orifice scrubber with associated fan, liquid circulation pump, and control is shown
as an alternative device in Table E-27. The cost data for this type of control system are
based on recent quotations. The collection efficiency of the orifice scrubber (20-25 cm WG)
will be greater than 97%.
1. EPA, Air Regulations, 1975.
2. Air Pollution Control Technology and Costs in Seven Selected Areas. Industrial Gas Cleaning Institute,
EPA Contract No. 68-02-0289, December 1973.
3. Control of Atmospheric Emissions in the Wood Pulping Industry, Environmental Engineering Inc., and
J.E. Sirrine Company, EPA Contract No. CPA-22-69-18, March 1970.
4. MRI Report, EPA Contract CPA-22-69-104, Handbook of Emissions, Effluents and Control Practices for
Stationary Particulate Pollution Sources, November 1970.
309
-------
TABLE E-26
CONTROL COSTS FOR LIME KILN SYSTEM
Mill Size (tpd) 500 1,000 1,500
Economic Level
Venturi Scrubber (37.5 cm WG)
Capital Cost, $ 87,000 123,000 156,000
Gross Annual Cost, $/yr 41,600 77,000 111,000
Credits, $/yr (63,600) - (127,200) (190,800)
Existing Mill
Venturi Scrubber (50 cm)
Capital Cost, $ 155,000 235,000 300,000
Gross Annual Cost, $/yr 52,600 98,200 141,400
Credits, $/yr (65,800) (131,600) (197,400)
Incremental Capital Cost, $ 68,000 112,000 144,000
Incremental Annual Cost, $/yr 8,800 16,800 23,800
Incremental Cost per Ton, $/yr 0.054 0.052 0.049
New Mill
Venturi Scrubber (75 cm)
Capital Cost, $ 196,000 297,000 379,000
Gross Annual Cost, $/yr 66,500 124,100 178,600
Credits, $/yr (66,200) (132,400) (198,600)
Incremental Capital Cost, $/yr 109,000 174,000 223,000
Incremental Annual Cost, $/yr 22,300 41,900 61,000
Incremental Cost per Ton, $/yr 0.137 0.129 0.125
Process Control Cost
Annual Cost, $/yr 17,500 38,300 60,300
Cost per Ton, $/ton 0.108 0.118 0.124
Based on the fuel cost to increase the cold end temperature 100°F.
Source: Arthur D. Little, Inc., estimates,
310
-------
500
21,000
4,100
(11,400)
1,000
25,000
4,700
' (22,700)
1,500
31,000
5,700
(34,100)
TABLE E-27
CONTROL COSTS FOR SMELT TANK SYSTEM
MILL SIZE (tpd)
i- s\r\
Economy Level
Mesh Pad (80%)
Capital Cost, $
Gross Annual Cost, $/yr
Credits, $/yr
Existing Mill
Packed Bed (max. 96%)
Capital Cost, $ 77,000 121,000 153,000
Gross Annual Cost, $/yr 19,700 34,000 46,000
Credits, $/yr (13,600) (27,300) (40,900)
Incremental Capital Cost, $ 56,000 96,000 122,000
Incremental Annual Cost, $/yr 13,400 24,700 33,500
Incremental Cost per Ton, $/ton 0.082 0.076 0.069
New Mill
Orifice Scrubber (97%)
Capital Cost, $ 117,000 160,000 195,000
Gross Annual Cost, $/yr 50,000 74,600 101,200
Credits, $/yr (13,800) (27,600) (41,400)
Incremental Capital Cost, $ 96,000 135,000 164,000
Incremental Annual Cost, $/yr 43,500 65,000 88,200
Incremental Cost per Ton, $/ton 0.268 0.200 0.181
Basis: The value of chemicals at $35/ton is used to determine credits,
Source: Arthur D. Little, Inc., estimates.
311
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The control technique for reducing TRS emissions from the smelt dissolving tank is to
use fresh water in the smelt dissolving tank scrubber. No control costs are presented for
control of TRS emissions, since this feature can be designed into a new mill at essentially no
cost.
Digesters and Multiple-Effect Evaporators
The vent gas streams from the digesters and the multiple-effect evaporators are similar
and contain TRS compounds. These gases present an odor problem. It is common practice
to combine and treat the emissions from both affected facilities together; the control costs
are presented for a combined treatment system. The costs presented in Table E-28 are for an
incinerator in the lime kiln. The system consists of the necessary piping and blowers to
collect the gas streams and delivery piping and controls to inject the gases into the lime kiln.
The spare incinerator would handle the gases when the lime kiln is not operating.
The digester affects the cost of the control system. The control cost for both cases
(batch or continuous digester, and multiple-effect evaporator), based on the Sirrine report,
are shown in Table E-28.
Brown Stock Washers
The gas stream from the brown stock washers is a relatively large stream with a low
concentration of TRS. The only control technique is incineration in the recovery furnace.
Estimates from the EPA are given in Table E-29. The control equipment consists of the
necessary piping and controls to inject the gases into the recovery furnace and hoods and
the connecting piping and controls to collect the gases.
Black Liquor Oxidation System
One method to reduce TRS emissions from conventional recovery furnaces is oxidizing
the black liquor to eliminate the compounds that cause TRS emissions when the black
liquor contacts the furnace flue gas in the direct contact evaporator.
The black liquor oxidation may be carried out to reduce TRS emissions from the
recovery boiler. The effluent bases from the black liquor oxidation with air represent an
emission source. (No emissions are generated with black liquor oxidation using oxygen.) It
will be necessary to treat these gases if it is a new source. The control method is to
incinerate the gases in the recovery boiler. Since the offgas stream has a high moisture
content, a condenser is necessary. The control costs are shown in Table E-30.
Condensate Stripper
In mills that have condensate strippers, the TRS compounds vented from the stripper
can be controlled by incineration. The cost estimate shown in Table E-31 is based on a
312
-------
TABLE E-28
CONTROL COSTS FOR THE DIGESTER AND THE MULTIPLE-EFFECT EVAPORATORS
MILL SIZE'(tpd)
Incineration in the Lime Kiln
Batch Digesters
Capital Cost, $
Annual Cost, $
Cost per Ton, $/ton
Continuous Digesters^
Capital Cost, $
Annual Cost, $
Cost per Ton, $/ton
500
162,000
35,000
0.216
102,000
25,000
0.155
1,000
235,000
54,000
0.165
156,000
39,500
0.121
1,500
318,000
73,500
0.151
205,000
54,000
0.110
A separate incinerator is included.
Source: Arthur D. Little, Inc., estimates.
313
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TABLE E-29
CONTROL COSTS FOR THE BROWN STOCK WASHERS
MILL SIZE (tpd)
500
Incineration in the Recovery
Furnace
Capital Cost, $
Annual Cost, $/yr
Cost per Ton, $/ton
1.000
164,000
29,500
0.182
252,000
46,000
0.142
1,500
318,000
58,000
0.119
Source: Arthur D. Little, Inc., estimates,
314
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TABLE E-30
CONTROL COSTS FOR BLACK LIQUOR OXIDATION SYSTEM
MILL SIZE (tpd)
500 1,"00 1,500
Air Oxidation
Capital Cost, $ 333,000 484,000 649,000
Annual Cost, $/yr 113,000 168,000 231,000
Cost per Ton, $/ton 0.695 0.517 0.474
Source: Arthur D. Little, Inc., estimates.
CONTROL COSTS FOR BLACK LIQUOR OXIDATION SYSTEM OFFGASES
(New Sources Only)
MILL SIZE (tpd)
Capital Cost, $
Annual Cost, $/yr
Cost Per Ton, $/ton
500
175,000
47,000
0.290
1,000
267,000
78,000
0.239
1,500
347,000
107,000
0.220
Source: Arthur D. Little, Inc., estimates.
315
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TABLE E-31
CONTROL COSTS FOR THE CONDENSATE STRIPPER
Incineration in Lime Kiln
Capital Cost, $
Cost per Ton, $/ton
MILL SIZE (tpd)
500
13,000
4,700
0.029
1,000
18,600
5,800
0.018
5,000
23,000
6,700
0.014
Source: Arthur D. Little, Inc., estimates.
316
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system including a fan, duct, seal pot, and flame arrester. The duct begins at the overhead
condenser on the stripper and ends at the point where it connects with the noncondensible
gas header which leads to the lime kiln and the spare incinerator.
Power Boiler
Combination boilers (bark and oil, or bark and coal) or bark boilers are used as power
boilers in the pulp industry. The discharge from a bark boiler consists of gaseous products of
combustion-containing particulate bark char and sand. Unlike most other stacks on a kraft
mill, there are no significant gaseous air pollutants emitted, and unlike most coal-fired
boilers, there is no SO2 problem, since there is little or no sulfur in the bark.
The SO2 problem in the combination boilers will depend on the fraction of the coal or
oil used in the boiler and the sulfur content of the fuel. There are no SO7 control systems
installed in the pulp industry, and the cost of such systems are not discussed here.
The bark flyash, unlike most flyash, is primarily unburned carbon and, with collection
and reinjection, can increase boiler efficiencies from 1 to 4%.
The air pollution control system for boilers consists of a mechanical collector followed
by an electrostatic precipitator or scrubber. The cost of a mechanical collector is not
included in Table E-32 since the char collected from the mechanical collector is recycled
and is considered an economic recovery level.
The cost of electrostatic precipitators for bark boilers and combination boilers having
different capacities is given in Table E-32. The cost for the bark boilers was obtained from
IGCI report1 and the cost for the combination boilers was obtained from recent quotations.
The boiler having a rated steam capacity of 350,000 #/hr was for a 600 tpd (bleached) air
dried pulp mill.
Ambient Air Quality Standards
Under the Clean Air Act, as amended in 1970, air quality standards have been
established for the whole country.
All of the states have established air quality standards. These standards are the same or
more stringent than the federal standards. Ambient air standards for the State of Wisconsin
are given in Table E-33 to illustrate.
Each state is required to adopt and to submit implementation plans to the Administra-
tor of the Environmental Protection Agency for its emission reduction strategy and
1. Air Pollution Control Technology and Costs in Nine Selected Areas. EPA report 63-02-0301 by Indus-
trial Gas Cleaning Institute, September 1972.
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TABLE E-32
CONTROL COSTS FOR POWER BOILERS
Bark Boilers
Rated Steam Load, ///hr 100,000 300,000
ESP Capital Cost, $ 440,000 886,000
Annual Operating Cost, $/yr 110,000 221,000
Bark/Oil Boiler
(1/3 Bark, 2/3 Oil)
Rated Steam Load, ///hr 250,000 350,000
ESP Capital Cost, $ 1,062,000 1,300,000
Annual Cost, $/yr 266,000 325,000
Source: Arthur D. Little, Inc., estimates.
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TABLE E-33
WISCONSIN AMBIENT AIR STANDARDS
SO
Annual Arithmetic Mean
24 Hr Concentration
*
3 Hr Concentration
Particulate
Annual Geometric Mean
*
24 Hr Concentration
CO
*
8 Hr Concentration
*
1 Hr Concentration
Photochemical Oxidants
*
1 Hr Concentration
Hydrocarbons
3 Hr Concentration
NO-
Annual Arithmetic Mean
Primary
yg/cu. m.
(ppm)
80 (0.03)
365 (0.14)
75
260
160 (0.08)
160 (0.24)
100 (0.05)
Secondary
yg/cu. m.
(ppm)
60 (0.02)
260 (0.1)
1,300 (0.5)
60
150
10,000 (9) 10,000 (9)
40,000 (35) 40,000 (35)
160 (C.08)
160 (0.24)
100 (0.05)
n
Not to be exceeded more than once/year.
Source: Environmental Reporter for the State Standards
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enforcement thereof to achieve air quality standards for particulates, sulfur oxides, nitrogen
oxides, hydrocarbons, and carbon monoxide. Also, the Environmental Protection Agency
has established emission standards to achieve ambient air quality standards for new sources.
Nondegradation of Air Quality
The nondegradation of air quality is applicable to the new sources. The rule implies
that if the ambient air quality is better than the primary and the secondary air quality
standards, then the new source should not be allowed to degrade air quality significantly.
The following factors should be considered in exercising the nondegradation of air quality:
a) The quantity and characteristics of air contaminants and the duration of
their presence in the atmosphere which may cause air pollution in a particu-
lar area of the state;
b) Existing physical conditions and topography;
c) Prevailing wind directions and velocities;
d) Temperatures and temperature-inversion periods, humidity, and other atmo-
spheric conditions;
e) Possible chemical reactions between air contaminants or between air contam-
inants and air gases, moisture, or sunlight;
f) The predominant character of development of the area of the state, such as
residential, highly developed industrial area, commercial, or other charac-
teristics;
g) The question of priority of location in the area involved;
h) Availability of air-cleaning devices;
i) Economic feasibility of air-cleaning devices;
j) Effect on normal human health of particular air contaminants;
k) Effect on efficiency of industrial operation resulting from use of air-cleaning
devices;
1) Extent of danger to property in the area to be expected from any particular
air contaminant;
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m) Interference with reasonable enjoyment of life by persons in the area and
conduct of established enterprises which can reasonably be expected from
air contaminants;
n) The volume of air contaminants emitted from a particular class of air
contaminant source;
o) The economic and industrial development of the state and the social and
economic value of the source of air contaminants; and
p) The maintenance of public enjoyment of the state's natural resources.
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APPENDIX F
FIELD INTERVIEW GUIDE FOR MILL CLOSURE ANALYSIS
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APPENDIX F
FIELD INTERVIEW GUIDE FOR MILL CLOSURE ANALYSIS
Date:
I. Description of Contact1
name and title of person contacted:
company.
location of subject mill and process/product category:
II. Identification
of interviewer
of Arthur D. Little, Inc.
III. Purpose of Call
We are currently doing a study for the EPA on the economic impact of Federal
pollution regulations on the pulp and paper industry. In this study, we must screen
those mills where we have questions on their ability to meet EPA water effluent
control guidelines stipulated for 1977 and 1983.1 am calling you to obtain your insight
and judgment concerning the future viability of your mill(s). [identify]
The information that you contribute to our study will be combined with other
inputs in statistical summaries. It will not be identified specifically with your mill or
company.
IV. Current Status of Mill
daily capacity: Pulp ; Products
pollution control
equipment in-place:
age of mill:
number of employees: Production ; Administrative:
how well has mill been maintained?
are there any exceptional economic conditions facing the mill?
1. Contacts should be as highly placed as possible. Ideally, the president of small (one-mill) companies and
the corporate officer of large (multi-mill) companies should be contacted.
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- operating cost advantages/disadvantages:
- raw material supply arrangements
energy costs
production efficiencies
- other
how profitable is the mill?
V. Pollution Control Cost Situation2
Does existing water pollution control equipment comply with 1977 HPA
standards; 1983 EPA standards?
If the answer above is negative, what is required to achieve full compliance?
How much will it cost?
Where will the required capital come from; at what anticipated interest rate?
What financial impact do you expect on
mill operating costs
mill profitability
Have you tried to justify this pollution control expenditure on a return-on-
investment basis?
- Is there any possibility of municipal treatment tie-in? At what cost?
VI State/Local Pollution Control Requirements
Beyond EPA requirements, what state/local air and water pollution control
requirements exist?
- What additional economic impact will state/local requirements have on your
operations?
2. Interviewer should have a copy of EPA effluent standards by process sector, since it may be necessary to
compare current and stipulated effluent loadings.
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VII. Future Plans
What plans do you have to invest further in:
pollution control equipment
expansion
mill maintenance
Are there any plans to shift product mix?
Will executing these plans achieve full compliance with EPA standards?
Are there any plans to curtail operations?
partial
complete closure
if complete closure is foreseeable, what is your estimate of mill
salvage value?
VIII. For Multi-Mill Companies Only
Are there plans to shift capacity and/or personnel from this mill to other
mills in the company?
Are there other mills in your company (beyond those that we have dis-
cussed) that you think may have difficulty complying with EPA pollution
control standards?
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TV
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