r -
EPA-440 2-77-003
MAY, 1977
ECONOMIC IMPACT ANALYSIS
OF
FINAL PRETREATMENT STANDARDS
Leather Tanning And
Finishing Industry
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Analysis and Evaluation
Office of Water and Hazardous Material
Washington, D.C. 20460
UJ
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ECONOMIC IMPACT OF FINAL PRETREATMENT
STANDARDS ON THE
LEATHER TANNING AND FINISHING INDUSTRY
Prepared for
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water and Hazardous Materials
Washington, D. C. 20460
Contract No:
68-01-4182
Development Planning and Research Associates, Inc.
P.O. Box 727
Manhattan, Kansas 66502
May, 1977
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CONTENTS
PREFACE
I. INTRODUCTION
A. Scope and Organization of this Report 1-1
B. Data Sources 1-1
II. METHODOLOGY - II-1
A. Industry Structure and Subcategorization II-2
B. Financial Profile of the Industry II-2
C. Model Plants II-4
D. Pricing Patterns II-5
E. Waste Treatment Technological Options and
Costs II-5
F. Analysis of Economic Impacts II-5
1. Fundamental Core Methodology II-5
2. Price and Production Impact Analyses 11-12
3. Financial Impact Analysis 11-13
4. Plant Closures and Production
Effects 11-13
5. Employment Impact Analysis 11-14
6. Community Impact Analysis 11-14
7. Balance of Payments Impact Analysis 11-14
8. Other Impact Analysis 11-14
III. STRUCTURE OF THE INDUSTRY III-l
A. Industry as a Process III-2
B. Characteristics of the Industry III-4
1. Number of Tanneries III-4
2. Size of Tanneries II1-6
3. Types of Major Products II1-7
4. Value of Shipments III-9
5. Location.of Tanneries III-9
6. Age of Planes and Level of
Technology 111-12
C. Importance of Integrated Capacities 111-13
D. Level of Diversification II1-13
E. Employment Characteristics 111-14
1. Employment II1-14
2. Level of Wages 111-14
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CONTENTS (continued)
Page
F. Ownership Type and Size 111-16
G. Industry Segments 111-16
1. Conventional Industry Segments 111-16
2. Categorization of Plants by Type
of Manufacturing Process 111-16
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY IV-1
A. General Financial Situation IV-1
B. Cost Structure of the Industry IV-4
1. Revenues IV-4
2. Variable Costs IV-4
3. Fixed Costs IV-8
C. Industry Profitability IV-8
1. Net Profits on Sales IV-8
2. Return on Investment IV-11
3. Cash Flow IV-11
D. Financial Structure of the Industry IV-13
1. Assets IV-13
2. Liabilities IV-13
3. Net Worth IV-16
E. Cost of Capital - After Tax IV-16
F. Assessment of Ability to Finance New
Investment IV-17
1. Financing New Investment IV-17
2. General Industry Situation IV-18
3. Expenditures for Plant and Equipment IV-18
4. Capital Availability IV-21
V. PRICES AND PRICE DETERMINATION V-l
A. Supply of Raw Hides V-l
1. Domestic Hide Supply V-l
2. World Supply of Hides and Skins V-3
B. The Demand for Raw Hides V-5
1. Trade Restrictions in Raw Hide
Supply V-7
C. Demand for Leather and Leather Products V-9
1. Domestic Demand V-10
2. Exports of Tanned Leather V-13
D. Imports of Finished Leather Products into the
United States V-l5
1. Trends in Imported Leather Goods V-l5
2. Trade Restrictions V-17
E. Price Trends and Analysis V-20
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CONTENTS (continued)
VI. MODEL PLANTS VI-1
A. Types and Sizes of Model Plants VI-1
B. Investment VI-2
1. Book Value of Assets VI-2
2. Operating Capital VI-6
3. Total Invested Capital VI-6
4. Salvage Value VI-6
C. Model Plant Capacity and Utilization VI-7
D. Annual Sales of Model Plants VI-7
E. Cost Structure of Model Plants VI-8
1. Raw Material VI-8
2. Labor VI-8
3. Tanning Materials and Other Costs VI-8
4. Depreciation and Interest VI-12
5. Total Costs VI-12
F. Model Plant Annual Profits VI-12
6. Annual Cash Flows VI-12
VII. PRETREATMENT COSTS VII-1
A. Pretreatment Control Recommendations VII-1
B. Pretreatment Control Options VII-1
C. Discharge Status of the Industry VII-2
D. Pretreatment Control Costs VII-3
1. Investment Costs VII-3
2. Total Yearly Costs VII-5
VIII. ECONOMIC IMPACT ANALYSIS VIII-1
A. Price Effects VIII-1
1. Required Price Increases VIII-1
2. Expected Price Increase VIII-2
B. Financial Effects VIII-2
1. Cattlehide, Chrome, Pulp Hair
Tanneries VI11-4
2. Cattlehide, Chrome, Save Hair
Tanneries VIII-4
3. Cattlehide, Vegetable Tanneries VIII-8
4. Cattle to the Blue Tanneries VIII-9
5. Cattlehide Split Tanneries VIII-9
6. Sheepskin Tanneries VIII-9
7. Shearling Tanneries VIII-10
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CONTENTS (continued)
Page
C. Production Effects VIII-11
1. Plant Closures VIII-11
2. Production Loss VIII-13
D. Employment and Community Effects VIII-13
E. Balance of Trade Effects VIII-14
IX. LIMITS OF THE ANALYSIS IX-1
A. General Accuracy IX-1
B. Range of Error IX-2
1. Errors in Data IX-2
C. Critical Assumptions IX-2
SELECTED REFERENCES
APPENDIX 1 - SUPPLEMENTAL CATTLE SUPPLY INFORMATION
APPENDIX 2 - PRETREATMENT CONTROL OPTIONS
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PREFACE
The attached document is a contractor's study prepared for the Office of
Analysis and Evaluation of the Environmental Protection Agency ("EPA").
The purpose of the study is to analyze the economic impact which could result
from the application of alternative pretreatment standards established
under Section 307(b) of the Federal Water Pollution Control Act, as amended.
The study supplements the technical study ("EPA Development Document")
supporting the issuance of interim final regulations under Sections 307(b).
The Development Document surveys existing and potential waste treatment
control methods and technology within particular industrial source cate-
gories and supports interim final promulgation of pretreatment standards
based upon an analysis of the feasibility of these standards in accordance
with the requirements of Section 307(b) of the Act. Presented in the
Development Document are the investment and operating costs associated
with various alternative control and treatment technologies. The attached
document supplements this analysis by estimating the broader economic
effects which might result from the required application of various control
methods and technologies. This study investigates the effect of alternative
approaches in terms of product price increases, effects upon employment and
the continued viability of affected plants, effects upon foreign trade and
other competitive effects.
The study has been prepared with the supervision and review of the Office
of Analysis and Evaluation of the EPA. This report was submitted in ful-
fillment of Contract No. 68-01-4182 by Development Planning and Research
Associates, Inc. This report reflects work completed as of May, 1977.
This report represents the conclusions of the contractor. It has been re-
viewed by the Office of Analysis 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, to-
gether with the Development Document, information received in the form of
public comments on the proposed regulation, and other materials in the
establishment of final pretreatment standards.
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I. INTRODUCTION
A. Scope and Organization of this Report
This study for the Environmental Protection Agency was designed to analyze
the economic impact of the costs of pretreatment requirements under the
Federal Water Pollution Control Act Amendments of 1972 on the Leather
Tanning and Finishing Industry (Standard Industrial Classification 3111).
Specifically, the following types of economic impacts were analyzed and,
to the extent that they were found to be significant, are described in
this report.
1. Price and production effects - including effect upon industry's
suppliers and consumers
2. Financial effects - profitability, growth, and capital avail -
abi1i ty
3. Number, size and location of plants that can be expected to
close or curtail production
4. Changes in employment
5. Community impacts, and
6. Balance of oayments consequences.
These impacts were analyzed only for those tanneries which discharge waste-
waters to privately owned treatment works (municipal treatment systems).
Those tanneries discharging directly to navigable waters will be analyzed
in a separate report which will be completed at a later date.
The basic organization of this report consists of establishing the overall
Tanning Industry's situation including discussions on the industry's
structure, financial and pricing characteristics. From these data, repre-
sentative model plants are developed which serve as a baseline (before
pretreatment controls) from which impacts can be measured. Finally, the
model plants are impacted utilizing oretreatment control costs provided by
EPA and the overall industry impacts determined.
B. Data Sources
The most commonly used and in many cases the most readily available sources
of industry information including employment, location, value of shipment
and product data are available from the U.S. Department of Commerce,
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particularly its Census of Manufactures, Annual Survey of Manufactures and
Industrial Outlook. Additionally, the Tanners' Council of America publishes
an annual report, the Leather Industry Statistics, which contains the most
recent industry production data"! Financial data are somewhat limited as
much of the published data are aggregated such that information concerning
just the Leather Tanning Industry are not available. These sources of
financial data include the Robert Morris Associates, Statement Studi,es;
Troy's Almanac of Business and Industrial Financial Ratios; and the
Internal Revenue Service's, Source Book of Statistics of Income.
The above sources do provide sufficient data such that generalizations con-
cerning the industry as a whole can be made. However, as much more detailed
information was required in order to accurately represent the industry for
the impact analysis, a data collection portfolio was distributed to 302
tanneries requesting various operational and financial information.
Of the 302 data collection portfolios sent, 135 responses were received
reflecting various stages of completion. The technical contractor also
utilized a survey of the industry and was able to provide additional infor-
mation concerning some 65 tanneries. Thus, in total, some information was
available for about 200 tanneries in the industry.
Also plant visitations were utilized to gain insight to problems about the
industry, its operation, and foreseeable problems concerning the implementa-
tion of pretreatment controls. In total, approximately 41 tanneries were
visited.
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II. METHODOLOGY
The methodological approach utilized to assess the likely economic impact
of proposed pretreatment requirements pursuant to the Federal Water Pollution
Control Act Amendments of 1972 (PL 92-500) on the Leather Tanning and
Finishing Industries is summarized in this chapter.
In this study, economic impact is defined as the comparison between (1)
the projections of the likely effects on plant, local area, U.S. and
foreign activity which would result from an industry's compliance with a
given level of pretreatment controls and (2) projection of industrial
activity and changes which would likely occur in the absence of the Act
(baseline).
In particular, the principal economic variables of interest in this study
are:
1. Price effects - including effects upon industry's suppliers
and consumers
2. Profitability, growth and capital availability
3. Number, size, and location of plants that can be expected to
close or curtail productions
4. Changes in employment
5. Community impacts
6. Balance of payments consequences
7. Any other impacts
Economic impacts were evaluated for preliminary treatment (pretreatment)
which is defined as wastewater treatment on the tannery site before dis-
charge to a municipal treatment system. Pretreatment requirements for
the Leather Tanning and Finishing Industry are described in detail in the
Development Document. I/
North Star Division of Midwest Research Institute, Supplement to the
Development Document for Pretreatment Guidelines - Leather Tanning and
Finishing, Draft, EPA, November, 1976.
II-l
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The pretreatment analyses focus on price increases, plant closures,
curtailment of production, dislocations of production, unemployment, com-
munity impacts, and balance of trade effects.
Several interrelated analyses are used to evaluate likely economic impacts
resulting from pretreatment controls on the Leather Tanning and Finishing
Industry. These in-depth analyses include: (1) characterization and sub-
categorization of the technical and economic structure of each industry,
(2) description of the financial profile of each industry, (3) construction
of representative model plants, (4) evaluation of pricing patterns within
each industry, (5) determination of technological options for meeting
designated levels of effluent control and the costs associated with each
option, and (6) analysis of economic impacts.
The analysis, however, is not a simple sequential analysis; rather it em-
ploys interacting feedback steps. The schematic of the analytical approach
is shown in Exhibit II-l. Due to the fundamental causal relationships among
the financial and production effects and other impacts, a greater emphasis
is devoted to plant closure analysis.
A. Industry Structure and Subcategorization
The industry structure and Subcategorization phase of the methodology pri-
marily involves describing and segmenting the industry in terms of past
and current economic characteristics. The purpose of this phase of the
analysis is to provide an information base to be used in subsequent analysis.
In particular, the information on'industry characteristics is useful in
determining an appropriate disaggregation design for industry Subcategori-
zation.
Subcategorization involves segmenting the plants within the industry into
relatively homogenous classes with respect to plant size, regional differ-
ences, technology employed, number of products, existing level of pollution,
scale of technological processes, level of output, or other relevant factors
important for assessing the impact of pollution controls. The delineation
of industry subcategories developed in the early stages of the analysis
serves as the basis for the definition and construction of representative
model plants and the determination of waste treatment technological options
and costs.
B. Financial Profile of the Industry
The ability of firms within the industry to finance investment for pollu-
tion control is determined in part by past and expected financial conditions
II-2
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Industry
Subcate-
gorization
i
Model Plant
Parameters
Industry
Financial
ria-i-a
ua ta
PD" Pnl 1 i-t ' A
Lr/-» ru i 1 u u 1 0
Control Cost
Base , Plant
Closures " Due to
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Employment
Effects
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rnmninni i v
Effects
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s
Closures .__
Control r
Budget Data
Development
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Model
Financial
Analyses
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vt
rri ce
Increases
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Shutdown
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Production-
Expected
Effects
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Foreign
Trndp
Effects
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Industry
1 -' "' Pricing
Financial
Profiles
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Exhibit II-l. Schematic of economic impact analysis of effluent control
guidelines.
II-3
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of those firms. Under the heading "financial profile of the industry,"
various factors are studied to develop insight into the financial charac-
teristics of actual plants in the industry. Much of the data compiled
in this section is also useful in determining financial profiles of
representative model plants.
Key financial statistics include after-tax profit as a percent of sales,
after-tax profit as a percent of invested capital, sales to total assets
ratios, sales per employee, assets per employee, and after-tax profit to
net worth. Other financial factors are studied with respect to the ability
of firms to generate funds to finance investment for effluent management,
either internally through cash flow or externally through new debt or equity
issues. The data compiled in this phase of the analysis provide an infor-
mation base useful for projecting key technical and economic factors and
for carrying out subsequent economic impact analysis.
C. Model Plants
The model plant concept represents a systematic framework from which to
assess likely economic impacts on individual types and sizes of actual
plants within the industry. Usually more than one model plant is re-
quired for an industry in order to represent various types and sizes of
existing plants or plants which are likely to be constructed after the
promulgation of the guidelines.
Model plants represent a variety of financial, economic, and technical
variables such as sales, investment, fixed and variable costs, profits,
size, type of process, etc. Model plant profiles are constructed from
data and information gathered in the industry characteristics and sub-
categorization and financial profile phases of the analysis. Additional
data, as required, are generally obtained from industry representatives,
trade publications, and from-engineering cost-synthesis methods.
The applicability of utilizing model plant data for assessing expected
economic impacts of water effluent controls rests principally on the
representativeness of the selected model plant(s). For example, the
economic concept of "economies-of-scale" in production is often present
in processing plants, e.g., average unit costs of production are usually
lower in large plants as compared with medium or small plants of the same
type. Furthermore, there are expected economies-of-scale in waste treat-
ment, which, in effect, will compound the economies-of-scale relationships
among differing sizes of plants.
In general, economies-of-scale relationships in pollution control costs
have been demonstrated; and this alone would necessitate multiple model
plant analyses to evaluate differential economic effects. Other pro-
cessing factors, e.g., type of manufacturing process employed (technology)
may also affect processing costs and/or v/asteflows. This again may neces-
sitate further segmentation of an industry and the inclusion of additional
model plants for more comprehensive analysis.
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D. Pricing Patterns
The analysis of pricing patterns in the Leather Tanning Industry focuses
on factors determining supply and demand. Market structure and the nature
of competition are evaluated which, for the Leather Industry, involves the
inclusion of the influence that international markets and competition assert
on the domestic industry's prices. Finally, the ability of impacted
tanneries to recover the increased costs of pretreatment controls is
assessed.
E. Waste Treatment Technological Options and Costs
Pretreatment control options and associated costs are obviously instrumental
in the assessment of economic impacts of pretreatment standards. In general,
basic technical and cost data are developed specifically for the types and
sizes of model plants which are representative of those tanneries utilizing
municipal treatment systems. In determining appropriate options and costs,
it is necessary to specify (1) sources of pollution in each segment in the
industry, and (2) types and proportions of pretreatment systems in place.
This information is primarily available from the Development Document.
Cost data from the technical contractor normally include estimated invest-
ment costs for each model plant and for each treatment option, plus the
estimated annual operating and maintenance costs based upon normal operating
rates or annual production.
F. Analysis of Economic Impacts
In carrying out an economic impact analysis, it is important to establish
a baseline of industry conditions that are expected without pollution con-
trols and to estimate the impact in terms of the change-from this baseline
attributable to the imposition of pollution controls. Thus, in this study
a "dynamic baseline", namely a projection of the industry structure in
terms of number of plants, production, employment and other parameters over
time is used as opposed to a "static" baseline which assumes a baseline
condition equivalent to that currently present.
Fundamentally, the impact analysis is similar to that usually required
for any capital budgeting study of new investments. The problem is one
of deciding v/hether a commitment of time or money to a project is worth-
while in terms of the expected benefits. The analysis is complicated by
the fact that benefits and investments will accrue over a period of time
II-5
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and that, in practice, the analyst can not reflect all of the required
imponderables, which by definition must deal with future projections. In
the face of imperfect and incomplete information and of time'constraints,
the industry segments are described in the form of financial budgets of
model plants. Key non-quantifiable factors were considered in the inter-
pretation of the quantified data. Actual financial results will deviate
from the model results, and these variances will be considered in inter-
preting the findings based on model plants.
The analysis of anticipated economic impacts of water pollution controls
are described as follows.
Fundamental Core Methodology
The fundamentals for analysis are basic to all impact studies. The core
methodology is described here as a unit vn'th the specific impact analyses
discussed under the appropriate headings following this section.
The core analysis for this study was based upon synthesizing the physical
and financial characteristics of the various industry segments through
representative model plant projections. Estimated financial profiles
and cash flows are presented in the industry reports. The primary factors
involved in assessing the financial and production impact of pollution con-
trol are profitability changes, which are a function of the cost of pollu-
tion control, and the ability to pass along these costs in the form of
higher prices. In reality, closure decisions are seldom made on a set
of well-defined and documented economic rules. They include a wide
range of personal values, external forces such as the inability to
obtain financing, or the relationship between a dependent production
unit and its larger cost center whose total costs must be considered.
Such circumstances include but are not limited to the following factors:
1. Inadequate accounting systems or procedures. This is especially
likely to occur in small, independent plants which do not have
effective cost accounting systems.
2. Insufficient production units. This is especially true of
plants where the equipment is old and fully depreciated and
the owner has no intention of replacing or modernizing them.
Production continues as long as labor and materials costs are
covered and/or until the equipment fails entirely.
3. Personal values and goals associated with business ownership
that override or constrain rational economic rules. This com-
plex of factors may be referred to as the value of psychic income.
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4. Production dependence. This is characteristic of a plant that
is a part of a larger integrated entity which either uses raw
materials being produced profitably in another of J.Sie firm's
operating units or supplies raw materials to another of the
firm's operations where the source of supply is critical.
When the profitability of the second operation more than off-
Sets the losses in the first plant, the unprofitable operation
may continue indefinitely because the total enterprise is pro-
fitable.
5. Temporary unprofitability. This may be found whenever an owner-
operator expects that losses are temporary and that adverse con-
ditions will change. His ability to absorb short-term losses
depends upon his access to funds through credit or personal re-
sources not presently utilized.
6. Low (approaching zero) opportunity costs for the fixed assets
and for the owner-operator's managerial skills and/or labor. As
long as the operator can meet labor and materials costs, he will
continue to operate. He may even operate with gross revenues
below variable costs until he has exhausted his working capital
and credit.
7. Plant site appreciation. This factor is important in those
situations v.iiere the value of the land on which the plant is
located is appreciating at a rate sufficient to offset short-
term losses.
These factors are generally associated with proprietorships and closely
held enterprises rather than publicly held corporations.
While the above factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficient to provide useful
and reliable insight into potential business responses to required invest-
ment and operating costs in pollution control facilities.
In the simplest case> a plant will bs closed when variable costs (Vc)
are greater than revenues (R) since by closing the plant, losses can be
avoided.
In a more probable situation, the variable costs are less than revenues
but revenues are less than variable costs plus cash overhead expenses (TCc)
which are fixed in the short-run. In this situation a plant would likely
continue to operate as contributions are being made toward covering a portion
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of these fixed cash overhead expenses. The firm cannot operate indefinitely
under this condition, but the length of this period is uncertain. Basic to
this strategy of continuing operations is the firm's expectations that re-
venues will increase to cover cash outlay. Identification of plants where
variable costs plus cash overhead expenses are greater than revenues, but
variable costs are less than revenues leads to an estimate of plants that
should be closed over some period of time if revenues do not 'increase.
However, the timing of such closures is difficult to predict.
In another situation the variable costs plus cash overhead expenses
are less than revenues. In this case, it is likely that plant operations
will continue if the net present value (NPVjJ of the cash flow I/ at the
firm's (industry) cost of capital (k) is greater than zero. If the net
present value is less than zero, the firm could liquidate, realizing salvage
value (S) 2/ -jn cash, and reinvest and be financially better off, assuming
reinvesting at least at the firm's (industry) cost of capital.
Computation of net present value involves discounting the cash flow
through the discounting function:
NPV =
y
(1 + k)
-n
where:
NPV = net present value
Ap = the cash flow in the n*" year
k = discount rate (after-tax cost of capital)
n = number of conversion periods, i.e., 1 year, 2 years, etc.
y = years
The "cash flow" including pollution control investment and annual costs
is described in the subsequent sections.
Construction of the Cash Flow
The cash flow used in the analysis of pretreatment control costs was con-
structed as follows:
Refer to "Construction of the Cash Flow"
& Salvage value is defined here as the liquidation value of fixed assets
plus working capital.
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1. Initial investment taken in year t0, considered to be outlays
for fixed assets and working capital.
2. After-tax cash proceeds taken for years ti to tn.
3. Annual replacement investment, equal to annual current deprec-
iation taken for years t] to tn.
4. Terminal value taken in year tn.
5. Investment for pollution control is added to outlays for fixed
assets and working capital in year t0.
6. Annual pollution control operating expenses are taken for years
t] tO tn.
7. Replacement investment taken on pollution investment on
assumption of life of facilities as provided by EPA.
8. No terminal value of pollution facilities to be taken in year
tn. Land value will probably be assumed to be very small and/or
zero, unless the costs provided indicate otherwise.
Baseline cash flow excludes investment and other costs associated with
the effluent controls.
It should be noted that a more common measure of profitability is return
on investment (ROI) where after-tax income (as defined in equation below)
is expressed as a percent of invested capital (book value) or as a percent
of net worth. These measures should not be viewed so much as different
estimates of profitability compared to net present value, but rather these
should be seen as an entirely different profstability .concept.
The data requirements for return on investment and net present value
measures are derived from the same basic financial information, although
the final inputs are handled differently for each.
In the construction of the cash flow for the net present value analysis,
after-tax cash proceeds are defined as:
(1) After-tax income = (1 - t) X (R - E - I - D)
(2) After-tax cash proceeds = (1 - t) X (R - E - D) + D
where
II-9
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t = tax rate
R = revenues
E =
I = interest expenses
D = depreciation charges
revenues
expenses other than depreciation and interest
Depreciation is included only in terms of its tax effect and is then
added back to obtain after- tax cash proceeds.
There is a temptation to include outlays for interest payments when computing
the cash proceeds of a period. Cash disbursed for interest should not affect
the cash proceeds computation. The interest factor is taken into consider-
ation by the use of tlie present-value procedure. To also include the cash
disbursement would result in double counting. The effect of interest
payments on income taxes is also excluded from the cash proceeds computa-
tion. This is brought into the analysis when computing the effective rate
of interest of debt sources of capital, which is used in the determination
of the cost of capital.
A tax rate of 22 percent on the first $25,000 income and 48 percent on
amounts over $25,000 was used throughout the analysis. Accelerated
depreciation methods, investment credits, carry forward and carry back
provisions were not used due to their complexity and special limitations.
Cost of Capital - After- tax
Return on invested capital is a fundamental notion in the U.S. business.
It provides both a measure of the actual performance of a firm as well
as its expected performance. In the latter case, it is also called the
cost of capital and this, in turn, is defined as the weighted average of
the cost of each type of capital employed by the firm in general terms,
equities and interest-bearing liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The cost of equity capital is estimated by two methods -- the dividend
yield method and the earnings stock price (E/P ratio) method. Both are
simplifications of the more complex DCF methodology. The dividend method
is:
where
11-10
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c - cost of equity capital
D = dividend yield
P = stock price
g = growth
The E/P method is simply
c = E/P
where
c = cost of equity capital
E = earnings
P = stock price
and is a further simplification of the first. The latter assumes future
earnings as a level, perpetual stream.
The after-tax cost of debt capital was estimated by using an estimated
cost of debt (interest rate) and multiplying it by .52 -- assuming a 48
percent tax rate.
d = .52 i
where
d = after-tax cost of debt capital
i = before-tax cost of debt (interest rate)
The sum of the cost of equity and debt capital weighted by the respective
equity to total assets and total liabilities to total assets ratios yields
the estimated weighted average cost of capital - after tax (k).
Investment
In evaluating the feasibility of new plants, investment is thought of as
outlays for fixed assets and working capital. However, in evaluating
closure of an on-going plant, the investment basis is its salvage value
(opportunity cost or shadow price). \l For this analysis, salvage value
was taken as the sum of liquidation value of fixed assets plus working
capital (current assets less current liabilities) tied up by the plant.
This same amount was taken as a negative investment or "cash out" value
in the terminal year.
This should not be confused with a simple buy-sell situation which
merely involves a transfer of ownership from one firm to another.
In this instance, the opportunity cost (shadow price) of the invest-
ment may take on a different value.
11-11
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The rationale for using total shadov/ priced investment was that the cash
proceeds do not include interest expenses which are reflected in the
weighted cost of capital. This procedure requires the use of total capital
(salvage value) regardless of source. An alternative would be to use as
investment, net cash realization (total less debt retirement) upon liqui-
dation of the plant. In the single plant firm, debt retirement would be
clearly defined. In the case of the multiplant firm, the delineation of
the debt by the plant would likely not be clear. Presumably this could
be reflected in proportioning total debt to wiit individual plant on some
plant parameter (i.e., capacity or sales). Under this latter procedure,
interest and debt retirement costs would be included in the cash flows.
The two procedures will yield similar results if the cost of capital and
the interest charges are estimated on a similar basis. The former procedure,
total salvage value, was used as it gives reasonable answers and simplified
both the computation and explanation of the cash proceeds and salvage values.
Replacement investment was considered to be equal to the annual depreci-
ation. This corresponds to the. operating policies of some managements
and serves as a good proxy for replacement in an on-going business.
Investments in pollution control facilities are from estimates provided
by EPA. Only incremental values are used in order to reflect in-place
facilities. Only the value of the land for control was taken as a nega-
tive investment, or "cash out" value, in the terminal year.
Price and Production Impact Analyses
Price and production impact analyses necessarily have to proceed simul-
taneously. In order to evaluate these impacts, two types of analyses are
used: one is at the micro level utilizing the model plant as the basis
of the analysis to arrive at required price impacts to maintain profit-
ability levels; the other is at the industry level utilizing supply and
demand analysis.
Application of the preceding DCF procedure to these costs yields the
present value of pollution control costs (i.e., investment plus operating
cost less tax savings). If this is known, the price increase required to
pay for pollution control can readily be approximated by the formula ]_/
_ (PVI
- IT
PVP) (100)
The above procedure is conceptually correct where an average tax
rate is used. However, to insure accuracy in the machine program
where the actual tax brackets are incorporated, a more detailed
iterative process is required.
11-12
-------
where
X - required percentage increase in price
PVP = present value of pollution control costs
PVR - present value of gross revenue starting in the year
pollution control is imposed
T = average tax rate
The required price increase at the-plant level is evaluated in light of
the price elasticities of the commodity involved and the competitive
structure of the industry. This represents the second approach using
supply and demand analysis. The supply and demand analysis provides
some insights into likely quantities and supply response to different
prices. This allows a preliminary estimate of the production and price
*
impact of pollution control costs. Following this, further analysis at
the micro level is performed to obtain a more detailed insight into the
plants' response to expected prices, absorption or shutdown. The indi-
cated plant shutdowns are then, aggregated to test whether or not tfre lost
production could be absorbed by the remaining capacity or whether such
curtail mi-nts would increase prices.
Financial Impact Analysis
The financial impact analysis involves preparation of pro forma income
statements and cash flow statements following the assessment of the
likely price change. The analysis provides estimates of profitability
with and without pollution control costs and also provides information
relative to the ability of the industry to finance this investment and
estimated financial requirements. The ability to finance plant investment
for pollution control may have a definite bearing on judgments and esti-
mates with regard to likely plant closures.
Plant Closures and Production Effects
Plant closures may result from the inability of less profitable plants
to adequately recover required pollution abatement cost through in-
creased product prices, decreased input prices, or improvements in econ-
omic efficiency. Often closures can be anticipated among older, smaller,
and less efficient plants as a result of economies of scale in pollution
control which would lower the overall costs to a larger operation. Since
the larger plants, whose unit pollution control costs are usually much
less, will be able to afford to sell at a lower price than the high-cost
plants, the high-cost plants will have no recourse other than to sell
11-13
-------
at the long run equilibrium price set by the low-cost plants. Conse-
quently in the long rim, it is expected that the older, smaller, less
efficient plants will eventually yield to the dominance of the larger
more efficient units. However, in the short run, it is always possible
that a plant may continue to operate even when economic considerations
indicate closure. Possible exceptions will occur to the extent that
smaller high cost plants are protected by regional markets and other
non-price impediments to competition from the larger low cost plants.
Employment. Impact Analysis
This analysis is concerned with estimating likely employment losses duo
to curtailed production and/or plant closures as a result of pollution
controls. If the actual plants which are expected to curtail production
end/or close can be identified, employment impacts can be estimated directly.
Otherwise the employment impact analysis involves the application of esti-
mates of employment changes by model plants. Employment changes in model
plants are then generalized according to the number of actual plants repre-
sented by the model plant and aggregated to derive an estimate of tote.":
employment effects for the industry. Employment dislocations will be noted
as appropriate.
Community Impact Analysis
This task is designed to identify potential impacts on local community
economies where the impacted plant might represent a major source of
employment and income. This analysis is based on a knowledge of the
location of plants, particularly threatened plants, and a general under-
standing of the economic base of those communities and the relative im-
portance of threatened plants to local economies.
Balance of Payments Impact Analysis
Balance of payments impact analysis deals with those products that have
competitive positions with regard to imports and exports. The analysis
considers whether or not the estimated price changes would hinder com-
petitive positions with regard to exports or increase foreign imports.
Where important, estimates on the amount of trade that potentially could
be impacted and total trade levels are presented.
Other Impact Analysis
Other potential impacts may be created by the imposition of pollution
control guidelines. This will likely be unique to given industries
requiring a case-by-case approach. An illustration of the possible type
of impact would be a plant that produces a critical intermediate, an input
for other industries. The loss of this plant or large price increases
could produce serious backward or forward effects on producers or consumers
To the extent additional impacts are identified and are important, these
will be noted.
11-14
-------
III. STRUCTURE OF THE INDUSTRY
The Census of Manufactures defines the Leather Tanning and Finishing
Industry (SIC 3111) as an industry comprised of establishments pri-
marily engaged in tanning, currying, and finishing hides and skins into
leather. The Census classifies the Leather Tanning and Finishing In-
dustry into three types of establishments. These include:
1. "Regular tanneries" - the regular tannery purchases raw
materials, employs production workers in the plant to tan,
curry and finish hides and skins, and sells the finished
product. In effect, this type of establishment performs
all of the usual manufacturing functions within one or-
ganization.
2. Converter - the converter typically performs only the entre-
preneural functions of the manufacturing concern such as
buying raw materials, and arranging processing with outside
factories, i.e., contract tanneries for the production of
the finished leathers. The actual tanning and finishing
of hides and skins is done on contract by the contract tanneries.
Thus these establishments do not generate an effluent and
as such, will not be required to meet pretreatment standards.
3. Contract tanneries - the contract tanner employs production
workers in his own establishment to process materials owned
by converters, makes products to specification but does not
become involved in the sale of the finished product.
It should be noted, however, that the above classification is not
mutually exclusive since some firms in the industry act as both regular
tanners, and leather converters or as regular tanners and contract tanners.
Included in the Census1 SIC 3111 industry are establishments that tan
leather, tan and finish leather, and only finish leather. Those establish-
ments which only finish leather essentially use little water and accordingly
generate litle, if any, wastewater. As this analysis is concerned with the
economic impacts of pretreatment controls on the industry, the primary
emphasis of this report will concern the "wet tanners", those that do
generate wastewaters.
Unfortunately most published data pertains to the entire Leather Tanning
and Finishing Industry. As such, it is difficult to delineate just the
relevant data for the wet tanners. When possible, distinctions between
the wet and dry process tanneries will be made, however, where no such
distinctions are possible aggregate data will be used.
III-l
-------
A. Industry as a Process
The Leather Tanning and Finishing Industry includes processing plants
primarily engaged in processing the raw animal hide into usable finished
leather. As mentioned previously, the industry is classified into three
types of establishments: (1) regular tanneries, (2) converter, and (3)
contract tanneries.
These tannery classifications help to provide an important link between
the raw hides and the Finished Leather Products Industry, by converting
the raw hides and skins into usable leather. The Leather Tanning and
Finishing represents one of six four-digit industries in the SIC 31A
Tanning; Industrial Leather Goods; and Shoes Industrial Group. A summary
of the Census of Manufactures data for SIC 31A provides a basis for com-
paring the Leather Tanning and Finishing Industry with other industries
in the SIC 31A group. This is depicted below.
Number of All Value Value of
SIC Description Establishments Employees Added Shipments
tOUOl"TOOU) ($OTT ($000)
3111 Leather Tanning and
Finishing 517* 25.7 368.3 1,059.5
3131 Boot and Shoe Cut
Stock & Findings 248 8.7 86.2 206.5
3142 House slippers 91 8.5 85.7 151.4
3143 Men's Footwear except
athletic 221 61.5 674.4 1,288.9
3144 Women's Footwear except
athletic 422 77.4 763.6 1,346.1
3149 Footwear, except rubber
N.E.C. 183 28.7 272.6 485.9
* Please note the 517 establishments reported here represent all
establishments included in the SIC 3111. Not all of these estab-
lishments are leather tanneries. This is discussed in detail in
Section B of this chapter.
As is shown in the summary, the Leather Tanning and Finishing Industry
is an important industry segment within the group. Exhibit III-l illus-
trates many of the interrelationships of the Leather Tanning and Finishing
Industry with regards to major supplier and customer industries. As is
shown, the Leather Tanning and Industrial Leathers account for approximately
55 percent of the Meat Packing Industry's hides and skins, with the remain-
ing 45 percent being exported. These hides represent approximately 39 percent
Ul-2
-------
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III-3
-------
of the Leather Industry's total expenditures. Other expenditures of the
Leather Industry include 42 percent of the total expenditures for mater-
ials, chemicals and processing costs and 19 percent for materials and
services provided by other establishments classified in the Leather
Industry.
With regards to the Leather Industry's total sales, 32 percent are to
establishments which produce other leather products, 19 percent are to
other establishments in the Leather Industry and 49 percent of the
Industry's sales are to the footwear, except rubber, manufactures. The
sale of leather to the footwear manufacture represent 40 percent of the
footwear manufactures' total expenditures.
Other interrelationships are also depicted in Exhibit III-l.
B. Characteristics of the Industry
The Leather Tanning and Finishing Industry consists of a wid° diversity
of types of firms. Firm ownership ranges from family-owned companies and
closely held corporations to divisions of relatively large conglomerations.
Tanneries vary considerably in size as well as tanning techniques for
tanning a variety of hides and skins into several distinct leathers.
Number of Tanneries
The U. S. Department of Commerce has reported the number of establishments
in the Leather Tanning and Finishing Industry as follows:
Number of Establishments
525
1967 519
1972 517
1973 490
1974 484
1975 441
Table III-l shows the total number of establishments in the Leather Tanning
and Finishing Industry by classification for 1967 and 1972. The Census
has used the primary plant operation as the delineating classification
criteria. If the direct wage and salary payments for one category were
less than the payments for the second, the plant was classified according
to the category in which the higher amount of wage and salary payments were
made. In 1972, 58 percent of the establishments were classified as tanneries,
15 percent as converters, and 27 percent as contract tanneries.
A tabulation by the Tanners' Council of America indicates a total of 431
plants (including converters) in the industry as of 30 June, 1973. Their
records also indicate a total of 19 plants (establishments) have ceased
III-4
-------
Table III-l. Total number of establishments in the Leather Tanning
and Finishing Industry by classification
Contract
Total Tanneries Converter Tanneries
1967
No. of establishments 519 314 70 135
With 1 - 19 employees 261 163 52 46
With 20 - 99 employees 171 91 13 67
With 100 employees or more 87 60 5 22
1972
No. of establishments 517 301 76 140
With 1 - 19 employees 294 154 64 76
With 20 - 99 employees 148 89 8 51
With 100 or more employees 75 58 4 13
Source: U.S. Department of Commerce, Census of Manufactures. 1967 and 1972.
III-5
-------
operations between the period of 1 July 1973 and 31 December 1975. This
would result in 413 plants being in operation at the end of 1975. It is
believed that the difference in the number of plants reflects a difference
in method of classification with the Department of Commerce data including
miscellaneous small operators, many of which would be classified as taxidermist
by the Tanners' Council rather than tanners or finishers.
To establish the number of wet tanneries in the industry an industry survey
was utilized based on an industry provided plant list. This approach re-
sulted in the determination that there are approximately 190 tanneries in
existence which generate wastewaters. The remainder of the industry's
establishment is believed to be finishers, converters and non-production
establishments (i.e., agents).
Size of Tanneries
Based on number of employees, an indication of plant size is available from
the Census of Manufactures (Table III-l). Plant size appears to have remained
relatively constant between the period of 1967 and 1972. In 1972, 57 percent
of the total plants had less than 19 employees. This is an increase from
50 percent in 1967. In 1972, 29 percent of the plants employed between 20
and 99 employees and 14 percent had 100 employees or more.
When the types of operation are compared on the basis of average plant em-
ployment between 1967 and 1972, we found that little change has occurred
in the tanneries while a shift from a higher number of employees to lower
numbers has occurred in the contract tanneries and converter segments.
Approximately 51 percent of the tanneries had less than 20 employees,
30 percent had between 20 and 99 employees, and 19 percent had one hundred
or greater employees in 1972. This is basically the same size structure
that existed in 1967. A marked increase took place in the 1-19 employment
classification for both converters and contract tanneries between 1967
and 1972. The converters had a ten percent increase in the number of
plants in the 1-19 employment class, with a moderate decline (8%) in the
20-49 class and a slight decline (2%) in the larger class. Contract tan-
neries had a larger increase in the 1-19 employment class (20%) and also
had larger declines in the 20-99 class (14%) and 100 and over class (7%).
When all operations are considered the size structure follows the pattern
depicted by the converters and contract tanneries; that is, an increase
in the number of small plants with employment between 1-19 (7%), and mod-
erate declines in the 20-99 employment class (5%) and 100 and over class
(2%).
The wet tanneries' respective size groupings are reported in a different
fashion. Instead of utilizing number of establishments for various em-
ployment groups, the wet tanners are disaggregated according to various
size categories of their daily capacity expressed in cattlehide equivalents.
These categories, as well as the number of associated wet tanneries, are
depicted below:
III-6
-------
Daily Capacity Number of Wet Tanners Percent
(cattlehide
equivalents) I/
Less than 300 48 25
300 - 699 45 24
700 - 1,199 39 21
1,200 - 1,999 33 17
2,000 or more 25 13
190 100
One cattlehide equivalent equals 40 square feet of leather.
As can be seen, the wet tanners are somewhat more evenly distributed
according to size than are the,establishments of the Census data. How-
ever, as was the case for the Census data, the smaller size categories
do represent a larger portion of the tanneries than the larger categories.
Types of Major Products
Six major categories of animal skins are used today in addition to im-
ported rare skins such as kangaroo, etc. They are as follows: cattle-
hides, kipskins and calfskins; sheep and lamb skins; goat and kidskins;
pigskins; horsehides; and deer and elk skins.
The products of the industry can be identified in traditional terms based
upon primary raw materials employed and end use.
CATTLEHIDES:
CATTLE SIDE LEATHER. This is the principal product of the
industry which accounts for approximately 67% of total in-
dustry sales. End use includesshoe uppers, linings, garments,
gloves, sporting goods, handbags, small leather goods, and waist
belts. Side leather is primarily chrome tanned.
CATTLE SIDE SPLIT LEATHER. Cattle side split leather is a by-
product of hides which is not processed in full thickness. Used
for shoe uppers, linings, insoles, work gloves, small leather goods,
handbags, protective industrial clothing. Chrome tanned; pro-
cessed by side leather tanners or sold to "split tanners" for
finishing into specialized products.
SOLE LEATHER. Almost entirely vegetable tanned. Major use is for
shoe soles. Secondary uses include welting, counters, box toes,
waist belts.
CATTLE SIDE PATENT LEATHER. Sub-class of chrome tanned cattle
sides finished with special compounds (polyurethanes) for glossy
surface.
KIP SIDE LEATHER. Leather tanned from kips which are small hides,
intermediate between calfskins and cattlehides. Used almost
entirely for shoe uppers.
III-7
-------
UPHOLSTERY LEATHER. Mainly vegetable tanned; some chrome retannage.
End use includes automotive and furniture upholstery.
HARNESS AND SADDLERY LEATHER. Composite group of the same plants
but possessing different characteristics useful for various parts
of equine equipage or related uses. (Collar, harness, skirting,
latigo, bridle, etc.) Also used for holsters, gun cases, etc.
SPORTING GOODS LEATHER. Combination tannages of chrome, vege-
table, alum, glutaraldehyde used for footballs, baseballs, base-
ball gloves and laces.
BAG, CASE AND STRAP LEATHER. Trade description for specialized
group of leathers which are vegetable,, chrome and combination
tanned. End use includes luggage, briefcases, small leather goods,
decorative items, equipment cases, straps, and heavy bookbinding.
MECHANICAL LEATHER. Vegetable, chrome and impregnated leather for
industrial uses including belting, gaskets, washers, seals for
equipment.
CALFSKINS. Chrome tanned leather from skins of immature cattle
used for shoe uppers and handbags. Volume is in sharp decline due
to shrinkage of raw material supply.
SHEEP AND LAMB SKINS:
Second largest raw material category. Chrome alum, oil and com-
bination tannages for garments, gloves, shoe uppers and linings
handbags and wallets, bookbinding and chamois.
GOAT AND KID LEATHER SKINS:
Chrome tanned in smooth or suede finish used for shoe uppers and
linings.
PIGSKIN:
Vegetable or chrome tanned shoe uppers, gloves, garments, and
small leather goods.
HORSE HIDES:
Chrome and vegetable processed for shoe uppers, garments, baseballs.
Cordovan is included in this group.
DEER AND ELK HIDES:
Chrome and vegetable tanned for gloves, garments, and to a minor
degree for shoe uppers (buckskin).
III-8
-------
MISCELLANEOUS AND EXOTIC LEATHERS:
Aggregate volume is minor and the number of producers in the U.S.
is less than 10. Products include Kangaroo for athletic shoe uppers,
reptile for shoe uppers, belts, and small leather goods, Peccary
and Carpincho for gloves.
In summary, cattlehides are the dominant raw material of the industry
with the major products of Cattle Side leather, Sole leather, Upholstery,
Garment and Bag, Case & Strap leathers. Sheep and Lamb skins are the
second and much smaller raw material base yielding mainly garment and
glove leather, lining and shoe stock, chamois and leather for small
leather goods.
Value of Shipments
Value of shipments and other receipts of the Leather Tanning and Finishing
Industry in 1972 totaled $1,059.5 million. This included shipments of
tanned and finished leather (primary products) valued at $1,018.2 million,
shipments of other products (secondary products) valued at $11.2 million,
and miscellaneous receipts (mainly resales) valued at $30.1 million.
Estimates of the 1976 value of shipments are expected to total $1200
million, 7.9 percent above the shipments of 1975 and 13.3 percent above
the 1972 value of shipments (Table III-2). Historically the value of
shipments have fluctuated from year to year, however, the overall average
annual increase has been 2.9 percent since 1960.
Shipments of tanned and finished leather (primary products) in 1972
represented 99 percent (specialization ratio) of the industry's total
product shipment. The industry specialization ratio in 1967 was 98
percent. Secondary products shipped by the industry in 1972 consisted
mainly of boot and shoe cut stock and findings ($2.5 million).
Shipments of tanned and finished leather from establishments classified
in industry SIC 3111 in 1972 represented 99 percent (coverage ratio) of
these products valued at $1,026.4 million shipped by all industries.
In 1967, the coverage ratio was also 99 percent. Thus for all practical
purposes, it can be concluded that all establishments of tanning and
finishing leather are classified in industry SIC 3111.
Location of Tanneries
Leather tanning and finishing establishments tend to be concentrated in
the Northeastern region of the country. As shown in Table III-3, 62 per-
cent of the total number of establishments were located in the area in 1972.
Massachusetts ranked first, in total number of plants; New York second;
and New Jersey third, with 25, 19, and 8 percent respectively.
The second area of concentration is the East North Central region with
Wisconsin reporting 22 plants or 4.3 percent of the total. Other states
of importance in this region include Ohio, Illinois, and Michigan. The
remaining plants are scattered widely throughout the United States.
III-9
-------
Table II1-2. The Leather Tanning and Finishing Industry, Value of
Shipments, 1960 to 1976
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976 */
Value of
shipment
(mil. $)
790.7
761.1
765.9
758.4
783.6
856.7
940.5
870.1
877.9
853.9
794.4
838.3
1,059.5
1,082.0
980.0
1,105.0
1,200.0
Percentage
change
(%)
__
-3.7
-0.6
-1.0
3.3
9.3
9.8
-7.5
0.9
-2.7
-7.0
5.5
26.4
2.1
-9.4
12.8
7.9
*/
Estimated
Source: Department of Commerce, Bureau of the Census and Bureau of
Labor Statistics, BDC.
111-10
-------
Table III-3. Location of Leather Tanning and Finishing establishments by primary state and region, 1967, 1972
1967
Total Industry
Region
Northeast Region
New England Division
Maine
New Hampshire
Vermont
Massachusetts
Other
Middle Atlantic Division
New York
New Jersey
Pennsylvania
North Central Region
East North Central Division
Ohio
Illinois
Michigan
Wisconsin
Other
West North Central Division
Minnesota
Missouri
Iowa
Other
South Region
South Atlantic Division
Delaware
Maryland
Virginia
West Virginia
North Carolina
Georgia
Other
East South Central Division
Kentucky
Tennessee
Other
West South Central Division
Texas
Other
West Region
Pacific Division
California
Other
TOTAL
Number
183
16
18
1
146
2
175
108
48
20
74
12
19
10
30
3
13
2
6
NA
5
26
6
2
4
4
2
2
6
12
3
9
9
7
2
26
15
11
519
Percent
35.3
3.1
3.5
0.2
28.1
0.4
33.9
20.8
9.2
3.9
14.2
2.3
3.6
1.9
5.8
0.6
2.6
0.4
1.2
NA
1.0
5.0
1.1
0.4
0.8
0.8
0.4
0.4
1.1
2.3
0.6
1.7
1.7
1.3
0.4
5.0
2.9
2.1
100.0
Establishments with
20 or More Employees
Number
93
14
15
1
62
1
68
30
25
13
51
7
12
5
24
3
7
1
5
NA
1
18
6
1
4
4
2
1
0
10
3
7
2
2
0
9
8
1
258
Percent
36.0
5.4
5.8
0.4
24.0
0.4
26.4
11.6
9.7
5.1
19.8
2.7
4.7
1.9
9.3
1.2
2.7
0.4
1.9
NA
0.4
7.0
2.3
0.4
1.6
1.6
0.7.
0.4
3.9
1.2
2.7
0.8
0.8
3.5
3.1
0.4
100.0
1972
Total Industry
Number
324
163
15
19
1
128
161
98
43
20
84
62
8
19
8
22
5
22
4
NA
6
12
59
27
2
1
5
4
5
2
7
12
3
8
1
20
15
5
50
42
33
9
517
Percent
62.7
31.5
2.9
3.7
0.2
24.7
31.1
19.0
8.3
3.9
16.2
12.0
1.5
3.7
1.5
4.3
1.0
4.2
0.8
NA
1.1
2.3
11.4
5.2
0.4
0.2
1.0
0.8
1.0
0.4
1.4
2.3
0.6
1.5
0.2
3.9
2.9
1.0
9.7
8.1
6.4
1.7
100.0
Establishments with
20 or More Employees
Number
132
78
10
14
1
53
54
26
15
13
48
39
4
10
4
19
2
9
2
NA
4
3
27
14
2
1
3
4
2
1
1
10
3
7
NA
3
3
NA
16
14
13
1
223
Percent
59.2
35.0
4.5
6.3
0.4
23.8
24.2
11.7
6.7
5.8
21.5
17.5
1.8
4.5
1.8
8.5
0.9
4.0
0.9
NA
1.8
1.3
12.1
6.3
0.9
0.4
1.3
1.8
0.9
0.4
0.4
4.5
1.3
3.2
1.3
1.3
7.2
6.3
5.8
0.5
100.0
NA - Not Available
Source: U.S. Department of Commerce, Census of Manufactures. 1967 and 1972.
III-ll
-------
Historically, tanneries were established where there was an adequate
supply of hides, water and tanning materials (i.e., tree bark). This
began in New England and the Mid-Atlantic states and followed the cattle
herds west, though with a long time delay. As indicated above, tanneries
are still located in New England and Chicago as well as in the dairy country
of Wisconsin. However, with the recent spatial dispersion of slaughter
facilities away from the traditional centers such as Chicago and Kansas
City, it is expected that in time new tanneries will follow the same trend
and locate near the supply of hides.
The locations of all the wet tanneries are difficult to pinpoint as
adequate data are not presently available. However, based on the re-
sponses of 168 of the 190 wet tanners, 54 percent were located in the
New England states; 10 percent were located in the Southern states;
25 percent were located in the Midwest; and the remaining 11 percent
were located in the Western and Southwestern states.
If these percentages are extrapolated for all 190 wet tanneries, the
locational breakdown appears as follows:
Area Number of Wet Tanneries
New England 103
South 19
Midwest 47
West and Southwest 21
Total 190
Age of Plants and Level of Technology
The Leather Tanning and Finishing Industry can be described as having
basically old plants in terms of actual brick and mortar with slightly
over 70 percent of the plants 50 years of age or older. From the member-
ship records of the Tanners' Council, the age of tanning and/or finishing
leather plants, excluding converter, is as follows:
Percent of Members
Less than 10 years 1
10-15 years 1
15-20 years 3
20-30 years 5
30-50 years 19
Over 50 years 71_
Total 100
Although the majority of industry units are in old buildings, a substantial
number of plants have been rebuilt, modernized and re-equipped at a cumu-
lative cost approaching the capital investment required for new plants.
111-12
-------
In a previous report developed for EPA, I/ tanneries were categorized
with respect to their level of technology. The technological levels
considered were older, prevalent and new, i.e., 1950, 1963 and 1967
vintage respectively. Using this classification scheme, 20 percent of the
tanneries were placed in the older category and the remainder categorized
in the prevalent or new category. Thus while the tanneries themselves
may be older, it is obvious that from a technological standpoint, they
are relatively modern. Finally, it should be noted that while a majority
of the tanneries have technological levels of 1963 or later, the tanning
technique has not changed significantly; instead the process is being
performed utilizing newer equipment.
C. Importance of Integrated Capacities
The industry is not characterized by any appreciable integration either
back to the raw material supply or forward to finished or fabricated
leather products. There is, in fact, less integration today than several
years ago when two major packers owned tanning facilities and four leading
shoe manufacturers operated tanneries. In 1973, the only known firm that
had integrated toward the raw material was A. C. Lawrence Leather Company
(Swift) and during 1974 it was sold by Swift to its employees. Armour and
Company, which had operated the Armour Leather Company for two generations,
sold its leather subsidiary and liquidated all leather operations.
With regard to forward integration, the Brown group (Brown Shoe) still
operates a tannery as does Genesco, both of which manufacture shoes. How-
ever, other shoe manufacturers such as Endicott, Johnson, Wolverine, and
Interco have sold or liquidated all tanning enterprises. A few tanneries
are associated with the leather garmet industry (e.g., Sawyer Tanning
Company), however, these types of arrangements are not common. It is
estimated that the sales volume of tanning or finishing establishments
integrated with raw material producers is very small, less than five per-
cent of gross annual volume. Leather tanning facilities owned or operated
by manufacturing companies account for equally as small percentage of
leather sales or value.
' Urban Systems and Engineering, "The Leather IndustryA Study of the
Impact of Pollution Control Costs," December, 1971.
111-13
-------
D. Level of Diversification
The Census of Manufactures shows the Leather Tanning and Finishing Industry
with a very high specialization ratio of 99 percent for 1972. This indi-
cates that 99 percent of sales are in the primary SIC code. The typical
production unit of the industry is not diversified for two main reasons.
First, tanning equipment and processes are specialized and non-interchange-
able in terms of raw materials or end product. For example, equipment
suitable for tanning and finishing skins cannot be used for hides. Hence,
most plants have confined production to a very limited range of product.
Second, shoe manufacturing has been and still is the principal consuming
industry. In 1962 shoes accounted for 83 percent of all leather used.
By 1972 this ratio had declined to 74 percent, and tanneries were seeking
to diversify output. Cattle side leather plants entered the garment
leather market and sought outlets in waist belts, handbags or small
leather goods. However, this trend does not reflect diversification of
basic product line. It indicates rather, an effort to adapt available
plants and equipment to moderately different needs of end uses other than
shoes.
A further observation is pertinent. Tanning machinery and equipment
cannot be adapted for any purpose other than treating hides and skins.
It is fixed capital which must be written off at scrap value in the
absence of demand for used machines.
E. Employment Characteristics
Employment
Total employment within the Leather Tanning and Finishing Industry has
decreased by over 31 percent since 1965 from 32,000 employees in 1965
to 22,000 employees in 1975 (Table III-4). Employment was up in 1975
from an eleven year low of 21,000 in 1974. Of the total employees in
1975, production workers represented approximately 86 percent or about
19,000 individuals. Since 1965, the number of production workers in the
industry has declined by nearly 32 percent from 27,900 in 1965 to 19,000
in 1975.
The Leather Tanning Industry employs unskilled, semi-skilled and skilled
labor dependent on the requirement of the task being performed. Tanneries
can be either union or non-union shops with the number of tanneries in
each category being about equal.
Production workers average approximately 1900 hours per year which repre-
sents 230 to 250 employed days per year. With respect to the production
workers productivity, Table III-4 depicts the average number of hours
required to produce one cattlehide equivalent. As shown in the table,
this productivity measure has varied from year to year but has remained
reasonably close to 1.7 hours per hide since 1965.
111-14
-------
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-------
Level of Wages
In 1973, the latest data available, the total industry's payroll amounted
to $186.5 million. The total wages paid to production workers for the
same year totaled $138.2 million or about 74 percent of the industry's
total payroll.
Annual wages per production worker averaged $6,980 in 1973 which repre-
sented an increase of 40 percent since 1965. During this same period,
the average hourly rate increased by 50 percent from $2.44 per hour in
1965 to $3.66 per hour in 1973.
F. Ownership Type and Size
The Leather Tanning and Finishing Industry consists of a wide diversity
of types and sizes of firms. Firm ownership ranges from family owned
companies and closely held corporations to divisions of large conglomerates.
However, the majority of the tanneries would fall into the family-owned
or closely held corporation group. This is attributable to the fact that
most tanneries are relatively small and were established years ago by
either a family or a small group of individuals who have remained in
control of the operation.
G. Industry Segments
The Leather Tanning and Finishing Industry has traditionally been seg-
mented by type of leather manufactured such as cattlehide leathers, sheep
and lamb skins, goat skins, etc. Most of the industry production data
are given in these terms. However, categorization of the industry by
manufacturing processes is more appropriate for evaluating the imposition
of pretreatment control on the industry since a major factor affecting
the waste production in the leather industry is the type of manufacturing
process used to convert the various types of animal skins to finished
leathers.
The following material discusses industry segments using two taxonomies:
(1) conventional industry segments, and (2) categorization of plants by
manufacturing process.
Conventional Industry Segments
Cattlehide leathers accounted for 81.3 percent of the total 1972 production
in the leather tanning and finishing industry. The major use of cattlehide
leathers is side and patent leather used for shoe uppers. This accounted
for 48 percent of total leather or 59 percent of the cattlehide processed.
Sheep and lamb skins were the second most important with approximately
10 percent of the 1972 production (Table III-5).
Categorization of Plants by Type of Manufacturing Process
For the purposes of establishing effluent limitation guidelines and
standards of performance, the Leather Tanning and Finishing Industry has
been divided into seven major categories. These categories have been
developed by the North Star Division of Midwest Research Institute prin-
cipally by similarities in process and wasteloads. The industry categories
are:
111-16
-------
Table II1-5. Percent of production and employment by conventional
industry segment, 1972.
Industry Segment
Cattlehide Leathers
Side and Patent
Sole and Belt
Upholstery
Split Leather
Harness
Bag, Case & Strap
Other!'
Calf Leather
Goat and Cabretta
Sheep and Lamb
Pig
All Other U
Converters
Percent
of industry
production
81.3
47.8 -
9.4
4.7
10.9
0.1
1.8
6.6
1.1
2.3
10.3
4.6
0.4
n. a.
100.0
Percent
of industry
employment
80.7
52.6
11.4
6.9
5.3
4.5
2.0
1.8
7.7
4.5
3.3
n. a.
100.0
II
2/
Includes sporting goods and mechanical
Includes horse, kangaroo, deer, reptile and exotic types,
Source: Tanners' Council of America, Inc.
111-17
-------
1. Cattle-pulp-chromea tannery that primarily processes raw
or cured cattle or cattle-like hides into finished leather,
chemically dissolves the hide hair, and uses chrome tanning.
2. Cattle-save-chromea tannery that primarily processes raw or
cured cattle or cattle-like hides into finished leather, with
at least a portion of the hide hair loosened and removed as a
solid and then discarded or saved, and uses chrome tanning.
3. Cattle-nonchrome--a tannery that primarily processes raw or
cured cattle or cattle-like hides into finished leather using
less than 20 percent (by hide weight) chrome tanning; includes
vegetable, alum, syntans, oils, and other methods and their
combinations.
4. Thru-the-bluea tannery that primarily processes raw or cured
cattle or cattle-like hides through the blue-tanned state only,
with no retanning or finishing operations, and uses chrome
tanning.
5. Retan only--a tannery that primarily processes previously tanned
hides and/or skins (including splits) into finished leather, the
major wet process consisting of retanning, coloring, and fat-
liquoring.
6. No beanhouse (NB) tannerya tannery that primarily processes
hides and/or skins, with the hair previously removed, into
finished leather using either chrome or nonchrotne tanning
methods, primarily includes pickled sheepskins and cattlehides
and pigskins.
7. Shear!irigs--a tannery that primarily processes raw or cured
sheep or sheep-like skins, with the wool or hair retained on
the hide, into finished leather using chrome or nonchrome
tanning; or, a wool pullery--a plant that processes hair-on
raw or cured sheep or sheep-like skins by first removing the
wool and then pickling the skin for use by a sheepskin tannery
(Category 6).
A brief description of the major processes are given here. More detailed
descriptions are available in published technical descriptions of the
tanning and finishing processes.
The major processes are:
1. BEAMHOUSE
This is a generic term for all the initial stages of process
after raw hides and skins are received at the tannery. The
beamhouse entails large use of water and is a major source of
tannery waste loads.
111-18
-------
2. TANYARD
The series of steps by which putrescible hides and skins are
converted into stable, non-putrescible leather utilizing
aqueous solutions containing various chemical agents. Also
marked by substantial water use and waste discharge.
3. RETANNING, FAT LIQUORING AND COLORING
In these process stages the specified physical properties of
leather are adjusted and set prior to surface treatment. Water
usage and waste loads are substantially reduced from the pre-
vious steps and processes.
4. FINISHING
Devoted largely to surface appeal and characteristics. Unimportant
with respect to use of water and waste loads.
Table III-6 depicts an estimation of the number of wet tanneries by size
and by general categories. Because of the limitations of available data
no further breakdown of the tanneries by category could be realistically
attempted.
It should be noted the number of tanneries depicted in Table II1-6 represent
all wet tanneries, including those which do not discharge to a publically
owned treatment works (direct dischargers). At the present there are 20
known direct dischargers and these tanneries will not be directly affected
by pretreatment controls.
Of the 20 direct discharging tanneries, ten are believed to be cattle
chrome tanneries, eight are believed to be cattle vegetable tanneries, and
two are sheep tanneries.
111-19
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111-20
-------
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY
Information reflective of the financial characteristics of the Leather
Tanning and Finishing Industry is particularly difficult to obtain. The
industry primarily consists of family-owned businesses or relatively small
privately-held corporations. As such, published information regarding
the financial position of the industry are not readily available. Limited
data are available from the Internal Revenue Service but these data are
relatively old (1972-73) and represent the aggregated Leather and Leather
Products Industry. Some more recent data are available from Robert Morris
Associates' Statement Studies, but these reflect 1974 conditions and
represent financial information from only 31 different statements.
Information used to develop this chapter on the financial profile of the
industry draws on the above named sources where applicable. Additional
information was obtained from the U.S. Department of Agriculture, U.S.
Department of Commerce, responses to the data collection portfolio as
well as discussions with persons knowledgeable of the Leather Tanning
and Finishing Industry.
A. General Financial Situation
The Leather Tanning and Finishing Industry in the United States has
experienced a somewhat volatile financial situation in recent years.
The industry declined steadily in terms of number of plants, volume and
profits from the mid'60's on and reached a low in 1972 and 1973. Be-
ginning in 1974 and continuing through 1975 the industry experienced a much
brighter market situation. This optimistic situation continued through
early 1976 but then deteriorated during mid year. During the later part
of 1976 the industry outlook varied firm by firm. Several firms felt the
market was picking up somewhat, but yet other firms were uncertain as
to their respective expectations.
The volatility of the industry varies from firm to firm as well as dif-
fering for the various types of tanneries and their respective leather
products. Causes of this volatility are primarily resultant of changes
in ^he volume of leather sold as well as competition from foreign countries
for both raw hides and the market for leather and leather products.
With the exception of 1968, the United States Leather Industry's total
production declined every year from 1965 to 1974, decreasing from 32.7
million cattlehide equivalents in 1965 to 20.0 million in 1974 (Table IV-1),
Only in the years 1968 and 1975 did the industry increase its annual pro-
IV-1
-------
Table IV-1. The Leather Tanning and Finishing Industry, Production and
Import and Export Trends, 1965-1975.
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Source:
Total
Industry,,
Producti on
1000
Equivalent
Hides
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21 ,894
Tanners' Council
Value of
Indust^,
Shipments-
1000
Dollars
857,000
940,000
870,000
878,000
854,000
794,000
838,000
1,060,000
1,082,000
980,000
1,105,000
of America, Inc.
Value of
Leather,
Imports-'
1000
Dollars
66,998
74,996
68,045
81 ,429
85,805
87,384
83,273
138,795
127,381
124,513
87,953
and
Value of
Leather,
Exports-
1000
Dollars
39,474
41,583
42,321
45,324
41,586
36,736
42,832
66,706
82,914
102,116
140,497
-' U.S. Department of Commerce
IV-2
-------
duction over the previous year. In 1975, the annual production increased
by 9.5 percent over the 1974 quantity produced and according to the U.S.
Department of Commerce 1976 production is expected to equal 23.0 million
hide equivalents, or an increase of 5.1 percent over the 1975 production.
As shown in Table IV-1, the industry's value of shipments have been much
more volatile than the annual production quantities. From 1966 to 1970,
the industry's value of shipments generally declined. Shipments then
increased from 1971 to 1973; decreased in 1974; and then increased in
1975. Again according to the U.S. Department of Commerce, the value of
shipments for 1976 are expected to increase, from $1105 million in 1975
to $1200 million in 1976, an increase of 8.6 percent.
The recent upturn in the economic condition may be attributed primarily to
the increase in consumer demand for natural leather and leather products.
This has been dampened by the influence of foreign tanneries on domestic
supply of raw leather and further expansion of imported leather products
to the United States.
Over the past decade consumer acceptance of synthetics as a substitute
for leather particularly for womens1 and childrens' shoes and handbags
has become particularly widespread. Also the decline of leather soles
has dropped to 13 percent of the shoes manufactured in 1975. As a result
a significant portion of the market previously held by leather was lost
to synthetic products. During the past few years, consumers have developed
an increased appreciation for natural leather products. Accordingly
leather increased its share of the appropriate products' market. However,
this increase was not totally absorbed by the United States tanners as
much of this increased demand was met by imported leather and leather
products.
As shown in Table IV-1, the value of leather imports steadily increased
from 1965 to 1971. In 1972 the value of imports increased by 66 percent
over the value of imports in 1971. Much of this increase was absorbed
by the increased demand created by the greater appreciation of leather
by consumers mentioned above. After 1972, the value of leather imports
slowly declined with a significant, 29 percent, drop between 1974 and
1975. When these trends are compared to the total industry production
it becomes apparent the values of leather imports are to a degree inversely
related to the total industry production. That is, while the values of
imports increased, the total domestic production of the industry decreased.
Thus the Leather Industry's volume of production has fluctuated in recent
years with the major cause being competition from foreign tanners.
IV-3
-------
B. Cost Structure of the Industry
Revenues
For 1976, the Leather Tanning and Finishing Industry is expected to have
shipments valued at $1200 million (Table IV- 2). This estimate represents
an increase of nearly 9 percent over the value of shipment for 1975.
Historically the industry's values of shipments have fluctuated from
year to year, however, since 1970, shipments have increased for every
year except 1974 at which time shipments decreased 9.4 percent over the
value in 1973.
As can also be seen in Table IV- 2 the industry's production has experienced
a decreasing trend in most years. Accordingly the industry's values
of shipment were adjusted to reflect real dollars by utilizing the GNP
Implicit Price Deflator. When expressed in this fashion, the industry's
values of shipment reveal a more definite declining trend. This decline
in the industry's production as well as the decline in the industry's
adjusted value of shipments is attributed to a variety of factors with
the most significant being demand lost to foreign tanners.
The 1975 value of shipment for the industry was based on information
provided by 441 establishments. This gives the value of shipment for the
average tannery to be $2.5 million with the average annual production
being 50,000 cattle hide equivalents (Table IV- 3). This compares to an
average value of shipments of $2.0 million in 1972 and $1.7 million in
1967. Average production per establishment was 48,000 hide equivalents
in 1972 and 59,000 in 1967.
Variable Costs
Within the Leather Tanning Industry, variable cost represent approximately
80 percent of the total sales. These costs include expenditures for raw
hides and/or skins, labor, tanning materials, and miscellaneous other
direct costs. According to a survey of the industry, hides and skins
represent 37.2 percent of the sales dollar, tanning materials, 14.3
percent, labor, 15.1 percent and miscellaneous expenditures, 12.4 percent.
These sum to 79 percent of the sales dollar.
The only time series available depicting the distribution of the sales
dollar is available from the Department of Commerce and is somewhat
limited in its disaggregation. These data are shown in Table IV- 4 and as
can be seen in the table, since 1970, raw materials have represented an
increasing portion of the sales dollar. This is attributed to the
significant higher cost of raw hides relative to other costs. Other
costs have accordingly declined.
IV-4
-------
Table IV-2. The Leather Tanning and Finishing Industry, Production and
Value of Shipments, 1965 to 1976.
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
19752/
1976-'
Production
1000
Equiv. Hides
32,697
32,252
30,861
31 ,884
28,388
25,941
25,267
24,661
21,062
19,998
21 ,894
23,000
Current
Value of
Shipments
Million
Dollars
857
940
870
878
854
794
838
1060
1082
980
1105
1200
Real
Value of, ,
Shipments-
Million
Dollars
1153
1225
1101
1063
985
869
873
1060
1021
843
875
897
' Shipments adjusted by the GNP, Implicit Price Deflator, Total
GNP, 1972 = 100.
- Estimated
Sources: U.S. Department of Commerce and Tanners Council of America, Inc.
IV-5
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IV-6
-------
Table IV-4.
The Leather Tanning & Finishing Industry, Distribution of
the Sales Dollar.
TOTAL
SALES
1965
1966
1967
1968
1969
1970
1971
1972
1973
Million
Dollars
856.7
940.5
870.1
177.9
853.9
794.4
838.3
1059.5
1081.5
Percent
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
RAW
MATERIALS
Mi 11 i on
Dollars
535.6
614.1
547.0
524.5
514.9
471.4
498.5
708.0
744.3
Percent
62.5
65.3
62.9
59.8
60.3
59.3
59.5
66,8
68.8
PAYROLL
Million
Dollars
180.0
189.2
186.4
196.0
188.1
171.5
183.9
200.0
186.5
Percent
21.0
20.1
21.4
22.3
22.0
21.6
21.9
18.9
17.3
OTHER INDIRECT
OPERATING COSTS,
TAXES & PROFITS
Mi 11 i on
Dollars
141.1
137.2
136.7
157.4
150.9
151.5
155.9
151.5
150.7
Percent
16.5
14.6
15.7
17.9
17.7
19.1
18.6
14.3
13.9
Source: Department of Commerce, Bureau of the Census, Census of Manufacturers.
IV-7
-------
Fixed Costs
Fixed costs are defined as those which do not vary directly as functions
of through put. These include:
Sales, general and administrative
Plant and labor overhead
Taxes and insurance
Maintenance and repair
Data are not available to discuss each of the above costs separately,
therefore, fixed costs were grouped. Fixed costs vary from firm to firm
however they usually represent 10 to 15 percent of sales.
Interest is considered a fixed cost although it is somewhat influenced
by the total sales. For the Leather Industry interest usually amounts
to 1 to 2 percent of sales. As shown in Table IV-5, interest costs vary
with different sizes of operations. Although there are exceptions, it
appears that the larger sized tanneries have a greater portion of their
sales dollar consumed by interest.
Depreciation is also considered a fixed cost. Typically it represents
between 5 and 10 percent of the firms total fixed assets. This would
represent an expected asset life between 10 and 20 years.
C. Industry Profitability
The Leather Tanning Industry in the United States experienced some rather
difficult times during the early 1970's. This was praticularly true
for 1972 and 1973. This was the result of the rapid rise in the price
of hides and the tremendous increase in cattlehide exports. Between
1970 and 1973, 31 tanneries discontinued operations and total movement
of cattlehides to tanners dropped from 19.2 million hides in 1972 to
17.7 million in 1973.
Since 1973, the industry performance has been considerably brighter.
Demand for leather has been up and the long run picture appears to be
very strong. The export of raw hides has stabilized and even decreased
during 1975. Also the industry has been successful over the past couple
of years in substantially increasing the quantity of finished leather
that is exported. The present supply of cattlehide is up and the future
of cattlehides appears to be strong after a serious setback in total
hides produced in 1973.
Net Profits on Sales
Net profits, before taxes, expressed as percentages of sales, are depicted
in Table IV- 6 for the years between 1970 and 1975. As can be seen in
the table prior to 1974, the industry's profits were relatively stable
IV-8
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IV-9
-------
Table IV-6. The Leather Tanning Industry Profitability, 1970-1975.
Year
1970
1971
1972
1973
1974
1975
Profits Before
Tax as Percent
of Sales
(%)
2.2
2.4
2.5
1.9
6.0
6.7
Percent Profits
Before Tax
to Worth
(%)
N.A.
N.A.
,10.0
14.1
12.7
17.9
Cash Flow
as Percent
Sales
(*)
4.7
4.0
4.4
2.9
N.A.
N.A.
Source: 1970 & 1971, Department of the Treasury, Internal Revenue Service,
Source Book of Statistics of Income, Annual
1972 to 1974, Robert Morris Associates, Statement Studies, Annual
1975, Industry Survey.
IV-10
-------
but yet quite low. As was explained above, 1973 was considered a
particularly bad year for the industry and accordingly profits that year
represent the poorest earned during the six year period. The recent
increased demand for leather products as well as the improvements in the
industry's raw hide supply are significant factors in the industry's
improved profitability during 1974 and 1975.
When the Leather Industry's profitability is viewed for various sized
operations it becomes apparent the medium and large tanneries tend to
be more profitable than the smaller operations (Table IV- 7 ). This may
reflect some economics of scale, however it should be noticed that the
profits of the largest size category in Table IV- 7 are consistently
less than the next smaller size category. Thus, while economies of scale
may be important, other factors such as effective management may have
more influence.
Return on Investment
Consistent information regarding the industry's return on investment
is difficult to obtain. However as reported in Robert Morris, Statement
Studies, the industry's return appears to have been between 10 and 15
percent during the 1972 to 1974 time period. In 1975, the industry's
return was determined to be 17.9 percent.
The relatively high returns experienced during the years 1972 and 1973
reflect the depreciated state of the industry which has resulted in the
industry's investments to be much smaller than would be normally required.
Cash Flow
Cash flow represents the cash that is actually available for distribution,
retention or use in acquiring additional assets. Utilizing data repre-
sented also in Table IV- 6 , it has been determined that cash flows as
a percent of sales were relatively small during the period 1970 to 1973.
While data are not available for 1974 or 1975, it would be probably that
the increased profits would result in substantially higher cash flows.
IV-11
-------
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VI-12
-------
D. Financial Structure of the Industry
Assets
Leather Tanning and Finishing can be considered a raw materials oriented
industry as tanners must maintain relatively large quantities of hides
and skins which represent a major component of the firms' capital re-
quirements. As shown in Table IV-8, current assets have represented
between 61 and 75 percent of the industry's total assets between 1969
and 1975. This reflects the large capital requirement tanners incur to
maintain adequate supplies of raw hides and skins as well as the capital
represented by in-process leather.
Fixed assets of the industry represent the conventional elements in
every manufacturing or processing industry, i.e., the plant, land and
equipment. In terms of the total assets, fixed asset requirements are
relatively small. This does not imply that the industry requires rela-
tively few fixed assets. Instead it reflects the significant amount of
capital required for hides as well as the fact that most tanneries are
older facilities and accordingly the costs of the fixed assets are signi-
ficantly less than if they were recently acquired.
The distribution of assets does vary between the various sizes of tanneries.
As shown in Table IV-9, the smaller tanneries reflect a lower proportion
of the total assets as fixed assets than do the larger tanneries. This may
be explained by the fact that the larger facilities are often newer, or at
least more modern, which represents capital expenditures proportionately
higher than those incurred by the older, smaller facilities.
Liabilities
Liabilities of the Leather Tanning Industry have been classified into two
basic categories: (1) current, or short term liabilities, and (2) long
term debt. The industry has maintained a much higher portion (approximately
two-thirds) of its total liabilities in the form of short term liabilities
as can be seen in Table VI-8. These short term liabilities typically repre-
sent accounts payable, unpaid wages, and minor plant and equipment maintenance
and replacement expenses. When expressed as a percent of the total assets,
current liabilities represent approximately 30 percent (Table IV-8).
Long term debt within the Leather Industry represents approximately 20
percent of the industry's total assets and one-third of the industry's
total liabilities. The somewhat low proportion of long term debt reflects
the relative age of the industry as most of the facilities and equipment
were purchased many years ago and thus have been paid for or at least
represent a lower purchase price than obtainable today.
Most of the industry's long term debt represents the debts of a few newer
tanneries as well as debts incurred by older tanneries modernizing or
expanding.
IV-13
-------
Table IV-8. The Leather Industry Assets, Liabilities
and Equity, Selected Years
1
Assets
Current Assets
Fixed Assets
Total Assets
Liabilities and Equity
Long Term Debt
Current Liabilities
Net Worth
Total Liabilities &
Equity
969
70
30
100
19
28
53
100
Source: 1968-1972, Department
Book of Statistics of
1970
66
34
100
17
32
51
100
1971
61
39
100
15
27
58
100
of the Treasury,
Income, Annual 1
1972
70
30
100
13
29
58
100
Internal
973 & 1974
1973
69
31
100
16
35
49
100
Revenue
, Robert
1974
75
25
100
17
33
50
100
Service,
Morris I
1975
65
35
100
11
28
61
100
Source
\ssocia
Statement Studies, Annual 1975, DPRA Survey, 1976.
IV-14
-------
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IV-15
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When the industry's liability structure is viewed with respect to size
(Table IV-9) it becomes apparent the larger tanneries have a much
more sizeable long term debt proportion of total liabilities than the
smaller tanneries. Furthermore, the larger tanneries maintain a relatively
low overall liability commitment (33 percent of total assets) than do the
smaller tanneries (67 percent of total assets).
Net Worth
The net worth of the industry is defined as its total assets less its
total liabilities. Thus the net worth represents what portion of the
industry's assets are owned by the industry. Since 1969, the net worth,
expressed as a percent of total assets, has varied. However, it has
usually remained near the 50 to 60 percent range. These percentages
would result in a debt to equity ratio of 0.8 to 1.0.
Net worth, when viewed with regards to tannery size, appears to be larger,
when expressed in terms of total assets, for the larger sized tanneries
than for the smaller tanneries (Table IV-9). This would imply that the
larger tanners are less dependent on creditors for providing funds either
for normal operations or capital improvements.
E. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U. S. business.
It provides both a measure of actual performance of a firm as well as
expected performance. In this latter case, it is also called the cost
of capital. The cost of capital is defined as the weighted average of
the cost of each type of capital employed by the firm, in general terms
equities and interest bearing liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The cost of capital was determined for purposes of this analysis by esti-
mating performance measures of the industry. The weights of the two
respective types of capital for the Leather Tanning Industry were esti-
mated at 39 percent debt and 61 percent equity. The cost of equity was
determined from the ratio of earnings to net worth and estimated to
be 12.3 percent.
To determine the weighted average cost of capital, it is necessary to
adjust the before tax costs to after-tax costs (debt capital only in
this case). This is accomplished by multiplying the costs by one minus
the tax rate (assumed to be 48 percent). These computations are shown
below and result in the estimated after-tax cost of capital being 9.2
percent.
IV-16
-------
Before Tax After Weighted
Item Weight Tax Cost Rate Tax Cost Cost
Debt .39 9.0 .48 4.3 1.7
Equity .61 12.3 7.5
9.2
F. Assessment of Ability to Finance New Investment
Financing New Investment
The ability of a firm to finance new investment for pollution abatement
is a function of several critical financial and economic factors. In
general terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources; (2) equity capital
through the sale of common or preferred stock; (3) internally generated
fundsretained earnings and the stream of funds attributed to deprec-
iation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For
debt financing, the firm's credit rating, earnings record over a period
of years, stability of earnings, existing debt-equity ratio and the lenders'
confidence in management will be major considerations. New equity funds
through the sale of securities will depend upon the firm's future earnings
as anticipated by investors, which in turn will reflect past earnings
records. The firm's record, compared to others in its own industry and
to firms in other similar industries, will be a major determinant of the
ease with which new equity capital can be acquired. In the comparisons,
the investor will probably look at the trend of earnings for the past
five or so years.
Internally generated funds depend upon the margin of profitability and
the cash flow from operations. Also, in publicly held corporations,
stockholders must be willing to forego dividends in order to make earnings
available for reinvestment.
The condition of the firm's industry and general economic conditions are
also major considerations in attracting new capital. The industry will
be compared to other similar industries in terms of net profits on sales
and on net worth, supply-demand relationships, trends in production and
consumption, the state of technology, impact of government regulations,
foreign trade and other significant variables. Declining or depressed
IV-17
-------
industries are not good prospects for attracting new capital. At the
same time, the overall condition of the domestic and international
economy can influence capital markets. A firm is more likely to attract
new capital during a boom period than during a recession. On the other
hand, the cost of new capital will usually be higher during an expansionary
period. Furthermore, the money markets play a determining role in new
financing.
These general guidelines can be applied to the Leather Tanning and Finishing
Industry by looking at general economic data and industry performance over
the recent past.
General Industry Situation
The Leather Tanning and Finishing Industry has shown significant improve-
ment on its pre-tax profit on sales during the past few years with profits
being 6.0 percent or better during 1974 and 1975 (Table IV-10). An
important consideration here is that the margin has improved during this
period in spite of a general downward trend in total volume of domestically
produced leather.
Return on investment (ROI) also shown in Table IV-10 expressed as pre-
tax profits as a percent of worth also shown an improving situation.
In 1972, ROI was reported to be 9.9 percent for the industry. By 1975,
this had nearly doubled to 17.9 percent. This increase is consistent
with the increase in profits on sales.
Another factor relative to the industry's capability to finance new
investments is the proportion of debt to equity the industry maintains.
As shown in Table IV-10, the debt to equity ratio has declined in
recent years with debt representing only 40 percent of the industry's
total assets in 1975.
Often, depending on the size of the investment, firms will choose short
term financing in lieu of long term debt financing. Relevant to such a
situation is the industry's current ratio, that is, the ratio of the
industry's current assets to its current liabilities. As depicted on
Table IV-10, this ratio has been relatively constant between 1972 and
1974 and has increased in 1975. The historical ratios indicate that the
industry has not experienced any industry-wide liquidity problems.
Expenditures for Plant and Equipment
New expenditures as reported by the Annual Survey of Manufactures and
the Census fluctuated between $4.7 and $7.2 million from 1960 through
1964, then increased sharply in 1965 and again in 1966 to $17.3 million.
Expenditures have remained at about that level since with only slight
declines in recent years and expect a 20 percent decline between 1972
and 1973 (Table IV- 11). A closer look at the $16.3 million spent in
1972 shows $3.6 million or 22 percent used for new structures and plant
additions and 78 percent for new machinery and equipment. Total expen-
ditures amount to 13 percent of the estimated fixed assets of the in-
dustry or 4 percent of total assets.
IV-18
-------
Table IV-10. The Leather Industry, Financial Situation
1972 1973 1974 1975
Pre-tax Return on Sales (%) 2.5 1.7 6.0 6.7
Pre-tax Return on Investment (%) 9.9 14.1 12.7 17.9
Debt to Equity Ratio 1.1 1.1 .9 .8
Current Assets to Current Liabilities
Ratio 1.7 1.6 1.7 2.3
Sources: 1972 through 1974, Robert Morris Associates, STATEMENT STUDIES, Annual
1975, DPRA Survey.
IV-19
-------
Table IV-11. Expenditures for new plant and new equipment in the leather
tanning and finishing industry ($ million)
Total new New structures
Year expenditures and plant additions
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
6.1
4.7
7.2
6.5 .8
7.8
11.3
17.3
16.7 5.2
16.6
14.4 3.0
12.4 1.9
17.7 3.5
16.3 3.6
12.8
New machinery Used plant
and equipment and equipment
6.2 .5
11.6 .9
11.4
10.6
14.3
12.7 K2
Source: Census of Manufactures and Annual Survey of Manufactures.
IV-20
-------
In addition to the new plant and equipment expenditures, Census reported
purchases of used equipment of $.9 and $1.2 million for years 1967 and
1972 respectively.
Capital Availability
Recently the leather tanning and finishing industry has been able to main-
tain a profitable position in spite of a severely declining volume. During
the past five years the total physical volume of the domestic leather
tanning and finishing industry has declined by approximately 33 percent
due primarily to severe international competition.
The industry has a large number of family-owned and operated plants especially
among the small and medium size categories. A few of the larger plants
are divisions of major corporations. The family-owned plants are largely
financed with internal capital and maintain a low level of long term debt.
New expenditures have been modest mainly for equipment and consequently
over 70 percent of the physical plants are over 50 years old. There has
been an apparent reluctance of outside capital sources to invest in or lend
money to the industry. Since January 1, 1970 a total of 45 plants have
closed and/or liquidated. This included large plants as well as small ones.
Problems in acquiring working capital by the remaining leather tanning
and finishing industry were intensified by the high 1973 raw material
price levels. Industry sources, including Tanners' Council, reported
very critical scrutiny of industry prospects by banks and fiduciaries
and reluctance to increase lending commitments to tanners. Another
gauge of the situation confronting the industry is the complete lack of
any market for existing facilities. Not the slightest investment interest
could be found in plants closed in 1973 such as Griess-Pfleger (Waukegan),
Superior (Chicago), or Modern (Peabody, Mass.). These plants had to be
liquidated and equipment sold at scrap value.
As mentioned previously, the leather tanning and finishing industry is
dominated by family-owned firms which tan leather in accordance with
practices and techniques resulting from years of experience. This, coupled
with the fact that 80 percent of the industry's plants are considered to
have 1963 or later levels of technology, make it doubtful that the industry
as a whole will make any major capital outlays if the past operating en-
vironment prevails.
The extent to which investment requirements will impose capital problems
on the tanneries will depend on the individual tanneries financial situa-
tions as well as the sizes of the capital requirements. While undoubtedly
some tanneries may encounter some difficulties in financing pollution
control expenditures, it is anticipated the industry as a whole will be
able to secure sufficient capital. Sources of financing available to the
tanneries would include internal financing, banks and fiduciaries, issuance
of stocks or bonds, or small business loans obtainable through the Environ-
mental Protection Agency.
IV-21
-------
V. PRICES AND PRICE DETERMINATION
The price for hides (and skins) is based primarily on the derived demand
for finished leather use in the manufacture of shoes, garments, and
other leather products. The available supply is based on the number of
cattle slaughtered both domestically and in other hide exporting countries
such as Australia, New Zealand and Canada. Since the production of hides
is a by-product of the livestock industry, the demand for hides has a very
negligible effect on the supply.
The domestic tanning industry must be viewed in an international context.
Not only do U.S. tanneries compete with foreign buyers for the purchase of
raw hides but also the importation of leather and leather products have
greatly affected the U.S. market for tanned leather. In this chapter, we
will look at the supply and demand for raw hides, leather and leather
products and attempt to identify the factors affecting each. Raw hides
trade on the open market and set the price trends which prevail throughout
the leather tanning and leather products industries.
A. Supply of Raw Hides
Hides and skins, for the most part, are a by-product of the meat industry.
For example, the value of a raw cattlehide represents only 3 to 6
percent of the value of the live animal. As a result the demand for
hides has virtually no influence on the supply of hides. The exception
would be some of the exotic skins.
Second, the supply of raw hides (and demand for leather) must be approached
from an international basis. Nearly half of the cattlehides are
exported to foreign tanneries which greatly effect the domestic price
of raw hides. As a result, one must look at the broad international setting
for the Leather Tannery Industry to understand the pricing of raw hides
and finished leather and leather products.
Domestic Hide Supply
The supply of cattlehides in the U. S. has been steadily increasing
over the past two decades as shown in Table V-l. In 1955, 26 million
cattle were slaughtered commercially in the U. S. including 19 million
slaughtered as Federal Inspected Slaughter (F.I.S.), and an additional
7 million were slaughtered in other commercial establishments If. This
number remained constant to 1960 when again 25.2 million head were
slaughtered. During the 60's the number grew rapidly as the cattle feeding
industry developed and greatly increased the total U. S. capacity over
the previously grass fattened production. By 1970 the number increased
to 35.2 million where it stabilized for the next few years then slaughter
I/ Federal Inspected Slaughter implies that the animal is inspected at the
slaughterhouse by a federal meat inspector which in turn allows the meat
to be sold interstate.
V-l
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increased to 40.9 million head in 1975 as the large buildup of cattle
numbers was reduced. With the exception of years 1958, 1959 and 1973
the rate of cattle slaughter increased in the U. S. at approximately
1 million head per year. Approximately 50 percent of all cattle slaughtered
were classified as heavy steers. Only 2.0 percent were bulls and stags,
with the remaining 48 percent classified as cows and heifers.
Total cattle numbers in the U. S. are estimated at 127.9 million head
(Appendix Table A-l.l). Based on this number the U.S. experienced a hide take-
off rate of 31.0 percent in 1975 (a recent low was hit in 1973 with a
take-off rate of 27.7 percent).
The livestock industry is firmly established in the U. S. and inspite of
recognized ups and downs is committed to long term growth assuring the
tanning industry an increasing supply of cattlehides in the future.
Suppliers of other types of leather making raw material do not show the
same trend as cattlehides. Calfskin supplies have been and are shrinking
drastically in the U. S. with the exception of a temporary increase
in 1974 and 1975, but are not expected to be a dominant factor in the market
in the future. Calfskin production in 1975 was estimated at 4.5 million
skins which represented a 40 percent rise above 1974 production of about
3.2 million skins. Sheep and lamb skins, the only other major source of
hides and skins in the U. S., have been declining steadily in the U. S.
over the past two decades. Although the numbers are responsive to price
developments in meat and wool, the long term prospect of sheepskins from
domestic sources is declining. Sheepskin production, which was estimated
at 8 million in 1975 dropped approximately 6 percent from the 1974 level
of 8.5 million skins.
Total movement of cattlehides to U. S. tanners has been decreasing
over the past 10 years as U. S. tanners and the U. S. shoe industry have
been confronted with stiff international competition and restrictive
trade legislation (discussed further in Section V-D). Total wettings
of domestic tanneries decreased from 23.5 million hides or 66.8 percentof the
U.S. total cattlehide production in 1966 to 17.5 million hides or 46.5
percent in 1974. Total wetting increased in 1975 to 19.1 million or 45.6
percent and are expected to reach 20 million in 1976 (Table V-2).
World Supply of Hides and Skins
Cattle numbers in the U. S. and throughout the world are in an upward
trend (Appendix Table A-1.2). The Foreign Agriculture Service of the
USDA estimated cattle numbers in 1973 at 1,288 million with an estimated
increase to 1,216 and 1,342 million in 1974 and 1975 or approximately a
2 percent increase per year. A comparable figure for 1964-1968 is given
at 1,185 million head.
V-3
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When the various countries are compared, India probably has the highest
number of cattle with Asia accounting for 491 million head estimated in
1975. However few, if any, of the cattle in India are slaughtered and
hides produced in that country are usually taken from fallen animals.
The U.S. is second in number of cattle with 131.8 million estimated in
1975 and the USSR third with 109 million.
A more meaningful number is the total hides produced by country shown in
Table V-3. As estimated by the Foreign Agriculture Service, total hide
production in the 1966-1970 period averaged 176 million hides per year.
This decreased slightly over the next few years as slaughter rates de-
clined but increased sharply in 1974 and 1975 to 182.7 and 198.5 million
hides respectively.
The U.S. is clearly the leader in hide production with a reported 49.9 mil-
lion estimated take off in 1975. As this estimate by the FAS includes an
estimate for death losses, we would argue that this number is probably over-
stated by 6-8 million hides. This is due to the fact that hides from animals
which die in the field are often not useable for tanning. When such an adjust-
ment is made, the FAS estimate of hide production is in line with the estimate
prepared by the Tanners' Council (Table V-2). The USSR is next in importance
with 37.0 million hides. Argentina and Brazil produced an estimated 13.2
and 11.3 million hides in 1975. It is interesting to note that although
Brazil has an estimated 91 million head compared to Argentina's 58 million,
Argentina produces a higher number of hides. This is due to the low quality
and poor slaughter rate in many Brazilian herds.
Australian hide production has fluctuated widely from a low of 5.8 million
during the 1966-70 period to a high of 9.2 million in 1975. This is due
to the volital cattle market in Australia since they have a great dependence
on the international beef market which also has fluctuated in recent years.
A very high herd build up in 1973-1974 has resulted in sharp herd reductions
and high slaughter rates in 1975.
B. The Demand for Raw Hides
The U.S. tanners must compete directly with foreign buyers for the supply
of hides made available as a by-product of the livestock slaughter industry.
In this section we will deal primarily with the international demand for
hides. In the following sections we will look at the demand placed on the
U.S. tanners for leather and-leather products which, in turn, translates
directly into the U.S. demand for raw hides.
Exports of raw hides have increased steadily over the past two decades.
The total international supply has been restricted by trade practices and
accordingly the U.S. Leather Tanning Industry has been gradually losing
its market share to foreign shoe and leather-goods manufacturers. In
1966, 40 percent of the cattlehides produced in the U.S. were exported and
by 1975 total exports had increased to 51 percent. This amounted to a total
of 21.3 million hides being exported in 1975. United States tanners pur-
chased 1.0 million hides from overseas sources (primarily Canada and Mexico)
resulting in a net export of 20.3 million hides.
V-5
-------
Table V-3. Bovine Hides and Skins: Production in Specified Countries-''
Average 1966-70, Annual 1971-75.
lV6ft-'0 1*T1 IfTf
.0*1*4 «**I4i
70T4L »CkiCTf3 COUNTRIES
4,114 4,0
241 2
175
146
114
161
1,226 1,
259
156
41,662 41,
50,697 50,
11.620 10,
6.636 9,
637
2,2«4 2,
265 1
754
1.231 1,1
1,091 1,2
> 4,017
> 10
20
16
17
27
1,56
34
20
39,94
49,411
11, 5
10, 4
0
2, 7
2
7 74
9 1,252
2 1,256
26,500 26,934 27.952
1,662 ,124 1,046
1.191 ,061 061
.166 ,125 7 040
5,606 ,719 4 691
6>1 975 147
1,979 ,104 1 703
1,727 ,910 1 691
3,961 1,95] 1 629
26,797 17,016 23,726
25 759 722
65 620 775
516 511 495
452 !«| 160
377 40C 359
1,425 1,715 1,474
"4 726 609
791 t!2 74T
32,914 33,146 29,269
1,619 1,<99 1,475
1.661 1,647 1,701
475 419 390
4,«32 4,697 4,250
1.970 1.954 1.717
10.556 10,236 9,533
41,490 43,162 It.IOZ
37.674 16.700 1*,516
2,464 2.612 2.925
2.464 2*612 2.925
47 45 27
569 614 661
961 1,251 1,215
247 174 >19
542 520 515
2,545 1,505 2.300
4,911 5,209 5,014
5.771 6,092 7,164
2,746 2,614 2.901
(.516 1.901. 10,267
176.476 174,110 166.949
1973
3,694
300
216
159
349
269
4,376
340
16,961
49,061
10,912
12,260
124
2,317
343
690
1,120
1.320
29,156
1.021
6(9
4.601
940
4,923
1,721
24,445
713
664
471
355
396
1,633
630
747
10,074
1,511
1.665
401
4,326
1.666
9,79)
19,667
34,916
2,901
2,901
34
675
16
261
792
2,622
5.202
.247
2,931
11,165
172,510
1974
4,245
1)5
219
350
215
4,966
267
197
42,777
51,746
11,161
10,500
671
2,404
357
660
1.573
1.369
26,717
1,153
1.125
7,974
5,434
1,469
4,977
1,900
4,60*
26.636
37
710
564
404
395
1.696
724
14
35.052
1.550
1.669
423
4,653
2.155
10,650
45.702
35.960
2.151
2,151
10
615
1,165
125
759
1,265
6.229
6.741
1,217
9.95*
U2.667
1975-
4.94
11
20
17
19
1C
21
49,97
62,25
13,19
11,25
75
2,53
37
71
1,750
1,429
11,995
1,159
1,126
6,003
5,235
1.7110
4,327
2,060
4,720
27,»S2
44
725
S53
194
646
1.75«
710
7*3
34,067
1.550
1.70»
450
5.060
2.250
11. (30
45.097
17.000
2.355
2.155
TOO
1.171
471
772
1.600
7,024
9.167
1.647
12.016
191,540
I/ B7:r,.l7ED ry CA~aE JL'C r.M
// r 3.LXU1I,
V ivr.'inr ti i^ri P;TE r. it. -x i
TV Dt:iti!n3 uj^j. r-itv nn i ;
J/ j::a>Jini x T/XCB,
Source: Foreign Agricultural Service. Prepared or estimated on the
Basis of official statistics of foreign governments, other
foreign source materials, reports of U.S. Agricultural
attaches and foreign service officers, results of office
research and related information.
V-6
-------
The rate at which the United States exports of raw hides has increased is
shown in Table V-4. Nearly one-third of U.S. hides are exported to the
Japanese market with about 7.8 million hides exported in 1975. Mexico
and Korea are next in importance with about 2.5 million hides each. It
is significant to note the rapid increase in exports to Korea as they
jumped from 411 thousand hides in 1972 to the 2.5 million reported for 1975.
Other countries with rapid increases in U.S. hide,purchases are Poland and
Taiwan. The majority of the remainder of the increase in international
demand for U.S. hides is reflected in the hides shipped to Other Countries
which doubled from 1972 to 1975 with an estimated 1.2 million hides exported
in 1975.
Argentina has traditionally been a large exporter of hides with an annual
average of 8 to 8.5 million hides exported from 1966 to 1969. Argentine
exports declined slightly in 1970 then sharply in 1971 and amounted to only
1.3 million in 1972. This has been caused by their internal production
problems and also an attempt to completely internalize their hide industry
and eventually only export finished leather products. Brazil also inter-
nalized the hide tanning industry and banned exports of raw hides further
reducing world supply by two million hides. Recently Brazil has become an
importer of raw hides and is now competing for raw hides on an international
basis.
In summary, we are basically in a demand pull situation for raw hides.
Foreign demand for our raw hides, which now takes 50 oercent of total U.S.
produced cattlehides, will continue and possibly expand. Only the U.S.,
Canada and Australia remain as major raw hide exporters. Nearly all other
historical exporters such as India, the Argentine and Brazil have internalized
their leather tanning industries and no longer allow the export of raw hides.
International demand for hides has broadened with Japan taking the lead.
Korea and Taiwan have sharply increased imports and Communist Bloc countries
such as Poland, Yugoslavia, Rumania and Czechoslovakia have more than
doubled their imports of raw hides since 1965. As a result, we see the
U.S. tanners facing continued international competition for our raw hides.
Trade Restrictions in Raw Hide Supply
Systematic restriction on exports of hides and skins tends to be the
trend in developing countries. Their basic policy is to restrict
exports of raw materials (hides and skins) while simultaneously encouraging
exports, and restricting imports, of the manufactured goods (leather and
leather products). This is done by levying taxes on exports of raw
hides and skins, imposing quotas on imports; and granting incentives for
exports of manufactured goods.
When raw hides and skins are converted into leather their value increases
by more than two and a half times. Benefits, particularly for developing
countries are derived by restricting their exports of raw hides and skins
and developing their own domestic tanneries. Developing countries gain
advantages by restricting their export of raw hides and increasing their
export of semi-tanned leather due to the preferences given by other
V-7
-------
Table V-4. Exports of Cattlehides from the U.S. and Other Major
Exporting Countries to Countries of Destination, 1972-1975.
Country of
Destination Unit
United States:
Japan 1 ,000 pcs.
Mexico "
Korea, Republic of "
Romania "
Spain "
Canada "
Czechoslovakia "
Poland "
China, Republic of (Taiwan) "
Italy
USSR
France "
Germany, West "
Hong Kong "
Hungary "
Netherlands "
Yugoslavia "
Israel "
Turkey "
United Kingdom "
Chile
Other countries "
TOTAL
Australia
Total Cattlehide equiv. "
1972
7,769
1,806
411
1,200
854
1,121
857
568
226
263
518
771
729
68
228
449
459
132
42
245
261
673
19,650
4,343
1973
7,596
2,036
908
1,006
620
905
821
766
332
605
48
591
656
98
201
160
273
140
66
199
273
452
18,752
3,878
1974
7,199
2,534
1,535
1,781
643
907
676
666
486
434
450
339
641
161
532
159
226
134
79
50
134
829
20,595
4,082
1975^
7,760
2,588
2,543
1,226
1,009
958
877
866
864
773
660
510
440
381
262
239
160
152
102
61
24
1,217
23,672
5,616
Canada
Total Cattlehide equiv.
Argentina
2,914 2,729 2,650 3,853
1,344
Source: USDA, Foreign Agriculture Service, Foreign Agricultural Circular.
Livestock and Meat, September, 1976.
Argentina: Tanners Council of America.
V-8
-------
countries to pre-tanned leather. These advantages are the results of
(1) developing countries not having the technological sophistication
to develop high quality finished products; (2) primary stages of leather
processing being labor intensive, and developed countries finding it
difficult to attract and retain sufficient quantities of labor, and
(3) developing countries being unable to keep abreast of fashion changes
as readily as developed countries.
In a review of the effects of some of its more recent tariff legislation,
such as The Kennedy Round, the U.S. government has indicated its findings
show little effect has been made on changing existing import-export patterns,
An overview of the estimated effects of The Kennedy Round on tariff barriers
dealing with raw hides and skins follows.
In 1968, one-third of the approximate $452.6 million raw hides and skins
imports was supplied by developing countries to the four major import
markets: EEC, the United States, Japan, and the United Kingdom. Latin
American countries, i.e., Argentina, Brazil, and Uruguay are the main
developing country suppliers. Prior to the Kennedy Round, entrance
into major market areas was duty-free, with the exception of the United
Kingdom and the United States. The Kennedy Round negotiations abolished
the tariffs in these market areas which resulted in duty-free access to
all four major markets.
In 1968, almost one-half of the sheep and lambskin imports were supplied
by developing countries. The bigger importers were the EEC, the United
Kingdom, and the United States, the latter which is also an important
supplier. The Kennedy Round improved accession to the four major markets
and "effective protection" of processing was reduced. Japan imposed
relatively high duties and quantitative restrictions on some items.
Also in 1968, eighty-seven percent of all goat and kid skin was supplied
by developing countries. The major importers were the EEC, United Kingdom,
United States, and Japan. The Kennedy Round resulted in improved market
access and reduced "effective protection". Nominal duties still apply to
some varieties of goat and kid leather. The resultant effect of these poli-
cies is that now only the United States, Canada, Australia and New Zealand
remain as open markets for the purchase of raw goat and kid skins.
C, Demand for Leather and Leather Products
Traditionally the demand for leather in the United States has been derived
from the shoe industry. This dependence has declined sharply in recent
years as the U.S. Shoe Industry has been losing out to overseas competition.
In this section, we will look at the domestic demand for leather and a new
market that seems to be emerging; the international demand for tanned and
semi-tanned leather from the U.S. tanners.
V-9
-------
Domestic Demand
The demand for leather hides is a derived demand resulting from consumer
interest in leather products. However, to get a true perspective of the
demand for U.S. tanned leather several other factors must be taken into
consideration in addition to the international demand for raw hides.
First the domestic shoe industry, the primary recipient of U.S. tanned
leather has slowly but steadily been losing its share of the domestic
market to international competition. In 1965 only 12.3 oercent of the
shoes purchased in the U.S. were manufactured overseas however by 1975
this had increased to 42.4 percent. Indications are that this trend will
continue over the forseeable future. During this time total U.S. demand
for shoes fluctuated only slightly but in recent years since the advent of
high inflation the trend has been down. Per capita consumption reached a
peak in 1968 with 4.07 pairs but since that time has dropped to 3.52
pairs in 1975.
The resulting effect of the stable U.S. demand and increasing imports
is the total pairs of shoes manufactured in the U.S. has declined steadily
from over 600 million pairs in 1965 to the 1975 level of 433 million pairs, a
decline of 31 percent over the 10 year period (Table V-5).
A further decline in the demand for leather can be seen in Table V-5
concerning the percent of U.S. manufactured shoes made with leather soles.
This has been declining steadily over the past 30 years and by 1975 only
13.3 percent of the U.S. shoes were made with leather soles, down from
25 percent in 1965.
During the 60's the substitution of synthetics for leather in the shoe
uppers made substantial progress. In 1960 only 25 percent of the U.S.
shoes were made with synthetic uppers. By 1973 this percentage had
increased to 43 percent where it has held since.
In summary the demand for leather from U.S. tanners going into the
manufacture of shoes has declined from 78 percent of the total leather
produced in the U.S. in 1970 to only 56 percent in 1975 (Table V-6).
One of the bright spots has been the increase in leather going into
leather garments which amounted to 14.4 percent in 1975. Imports from
Korea have cast a dim shadow over that market as rapid increases in
imports - some at extremely low prices - have been seen over the past
few months.
Other areas where demand appears strong, however representing a minor
portion of the entire market, include: leather work gloves, 7.7 percent;
leather handbags, 9.6 percent; leather belts, 3.0 percent; small leather
goods, 3.0 percent; and miscellaneous, 5.9 percent.
V-10
-------
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V-12
-------
Exports of Tanned Leather
The export of tanned leather from the U.S. is a potential bright spot in
the future of U.S. tanners. In 1968, U.S. exports represented only 1 per-
cent of total production (luggage was the main export item), and by 1975
exports amounted to 13 percent. Unfortunately high wages combined with
increased prices of raw material has forced manufacturers to raise the
price of domestic finished leather products. This has made fully tanned
domestic leather less competitive in the international market and has
increased the attractiveness of the U.S. market for potential imports
of finished leather products.
However, an encouraging trend is the tendency of developed countries to
import semi-tanned or semi-processed leather. There are a number of reasons
for this. The semi-tanned leather is lighter in weight than raw hides and
thus costs less to ship. Much of the water pollution problems result
from the initial stages of the tanning process. This can be avoided in
other developed countries where pollution control regulations are becoming
more and more strict. Also the early tanning stages require a large
number of workers. Tanners in developed countries find it difficult to
maintain their labor forces. Therefore, their demand for semi-processed
leather has increased. This trend is reflected in Table V-7. Leather
exports increased from $83 million in 1973 to $102 million in 1974 and
$140 million in 1975. As one might expect the major portion of the exports
was cattle and kip side leather (46.9 percent) and leather N.E.C. which
also is primarily from cattlehides (15.0 percent).
From current information, it would appear that future demand for U.S.
exports will be affected by improved grading, shipping, and packing of
leather and more flexibility in design of leather products. When elab-
orating their future export policies, leather goods manufacturers will
have to analyze carefully anti-inflationary or protectionist measures
that may be taken to enhance the competitive position of exports. Export
expansion has been affected by the high prices of energy and raw materials.
One consequence which has affected international trade, has been a sub-
stantial increase in freight rates. However, since prices have also
risen in the plastics industry, which is based on petro-chemicals, the
position of leather products may be further strengthened.
American tanners feel certain that as foreign countries place emphasis
upon importing raw hides or semi-tanned hides and exporting finished
leather products, the basic article of export commerce for the U.S.
leather industry in the future will be semi-finished leather rather
than raw cattlehides.
V-13
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V-14
-------
D. Imports of Finished Leather Products into the United States
The United States is the world's largest importer of leather products
with Germany, the United Kingdom and Switzerland following in that order.
Not only is the United States a big, attractive market for foreign leather
products but also it has been growing at a very rapid rate. In fact,
the imports of leather products have continued to increase at an increasing
rate, which has created what some industry experts perceive as a very
serious threat to the entire domestic industry.
This trend has occurred in other developed countries. Leather imports
have largely reduced the leather tanning and leather products industries
to a fraction of their former size in Germany, Sweden ard other countries.
The exact reasons for this shift are many and complex. Basically, the
leather industry is labor intensive and developing countries find they
have certain advantages in competing on a cost basis (however, we have
not been able to quantify them on any suitable basis). Second it is an
industry that does not require a high level of technology such as the
computer industry or aircraft industry and can be adapted to developing
countries. Third, a complicated series of trade restrictions have been
built up which prohibits the U.S. tanning and leather products industries
from competing favorably in foreign markets. The second part of this
section is devoted to looking at some of these aspects. Fourth, developing
countries such as Korea, Taiwan, and Brazil see this industry as one in
which they can compete on an international basis and earn a valuable
source of badly needed foreign exchange. As a result they tend to
"push" the industry in their countries.
Trends in Imported Leather Goods
Table V-8 demonstrates the U.S. foreign trade in leather products.
Basically the value of imports have doubled from 1970 to 1975 increasing
from $790 million to over $1.5 billion in 1975. Exports during this
period increased rapidly but in 1975 amounted to only $88 million or only
5.6 percent of imports.
Footwear is the major product imported accounting for 72 percent of total
imports in 1975. Percentage wise it makes up approximately the same
proportion of total imports today as it did 5 years ago. Leather
wearing apparel has made rapid increases since 1972 and is the second
most important product line. Again in 1976 leather apparel made rapid
increases. Handbags and luggage make up the next most important cate-
gories with imports of $124 million and $89 million respectively in 1975.
The following observations are obtained from viewing import statistics.
Latin American countries have good access to the United States market;
Mexico, Columbia and Brazil regularly export certain types of leather goods.
V-15
-------
Table V-8 . United States Foreign Trade in Leather Products ($1000).
Year
1969
1970
1971
1972
1973
1974
1975
Footwear
435,884
559,347
678,352
832,652
976,106
982,892
1,135,348
Wearing
Apparel
19,674
38,233
59,251
91 ,773
109,728
123,066
154,334
Handbags
& Purses
58,420
62,974
67,606
83,623
108,211
106,853
124,776
Luggage &
Flat Goods
38,393
41,366
49,758
76,795
100,231
95,890
89,486
Other
Products
78,643
87,282
74,188
83,561
94,380
106,723
81,963
Total
Imports
631,014
789,202
929,155
1,168,404
1 ,388,656
1,415,424
1,585,907
Total
Exports
33,984
35,732
36,987
43,756
55,037
79,754
88,852
Other than rubber
Source: Tanners Council of America
V-16
-------
Lebanon, Morocco, Yugoslavia and Hong Kong are the only developing
countries outside Latin America which regularly export certain types of
leather goods to the United States. Some developing countries have begun
to emerge as suppliers in recent years. For example, Israel, the Republic
of Korea and China (Taiwan) have become important importers of leather
products to the U.S.
2. Trade Restrictions
Foreign sources have free access to U.S. raw hides and skins. At the same
time, U.S. tanners are denied equal access to foreign leather markets.
This is one of the primary concerns of the U.S. leather tanning industry.
Representatives of the U.S. leather industry feel that current and past
trade legislation and duties have not been effective in curtailing U.S.
imports of leather and leather products. Therefore, they are not in
favor of any further cuts in U.S. duties on competitive imports.
The following section is an overview of some of the tariffs and trade
legislation which has and/or could affect the industry. The following
discussion is largely taken from a report, Leather and Leather Products,
which was published by the United Nations in 1971.
Tariff Structures
Tariffs have a tendency to increase as the degree of processing or the
manufacturing content of the article increases. The leather industry is
an example of this. In all countries most raw hides and skins enter
duty free. Leather tends to carry a tariff of about 5 to 10 percent,
while leather footwear and other finished articles tend to carry tariffs
of between 10 and 25 percent. Japan and Finland are exceptions to this
tendency of tariffs to escalate as manufacturing content increases. Japan
has elaborate sets of restrictions on leather and leather goods imports.
It is the only country which imposes restrictions on imports of leather
itself.
Effective Rates of Tariffs
A tariff imposed on the principal product of some industry affords that
industry increased protection. In order to measure the effective degree
of protection consideration must be given to all of the relevant tariffs
and not merely those on the principal product or products of the industry.
An Effective Tariff Rate is defined as the percentage increase in value
added per unit of output in a given industry which is made possible by
the tariff structure. The effective tariff rate is a measure of the
excess remuneration of domestic factors of production, obtainable be-
cause of the tariffs, as a percentage of what value added would be in a
free-trade situation.
V-17
-------
A tariff on the outputs of an industry and none on the inputs results in
the effective tariff rate being higher than the nominal rate (price)
(see Table V-9 ). In the Leather Industry, since the tariff rate escalates
with increasing levels of production, the effective rate of protection
is even greater than the nominal tariff applied to leather. The effective
rate of protection for footwear or other leather product industries tends
to be greater than the nominal tariffs on leather products.
The effective rate of protection is dependent on three factors: (1) the
cost structure of the industry; (2) the nominal tariff on output; and
(3) the difference between this rate and tariffs on inputs. Owing to
the sensitivity of effective rates to differences between tariffs on out-
puts and tariffs on inputs, it does not follow that because the level
of nominal tariffs is escalating effective rates must be escalating. On
the contrary, the effective rates of protection may easily be just as
high at the earlier stages of production as at the later stages of pro-
duction. This is particularly true if value added is relatively small
at the earlier stages.
Effect of Current Legislation
Current and past trade legislation and duties have not been effective in
curtailing U.S. imports of leather and leather products. Therefore, many
industry leaders are lobbying for more effective tariff rates and they
are definitely not in favor of any further cuts in U.S. duties on compet-
itive imports.
A number of trade associations, particularly the American Footwear
Industries Association have petitioned the U.S. International Trade Com-
mission to conduct investigations concerning serious injury or threats
of serious injury to the industry. The Commission's findings on the basis
of its investigation was that "footwear is being imported in such increased
quantities as to be a substantial cause of serious injury to the domestic
industry or certain industries producing articles like or directly compe-
titive with imported articles." The Commission has not made any decision
pending the completion of its investigation.
In the past years there have been attempts to pass legislation which
would enhance the international trade position of the industry. The
Kennedy Round is one. With only one exception, the Kennedy Round increased
the effective rates of protection through modest reductions in tariffs.
Hides and skins already entered free of duty so that no reductions were
called for. Rates for pre-tanned leather were reduced very little. In
the case of finished leather, the United States halved its rates.
The Generalized System of Preferences (GSP) is another trade legislation
which was intended to establish a system of generalized preferences in
favor of developing countries. The impact of the Generalized System of
V-18
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Preferences is to permit manufactured and semi-manufactured products by
developing countries to enter duty-free. The overall objective is to en-
courage the industrialization of developing countries through increased
export earnings.
The GSP did not have any noticeable affect on hides and skins exports
because they were allowed to enter duty-free before this 1970 agreement.
In the semi-manufactured group of products, many countries have exceptions
in terms of the products covered by GSP. For example, the U.S. does not
give preferential treatment to all types of footwear. The overall affect
of the GSP is also reduced due to the fact that many countries set upper
limits on the value of items that will be given preference. In general,
the affect of the GSP has lessened in the case of leather and leather
products because so many developed market economies have various exceptions
and restrictions imposed on items which are covered by the agreement.
In 1975 the Trade Act recommends that the Administration arrange for
international agreements which would establish procedures for the import-
ation of certain articles, including footwear, into the United States.
In addition, the 1974 Trade Act prohibits extending the Generalized System
of Preferences.
E. Price Trends and Analysis
The price basis for tanned and finished leather is the price of raw
(salt or brine cured) hides at the packing house. The raw hide price
(for cattle hides) is a published price and commonly known throughout the
trade on a day to day basis. Tanners - both domestic and foreign -
purchase the available supply of hides from packers in a relatively open
and competitive market. The one base price (with exception for. grade
and type) prevails throughout the industry and is established on the
basis of supply and demand.
A unique feature of this market is that it is strictly a by-product
market. The demand for hides in no way affects the supply of cattle moving
to market. For example, the value of a hide represents approximately
3-6 percent of the value of a 1,000 pound market steer depending on
the hide price. Ten years ago when hide prices were considerably lower,
it represented approximately 4.4 percent of the value. Even with the
current high hide prices, the demand for hides has a negligible effect
on the supply of cattle.
Prices of cattlehides in 1974-75 tended to seesaw between a high average
of 30.44 cents per pound in 1974 to 13.07 cents per pound in 1975 and
back to an average of 25.69 cents per pound. This seesawing of prices
was attributed in part to large foreign trading companies purchasing
hides under long term contract agreements and a reduction in supply
(Table V-10).
V-20
-------
Table V-10. Packer Hide and Skin Prices, Average Per Pound, 1959 to date.
Steers
Cows
Year
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
19761/
Heavy
Native
Cents
19.16
13.72
14.91
15.19
11.23
10.32
13.93
17.42
11.73
11.84
14.38
12.85
14.53
29.79
33.70
23.00
23.50
29.07
Butt
Branded
Cents
17.22
11.77
13.00
13.64
9.74
8.47
12.39
16.33
10.31
9.51
12.48
11.80
11.95
27.42
28.60
19.50
20.90
27.01
Light
Native
Cents
25.61
18.81
19.54
18.50
12.83
13.23
15.60
20.21
16.34
15.73
18.35
16.98
17.03
34.76
38.40
26.70
24.00
34.26
Branded
Cents
20.45
13.58
14.78
14.85
10.54
8.95
12.57
16.65
10.80
9.64
12.95
11.35
11.63
28.21
28.80
19.10
17.60
27.83
Calf-
skins
Cents
64.95
55.64
62.16
61.08
36.61
40.63
53.29
59.09
46.51
54.85
56.33
33.55
30.17
51.77
62.10
61.60
36.40
52.56
Kip-
skins
Cents
52.32
43.92
51.70
44.48
29.99
32.34
34.09
45.67
33.11
32.96
35.10
27.81
22.70
45.00
56.40
51.00
24.40
37.50
' Prices for packer steer and cow hides obtained from Livestock Market
News publication beginning in 1967-1972. Data for calfskins and kip-
skins compiled from National Provisioner weekly publication. Calfskins
classified as (North) 10-15 lb., kipskins classified as (North) 15-25 Ib.
o/
January, February, March only.
Source: USDA Livestock and Meat Statistics, 1976 and earlier.
Council of America, 1972-74.
Tanners'
V-21
-------
The finished leather price - with a constant margin for tanning and
finishing - follows the course of hide and skin prices. There is a
frictional lag on finished leather when hide prices move up and a lag
of shorter duration as hide prices move down as knowledgeable customers
immediately request the benefit of lower raw material costs. Further,
approximately 60 percent of the finished leather is sold on contract.
The finished leather wholesale price, raw hide equivalent, and raw hide
to wholesale spread are shown in Table V-ll for the years 1955 to 1975.
When expressed in real dollars (prices adjusted by the implicit GNP
deflator, total GNP, 1973 = 100) both raw hide prices and wholesale
prices have been volatile with fluctuations experienced in either
direction.
As can be seen in Table V-ll, the raw hide prices (real dollars) tend to
decline from 1955 to 1971. However, as cattle prices increased after
1971, so did the hide prices. The wholesale finished leather prices
follow the pattern of the raw hide prices, however the fluctuations are
much less pronounced.
The raw hide to finished wholesale leather spread, expressed in real dollars,
has fluctuated as prices fluctuate but for the most part, has remained
between 46 to 55 cents per square foot of finished leather. Usually,
price increases result in decreases in the spreads while price declines
result in increases in the spreads. Expressed as a percent of the
wholesale leather price, the spreads range from 55 to 65 percent.
To determine the relationship between the raw hide prices and wholesale
finished leather prices, the raw hide prices were regressed as a function
of the wholesale price. This regression resulted in a determination that
the difference between the two prices, the above mentioned spread, is
best represented by a constant absolute amount added to the raw hide
equivalent price. This was determined since the regression revealed a
slope which was not significantly different from one and an intercept
value which corresponded to the historical spread.
Though there are no definitive studies available regarding pricing in
the leather tanning industry, some general conclusions can be drawn.
1. Hide and skin prices are widely quoted and well-known to the
industry -- both domestic and international.
2. Leather tanning and finishing is a chemical processing industry
in which continuity of operation is desirable and interruption
is costly in terms of overhead or fixed costs as well as start-
up time.
V-22
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V-23
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3. Very few operations have been automated to any significant
degree. Tanning is a batch processing industry in which the
hides must be handled individually at various key stages.
Therefore, a large tannery consists of multiples of a smaller
plant without major economies of scale in production.
4. Standard costs for leather tanning and finishing in the industry
are well-known. Therefore, the market value of finished
product follows the price of raw materials with a relatively
uniform margin for processing.
5. The industry is very competitive and is under-utilizing its
present capacity.
6. In an industry that is predominantly family-owned, financial
considerations are frequently less important in operating
or management motivation than the prerequisites of ownership,
obligation to associates, employees and community.
V-24
-------
VI. MODEL PLANTS
The Leather Tanning Industry is comprised of nearly 200 tanneries which
utilize slight variations of a basic process to produce differentiated
types of leather. The Industry consists of establishments primarily
engaged in tanning, currying and finishing hides and skins into leather.
As this chapter is concerned with the development of economic plants
representative of tanneries which could be effected by the imposition
of pretreatment controls, an attempt will be made to describe models
which together could typify most tannery operations in the United States.
A. Types and Sizes of Model Plants
Tanneries vary with respect to their operating characteristics such that
several models were required to be developed. However, these models do
not totally represent all tanneries. Instead it is is believed that the
models developed represent various categories of tanneries with each re-
spective tannery in that group having several characteristics closely
associated with the models.
The general categories of tanneries utilized in this analysis are defined
below:
1. Cattle-pulp-chrome--a tannery that primarily processes
raw or cured cattle or cattle-like hides into finished
leather, chemically dissolves the hide hair, and uses
chrome tanning.
2. Cattle-save-chrome--a tannery that primarily processes
raw or cured cattle or cattle-like hides into finished
leather, with at least a portion of the hide hair
loosened and removed as a solid and then discarded or
saved, and uses chrome tanning.
3. Cattle-nonchrome~-a tannery that primarily processes
raw or cured cattle or cattle-like hides into finished
leather using less than 20 percent (by hide weight)
chrome tanning; includes vegetable, alum, syntans,
oils, and other methods and their combinations.
4. Thru-the-blue--a tannery that primarily processes raw
or cured cattle or cattle-like hides through the blue-
tanned state only, with no retanning or finishing opera-
tions, and uses chrome tanning.
5. Retan only--a tannery that primarily processes pre-
viously tanned hides and/or skins (including splits)
into finished leather, the major wet process consist-
ing of retanning, coloring, and fatliquoring.
6. No beamhouse (NB) tannerya tannery that primarily
processes hides and/or skins, with the hair previously
removed, into finished leather using either chrome or
nonchrome tanning methods, primarily includes pickled
sheepskins and cattlehides and pigskins.
VI-1
-------
7. Shearlingsa tannery that primarily processes raw or
cured sheep or sheep-like skins, with the wool or hair
retained on the hide, into finished leather using
chrome or nonchrome tanning; or, a wool pullerya
plant that processes hair-on raw or cured sheep or
sheep-like skins by first removing the wool and then
pickling the skin for use by a sheepskin tannery
(Category 6).
For each of the above categories at least one representative model was con-
sidered. Where there were several corresponding tanneries associated with
a category, various representative sizes of models were developed for that
specific category. The models and their corresponding sizes are depicted
in Table VI-1.
Note in Table VI-1, for category 4, cattlehide to the blue only, no models
were developed. There are presently only three known through-the-blue tanneries
in operation. One of these tanneries has just begun operation under new man-
agement and thus no historical data are available from it. In efforts not to
disclose the confidential data that are available from the other two tanneries,
no financial models were developed. Through-the-blue tanneries are considered
similar in operation to the cattlehide chrome tanneries and accordingly
through-the-blue tanneries were grouped with this tannery category.
Table VI-2 depicts the various operational characteristics of the model
plants. These characteristics were determined from the industry survey
as well as discussions with industry members. As is shown, operations
involving cattlehides predominately operate 250 days per year utilizing
approximately 85 percent of their capacity. Sheep operations commonly
operate 240 days per year with sheepskin operations utilizing 75 percent
of their capacity while shearling operations utilize 90 percent.
To compute the annual production of the models in terms of square footage
the following standards were used:
Cattlehides yield 40 square feet per hide; cattle splits yield 8 square
feet per split; and sheepskins yield 6.67 square feet per skin or pelt.
It should also be noted that in this chapter's discussions of model
plants no distinction is made between Categories 1 and 2 models. This
is due to the fact that cattlehide, chrome tanning, pulp hair operations
are financially very similar to cattlehide, chrome tanning, save hair
operations. Accordingly, these two categories will be referred to only
as cattlehide chrome tanning operations.
B. Investment
The estimated book value and salvage value for each tannery model are
shown in Table VI-3. Also shown are current assets, current liabilities,
networking capital, total invested capital and estimated replacement
value.
Book Value of Assets
The book value of a tannery's assets represents the acquisition costs
of the various assets. As would be expected in an industry with a substan-
tial number of older plants and equipment, the book values of the model's
VI-2
-------
Table VI-1. The Leather Tanning Industry, Representative Model
Plants and Respective Plant Capacities
Model
Corresponding
Category
-Size-
Units X-Small Small Medium Large X-Large
Cattlehide, chrome,
pulp 1
Cattlehide, chrome,
save 2
Cattlehide, vegetable 3
Cattlehide to blue only 4
Cattle splits 5
Sheepskins 6
Shearlings 7
Units/
Day
cattlehides 100 400 900 1,500 3,000
cattlehides 100
cattlehides
cattlehides
splits
sheepskins
pelts
400 900 1,500
100 625 1,500
No model developed
- 4,250
1,200 2,400 5,800
900 - 3,000
3,000
VI-3
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assets do not reflect significant amounts. However, the book value does
reflect the amount of capital the tannery owners have invested in assets
and accordingly represent a portion of what is used as a basis for deter-
mining the return on the owners equity.
Operating Capital
The models' operating capital is defined as that capital necessary to
maintain the day to day operations of the tanneries. Included in the
computation of operating capital are a firm's current assets and current
liabilities. Current assets represent those assets a firm maintains
that could be converted relatively easy into cash. Current assets in-
clude such items as raw materials inventory, finished product inventory
and accounts receivable.
As can be seen in Table VI-3, current assets for the models represent a
sizeable amount. This is due to the substantial quantities of hides and
leather that tanneries must maintain in their facility at any given time
in order to assure continuous operation. This reflects a sizeable
additional investment requirement to the tanneries owners.
Current liabilities represent those liabilities that a firm holds that
could be demanded to be paid within a short time period. Current liabili-
ties include short term notes, accounts payable and wages payable.
The difference between current assets and current liabilities represent
the firm's operating capital or as it is sometimes called, net working
capital. Net working capital represents the quantity of capital that the
firm is required to maintain just to maintain daily cash balances. Thus.
it represents an investment requirement to the tanneries' owners.
To ta1 In ve s te d Capital
Total invested capital is the sum of the book value of assets and the net
working capital. It represents the total amount of capital that is re-
quired to be invested in an operation by the owners. Accordingly the
total invested capital represents the investment amount utilized for
determining a firm's return on investment.
Total invested capital requirements for the model tanners range from $84,000
for a small sheepskin tannery to nearly $7.3 million for the extra-large
cattlehide chrome tannery. Each model's total invested capital requirement
is depicted in Table VI-3.
Salvage Value
The salvage value of the model tanneries represents the amount of money
that the owners could recover should the tannery cease operation. This
VI-6
-------
value will vary widely from plant to plant, depending on the age of the
facility and its condition and the use ability of the equipment as well
as the location of the plant. In some instances the salvage value of
old, obsolete plants will be equal to the site value plus the scrap
value of the equipment.
There exist only a limited market for certain types of used machinery
and equipment. Thus most of a closing plant's equipment would be
scraped.
Data are not available depicting the salvage value of tanneries. According-
ly after discussions with industry members it was determined that salvage
values for most tanneries would range between 10 and 20 percent of the
tannery's fixed assets plus its net working capital.
C. Model Plant Capacity and Utilization
As tanneries vary from one to another, there appears to be no industry rule
by which the models' capacity or utilization can be accurately described.
For most tanneries their constraining factor is the number and capacity of
their drums (or for some tanners, the number and capacity of their pits).
Commonly, tanneries will operate 5 days per week for 240 to 250 days per
year. Furthermore, their utilization rates varies for the different types
of tanneries, however usually the rates range between 75 and 90 percent of
the tanneries' capacity. The capacity and utilization rates for each of the
representative model plants were depicted in Table VI-2.
D. Annual Sales of Model Plants
Annual sales of the model plants were determined utilizing the production
characteristics described in Table VI-2 as well as estimates of final
product prices. Prices were estimated to be reflective of the average
grade and quality of leather within each tannery type. Prices are repre-
sentative of late 1975.
The prices utilized in this analysis are depicted below:
Type Price Source
Cattlehide, Chrome
Cattlehide, Vegetable
Cattlehides to the Blue
Cattle, Splits
Sheepskins
Shearlings
$ .86/sq. ft.
$ .94/sq. ft.
$ .234/sq. ft.
$ .726/sq. ft.
$1.15/sq. ft.
VI-7
Wholesale Price Index
Cattle & Kip Sides, Smooth
Oct.-Dec. 1975 Average
From industry surveys
From industry surveys
From industry surveys
From industry surveys
From industry surveys
-------
The annual sales for each of the tannery models are shown in Tables VI-4
through VI-6.
E. Cost Structure of Model Plants
The cost structures for each tannery model are depicted in Tables VI-4,
5 and 6. The major cost items are discussed below.
Raw Material
Raw materials for purposes of this analysis consisted entirely of raw
cattle hides or splits, or sheep skins or pelts. Raw cattlehides are
sold by slaughterhouses on a poundage basis and this analysis assumed
the average hide weighed 55 pounds. Prices utilized reflected the
October through December 1975 average price for Chicago Native Heavy
hides. The price was 28.7 cents per pound.
The price utilized for raw cattle splits was determined from industry
surveys and is estimated to be $.72 per split.
Raw sheepskin prices were assumed to be $1.75 per skin. These would
be received in the pickled state.
Finally, the price for sheep pelts was estimated to be $4.00 per pelt.
Both the sheep skin and sheep pelt prices were estimated utilizing the
industry surveys.
Labor
tabor costs were developed using the estimated number of employees for
each model plant multiplied times an estimate of the annual costs per
employee. These costs were developed from industry provided data and
reflect varying wages for different types and sizes of tanneries.
For the cattlehide chrome tanneries annual per employee labor costs ranged
from $6,300 for the extra small model to $8,800 for the extra large model.
For the cattlehide, vegetable tanneries annual labor costs were estimated
to be $7,325 per employee for the small and medium model and $9,235 for the
large tannery model. Labor costs for split tanners were estimated to be
$7,200 per year; for sheepskin tanners, $8,035; and for shearling tanners,
$9,200 per year.
Tanning Materials and Other Costs
This cost classification includes expenditures for materials used in the
tanning process, miscellaneous other direct costs as well as indirect
costs (i.e., administrative expenses). These costs vary considerable
for different tanneries and for the models, ranged between 13.3 and
43.9 percent of sales.
VI-8
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Depreciation and Interest
Estimates of model tanneries' depreciation and interest were developed
from industry as well as Internal Revenue Service data. The deprecia-
tion amounts utilized in this analysis are depicted in Table VI-7. In
this table depreciation is expressed as a percent of sales as well as
fixed assets. In terms of sales depreciation represents between 1.0
and 3.0 percent. Expressed as a percentage of fixed assets deprecia-
tion represents between 1.0 and 18.0 percent. This wide variation in
depreciation as a percent of fixed assets is reflective of the wide
variation of plant and equipment composition that exists in the industry,
Interest charges for the model plants, expressed as a percent of sales,
are also shown in Table VI-7. Interest charges ranged from 0.2 percent
of sales to 2.5 percent.
Total Costs
Raw hides or skins costs ranged from 36.1 percent of sales for the
sheepskin tanneries to 52.1 percent for the shearling tanneries. The
cattle tanneries raw hide costs approximated 40 percent. Labor costs
ranged from 10.5 percent of sales for the medium cattle chrome tannery
model to 36.7 percent for the small cattle vegetable model. The majority
of the models' labor costs represented 10 to 20 percent of sales. Finally
expenditures for tanning materials and other direct and indirect costs
ranged from 13.3 percent for the small cattle vegetable model to 43.9
percent of sales for the small cattle chrome tannery model.
As previously mentioned these costs are depicted for all the models
on Table VI-4 through VI-6. Total costs of all the models, including
depreciation and interest, represent between 90.3 percent and 97.7
percent of sales. This would result in a pre-tax income range of 2.3
to 9.7 percent.
F. Model Plant Annual Profits
After-tax income, pre-tax and after-tax return on sales and return
total invested capital for the various model tanneries are shown in
Table VI-8. These profitabilities reflect late 1975 conditions. As
shown in the table the models' return on sales, after-tax, range from
1.3 percent to 5.9 percent. After-tax return on total invested capital
range from 2.1 percent to 14.5 percent.
G. Annual Cash Flows
Estimated annual cash flows for the different types and sizes of model
tanneries are depicted in Table VI-9. Cash flow, as calculated,
VI-12
-------
Table VI-7.
The Leather Tanning Industry, Representative Model Plant
Depreciation and Interest.
Model/Size
Depreciation
Percent of
Sales
Percent of
Fixed Assets
Interest
As a Percent
of Sales
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
2.4
2.2
2.0
1.7
1.7
1.8
1.5
1.2
6.0
14.4
12.2
9.3
9.3
6.3
18.0
16.5
1.5
1.0
1.3
1.0
1.0
0.2
0.5
1.3
Cattle Splits
Medium
1.8
13.0
1.0
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
1.0
1.0
1.0
3.0
3.0
1.4
1.0
1.3
6.9
6.9
0.3
0.5
1.0
2.5
2.5
VI-13
-------
Table VI-8.
The Leather Tanning Industry, Representative Model Plant
Profitability
Model /Size
After-Tax
Income
1000
Dollars
Return of Sales
Pre-Tax After-Tax
Return of Total
Invested Capital
Pre-Tax After-Tax
Cattle-Chrome
X-Small 31.6
Small 123.0
Medium 225.6
Large 321.4
X-Large 903.0
Cattle-Vegetable
Small 37.9
Medium 115.3
Large 156.8
5.5
7.2
6.2
5.4
7.8
6.0
4.9
2.3
4.3
4.2
3.4
2.9
4.1
4.7
2.8
1.3
11.3
24.8
23.6
16.3
23.6
8.6
11.6
8.7
8.9
14.5
13.1
8.9
12.4
6.8
6.7
4.9
Cattle Splits
Medium
64.5
5.8
3.8
16.5
11.0
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
27.4
53.7
221.2
88.7
264.9
3.3
3.7
7.9
9.7
9.7
2.6
2.6
4.4
5.9
5.3
4.1
3.4
6.5
20.6
20.6
2.1
2.4
3.0
12.6
11.3
VI-14
-------
Table VI-9.
The Leather Tanning Industry, Representative Model Plant
Cash Flow
Model/Size
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
Annual
Cash Flow
1000
Dollars
49.2
187.3
357.2
507.8
1275.8
52.3
215.6
300.7
Cash Flow
as a Percent
of Sales
(Percent)
6.7
6.4
5.4
4.6
5.8
6.5
4.3
2.5
Cash Flow
as a Percent
of Total
Invested Capital
(Percent)
13.9
22.1
20.7
14.0
17.6
9.3
10.2
9.5
Cattle Splits
Medium
94.9
5.6
16.0
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
37.9
74.7
271.7
133.4
414.0
3.6
3.6
5.4
8.9
8.3
3.4
3.3
4.4
19.0
17.7
VI-15
-------
represents the sum of after-tax income plus depreciation. In the table
it is shown in actual dollars as well as expressed as a percent of sales
and total invested capital.
VI-16
-------
VII. PRETREATMENT COSTS
The effluent control system requirements and costs depicted in this chapter
were provided by the Effluent Guidelines Division of the Environmental
Protection Agency as provided by the technical contractor, Midwest Research
Institute, North Star Division. The recommended and optional pretreatment
alternatives for the model tanneries are the same as presented in the
Development Document II.
Preliminary treatment (pretreatment) is defined as wastewater treatment
on the plant site before discharge to a municipal treatment system.
Pretreatment consists of physical-chemical treatment and intermediate
storage before discharge into a secondary (biological) treatment system.
It is necessary to reduce shock loads, protect the biological system,
remove the suspended solids that resist treatment, prevent damage to
sewer lines, and reduce health hazards in sewerage maintenance. Although
it is defined as preliminary to treatment in municipal plants, pretreat-
ment is equally applicable to an on-site or other company-owned secondary
treatment system.
A. Pretreatment Control Recommendations
According to the Environmental Protection Agency, the recommended waste-
water pretreatment standard for the Leather Tanning and Finishing Industry
is based on the performance of properly designed and well-operated pH
control equipment in use by the industry. Recommended pH standards are:
between 6 and 10 pH for the no beamhouse, shearling and the retan only
tanneries; and between 7 and 10 pH for the pulp hair, chrome tanneries,
save hair, chrome tanneries, non-chrome tanneries, and through-the-blue
tanneries.
B. Pretreatment Control Options
In addition to the recommended pretreatment control technology, various
other pretreatment control systems were included in this study's analysis
These other pretreatment control systems were developed by the technical
contractor and are formated to be incremental, that is, each individual
treatment technology can be added to another treatment technology such
that the combined systems' impacts can be depicted.
I/ Development Document for Pretreatment Limitation Guidelines, Leather
Tanning and Finishing, Draft Supplement Report prepared by Midwest
Research Institute, North Star Division for the U.S. Environmental
Protection Agency.
VII-1
-------
As these pretreatment options are not a part of the recommended pretreat-
ment systems, the discussion of their various costs and impacts has not
been included in the main text of this analysis. Instead, the pretreatment
control options are discussed in Appendix 2 of this report.
C. Discharge Status of the Industry
Current practices in the tanning industry range from no treatment of
wastewater to secondary treatment. In general, effluent quality require-
ments for tanneries discharging to municipal sewer systems are less
stringent than for plants that discharge directly to surface waters. This
is reflected in the survey made of 91 wet-process tanners by the technical
contractor that indicates 12 percent of the tanners discharging to
municipal systems have no pretreatment, whereas all direct dischargers
surveyed have at least preliminary treatment. Further, 100 percent of the
direct dischargers are operating some type of secondary treatment or
equivalent. With increasing numbers of municipalities imposing more
stringent effluent limitations, there is a trend toward some pretreatment
by all tanners.
The technical contractor's information collection surveys, site visits,
and verification sampling visits of wet tanneries yielded the following
breakdown of current control practices in the industry:
Discharge to municipal treatment plant--
76 percent of tanners surveyed
Percent of
Dischargers
Preliminary treatment 88
Coarse screening only .20
No preliminary treatment 12
Secondary treatment 0
Discharge to surface water
24 percent of tanners surveyed
No preliminary treatment 0
Preliminary treatment only 23
Secondary treatment 77
Lagoon treatment 63
Activated sludge treatment 14
VII-2
-------
Presently there are 20 known tanneries discharging directly into navigable
streams or waters. Thus, of the 190 tanneries generating wastewaters,
approximately 170 discharge to publically owned treatment works (municipal
systems). The breakdown of all 190 tanneries according to type and size
was depicted in Table III-6. The breakdown of the direct dischargers with
regards to tannery type is believed to be as follows:
Type Number
Cattlehide chrome tanneries 10
Cattlehide vegetable tanneries 8
Sheepskin or pelt tanneries 2
TOTAL DIRECT DISCHARGERS 20
The discharge status of the municipal treatment system dischargers for
each category of the industry is shown in Table VII-1. Data in this
table were developed by the technical contractor and is based on industry
surveys and discussions with individual industry members.
D. Pretreatment Control Costs
The pretreatment control costs, as provided by EPA, are based on plant
production, wastewater flow and BODs levels as discussed in the Develop-
ment Document for "typical", yet hypothetical tanneries in each category.
The costs depicted and discussed in this section are those for only the
recommended pretreatment control system. Costs for the pretreatment
optional control systems are presented in the Appendix 2.
Investment Costs
Investment costs for specific pretreatment components were primarily
based on the estimated wastewater flow or hydraulic load of the model
tanneries. These costs were developed based on the following assumptions:
Costs are expressed in January 1, 1976, dollars.
Expected accuracy for these conceptual-type estimates is
± 30 to 40 percent.
All design specifications will be prepared by an outside
consulting engineer in accordance with applicable codes.
Construction work to be performed by outside contractor
using union labor and np_ work to be done by in-plant labor
or maintenance people.
Engineering costs are not included in cost estimates, but
the construction contractor's overhead and profit are in-
cluded.
No land acquisition cost is included.
VII-3
-------
Table VII-1. Percentage distribution of required pretreatment
process and of pretreatment option alternatives needed by
municipal dischargers
Category
Cattle, Chrome,
Pulp Hair
Cattle, Chrome,
Save Hair
Cattle, Non-
Chrome
Cattle through
the Blue
Retan Only
No Beamhouse
Tanneries
Shearlings
Percentage of Tanneries
Sulfide Removal
pH Control Process Required
6
6
6
0
14
12
50
75
75
85
1 plant
0
1 plant
1 plant
in Each Category
Flow
Screening Equalization
43 10
43 10
50 0
1 plant 0
77 0
75 0
33 0
Source: Development Document
VII-4
-------
Table VII-2 presents the effluent control investment costs for each
tannery model. Also shown in the table is the pretreatment investment
requirement expressed as a percent of the model's estimated book value of
assets. As investments for pretreatment controls will be considered a
part of the tannery's total assets, this method of expressing investment
costs helps to illustrate the magnitude of the pretreatment investment
costs. As shown in the table, pretreatment investments represent 3.3 to
31.9 percent of the various models existing assets. As would be expected,
the larger percentages correspond to the smaller tannery models thus
implying that economies of scale do exist in the investment requirements.
Total Yearly Costs
Total yearly effluent control costs consist of the annual operating and
maintenance costs, interest and depreciation. The annual operating costs
were provided by the EPA and are shown in Table VII-2. Interest was
based on a 9 percent rate which was then computed as 9 percent of one half
the pretreatment controls investment costs. Depreciation utilized the
straight-line method over the controls 10 year life with no salvage value.
Also presented in Table VII-2 is the total yearly cost for each tannery
model expressed as a percent of the respective model's total sales. For
most tannery models the total yearly costs represent less than one per-
cent of sales. The yearly costs range from 0.2 percent to 1.6 percent
of the models' sales.
VII-5
-------
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VII-6
-------
VIII. ECONOMIC IMPACT ANALYSIS
The resulting direct impacts from the imposition of pretreatment controls
on the Leather Tanning Industry are expected to vary for different types
of tanneries, however the overall industry impacts are expected to be
nominal. The pretreatment requirement consists of pH adjustment and as
depicted in Table VII-1 very few of the tanneries will be required to
invest in additional controls to meet the standard. However, as was
also discussed in the previous chapter, the overall investment require-
ment for the individual tanneries is not considered prohibitive in most
cases.
This chapter will address itself to the various types of impacts for
each of the different tannery categories. These impacts will be applied
to the model tanneries described in Chapter VI. Impacts are based on
the production and financial characteristics of the models and the pre-
treatment control costs as presented in Chapter VII.
It should be noted that in Chapter VII, two sets of control costs are
mentioned; the recommended pretreatment system and the optional system.
For purposes of this impact chapter only the recommended pretreatment
system will be utilized. The impacts for the pretreatment control
options for each of the model tanneries are described in Appendix 2.
A. Price Effects
Required Price Increases
An implicit indication of the expected price effects of pretreatment con-
trols used in this report is the amount of sales price increase necessary
to maintain a tannery's profitability, after pretreatment control expendi-
tures, at a level the same as the tannery without the control expenses.
The method of computation was described in Chapter II (Methodology),
Section F, of this report. The ability of tanneries to pass on such
required price increases is evaluated in the next section of this report.
The amounts of sales price increases necessary to offset the estimated
pretreatment control costs for the model tanneries are depicted in Table
VIII-1. Also shown are the sensitivity ranges of required price increases
when pretreatment costs vary plus or minus 20 percent of the original
estimated costs.
The required price increases for cattlehide chrome tanneries (both pulp
and save hair) range from 0.6 percent for the small model to 0.2 percent
for the extra large model. Price increases required for the cattlehide
vegetable tannery models range from 1.5 percent for the small model to 0.4
percent for the medium. No controls are required for the large model.
VIII-1
-------
Table VIII-1. The Leather Tanning Industry, Pretreatment Standard Impacts
on Prices, Required Price Increase Necessary to Offset Pre-
treatment Control Costs
Model /Size
Cattle-Chrome, Pulp
XCm-> 1 1
-oma 1 i
Small
Medium
Large
X-Large
Cattle-Chrome, Save
XCrvi-» 1 T
-bma 1 1
Small
Medi um
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
Required Price
Percent of Proposed
80%
Hair
0.4
0.3
0.2
0.2
Hair
0.4
0.2
1.2
0.4
; Increase (%)
Pretreatment
100%
0.6
0.4
0.3
0.2
0.6
0.2
1.5
0.4
Costs
120%
0.7
0.4
0.4
0.3
0.7
0.3
1.8
0.5
Cattle Splits
Medium 0.6 0.8 0.9
Sheepskins
Small
Medi urn
Large
Shearlings
Small
Large
0.7
0.4
0.3
0.8
0.6
0.8
0.5
0.4
1.0
0.8
1.0
0.6
0.4
1.2
0.9
VIII-2
-------
The price increase required for the medium cattle split model is 0.8
percent. For the sheepskin models, the required price increases are
0.8, 0.5 and 0.4 percent for the small, medium and large models, respec-
tively. For the shearling models, the required price increases are 1.0
percent for the small model and 0.8 percent for the large.
Thus, it appears that for the industry, as a whole, the required per-
centage increases in prices are relatively small. Of the 14 models de-
picted in Table VIII-1 as requiring price increases, only 2 are 1.0
percent or greater and 6 are less than one-half of one percent.
Expected Price Increase
In the extremely competitive operating environment of the Leather Tanning
Industry, it is doubtful that the impacted tanneries will be successful
in passing on any price increases to recoup their expenditures for pre-
treatment controls. Required price increases are all relatively small,
with the larger tannery model requiring very small price increases. As
the industry's total production is generated primarily by the larger
tanneries, the smaller tanneries will not have the influence to increase
prices to their required levels. Also, at this time, it is not known
what the impact will be on the direct dischargers although because the
number of direct dischargers is limited (approximately 20) it is expected
the impact on industry-wide prices will be minimal. Thus, the domestic
industry is not expected to be capable of increasing their prices to off-
set pretreatment control expenditures.
B. Financial Effects
Based on model tannery profiles described in Chapter VI and the estimated
costs of pretreatment controls provided by EPA, the following financial
indicators were computed under baseline (without pretreatment controls)
and with pretreatment controls:
1. After-tax income
2. After-tax return on sales
3. After-tax return on invested capital
4. Cash flow and cash flow as a percent of invested capital
5. Net present value.
The above were computed for each tannery model according to the discounted
cash flow (DCF) and return on investment (ROI) procedures outlined in the
methodology chapter, Chapter II. Furthermore, a sensitivity analysis was
performed for each model using pretreatment control cost estimates at
levels of 80 percent and 120 percent of the costs provided by EPA.
VIII-3
-------
The results of the model tannery analysis of the recommended pretreatment
standards are summarized in Tables VIII-2, 3 and 4, for each tannery
model. The results are described below for each category of tannery
models.
Cattlehide, Chrome, Pulp Hair Tanneries
After-Tax Income. As shown in Table VIII-2, the imposition of pretreat-
ment controls on cattlehide, chrome, pulp hair tannery models results in
no reductions in the extra-small model's income and only moderate or
slight reductions in the other four model's income. Expressed as a
percent of the baseline incomes, the imposition of pretreatment controls
resulted in after-tax incomes being reduced by 13 percent for the small
model, 9 percent for the medium model, 8 percent for the large model, and
4 percent for the extra large model.
Return on Sales. As would be expected with the above indicated declines
in after-tax incomes, the impacted models' returns on sales declined by a
corresponding percentage (Table VIII-2). The impacted models' (small
through extra-large) returns on sales declined by less than 0.5 per-
centage points.
Return on Invested Capital. The baseline and impacted cattlehide, chrome,
pulp hair tannery models' returns on invested capital are also shown in
Table VIII-2. The imposition of pretreatment controls on these models
result in their ROI's being reduced.
Cash Flow. Relevant information concerning the cattlehide, chrome, pulp
hair tannery models' cash flows are depicted in Table VIII-3. As can be
seen in the table, the various models' cash flows are reduced, however,
the reduction are not as great as were incurred by the models' incomes.
For the models, the cash flows declined by as much as 6 percent for the
small model to as little as 1.6 percent for the extra large model.
Cash flows as percents of invested capital decline by as much as 1.3 per-
cent for the small to 0.3 percentage points for the extra large tannery
model.
Net Present Values. The net present values for the cattlehide, chrome,
pulp hair tannery models are all positive in both the baseline case as
well as after incurring pretreatment expenditures (Table VIII-4). This
implies that it would be probable the model tanneries could remain in
operation after meeting the imposition of pretreatment standards and re-
main financially stable, assuming all other factors are constant.
Cattlehide. Chrome, Save Hair Tanneries
The financial impacts incurred by cattlehide, chrome tanneries that save
hair are expected to be the same as those incurred by those cattlehide,
chrome tanneries that pulp hair. This is resultant of the fact that from
VIII-4
-------
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VIII-6
-------
Table VIII-4. The Leather Tanning Industry, Pretreatment
Standard Impacts on Net Present Values
Model /Size
Cattle-Chrome, Pulp
X-Small
Small
Medium
Large
X-Large
Cattle-Chrome, Save
X-Small
Small
Medi urn
Large
X-Large
Cattle-Vegetable
Small
Medium
Baseline
Case
Hair
199
788
1,682
1,687
5,820
Hair
199
788
1,682
1,687
5,820
-21
-159
91
Net Present
Percent
80%
727
1,588
1,562
5,636
727
5,636
-66
-244
Values ($000)
of Proposed Pretreatment
100%
712
1,564 1
1,531 1
5,613 5
712
5,613 5
-77
-265
Costs
120%
696
,541
,500
,544
696
,544
-89
-286
Cattle to Blue
Medium
Cattle Splits
Medi urn
283
233
220
207
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
222
440
2,106
826
2,613
189
399
2,038
768
2,467
181
389
2,021
754
2,431
173
378
2,004
740
2,394
VIII-7
-------
a financial operation point-of-view no significant differences could be
found as well as the fact that pretreatment control cost estimates pro-
vided by EPA were the same for both tannery categories.
Cattlehide, Vegetable Tanneries
Cattlehide vegetable tannery models were utilized to represent the cattle-
hide, non-chrome tannery category. The resultant impacts are described
below.
After-Tax Income. As shown in Table VIII-2, the vegetable tannery models'
incomes are reduced by $12,000 and $20,000 for the small and medium models,
respectively. These reductions prepresent a decline of 32 percent for
the small vegetable tannery model and 14 percent for the medium model.
No impacts are anticipated for the large model.
Return on Sales. The model vegetable tanneries' return on sales, which are
relatively low in the baseline case, are reduced to even lower levels after
pretreatment control expenditures (Table VIII-2). The small vegetable
tannery models return is reduced from 4.8 percent to 3.2 percent and the
medium model, from 2.8 percent to 2.4 percent.
Return on Invested Capital. The vegetable tannery models reveal a some-
what healthier return on invested capital than are reflected by their
return on sales (Table VIII-2). This is attributable to the older nature
of vegetable tanneries which results in the book value of their invest-
ment being somewhat low. The imposition of pretreatment requirement on
the vegetable tannery models results in the small models ROI being reduced
from 6.8 percent to 4.5 percent and the medium model's ROI declining from
a baseline case of 6.7 percent to 5.6 percent.
Cash Flow. The imposition of pretreatment controls on the models resulted
in their respective cash flows decreasing by 15 percent for the small
model and 6 percent for the medium model. After incurring control ex-
penditures, the cash flows are $44,000 and $203,000 for the small and
medium models, respectively.
Cash flows expressed as a percent of invested capital were 9.3 and 10.2
percent for the small and medium models respectively in the baseline case.
Expenditures for pretreatment controls reduced these to 7.8 and 9.6 per-
cent respectively.
The cash flow baseline cases as well as after impacts are depicted in
Table VIII-3.
Net Present Values. The net present values (NPV) for the baseline cases
of small and medium vegetable tanneries are negative with the baseline
NPV for the large model being a positive $21,000. As was discussed in
Chapter II, Methodology, negative NPV's would cause most operations to
VIII-8
-------
cease operation in the long run. This has been somewhat the situation in
the vegetable tanning category, with those firms remaining either operating
on a marginal basis or having economic conditions which are not consistent
with those of the models.
The imposition of pretreatment controls on the models results in all their
respective net present values becoming negative. This implies that for
the models, the requirement of pretreatment controls may be one of the
deciding factors in the decision to shut down in an industry category that
is already marginal. However, it should be noted that it is doubtful that
in most cases pretreatment requirements alone would be the decisive shut
down factor.
Cattle to the Blue Tanneries
As discussed previously, due to the limited number of cattle to the blue
tanneries presently in operation (three are known), no model plants were
developed. Impacts for this category are represented by the Cattlehide,
Chrome Tannery category.
Cattl?* ~de Split Tanneries
Only one model cattlehide split tannery was developed. The imposition of
pretreatment controls on this model reduces its base case after-tax income
from $65,000 to $50,000 with a corresponding decrease in its returns on
sale (from 3.8 to 3.0 percent). This reduction affects the models return
on investment by decreasing from 10.8 percent in the base case to 8.0
percent after the imposition of pretreatment controls (Table VIII-2).
As shown in Table VIII-3, the cattlehide split tannery's cash flow is
reduced from $95,000 to $86,000 after pretreatment controls. This results
in the cash flow expressed as a percent of invested capital decreasing
from 16.0 percent in the base case to 14.4 percent.
The models net present value remains positive after pretreatment control
costs are incorporated into the model. In the base case, the NPV is
$283,000 and after controls it is $220,000 (Table VIII-4).
Sheepskin Tanneries
Sheepskin tannery models were utilized to depict the no-beamhouse tannery
operations. The resultant impacts of pretreatment controls on these
models are depicted below.
After-Tax Income. As shown in Table VIII-2, the sheepskin tannery models'
incomes are reduced by $7,000, $13,000 and $17,000 for the small, medium
and large models, respectively. These reductions represent declines in
income of 26 percent for the small model and 24 and 8 percent for the
medium and large models, respectively.
VIII-9
-------
Return on Sales. The sheepskin tanneries' returns are reduced from
fairly low levels in the base case to even lower levels. After pretreat-
ment controls, the small models return on sales is only 1.9 percent as is
the medium models also. The large models' return is reduced from 4.4
percent to 4.0 percent by the imposition of pretreatment controls {Table
VIII-2).
Return on Invested Capital. Table VIII-2 also depicts the sheepskin
models return on invested capital both before and after pretreatment
controls. As shown in the table, the returns are reduced; however, the
magnitudes of the reductions are not great and the impacted returns appear
to be relatively healthy with the after pretreatment controls returns
being 20.5 and 16.8 percent for the small and medium models and 31,7 per-
cent for the large model.
Cash Flow. The cash flows of the sheepskin models are shown in Table
VIII-3. In actual dollars, the imposition of pretreatment requirements
results in reductions of $6,000 for the small model, $10,000 for the
medium model, and $12,000 for the large model. Compared to the respective
amounts of the models' original cash flows, these reductions represent
reductions of less than 16 percent of the models cash flows.
Cash flows expressed as a percent of total invested capital are reduced
from 45.2, 33.1 and 44.2 percent to 38.6, 28.7 and 42.3 percent for the
small, medium and large sheepskin tannery models, respectively.
Net Present Val ties. The net present values in the base case are all
positive with the small models' NPV being $222,000, the medium model
being $440,000 and the large models' NPV being $2,106,000. After pre-
treatment impacts, the NPV are reduced to $181,000, $389,000 and $2,021,000,
respectively (Table VIII-4).
Shearling Tanneries
Approximately one-half of the shearling tanneries do not presently
meet the proposed pretreatment standard. As these tanneries install
required equipment, some financial impacts will incur. The following
model analysis assumes no equipment are presently in place. The
resultant model tanneries' impacts are as follows.
The small shearling tannery model will incur a reduction of 18 percent,
or $16,000 of its base case incomes by implementing pretreatment controls.
This will result in a reduction of the models return on sales from 5.9
percent to 4.9 percent and the return on invested capital will decline
from 12.5 percent to 10.0 percent (Table VIII-2). The small models' cash
flow will decline by $9,000 to an after control amount of $124,000 which
will result in the cash flow as a percent of invested capital decreasing
from 19.0 percent in the base case to 17.6 percent after impacts (Table
VIII-3). As shown in Table VIII-4, the models' NPV will decline from
$826,000 in the base case to $754,000 after incurring pretreatment control
costs.
VIII-10
-------
The large shearling tannery models' income will decline by 11 percent
from $265,000 to $236,000 when implementing pretreatment controls. This
will result in the models' return on sales to decrease from 5.3 to 4.7
percent and its return on invested capital to decrease from 11.3 to 9.9
percent (Table VIII-2). The models' cash flow will decline by only
$19,000 to an after controls amount of $395,000. This cash flow reduc-
tion will correspond to a decrease in its cash flow expressed as a per-
cent of invested capital decreasing from 17.7 to 16.9 percent (Table
VIII-3). The large shearling tannery models net present value before
pretreatment controls was $2,613,000. After incurring pretreatment
expenditures, its NPV is reduced by 7 percent to $2,431,000.
C. Production Effects
The Leather Tanning and Finishing Industry can accurately be depicted as
having experienced a deteriorating phase until 1975 at which time total
industry production increased for the first time in eight years. Prior
to 1975, industry production dropped substantially each year from a peak
physical volume of 32.4 million cattlehide equivalents in 1967. The volume
in 1974 was less than 20 million cattlehide equivalents, or a decline of
38 percent from the peak year (1967).
Two major factors have contributed to the decline experienced by the
industry:
1. Increased international competition
2. Increased competition from synthetic leathers both in
terms of physical product and price.
During 1975, the tanning industry experienced a growth situation which
resulted in the industry's annual production to increase from less than
20 million cattlehide equivalents in 1974 to r.^arly 22 million by the
end of 1975. This growth situation was partially resuTtant of improve-
ments in the domestic tanners competitive environment as well as
increased demand by consumers for the natural look (i.e., leather).
There are approximately 190 wet tanneries in the industry today. Thirty
one percent of the tanneries are categorized as large (or extra-large) and
handle approximately 68 percent of the industry's volume. Twenty one
percent of the tanneries are categorized as medium and process an estimated
19 percent of the volume. The remainder or 93 tanneries are small or
extra small operations which as an aggregate produce only 13 percent of
the total industry volume.
Plant Closures
According to the records of the Tanners' Council of America, 45 tanneries
have shut down or ceased operation between 1968 and 1975. The reasons
for these closures vary, however some of the more important factors include:
VIII-11
-------
. increased international competition
. increased strides in the production of synthetic leather
. higher per unit cost of production in some plants especially
the smaller size
lower per unit profit
. difficulty in meeting (physically and financially) occupational
safety requirements
plants becoming physically worn out
inadequate owner income
. present owner reaching retirement age
It is anticipated tanneries will continue to close in the future for the
same or at least similar reasons as those stated above. This must be
considered when estimating plant closures attributed to pretreatment re-
quirements.
As was discussed in Chapter II, Methodology, barring unusual circumstances,
most operations would cease operations if they could not adequately absorb
required pretreatment costs. The most obvious measurement of a firms ability
to absorb the costs is its ability to maintain a positive income after incur-
ring pretreatment control expenditures.
If the situation arises where incomes are negative, some firms will remain
in operation as long as they can cover their variable costs (positive cash
flows). However, as they will eventually be required to meet their overhead
expenses, these firms cannot operate in this manner indefinitely.
The remaining situation that could arise is when firms maintain a positive
income and generate a net present value (NPV) of their cash flows at their
cost of capital which are positive. This indicates that these firms are
earning a return on their operation which exceeds their cost of capital.
If their NPV's are negative then the firms could liquidate, realizing
salvage value in cash, and reinvest in a more financially viable investment
(one which would earn at least their cost of capital).
With the above in mind, review of the model plants' impacts reveal that in
all situations, the models maintained positive profitability levels after
incurring the costs of pretreatment controls (Table VIII-2). Furthermore,
review of Table VIII-3 reveals that all tannery models maintained positive
cash flows after meeting pretreatment standards.
Review of the models' net present values indicate that all models except
the vegetable tannery models maintain positive net present values. Thus
for these tanneries with positive NPV's it can be expected that very few,
if any, will close due to pretreatment requirements.
As mentioned above the net present values for the vegetable tannery models
are negative. It should be noted however the NPV for the small and medium
sized models are also negative in the baseline case and the NPV for the large
model is only $21,000. This implies that these tanneries earn less than
the estimated industry cost of capital of 9.2 percent. Thus it would be
VIII-12
-------
doubtful that the model vegetable tanneries would remain in operation in
the long run even without pretreatment control requirements unless their
owners are willing to accept less for their equity share than is generally
recognized in the industry, or they can improve their profitability
utilizing some characteristics not incorporated into the models.
With regards to possible vegetable tannery closures, information presented
in Table III-6 indicated there are approximately 29 cattlehide non
chrome tanneries in the industry. However, as stated in Chapter VII, eight
of these tanneries discharge directly to navigable streams or waters.
Thus there are approximately 21 vegetable tanners that would be required
to meet pretreatment standards. According to information provided by the
technical contractor, it is estimated 6 percent of the vegetable tan-
neries discharging to POTW's will require investments for pretreatment
controls (Table VII-1). Thus, it appears that only one vegetable tannery
will require to make some expenditure to achieve the pretreatment standard.
As, according to the data provided by the technical contractor, all the
other vegetable tanneries have the necessary pretreatment controls and
appear to have remained viable, it appears that the one vegetable tannery
not having an adequate pH adjustment system could afford to install such
a system and remain viable. Furthermore, the one vegetable tannery may
have some of the requirement technology already in place and, thus, its
actual impacts may be less than those depicted in the preceding impact
analysis.
Production Loss
As discussed in the previous section, of the estimated 190 leather tanneries
in operation, it is not anticipated that any will cease operation solely
becuase of pretreatment control requirements. Accordingly, it is doubtful
that the leather industry's total production will be effected. This is
particularly true since during 1975, total domestic leather produced in-
creased by 9.5 percent or nearly 1.9 million cattlehide equivalents. During
this same year, the Tanners' Council of America reported five tanneries
ceased operation. Thus it appears the industry does have the capability
to absorb the volume lost by those operations ceasing operations within
a reasonable range.
D. Employment and Community Effects
The estimated number of employees in the Leather Tanning and Finishing
Industry is estimated to be 22,000 in 1975 up from 21,000 in 1974. His-
torically, however the number of employees has declined. In 1967, employ-
ment was approximately 31,000.
As there are no projected plant closures attributable solely to pretreat-
ment controls, it is anticipated there will be no loss of employment re-
sulting from the imposition of pretreatment standards. Accordingly, it
is doubtful that communities will be effected either.
VIII-13
-------
E. Balance of Trade Effects
The impacts of pretreatment controls are expected to result in little or
no effect on the United States' balance of trade. As discussed in
previous sections, the Tanning Industry has historically been losing
volume to international competition. However, the majority of these
losses are attributable to trade restrictions and agreements and not
so much due to lack of competitive prices. Additionally since domestic
leather prices are not expected to increase because of pretreatment
controls, it is doubtful that the competitiveness of the domestic tanners
will be effected and thus their ability to compete on the international
market will remain approximately the same.
VIII-14
-------
IX. LIMITS OF THE ANALYSIS
There is little published information regarding the structure, pricing
and economic data of the Leather Tanning and Finishing Industry. Much of
the descriptive data used in this report was orginally compiled by the
Tanners' Council of America for inclusion in the previous EPA reports
concerning the Leather Industry and was, at the time, considered to be the
most complete and accurate source available. This information has been
updated for utilization in this report. Nevertheless, much of the infor-
mation required to develop this report did not exist in quantifiable form
but was derived from personal discussions with individuals knowledgeable
of the industry. This chapter discusses the general accuracy of the
report and some of the key assumptions involved.
A. General Accuracy
The data and other information used in this study were drawn from published
governmental reports, the industry trade association, the industry data
collection portfolio, and from extensive contacts with individual tanneries.
Information on the status of effluent discharge, recommended pretreatment
systems and costs were furnished by EPA. Every effort was made to verify
the data and other information used.
Detailed data on size distribution by types of plants are not available.
Using industry size distributions from the Census of Manufactures, together
with information obtained from the Tanners Council, the technical con-
tractor, and contacts, segmentation of size and type of plants were made
for each industry.
Financial information concerned with investments, operating costs and
returns was not available for individual olants or firms. As a result,
the financial aspects of the impact analysis were, of necessity, based
on synthesized costs and returns for "representative" types of model plants.
These costs and returns were developed from a variety of sources including
published research from universities and government agencies, information
obtained from the data collection portfolio and published financial per-
formance data.
Throughout the study, an effort was made to evaluate the data and other
information used and to update these materials wherever possible. Checks
were made with informed sources in both industry, government and universities
to help insure that data and information used were as reliable and as repre-
sentative as possible. For example, construction costs, working capital
requirements, proportions of capital financed through debt and equity and
profitability ratios were checked with the appropriate persons in industry
firms who are experienced and knowledgeable in these matters. Efforts were
made to use the latest data available.
IX-1
-------
Specifications of the contract require the Contractor to use effluent
control costs provided by EPA. The Effluent Guidelines Division, EPA,
together with its technical contractor, provided recommended alternative
effluent control systems, investment costs and annual operating costs
adapted to the types and sizes of "representative" model plants used in
this analysis. The recommended alternative primarily consisted of pH
control. Disposition of final discharge by plant type was taken from
the Development Document Draft and checked to the extent possible by the
Contractor.
Given the accuracy of the pretreatment control costs, it is believed that
the analysis represents a usefully accurate evaluation of the economic
impact of the proposed pretreatment guidelines.
B. Range of Error
Different data series and different sections of the analysis will have
different possible ranges of error.
Errors in Data - Estimated data error ranges as an average for the in-
dustry are as follows:
Error Range
(Percent)
1. Information regarding the organization and
structure of the industry, number, location
and size of plants, and other information
descriptive of industry segments '+_ 10
2. Price information for products and raw
materials +_ 15
3. Cost information for plant investments and
operating costs +_ 15
4. Financial information concerning the industry +_ 10
5. Alternative pretreatment costs \j +_ 30 to 40
C. Critical Assumotions
In an economic impact analysis of most any industry, it is inevitable
that simplifying assumptions must be made to bring the problem into a
framework of analysis consistent with the constraints of time, budget
and data availability. The major critical assumptions used in this
analysis are as follows:
I/ Error ranges for pretreatment costs are as stated in the Development
Document.
IX-2
-------
1. Types and sizes of the model plants are representative of
plants actually existing in the industry and of plants
expected to be built in the future.
2. It is assumed the financial data are representative of costs
and returns of existing plants or new plants to be constructed
after promulgation of proposed guidelines. As stated earlier,
the model plant financial data are on a constant 1975 dollar
basis and can be adjusted at future times to reflect the future
economic activity.
3. Levels of profitability reflected in model plant profiles (based
primarily on the average of the period from 1970 to 1975 so as
to include years of high and low profits) will be the same in
the future.
4. It was assumed that the economic impacts of oretreatment con-
trols on those products not included in the detailed analysis
of "representative" plants could be evaluated in general terms
through associating them with those "representative" model
plants for which detailed analyses were made. This association
was based primarily on the fact that models were developed for
a single product plant which represented a majority of industry
segment's production. In most cases, there were actual plants
producing products in similar combinations to the model plants
which was the primary objective where possible.
5. Pretreatment control costs and control status estimates were
supplied by the Effluent Guidelines Division, EPA. It is
assumed that these data are realistic in terms of:
(a) Applicability of effluent treatment systems recommended.
(b) Investment and annual operating costs for systems
(c) Percentage of total number of plants which have pre-
treatment in place for each industry segment and for the
industry in general as reported in the Development Document
Draft.
IX-3
-------
Selected References
-------
Selected References
1. Baker, Allen 0., "Hides and Skins," Livestock Marketing Situation,
Economic Research Service, USDA, Washington, D.C., November, 1971.
2. National Commission on Water Quality, Economic Impact of Water
Pollution Controls on Selected Food Industries, The Leather
Tanning Industry, November, 1975.
3. New England Tanners Club, "Leather Facts," Peabody, Mass., 1972.
4. Poats, Fred, "Cattle Hides and Shoe Prices," Marketing and Trans-
portation Situation, Marketing Economic Division, USDA, Washington,
D.C., August, 1972.
5. Poats, Frederick J. and Thompson, John W., "Alternative Markets
for Cattle Hide Trim," Marketing Economics Division, Economic
Research Service, USDA, Washington, D.C., February, 1965.
6. The President's Council on Environmental Quality, The Leather
Industrya Study of the Impact of Pollution Control Costs, prepared
by Urban Systems Research and Engineering, Inc., December, 1971.
7. Robert Morris Associates, Annual Statement Studies, 1975.
8. Tanners' Council of America, "Membership Bulletin Leather Industry
Statistics, 1955-1975," Trade Survey Bureau, Tanners' Council of
America Inc., New York, New York, 1976.
9. Thompson, John W., "Marketing Spreads for Leather Products," Market-
ing and Transportation Situation, Marketing Economic Division,
Economic Research Service, USDA, Washington, D.C., February, 1965.
10. Thompson, John W. and Poats, Frederick J., "Economics of Segmenting
Cattle Hides," Marketing Economics Division, Economic Research
Service, USDA, Washington, D.C., 1965.
11. Troy, Leo, Almanac of Business and Industrial Financial Ratios, 1976.
12. United Nations/Industrial Development Organization Vienna, "Market-
ing and Export Possibilities for Leather and Leather Products Manu-
factured in Developing Countries," United Nations, New York, New
York, 1972.
13. United Nations/CTAD, "The Kennedy Round Estimated Effects on Tariff
Barriers, "United Nations, New York, 1968.
-------
14. United Nations/CTAD, "Leather and Leather Products," United Nations,
New York, New York, 1971.
15. United Nations/CTAD/GATT, "The Market for Leather Goods" Inter-
national Trade Centre, Geneva, 1969.
16. United Nations/CTAD/GATT, "Selected Markets for Leather Garments,"
International Trade Centre, Geneva, 1974.
17. U.S. Department of Agriculture, "Problems of U.S. Hides and Calf
and Kip Skins in International Trade," Foreign Agricultural Service,
Washington, D.C., 1959.
18. U.S. Department of Commerce, Census of Manufactures 1972 and Earlier,
Bureau of the Census, U.S. Government Printing Office, Washington,
D.C.
19. U.S. Department of Commerce, Annual Survey of Manufacturers, 1974 and
Earlier, Bureau of the Census, Washington, D.C.
20. U.S. Department of Commerce, "United States Leathers in World Markets,"
Domestic and International Business Administration, Bureau of Domestic
Commerce, Washington, D.C., 1976.
21. U.S. Environmental Protection Agency, Assessment of Industrial Hazardous
Waste PracticesLeather Tanning and Finishing Industry, Prepared by SCS
Engineers, Inc., February, 1976.
22. U.S. Environmental Protection Agency, Supplement to the Development
Document for Pretreatment Limitation Guidelines, Leather Tanning and
Finishing, Draft Report, Prepared by North Star Division, Midwest
Research Institute, November, 1976.
23. U.S. Environmental Protection Agency, Economic Analysis of Effluent
Guidelines, Leather Tanning and Finishing Industry, Prepared by Develop-
ment Planning and Research Associates, September, 1974.
24. U.S. International Trade Commission, "Footwear", Washington, D.C., 1976.
25. U.S. Treasury Department, Internal Revenue Service, Source Book of
Statistics of Income, 1972 and Earlier.
-------
APPENDIX 1
SUPPLEMENTAL CATTLE SUPPLY INFORMATION
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-------
APPENDIX 2
PRETREATMENT CONTROL OPTIONS
-------
I. Introduction
This Appendix supplements the report for the Environmental Protection
Agency which was designed to analyze the economic impact of the costs
of pretreatment requirements under the Federal Water Pollution Control
Act Amendments of 1972 on the Leather Tanning and Finishing Industry
(SIC 3111).
Specifically, this supplemental report provides incremental economic
impacts for each of the model tannery plants developed in the original
draft report. These economic impacts were determined utilizing incre-
mental treatment alternative components which were applied to the var-
ious types and sizes of the model tanneries. The intent of this approach
was to provide a guidence document which municipalities could utilize
to determine how various configurations of requirements for pretreatment
would effect model tanneries' economic conditions.
It should be noted that use of this guidence document for the determina-
tion of a specific tannery's ability to absorb the expenditure for pre-
treatment controls is not recommended as the tannery models utilized
herein are considered as only representative model tanneries of the entire
Leather Tanning Industry. Specific tanneries will have both operational
and financial characteristics which are unique only to their firm and
will result in economic impacts which are not predictable through this
exercise.
II. Incremental Pretreatment Costs
The incremental pretreatment control costs were provided by the techni-
cal contractor and included the following alternative treatment components
for each tannery model:
Pretreatment Components
Sulfide Removal
Screening
pH Adjustment
Flow Equalization
Optional Pretreatment Components
Pump System
Chrome Recycle
Plain Sedimentation
Coagulation Sedimentation
Sludge Treatment, Removal
In addition, for each model, an impact analysis was completed using an
incremental capital cost approach with capital costs ranging from $25,000
to $300,000 and the increment being $25,000. Estimates of the operating
-------
and maintenance costs for each increment were developed by the technical
contractor and were estimated to be 16.0 percent of the capital cost.
Depreciation was assumed to be straight-line method over a 10 year
asset life. The costs used are summarized below.
Step Capital Cost Operating & Maintenance Depreciation
1 $ 25,000 $ 4,000 $ 2,500
2 50,000 8,000 5,000
3 75,000 12,000 7,500
4 100,000 16,000 10,000
5 125,000 20,000 12,500
6 150,000 24,000 15,000
7 175,000 28,000 17,500
8 200,000 32,000 20,000
9 225,000 36,000 22,500
10 250,000 40,000 25,000
11 275,000 44,000 27,500
12 300,000 48,000 30,000
The component costs used for each tannery model are summerized in Tables
1 through 5. It should be noted that only the pretreatment component
and optional pretreatment component costs are shown on each table. The
$25,000 incremental capital costs expenditures are the same as shown
above for each of the tannery models.
III. Incremental Pretreatment Impacts
For each of the tannery models an impact analysis was completed for each
of the various pretreatment components. For each component the following
impact indicators were computed:
. Required Price Increase
. After Tax Income
. After Tax Return on Sales
. After Tax Return on Invested Capital
. Estimated Cash Flow
. Cash Flow as a Percent of Invested Capital
. Net Present Value
The impacts of the various components on each tannery model are illustrated
in Tables 6 through 19.
To explain the use of these tables an example will be used.
-------
In Table 6, the impacts for the various treatment components are depicted
for the extra-small, cattlehide, chrome tannery. For each impact indicator,
the base case is shown. This represents what the indicator would be if the
model tannery incurred no additional expenditures for pretreatment con-
trols. Below the base case are the various pretreatment alternative com-
ponents and their respective impacts on the indicators. For example,
after-tax income of the extra-small model was $32,000 in the base case.
The imposition of sulfide removal would reduce the income to $18,000; the
imposition of chrome recycling would result in an after-tax income of
$24,000; etc. If both sulfide removal and chrome recycling were required
the after-tax income for the extra-small tannery would be $10,000. (This
was computed by taking the after-tax income corresponding to sulfide re-
moval and subtracting from that the difference between the base case after
tax income and the after-tax income corresponding to chrome recycling
$18,000 - ($32,000 - $24,000). Various other combinations of the com-
ponents can also be derived in a similar fashion.-'
For those individuals wishing to see the model's ability to absorb expendi-
tures for pretreatment controls not specified as one of the components,
the incremental cost approach can be used. For example if the extra
small model v/as to be impacted by a capital expenditure of $75,000,
this would reduce its after-tax income to $13,000 which would correspond
to an after-tax return on sale of 1.8 percent and whcih would necessitate
a price increase of 2.3 percent if the tannery were to remain a profit
level equal to that orior to the expenditure.
Finally, it should be noted that the computer program used for the impact
analysis generates an error for the price increase required when after-tax
income is negative beyond a certain amount. Efforts are being made to re-
solve this problem. Note only the required price increase is affected,
the other impact indicators are correct.
The program used for the impact analysis, considers the tax effect of
expenditures for pretreatment controls. When combining treatment com-
ponents, a slight overstatement of the impact may result when the model's
income is reduced from one tax bracket to a lower tax bracket (i.e., going
from pre-tax income above $25,000 to pre-tax income below $25,000). As
the actual effect on impacts is slight and the net effect is to make the
potential impacts more conservative, no adjustment is felt necessary.
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
1. REPORT NO.
EPA 440/?-77-nn3
3. RECIPIENT'S ACCESSION-NO.
4. TITLE AND SUBTITLE
Economic Impact Analysis of Final Pretreatment
Standards Leather Tanning & Finishing Industry
TE
6. PERFORMING ORGANIZATION CODE
WH-586
7 AUTHOR(S)
8. PERFORMING ORGANIZATION REPORT NO.
EPA 440/2-77-003
10. PROGRAM ELEMENT NO.
Water Economics Branch
401 M Street, S.W.
Washington, D.C. 20460
11. CONTRACT/GRANT NO.
13. TYPE OF REPORT AND PERIOD COVERED
Office of Water Planning & Standards
401 M Street, S.W.
Washington, D.C. 20460
14. SPONSORING AGENCY CODE
700/01
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This study is to analyze the economic impact which could result from the
application of alternative pretreatment standards established under Section
307(b) of the Federal Water Pollution Control Act (FWPCA), as amended. The
surveys existing the potential waste treatment control methods and techno-
logy within particular industry source categories and support interm final
promulgation of pretreatment standards based upon analysis of feasibility
of these standards in accordance with the requirements of Section 307(b)
of the Act. This document supplements this analysis by estimating the
broader economic effects which might result from the required application
of various control methods and technologies. This study investigates the
effect of alternative approaches in terms of product price increases,
effect upon employment and the continued viability of affected plants,
effects upon foreign trade and other competitive effects.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b.lDENTIFIERS/OPEN ENDED TERMS
c. COSATI Field/Group
18. DISTRIBUTION STATEMENT
RELEASE TO PUBLIC
21. NO. OF PAGES
100
20
22. PRICE
EPA Form 2220-1 (9-73)
U S GOVERNMENT PRINTING OFFICE 1977 247-726/6611
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