EPA—440/2-79-019
JULY, 1979
ECONOMIC IMPACT ANALYSIS
OF PROPOSED
EFFLUENT LIMITATIONS GUIDELINES,
NEW SOURCE PERFORMANCE STANDARDS
AND PRETREATMENT STANDARDS
FOR THE
LEATHER TANNING
AND FINISHING
POINT SOURCE CATEGORY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Analysis and Evaluation
Office of Water and Waste Management
Washington, D.C. 20460
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This document is available through the U.S. Environ-
mental Protection Agency, Economic Analysis Staff
WH-586, 401 M Street, S.W., Washington, D.C.
20460, 202-755-2484.
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This report has been reviewed by the Office of Water Planning and Standards,
EPA, and approved for publication. Approval does not signify that the
contents necessarily reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or commercial products
constitute endorsement or recommendation for use.
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Development Planning and Research Associates, Inc
P.O. Box 727, Manhattan, Kansas 66502
ECONOMIC IMPACT ANALYSIS OF PROPOSED EFFLUENT
LIMITATIONS GUIDELINES, NEW SOURCE PER-
FORMANCE STANDARDS AND PRETREATMEMT
STANDARDS FOR THE LEATHER
TANNING AND FINISHING INDUSTRY
POINT SOURCE CATEGORY
Richard E1. Seltzer
Principal Investigator
Preoared for
U.S. Environmental Protection Agency
Office of Analysis and Evaluation
Washington, D.C. 20460
Contract Number
68-01-4182
July, 1979
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PREFACE
This document is a contractor's study prepared for the Office of Water
Planning and Standards of the Environmental Protection Agency (EPA).
The purpose of the study is to analyze the economic impact which could
result from the application of effluent standards and limitations issued
under Sections 301, 304, 306 and 307 of the Clean Water Act to the
Leather Tanning and Finishing Industry.
The study supplements the technical study (EPA Development Document)
supporting the issuance of these regulations. The Development Document
surveys existing and potential waste treatment control methods and tech-
nology within particular industrial source categories and supports certain
standards and limitations based upon an analysis of the feasibility of
these standards in accordance with the requirements of the Clean Water
Act. Presented in the Development Document are the investment and
operating costs associated with various control and treatment technol-
ogies. The attached document supplements this analysis by estimating the
broader economic effects which might result from the application of
various control methods and technologies. This study investigates the
effect in terms of product price increases, effects upon employment and
the continued viability of affected plants, effects upon foreign trade and
other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Planning and Standards of EPA. This report was submitted in
fulfillment of Contract No. 63-01-4182 by Development, Planning and
Research Associates, Inc. and completed in July 1979.
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule
making. The study is not an official EPA publication. It will be con-
sidered along with the information contained in the Development Document
and any comments received by EPA on either document before or during final
rule making proceedings necessary to establish final regulations. Prior
to final promulgation of regulations, the accompanying study shall have
standing in any EPA proceeding or court proceeding only to the extent that
it represents the views of the contractor who studied the subject industry.
It cannot be cited, referenced, or represented in any respect in any such
proceeding as a statement of EPA's views regarding the Leather Tanning
and Finishing Industry.
ENVIRONMENTAL pROTE
i i
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ACKNOWLEDGEMENTS
This study was conducted by a team of DPRA staff members with Mr. Donald
J. Wissman serving as the overall DPRA Project Director. DPRA staff
members making major contributions to this project included Mr. Daniel
W. Francke and Ms. Linda Drumhiller Chapman.
DPRA especially acknowledges Ms. L. Oean Noroian and Mr. Anthony M.
Montrone, U.S. Environmental Protection Agency, Office of Analysis and
Evaluation, who served as the Project Officers for this study and who
provided the necessary guidance in carrying out all aspects of the
project. Also valuable contributions to this study were made by Mr.
Donald F. Anderson, U.S. Environmental Protection Agency, Effluent
Guidelines Division, and Mr. Robert J. Reid, Midwest Research Institute,
who provided information concerning the technical aspects of the study.
The cooperation and assistance of the Tanners' Council of America, Inc.,
particularly Mr. Eugene Kilik, is acknowledged for their assistance in
supplying industry information. Also the numerous tannery owners and
their respective managements who submitted information and cooperated
during staff interviews are acknowledged and thanked.
Richard E. Seltzer
Principal Investigator
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CONTENTS
PREFACE i i
ACKNOWLEDGMENTS iii
EXECUTIVE SUMMARY vii
I. INTRODUCTION 1-1
A. Scope of this Report 1-1
B. Organization of this Report 1-2
C. Data Sources 1-2
1. Primary Data Sources 1-2
2. Secondary Data Sources 1-3
II. METHODOLOGY I1-1
A. Industry Structure and Subcategorization II-2
B. Financial Profile of the Industry 11-2
C. Model Plants II-4
D. Pricing Patterns 11-5
E. Waste Treatment Technological Options and Costs II-5
F. Other Regulatory Costs 11-6
G. Analysis of Economic Impacts II-6
1. Fundamental Core Methodology II-7
2. Price, Supply and Demand Impact Analysis 11-13
3. Financial Impact Analysis 11-14
4. Plant Closures and Production Effects 11-14
5. Employment Impact Analysis 11-17
6. Community Impact Analysis 11-17
7. Dislocation Analysis 11-17
8. Balance of Trade Impact Analysis 11-17
9. Other Impact Analysis 11-17
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 III-6
3. Types of Major Products III-7
4. Value of Shipments III-9
5. Location of Tanneries III-ll
6. Age of Plants and Level of Technology III-ll
C. Importance of Integrated Capacities III-l3
D. Level of Diversification 111-14
E. Employment Characteristics 111-14
1. Employment 111-14
2. Level of Wages 111-16
F. Ownership Type and Size 111-16
G. Industry Subcategories 111-16
1. Conventional Industry Subcategories 111-16
2. Subcategorization of Plants by Type of
Manufacturing Process 111-17
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CONTENTS (continued)
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY IV-1
A. General Financial Situation IV-1
B. Cost Structure of the Industry IV-3
1. Revenues IV-3
2. Variable Costs IV-5
3. Fixed Costs • IV-5
C. Industry Profitability IV-9
1. Net Profits on Sales IV-9
2. Return on Investment IV-12
3. Cash Flow IV-12
D. Financial Structure of the Industry IV-12
1. Assets IV-12
2. Liabilities IV-15
3. Net Worth IV-15
E. Cost of Capital - After Tax IV-16
F. Assessment of Ability to Finance New Investment IV-16
1. Financing Mew Investment IV-16
2. General Industry Situation IV-17
3. Expenditures for Plant and Equipment IV-19
4. Capital Availability IV-19
V. PRICE AND PRICE DETERMINATION V-l
A. Leather Prices, Demand, and Supply V-l
1. Hide and Leather Prices V-l
2. Demand for Leather V-5
3. Supply of Leather V-9
B. Imports of Finished Leather Products into the
United States V-ll
1. Trends in Imported Leather Goods V-13
2. Trade Restrictions V-13
C. The Raw Hide Market V-16
1. United States Supply of Hides V-17
2. World Supply of Hides and Skins V-19
3. The Demand for Raw Hides V-23
4. Trade Restrictions in Raw Hide Supply V-25
VI. REPRESENTATIVE MODEL TANNERIES VI-1
A. Types and Sizes of Model Plants VI-1
B. Operational Characteristics VI-3
C. Investment Characteristics VI-5
1. Fixed Assets VI-5
2. Operating Capital VI-5
3. Total Investment VI-11
4. Salvage Value VI-11
D. Sales and Costs Characteristics VI-11
1. Annual Sales VI-19
2. Raw Material Costs VI-19
3. Labor Costs VI-19
4. Tanning Materials and Other Costs VI-20
5. Deoreciation and Interest Costs VI-20
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CONTENTS (continued)
E. Model Plant Income and Annual Cash Flow
Characteristics VI-20
1. Existing Direct Discharging Models VI-25
2. Existing Indirect Discharging Models VI-25
3. New Source Models VI-25
VII. WASTEWATER CONTROL COSTS VII-1
A. Discharge Status of the Industry VII-1
B. Wastewater Treatment Technologies VII-2
1. Existing Direct Dischargers (BPT and BAT) VII-2
2. Existing Indirect Dischargers (PSES) VII-3
3. New Source Indirect Dischargers (PSNS) VII-3
4. New Source Direct Dischargers (NSPS) VII-3
C. Wastewater Treatment Costs VII-3
1. Investment Costs VII-4
2. Annualized Costs VII-4
3. Aggregated Industry Costs VII-5
D. Availability of Land for Controls VII-5
VIII. PROJECTED ECONOMIC IMPACTS VIII-1
A. Price Effects VIII-1
1. Required Price Increases VIII-1
2. Expected Price Increases VIII-2
B. Financial Effects VIII-5
1. Return on Sales VIII-5
2. Return on Total Assets VIII-11
3. Annual Cash Flows VIII-11
4. New Present Values VIII-16
C. Production Effects VIII-19
1. Baseline Plant Closures (without control
expenditures) VIII-19
2. Impacted Plant Closures VIII-20
3. Production Loss VIII-24
D. Employment and Community Effects VIII-24
E. Dislocational Effects VIII-25
F. Balance of Trade Effects VIII-25
G. Summary of Recommended Treatment Options Impacts VIII-25
1. BPT Revised VIII-26
2. BAT Option 3 VIII-26
3. NSPS Option 1 VIII-26
4. PSES Option 1 VIII-27
5. PSNS Option 2 VIII-27
IX. LIMITS OF THE ANALYSIS IX-1
A. General Accuracy IX-1
B. Range of Error IX-2
C. Critical Assumptions IX-2
APPENDIX A - Selected References
APPENDIX B - Effects of Sensitivity on Model Plant Impacts
APPENDIX C - Data Collection Portfolio
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EXECUTIVE SUMMARY
1. Introduction
This report analyzes the economic impacts of the imposition of water
pollution controls on the Leather Tanning and Finishing Industry (SIC
3111). Prepared under the supervision and review of the Office of
Analysis and Evaluation, U.S. Environmental Protection Agency, the study,
as required under the Clean Water Act, considers the economic effects
of the controls imposed by that law over the industry's discharge of
its effluents.
The specific economic impacts analyzed in this study include those
affecting industry:
1. prices, profitability, and growth,
2. extent and determinants of capitalization,
3. number, type, and size of plants,
4. production and employment, and
5. community and balance-of-trade effects.
To determine the industry's water pollution control cost impacts, the
study describes the industry's structural, financial, and pricing
characteristics, develops representative model plants reflective of
these, and by imposing controls costs on the models, determines the
economic impacts of those costs.
The data employed in the study were derived from reports issued by federal
agencies, survey information required from industry firms, the industry
trade association, and interviews conducted among industry personnel during
the Contractor's plant visits. Common published sources included EPA's
Development Document, Robert Morris' Statement Studies, Troy's Almanac of
Financial Ratios, and the Bureau of the Census' Census of Manufactures.
Data from these and the other sources listed above were used to develop the
macroeconomic profile of the industry as well as the representative
financial models.
II. Methodology
In this study, several interrelated analyses were used to evaluate likely
economic impacts resulting from effluent control requirements on the
Leather Tanning and Finishing Industry. These in-depth analyses included:
(1) a characterization and subcategorization of the technical and economic
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structure of the industry, (2) a description of the financial profile of
the industry, (3) the construction of representative model plants, (4) an
evaluation of pricing patterns within the industry, (5) a description of
the technological options and their costs for meeting designated levels
of pollution control, and (6) the analysis of the economic impacts. The
exhibit on the following page illustrates the schematic organization of
this study's analyses.
In the case of Best Practical Control Technology Currently Available
(BPCTCA), Best Available Technology Economically Achievable (BATEA), and
Pretreatment Standards for Existing Sources (PSES), the analyses focused
on price increases, plant closings, curtailments of production, dislocations
of production, unemployment, community impacts, and balance of trade
effects. For New Source Performance Standards (NSPS) and Pretreatment
Standards for New Sources (PSNS), the impacts were assessed in terms of
the effects on industry growth, prices, plant locations (i.e., domestic
or foreign production), and balance of trade.
The fundamental methodology used in the impact analysis is the same as that
generally employed in capital budgeting studies of new investments. The
budgets of the representative model plants, derived from various data
sources concerning existing industry plants, provided the baseline case
upon which the costs of pollution controls were imposed to determine the
impacts of those controls' costs.
The model plants, though not precisely representative of any single existing
plant operation, reflect the financial and physical characteristics of the
industry as of early 1977. Adjustments to model plant budgets reflecting
pollution control investment and annual operating costs permitted pre- and
post-pollution control economic analyses for impacts on prices, profit-
ability, and production. It should be noted, while models were developed
for both direct and indirect discharging tanneries, data were also avail-
able for each of the direct dischargers. Accordingly, these existing
tanneries were analyzed individually. For purposes of presentation in this
report, however, the data v/ere aggregated and presented in the form of
models.
Price increases required to return the model plants to pre-pollution con-
trol levels of profitabilities were calculated to estimate the expected
price effects. The abilities of the impacted plants to pass on such
increases were then determined. Based on these price analyses, the abili-
ties of plants to remain in operation after control expenditures were
assessed.
Probable plant closures, a key part of the analysis, were determined through
a net present-value analysis, by which expected future cash proceeds were
discounted at a firm's estimated cost of capital rate. A net present-value
of less than zero implies that it would be more practical for the owner to
liquidate the plant and reinvest the salvage proceeds at the cost of capital
VI 1 1
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Industry
Industry
Structure
Industry
Financial
Data
EPA Pollution
Control Costs
Subcate-
gorization
Model Plant
Parameters
Budget Data
Development
Model
Financial
Analyses
Price
Increases
Plant Closures
Due to Control
Shutdown
Analysis
Employment
Effects
Community
Effects
Production-
Expected
Effects
Foreign
Trade
Effects
Industry
Pricing
Financial
Profiles
Schematic of economic impact analysis of effluent control guidelines
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rate. The projected model plant closures were then extrapolated to the
existing tanneries associated with the respective model plants. These
closures were projected for the base case '(without control expenditures) and
the impacted case (with control expenditures). For new source tanneries
(those yet to be constructed), projections for the base case and the impacted
case were also determined utilizing the same methodology.
Finally, a qualitative analysis of economic determinants indicated the
broad macroeconomic effects on industry production and employment, on its
communities, location, and on balance of payments.
A detailed description of the study's methodology comprises Chapter II.
III. Structure of the Industry
The Census of Manufactures defines the Leather Tanning and Finishing
Industry (SIC 3111) as one comprised of establishments primarily engaged
in tanning, currying, and finishing hides and skins into leather, and
characterizes the establishments as regular, converter, and contract
tanneries. Of these, only regular and contract tannery firms generate
effluents. Additionally, only "wet" tanneries discharge an appreciable
amount of toxic substances. This study's analysis, then, is concerned
principally with regular and contract "wet" tanneries. A comparison of
Department of Commerce and the Tanners Council of America data indicates
that approximately 138 wet tanners are in operation with firm ownership
ranging from family-owned companies and closely held corporations to
divisions of relatively large conglomerates.
Census data for 1967 and 1972 indicative of plant sizes by number of
employees are considered reflective of general industry characteristics.
Plant size remained relatively constant over the period and plants were
typically small: in 1972, 57 percent employed fewer than 19 persons, 29
percent between 20 and 99, and 14 percent had 100 or more employees. The
188 wet tanneries, classified in size groupings by their daily production
capacity, ranged as follows: less than 300 cattlehide equivalents (a
cattlehide equivalent equals 40 square feet of leather and weighs approx-
imately 55 pounds), 24 percent; 300 to 699 cattlehides, 24 percent; 700
to 1,199, 21 percent; 1,200 to 1,999, 17 percent; and more than 2,000,
14 percent. It is estimated that approximately 40 percent of these wet
tanneries have fewer than 50 employees.
The 1979 value of shipments are expected to total $1,546 million, 5.5
percent above that of 1978 and 45.8 percent over the 1972 value. His-
torically, the value of shipments has fluctuated yearly; however, the
overall average growth rate since 1960 has been 4.8 percent. Shipments
of industry tanned and finished leather, its primary products, in 1972
represented 99 percent of the industry's total product; secondary products
were valued at $2.5 million.
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Historically, tanneries are located near adequate supplies of hides, water
and tanning materials. Industry location continues to follow that pattern.
As the slaughter industry gradually disperses nationally, the tanning
industry is expected to become less concentrated geographically than at
present. Based upon EPA's economic industry survey, 54 percent of the
wet tanneries are located in New England, 10 percent in the South, 25
percent in the Midwest, and the remaining 11 percent in the West and
Southwest.
The industry is comprised essentially of older plants, with slightly over
70 percent of them 50 years of age or older; however, and quite importantly,
the industry plants have been characteristically modernized and re-equipped
at a cumulative cost nearly equal to new plant capitalization costs.
Similarly, it is important that 80 oercent of industry plants employ tech-
nologically modern processes. Prospects for new plants vary among subcate-
gories with the chrome tan (Subcategories 1 and 2) and the through-the-blue
(Subcategory 6) subcategories appearing to have the greatest potential for
construction of new tanneries.
Total industry employemnt declined by 31 percent between 1965 and 1978,
from 32,000 to 22,0,00 employees. Approximately 90 percent of the latter
are production employees. The 1976 total industry payroll was $243.9
million. Production workers earned 74 percent of that total with an
average annual wage of $9,351, an increase of 38 percent since 1965.
IV. Financial Characteristics of the Industry
There is relatively little published information concerning this industry's
financial characteristics due to the preponderance of small, family-owned
businesses and privately-held corporations. Information from government
sources, industry surveys, and the Contractor's industry contacts provided
the majority of the data base used in this study.
In general, the industry has experienced a somewhat volatile financial
situation in recent years. The industry declined steadily in terms of
number of plants, volume, and profits beginning in the mid 1960's and
reached a low in 1972 and 1973. Beginning in 1974 and, for the most part
continuing through early 1977, the industry experienced a much brighter
financial situation. However, in late 1977 and continuing through 1978
and early 1979, the industry's financial situation again showed signs of
deterioration.
The study examined the industry's potential to finance pollution control
expenditures. While individual firm ooportunities will vary, the industry
as a whole should not encounter significant difficulties in obtaining
financing because of its traditional low debt-high liquidity characteris-
tics. However, if the recently experienced financial deterioration con-
tinues, then the ability of the industry to finance controls may be reduced.
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V. Price and Price Determination
The economic impacts resulting from the imposition of pollution controls
depend, in part, upon the industry's ability to absorb or to pass forward
or backward the economic costs of those controls. For the Leather Tanning
Industry this ability would be in large part a result of its influence
over its products (leather) or its supply (hides) prices and pricing
processes.
The demand and supply for the prices of leather experienced by U.S. leather
tanners have been highly variable in recent years: the depressed markets
of the early 1970's were somewhat recovered in 1975 and 1976, but they
were again depressed in 1977 as both dollar volume and units produced,
declined. In 1978, volume produced continued to decline with only a small
increase in dollar volume. The outlook for 1979 is projected to be only
fair. Because hides and skins are a major component of tanners' direct
costs, the increases in materials' costs reflective of foreign demand for
cattlehides have resulted in both higher leather costs and a decreasing
margin between material costs and finished product prices. The margin has
declined in real-dollar terms at an average annual decrease of 1.4 percent
per year. Increased foreign competition and declining volumes have pre-
vented tanners from increasing production margins sufficiently to maintain
historic profit levels.
The industry's annual production decline from nearly 32.7 million cattle-
hide equivalents in 1965 to 20.5 million in 1978 reflects the increasing
competition of foreign tanneries and leather product manufacturers.
Historically, the demand for leather is greatly determined by the U.S.
shoe industry, and the effect of foreign competition in the shoe industry
has been marked: the U.S. shoe manufacturers' share of the market decreased
34 percent between 1965 and 1975. The resulting demand by domestic shoe
manufacturers for U.S. produced leather declined from 78 percent of total
U.S. leather produced in 1970 to only 59 percent in 1976. It is projected
to be at 54 percent in 1977. Although other finished leather purchasers
operate in somewhat better markets, only 30 percent of the U.S. produced
leather purchases are received by those who maintain strong, promising
markets.
The effect of such determinants upon the tanning industry's ability to
determine its finished produce prices is further compounded by the im-
balance that exists between finished leather product exports and imports.
Imports of finished leather products more than tripled between 1969 and
1977--from $631 million to over $2.39 billion. Exports by 1977 amounted
to $119 million or only 5.0 percent of all leather imports.
The supply equation that affects the U.S. tanners' pricing ability is no
more promising than that for demand. Hide prices represent only 3 percent
to 6 percent of live animal values and, consequently, the tanning industry
exerts little demand effect on the slaughter industry.
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In general, although cattlehide production has traditionally increased
annually in the U.S. and in most producing countries, annual hide demand
in other nations restricts the U.S. tanning industry's ability to become
the chief determinant of its raw material prices. The industry is basically
in a demand-pull situation for raw hides. Foreign demand for U.S. raw
hides, which now take over 50 percent of our total produced cattlehides, will
continue and possibly exoand. U.S. tanners, then, will face continued
international competition for raw hides, and such a condition restricts
the industry's ability to pass back the added costs of pollution controls
to their supply sector.
VI. Representative Model Tanneries
Economic models were developed to represent tanneries which could be
affected by the imposition of effluent control guidelines. The models
depicted typify most tannery operations. Among the aspects considered
are industry plant:
a. types and sizes,
b. operational characteristics,
c. investment characteristics,
d. sales and cost characteristics, and
e. profit and annual cash flow characteristics.
The models were developed from published sources and from the Contractor's
survey of the industry based on procedures outlined in the methodology
chapter. Furthermore, the models were originally designed to reflect
industry conditions during 1975 and 1976; thus, they are baseline models
and do not reflect the effects of water pollution control costs (considered
in succeeding study chapters). The models' financial data have been adjusted
to reflect early 1977 industry conditions. It should be noted that while
models were developed for both existing direct and indirect dischargers,
due to the small number of direct dischargers it was possible to analyze
each facility individually. However, for purposes of presentation in this
report the direct dischargers were combined and depicted in the representa-
tive models.
VII. Wastewater Control Costs
The wastewater control systems and costs considered in this study were
furnished by EPA in the Development Document I/, and the conclusions
reached resulted from the imposition of those costs on the model plants
presented in the previous chapter.
If Development Document for Proposed Effluent Limitations Guidelines, New
Source Performance Standards and Pretreatment Standards for the Leather
Tanning and Finishing Point Source Category, U.S. Environmental Protection
Agency, EPA 440/1-79-016, 1979.
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The wet tanneries, those industry plants affected by control requirements,
presently treat their effluents in the following way: 90 percent (170
tanneries) of the industry discharge to municipal treatment facilities and
10 percent (18 tanneries) discharge to surface water. The control tech-
nology costs considered reflected those for systems incremental to presently
employed systems, those for new point source dischargers, and those for
existing direct and indirect dischargers. Included in the costs were in-
puts for design development, outside labor costs, contractor overhead and
profit, annual operating and maintenance expenditures, and capital costs
and depreciation. Mo costs were included for land acquisition or engineering.
VIII. Projected Economic Impacts
The impacts described in this report were assessed for each of the model
tanneries described in Chapter VI utilizing the various wastewater control
alternatives' costs presented in Chapter VII. The methodology used (Chapter
II) was based on a net present value (NPV) analysis to determine the model
tanneries' required price increases, their ability to make price increases
necessary to offset control expenditures, and the potential financial impacts
attributable to such expenditures. Other potential impacts such as plant
closures, employment losses, community effects, dislocation effects, and
balance of payment effects were also assessed. The impacts presented are
reflective of the industry conditions as of early 1977.
The strong competitive threat from foreign tanneries, and the existing
domestic intra-industry competition indicate that the U.S. tanning industry
will not be able to adequately raise prices to offset pollution control
costs. The projected closure impacts assume the industry will absorb all
of these costs.
The impact analysis suggests a few small tanneries may not choose to con-
tinue operations after the imposition of control costs. Although closures
and resulting losses in employment in small communities would impact those
areas, such closures would not seriously disrupt the industry as a whole.
Their lost production could be absorbed by existing plants, and their
effects on the national balance-of-trade would be negligible.
The impacts of the recommended control options are summarized below.
1. BPT Revised
The imposition of the control technology associated with BPT Revised will
potentially affect only 14 tanneries with a few already having some of the
necessary technology in place. For those models requiring expenditures,
the projected required price increases to offset such expenditures was 1.7
percent or less. With respect to financial effects, assuming no price
increases, BPT Revised could reduce the models' returns on sales from a
range of 2.0 to 2.5 percent to a range of 1.3 to 2.2 percent and the
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models could also incurr reductions in their respective annual cash-flows
and net present values; but not to the extent of being negative. Compli-
ance with BPT Revised is estimated to cost the affected tanneries a total
initial investment of $4.5 million and a total annualized cost of $1.5
million. It was anticipated no closures would be incurred with the imposi-
tion of BPT Revised. Accordingly, no impacts would be anticipated on
production, employment, community, or balance of trade.
2. BAT Option 3
The imposition of BAT Option 3 would potentially affect all 18 tanneries.
With the imposition of this option, the projected required price increases,
assuming BPT Revised is in place, to offset the associated expenditures
will be 0.6 percent or less. The projected impacts on the models financial
indicators, assuming no price increases, included reductions in returns on
sales from a range of 1.3 to 2.2 percent to a range of 0.6 to 1.9 percent,
reductions in annual cash flows, and reductions in the models' net present
values. For all the models except the non chrome tan (3) model, reductions
in these latter two indicators were not to the extent of their becoming
negative. The small non chrome tan (3) model maintained a positive cash
flow but after incurring BAT Option 3 expenditures, its NPV was -$20,000.
In addition to the model plant approach, individual tanneries were assessed
as to their ability to afford BAT Option 3 expenditures. As a result of
this analysis, it was determined that only one tannery was believed to en-
counter potential difficulty in meeting the recommended option. If the
tannery curtailed operations, then approximately 50 employees could lose
their jobs and at least one and perhaps 3 or 4 neighboring communities
could be effected. Production and balance of payments inputs would be re-
latively small. Compliance with this BAT option is estimated to cost the
direct dischargers a total of $1.9 million initial investment in addition
to the proposed BPT investment. Annualized costs are estimated to total
$2.1 million in addition to proposed BPT annualized costs.
3. NSPS Option 1
As discussed in the previous section, impacts associated with new source
models were difficult to assess as they represent facilities which have yet
to be constructed. However, based on the new source models, the imposition
of NSPS Option 1 expenditures resulted in individual new source models
requiring projected price increases to offset control expenditures ranging
from 0.9 to 8.4 percent. Assuming no price increases, projected impacts
reflected reductions in returns on sales from a base case range of 4.1 to
11.6 percent to an impacted range of 1.0 to 9.0 percent, reductions in the
annual cash flows but none to negative levels, and reductions in the models
NPV's with the extra-small and large chrome tan (1 & 2) models incurring
negative NPV's after having positive NPV's in the base case. Based on the
analysis it was determined new non chrome tan (3) facilities would probably
not be constructed in the future even without control requirements and that
new large chrome tan (1 & 2) facilities may prove to be marginally viable
if required to meet NSPS Option 1 requirements. During the next 5 years,
a few new tanneries may be constructed. These most probably would be in
the chrome tan (1 & 2) and the through-the-blue (6) subcategories. They
may be either direct or indirect discharging facilities.
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4. PSES Option 1
The requirement of PSES Option 1 on all 170 existing indirect discharging
tanneries resulted in the need for a price increase of 5.8 percent or less
to offset the control expenditures. If no price increase was assumed then
the control expenditures could cause the models' returns on sales to be
reduced from a range of 2.3 to 8.2 percent to a range of -2.4 to 6.9 per-
cent with the extra-small chrome tan (1 & 2) and the small non chrome tan
(3) model incurring negative profits after control expenditures. The
impacts of PSES Option 1 reduced all the models' annual cash flows; but
none to negative levels. The models' projected net present values were
all positive after control expenditures except for the small non chrome
tan (3) model, whose MPV was negative. Resultant of this analysis was
the determination that the imposition of PSES Option 1 would result in
approximately 5 to 7 tannery closures; the majority of which would be
small non chrome tan (3) operations. Economic impacts associated with
the closure of tanneries would be employment impacts (approximately 260
to 350 persons affected); community impacts (five to seven communities):
production impacts (less than one percent of the industry's total produc-
tion); and balance of trade impacts (almost negligible). Compliance with
PSES Option 1 is estimated to require indirect dischargers to invest $59
million and incur annualized costs approximating $30.4 million.
5. PSNS Option 2
The impacts associated with control requirements for new sources were
difficult to assess as new source plants represented facilities which
have yet to be constructed. However, based on the new source models,
the imposition of PSNS Option 2 expenditures resulted in individual model
plant projected required price increases ranging from 0.6 to 7.9 percent.
Assuming no price increases, projected financial impacts reflected reduc-
tions in returns on sales from a range of 4.1 to 11.6 percent to a range
of 1.9 to 9.8 percent, reductions in annual cash flows (none to the point
of being negative), and reductions in the models net present values with
only the extra small chrome tan (1 & 2) model incurring a negative impacted
NPV after having a positive NPV in the base case (prior to controls).
Based on the analysis it was determined it would be doubtful if non chrome
tan (3) facilities would be constructed even without control expenditures
and that new extra small chrome tan (1 & 2) operations may prove to be
unviable if required to meet PSNS Option 2 requirements. However, a few
new tanneries may be built even with PSNS requirements. These most prob-
ably would be in the larger chrome tan (1 & 2) and through-the-blue (6)
subcategories. They may be either direct or indirect discharging facilities.
IX. Limits of the Analysis
As v/as indicated, published data applicable to the Leather Tanning and
Finishing Industry were not readily available and, at times, non-existent.
iMuch of the data in the present study was gathered from industry data
collection oortfolios, studies published by the industry's trade associa-
tion, reports published by government agencies, published statistical
surveys, and interviews with industry personnel.
xvi
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The estimated data error ranges, as an average for the industry, were as
follows:
1. Information regarding the organization and structure of
the industry, number, location and size of plants, and
other information descriptive of industry subcategories +_ 10%
2. Price information for products and raw materials +_ 20%
3. Cost information for olant investments and operating costs +_2Q%
4. Financial information concerning the industry +_ 15%
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 avail-
ability. The major critical assumptions used in this analysis were as
follows:
1. Types and sizes of the model plants were representative of plants
actually existing in the industry and of plants expected to be
built in the future.
2. It was assumed that the financial data were representative of
costs and returns of existing plants or new plants to be con-
structed after promulgation of proposed guidelines. As stated
earlier, the model plant financial data are on a constant 1977
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 1977 so as
to include years of high and low profits) would be the same in
the future 21 years.
4. It was assumed that the economic impacts of wastewater controls
on those products not included in the detailed analysis of "repre-
sentative" 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 subcategory's
production. In most cases, there were actual plants producing
products in similar combinations as those described in the model
plants.
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5. Wastewater control costs and control status estimates were
supplied by the Effluent Guidelines Division, PEA. It was
assumed these data were realistic in terms of:
(a) applicability of effluent treatment systems recommended,
(b) investment and annual operating costs for systems, and
(c) percentage of total number of plants which have treat-
ment in place for each industry subcategory and for the
industry in general as reported in the Development
Document.
xv m
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I. INTRODUCTION
Section 301 (b) (1) (A) of the Clean Water Act (the Federal Water Pollu-
tion Control Act Amendments of 1972, as amended by P.L. 95-217, the Clean
Water Act of 1977) requires existing industrial dischargers to waters of
the U.S. to achieve by July 1, 1977, effluent limitations requiring the
application of the best practicable control technology currently avail-
able (BPT). By July 1, 1984, these same dischargers are required to
achieve effluent limitations requiring the application of the best avail-
able technology economically achieveable (BAT) and the best conventional
pollutant control technology (BCT) pursuant Sections 301 (b) (2) (A),
(b) (2) (C), (b) (2) (E). Additionally, new industrial dischargers are
required to comply with New Source Performance Standards (NSPS) under
Section 306 of the Clean Water Act (the Act), and new and existing
industrial dischargers to Publicly Owned Treatment Works (POTW's) are
subject to Pretreatment Standards under Sections 307 (b) and 307 (c)
of the Act.
The purpose of this study is to assess the economic impacts of these
requirements on the Leather Tanning and Finishing Point Source Category.
A. Scope of this Report
The analysis of the economic impact of the five types of effluent limita-
tions on the Leather Tanning and Finishing Industry necessitates analyses
at both micro and macro economic levels. To accomplish such analyses the
aggregate industry as well as individual firms within the industry must
be represented.
This report depicts the Leather Tanning and Finishing Industry's struc-
ture, financial characteristics, marketing and pricing practices, repre-
sentative model plants, proposed effluent limitations costs, and the analyses
of their resulting economic impacts. The report includes, also, a descrip-
tion of the methodology to determine these impacts. The specific types of
economic impacts analyzed in this report include those upon:
(1) prices (including effects upon an industry's suppliers and
consumers),
(2) profitability,
(3) industry growth,
(4) ability to raise capital,
(5) number of plants,
(6) production,
(7) employment,
(8) communities, and,
(9) others as appropriate (such as dislocation and balance of trade).
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B. Organization of this Report
This report presents an overall description of the Leather Tanning and
Finishing Industry. This description includes discussion concerning the
industryrs structural, financial, and pricing characteristics. From these
data, representative economic model plants were developed as a baseline
(before the imposition of control costs) upon which the impact analysis
was based. (These models reflect new and existing tanneries representing
common industry subcategories and sizes and their discharge compliance status),
The impact analyses are presented in two parts. The first, the direct
discharger impacts, consider those resulting from BPCTCA, BATEA, and NSPS.
The second examines the impact effects from the PSES and PSNS limitations
on municipal (POTVJ) dischargers. It should be noted in Chapters VI, VII,
and VIII, the material are first presented for all existing sources (BPCTCA,
BATEA, and PSES) with the material associated with the new sources (NSPS
and PSNS) then presented. This order of presentation differs slightly
from the order in the Development Document I/.
C. Data Sources
Data utilized in the development of this report were obtained from both
primary and secondary sources. Primary data typically pertained to specific
industry plants or subcategories, and secondary data typically pertained to
published data reflecting the aggregate industry. Some of the more commonly
used data sources are described below. A bibliography is presented in Appen-
dix A.
It should be noted throughout this report an attempt was made to utilize the
latest data and information available. While not all sources were available
depicting 1978-79 conditions, attempts were made to qualitatively describe
the current industry situation. The model plants presented in Chapter VI
were developed from both primary and secondary data sources. The primary
sources were reflective of 1976 and through the use of secondary sources
updated to early 1977 conditions. Accordingly, the impact analysis presented
in this report reflects the industry's impacts as the industry would incur
them as of early 1977.
1. Primary Data Sources
Information acquired directly from tanneries or from representatives of the
industry were considered primary data. The major sources of this study's
primary data were individual tanneries, as well as tannery and industry
representative visits by DPRA personnel.
If Development Document for Proposed Effluent Limitations Guidelines, New
Source' Performance Standards and Pretreatment Standards for the Leather
Tanning and Finishing Point Source Category, U.S. Environmental Protec-
tion Agency, EPA 440/1-79-016, 1979.
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Under the authority of Section 308 of the Act, data collection portfolios
were sent to the 18 direct discharging tanneries and the 170 indirect dis-
charging tanneries, seeking production costs, balance sheet and income data,
and costs for existing pollution abatement systems. Ten direct dischargers
and 120 indirect dischargers responded to this survey effort. Follow-up
surveys to the eight non-responding direct dischargers yielded six additional
responses. Follow-up surveys were not sent to the 50 non-responding indirect
dischargers as sufficient information was obtained from responses to the
technical contractor's survey. The economic survey data was supplemented by
data from secondary sources and facility visits to 16 direct dischargers,
25 indirect dischargers, and 10 publically owned treatment works (POTW's).
A copy of the data collection portfolio is presented in Appendix C.
2. Secondary Data Sources
The published data utilized in this analysis were predominately obtained
from the annual statistical summary of the industry's trade association,
Tanners' Council of America, Inc., and from various reports obtainable
from both private and governmental sources. These secondary data sources
were utilized throughout this analysis to depict historical industry trends
and to supplement and check information received from primary sources. This
latter use of secondary information was particularly important in the develop-
ment of the financial model plants to assure the representativeness and
accuracy of the models. A complete listing of the major secondary sources
utilized in the development of this report are listed in Appendix A.
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II. METHODOLOGY
The methodological approach utilized to assess the likely economic impact
of effluent control limitations on the Leather Tanning and Finishing Indus-
try is summarized in this chapter. In this impact study, economic impact
is defined as the differences between (1) the projections of the likely
effects on a plant, a local area, the United States, and on foreign activity
which would result from an industry's compliance with a given level of
effluent control standards and (2) the projection of industrial activity
and changes which would likely occur in the absence of control standards
(baseline conditions).
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 employment
4. Changes in employment
5. Community impacts
6. Dislocation effects
7. Balance of trade consequences
8. Other impacts
In the case of Best Practicable Control Technology Currently Available (BPCTCA),
Best Available Technology Economically Achievable (BATEA), and Revised Pre-
treatment Standards for Existing Sources (PSES), the analysis focused on price
increases, plant closings, curtailments of production, dislocations of produc-
tion, unemployment, community impacts, and balance of trade effects. For
Revised New Source Performance Standards (NSPS) and Revised Pretreatment
Standards for New Sources (PSNS), the impacts were assessed in terms of the
effects on industry growth, prices, plant locations (i.e., domestic or foreign
production), and balance of trade. The specific bases for effluent control
relating to the Leather Tanning and Finishing Industry are described in detail
in a separate EPA report. I/
I/ Development Document for Proposed Effluent Limitations Guidelines, New
Source Performance Standards and Pretreatment Standards for the Leather
Tanning and Finishing Point Source Category, U.S. Environmental Protec-
tion Agency, EPA 440/1-79-016, 1979.
II-l
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Several interrelated analyses were used to evaluate likely economic impacts
resulting from effluent control requirements on the Leather Tanning and
Finishing Industry. These in-depth analyses included: (1) a characteriza-
tion and subcategorization of the technical and economic structure of the
industry, (2) a description of the financial profile of the industry, (3)
the construction of representative model plants, (4) an evaluation of pricing
patterns within the industry, (5) a description of the technological options
for meeting designated levels of pollution control and the costs associated
with each option, and (6) the analysis of economic impacts.
The overall analysis, however, was not a simple sequential one; rather, it
employed 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 was
devoted to plant closure analysis.
A. Industry Structure and Subcategorization
The industry structure and subcategorization analysis primarily involved
describing and segmenting the industry in terms of its past and current
economic characteristics in order to provide an information base for the
subsequent analytic steps. In particular, the information on industry
characteristics was useful in determining an appropriate disaggregation
design for industry subcategorization.
The subcategorization involved segmenting the plants within the industry
into relatively homogenous classes with respect to plant size, regional
differences, 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.
This delineation of industry subcategories served as the basis for the
definition and construction of representative model plants and the deter-
mination of the waste water treatment technological options and costs
appropriate to each.
B. Financial Profile of the Industry
The ability of firms within the industry to finance investment for pollu-
tion control was determined, in part, by the past and expected financial
conditions of those firms. Under the heading "financial profile of the
industry," various factors were studied to develop insight into the finan-
cial characteristics of actual plants in the industry. Much of the data
compiled in this section was also useful in determining the financial
profiles of representative model plants.
II-2
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Industry
Industry
Structure
Industry
Financial
Data
EPA Pollution
Control Costs
Plant Closures
Due to Control
Employment
Effects
I
Community
Effects
Subcate-
gorization
Model Plant
Parameters
I
Budget Data
Development
Model
Financial
Analyses
Price
i nui ecoci
i
Shutdown
Analysis
4
Production-
Expected
Effects
I
Foreign
Trade
Effects
^
Industry
Pricing
Financial
Profiles
Exhibit II-l.
Schematic of economic impact analysis of effluent
control guidelines
II-3
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Key financial statistics included 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 were 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 analysis used was a systematic framework within which to
assess likely economic impacts on individual types and sizes of actual
plants within the industry. Usually more than one model plant was 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 effluent control guidelines.
The model plant profiles represent a variety of financial, economic, and
technical variables such as sales, investment, fixed and variable costs,
profits, size, and type of process. The profiles were constructed from
•information and data gathered in the industry characterization phase of
the analysis. This information was generally obtained from an industry
survey, plant visits, discussions with industry representative, trade
publications, other secondary data sources, and from engineering cost-
synthesis methods.
In developing the model plants, the best data source was the industry surveys
which provided detailed financial data from the various types and sizes of
existing firms. However, data from the industry surveys were checked with
published financial data to assure the reliability of the data contained in
the surveys. Also data from published sources are available annually which
allow historical trends to be considered as well as enabling the industry's
financial situation to be updated without resurveying the industry.
Thus, the model plants are developed utilizing an eclectic approach which
considers data from both primary and secondary sources. In a typical
development of a model plant, key economic/financial data (e.g. sales,
production costs, margins, asset structure) are collected from numerous
sources and converted to a common base. These data are, in turn, analyzed
and compared, considering also non quantifiable aspects of the industry,
to determine the appropriate parameter to use for the particular model
plant. The consolidation of the various parameters results in the depic-
tion of the key economic and financial components in the form of a
representative model plant.
II-4
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In the Leather Tanning and Finishing Industry there are relatively few exist-
ing direct dischargers. Accordingly these existing plants were analyzed on
an individual basis. However, for presentation in this report, the existing
facilities' data were combined and represented by model plants. Due to the
large number of existing indirect discharging facilities, only the model plant
concept was utilized.
The applicability of utilizing model plant data for assessing expected
economic impacts of pollution controls rests principally on the repre-
sentativeness 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 for large
plants than for medium or small plants of the same type. Furthermore, there
are expected economies-of-scale in waste treatment, 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 processing factors,
e.g., type of manufacturing process employed (technology) may also affect
processing costs and wasteflows. This again may necessitate a further seg-
mentation of an industry and the inclusion of additional model plants for a
more comprehensive analysis.
D. Pricing Patterns
The analysis of pricing patterns in the Leather Tanning and Finishing
Industry focused on factors determining supply and demand. Market struc-
ture and the nature of competition were evaluated, a step which, for the
Leather Tanning Industry, involved 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 in-
creased costs of pollution controls were assessed.
E. Waste Treatment Technological Options and Costs
Waste treatment options and their associated costs are obviously instru-
mental in the assessment of the economic impacts of water pollution con-
trols. In general, basic technical and cost data were developed specifi-
cally for various types and sizes of model plants using the appropriate
discharge method (direct or POTW). This analysis also examined model
plants reflecting new facilities which were projected most likely to be
built after the promulgation of the guidelines. In determining appropriate
options and costs, it was necessary to specify 1) the points of final dis-
position of discharge in each industry segment, and 2) the types and pro-
portions of effluent systems in place. This information was primarily
obtained from EPA, Effluent Guidelines Division through the technical
contractor.
II-5
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Cost data from the technical contractor usually included estimated investment
costs for various treatment options for each model plant and their respective
estimated annual operating and maintenance costs based upon normal operating
rates or annual production.
F. Other Regulatory Costs
In addition to regulations pertaining to water pollution control, plants
are also subject to other federal regulatory requirements which depend
upon the industry and the nature of its processes and/or products. These
regulations can pertain to product quality, air pollution, solid waste
disposal, occupational safety and other areas.
Unfortunately these other regulations are not uniformly required or enforced.
Also, data reflecting the costs of compliance to these regulations are not
often available. To the extent possible, the impact analysis considered the
costs associated with these other regulations.
G. Analysis of Economic Impacts
This study's economic impact analysis required the establishment of a base-
line of industry conditions that would prevail without pollution controls in
order to estimate the consequent economic iinpact of pollution controls by
showing the change from this baseline attributable to their imposition.
Thus, in this study a "dynamic baseline"--a projection of the industry
structure in terms of the number of its plants, production, employment and
other parameters over time—was used as opposed to a "static" baseline
descriptive of current industry conditions.
Fundamentally, the impact analysis was similar to that usually required
for any capital budgeting study of new investments in which the problem
is one of deciding whether a commitment of time or money to a project is
worthwhile in terms of the expected benefits. The analysis was complicated
by the fact that benefits and investments will accrue over a period of time
and that, in practice, the analyst cannot reflect all of the required im-
ponderables which, by definition, must deal with future projections. In
the face of imperfect and incomplete information and of time constraints.
the industry segments were 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 deviated from
the model results; however, these variances were considered in interpre-
tating the findings based on model plants.
The analysis of anticipated economic impacts of water pollution controls
are described as follows.
II-6
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1. Fundamental Core Methodology
The fundamentals for analysis are basic to all impact studies. The core
methodology is described here as a unit with the specific impact analyses
discussed under the appropriate headings following this section.
a. Model Plant Impact Analysis
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 model plant chapter. The primary
factors involved in assessing the financial and production impact of
pollution control were profitability changes—a function of the cost
of pollution control and a plant's 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 betv/een 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. Inefficient 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 it. Production con-
tinues as long as labor and materials costs are covered until the
equipment fails entirely,
3. Personal values and goals associated with business ownership that
override or constrain rational economic rules. This complex of
factors may be referred to as the value of psychic income.
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 the 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 offsets the losses in the first plant,
the unprofitable operation may continue indefinitely because the
total enterprise is profitable.
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.
II-7
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6. Low (approaching zero) opportunity costs for the fixed assets and for
the owner-operator's managerial skills labor. As long as the ooerator
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 situa-
tions where 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 with publicly held corporations.
Although the above factors are present in and relevant to business decisions,
they are not always susceptible to quantifiable analysis. This study's
analytic techniques are sufficient, however, to provide useful and reliable
insight into such potential business responses to required investment and
operating costs for pollution control facilities. Accordingly this analysis
of the model plants' impacts was primarily based on the determination of the
model plants' net present values (NPV) both before and after expenditures
for controls. This NPV analysis was then combined with considerations for
unique influencing factors (such as those listed above) so that its assess-
ment of impacts reflects, as accurately as possible, the responses actual
businesses will make.
The computation of the net present values in such an analysis involves the
discounting of the models' cash flows over some period of time (in this
analysis 21 years) through the discounting function:
NPV = Z A (1+K) - Irt
n=l n °
where:
NPV = net present value tu
A = the cash flow in the n ' year
K = discount rate (after-tax cost of capital)
n = number of the conversion period, i.e., year 1, year 2, etc.
t = total number of conversion periods (years)
I = value of facility for nonconforrning uses (salvage value
0 for existing facilities and initial investment for new source
facilities)
The resulting net present value indicates, in current dollars, the size of
the return to the equity holders in excess of the firm's cost of capital.
Thus, if the NPV is positive, the equity holders are earning a return which
is greater than the model's cost of capital. If the NPV is negative, then
II-8
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the equity holders are earning less than the cost of capital, and in such a
situation, they would be better off liquidating, realizing the salvage value
in cash,_l/ and reinvesting it at least at the firm's (industry) cost of
capital.
Model plant NPV's are determined both without and with expenditures for
pollution controls. Comparison of the base case (without controls) and
the impacted case (with controls) allows the net effects of the controls
to be determined. These effects in combination with other relevant economic
considerations enable overall impacts to be determined.
b. Construction of the Model Plant Cash Flow and Capital Outlays
The cash flow and capital outlays used in this analysis of pollution control
costs were constructed in the following manner:
(1) The cash flows were presented in current dollars thus requiring
the use of different cash flows for each of the respective years.
(2) For existing model plants, the initial investment, taken in year t ,
was considered to be outlays for the model fixed assets and
working capital.
(3) The after-tax cash proceeds were taken for years t-, to t . These
were adjusted annually for inflation.
(4) Annual reinvestment for replacement of depreciated assets was
estimated for year t} and was adjusted annually to compensate
for inflation and the net between reinvestment and depreciation.
(5) Terminal value of the model was taken in year tn and reflected
the salvageable assets plus the net working capital.
(6) Capital outlays for pollution controls, when applicable, were
added to the models' total assets in increments during years t,
to tg.
(7) Annual pollution control expenses were incurred incrementally between
years ti and t6 reflecting the stages of construction completion for
the capital outlays. After year tg, expenses were adjusted annually
for inflation.
\l Salvage value is defined here as the liquidation value of fixed assets
plus working capital, i.e. sold for nonconforming uses.
II-9
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(8) Depreciation of depreciable assets was computed utilizing rapid depre-
ciation techniques for tax computations and the straight-line method
for the pro forma income statements. Replacement investments of pollu-
tion control equipment began in year t,,.
(9) No terminal values of the pollution facilities were computed as it
was anticipated there would be few, if any, salvageable assets in
year tR.
Baseline cash flows consisted of Steps 1 through 5 and excluded investments
and annual costs associated with pollution controls. Impacted cash flows
consisted of Steps 1 through 9 and reflected the model plant after the impo-
sition of environmental requirements.
In the construction of the cash flow for the net present value analysis,
after-tax cash proceeds were 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
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = interest expenses
D = depreciation charges
Depreciation was included only in terms of its tax effect and was 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 consideration
by the use of the present-value procedure. To also include the cash disburse-
ment would result in double counting. The effect of interest payments on
income taxes is also excluded from the cash proceeds computation. This was
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 20 percent on the first $25,000 income, 22 percent on the
second $25,000 income, and 48 percent on amounts over $50,000 was used
throughout the analysis. Accelerated depreciation methods, investment
credits, carryforward and carryback provisions were not used due to their
complexity and special limitations. The annual inflation rate used for this
analysis was 6.0 percent. This rate reflects, approximately, the annual rate
for the past ten years based on the historical implicit price deflators for
the gross national product. A period of twenty-one (21) years was selected
11-10
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for the length of time to discount models' cash flows because this period of
time was determined to be representative of the useful economic life of actual
industry facilities. The important consideration in this length of time is
the length of service of machinery and equipment. Building life for a facility
typically is considerably longer than 21 years. However, building costs are
small relative to the costs of production equipment. Furthermore, the 21 year
period is sufficiently long enough to allow for business cycles and fluctua-
tions to balance out.
While profitability is an important input to the net present value analysis,
the overall assessment of a model plant's viability was not totally dependent
upon the plant's level of profits. The NPV concept also considers the value
of the model's equity to the equity holders as well as effects of the timing
of the cash flows including consideration for depreciation schedules. A
more common measure of profitability is return on investment (ROI) where
after-tax income (as defined in Equation 1) is expressed as a percent of
invested capital (book value) or as a percent of net worth. Such measures
should not be viewed as necessarily different estimates of profitability
when compared to the net present value concept; rather, these should be
considered as entirely different profitability concepts. It should be
noted the data requirements for ROI and NPV measures are derived from the
same basic financial information, although the final inputs are handled
differently for each.
c. Cost of Capital - After-tax
Return on invested capital is a fundamental notion in 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. Although no methodology yields the precise
cost of capital, it can be approximated within reasonable bounds.
Equity capital. The cost of equity capital was estimated by two methods —
the dividend yield method and the earnings stock price (E/P ratio) method.
Both are simplifications of the more complex discounted cash flow (DCF)
methodology. The dividend yield method is:
c - Hi
Po + 9
where:
c = cost of equity capital
Dj = dividend per share expected at end of period 1
PQ = stock price at time o
g = growth of dividend per share
11-11
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The earnings/price ratio method is:
« • f
where:
c = cost of equity capital
E = current earnings per share
P = current stock price
This latter method assumes that future earnings per share will be the
same as the current earnings and that the dividend-payout ratio is 100
percent.
Debt Capital. The after-tax cost of debt capital was estimated by using
an estimated cost of debt (interest rate) and multiplying it by 0.52 --
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)
Weighted Cost of Capital. The sum of the cost of equity and debt capital
weighted by the respective equity to equity plus debt and total debt to
equity plus debt (where debt is long-term debt) ratios yields the esti-
mated average cost of capital (k), after tax. This is depicted below.
Ic - Eouity Total debt .
* ~ Debt plus equity * c Debt plus equity
d. Investment Determination
fn evaluating the feasibility of new plants, investment was thought of as
outlays for fixed assets and working capital; however, in evaluating
closure of an on-going plant, the investment basis was its salvage value
(opportunity cost or shadow price)._!/ 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.
If 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 investment may take on a
different value.
11-12
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The rationale for using total shadow priced investment was that the cash
proceeds do not include interest exoenses which are reflected in the weighted
cost of capital. This procedure required the use of total capital (salvage
value) regardless of source. An alternative would have been to use as in-
vestment, net cash realization upon liquidation of the plant (total cash
realized from liquidation less debt retirement). In the single plant firm,
debt retirement v/ould 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 the
individual plant on some plant parameter (.i.e., capacity or sales). Under
this latter procedure, interest and debt retirment costs v/ould 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 100 percent times the
annual depreciation. 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 were determined from estimates
provided by EPA. Only incremental values were used in order to reflect in-
place facilities. Only the value of the land for controls was taken as a
negative investment, or "cash out" value, in the terminal year.
2. Price, Supply and Demand Impact Analyses
Price and supply and demand impact analyses necessarily have to proceed simul-
taneously. In order to evaluate these impacts, two types of analyses were used:
one—the micro level-utilized the model plant as the basis of the analysis to
arrive at required price impacts to maintain profitability levels; the other--
the industry level—utilized supply and demand analysis.
Application of the preceding DCF procedure to these costs yielded the
present value of pollution control costs (i.e., investment plus operating
cost less tax savings). When this was known, the price increase required
to pay for pollution control could readily be approximated by the formula:j7
x = (PVP) (100)
(1-T) (PVR)
_!/ 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 brackers were incorporated, a more detailed
iterative process was required.
11-13
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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 was evaluated in light of
the price elasticities of the commodity involved and the competitive struc-
ture of the industry. This represented the second approach using supply
and demand analysis. The supply and demand analysis provided some insights
into likely quantities and supply responses to different prices. This
allowed a preliminary estimate of the production and price impacts of pollu-
tion control costs. Following this, further analysis at the micro level was
performed to obtain a more detailed insight into the plants' responses to
expected price changes, cost absorption, or plant closure (the plant closure
criteria are discussed in Section G-4, on the following page). The indicated
plant shutdowns were then aggregated to test whether or not the lost produc-
tion could be absorbed by the remaining capacity or whether such curtailments
would increase prices.
3. Financial Impact Analysis
The financial impact analysis involved the preparation of pro forma income
statements and cash flow statements (including computations of the models'
net present values) following the assessment of the likely price change.
The analysis provided estimates of profitability with and without pollution
control costs and also provided 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 could have a
definite bearing on judgments and estimates with regard to likely plant clo-
sures.
4. Plant Closures and Production Effects
Plant closures may result from the inability of less profitable plants to
adequately recover required pollution abatement cost through increased
product prices, decreased input prices, or improvements in economic effi-
ciency. 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 competing larger operations. 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 smaller high-cost
plants, the high-cost plants will have no recourse other than to sell at the
long run equilibrium price set by the low-cost plants. Consequently, the
older, smaller, less efficient plants would probably and eventually yield to
11-14
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the dominance of the larger more efficient units. However, in the short
run, a plant may continue to operate even when economic considerations
indicate closure, especially when the smaller, high cost plants are pro-
tected by regional markets and other non-price impediments to competition
from the larger low cost plants.
Most firms would cease operations if they could not adequately absorb the
required wastewater control expenditures. The most obvious measurement of
a firm's ability to absorb the costs is its ability to maintain a positive
income or cash flow after incurring control expenditures. If incomes are
negative, some firms would remain in operation as long as they cover variable
costs (positive cash flows); however, the requirements for overhead expenses
would eventually cause such firms to cease.
The remaining situation that could arise would be one in which firms maintain
positive incomes and generate net present values (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 would liquidate, realize salvage
value in cash, and reinvest in a more financially viable investment (one
which would earn at least their cost of capital).
A review of the potential financial effects of the imposition of wastewater
controls on the models results in some confusion in the determination of which
plants would be forced to close due to an inability to absorb the control expen-
ditures; a confusion which can result from a large number of models and waste-
water control treatment alternatives applicable to each model. Accordingly,
for this analysis, formalized closure criteria were developed. In the develop-
ment of these criteria, certain necessary assumptions were made to simplify
the interpretation of the impact results.
The closure criteria utilized are depicted below. These criteria basically
represent the models' abilities to continue operations after incurring
expenditures for wastewater controls.
Model's Net Present Annual Cash
Viability Value Flow
Viable Positive Positive
Marginal Slightly Negative \j Slightly Negative V
Closure Negative Negative
V The criterion utilized here was that the positive cash flow must be greater
than the amount by which the NPV was negative or a positive NPV must be
greater than the amount by which the cash flow was negative. If not, then
the plant was projected to close.
11-15
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Based on the above criteria, closure decisions are made for each model at
each treatment level. The number of existing facilities associated with the
representative models which will cease operations due to wastewater control
expenditure requirements are projected utilizing the following methodology.
(1) Based on the NPV closure criteria described previously, the sub-
categories and associated models projected to close are identified.
(2) Once identified, the following factors are considered in the deter-
mination of the number of actual existing plant closures associated
with each projected model plant closure.
a. The number of existing facilities associated with the model.
b. The degree to which existing facilities already have at least
some of the treatment controls in place.
c. Historical trends for existing facilities within the sub-
category as well as projections of the subcategory's future
expectations (helps establish the base case).
d. The severity by which the model's financial data are reduced.
Are the financial data substantially reflective of closure or
are the data reflective of a borderline situation?
e. Review of data utilized (both published and survey data) to
develop models. This allows the determination of the probable
distribution of the financial profiles of existing facilities
when compared to the financial profile of the closing model
plant.
f. Consideration of the reliability of the data utilized in the
development of the model plants.
(3) Based on the above, the number of existing facilities projected to
close are made. These projections are determined qualitatively, based
on the analyst's knowledge of business and economic principles as well
as the analyst's knowledge of the industry.
The determination of the production effects resulting from the plant closures
is made by applying the projected number of existing facility closures to pro-
duction quantities associated with the applicable model plant. This is then
viewed from the perspective of whether or not the remaining facilities have
the capability to absorb the lost production and if not, whether the lost
production will be absorbed by increased foreign impacts or whether it will
not be absorbed at all.
11-16
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5. Employment Impact Analysis
This analysis was concerned with estimating likely employment losses due
to curtailed production or plant closures as a result of pollution con-
trols. If the actual plants which are expected to curtail production or
to close could be identified, their employment impacts could be estimated
directly. When, however, they cannot be identified, the employment impact
analysis must involve the application of estimates of employment changes
by model plants. Employment changes in model plants would then be gen-
eralized according to the number of actual plants represented by the model
plant and aggregated to derive an estimate of total employment effects for
the industry. Employment dislocations are noted as appropriate.
6. Community Impact Analysis
The community impact analysis identified the potential impacts on local
community economies when the impacted plant represented a major source of
employment and income. This analysis was 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.
7. Dislocation Analysis
The analysis of the dislocational effects of control requirements addressed
the possibility of plants closing their existing facilities to move to other
locations offering better opportunities either for control compliance or
production or market efficiencies. The potential for dislocation was parti-
cularly true for plants required to install control technologies which were
land intensive where the plants were limited in their respective availability
of land. This analysis was based on a general knowledge of trends in the
industry, the availability of land for the industry's plants, and the land
requirements of the treatment technologies.
8. Balance of Trade Impact Analysis^
Balance of trade impact analysis dealt with those products that have
competitive import and export positions. The analysis considered whether
or not the estimated price changes would hinder the products competitive
positions with regard to exports or increases in foreign imports. Where
important, estimates on the amount of trade that potentially could be
impacted and total trade levels are presented.
9. Other Impact Analysis
Other potential impacts may be created by the imposition of pollution
control guidelines. These are unique to given industries and require
a case-by-case approach. An illustration of such an impact would be a
plant that produces a critical intermediate, an input for other indus-
tries. 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 were as important, they are noted.
11-17
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III. STRUCTURE OF THE INDUSTRY
The Census of Manufactures defines the Leather Tanning and Finishing Industry
(SIC 3111) as an industry comprised of establishments primarily engaged in
tanning, currying, and finishing hides and skins into leather. The Census
classifies the Leather Tanning and Finishing Industry plants into three types
of establishments: regular, converter, and contract tanneries.
1. Regular. These tanneries purchase raw materials, employ in-plant
production workers to tan, curry, and finish hides and skins, and
sell the finished product. In effect, a "regular" tannery per-
forms all of the usual manufacturing functions within one organi-
zation.
2. Converter. These tanneries perform only the entrepreneural func-
tions of the manufacturing concern such as the buying of raw
materials and the arranging of their processing by outside factor-
ies, i.e., by contract tanneries that actually tan and finish hides
and skins under contract. Converter tanneries do not generate an
effluent and, therefore, are not required to meet wastewater
standards.
3. Contract. The contract tanneries employ production workers to
process materials owned by converters and make products to speci-
fication. They do not become involved in the sale of the finished
product as they do not take title to the processed material.
It should be noted, however, that the above categories are not mutually exclu-
sive. Some firms in the industry act as both regular tanners and leather con-
verters 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 establishments which
only finish leather use little water and, accordingly, generate little, if
any, wastewater. As this analysis is concerned with the economic impacts of
effluent controls on the industry, the primary emphasis of this report will
concern the "wet tanners," those that do generate wastewaters.
Unfortunately, most published data pertain to the entire Leather Tanning and
Finishing Industry and it is difficult to delineate 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
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A, Industry as a Process
The Leather Tanning and Finishing Industry includes processing plants primarily
engaged in processing raw animal hides into usable, finished leather. As
mentioned previously, the industry is classified into three types of establish-
ments: (1) regular, (2) converter, and (3) contract tanneries.
These tanneries, by converting raw hides into finished, usable leather, are
of primary value to and within the SIC 31A classification. The Leather Tan-
ning and Finishing Industry represents one of six four-digit industries in
SIC 31A, Tanning: Industrial Leather Goods; and Shoes Industrial group. A
summary of the 1972 Census of Manufactures data for SIC 31A provides a basis
for comparing the Leather Tanning and Finishing Industry with other industries
in the SIC 31A group. As is shown below in the summary, the Leather Tanning
and Finishing Industry is an important industry segment within the group.
SIC Description
Number of
Establishments
3111 Leather Tanning and
Finishing
3131 Boot and Shoe Cut
Stock and Findings
3142 House slippers
3143 Men's Footwear except
athletic
3144 Women's Footwear except
athletic
517*
248
91
221
422
3149 Footwear, except rubber 183
N.E.C.
All
Employees
(000)
25.7
8.7
8.5
61.5
77.4
28.7
Value
Added
(million
dollars)
86.2
272.6
Value of
Shipments
(million
dollars)
368.3 1,059.5
206.5
85.7 151.4
674.4 1,288.9
763.6 1,346.1
485.9
* The 517 establishments reported here represent all establishments included
in the SIC 3111. Not all of these establishments are leather tanneries.
This is discussed in detail in Section B of this chapter.
Exhibit III-l illustrates many of the interrelationships between the Leather
Tanning and Finishing Industry and its major supplier and customer industries.
As shown, in 1975, the Leather Tanning and Industrial Leathers industry
utilized approximately 55 percent of the Meat Packing Industry's hides and
skins (the remaining 45 percent were exported). These purchases represent
III-2
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III-3
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approximately 39 percent of the Leather Tanning Industry's total 1975 expendi-
tures. Other expenditures of the Leather Tanning Industry included 42 per-
cent of the total expenditures for materials, chemicals, and processing costs,
and 19 percent for materials and services provided by other establishments
classified in the Leather Tanning Industry.
Thirty two percent of the Leather Tanning Industry's total sales were to
establishments which produced other leather products, 19 percent were to other
establishments in the Leather Tanning Industry, and 49 percent of the Indus-
try's sales were to the footwear, except rubber, manufactures. The sale of
leather to the footwear manufactures represent 40 percent of the footwear
manufactures' total expenditures.
B. Characteristics of the Industry
The Leather Tanning and Finishing Industry consists of a wide diversity of
types of firms. Firm ownership ranges from family-owned companies and closely
held corporations to divisions of relatively large conglomerates. Tanneries
vary considerably in size as well as tanning techniques for tanning a variety
of hides and skins into several distinct leathers.
1. Number of Tanneries
The U. S. Department of Commerce has reported the number of establishments in
the Leather Tanning and Finishing Industry as follows:
Year Number of Establishments
1963 525
1967 519
1972 517
1973 490
1974 484
1975 441
1976 430
1977 400
1978 380
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 criterion.
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.
III-4
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Table III-l. Total number of establishments in the Leather Tanning
and Finishing Industry by classification
Regular Converter Contract
Total Tanneries Tanneries 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
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A tabulation by the Tanners' Council of America indicates a total of 431
plants (including converters) in the industry as of June, 1973. The Council's
records also indicate that a total of 19 plants (establishments) ceased oper-
ations between the period of 1 July, 1973 and 31 December, 1975 leaving a
total of 413 operating plants at the end of 1975. It is believed that the
difference in the number of plants estimated by the Council and the Depart-
ment of Commerce reflects a difference in method of classification. The
Department of Commerce data include miscellaneous small operators who would
be classified as taxidermists by the Tanners' Council.
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 188 tanneries in
existence which generate wastewaters. The remainder of the industry's
establishments are believed to be finishers, converters and non-production
establishments (e.g., agents).
2. Size of Tanneries
The Census of Manufactures (Table III-1) indicates plant size ranges by num-
bers of employees. These data are restricted to the year 1967 and 1972, but
they are considered reflective of general industry characteristics. 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,
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.
A comparison of average plant employment numbers among the three tannery
categories indicates that between 1969 and 1972, regular tanneries experienced
little change while a shift from a higher number of employees to lower numbers
occurred in the contract tanneries and converter segments. In 1972, approxi-
mately 51 percent of the regular tanneries had fewer than 20 employees, 30
percent had between 20 and 99 employees, and 19 percent had 100 or more
employees. This is basically the same size structure that existed in
1967. A modest increase took place in the 1-19 employment classification
for both converters and contract tanneries between 1967 and 1972. The
converters had a 10 percent increase in the number of plants in the 1-19
employment calss, a moderate decline (8%) in the 20-49 class, and a slight
decline (2%} in the larger class. Contract tanneries had a greater in-
crease in the 1-19 employment class (20%), with 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 con-
verters and contract tanneries: an increase in the number of small plants
with employment between 1-19 (7/0, and moderate declines in the 20-99
employment class (5%) and 100 and over class (2%).
The 188 wet tanneries' respective size groupings are reported differently.
Instead of utilizing employment ranges, the wet tanners are classified on the
basis of their daily capacity expressed in cattlehide equivalents. These
categories, as well as the number of associated wet tanneries, are depicted
below:
III-6
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Dai1y Capacity I/ Number of Wet Tanners Percent
Less than 300 45 24
300 - 699 45 24
700 - 1 ,199 39 21
1,200 - 1,999 32 17
2,000 or more 27 _J_4
188 100
!/ Capacity is expressed in terms of cattlehide equivalents.
One cattlehide equivalent equals 40 square feet of leather.
As can be seen, the wet tanneries are somewhat more evenly distributed accord-
ing to size than are the establishments of the Census data. However, as was
the case for the Census data, the smaller size categories do represent a
larger number of the tanneries than do the larger categories.
3. Types of Major Products
The industry processes six major categories of animal skins and one category
of exotic, generally imported skins. They are as follows: cattlehides (kip-
skins and calfskins); sheep and lamb skins; goat and kidskins; pigskins;
horesehides; deer and elk skins; and miscellaneous and exotic skins.
The products of the industry can be identified in traditional terms based
upon their primary raw materials and end use.
CATTLEHIDES:
CATTLE-SIDE LEATHER. This is the principal product of the industry,
and it accounts for approximately 67% of total industry sales. Its
end uses include—shoe 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. It is used for
shoe uppers, linings, insoles, work gloves, small leather goods, hand-
bags, protective industrial clothing. Chrome tanned, it is processed
by side leather tanners or sold to "split tanners" for finishing into
specialized products.
SOLE LEATHER. This is almost entirely vegetable tanned. Its major
use is for shoe soles and its secondary uses include welting, counters,
box toes, and waist belts.
CATTLE-SIDE PATENT LEATHER. This sub-class of chrome tanned cattle
sides is finished with special compounds (polyurethanes) to produce a
glossy surfaced leather.
III-7
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KIP SIDE LEATHER. Tanned from kips—small hides intermediate between
calfskins and cattlehides--kip side leather is used almost entirely
for shoe uppers.
UPHOLSTERY LEATHER. Mainly vegetable tanned with some chrome retan-
nage, upholstery leather is used extensively as an automotive and
furniture upholstery.
HARNESS AND SADDLERY LEATHER. This composite leather group is processed
by the same plants, and its varying characteristics result in its being
useful for various parts of equine equipage or related uses, i.e.,
collar, harness, skirting, latigo, bridle, etc. It is used also for
such products as holsters and gun cases.
SPORTING GOODS LEATHER. This category of product leather results from
the combination tannages of chrome, vegetable, alum, and glutaralde-
hyde. It is used for footballs, baseballs, baseball gloves, and laces.
BAG, CASE AND STRAP LEATHER. This category is the trade description
for a specialized group of leathers which are vegetable, chrome and
combination tanned. Their end use includes luggage, briefcases, small
leather goods, decorative items, equipment cases, straps, and heavy
bookbinding.
MECHANICAL LEATHER. This is a vegetable, chrome, and impregnated
leather for industrial uses including belting, gaskets, washers, and
equipment seals.
CALFSKIN. This is a chrome tanned leather of the skins of immature
cattle and is used for shoe uppers and handbags. Its volume is in
sharp decline because of its lessening raw material supply.
SHEEP AND LAMB SKINS:
Sheep and lamb skins provide the industry with its second largest raw
material category. The leather is produced by chrome alum, oil, and
combination tannages and is used for garments, gloves, shoe uppers
and linings, handbags, wallets, bookbindings, and chamois.
GOAT AND KID LEATHER SKINS:
These leathers are chrome tanned in smooth or suede finish for shoe
uppers and linings.
PIGSKINS:
Pigskins are vegetable or chrome tanned and are used for shoe uppers,
gloves, garments, and small leather goods.
III-8
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HORSEHIDES:
This leather is chrome and vegetable processed for use as shoe uppers,
garments, and baseballs. Cordovan is included in this group.
DEER AND ELK HIDES:
Deer and elk hides are chrome and vegetable tanned for processing
into gloves, garments, and to a minor degree, shoe uppers (buckskin).
MISCELLANEOUS AND EXOTIC LEATHERS:
Fewer than ten U. S. producers process this category of leathers. Its
aggregate volume is minor and its products includes kangaroo for ath-
letic shoe uppers, reptile for shoe uppers, belts, and small leather
goods, peccary and carpincho for gloves.
In summary, then, cattlehides are the dominant raw material of the industry
with the major products of Cattle Side leather, Sole leather, Upholstery,
Garment and Bag, and Case and Strap leathers. Sheep and lamb skins are the
second, much smaller raw material base, and yield mainly garment and glove
leather, lining and shoe stock, chamois and leather for small leather goods.
4. 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 miscel-
laneous receipts (mainly resales) valued at $30.1 million.
Estimates of the 1979 value of shipments are expected to total $1,546 million,
5.5 percent above the shipments of 1978 and 45.8 percent above the 1972 value
of shipments (Table III-2). Historically the value of shipments have fluctu-
ated from year to year; however, the overall average annual increase has been
4.8 percent since 1960.
Shipments of tanned and finished leather (primary products) in 1972 repre-
sented 99 percent (specialization ratio) of the industry's total product
shipment. The industry specialization ratio in 1967 was 98 percent. Second-
ary products shipped by the industry in 1972 consisted mainly of boot and
shoe cut stock and bindings ($2.5 million).
Shipments of tanned and finished leather from establishments classified in
industry SIC 3111 in 1972 represented 99 percent (coverage ratio) of this
SIC's classification 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.
III-9
-------
Table III-2. The Leather Tanning and Finishing Industry, Value of
Shipments, 1960 to 1978
Value of Percentage
Year shipment change
(iiTTT) T%)
1960 790.7
1961 761.1 -3.7
1962 765.9 -0.6
1963 758.4 -1.0
1964 783.6 3.3
1965 856.7 9.3
1966 940.5 9.8
1967 870.1 -7.5
1968 877.9 0.9
1969 853.9 -2.7
1970
1971
1972
1973
1974
1975
1976
1977
1978*
1979*
794.4
838.3
1,059.5
1,082.0
1,075.5
1,092.2
1,416.0
1,390.0
1,466.0
15546.0
-7.0
5.5
26.4
2.1
-0.6
1.5
29.7
-1.8
5.5
5.5
— Estimated
Source: Department of Commerce, Bureau of the Census and Bureau of
Labor Statistics, BDC.
111-10
-------
5. Location of Tanneries
Leather tanning and finishing establishments tend to be concentrated in the
Northeast. As shown in Table III-3, 62 percent of the total number of estab-
lishments were located in that 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 Wis-
consin reporting 22 plants or 4.3 percent of the total. Other states of
importance in this region include Ohio, Illinois, and Michigan. The remain-
ing plants are scattered widely throughout the United States.
Historically, tanneries were established where there was an adequate supply
of hides, water and tanning materials (i.e., tree bark). This industry 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 Wiscon-
sin. 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.
Based on the responses of 168 of the 188 wet tanners, it was estimated 54
percent of the wet tanners were located in the New England states, 10 per-
cent 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 188 wet tanneries, the locational
breakdown appears as follows:
Area Number of Wet Tanneries
New England 101
South 19
Midwest 47
West and Southwest 21
Total 188
6. Age of Plants and Level of Technology
The Leather Tanning and Finishing Industry is characteristically comprised of
older plants with slightly over 70 percent of the plants 50 years of age or
older. From the membership records of the Tanners' Council, the age of tan-
ning and/or finishing leather plants, excluding converter tanneries, is as
follows:
III-ll
-------
Table III-3. Location of Leather fanning and Finishing establishments by primary state and ragion, 1367, 1972
1967
1972
LStaoltsnmencs with
Total Industry 20 or More &roldveas
Region
Northeast Region
New England Division
Maine
New Hamoshire
Vennont
Massachusetts
Other
liddle Atlantic Oivision
New fork
New Jersey
Pennsylvania
North Central Segion
East North Central Division
Ohio
Illinois
Mlctriij'n
Wisconsin
Other
West North Central Division
Minnesota
Missouri
Iowa
Other
South Reoion
Soutn Atlantic Division
Del aware
Maryland
Virginia
'/lest Virginia
Nortn Carolina
Georgia
Otner
East South Central Oivision
Kentucky
Tennessee
Otner
Weft South Central Dlvisior
>exas
Other
Mest Region
Pacific Division
California
Otner
TOTAL
NA - Not Available
Source: U.S. Oeoartment of
Number Percent Numoer
183
16
18
1
146
2
rs
108
48
20
74
12
19
10
30
3
13
1
I
NA
• 5
26
6
2
i.
4
2
2
6
12
3
9
...
3
7
2
25
'5
n
519
Comnerce,
35.3
3.1
3.5
0.2
28.1
0.4
33.3
20. S
9.2
3.3
14.2
2.3
3.6
1.9
5.3
0.5
2.6
0.4
1.2
NA
1.0
5.0
1.1
0.4
0.8
0.3
0.4
0.4
1.1
2.3
0.3
1.7
._
1.7
1.3
0.4
5.0
2.9
2.1
100.0
Census of Manufac
93
14
15
1
52
1
58
30
25
13
51
7
12
5
24
3
/
1
5
NA
1
13
S
1
4
4
2
1
0
10
3
7
—
2
2
0
9
3
1
253
fjres.
Percent
36.0
5,4
5.3
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
C.4
1.9
NA
0.4
7.0
2.3
0.4
1.0
1.5
0.7
0.4
--
3.9
1.2
2.7
—
0.8
0.3
—
3.5
3.1
0.4
100.0
1967 and 1972.
Total
Numoer
324
163
15
19
1
128
..
161
98
43
20
34
62
3
19
3
22
5
22
4
NA
6
12
59
27
2
1
5
4
c
2
7
12
3
i
1
20
15
5
5Q
42
33
9
517
Industry
Percent
62.7
31.5
2.9
3.7
0.2
24.7
—
31.1
19.0
8.3
3.3
16.2
12.0
1.5
3.7
1.5
4.3
1.0
4.2
0.3
NA
1.1
2.3
11.4
5.2
0.4
0.2
1.3
0.3
1.0
0.4
1.4
2.3
0.6
1.5
0.2
3.9
2.9
1.0
9.7
3.1
6.4
1.7
100.0
-staol isranents with
20 or uor» £">o1oyees
Numoer
132
78
10
14
1
53
—
54
26
15
13
43
39
4
10
4
19
*>
t.
9
2
NA
4
3
27
H
2
1
3
4
2
1
1
10
3
7
NA
3
3
,TA
15
14
13
1
223
Percent
59.2
35.0
4.5
6.3
0.4
23.3
—
24.2
11.7
6.7
5.3
21.5
17.5
1.3
4.5
1.3
8.5
0.9
4.0
0.9
NA
1.8
1.3
;2.1
6.3
0.9
0.4
1.3
1.3
0.9
0.4
0.4
4.5
1.3
3.2
-.
1.3
1.3
—
7.2
6.3
5.3
0.5
100.0
111-12
-------
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 have been rebuilt, modernized, and re-equipped at a cumulative cost
approaching the capital investment required for new plants.
In a previous report developed for EPA,— tanneries were categorized with
respect to their level of technology. The technological levels were charac-
terized as older, prevalent and new, i.e., 1950, 1963 and 1967 vintage
respectively. Under this classification, 20 percent of the tanneries in the
present study were placed in the older category and the remainder were placed
in the prevalent or new categories. Thus, while the tannery plants themselves
may be older, it is obvious that they are relatively modern from a technology
standpoint. 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. Plants perform the traditional process while utiliz-
ing 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 pro-
ducts. There is, in fact, less integration today than several years ago when
two major packers owned tanning facilities and four leading shoe manufactures
operated tanneries. In 1973, the only known firm that had integrated toward
the raw materials was A. C. Lawrence Leather Company (Swift) (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.
Both the Brown group (Brown Shoe) and Genesco, shoe manufacturing concerns,
operate tanneries. However, other shoe manufactures such as Endicott, John-
son, and Interco have sold or liquidated all tanning enterprises. A few
tanneries are associated with the leather garnet industry (e.g., Sawyer
Tanning Company); however, these types of arrangements are not common. It
]_/ Urban Systems and Engineering, "The Leather Industry—A Study of the
Impact of Pollution Control Costs," December, 1971.
111-13
-------
is estimated that the sales volume of tanning or finishing establishments
integrated with raw material producers is very small, less than five percent
of gross annual volume. Leather tanning facilities owned or operated by
manufacturing companies account for equally as small a percentage of leather
sales or value.
D. Level of Diversification
The Census of Manufactures shows that the Leather Tanning and Finishing
Industry has a very high specialization ratio of 99 percent for 1972. This
indicates 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 products. For example, equipment suit-
able 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 sought to diver-
sify 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 indi-
cates 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
1. Employment
Total employment within the Leather Tanning and Finishing Industry has decreased
by over 31 percent since 1965with 32,000 employees in 1965 to 22,000 employees
in 1977 and 1978 (Table III-4). Employment was up in 1976 from an eleven year
low of 22,000 in 1974. However in 1977 and 1978 employment returned to the low
level experienced in 1974. Of the total employees in 1978, production workers
represented approximately 90 percent or about 18,000 individuals. Since 1965,
the number of production workers in the industry has declined by over 32 per-
cent from 27,900 in 1965 to 18,000 in 1978.
The Leather Tanning Industry employs unskilled, semi-skilled, and skilled
labor depending on the requirements 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.
111-14
-------
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Production workers average approximately 2,000 hours per year or 240 to 260
employed days per year. Table III-4 depicts worker productivity as the aver-
age number of hours required to produce one cattlehide equivalent. As shown
in the table, the productivity measure, though varying year to year, has re-
mained reasonably close to 1.7 hours per hide since 1965.
2. Level of Wages
In 1976, the total industry's payroll amounted to $243.9 million. The total
wages paid to production workers for the same year totaled $181.4 million or
about 74 percent of the industry's total payroll.
Annual wages per production workers averaged $9,351 in 1976, an increase of
88 percent since 1965. During this same period, the average hourly rate
increased by 95 percent from $2.44 per hour in 1965 to $4.76 per hour in
1976.
F. Ownership Type and Size
The Leather Tanning and Finishing Industry consists of a wide diversity of
types and sizes of firms. Firm ownership types range from family-owned com-
panies and closely held corporations to divisions of large conglomerates.
However, the majority of the tanneries fall into the family-owned or closely
held corporation groups. This is attributable to the fact that most tanner-
ies 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 Subcategories
The Leather Tanning and Finishing Industry has traditionally been subcategorized
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, a subcategorization of the industry by manufacturing processes
is appropriate for evaluating the impacts associated with effluent guidelines
on the industry since a major factor affecting the waste production of the
leather industry is the type of manufacturing process used to convert the various
types of animal skins to finished leathers.
The following discussion considers industry subcategories using two taxonomies:
(1) conventional industry subcategories, and (2) manufacturing process sub-
categories.
1. Conventional Industry Subcategories
Cattlehide leathers accounted for 81.3 percent of the total 1972 production
in the Leather Tanning and Finishing Industry. The major use of cattlehide
111-16
-------
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).
2. Subcategorization 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 subcategories. These subcategories have been developed by the
Effluent Guidelines Division, U.S. Environmental Protection Agency and reflect
plant similarities in process and wasteloads. The industry subcategories are:
1. Hair pulp, chrome tan, retan-wet finish: a tannery that (1) pri-
marily processes raw or cured cattle or cattle-like hides into
finished leather, (2) chemically dissolves the hide hair, and
(3) uses chrome tanning.
2. Hair save, chrome tan, retan-wet finish: a tannery that (1)
primarily processes raw or cured cattle or cattle-like hides
into finished leather, (2) loosens and removes a portion of
hide hair as a solid and then discards or saves it, and (3)
uses chrome tanning.
3. Hair save, non chrome tan: a tannery that (1) primarily processes
raw or cured cattle or cattle-like hides into finished leather
using less than 20 percent (by hide weight) chrome tanning, and
(2) uses vegetable, alum, syntans, oils, and other methods and
their combinations for tanning.
4. Through-the-blue: a tannery that (1) primarily processes raw or
cured^cattle or cattle-like hides through the blue-tanned state
only, (2) has no retanning or finishing operations, and (3) uses
chrome tanning.
5. Retan only: a tannery that (1) primarily processes previously
tanned hides and/or skins (including splits) into finished leather,
and (2) uses a major wet process consisting of retanning, color-
ing, and fat-liquoring.
6. No beamhouse (NB) tannery: a tannery that (1) primarily processes
hides and/or skins with the hair previously removed into finished
leather using either chrome or nonchrome tanning methods, and (2)
primarily includes pickled sheepskins and cattlehides and pigskins.
7. Shearlings: 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).
111-17
-------
Table III-5. Percent of production and employment by conventional
industry subcategory, 1972
Industry Segment
Cattlehide Leathers
Side and Patent
Sole and Belt
Upholstery
Split Leather
Harness
Bag, Case St Strap
Other!'
Calf Leather
Goat and Cabretta
Sheep and Lamb
Pig
All Other I/
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
— Includes sporting goods and mechanical
2/
— Includes horse, kangaroo, deer, reptile and exotic types.
Source: Tanners' Council of America, Inc.
111-18
-------
A brief description of the major processes and tannery operations are described
below. 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 processing
after raw hides and skins are received at the tannery. The beam-
house entails large volumes of water and is a major source of
tannery waste loads.
2. TANYARD
The series of steps by which putrescible hides and skins are con-
verted 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
useage and waste loads are substantially reduced from the previous
steps and processes.
4. FINISHING
Devoted largely to surface appeal and characteristics. These
steps use relatively little water and result in unsubstantial
waste loads.
Table III-6 depicts the estimated number of wet tanneries by subcategory, size,
and discharge status. For the direct dischargers, individual tanneries were
identified; therefore the numbers presented in Table III-6 are believed to be
reflective of the actual situation. The numbers representing the indirect
dischargers are estimates based on responses to the industry survey. It should
be noted for purposes of this analysis, subcategories 1 and 2 (hair pulp,
chrome tan, retan-wet finish and hair save, chrome tan, retan-wet finish,
respectively) have been combined. The only difference between these subcate-
gories is whether or not the tanneries save on pulp hair. As will be explained
in Chapter VI, there are few financial and economic differences between the
two subcategories. This combined subcategory will be referred to as the
"chrome tan" subcategory. Similarly for the direct dischargers, subcategories
5 (No Beamhouse) and 7 (Shearling) have been combined. This was deemed necessary
to eliminate the potential of depicting data reflective of an individual facility.
111-19
-------
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IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY
Information reflective of the financial characteristics of the Leather
Tanning and Finishing Industry is particularly difficult to obtain.
Because the industry primarily consists of family-owned businesses or
relatively small privately-held corporations, published information
regarding the financial position of the industry are not readily avail-
able. Limited data are available from the Internal Revenue Service,
but these data are relatively old (1972-74) and represent the aggregated
Leather and Leather Products Industry. More recent data are available
from Robert Morris Associates' Statement Studies, but these represent
financial information from fewer than 40 different statements.
Information used to develop this chapter on the financial profile of the
industry draws on the above sources where applicable. Additional infor-
mation was obtained from the U.S. Department of Agriculture, the U.S.
Department of Commerce, the responses to the study's data collection port-
folio, and from discussions with persons knowledgeable about the Leather
Tanning and Finishing Industry.
A. General Financial Situation
The Leather Tanning and Finishing Industry in the United States has ex-
perienced a somewhat volatile financial situation in recent years. The
industry declined steadily in terms of numbers of plants, volume, and
profits from the mid 60's on and reached a low in 1972 and 1973. Beginning
in 1974 and, for the most part continuing through early 1977, the industry
experienced a much brighter financial situation. However, in late 1977
and continuing through 1978 and early 1979, the industry's financial sit-
uation again showed signs of deterioration.
The volatility of the industry varies from firm to firm and reflects their
differing tannery operations and leather products. The causes of this vola-
tility are primarily the changes in the volume of leather sold as well as
the competition from foreign countries for both raw hides and for the leather
and leather products markets. 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). However, in 1975 and 1976 the industry did increase
its annual production over the previous year. In 1975, the annual production
increased by 9.5 percent over the 1974 quantity produced, and 1976 production,
equal to 23.5 million hide eauivalents, increased 7.5 percent over the 1975
production. Since 1976, the industry's annual production again began a
declining trend with 21.5 million hide equivalents being produced in 1977
and an estimated 20.5 million in 1978. The industry's production for
1979 as orojected by the U.S. Department of Commerce is expected to be
20.0 million hide equivalents.
IV-1
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IV-2
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As shown in Table IV-1, the industry's value of shipments has been much
more volatile than its annual production quantities. From 1966 to 1970,
the industry's value of shipments (current dollars) generally declined.
Shipments then increased from 1971 to 1973; decreased in 1974; and then
increased in 1975, 1976, 1977, and 1978. Again according to the U.S.
Department of Commerce estimates, the value of shipments for 1978 were
expected to increase from $1,303 million in 1977 to $1,466 million in
1978, an increase of 12.5 percent.
The growth in the industry's shipments may be attributed primarily to the
increased consumer demand for natural leather and leather products. The
full potential of this increase has been dampened by foreign tanneries
seeking a domestic supply of raw leather and an increased importation of
leather products to the United States.
Over the past decade consumer acceptance of synthetics as a substitute for
leather—particularly for women's and children's 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 has been
lost to synthetic products. During the past few years however, consumers
have developed a renewed appreciation for natural leather products. Accord-
ingly, leather increased its share of the appropriate products market.
This increase, however, has not been totally absorbed by domestic tanners;
much has been 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 that of 1971. Much of this increase resulted from the consumers'
appreciation of leather as mentioned above. After 1972, the value of leather
imports slowly declined with a significant, 29 percent, drop between 1974
and 1975, but in 1976, imports rebounded to record levels that were estimated
at $181 million. In 1977 imports declined to $156 million, however in
1978 they again rebounded to a new record level of $215 million. When
these import trends are compared to the total domestic industry production,
it becomes apparent the values of leather imports are to a degree inversely
related to the total domestic industry's production. That is, while the
value of imports increased, the total domestic production of the industry
decreased; thus changes in the Leather Industry's volume of production
may be partially attributed to foreign tanner competition as well as changes
in consumer demand.
B. Cost Structure of the Industry
1. Revenues
For 1978, the Leather Tanning and Finishing Industry had an estimated shipment
valued at $1,466 million (Exhibit IV-1), an increase of about 12.5 percent over
the value of shipment for 1977. Historically, the industry's values of ship-
ments have fluctuated from year to year; however, since 1970, shipments have
increased for every year except 1974 when they decreased 9.4 percent over the
value in 1973.
IV-3
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In addition to experiencing a general slump in production prior to 1975-76,
the real value of the industry's production has declined noticeably. From
1966, when the real value of shipments I/ was 31,225 million, (Exhibit IV-1),
real revenues have fallen to as low as 5843 million in 1974, a 31 percent
decrease over eight years. This decline in real terms mirrors a decline in
production which is attributable to a variety of factors of which the most
significant has been foreign competition.
The 1978 value of shipment for the industry was based on information pro-
vided by 380 establishments. The average tannery's value of shipment was
nearly $3.9 million and its average annual production was nearly 54,000
cattle-hide equivalents (Table IV-2). This compares to an average value
of shipments of $2.7 million in 1975, $2.0 million in 1972, and $1.7
million in 1967. Average production per establishment was 50,000 cattle-
hide equivalents in 1975, 48,000 in 1972, and 59,000 in 1967.
2. Variable Costs
Within the Leather Tanning Industry, variable costs represent approximately
80 percent of the total sales. These costs include expenditures for raw
hides and/or skins, labor, tanning materials, and miscellaneous other di-
rect costs. According to a survey of the industry, hides and skins repre-
sent 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 depicting the distribution of the sales dollar is
available from the Department of Commerce and is limited in its disaggre-
gation. These data are shown in Table IV-3 and, as can be seen in the
table, raw materials, primarily hides, have represented about 60 percent
of the sales dollar. It should be noted the information described above
represents data reflective of 1976-77. Since 1976-77, prices of new mat-
erials have all increased but particularly the prices paid for hides.
Accordingly, the respective share of the sales dollar attributable of hide
prices is presented in Chapter V, Prices.
3. Fixed Costs
Fixed costs are defined as those which do not vary with the level or quantity
of production. These include:
sales expenses—general and administrative,
plant and labor overhead,
taxes and insurance, and
maintenance and repair.
Data were not available to discuss aach of the above costs separately; there-
fore, fixed costs were grouped. Fixed costs vary from firm to firm; however,
they usually represent 10 to 15 percent of sales.
I/ Value of Industry Shipment^ t where i = year
Implicit GNP Deflator.,-
(1972 = 100.0)
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Table IV-3.
The Leather Tanning & Finishing Industry, Distribution of
the Sales Dollar.
TOTAL
SALES
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Mi 1 1 i on
Dollars
856.7
940.5
870.1
177.9
853.9
794.4
838.3
1059.5
1081.5
1075.5
1091.8
1326.0
Percent
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
RAW
MATERIALS
Million
Dollars
535.6
614.1
547.0
524.5
514.9
471.4
498.5
708.0
744.3
680.4
643.3
816.5
Percent
62.5
65.3
62.9
59.8
60.3
59.3
59.5
66.8
68.8
63.3
58.9
61.6
PAYROLL
Mi 11 i on
Dollars
180.0
189.2
186.4
196.0
188.1
171.5
183.9
200.0
186.5
194,3
220.0
243.9
Percent
21.0
20.1
21.4
22.3
22.0
21.6
21.9
18.9
17.3
18.1
20.2
18,4
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
200.8
228.5
265.6
Percent
16.5
14.6
15.7
17.9
17.7
19.1
18.6
14.3
13.9
18.7
20.9
20.0
Source: Department of Commerce, Bureau of the Census, Census of Manufacturers.
IV-7
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IV-8
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Interest is considered a fixed cost although it is somewhat influenced by
total sales. For the Leather Industry interest usually amounts to 1 to 2
percent of sales. As shown in Table IV-4, interest costs vary by size of
operations. Although there are exceptions, larger tanneries generally
allocate a greater portion of their sales dollar to interest.
Depreciation is also considered a fixed cost. Typically it represents
between 5 and 10 percent of the firm's total fixed assets for an expected
asset life of between 10 and 20 years.
C. Industry Profitability
The Leather Tanning Industry in the United States experienced difficulty
during the early 1970's, particularly in 1972 and 1973 as a result of
the rapid rise in the price of hides, a rise caused by the tremendous
increase in cattlehide exports. Between 1970 and 1973, 31 tanneries
discontinued operations and total movement of cattlehides to U.S. tanners
dropped from 19.2 million hides in 1972 to 17.7 minion in 1973.
Between 1974 and 1976, the industry performance was considerably improved.
Demand for leather was up and the long-run picture appeared strong. In-
dustry production increased in both 1975 and 1976, with 1976 production
being the highest since 1972. Because of higher production and favorable
leather prices, sales were at an all-time high in 1976 and profits were
acceptable; however following the two years of growth in 1975 and 1976,
American tanning in 1977 declined in both real dollar volume and units
produced. This decline in 1977, the decreased production experienced in
1978, and projected production decline in 1979 have made industry members
somewhat cautious, and expectations for the industry are only fair for the
next four or five years.
1. Net Profits on Sales
Net profits, before taxes and expressed as percentages of sales, are depicted
in Table IV-5 for the years between 1970 and 1978 Prior to 1974, the industry'
profits were relatively stable though low. As explained above, 1973 was a
particularly bad year for the industry, and accordingly, its profits were the
lowest during the eight year period. The recent increased demand for leather
products as well as the improvements in the industry's raw hide supply were
significant factors in the industry's improved profitability during 1974 and
1975. However, strong competition from foreign produced leathers and even
stronger competition from these foreign tanners for raw hides have caused
the industry's profit levels to decline in both 1977 and 1978. Compared to
the profit levels of all manufacturing industries, the Leather Tanning
Industry's profits were about one-fourth of the all manufacturing average.
IV-9
-------
Table IV-5. The Leather Tanning Industry Profitability, 1970-1977
Year
1970
1971
1972
1973
1974
1975 DPRA Survey
Robert Morris
1976
1977
Profits Before
Tax as Percent
of Sales
(*)
2.2
2.4
2.5
1.9
6.0
6.7
6.5
4.5
2.1
Percent Profits
Before Tax
to Worth
(%)
N.A.
N.A.
10.0
14.1
12.7
17.9
20.0
15.5
19.6
Cash Flow
as Percent
Sales
(%)
4.7
4.0
4.4
2.9
N.A.
N.A.
N.A.
5.7
3.3
Source: 1970 & 1971, Department of the Treasury, Internal Revenue Service,
Source Book of Statistics of Income, Annual
1972 to 1977 Robert Morris Associates, Statement Studies, Annual
1975, Information from a data collection portfolio sent to the
industry by DPRA.
IV-10
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IV-11
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When the Leather Industry's profitability is viewed for various sized opera-
tions, it becomes apparent the medium and large tanneries tend to be more
profitable than are the smaller operations (Table IV-6). This may.reflect
some economies of scale, however it should be noticed that the profits of
the largest size category in Table IV-6 are consistently less than the next
smaller size category for the year between 1968 and 1973. Thus, while
economies of scale may be important, other factors, such as operating
efficiency, may have more influence.
2. Return on Investment
Information regarding the industry's return on investment is difficult to
obtain. However, as reported in Robert Morris, Statement Studies, the
industry's returns appear to have been between 10 and 15 percent during
the 1972 to 1974 time period. In 1975, the industry's returns were deter-
mined to be 17.9 percent according to an industry survey and 20.0 percent
according to Robert Morris surveys. Returns in 1976, were somewhat lower—
15.5 percent according to the Robert Morris surveys; in 1977, returns were
higher at 19.6 percent.
3. Cash Flow
Cash flow represents the .cash that is actually available for distribution,
retention, or use in acquiring additional assets. The data represented also
in Table IV-5 indicates that cash flows as a percent of sales were relatively
small from 1970 to 1973. While data are not available for 1974 and 1975,
it is probable that increased profits would result in substantially higher
cash flows. A new Robert Morris Associates data series does show high
cash flows in 1976 as compared to early data years. However in 1977,
Robert Morris indicated cash flows in the industry represented only 3.3
percent of sales.
D. Financial Structure of the Industry
1. Assets
Leather Tanning and Finishing can be considered a raw materials oriented
industry. Tanners maintain relatively large quantities of hides and skins
as a major component of their firms' capital requirements. As shown in
Table IV-7, current assets have represented between 61 and 75 percent
of the industry's total assets between 1969 and 1977. This reflects the
large capital that tanners require to maintain in-process leather and
adequate supplies of raw hides and skins.
Contract tanners and finishers are major exceptions because they do not buy
hides to process and only perform a service for hide owners. In their
operations, tanning and finishing supplies and equipment would account for
most of the capital requirements.
IV-12
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IV-14
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The fixed assets of the industry represent the conventional elements in
every manufacturing or processing industry, i.e., the plant, land, and
equipment. The fact that fixed asset requirements are a relatively minor
portion of total assets does not imply that the industry requires relatively
few fixed assets; rather it reflects the significant amount of capital re-
quired for hides and the fact that most tanneries are older facilities
whose costs of fixed assets are significantly less than if they were re-
cently acquired.
The distribution of assets does vary among the various sizes of tanneries.
As shown in Table IV-8, 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 because the larger facilities are often newer,
or at least more modern, their capital expenditures are proportionately
higher than those of the older, smaller facilities.
2. Liabilities
The 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 IV-7. These short-term liabilities typically
represent 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. In
1977, current liabilities were an atypical 46 percent of the total assets.
This inverse may be reflective of tanneries increasing their short-term
debt to finance, in particular, higher priced hides.
Long-term debt within the Leather Industry represents approximately 20
percent of the industry's total assets and 40 percent of the industry's
total liabilities. The somewhat low proportion of long-term debt re-
flects 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 that 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 that have modernized
or expanded their facilities.
When the industry's liability structure is viewed with respect to size
(Table IV-8), it becomes apparent that the larger tanneries have a much
more sizable long-term debt proportion of total liabilities than'do the
smaller tanneries. Furthermore, the larger tanneries maintain a somewhat
lower overall liability commitment than do the smaller tanneries.
3. Net Worth
The net worth of the industry is defined as its total assets less its total
liabilities; thus, the net worth represents that portion of the industry's
assets that 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 or a debt-to-equity ratio of 0.8 to 1.0.
IV-15
-------
Net worth, related to tannery size, appears to be variable when expressed in
terms of total assets for both the larger sized and the smaller tanneries
(Table IV-8). This implies that tanneries are similar with respect to their
dependence 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 the actual performance of a firm as well as its
expected performance. In this latter case, it is also called the cost of
be approximated within reasonable bounds.
The current cost of capital was determined for purposes of this analysis
by estimating various performance measures of the industry. The weights
of the two respective types of capital for the Leather Tanning Industry
were estimated utilizing Robert Morris Survey data, with the equity weight
being 46 percent and the debt weight being 54 percent. The actual cost of
debt was assumed to be 10.0 percent. The cost of equity was more difficult
to estimate as there are no known publically traded leather tanning company
stocks. Accordingly, various equity cost-related measures were reviewed,
including P/E ratios for the related Shoe Industry and the Robert Morris
Survey's earnings-to-net worth ratios for the Leather Tanning Industry.
From these sources, the cost of equity capital was determined to be approx-
imately 15.5 percent.
To determine the weighted average current cost of capital the before tax
costs are adjusted 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 current cost of capital being 9.9 percent.
Item
Debt
Equity
Weight
.54
.46
Before
Tax Cost
10.0
Tax
Rate
.48
After
Tax Cost
5.2
15.5
Weighted
Cost
2.8
7.1
9.9
F. Assessment of Ability to Finance New Investment
1. 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
IV-16
-------
sources: (1) funds borrowed from outside sources; (2) equity capital
through the sale of common or preferred stock; (3) internally generated
funds—retained earnings and the stream of funds attributed to the de-
preciation 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 deter-
minant 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, stock-
holders must be willing to forego dividends in order to make earnings avail-
able for reinvestment.
The firm's industry and general economic conditions are also major consid-
erations 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 sig-
nificant variables. Declining or depressed industries are not good prospects
for attarcting 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.
2. General Industry Situation
The Leather Tanning and Finishing industry experienced significant improve-
ment on its pre-tax profit on sales during 1974 and 1975 with profits being
6.0 percent or better. (Table IV-9) An important consideration of this time
period is that the margin improved during the period in spite of a general
downward trend in total volume of domestically produced leather. This may be
attributable to improved operating efficiency as well as more favorable
spreads between the hides and finished leather prices experienced during the
1974-75 period. Since 1975, the industry's profits have declined with 1977
returns on sales averaging on 2.1 percent. These declines are attributable
to foreign competition for hides and in the consumer markets. At the present
it is anticipated the industry will remain at these low levels for the next
few years.
IV-17
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IV-18
-------
Returns on investment (ROI) also shown in Table IV-9 and expressed as pretax
profits as a percent of worth, have shown a somewhat improving situation.
In 1972, ROI was reported to be 9.9 percent for the industry. By 1975,
this had doubled to 20.0 percent. In 1976, the industry's ROI declined to
15.5 percent, however in 1977 it increased to 19.6 percent. These shomewhat
higher ROI's, when compared to the above discussed returns on sales, may be
reflective of the industry's older facilities, many of which have not been
modernized in recent years.
Another factor relative to the industry's capability to finance new invest-
ments is the proportion of debt to equity the industry maintains. As shown
in Table IV-9, the debt to equity ratio has varied from year to year with
debt representing 62 percent of the industry's total assets in 1977.
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 in-
dustry's current assets to its current liabilities. As depicted on Table
IV-9, this ratio has been relatively constant between 1972 and 1974 and
then increased in 1975. In 1976 the ratio remain the same as 1975 (1.8)
but in 1977 declined to 1.5. However, the historical ratios indicate that
the industry has not experienced and industry-wide liquidity problems.
3. 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
and increased sharply in 1965 and, again, in 1966, to $17.3 million.
Expenditures remained at about that level with only slight declines be-
tween 1966 and 1972. In 1973 and 1974, expenditures declined to about
$13 million. Since 1974, however, expenditures have increased with the
1976 expenditures totaling $32.6 million (Table IV-10). A closer look
at the $32.6 million spent in 1976 shows $12.4 million or 38 percent used
for new structures and plant additions and 62 percent for new machinery
and equipment. Total expenditures amount to 14 percent of the estimated
fixed assets of the industry.
4. Capital Availability
The Leather Tanning and Finishing Industry has been able to maintain a
profitably position in spite of a severely declining volume. During the
past five years, the total physical volume of the domestic leather tanning
and finishing industry declined by approximately 33 percent due primarily
to severe international competition. In spite of this decline the overall
industry profitability has remained positive. This may be attributable
to the exit of some of the older, less profitable firms from the industry.
The industry has a large number of family-owned and operated plants,
especially in the small and medium size categories. A few of the larger
plants are divisions of major corporations. The family-owned plants are
largely financed with internal capital and maintain a low level of long-term
debt.
IV-19
-------
Table IV-10. Expenditures for new plant and new equipment in the leather
tanning and finishing industry ($ million)
Total new New structures Mew machinery Used plant
Year expenditures and plant additions and equipment and equipment
1960 6.1
1961 4.7
1962 7.2
1963 6.5 .8 6.2 .5
1964 7.8
1965 11.3
1966 17.3
1967 16.7 5.2 11.6 .9
1968 16.6
1969 14.4 3.0 11.4
1970 12.4 1.9 10.6
1971 17.7 3.5 14.3
1972 16.3 3.6 12.7 U2
1973 12.8
1974 13.1
1975 22.7 6.1 16.6
1976 32.6 12.4 20.2
Source: Census of Manufactures and Annual Survey of Manufactures.
IV-20
-------
New expenditures have been modest--mainly for equipment and, consequently,
over 70 percent of the physical plants are over fifty years old. There has
been an apparent reluctance of outside caDital sources to invest in or lend
money to the industry. Since January 1, 1970 a total of 45 plants con-
sidered to be wet process tanneries, both large and small, have closed
and/or liquidated.
Problems in acquiring working capital by the Leather Tanning and Finishing
Industry were intensified by the high 1973 raw material price levels. In-
dustry sources, including the Tanners' Council, reported very critical
scrutiny of industry prospects by banks and fiduciaries and a 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. No investment interest could be found in plants closed in
1973 such as Griess-Pfleger (Waukegan), Superior (Chicago), or Modern
(Peabody, Mass.) I/. These plants had to be liquidated and their 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 and
the fact that 80 percent of the industry's plants are considered to have
1963 or older levels of technology make it doubtful that the industry as
a whole will make any major capital outlays if the past operating environ-
ment prevails.
The extent to which investment requirements will impose capital problems
on the tanneries will depend on an individual tannery's financial situation
as well as its size of capital requirements and the desires of the firm's
management. While undoubtedly some tanneries may encounter difficulties
in financing pollution control expenditures, it is anticipated that the
industry as a whole will be able to secure sufficient capital. However,
if the recently experienced financial deterioration continues, then the
industry's ability to finance controls may be reduced. Sources of financ-
ing available to the tanneries would include internal financing, banks and
fiduciaries, stock or bond issues, or small business loans obtainable
through the Environmental Protection Agency.
_!/ Source: Tanners' Council of America, Inc.
IV-21
-------
V. PRICE AND PRICE DETERMINATION
The domestic price of leather is basically a function of the cost of raw
materials (predominately hides or skins), the quality of the leather, the
demand in the consumer market for leather products, and market competition
among both foreign and domestic tanners and leather product manufacturers.
An analysis of the prices and of the price determination process of the
Leather Tanning Industry is desirable as impacts resulting from the impo-
sition of environmental controls on the industry may vary depending upon
the industry's ability to influence the prices of either its raw materials
(hides) or its finished products (leather). If an industry possesses the
ability to influence prices, then often part, and sometimes all, the addi-
tional cost associated with environmental controls can be passed either
forward in the form of higher product prices or backward in the form of
lower prices paid for raw materials.
In this chapter, the Leather Tanning Industry's prices and price determin-
ation processes will be analyzed in order to determine its influence on
raw material and finished product prices. In the following sections,
characteristics of recent price and price determination factors will be
assessed, including a qualitative and quantitative analysis of supply,
demand, and leather prices vs. an evaluation of leather product imports
and associated trade restrictions. Finally, an analysis of the raw hide
markets will be presented and will include discussions of the international
trade of and trade restrictions over raw hides.
A. Leather Prices, Demand, and Supply
The demand and supply for and the prices of leather experienced by U.S.
leather tanners have been highly variable in recent years. Markets were
fairly depressed in the early 1970's, but picked up during 1975 and 1976.
In 1977, the Leather Tanning Industry again experienced a depressed market
as both dollar volume and units produced declined and in 1973 while dollar
volume increased over the 1977 volume, the units produced declined. The
outlook for 1979 is for moderate growth. Most industry analysts are cautious
because of the potentially strong competition from foreign tanneries and
leather product manufacturers.
1. Hide and Leather Prices
As discussed in the Department of Commerce report, U.S. Industrial Outlook -
,1978, the increasing percentage of raw hides exported from a finite domestic
supply has caused sharp increases in both raw hide and leather prices since
1971. This has remained applicable through 1978 and early 1979.
V-l
-------
According to the 1978 Outlook report, although domestic demand for cattle-
hides declined in 1977, the small reduction in domestic production coupled
with steady foreign demand maintained cattlehide prices at levels higher
than those of 1976. According to the 1979 Outlook, in 1978, a reduction
in slaughter coupled with strong foreign demand, significantly aided by a
declining U.S. dollar against many foreign currencies, tightened the supply
of cattlehides available to U.S. tanners and forced prices sharply higher
than those of 1977. The composite average monthly price of heavy native
steers, light native steers and butt branded steers started at 40.81 cents
per pound in January, rose to 45.70 in June, and then soared to 58.62 cents
per pound in September, averaging 46.10 cents for the first nine months of
1978. The annual average for 1977 was 36.84 cents per pound. Certain
types of hides in early September were selling in excess of 60 cents per
pound, the highest on record. The Producers Price Index (PPI) (1967=100)
for all hides and skins increased from an average of 286.8 for all of 1977
to an average of 342.2 for the first nine months of 1978. The September
1978 index was 435.8, up 58.6 percent over September 1977.
Since raw hides and skins constitute the major component of tanners' direct
cost, leather prices advanced sharply. The PPI for all leather, which
averaged 200.5 for 1977 and stood at 200.4 in December 1977, averaged
226.2 for the first nine months of 1978 and was 269.4 in September~1978.
By September 1978, skyrocketing hide prices had substantially increased
tanners' requirements for working capital, and the tanning industry was
urging the U.S. Government to provide relief through negotiating access
to other countries' raw material. Leather products industries were urging
imposition of export controls on U.S. cattlehides.
Historically, there has been a stable relationship between the prices of
leather and hides. The relationship was essentially absolute and was re-
flected by stable margins between the raw material and finished product
prices—especially for the period from the late 1950's to 1971. After 1971,
market disruptions made it difficult to maintain historical margins, and
classical relationships had to be adjusted in order to retain sales although
the margin adjustment usually resulted in a loss.
The data in Table V-l include the current and real dollar values for leather
(wholesale), cattlehides (pound-price converted to equivalent of one square
foot of leather), and the equivalent square foot price spread or margin.
The hide-to-finished price spread is graphed in Figure V-l to more clearly
depict the recent price spreads. Over time the current dollar price spread
has been increasing at about the rate of .64 I/ cents per square foot, per
year. Based on the 1955-76 average price spread (x) of 35 cents per square
foot, the average annual change or increase has been about 1.8 percent per
year. The increase is necessary to offset ever increasing production costs
which consume much of the price spread.
V .64 cents per square foot per year is the coefficient of the trend
line equation: 7=27.8 + .64 t where Y-j=margin in year-j, and t=year1-,
i-1, 2, ...,22 starting with 1955.
V-2
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V-4
-------
Based on a real-dollars analysis, the price spread on a trend basis has
been declining at about .59 _]_/ cents per square foot, per year. This is
euqal to the average annual decrease of 1.4 percent per year with the 22
year average real-dollar margin (x) of 43.2 cents per square foot. Thus,
although the margin has been increasing in current dollars, the increase
has not kept pace with the value of the dollar and the margin has declined
in real terms.
Increased competition and declining volume have kept the industry operators
from increasing production margins sufficiently to cover costs and maintain
historical profit levels. The industry has responded two ways: first,
plants continually attempt and often succeed in increasing production
efficiency, and second, inefficient plants unable to cover increasing costs
by the small increase in market margins, have been forced out of business.
The latter situation is seen in the industry plant data discussed in Chapter
III.
2. Demand for Leather
As was shown in Table IV-1, the Leather Tanning Industry's annual production
declined during recent years, decreasing from nearly 32.7 million hide equiv-
alents in 1965 to 20.5 million in 1978, a reduction reflecting a declining
demand for U.S. produced leather and leather products caused, in part, by
increased competition from foreign tanneries and leather product manufacturers.
This section discusses both the domestic and international markets for U.S.
produced leather and their respective trends and influences on the demand
for leather.
Domestic Markets. Traditionally the demand for leather in the United States
has been derived from the needs of the U.S. shoe industry. However, since
in recent years the domestic shoe manufacturing industry has lost major
portions of its markets to imported shoes, its influence on leather demand,
though still consequential, has declined and other leather markets have
grown in their ability to influence the demand for U.S. produced leather.
As discussed above, the domestic shoe manufacturing industry, the primary
customer for U.S. tanned leather, has slowly but steadily been losing its
share of the domestic market to international competition. In 1965, only
12.3 percent of the shoes purchased in the U.S. were manufactured overseas;
however, by 1977, this had increased to 43.9 percent, and indications are
that this trend will continue over the foreseeable future. During this
time, the 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 of shoes reached a peak in 1968 with 4.07 pairs and
declined to 3.28 pairs in 1975. In 1976 it recovered significantly,
increasing to 3.68 pairs, but then in 1977 fell again, to 3.47.
_!/ .59 cents per square foot per year is the coefficient of the trend
line equation: y=49.9 - .59t
Where: y = real dollar margin in year-j
t = year-j, i=l 2, ..., 22 starting with 1955.
V-5
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The effect of the relatively stable U.S. demand for shoes and increasing
imports has been that the total pairs of shoes manufactured in the U.S.
has declined steadily from 600 million pairs in 1965 to the 1975 level
of 413 million pairs, a decline of 34 percent over the ten year period
(Table V-2). U.S. production of shoes was up in 1976, 422 million pair,
but this appeared to be only an aberration as shoe production fell in 1977
to 384 million pair. As shown in Table V-3, forecasts for 1978 are a bit
more optimistic with projections of 450 million pair.
A further indication of the decline in the shoe industry's demand for
leather can be seen in Table V-2 which shows the percent of U.S. manu-
factured shoes made with leather soles. This has declined steadily over
the past thirty years, by 1976, only 14.6 percent of the U.S. shoes were
made with leather soles, down from 25 percent in 1965. Also during the 60's,
the substitution of synthetics for leather in shoe uppers made substantial
inroads in the market. In 1960, only 25 percent of the U.S. shoes were made
with synthetic uppers. By 1976, this percentage had increased to 48 percent.
In summary, the damand by domestic shoe manufacturers for U.S. produced
leather declined from 78 percent of the total leather produced in the U.S.
in 1970 to only 53 percent in 1977. It is projected to increase slightlv
to 58 percent in 1978 (Table V-3).
Other domestic markets for U.S. produced leather include manufacturers of
such products as leather garments, gloves, and handbags. As recently as
two and three years ago, leather garment demand was encouraging, utilizing
190 million square feet of domestic leather or 14.4 percent of the 1975
domestic production. The rapid increase of imports of Korean leather
garments—some imported at extremely low prices — have depressed that
market, and in 1976, utilization for leather garments declined 26 percent
to 140 million square feet or 10.7 percent of the domestic 1976 leather
production. In 1977, utilization of leather for garments increased to 150
million square feet or 12.6 percent of the total leather utilized. However
for 1978, projections are that the square footage and the percentage will
decline. Markets where demand still appears strong, however, include: leather
work gloves, 8.1 percent of the domestic leather produced; leather handbags,
8.5 percent; leather belts, 3.8 percent; small leather goods, 5.2 percent;
and miscellaneous, 6.7 percent (Table V~3). Unfortunately, these segments
represent less than 30 percent of the leather utilization in the United
States.
Foreign Markets. Leather exports offer the newest potential market for U.S.
leather tanners. In 1968, U.S. exports of leather and leather products
consisted mainly of leather luggage and represented only 1 percent of the
total 1968 domestic leather production. By 1975, these exports amounted
to 13 percent. While, when compared proportionately to total domestic
production, exports in 1976, 1977, and 1978 declined, exports did reach
an estimated S150 million in 1977, about 8 percent higher than the total
value of 1976 and $185 million in 1978. Exports in 1978 were approximately
12.6 percent of the total domestic production.
V-8
-------
While U.S. tanners and leather product manufacturers are attempting to
expand their exports, higher wages and raw material costs have forced
manufacturers to raise the prices of domestic leather and leather prod-
ucts. While the devaluation of the U.S. dollar has helped to keep U.S.
leather prices competitive in some countries, the devaluation has not
been uniform. In the latter case, it has reduced the ability of some
U.S. manufacturers to compete in the international market and has actually
increased the attractiveness of the U.S. market for potential imports of
foreign finished leather products. There is, however, an encouraging
trend among foreign exporting leather manufacturers: some import semi-
tanned or semi-processed leather instead of raw hides and produce finished
leather products for their domestic or export markets. Several reasons
support this trend. First, most foreign leather tanners must import raw
hides to supplement their domestic supplies. The semi-tanned leather is
considerably lighter in weight than are raw hides and, accordingly, less
costly to ship. Also, many countries are facing increasingly more strict
pollution control regulations, and the importation of semi-tanned leather
instead of raw hides significantly reduces their pollution control require-
ments. Finally, the early stages of the tanning process are labor intensive,
and tanners in many foreign developed countries are finding it difficult to
maintain an adequate, experienced labor force. The importation of semi-
tanned leather eliminates the need for a large labor force.
The increased trend for foreign tanners and leather product manufacturers
is reflected by data appearing in the 1976 Department of Commerce Report--
"U.S. Leather in World Markets." These data are depicted in Table V-4 and
show the U.S. exports of leather by classes for 1973 through 1975. As
shown, leather exports increased from $83 million in 1973, to $102 million
in 1974, and to $140 million in 1975. While nearly all classes of leather
shown on Table V-4 increased, a substantial portion of the increase was
for the Rough and Crust and the Not Elsewhere Classified (N.E.C.) classi-
fications with the N.E.C. classification presumed to include semi-tanned
leathers. Of the total change in exports from 1973 to 1975, the Rough
and Crust and the N.E.C. classifications represented over 45 percent of the
total change. While these data are fairly old, current trends in the industry
would indicate the implications of the data are still applicable.
3. Supply of Leather
The United States leather supply originates from two general sources--
domestic tanneries and foreign tanneries. While the domestic tanneries
supply most of the finished leather to U.S. leather product manufacturers,
the foreign tanneries predominately supply their leathers to foreign
manufacturing firms which, in turn, compete with U.S. leather manufacturing
firms for the finished leather goods markets. In this section of this report,
the discussion emphasizes the supplies of leather available to U.S. leather
manufacturing firms. The discussion of the importation of finished leather
products into the U.S. is presented in the next section of this chapter.
V-9
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V-10
-------
While the ability of the U.S. Leather Tanning Industry to meet the demand
for leather could be restricted by the availability of hides or skins, it
generally has been able to respond to the domestic demand for leather. Since
less than half of the hides produced in the U.S. are consumed by U.S. tanners
with the remainder purchased by foreign tanneries, the inability of the U.S.
tanners to meet the domestic demands for leather would be possible only if
U.S. tanners are unwilling to compete with foreign tanneries for the supply
of U.S. hides. Historically, U.S. tanneries have been able to purchase all
the necessary hides to meet their forecasted demands although often not at
a price they would prefer.
As will be discussed in a later section of this chapter, while the total
U.S. supply of hides available for tanning has been traditionally increas-
ing steadily, the number of hides utilized by domestic tanneries has been
declining. Shown in Table V-5 are the U.S. Leather Tanning Industry's
annual production data from 1955 to 1977. The industry's output has steadily
declined throughout this period, falling from 37.2 million equivalent hides
in 1955 to a low of 20.0 million in 1974. On the average, production has
declined 2.3 percent per year. At an output of 25 million equivalent hides,
a 2 percent decline is equal to 500,000 hides—about 20 million square feet
of leather—equal to the annual output of two medium-sized chrome tanners.
B. 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. Im-
porters have realized the United States is a attractive market for foreign
leather products and the market has been expanding at a rapid rate. As
a result, imports of leather goods into the U.S. have been growing at an
accelerating rate to create what some industry experts perceive as a
serious threat to the domestic Tanning and Leather Goods Industries.
This trend has also occurred in other developed countries. In Germany, Sweden,
and in other countries, leather imports have reduced their respective Leather
Tanning and Leather Products Industries to a fraction of their former size.
The exact reasons for this shift are many and complex. Basically, the
Leather Industry is labor intensive and developing countries have certain
cost advantages. Second, because the industry does not require a high
level of technology, it can be adapted to developing countries. Third,
a complicated series of trade restrictions prohibit the U.S. Tanning and
Leather Products Industries from competing favorably in foreign markets.
Fourth, developing countries such as Korea, Taiwan, and Brazil see in
this industry's development a valuable source of badly needed foreign
exchange and as a result, they encourage its development. The following
sections discuss the trends in U.S. imports of leather products and the
factors affecting the foreign trade of leather and leather products.
v-n
-------
Table V-5. Tanning industry production, cattlehide equivalents,
1955-1977
Year
1,000 cattlehide
equivalents
% change from
previous year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
37,220
36,810
35,820
33,810
34,090
31,850
32,226
31,596
31,325
32,187
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21,894
23,526
21,528
._
-1.1
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-5.6
+0.8
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-4.3
+3.3
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-8.6
-2.6
-2.4
-14.6
-5.0
+9.5
+7.5
-8.5
average annual
change from
1955 to 1977
equals -2.3%.
Source: Tanners' Council of America, "Membership Bulletin Leather
Industry Statistics".
V-12
-------
1. Trends in Imported Leather Goods
Table V-6 presents the U.S. foreign trade in leather products. The value
of imports have more than tripled from 1969 to 1977, increasing from $631
million to over 52.39 billion in 1977. The value of exports during this
period increased rapidly, but in 1977, they amounted to only S119 million
or only 5.0 percent of all leather imports.
Footwear, the major product imported into the U.S. accounts for two-thirds
of total leather imports in 1977, approximately the same proportion of total
imports as in 1971. Leather wearing apparel has made rapid increases since
1972 in its proportion of total imports and was the second most important
imported leather product in 1976. In 1976, leather apparel imports increased
by 53 percent over their 1975 level although in 1977 its volume declined
slightly from $237 million in 1976 to $204 million in 1977. Handbags and
luggage make up the next two most important categories with imports of $207
million and $190 million, respectively, in 1977.
Latin American countries appear to have good access to the U.S. market with
Mexico, Columbia, and Brazil regularly exporting certain types of leather
goods. 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 other developing countries have
also begun to emerge as suppliers. For example, Israel, the Republic of
Korea, and China (Taiwan) have recently become important exporters of leather
products to the U.S.
While much of the historical data reflect U.S. imports of finished leather
products, a recent trend is emerging of shipping crust leather to the U.S.
According to industry sources, much of this is coming from Argentina and it
has been offered at prices very near the U.S. price for untanned hides.
While it has been reported that some of this crust leather is of lower
quality, several U.S. tanners are considering the purchase of it for re-
tanning purposes. As this trend emerged only during late 1977 and early
1978, very little additional data about it have been available.
2. Trade Restrictions
One of the major restrictions of the U.S. Leather Tanning Industry is that,
although foreign sources have free access to U.S. raw hides and skins,
U.S. tanners have traditionally been denied equal access to foreign leather
markets. Since representatives of the U.S. Leather Industry feel current
and past trade legislation and duties have not been effective in controlling
U.S. imports of leather and leather products, they have not favored any
further cuts in U.S. duties on competitive imports. The following sections
of this report offer an overview of some of the tariffs and trade legislation
which has and/or could affect the industry. The discussions of Tariff Struc-
tures and Non-tariff Barriers described below were largely taken from the
report, Leather and Leather Products, which was published by the United Nations
in 1971 and reflects tariff status after the Kennedy Round of trade negotiations.
V-13
-------
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Tariff Structures. Tariffs tend to increase as the degree of processing or
the manufacturing content of an article increases. The Leather Industry is
a fairly good example of this as in most countries raw hides and skins can
be imported duty free while finished leather carries a tariff of about 5 to
10 percent of the imported value of the leather and leather footwear and
other finished leather articles carry tariffs between 10 and 25 percent.
The Kennedy Round negotiations for leather and leather products resulted
in only modest tariff reductions. As mentioned above, since hides and
skins were already free of duty in most developed market-economy countries,
no reductions were called for. Tariff rates for pre-tanned leather were
not reduced much, except in the U.S., and the concessions made by the EEC
and Japan were confined to goat, sheep, and exotic leathers. In the case
of finished leather, the U.S. effectively halved its rates, the United
Kingdom made somewhat smaller concessions, EEC made smaller concessions
still, while Japan made only a few concessions and those mainly for the
more exotic leathers.
More significant reductions in tariffs were agreed on for footwear and
leather products. The EEC tariff on footwear was halved, from 16 per-
cent to 8 percent, while the United Kingdom tariffs, in general, were also
halved. In the U.S., somewhat smaller reductions were conceded, but Japan
made no concessions, maintaining its tariff at 27 to 30 percent, the highest
tariff to be found in the post-Kennedy Round rates for leather and leather
products.
Non-Tariff Barriers. Apart from tariffs, imports of leather and leather
products are also subject to other restrictions of various kinds in a
few developed market-economy countries. For example, Japan has the most
elaborate set of restrictions on imports of leather and leather goods
and appears to be the only developed country with import restrictions
on leather itself as distinct from goods manufactured from leather.
Japan also has restrictions on footwear, as have two other developed
countries, Ireland and Norway. Australia restricts imports of leather
clothing.
In general, therefore, only a few countries operate non-tariff barriers
against leather and leather goods; indeed, in Western Europe and North
America such restrictions are negligible. In Japan, a fairly complex
set of restrictions reinforces the relatively high tariff rates noted
in the previous section, and the effects of these two barriers, operating
simultaneously, must reduce the level of imports of leather and leather
goods into Japan.
Effect of Current Legislation. Past trade legislation and trade duties
have generally not been effective in curtailing U.S. imports of leather
and leather products. As such, industry leaders have stepped up lobbying
efforts for more effective tariff rates and the initiation of trade
restrictions.
V-15
-------
One such effort was initiated in August, 1977, when the Tanners' Council
of America filed a complaint with the Office of Special Representative
for Trade Negotiations (STR) under Section 301 of the Trade Act of 1974
The complaint alleged that Japan had maintained quantitative restrictions
and excessive tariffs that adversely affected U.S. exports of leather to
Japan. The Tanners' Council claimed that such restrictions unfairly limit
access to Japanese leather markets. As a result of the Tanners' Council
complaint, early in 1979, the U.S. Government announced it had achieved
an "understanding" with Jaoan that will increase U.S. leather exports to
that nation. The "understanding" will ease Japanese quota restrictions
against U.S. leather to the extent that up to $30 million in new sales may -, ,
be forthcoming compared to SI.5 million U.S. Tanners sold to Japan in 1978.—
The domestic shoe industry, after working for nearly fifteen years to gain
government recognition of its serious import problem, late in 1977 gained
a positive stimulus to domestic producers when the U.S. Government completed
negotiations of Orderly Marketing Agreements (OMA's) with the Republic of
China (Taiwan) and Korea. These OMA's were designed to restrain the exports
of nonrubber footwear to the U.S. market by those two countries by allowing
only specified quantities until 1981.
Other efforts by the Leather and Leather Products Industries to reduce im-
ports have included those to obtain countervailing duties against specific
leather products from countries whose export manufacturers receive govern-
ment subsidies on export products. While the overall effectiveness of
countervailing duty actions may or may not be great, their award does
reassure the U.S. industries that their efforts are not in vain.
The Raw Hide Market
Cattlehides and sheep skins are the primary raw materials used in the
Leather Tanning Industry and, for the most part, are a by-product of the
Meat Packing Industry. As the value of a raw cattlehide traditionally
represents only 3 to 6 percent of the value of the live animal, the supply
of' hides is highly inelastic, i.e., neither hide prices or demand has
substantial influence on the total supply of hides. Hide prices and
demand will, however, affect the destination of the raw hides.
Historically some U.S. hides have always been exported to foreign tanners.
Recently, however, the demand has increased significantly, and the inter-
national trade of raw hides has become an even greater influence on raw
hide movements. For example, in 1976, for the first time, over half of
the U.S. produced cattlehides were exported to foreign tanneries and
substantially affected the domestic prices of hides. Thus, the broad
international setting must be considered to understand the price of
raw hides as well as the orice of leather and leather products.
V "Japan, U.S. in Accord on Leather", Daily News Record, March 13, 1979.
V-16
-------
1. United States Supply of Hides
The supply of U.S. cattlehides has been traditionally steadily increasing
over the past two decades as shown in Table V-7. 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 slaughtered
in other commercial establishments.!/ This number remained constant to 1960
when 25.2 million head were slaughtered. During the 60's the number grew
rapidly as the cattle feeding industry greatly increased the total U.S.
capacity over the previously grass-fattened production. By 1970, the number
of slaughtered cattle increased to 35.2 million, stabilized for the next
few years, and then increased to 42.6 and 41.9 million head in 1976 and
1977, respectively, as the large buildup of cattle on feed was reduced.
Since 1960, the rate of cattle slaughter increased in the U.S. at approxi-
mately 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; the remaining 48 percent were classified as cows and heifers.
While the historic trends for hide supplies have traditionally increased,
beginning in 1977 and continuing through 1978, U.S. production of cattle-
hides has declined. These declines are the result of the high levels of
cow and calf slaughter during 1975-77 when high grain and feed costs forced
growers to liquidate their herds. Herd liquidation continued in 1978, and
with long periods of time required to sufficiently rebuild breeding stock,
it is likely that the calf crop and thereby cattle numbers available for
slaughter will continue to decline at least through 1980.
The supply of cattlehides available for domestic tanning production further
tightened in 1978 because hide exports remained at the high level of 1977, an
estimated 24.2 million, or 61.3 percent of slaughter. The percentage exported
has risen steadily from 41.9 percent in 1969. Japan, Republic of Korea,
Mexico, and Rumania were the largest importers of U.S. cattlehides. By com-
parison, U.S. imports of cattlehides, mostly from Canada, totaled less than
1 million.
The expanding percentage of cattlehides exported is a problem of major con-
cern to domestic tanners and leather products manufacturers. Restrictions
that many developing countries place on access to their raw material supplies
in order to foster the growth of their tanning and leather products indus-
tries have increased worldwide demand for freely-traded U.S. cattlehides.
Suppliers of other types of leather-making raw materials have not shown the
same trend as have cattlehides. Prior to 1974, calfskin supplies had been
shrinking drastically in the U.S. Calfskin production in 1976 was estimated
at 4.5 million skins, a 40 percent rise above the 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
If Federal Inspected Slaughter means that the animal is slaughtered and
processed in a slaughterhouse and inspected and identified by federal
meat inspectors to allow the meat to be sold interstate.
V-17
-------
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V-18
-------
the past two decades. Although the numbers are responsive to price develop-
ments in meat and wool, the long-term prospect for domestic sheepskins is
declining. Sheepskin production, estimated at 11.5 million in 1976, dropped
approximately 2 percent from 1975 level of 11.7 million skins.
In 1978, for the first time in three years, production of calfskins declined
a substantial 20 percent to 4.4 million. Exports of raw calf and kip skins
were 2.6 million or 59.1 percent of total production. Domestic sheep and
lambskin production in 1978 declined 14 percent to an estimated 5.5 million.
Sheepskin exports totaled 1.2 million or 22 percent of 1978 production.
Total cattlehide movement to U.S. tanners has been decreasing over the past
ten years as U.S. tanners and the U.S. shoe industry have met stiff inter-
national competition and restrictive trade legislation. Total wettings
of domestic tanneries decreased from 23.5 million hides or 66.8 percent
fo the U.S. total cattlehide production in 1966 to 17.5 million hides or
46.5 percent in 1974. Total wetting increased in 1975 and 1976 to 19.1
million and 20.4 million, respectively. These levels represented 46 and
47 percent of the total U.S. cattlehide production in those two years
(Table V-8).
2. World Supply of Hides and Skins
World cattle numbers were increasing prior to 1976, but drought in many
countries and unfavorable prices in key countries have since caused cattle-
herd reductions. The Foreign Agriculture Service of the USDA estimated
world cattle numbers in 1974 at 707 million with an estimated increase
to 723 million in 1975 or approximately a 2 percent increase. Production
for 1976 was down,
decline further in
however, by about 2 million
1977 to drop to 715 million
head and is expected to
head. This is still well
above historic levels, for the average 1968-1972 production was 635 million
head per year (Table V-9).
Of countries whose data are reported, the U.S. is the largest cattle pro-
ducer, accounting for about 18 percent of the world production. The USSR
is second with about 15 percent. Other countries have more cattle, spe-
cifically India, but as they are not slaughtered, no major hide production
occurs.
A more meaningful number depicting supply is the total hides produced by
country as shown in Table V-10. 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 declined but increased sharply in 1974 and 1975 to 182.7 and 198.5
million hides, respectively.
V-19
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TableV-9.
ATT^ JLTO Hl.TfA.u-
S'ECIMEO COUNTRIES - >»t«»G£ 1969-721
IN UMTS I' 1 ,000 "E«0
'""" "I0 ««*""
SCUTI ««£aic»i
•ESTERNi
CCI
JC^'ANT, FEDERAL HEP. OF
EASTERN!
SERH.NYi OEXCCSATIC SEP. CJ...
ASIil
CH1N»,R£P 3f 1 T ft IvAN) . ( . . .
OCEANIA!
TOTAL SELECTED COUNTRIES
SiOTES: 7ARICCS HATES Of S^KESAIICS A.-.Z
AS POSSIBLE.
AVEHA3E
1969-72
11,791
1,501
1,207
1 ,503
1,561
2*. 8**
1.199
159,71*
85,510 2
2,892
19,97*
2,200
4,0192'
8. 757
8.43*
191,9*6
2.862
2. 897
21 .640
13,999
9.253
9.3*2
3.803
12.3*8
72.19*
943
1.11*2'
4.192
1.939
57,603
5.156
1C. 34*
5,219
33.720
97.9*5
11,1*2
397
239
3.*78
31.970
635,331
USED 3T THE CCmTHUS
1973
12,726
llsoe
1 1 6*1
2»t830
1.312
121 t53*
172*343
36, 13$
2.890
3*600
818*3
190.799
2*954
2i 81 0
13.892
5*945
8*738
13.760
7*. 77?
9*7
litOO
4,47S
1*996
*
9Q,&«£
5,379
11.265
5,767
35,649
104,006
11*741
2*8
260
3,569
33.186
676,594
HEPOr.TD'G ANIXAL
197.
13,210
1,7*2
1.837
1,916
1 ,661
27,512
1,333
127,670
199,319
92,000
3.*56
23.032
2.*65
10.961
9,098
203. 3?6
3. 10*
3.100
23.^*9
6,«09
9,497
4.723
14,839
78,974
963
1,072
..413
1.909
9*.9«2
5,»92
12,309
5,997
37,377
106,266
11,911
2*5
290
3,650
32*341
706,806
. H3SEK. TSI3
1975
14,008
U816
1*900
1 * 07*
?, 031
1 ,689
2B,79u
1,348
131 ,826
1R6.89Z
94*000
3 i606
23, 032
',593
4,290
1 1 i 362
9,*44
J37, T47
3,103 '
3*060
'4,327
14,4)0
6,500
8,243
4,71*
14, 040
79,222
947
1,100
4,417
1,87*
95,065
5*585
12,815
5.983
38,461
109,122
12,333
£42
300
3.6*4
32,*23
7?., .81
TABuE ;^AC3I7rES 7H
197|,
13,696
1.1(94
1.V50
1,100
2, 1*4
1.759
29. 2K
2.600
1.3M
127,976
193.675
95.000
3.336
23.222
2.7^5
*.26C
10,701
9.59;
217,896
3,011
3*060
23.9*1
1*1*93
5.966
8.529
4.606
13,915
77.421
1,702
901
1,000
4.409
1.876
93.113
1 ,725
5.532
12.762
6.126
39,359
111.03*
12.7 *
12.77.
2*9
323
3.723
32.451
722. *95
ESI DATA A3 CLCS2 T
19TT,
13.1SS
1,970
2,13C
1 t 1&2
2.270
1 »aoo
24.60C
2,720
1.375
1*3,078
96.900
3.100
33.959
2.«6»
.,330
10.750
9,78*
J09.007
3.0' 6
3.060
23.510
1*.52S
6.060
9.900
4,523
13.300
76.899
900
1.009
4,412
1.870
92.571
5«47&
12.0*5
6.3*9
38,926
110,300
13,1*6
2*9
320
3,375
* . oo
32,795
715, y9S
0 JAATJJLPY :
I/ PRELDGSAHY.
f • DAT* mcuno m TBE ATEHACZ FOB THESE COOTTRIES AHE BOT CCKPARABU; TO SOTSBJTEST Ti
SHOWS EECACSZ o? A HBEAI rs TEE OFTICIAL SERIEC.
P03EI3K AOHICUITOIUI, SEH7TCE. TlSfiSSS OB ESTIMATED OX THE BASIS OP OFFICIAL STATISTICS Or ?0!EI3S 50V3BK3TT3 . OTHEH POEErCH SOURCE XATE3IA1C ,
HEPOitrS OF 0.3. ACaiCTn.7tJHAJ, ATTAIES AND FOHEION SERVICE OFPICZSS, RESULTS OF OFFICE BESEASCS. ASH KELATE) UTFOSKATICS .
V-21
-------
Table,V-10.Bovine Hides and Skins: Production in Specified Countries-7
Average 1966-70, Annual 1971-75.
i/MM C" 1 • o •* ~ -
COST. «!C4 m ,1
5001" |-C«IC«I
CtUl tJT it
•«J Ti4 l>
turf&'t
«CS1C»M
C t
'l-L»-; a s «?i
i'CtCE ' 5 « 513
«<<"IT 4 ? 311
• jauc-ii. 3 ? 40:
S»4|.. I.4Z5 1,11! 1,
i-ITU/H.**; J«i kit
10TH. «tiH»~ «.«4 JJ.:4» ?».
1.1H.S,
SCK-ivfi 3T!. SJT. CT 1.6 1 .6»I 1.
U.i.S.H 31.874 36, JOC >',
t SI * i
J4>.< « 1 1.2S1 1.
»-ii.i'»i"cs s ^ set
USIJl^U J.TT1 ».(»? ».
T01IL l.Sll l.<9f 10.
,BtlL UllcttJ „„,„,„
i/ r-- t^= »-r ct-E t D --- s-- --_ .
•»r 1*73 i»
3 3.*** 4,
30 30
» IS
)7 34
M I
i* «« T « ,
'S V
It •». 6 S3.
a*t lo. i ii.
MO 12, 6 ] 9.
*07 2
&7i ?. e 2.
T4^ « »
!5? 1, 2 ,i
>5? ?9,3S6 78,?
«* 1.021 j :
»1 68« 1
9 »0» 4
* 940 4
0 *23 »
9 721 9
2 7]J •
7 b»* 7
9 471 5
ft 355 4
7 1.63J 1.8
*7 7*7 «
?6S 30, 07» 3i. 3
01 1.66-^ 1.6
J9Q 403 4
IT 1.681. 2.1
33 », 793 1 fl.6
iC2 39. 8«7 45. 7
438 3*. 938 35, V
Ui ?i?01 2.3
?•> P. 961 2.3
I*.* 6T$ ft
!l» 2b* J
33* S.207 *-.?
38t l.2*>7 4.7
*ai 2if3l 3.2
7«T 11.315 ».'
*»» 17?,53o 112.6
T4 Itt
*J *.»»
;^ 33
SO 3«
41 l?.?->
63 13, 9
00 M. •>
71 i
2.3
40 ]
73 1. S
17 >1.«9
S3 IS
25 1 2
* 23
« 7 R
7 32
3 08
7 8*
0 7*
. S5
4 3«
S **
• 1.75
i %
52 3* , ib
69 .70
23 *S
S5 2.25
50 !1 .S3
02 45. e«
6C 3T . CC
S3 ?.3i
53 ?.3S
*5 1 &
2S 47
28 "f.O?
«i ».:*
17 3.44
S^ 12. • 1
67 I«%,i4
*-
t
T
i
7
r
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 officiers, results of office research and
related information. September 1976.
V-22
-------
According to the FAS data, the U.S. is clearly the leader in hide production
with a reported 49.9 million estimated take offs in 1975; however, since
this estimate includes death losses, it is probably overstated by 6-8 million
hides (hides from animals which die in the field are often not useable for
tanning). When such an adjustment is made, the FAS estimate of hide produc-
tion is in line with the estimate prepared by the Tanners' Council (Table
V-7). 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
of cattle compared to Argentina's 58 million, Argentina produces a higher
number of hides because of the low quality and poor slaughter rate of
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 to reflect
Australia's volatile cattle market which greatly depends on the also highly
fluctuating international beef market. A very high herd build up in 1973-
1974 resulted in sharp herd reductions and high slaughter rates in 1975.
3. The Demand for Raw Hides
Earlier sections of this study examined the demand placed on the U.S. tanners
for leather and leather products, a demand which results in that for raw
hides. Since, U.S. tanners must compete directly with foreign buyers for
the livestock slaughter industry's by-product hides, this section will con-
sider that international demand.
Exports of U.S. 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 1977,
net exports had increased to 61 percent. This amounted to a 1977 total of
24.2 million hides. In 1977, United States tanners purchased 1.0 million
hides from foreign sources (primarily Canada)-
The rate at which the United States exports raw hides has increased as is
shown in Table V-ll. In 1978, nearly one-third, 8.8 million, of the U.S.
hides were exported to Japan, 3.7 million to Korea, and nearly 2.0 million
to Mexico. It is significant to note the rapid increase in exports to
Korea as they jumped from 411 thousand hides in 1972 to the 3.7 million
reported for 1978. Other countries with rapid increases in U.S. hide
purchases are Italy 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. Changes in the method of reporting the
other countries' exports in later years caused significant increases in
these latter years data. Adjustments to comparable 1972 and 1977 data result
in a decrease in other countries by 13 percent from 5.2 million in 1972 to
4.6 million in 1977.
V-23
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Argentina has traditionally been a major exporter of hides with an annual
average of 8 to 8.5 million hides exported from 1966 to 1969. Its exports,
however, declined slightly in 1970, and then sharply in 1972, to amount to
only 1.3 million in 1972 as Argentina suffered production problems and
attempted to completely internalize its hide industry and, eventually, ex-
port only finished leather products. Brazil also internalized its hide
tanning industry and banned exports of raw hides to further reduce 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, the industry is basically in a demand-pull situation for raw
hides. Foreign demand for our raw hides, which now takes over 50 percent
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.
4. Trade Restrictions in Raw Hide Supply
The systematic restriction of hides and skins exports appears to be the
trend in developing countries whose basic policies are to restrict exports
of raw materials (hides and skins), simultaneously encourage exports and
restrict imports of manufactured goods (leather and leather products).
This is done by levying taxes on exports of raw hides and skins, imposing
high tariffs and quotas on imports; and granting incentives for exports
of manufactured goods.
When raw hides and skins are converted into leather, their value increases
more than two and a half times. Benefits, particularly for developing
countries, are derived by restricting exports of raw hides and skins, by
developing domestic tanneries and by increasing their export of the pre-
ferred semi-tanned leather. These advantages result from (1) the developing
countries' relative inability to adapt to changing fashion markets rapidly
and to develop the technological sophistication necessary to high quality
finished product development and (2) the leather processing industry's
inability in developed countries to attract and retain the labor supply
necessary to the semi-skilied labor intensive character of the primary
leather processing production stages.
In a review of some of its more recent tariff legislation, such as the
Kennedy Round, the U.S. Government has indicated that 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.
V-25
-------
In 1968, one-third of the approximately $452.6 million raw hide and skin
imports was supplied by developing countries to the four major import
markets: the EEC, the United States, Japan, and the United Kingdom. Latin
American countries, i.e., Argentina, Brazil, and Uruguay, were the suppliers
for the main developing countries. 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 and resulted in duty-free access to all
four major markets.
Almost one-half of the sheep and lambskin imports in 1968 were supplied
by developing countries. The bigger importers were the EEC, the United
Kingdom, and the United States, the latter of which is also an important
supplier. The Kennedy Round improved access to the four major markets
and "effective protection" of processing was reduced. Japan imposed re-
latively 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 the "effective protection" of major importers. Nominal
duties still apply to some varieties of goat and kid leather. The resultant
effect of these policies is that now only the United States, Canada, Aus-
tralia and New Zealand remain as open markets for the purchase of raw goat
and kid skins.
V-26
-------
VI. REPRESENTATIVE MODEL TANNERIES
The Leather Tanning Industry is comprised of nearly 190 tanneries which
utilize variations of the basic tanning process to produce differentiated
types of leather. The industry consists of establishments primarily engaged
in tanning (either chrome or non chrome), currying, and finishing hides and
skins into leather. As this chapter is concerned with the development of
economic models representative of tanneries which could be affected by the
imposition of effluent control guidelines, an attempt will be made to des-
cribe those models which, together, could typify most tannery operations
in the United States. These models have been developed from data obtained
from the EPA survey of industry members as well as from published sources. It
should be noted that while models were developed to represent the industry
in this report, for the existing direct dischargers, actual tannery data
were obtained and analyzed. For purposes of presentation in this report
these direct discharger data have been aggregated. Due to the time lag
in finalizing this report, the models were originally designed to be reflec-
tive of industry conditions during the 1975/1976 time period.
Utilizing secondary data sources and limited primary data, the models were
then updated to reflect 1977 dollars and early 1977 industry conditions.]_/
The models as described in this chapter are considered to be the "base case";
that is, reflecting only limited wastewater controls in place for the direct
dischargers and no controls in place for the indirect dischargers.
Data presented in this chapter concerning the models are presented in a
slightly different order than corresponding data in the Development Docu-
ment. In this chapter both direct and indirect discharging existing models
are first discussed followed by the new source direct and indirect models.
The development document discusses all direct discharging characteristics
first (both existing and new source) and then discusses indirect discharg-
ing characteristics.
A. Types and Sizes of Model Plants
Tanneries vary by operational and financial characteristics; thus, the models
will not accurately depict the characteristics of each existing tannery. How-
ever, since the various existing tanneries can be grouped into general cate-
gories which reflect their processes utilized and their discharge methods,
fairly accurate representative models were developed. While the representa-
tive models may not correspond exactly to actual tanneries, they do reflect
operational and financial characteristics similar to those of industry tan-
neries.
I/ Dollars were adjusted utilizing the Implicit Price Deflators, GNP, 1972=100.
VI-1
-------
The subcategories of tanneries utilized in this analysis are described
below.
Subcategory Name/Description
1 & 2 Chrome Tan: plants which process cured or raw cattle
(or similar) hides into finished ,leather by either
chemically dissolving the hair (pulp hair-subcategory
1) or chemically loosening and mechanically removing
the hair (save hair-subcategory 2), tanning with
trivalent chromium, and retanning and wet finishing.
3 Non-Chrome Tan: plants which process cured or raw
cattle (or similar) hides into finished leather by
chemically loosening and mechanically removing the
hair, tanning primarily with vegetable tanning, alum,
syntans, oils, or other chemicals, and retanning and
wet finishing.
4 Retan: plants which process previously unhaired or
pickled sheepskins and tanned hides or splits into
finished leather by retanning and wet finishing,
including coloring, fatliquoring, and mechanical
conditioning.
5 No Beamhouse: plants which process previously un-
haired or pickled sheepskins or cattlehides into
finished leather by tanning with trivalent chromium
or other chemicals, and retanning and wet finishing.
6 Through-the-Blue: plants which process cured or raw
cattle (or si mi far) hides into the "blue" stage only,
by chemically dissolving the hair and tanning using
trivalent chromium, with no retanning or wet finish-
ing.
7 Shearling: plants which process cured or raw sheep
(or similar) skins into finished leather by retaining
the hair on the skin, tanning with trivalent chromium
or other chemicals, and retanning and wet finishing.
Note for the existing direct dischargers, a model representing two subcate-
gories was developed. This model is described below.
5 & 7 Other Chrome: plants with processes similar to those
described in either subcategory 5 or 7 above.
VI-2
-------
For each of the above subcategories at least one representative model was
developed. Where there were several corresponding tanneries of varying
sizes associated with the specific subcategory, various representative
sizes of models for that subcategory were developed. The models were also
differentiated according to the corresponding tanneries' methods of effluent
discharge. The most common method of discharge for the industry is an
indirect discharge of effluents to publicly owned treatment works (POTW).
Thus, indirect discharging models were developed for all subcategories.
Direct discharging leather tanneries — those that discharge directly to a
river, stream, lake, etc.--are not as numerous and, accordingly, can be
represented by models from three of the subcategories. These direct dis-
charging subcategories include Chrome Tan (1 & 2), Non-Chrome Tan (3), and
another category called "Other-Chrome" (5 & 7). This latter category
represents a combination of the No Beamhouse (5) and Shearling (7) sub-
categories. Finally, model plants were also developed for each subcate-
gory which were believed to be representative of new, yet-to-be constructed
tanneries. These models, referred to as "new-source models," are similar
in many characteristics to the indirect discharging models although they
can be either direct or indirect dischargers.
The various models utilized in this report to represent the Leather Tanning
Industry and their respective sizes are depicted in Table VI-1. These
models were based on various assumptions; these are discussed in the follow-
ing sections. The number of existing tanneries applicable to each of the
models was depicted in Table II1-6.
B. Operational Characteristics
The operational characteristics for the direct discharging models and the
indirect discharging and new source models are summarized in Tables VI-2
and VI-3, respectively. These characteristics were determined from the
industry survey as well as discussions with industry members. As shown in
the tables, most Chrome Tan (1 & 2), Non-Chrome Tan (3), and Retan (4)
models operate approximately 250 days per year. The Through-the-Blue (6)
model operates almost everyday of theyear,and the No Beamhouse (5) and
Shearling (7) models operate about 240 days each year.
Indirect and new source Chrome Tan (1 & 2), Non-Chrome Tan (3), Retan (4)
and Through-the-Blue (6) models all utilize approximately 85 percent of
their daily capacity. Indirect and new source No Beamhouse (5) models
operate on a 75 percent utilization rate, and Shearling (7) models main-
tain a 90 percent rate. Direct discharging models' utilization rates vary
from those shown for the indirect and new source models: the direct dis-
charging Chrome Tan (1 & 2) models reflect a 76 percent utilization rate
for the small model and a 88 percent rate for the large model; the Non-
Chrome Tan (3) direct discharging models reflect 97 percent for the small
operation and 89 percent for the large; the utilization rate for the Other-
Chrome (5 & 7) direct discharging model was determined to be 97 percent of
the daily capacity.
VI-3
-------
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Also shown in Tables VI-2 and VI-3 are the models' annual production estimated
in terms of units (hides, skins, pelts) tanned and square feet of leather
produced each year. To convert units-per-year to square feet of leather,
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.
Finally, the estimated numbers of employees employed at each model tannery
are also shown in the tables. It should be noted that the new source models'
number of employees was estimated to be approximately 15 percent fewer than
those determined for the indirect models. This slightly reduced employment
requirement reflects the utilization of labor saving equipment and the require-
ment for a reduced maintenance force in the new source tanneries. This would
not be available to the existing tanneries as they typically are committed to
the majority of their fixed equipment and the costs prohibitive for them to
replace their equipment.
C. Investment Characteristics
The investment characteristics for the direct discharging, indirect discharg-
ing, and new source models are depicted in Tables VI-4, VI-5 and VI-6, respec-
tively. Included in these tables are estimates for the models' assets (both
fixed and current), current liabilities, net working capital, total invested
capital, and salvage value for non-conforming uses. These are discussed below.
1. Fixed Assets
The fixed assets depicted in the tables are representative of the bock value
of the acquisition costs of the tanneries' various assets. As would be
expected in an industry with a substantial number of older plants and equip-
ment, the book values of the models' assets do not reflect significant
amounts. However, the book values do 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 determining the return on the owners' equity.
2. Operating Capital
The models' operating capital is defined as that capital necessary to main-
tain 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
to cash with relative ease. Current assets include such items as raw materials
inventory, finished product inventory and accounts receivable.
As can be seen in the tables, current assets for the models are sizeable be-
cause substantial quantities of hides and leather must be maintained at any
given time in order to assure continuous operation. This reflects a sizeable
additional investment requirement to the tanneries owners.
VI-5
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Current liabilities represent those a firm maintains on short period demand,
and include short term notes and accounts 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 for daily cash balances.
3. Total Investment
Two measures of the models' total investments are provided. First, total
assets — the total amount of capital required to be invested by a firm's owners
is provided. Second, the total invested capital—the net amount of capital
invested in each model is shown. While each represents an interpretation of
the models' total investment, total fixed assets will be predominately utilized
as the basis for measuring the models' returns on investment.
4. Salvage Value
The salvage value for nonconforming uses of the model tanneries represents
the amount of money that the owners could recover should a tannery cease
operation. This will vary widely from plant to plant, depending on the loca-
tion and the age of the facility, its condition, and the use ability of its
equipment. In some instances, the salvage value of old, obsolete plants will
be equal to its site value and its equipment scrap value.
As described earlier in the report only a limited market exists for certain
types of used machinery and equipment; thus, most of a closing plant's equipment
would be scrapped.
Data are not available depicting the salvage value of tanneries. Discussions
with industry members determined that salvage values for most tanneries would
range between 10 and 20 percent of a tannery's fixed assets plus its net work-
ing capital.
D. Sales and Costs Characteristics
Model plant sales and costs characteristics were developed from the indus-
try survey responses, conversations with industry personnel, and from infor-
mation available in published sources. Table VI-7 depicts the sales and
cost characteristics for the existing direct discharging models; Table VI-8,
the characteristics for the existing indirect discharging models; and Table
VI-9, the characteristics for the new source models. These characteristics
are reflective of 1977, and each component is discussed below. It
should be noted that some costs for the existing direct discharging models
may not exactly correspond to those discussed below. The difference is
that the cost characteristics for the direct discharging models were developed
entirely from survey responses from the applicable actual direct discharging
tanneries; therefore the assumptions depicted below may not reflect the
direct discharging tanneries' survey responses.
VI-11
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1. Annual Sales
Annual sales of the model plants were determined from the production charac-
teristics described in Tables VI-2 and VI-3 as well as from estimates of
final product prices. Prices were estimated to be reflective of the average
grade and quality of leather within each tannery type.
The prices utilized in this analysis are depicted below:
Type
Cattlehide, Chrome
Cattlehide,
Cattlehides
Blue
Cattle, Splits
Sheepskins
Shearlings
Vegetable
through the
Price I/
$ .86/sq. ft.
$ .94/sq. ft.
$ .508/sq. ft.
$ .234/sq. ft.
$ .726/sq. ft.
S1.15/sq. ft.
Source
Wholesale Price Index
Cattle & Kip Sides, Smooth
Oct.-Dec. 1975 Average
From industry surveys
From industry surveys and
contacts
From industry surveys
From industry surveys
From industry surveys
2_. Raw Material Costs
The raw material costs analyzed were for raw cattlehides or splits, or sheep
skins or pelts. Raw cattlehides are sold by slaughterhouses on a poundage
basis, and this analysis assumed an average hide weight of 55 pounds. Prices
utilized reflected the 1976 annual average price for Chicago Native Heavy
hides. The price was 32.6 cents per pound.
The price utilized for raw cattle splits, $.82 per split, was determined from
industry surveys.
Raw sheepskin prices were assumed to be $1.99 per skin in the pickled state.
The price for sheep pelts was estimated to be $4.54 per pelt. Both the sheep
skin and sheep pelt prices were estimated from industry surveys.
3. Labor Costs
Labor costs were developed by multiplying the estimated number of employees
for each model plant by an estimate of the annual costs per employee. These
costs, developed from industry-provided data, reflect varying wages for dif-
ferent types and sizes of tanneries.
I/ Prices presented are in 1975/1976 dollars. For financial model plants,
~ these have been adjusted to reflect 1977 dollars. Also it should be
noted cattlehide, vegetable leather and splits are usually priced on a
per pound basis. For this analysis these prices have been converted to
a square footage basis.
VI-19
-------
For the chrome tanneries (1 & 2) annual labor costs oer employee ranged
from $7,150 for the extra small model to $9,990 for the extra large model.
For the non chrome tanneries (3) annual labor costs were estimated to be
$8,315 per employee for the small and medium model and $10,480 for the
large tannery model. Labor costs for retan tanneries (4) were estimated
to be $8,170 per year; no beamhouse tanneries (5) $9,120 per year; throuah-
the-blue tanneries (6) $9,080; and shearling tanneries (7) $10,440 per year.
4. Tanning Materials and Other Costs
These costs include expenditures for materials used in the tanning process,
miscellaneous other direct costs, and indirect costs (i.e., administrative
expenses). These costs vary considerably for different tanneries and for
the models. For most tanners returning survey data, they ranged between
13.3 and 43.9 percent of sales.
5. Depreciation and Interest Costs
Estimates of the model tanneries' depreciation and interest costs were developed
from responses to the industry survey as well as from data available from the
Internal Revenue Service. The models' depreciation costs, expressed as a per-
cent of sales and as a percent of fixed assets, are shown in Table VI-10. For
both types of existing models (direct and indirect), depreciation as a percent
of fixed assets for the existing models ranged from 6.0 percent to 18.0 per-
cent. For the new source models, depreciation as a percent of fixed assets
was 11.3 percent. The resulting new source depreciation expressed as a percent
of sales ranged from 2.3 to 14.6 percent. Also shown on Table VI-10 are the
models' interest charges expressed as a percent of sales. As shown these
charges ranged from 0.1 percent of a models' sales to 5.2 percent. As would
be expected the higher percentages were incurred by the new source models.since
the new source models would have a significantly higher amount of debt.
E. Model Plant Income and Annual Cash Flow Characteristics
For each model plant the following were computed: its after-tax income, re-
turns on sales, total assets, total invested capital, and annual cash flow
expressed as an amount, as a percent of sales, and as a percent of total
invested capital. These are presented in Table VI-11 for the existing direct
discharging models, Table VI-12 for the existing indirect discharging models,
and Table VI-13 for the new source models. It should be noted that these pro-
fits and annual cash flows represent tanneries as of early 1977 conditions
and the models are "baseline models" which do not reflect the pollution
control expenditures under consideration.
The base case models' incomes and annual cash flows are discussed below for
each of the three major types of model plants.
VI-20
-------
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-------
]__. Existing Direct Discharging Models
As shown in Table VI-11, after-tax income for the five existing direct dis-
charging models ranged from $90,200 for the small chrome tan (1 & 2) model
to $401,900 for the large chrome tan (1 & 2) model. The small chrome tan
(1 & 2) model and the medium other chrome (5 & 7) model both obtain a 1.8
percent return on sales with the other three models yielding a return of
approximately 2.5 percent. The after-tax return on total assets was fairly
low (3.7 to 7.9 percent) for four of the models. The large chrome tan
(1 & 2) model generated a return of 26.5 percent.
The models' annual cash flows were more consistent: the range for the cash
flows expressed as a percent of sales was 2.6 to 4.2 percent; the range for
the cash flows expressed as a percent of total invested capital was 9.6 to
13.9 percent.
2. Existing Indirect Discharging Models
Table VI-12 depicts the models' after-tax income and, as can be seen, they
all are positive. The models' returns on sales are fairly consistent for
all models with a range from 1.3 percent for the large non chrome tax (3)
model to 5.9 percent of the small shearling (7) model. After tax returns
on total assets are a bit more varied with range from 4.0 percent to 15.4
percent.
The models' annual cash flows expressed as a percent of sales ranged from
2.5 percent to 8.9 percent and, as a percent of total invested capital,
from 9.3 percent to 32.4 percent.
3. New Source Models
The after-tax incomes of the new source models were lower than the profits
of the existing indirect discharging models with the exception of those
for the retan (4) and no beamhouse (5) models. Expressed as a percent of
sales, new source models after-tax incomes were negative for all non chrome
tan (3) models with the positive returns for the other models ranging from
1.7 to 5.4 percent. As would be expected, the new source models' returns
on total assets were all lower than the returns for the models depicted in
Table VI-12 since the new source models have higher levels of investment
and which accordingly would result in lower returns.
Because of the higher annual depreciation associated with the new source
models, their annual cash flows were all higher than those for the existing
indirect discharging models. New source annual cash flows expressed as
percent of sales ranged from 4.6 percent to 12.8 percent. Expressed as a
percent of total invested capital, the new source models' annual cash flows
ranged from 4.9 percent for the small non chrome tan (3) model to 32.9 per-
cent for the large no beamhouse (5) model.
VI-25
-------
VII. WASTEWATER CONTROL COSTS
The various wastewater control alternatives and costs discussed in this
chapter were furnished by the Effluent Guidelines Division of the U.S.
Environmental Protection Agency. The supportive data and analyses for
the treatment alternatives are presented in a separate document _!/.
Included in this chapter are a brief description of the discharge status
of the Leather Tanning Industry and a presentation of the various pollution
control technologies and costs for each of the tannery models. It should
be noted that while cost data presented in this chapter are reflective of
the models, for the existing direct discharging tanneries, each facility
was individually analyzed. For purposes of presentation in this report,
the individual facilities' data have been aggregated. The format for
presentation in this chapter differs slightly from the format used in the
Development Document. In this chapter, both direct and indirect existing
sources are first discussed followed by both direct and indirect new sources.
In the development document, direct dischargers are first discussed (both
existing and new source) followed by the discussions of the indirect
dischargers.
A. Discharge Status of the Industry
Current practices in the tanning industry range from no treatment of waste-
water to secondary treatment. In general, effluent quality requirements for
tanneries discharging to municipal sewer systems (requirement set by POTW's)
are less stringent than for plants that discharge directly to surface waters
(requirements set by EPA or states). This was reflected in the survey made
of 89 wet-process tanners by the technical contractor which indicated that
12 percent'of the tanners discharging to municipal systems had no pretreat-
ment, whereas all direct dischargers surveyed had at least preliminary
treatment. Further, 100 percent of the direct dischargers operated some
type of biological treatment.
The technical contractor's information collection surveys, site visits,
and verification sampling visits of wet tanneries yielded the following
breakdown of control practices in the industry:
I/ Development Document for Proposed Effluent Limitations Guidelines,
New Source Performance Standards and Pretreatment Standards for the
Leather Tanning and Finishing Point Source Category, U.S. Environmenta1
Protection Agency, EPA 440/1-79-016, 1979.
VII-1
-------
Discharge to municipal treatment plant--90 percent of industry--
76 percent of tanners surveyed
Percent of
dischargers
W
Preliminary treatment 88
Coarse screening only 20
No preliminary treatment 12
Secondary treatment 0
Discharge to surface water--10 percent of the industry—
24 percent of tanners surveyed
No preliminary treatment 0
Preliminary treatment only 0
Secondary treatment 100
Lagoon treatment 72
Activated sludge treatment 28
Presently 18 known tanneries discharge directly into navigable streams or
waters. Thus, of the 188 tanneries generating wastewaters, approximately
170 discharge to publically-owned treatment works (municipal systems). The
breakdown of all 188 tanneries according to type, size, and discharge status
was depicted in Table III-6.
B. Wastewater Treatment Technologies
The treatment technologies utilized in this impact analysis were furnished
by the Effluent Guidelines Division of the EPA. For each model plant,
alternative treatment technologies were provided to enable the incremental
impacts of going from one technology to a slightly more advanced technology
to be assessed. The technologies utilized were designed specifically for
the model plants described in Chapter VI and reflect their respective
discharge status as well as their age (i.e., new source versus existing).
A detailed description of the technologies under consideration is contained
in the Development Document _!/.
The wastewater treatment technologies considered in this analysis included
the following treatment options:
1. Existing Direct Dischargers (BPT and BAT)
a. BPT Revised. Levels 3 and 4 treatment. Extended aeration activated
sludge biological treatment including coagulation-sedimentation
with equialization.
_!/ op. cit.
VII-2
-------
b. BAT Option 1. Require efficient quality at Level 4—extended
aeration activated sludge biological treatment—including in-plant
controls (Level 1) and pretreatment (Level 2).
c. BAT Option 2. Require effluent quality at Level 5--activated sludge
upgraded by powdered activated carbon.
d. BAT Option 3. Require effluent quality at Level 6--multi-media
filtration.
e. BAT Option 4. Require effluent quality at Level 7--granular
activated carbon columns.
2. Existing Indirect Dischargers (PSES)
a. PSES Option 1. Require limitations established at Level 3 treatment-
primary treatment including in-plant controls (Level 1), flue gas
carbonation with protein/lime precipitation for beam house waste-
waters (Level 2) and coagulation-sedimentation with equalization.
b. PSES Option 2. Require limitations established at Level 4A
treatment—physical/chemical treatment.
c. PSES Option 3. Require limitations established at Level 4A for
Cattlehide Chrome Segment (subcategories 1 & 2) and Level 3 for
the other segments (subcategories 3 through 7).
3. New Source Indirect Dischargers (PSNS)
a. PSNS Option 1. Require limitations equal to PSES Option 1.
b. PSNS Option 2. Require limitations equal to PSES Option 2.
4. New Source Direct Dischargers (NSPS)
a. NSPS Option 1. Require limitations equal to BAT Option 3, Level 6
treatment.
b. NSPS Option 2. Require limitations equal to BAT Option 4, Level 7
treatment.
c. NSPS Option 3. Require limitations established at PSES Option 2,
Level 4A treatment.
C. Wastewater Treatment Costs
The wastewater treatment costs, as provided by EPA, were based on the model
plants' production levies, estimated wastewater flows, and wastewater char-
acteristics as discussed in the Development Document I/.
I/ oP. cit. _
-------
1. Investment Costs
The investment costs for the treatment alternatives were primarily based
on the estimated wastewater flow or hydraulic load of the model tanneries.
These costs were developed by the technical contractor and were based on
the following assumptions.
. Costs were expressed in fourth quarter, 1977 dollars.
Expected accuracy for these conceptual estimates was plus or
minus 30 to 40 percent.
. All design specifications were prepared by outside consulting
engineers in accordance with applicable codes.
Construction work was performed by outside contractor using
union labor and n_o_ work was performed by in-plant labor or main-
tenance personnel.
Engineering costs were not included in cost estimates; however, the
construction contractor's overhead and profit were included.
. No land acquisition costs were included.
Approximately 15 percent of investment costs was allowed for
design development.
The wastewater control investment requirements for the existing direct and
indirect discharging models are depicted in Table VII-1. The costs pre-
sented in Table VII-1, and all subsequent tables, reflect the costs associ-
ated with the models going from the models' base cases to the various
treatment options. For the direct discharging models, the incremental
costs of going from BPT revised to the BAT options are also presented. The
investment requirements for the new source models are shown in Table VII-2.
Shown in Table VII-3 for the existing models and Table VII-4 for the new
source models are the various models' investment requirements for the dif-
ferent treatment alternatives expressed as a percent of the models' fixed
assets. As investments for wastewater controls are considered a part of
the tanneries' assets, this method of expressing investment requirements
helps illustrate the relative magnitude of the treatment investment costs.
2. Annualized Costs
Annualized wastewater treatment costs consist of annual operating and
maintenance expenditures, cost of capital and depreciation. The annual
operating and maintenance expenditures were provided by EPA and are shown
in Table VII-5 for the existing models and Table VII-6 for the new source
models. The estimated industry cost of capital, discussed in Chapter IV,
was determined to be 9.9 percent. Depreciation assumed a 15 year asset
life with no salvage value. A straight-line depreciation method was used.
The estimated annualized costs for the wastewater control technologies are
shown in Table VII-7 for the existing models and Table VII-3 for the new
source models. These costs were also expressed as a percent of the
respective models annual sales. These percentages are presented in Table
VII-9 for the existing models and Table VII-10 for the new source models.
VII-4
-------
3. Aggregated Industry Costs
Table VII-11 depicts the aggregate industry investment and annualized
costs for each of the treatment options considered for existing sources.
These costs were developed from cost estimates presented in preceding
sections of this chapter, information concerning the estimated number of
plants by discharge status, type, and size presented in Table III-6, and
information provided by the Effluent Guidelines Division of EPA.
D. Availability of Land for Controls
Available land, located near those tanneries discharging to POTW's and
suitable for the construction of pretreatment controls, may be limited for
some tanneries. According to an industry survey, approximately 20 percent
of the indirect discharging tanneries have land available with the re-
maining 80 percent foreseen as maybe having some difficulties in acquiring
additional land.
VII-5
-------
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VIII. PROJECTED ECONOMIC IMPACTS
The imposition of wastewater control requirements on the Leather Tanning and
Finishing Industry will result in at least some economic impacts for the indus-
try as they will be required to make expenditures which, for all practical
ourposes, will not result in improved operating efficiency. Thus, the indus-
try's profitability will be reduced even if only by a very small amount. As
the capital and annual operating and maintenance expenditures for wastewater
controls increase, the resulting economic impacts become more significant.
The purpose of this chapter is to describe the various economic impacts asso-
ciated with the treatment alternatives described in Chanter VII and to project
the economic ramifications of tanneries incurring the associated expenditures.
For purposes of this analysis, economic impacts were assessed for each of the
model tanneries described in Chapter VI utilizing the various wastewater con-
trol alternatives' costs presented in Chapter VII. It should be noted however,
that while impacts are described for the models, the existing direct discharg-
ing tanneries were analyzed individually. The results of these individual
impacts analyses are aggregated in this chapter for purposes of presentation.
The economic impact methodology, described in Chapter II, was primarily based
on a net present value (NPV) analysis to determine the model tanneries' required
price increases necessary to offset control expenditures and the financial
impacts attributable to the control expenditures. Utilizing this information
and other industry economic characteristics described in this report, the
industry's ability to increase prices was assessed. Also other economic
impacts such as plant closures, production impacts, employment losses,
community effects, dislocation effects, and balance of trade effects were
assessed. It should be noted the impacts projected in this chapter are
reflective of the industry conditions as of early 1977.
As discussed in the preceeding two chapters, the format for presentation in
this chapter differs slightly from the format of the Development Document.
In this chapter existing sources are first discussed (both direct and indirect)
then new sources are discussed. The Development Document discusses direct dis-
chargers first (both existing and new sources) then it discusses the indirect
dischargers.
A. Price Effects
1. Required Price Increases
An implicit indicator of the expected price effects attributable to the imposi-
tion of wastewater controls used in this analysis was the amount of sales price
increase required to maintain a tannery's profitability, after control expendi-
tures, at a level equal to that prior to control expenses. The method of the
computation of this required price increase was described in detail in Chapter
II (Methodology) of this report. The ability of tanneries to pass on such
required price increases is evaluated in the next section of this chapter.
VIII-1
-------
a. Existing Models. The required price increases for the existing model tan-
neries at each of the treatment options are depicted in Table VIII-1. As shown
for the existing direct discharging model tanneries, required price increases
were 1.2 percent or less for BPT Revised with the BAT options increasing the
required price increase by 0.7 percentage points or less for all options con-
sidered for BAT.
Required price increases for existing indirect discharging model tanneries
varied according to the industry subcategory, the model size, and the treat-
ment option. For PSES Option 1, the highest price increase was required by
the extra small chrome tan (1 & 2) model (4.9 percent) with the small non
chrome tan (3) model being next at 3.8 percent. Other models with PSES Option
1 required price increases of 2.0 percent or higher include the small chrome
tan (1 & 2) model (2.7 percent) and the medium non chrome tan (3) model (2.0
percent). Models with PSES Option 1 which required price increases greater
than 1.0 percent but less than 2.0 percent included the remainder of the
chrome tan (1 & 2) and non chrome tan (3) models and the small shearling
model (7). The remainder of the models had less than 1.0 percent required
price increases at the PSES Option 1 treatment level.
The required price increases for PSES Option 2 were slightly higher than those
for Option 1 as the Option 2 expenditure requirements were higher. Models
incurring the more significant increases included the extra-small chrome tan
(1 & 2) model (from 4.9 to 5.8 percent), the small non chrome tan (3) model
(3.8 to 4.5 percent), and the small no beamhouse (5) model (1.3 to 2.1 per-
cent). The other models, at PSES Option 2, incurred price increases by 0.5
percentage points or less.
As PSES Option 3 consisted of PSES Option 2 treatment for the chrome tan
(1 & 2) models and PSES Option 1 treatment for the other models, the required
price increases necessary to offset PSES Option 3 control expenditures are
similar to those already discussed.
b. New Source Models. Table VIII-2 shows the required price increases associated
with the new source direct and indirect discharging model tanneries. As shown,
price increases required by new source indirect models at PSNS Option 1 were 2.8
percent or less for all models except the extra-small chrome tan (1 & 2) model
(6.4 percent). At PSNS Option 2. required price increases were 3.2 percent or
less except, again, the extra-small chrome tan (1 & 2) model (7.2 percent) and
the small non chrome tan (3) model (7.9 percent).
Required price increases for the new source direct discharging models were
slightly higher for NSPS Options 1 and 2 than those for the new source indirect
discharging models. NSPS Option 3 required price increases were equal to those
required at PSNS Option 2 as the same treatment expenditures were required for
both options.
2. Expected Price Increases
The Leather Tanning and Finishing Industry is an extremely competitive industry
in which tanneries operate on relatively small profit margins. Primarily
because of strong competition from non-impacted foreign tanners, domestic
VIII-2
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tanners are expected to have little success in passing on expenditures
associated with wastewater controls. Furthermore, as shown in Table VIII-1,
most existing model tanneries required price increases which were relatively
small, with most being 2.5 percent or less. Another factor contributing to
the expected lack of ability to increase prices would be the fact that indi-
vidual tanneries would be affected differently, depending upon their respec-
tive size levels of profitability, and magnitude of expenditure required.
Thus while some tanneries will require relatively large price increases,
others will not. Accordingly, due to intra-industry competition, price
increases by individual tanneries would be difficult to implement.
Therefore the Leather Tanning and Finishing Industry is not expected to
raise prices to recoup expenditures for wastewater controls. It is antici-
pated then, that the tanneries will absorb wastewater control expenditures.
B. Financial Effects
Based on the model tannery profiles described in Chapter VI and the estimated
cost of wastewater control costs described in Chapter VII, the following finan-
cial indicators were computed for the base case (without wastewater controls
considered) and the impacted case (with wastewater controls considered).
. After-Tax Return on Sales
. After-Tax Return on Total Assets
Annual Cash Flow
Net Present Value
These indicators were computed for each tannery model according to the net
present value (NPV) and accounting procedures outlined in Chapter II, Methodo-
logy. It should be noted that unlevel discounted cash flow procedures were used
in determining the models' NPV's. That is, for each of the twenty-one years,
independent cash flows were computed based on certain assumptions of inflation,
profitability, depreciation, and reinvestment. Accordingly, the after-tax
returns on sales and total assets varied slightly from year to year. To
compensate for this, a 21-year average was computed for each return. The
model tanneries' annual cash flows and net present values also varied from
yaar to year; however, for these indicators the respective amounts in year
21 were used. This procedure was used to view the cash flow and NPV effects
of wastewater control expenditures at the end of a 21-year period. Because
of the above described procedures, the base case financial indicators may
differ slightly from similar indicators presented in Chapter VI, Model Plants.
1. Return on Sales
After-tax return on sales reflects the general level of profitability in an
industry. For the Leather Tanning and Finishing Industry, returns on sales
have been low for the past few years due to a general decline in the industry.
The imposition of wastewater control requirements on the industry contributes
to a further deterioration of its returns.
VIII-5
-------
a. Existing Models. The 21-year average after-tax returns on sales for the
existing model tanneries both before and after expenditures for wastewater
controls are shown in Table VIII-3. Table VIII-4 depicts the amounts by
which the models' returns were reduced by the imposition of control expendi-
tures. For the existing direct discharging models, the imposition of BPT
Revised most seriously affected the returns of both chrome tan (1 & 2)
models and the small non chrome tan (3) model, reducing returns by 20 to
34 percent. These models were also the most seriously affected by the
imposition of BAT treatment options with BAT Option 4 (the most expensive)
reducing returns by an additional 45 percent for the small chrome tan (1 & 2)
model and approximately 25 percent for the large chrome tan (1 & 2) and the
small and large non chrome tan (3) models. The imposition of control expen-
ditures on the medium other chrome (5 & 7) model did reduce its respective
returns; however, in comparison to the other existing direct discharging
models, the reductions were considerably smaller.
The impacts on average after-tax returns on sales for the existing indirect
discharging models are also shown in Tables VIII-3 and VIII-4. As shown,
the extra small chrome tan (1 & 2) and small non chrome tan (3) models'
returns were reduced to negative levels at the PSES Options 1 and 2 levels.
Other models reflecting reductions of 50 percent or more for the PSES Option
2 technology (the most expensive) include the medium and large non chrome
tan (3) models and the small no beamhouse (5) model. The remaining models1
returns were reduced by the imposition of the control options but not to
the extent of the models described above. It should be noted PSES Option 3
represents PSES Option 2 for the chrome tan (1 & 2) models and PSES Option 1
for the other models. Accordingly impacts resulting from PSES Option 3 are
a combination of those previously discussed.
b. New Source Models. The effects of the imposition of the various treat-
ment options on the 21-year average after-tax returns on sales for the new
source direct and indirect discharging model tanneries are depicted in Tables
VIII-5 and VIII-6. For new source indirect dischargers (PSNS), the reduc-
tions associated with PSNS Option 1 treatment were most severe for the extra-
small and small chrome tan (1 & 2) models and the small non chrome tan (3)
model with returns being reduced by 63, 31, and 67 percent respectively. The
other models, at PSNS Option 1, incurred reductions in returns of 25 percent
or less. The requirements of PSNS Option 2 reduces the extra-small and small
chrome tan (1 & 2) models by 78 and 38 percent respectively from their base
case situation. The small non chrome tan (3) models' returns were reduced
by 80 percent. The other models, at PSNS Option 2, incurred reductions in
returns by approximately 35 percent or less.
The costs for wastewater controls of the new source direct dischargers (NSPS)
were hiaher than those for the indirect dischargers with the exception of
NSPS Option 3 which was equal to PSNS Option 2. Accordingly, the returns
for the new source direct dischargers at NSPS Option 1 and 2 were reduced
VIII-6
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considerably more than those described above. At NSPS Option 2 (the most
expensive) the extra small chrome tan (1 & 2) models and the small non
chrome tan (3) models' returns were negative. Also at NSPS Option 2 the
small chrome tan (1 & 2) model, the medium and large non chrome tan (3)
models, and the small no beamhouse (5) model incurred reductions of approx-
imately 50 percent or more.
2. Return on Total Assets
Due to the relative age of most tanneries, their respective assets were
acquired at considerably less cost than if acquired today. Accordingly,
the model tanneries' average returns or total assets were relatively high
in the base case. The imposition of wastewater control costs affected the
models in the same manner as was described for the return on sales; thus,
the models' returns on total assets would be reduced by approximately the
same percentages. As such, a detailed description of the reductions in
the returns on total assets for each model was not developed. The 21-year
average returns on total assets are shown in Table VIII-7 for the existing
model tanneries and Table VIII-8 for the new source model tanneries. It
should be noted the returns depicted were averages of each of the model's
21-years' returns on total assets; thus, some slight differences of the
percentage reductions between the returns on sales and the returns on total
assets may be noted.
3. Annual Cash Flows
The annual cash flows were based on data reflective of the 21s year and
were computed by adding the models' after-tax profits to their respective
depreciation expenditures. The model plant cash flows are significant in
that they represented the annual inflows of dollars to the models' manage-
ments. Thus, even if the models' profits were negative, the plants could
maintain at least short-run operations if they could sustain positive cash
f1ows.
a. Existing Models. The existing models' annual cash flows for year 21 are
presented in Table VIII-9. As shown, for both direct and indirect models,
all base case cash flows were positive. For the direct dischargers the
imposition of BPT Revised or any of the BAT Options did not cause any of
the cash flows to become negative. Impacted cash flows for the existing
indirect dischargers were positive for all treatment options and all models
except for the small non chrome tan (3) model which incurred a negative
cash flow only at PSES Option 2 treatment.
b. New Source Models. The annual cash flows for the new source models are
depicted in Table VIII-10. As shown, all cash flows for both the direct
and indirect models both before and after impacts were positive.
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4. Net Pr_esent J/aJ_ues
The model plant net present values (NPV)ref1ected the net present values
of the model tanneries as of year 21. The net present value concept indi-
cates the size of the return <;o the equity holders in excess of the firm's
cost of capital (9.9 percent); thus, iF the MPV was positive, it was assumed
the particular firm was earning a return during the 21 year period in excess
of the minimum return necessary to attract investors (the cost of capital).
If the NPV was negative, then the fim's return was less than the minimum
cost of capital.
a. Existing Model s. The existing models' iJPV's are shown in Table VIII-11.
As shown for both The direct and indirect existing models, the base case NPV's
were positive. This indicates that in the absence of wastewater control
requirements, the tannery models would remain in operation. For the exist-
ing direct discharging models, the imposition of control requirements caused
reductions in the models' NPV's, but only the small non chrome tan (3) model
at BAT Options 3 and 4 incurred a negative NPV. The rest of the direct dis-
charging models' NPV's at all treatment options were positive.
The NPV's of the existing indirect dischargers are also shown in Table VIII-11.
As shown for PSES Options 1 and 3, all models except the small non chrome
tan (3) model, maintain positive NPV's after incurring control expenditures.
At PSES Option 2 (the most expensive), NPV's for both the small and medium
non chrome tan (3) models are neoative with all other models' NPV's remaining
positive.
b. New Source Model s. The NPV s for1 i.he new source models are depicted in
Table VIII-12. Since the same financial models were utilized for both in-
direct and direct discharqers, their respective base case MPV's were the same.
For the base case models, all non chrome tan (3) models reflected NPV's which
were negative to indicate that their respective returns were less than the
industry cost of capital. The remaining base case models all reflected
positive NPV s.
The imposition of the two difforpnt wastewater control options on the new
source indirect dischargers f'S'.i'ed in only one model reflecting a negative
NPV which was not negative in Lhp base case. This model, the small chrome
tan (1 & 2) model, incurred negative ,'iPV's at both PSNS Options 1 and 2.
For the new source direct discharging models, three treatment options were
considered. Imposition of NSPS Option ! on these models resulted in two
models' NPV's becoming negative which were not negative in the base case.
These were the extra-small and large chrome tan (1 & 2) models. Requirement
of NSPS Option ?. (the most expensive) resulted in both the extra-small and
small no beamhouse (5) model. NSPS Option 3 was the same as PSNS Option 2
and accordingly the impacts on tns new source models were the same—only the
extra-small chrome tan (1 & 2) model's 'iFV changed to negative from a positive
base case situation.
VJ II-J6
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VIII-18
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C. Production Effects
The Leather Tanning and Finishing Industry can accurately be depicted as hav-
ing experienced a deteriorating phase until 1975 at which time total industry
production increased for the first time in eight years. Prior to 1975, indus-
try 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--a decline of 38 percent from the peak
year (1967).
Two major factors contributed to the decline experienced by the industry:
1. increased international competition, and
2. increased competition from synthetic leathers both in terms
of physical product and price.
Since 1975, the Leather Tanning Industry experienced an increase in its pro-
duction in 1976 (23.5 million cattlehide equivalents) and then a decline to
about the 1975 production level in 1977. The industry continued to decline
in 1978 (20.5 million hides) and prospects for 1979 are considered somewhat dim.
There are approximately 188 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.
1. Baseline Plant Closures (without control expenditures)
According to the records of the Tanners' Council of America, 45 tanneries
ceased operations between 1968 and 1975. The reasons for these closures
vary; however, some of the more important factors included:
. increased international competition
. increased 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 obsolescent
inadequate owner income
owner retirement
It is anticipated that additional tanneries will close in the future for
similar reasons. While during the late 60's and early 70's several tanneries
ceased operations, since 1975 the number of wet tanneries has somewhat stabilized.
Accordingly, it is estimated less than 10 tanneries will close prior to 1984
barring any atypical changes in the industry's operating environment. The
majority of these "baseline" closures will probably be smaller operations in
the chrome tan (1 & 2) and non chrome tan (3) subcategories.
VIII-19
-------
While tanneries are projected to close, new tanneries are also expected
to be constructed prior to 1984. These new tanneries are expected to
number about 5 and will probably be relatively large operations in the
chrome tan (1 & 2) or through-the-blue (6) categories.
2. Impacted Plant Closures
Predicted on the assumption of no price increases, the industry's produc-
tion effects resulting from the imposition of wastewater controls are best
measured in terms of the possibility of tanneries closing due to the
imposition of effluent control costs. As was discussed in Chapter II,
Methodology, barring unusual circumstances, most operations would cease
if they could not adequately absorb required control costs. The most
obvious measurement of a firm's ability to absorb the costs is its ability
to maintain a positive income or cash flow after incurring control expendi-
tures.
If incomes are negative, some firms would remain in operation as long as
they cover variable costs (positive cash flows); however, the requirements
for overhead expenses would eventually cause such firms to cease.
The remaining situation that could arise would be one in which firms main-
tain positive incomes and generate net present values (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 would liquidate,
realize salvage value in cash, and reinvest in a more financially viable
investment (one which would earn at least their cost of capital).
A review of the financial effects of the imposition of wastewater controls
on the models results in some confusion in the determination of which plants
would be forced to close due to an inability to absorb the control expen-
ditures, a confusion which results from the large number of models and
wastewater control treatment alternatives applicable to each model. Accord-
ingly, for this analysis, formalized closure criteria were developed. In
the development of these criteria, certain necessary assumptions were made
to simplify the interpretation of the impact results.
The closure criteria utilized are depicted below. These criteria basically
represent the models' abilities to continue operations after incurring
expenditures for wastewater controls.
Model's Net Present Annual Cash
Viability Value Flow
Viable Positive Positive
1 ' 1 /
Marginal Slightly Negative— Slightly Negative-
Closure Negative Negative
]_/ The criterion utilized here was that the positive cash flow must be greater
than the amount by which the NPV was negative or a positive NPV must be
greater than the amount by which the cash flow was negative. If not, then
the plant was projected to close.
VIII-20
-------
Based on the above criteria, closure decisions were made for each model
tannery at each treatment level. These are discussed below. It should
be noted the impacts discussed below do not include consideration of
nonavailability of land for the construction of the controls. This is
discussed in a separate section of this chapter entitled Dislocation
Effects.
a. Existing Models. The projected tannery closures for the existing models
are depicted in Table VIII-13. For the existing direct discharging models
only the small non chrome tan (3) model reflected a change in viability
status, and it was considered only marginal in the worst case. In addition
to this model plant approach and because the numbers of direct dischargers
are few, analyses were also made of the actual existing direct dischargers
to assess their abilities to afford wastewater controls. The results of
these plant-by-plant analyses shows that only one tannery was believed to
encounter potential difficulty in meeting the proposed control requirements.
Existing indirect discharging model tanneries' projected closures are also
shown in Table VIII-13. As shown, the imposition of PSES Option 1 resulted
in the small non chrome tan (3) model changing from viable in the base case
to a projected closure in the impacted case. The imposition of PSES Option
2 resulted in medium non chrome tan (3) model incurring sufficient impacts
to change its status from viable to marginal. Also at PSES Option 2, the
small non chrome tan (3) model was projected to close. PSES Option 3 repre-
sented a combination of PSES Options 1 and 2. At PSES Option 3 only the
small non chrome tan (3) model was projected to close.
For all existing tanneries, the number of actual projected closures would
vary depending on the level of treatment required. For the 18 existing
direct dischargers, the imposition of BPT Revised treatment should not
result in any tannery closures. The imposition of BAT (any option) on
these 18 tanneries may result in one tannery ceasing operations with the
probability significantly increasing if the more expensive BAT options are
considered. For the 170 tanneries which discharge to a POTW, the imposition
of PSES treatment options would result in a projected 5 or 7 closures. While
it would be anticipated the majority of these closures would be small non
chrome tan (3) operations it also is possible one or two could be a medium
non chrome tan (3) or an extra-small chrome tan (1 & 2) operation.
b. New Source Models. The projected model tannery viabilities for the new
source models are shown in Table VIII-14. For the base case, it is doubtful
if any new non chrome tan (3) facilities would be constructed. The imposi-
tion of wastewater control requirements on these base case projected marginal
or closure models made their construction just that much more doubtful.
For the remaining viable new source indirect discharging models, the imposi-
tion of PSNS Options 1 and 2 resulted in projected closures only for the
extra-small chrome tan (1 & 2) model. For the viable base case new source
direct discharging models, the imposition of NSPS Option 1 resulted in the
VIII-21
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extra-small chrome tan (1 & 2) model becoming a projected closure and the
large chrome tan (1 & 2) model becoming marginal. At NSPS Option 2, the
projected closures were the same as at Option 1 except the small no beam-
house (5) model became marginal. NSPS Option 3 was the same as NSPS Option
2. The impacts associated with this option were that only the extra-small
chrome tan (1 & 2) model would close.
As discussed previously, while it is doubtful if tanneries in certain sub-
categories will be built, it is probable that some new tanneries will be
constructed prior to 1984. These new tanneries are expected to number
approximately 5 and be relatively large chrome tan (1 & 2) or through-the-
blue (6) operations.
3. Production Loss
The potential for production loss resulting from wastewater control imposition
was determined to be very small. The imposition of any BAT treatment options
or PSES options on existing tanneries would not be expected to result in
production losses aven though a few tanneries could be expected to curtail
operations. The reason for this lack of expected production losses is the
fact_that most of the projected closures would be small tanneries whose pro-
duction could very easily be absorbed by unutilized capacity remaining in the
industry.
This rationale is exemplified by the industry's behavior after the closures of
five tanneries in 1975 as reported by the Tanners' Council of America. Dur-
ing the year when these five tanneries ceased operations, no new tanneries
were built and the domestic industry increased its production of leather by
9.5 percent or nearly 1.9 million cattlehide equivalents. It appears, then,
that the tanneries do have the capability to absorb reasonable production loss
volumes.
If, however, the industry could not absorb the potential lost production,
it is estimated that the loss associated with tanneries closing due to the
imposition of wastewater controls would represent only 0.7 percent of the
industry's total current production.
D. Employment and Community Effects
The estimated number of employees in the Leatu?r Tanning and Finishing
Industry was estimated to be 22,000 in 1977--up from the 21,000 estimated
in 1974. However, historically the number of employees has declined from
the 1967 estimate of 31,000 employees.
If tanneries were required to meet the BAT treatment options or PSES Options
1, 2, or 3 and the projected tannery closures were to occur, then there
VIII-24
-------
would be some employment and community effects. The closure of six to
eight small tanneries would affect the jobs of an estimated 300 to 400
individuals. As most small tanneries are traditionally located in smaller
communities, these closures would have some effect on their communities as
there may not be alternative employment for the displaced personnel. Addition-
ally, other businesses in the communities would be affected, particularly
those providing services to the tannery and to its employees. While in
those communities with tannery closures, impacts would be incurred, in
some communities the imposition of wastewater control requirements would
have positive effects. These would include increases in employment as
tanneries hire and train personnel to operate the treatment systems and
the channeling of tannery dollars into the local community as the tanner-
ies procure supplies and services to construct the treatment systems.
E. Dislocational Effects
Given that tanneries may h.ave sufficient available land for the construction
of wastewater controls, no dislocational effects are expected to result from
the imposition of control requirements. However if, as was discussed in
Chapter VII, Section D, Availability of Land for Controls, some tanneries
do encounter difficulty in acquiring suitable land to construct controls,
then it can be expected some of these tanneries will be dislocated; some
to more land abundant areas and others to closure. While no attempt has
been made to estimate the number of affected tanneries it should be noted
tanneries with relatively limited available space often can capitalize
unutilized in-house space, reorganize the tannery operations, utilize
parking lots, or utilize less space-intensive technologies in order to
comply with wastewater control requirements. Those tanneries without
any available space can be expected to either relocate the entire operation ,
relocate the major sources of wet processes, curtail the wet processes and
purchase crust leather, or if financial conditions are marginal curtail all
operations.
F. Balance of Trade Effects
The impacts of wastewater controls are expected to result in little or no
effect on the United States' balance of trade. As discussed in the Pricing
Chapter, the Leather Tanning and Finishing Industry has historically lost
volume to international competition--most of which is attributable to trade
restrictions and agreements and not price competition. Additionally, since
domestic leather prices are not expected to increase due to wastewater con-
trol requirements, it is doubtful the competitiveness of the domestic tanners
would be affected. Thus, those tanners remaining in operation are expected
to maintain the ability to compete in the international market.
G. Summary of Recommended Treatment Options Impacts
The following summarizes the impacts associated with each of the wastewater
treatment options recommended for implementation by the Development Document.
VIII-25
-------
1. BPT Revised
The imposition of the control technology associated with BPT Revised will
potentially affect only 14 tanneries with a few already having some of the
necessary technology in place. For those models requiring expenditures,
the projected required price increases to offset such expenditures was 1.7
percent or less. With respect to financial effects, assuming no price
increases, BPT Revised could reduce the models' returns on sales from a
range of 2.0 to 2.5 percent to a range of 1.3 to 2.2 percent and the
models could also incurr reductions in their respective annual cash-flows
and net present values; but not to the extent of being negative. Compli-
ance with BPT Revised is estimated to cost the affected tanneries a total
initial investment of $4.5 million and a total annualized cost of $1.5
million. It was anticipated no closures would be incurred with the imposi-
tion of BPT Revised. Accordingly, no impacts would be anticipated on
production, employment, community, or balance of trade.
2. BAT Option 3
The imposition of BAT Option 3 would potentially affect all 18 tanneries.
With the imposition of this option, the projected required price increases,
assuming BPT Revised is in place, to offset the associated expenditures
will be 0.6 percent or less. The projected impacts on the models financial
indicators, assuming no price increases, included reductions in returns on
sales from a range of 1.3 to 2.2 percent to a range of 0.6 to 1.9 percent,
reductions in annual cash flows, and reductions in the models' net present
values. For all the models except the non chrome tan (3) model, reductions
in these latter two indicators were not to the extent of their becoming
negative. The small non chrome tan (3) model maintained a positive cash
flow but after incurring BAT Option 3 expenditures, its NPV was -$20,000.
In addition to the model plant approach, individual tanneries were assessed
as to their ability to afford BAT Option 3 expenditures. As a result of
this analysis, it was determined that only one tannery was believed to en-
counter potential difficulty in meeting the recommended option. If the
tannery curtailed operations, then approximately 50 employees could lose
their jobs and at least one and perhaps 3 or 4 neighboring communities
could be effected. Production and balance of payments inputs would be re-
latively small. Compliance with this BAT option is estimated to cost the
direct dischargers a total of $1.9 million initial investment in addition
to the proposed BPT investment. Annualized costs are estimated to total
$2.1 million in addition to proposed BPT annualized costs.
3. NSPS Option 1
As discussed in the previous section, impacts associated with new source
models were difficult to assess as they represent facilities which have yet
to be constructed. However, based on the new source models, the imposition
of NSPS Option 1 expenditures resulted in individual new source models
requiring projected price increases to offset control expenditures ranging
from 0.9 to 8.4 percent. Assuming no price increases, projected impacts
reflected reductions in returns on sales from a base case range of 4.1 to
11.6 percent to an impacted range of 1.0 to 9.0 percent, reductions in the
VIII-26
-------
annual cash flows but none to negative levels, and reductions in the models
MPV's with the extra-small and large chrome tan (1 & 2) models incurring
negative NPV's after having positive NPV's in the base case. Based on the
analysis it was determined new non chrome tan (3) facilities would probably
not be constructed in the future even without control requirements and that
new large chrome tan (1 & 2) facilities may prove to be marginally viable
if required to meet NSPS Option 1 requirements. During the next 5 years,
a few new tanneries may be constructed. These most probably would be in
the chrome tan (1 & 2) and the through-the-blue (6) subcategories. They
may be either direct or indirect discharging facilities.
4. PSES Option 1
The requirement of PSES Option 1 on all 170 existing indirect discharging
tanneries resulted in the need for a price increase of 5.8 percent or less
to offset the control expenditures. If no price increase was assumed then
the control expenditures could cause the models' returns on sales to be
reduced from a range of 2.3 to 8.2 percent to a range of -2.4 to 6.9 per-
cent with the extra-small chrome tan (1 & 2) and the small non chrome tan
(3) model, incurring negative profits after control expenditures. The
impacts of PSES Option 1 reduced all the models' annual cash flows; but
none to negative levels. The models' projected net present values were
all positive after control expenditures except for the small non chrome
tan (3) model, whose NPV was negative. Resultant of this analysis was
the determination that the imposition of PSES Option 1 would result in
approximately 5 to 7 tannery closures; the majority of which would be
sir.all non chrome tan (3) operations. Economic impacts associated with
the closure of tanneries would be employment impacts (approximately 260
to 350 persons affected); community impacts (five to seven communities):
production impacts (less than one percent of the industry's total produc-
tion); and balance of trade impacts (almost negligible). Compliance with
PSES Option 1 is estimated to require indirect dischargers to invest $59
million and incur annualized costs approximating $30.4 million.
5. PSNS Option 2
The impacts associated with control requirements for new sources were
difficult to assess as new source plants represented facilities which
have yet to be constructed. However, based on the new source models,
the imposition of PSNS Option 2 expenditures resulted in individual model
plant projected required price increases ranging from 0.6 to 7.9 percent.
Assuming no price increases, projected financial impacts reflected reduc-
tions in returns on sales from a range of 4.1 to 11.6 percent to a range
of 1.9 to 9.8 percent, reductions in annual cash flows (none to the point
of being negative), and reductions in the models net present values with
only the extra small chrome tan (1 & 2) model incurring a negative impacted
NPV after having a positive NPV in the base case (prior to controls).
Based on the analysis it was determined it would be doubtful if non chrome
tan (3) facilities would be constructed even without control expenditures
and that new extra small chrome tan (1 & 2) operations may prove to be
unviable if required to meet PSNS Option 2 requirements. However, a few
new tanneries may be built even with PSNS requirements. These most prob-
ably would be in the larger chrome tan (1 & 2) and through-the-blue (6)
subcategories. They may be either direct or indirect discharging facilities.
VIII-27
-------
IX. LIMITS OF THE ANALYSIS
There was 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 were originally compiled by the Tanners'
Council of America for inclusion in the previous EPA reports concerning the
Leather Industry and were, at the time, considered to be the most complete
and accurate source available. This information was updated for utilization
in this report. Nevertheless, much of the information 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 col-
lection portfolio, and from extensive contacts with individual tanneries.
Information on the status of effluent discharge and on recommended waste-
water control 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 were not available.
Using industry size distributions from the Census of Manufactures, and
information obtained from the Tanners Council, the technical contractor,
and contacts, subcategorization of size and type of plants were made for
each industry.
Financial information concerning investments, operating costs, and returns
was not available for all individual plants 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 infor-
mation used and to update these materials wherever possible. Checks were made
with informed sources in industry, government, and universities to help assure
that the data and information used were as reliable and as representative
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 required the Contractor to use effluent con-
trol costs provided by EPA. The Effluent Guidelines Division, EPA, and the
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. Disposi-
tion 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 wastewater control costs, it is believed that this
study's analysis represents a usefully accurate evaluation of the economic
impact of the proposed wastewater guidelines. For informational purposes
a sensitivity analysis was conducted utilizing different assumptions about
the wastewater control costs. The results of this sensitivity analysis are
presented in Appendix B of this report.
B. Range of Error
Different data series and different sections of the analysis will have dif-
ferent possible ranges or error.
Estimated data error ranges as an average for the industry were as follows:
These were based on review of the variability in survey data received and
estimates of possible error in interpretation and duplication of published
and unpublished information.
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 subcategories +_ 10
2. Price information for products and raw
materials +_ 20
3. Cost information for plant investments and
operating costs +_ 20
4. Financial information concerning the
industry +_ 15
C. Critical Assumptions
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 avail-
ability. The major critical assumptions used in this analysis were as follows
IX-2
-------
1. Types and sizes of the model plants were representative of plants
actually existing in the industry and of plants expected to be
built in the future.
2. It was assumed that the financial data were 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 1977 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 1977 so as to
include years of high and low profits) would be the same in the
future 21 years.
4. It was assumed that the economic impacts of wastewater controls
on those products not included in the detailed analysis of "repre-
sentative" 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 subcategory's
production. In most cases, there were actual plants producing
products in similar combinations as those described in the model
plants.
5. Wastewater control costs and control status estimates were supplied
by the Effluent Guidelines Division, EPA. It was assumed these
data were realistic in terms of:
(a) applicability of effluent treatment systems recommended,
(b) investment and annual operating costs for systems, and
(c) percentage of total number of plants which have treatment
in place for each industry subcategory and for the industry
in general as reported in the Development Document.
IX-3
-------
APPENDIX A
Selected References
-------
Selected References
1. Baker, Allen J., "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. Robert Morris Associates, Annual Statement Studies, 1973-1978.
7- Tanners' Council of America, "Membership Bulletin Leather Industry
Statistics, 1955-1977," Trade Survey Bureau, Tanners' Council of
America Inc., Mew York, New York, 1978.
8. 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.
9. Thompson, John W. and Poats, Frederick J., "Economics of Segmenting
Cattle Hides," Marketing Economics Division, Economic Research
Service, USDA, Washington, D.C., 1965.
10. Troy, Leo, Almanac of Business and Industrial Financial Ratios, 1973.
11. 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.
12- United Nations/CTAD, "The Kennedy Round Estimated Effects on Tariff
Barriers, "United Nations, New York, 1968.
13. United Nations/CTAD, "Leather and Leather Products, " United Nations,
New York, N.Y., 1971.
A-l
-------
14. United Nations/CTAD/GATT, "The Market for Leather Goods," International
Trade Centre, Geneva, 1969.
15. United Nations/CTAD/GATT, "Selected Markets for Leather Garments,"
International Trade Centre, Geneva, 1974.
16. U. S. Department of Agriculture, Foreign Agriculture Service, Foreign-
Agriculture Circular - Livestock and Meats, Washington, D. C. Selected
issues.
17. U. S. Department of Agriculture, "Problems of U. S. Hides and Calf and
Kip Skins in International Trade," Foreign Agricultural Service, Washing-
ton, 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 Manufactures, 1976 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. Department of Commerce, Bureau of the Census and Bureau of Labor
Statistics, BDC, U. S. Industrial Outlook, 1979, U. S. Government Print-
ing Office, Washington, D. C. , January 1979.
22. U. S. Environmental Protection Agency, Assessment of Industrial Hazardous
Waste Practices — Leather Tanning and Finishing Industry, Prepared by SCS
Engineers, Inc., February, 1976.
23. U. S. Environmental Protection Agency, Costs of Complying with Hazardous
Waste Management Regulations, Battelle Columbus Laboratories, October,
1977.
24 US Environmental Protection Agency, Development Document for Proposed
Effluent Limitations Guidelines, New Source Performance Standards and
Pfetreatment Standards for the Leather Tanning and Finishing Point Source.
Category, EPA 440/1-79-016, 1979.
25. U. S. Environmental Protection Agency, Economic Analysis of Final Pre-
treatment Standards, Leather Tanning and Finishing Industry, Prepared
by Development Planning and Research Associates, May, 1977.
26. U. S. Environmental Protection Agency, Economic Impact Analysis of
Hazardous Waste Management Regulations on the Leather Tanning Industry,
Prepared by Development Planning and Research Associates, February,
1978.
27 U. S. International Trade Commission, "Footwear," Washington, D.C.,
1976.
28. U. S. Treasury Department, Internal Revenue Service, Source Book of
Statistics of Income, 1974 and Earlier.
A-2
-------
APPENDIX B
Effects of Sensitivity on Model Plant Impacts
-------
Effects of Sensitivity on Model Plant Impacts
To ascertain the effects higher wastewater control investments and annual
operating and maintenance (O&M) costs had on the model plant impacts des-
cribed in Chapter VIII of this report, a sensitivity analysis of the con-
trol costs was conducted. The sensitivity analysis was conducted at two
levels. First the original wastewater control costs were increased by
50 percent and then secondly the costs were doubled (increased by 100
percent). Aside from the changes in the control costs, all assumptions
utilized in the sensitivity analyses were the same as those used in the
original impact analysis.
While the impact analyses described in Chapter VIII include numerous impact
indicators (i.e. effects on prices, incomes, cash flows, and net present values) >
the sensitivity analyses concentrated only on the changes in the model
plant viabilities. These are presented in Tables B-l through B-4.
B-l
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-------
APPENDIX C
Data Collection Portfolio
(and transmittal letter)
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCV
WASHINGTON. D C. 2CW60
Dear Sir:
The Federal Water Pollution Control Act was amended effective
October 18, 1972. These amendments greatly increased the scooe of the
act and as a result, the Environmental Protection Agency is
responsible for establishing effluent limitations for existing
sources, standards of performance for new sources, and pretreatment
standards for sources which discharge into publicly owned treatment
works. Although guidelines already had been promulgated for existing
direct dischargers of wastewater as well as for new sources of
discharge in the leather tanning industry, these regulations were
remanded by the court as being unacceptable. In addition, as a result
of a later court action, the Agency is required to promulgate
pretreatment standards for leather tanning and finishing
establishments by February 15, 1977.
The Agenc> now is in the process of revising the direct discharge
regulations and developing the pretreatment legislation. As a part cf
this standard setting process, it is necessary to examine the economic
impact of the new regulations. EPA has contracted with Development
Planning and Research Associates (DPRA), an independent firm located
in Manhattan, Kansas, to conduct this analysis. In order to ensure
that the economic impacts are identified as accurately as possible,
your cooperation is essential. The Agency's specific information
needs in this respect are enclosed. Please complete this data
collection portfolio as completely as possible and return it to DPRA
in the enclosed self-addressed envelope by September 27, 1976. If
your firm is not a wet process tannery, please complete questions rl
and n,
The information requested in the enclosed data information form
is sought pursuant to Section 308 of the Federal Water Pollution
Control Act of 1972. That section authorizes EPA to collect such
information as required for developing the required effluent
standards. Should you consider any part of your response confidential
or proprietary, please indicate this clearly in your responses. The
Agency then yi'M take appropriate protective measures.
-------
Thank you in advance for the cooperation of your firm. The EPA
is committed to promulgating effluent regulations which are in
accordance with the Federal Water Pollution Control Act and which are
also reasonable and fair. The agency has found that only with
complete cooperation of all parties concerned can thoughtful and fair
regulations be published. I am confident that we can anticipate your
assistance in reaching that goal.
Should you have any questions regarding this request, do not
hesitate to contact Mr. Anthony M. Montrone at (202) 755-6906, the EPA
Project Officer. For technical questions, please contact Mr. Donald
J. Wissman or Richard E. Seltzer of DPRA at (913) 539-3565.
Sincerely,
Swep T. Davis, Jr., Director
Office of Analysis and Evaluation
Office of Water Planning and Standards
-------
Ij '
1
PROCEDURES:
To realistically assess the potential isripacts on the leather
tanning and finishing industry, it is essential that DPRA
mpee orms sou e sen to y epemer , . e resu-
tant data will be utilized to develop an economic assessment of the poten-
tial impacts of effluent controls on the industry.
Question 2 of this portfolio requests the categorization of your operation.
If your firm is categorized as Finish Only or if your operation is con-
sidered a Dry Process Only please answer questions 1 and 2 only and return
this form to DPRA. If your firm is considered a Viet Process operation
please complete the entire data collection portfolio. Your cooperation
will be greatly appreciated.
INSTRUCTIONS:
dc not seem to fit or if
Complete a survey form FOR EACH PLANT. Respond to all
questions if possible. Where specific accounting figures
it or if allocations of costs era on a different basis,
your O'.vn estimates. Estimates by you are far better than estimates by
outsiders, but please indicate the nature of your estimates. Regardless
of the number of questions you are able to answer, please return this
form. Should you have questions regarding the survey you may call Mr.
Tony Montrone, EPA, i202) 755-5906. For answers to specific questions,
Tony
please contact Mr. Richard Seltzer or
539-3565.
Donald kiss roan, DPRA,
(913)
TO:
PLEASE RETURN BY:
Development Plan:
P. 0. Box 727
Manhattan, Kansas
September 27
no and Research
66502
, 1976
Assoc. , Inc.
-------
1. FIRM NAME
Address of Plant
Name of person we may contact concerning
this data collection portfolio
2. TYPE OF LEATHER PROCESSES
Complete Tannery
Blue/Pickle Only
Retan to Finish
Finish Only (dry process)
Other
3. PLANT DESCRIPTION: Please check the boxes which best describe yo'jr plant,
A. Plant Size: (Dollar volume of sales)
D 40-50 million dollars
D 30-40 million dollars
D 20-30 mill-ion dollars
G 10-20 million dollars
D 5 - 10 million dollars
Q 1 - 4 mi Hi on dollars
D 0 - 1 million dollars
B. Organization:
D Family or restricted ownership
D Public corporation or subsidiary
C. Age of Plant:
D Less than 5 years
n 5-10 Oate of last major
Q 10-20 Remodeling or Renovation
Q 20 - 30 a
D 30-50
O More than 50 years
D. Employment:
Average number of employees? employees
Number during peak season? employees
-------
4. PROCESS DESCRIPTION: Check appropriate category in each column as
it applies to your operations. If more than one category is appro-
priate please indicate percentage each category represents.
Skin or Hide Type Beamhouse Operation Tanning Process Products
Cattle (inclu- Pulp hair Chrome Sides
ding calf)
Pig Save hair Vegetable Splits
Sheep Hair removed Alum Sides & Splits
previously
Deer Hair retained Previously Bends
tanned
Other Wool pullery Vegetable & Shoulders
(specify) chrome
Hide curing Blue Chrome Bellies
Pulp & save Other Skins
(specify)
Other (specify) None Oth^r (specify)
None
5. PRODUCTION DATA: Please complete the following based on the last
annual accounting period:
Products Sg. Ft. Volume Dollar Volume
Cattlehide Leathers
Side, Patent, Carment,
Glove & Upholstery
Sole & Belt
Chrome Split Leather
Vegetable Tanned Sides
Other (1)
Calf Leather
Goat & Cabretta
Sheep & Lamb
Pig
All Other (please
specify) (2)
Year for which the above represents
(1) Includes sporting goods and mechanical.
(2) Includes Horse, Kangaroo, Deer, Reptile and exotic types.
-------
6. PLANT CAPACITY AND UTILIZATION
A. Please indicate the number of hours and days in your
"normal" work week.
B. Days of operation in 1975 days.
C. Maximum rated plant capacity under normal conditions: hides
per day.
-0. Percent of plants maximum "normal" capacity utilized in 1975
in 1976 (to date) .
E. Inventory turnover times per year.
7. COST STRUCTURE: Please indicate 1975 costs as shown below. Expenses
shown should include effluent treatment costs if applicable.
Dollars
A. Annual Sales
B. Total Direct or Variable Costs
Costs of raw hides
Labor
Tanning materials
Miscellaneous
C. Tot^l Indirect or Fixed Costs
Depreciation
Interest
Other indirect including selling and administrative
D. Net Profit Before Taxes
E. Of total expenses shown above, what amount was
for effluent control expenses?
-------
8. PROFITABILITY - 1970-1975: Please calculate as accurately as possible
your profit (or loss) as a percent of sales and as a return on invest-
ment for your major products, all other commodities, and for your plant
as a whole for 1970-1975. Use the following formula for calculations:
Percent Profit (Loss) =
/Profit before tax (S)\
^Sales ($) J
m
Profits
X 100
1975
1974
1973
1972
1971
1970
9. PLANT INVESTMENT - 1975
A. Average current assets, 1975
B. Average current liabilities, 1975
C. Total book value of fixed assets at this location:
Land
Building
Equipment
Other
D. Amount of long term dabt
£. Estimate salvage value (liquidation value for non-
conforming uses)
a. All fixed assets excluding nnd
b. Value of land
Return on
Investment
Plant Total
F. Estimate current replacement cost of all fixed
assets
G. Annual depreciation, per book
H. What was the average annual amount of capital
investment (exluding major plant expansions)
for this plant during the past five years
I. What was the total amount of computed investment
for water pollution control equipment for this
plant during the past 5 years
-------
10. EFFLUENT CHARACTERISTICS AND DISCHARGE DATA - 1974
Although most plants in the industry are thought to discharge to municipal
systems, your answer to Question 8 will provide a more complete description.
Plants may have several types of liquid waste discharges. What is the final
disposition of wastewaters from this plant by type of wastewater?
Wastewater Type
process
Cooling
Sanitary
Land
Disposal
Municipal
System
Recycle
Discharge to
waten-ourse
Total
100
100
TOO
If this plant is not connected to a municipal system, is such a connection
a feasible alternative to meet the 1S77 effluent control guidelines?
yes
no (Please explain why)
For your wastewaters, check the types of on-site treatment, if any,
that are performed prior to final discharge from the plant site:
Process
Type of Treatment Wastewater
Screening D
Lagoon O
Aerated lagoon G
Activated sludge C3
Trickling filter D
Chemical precipitation O
Irrigation D
Other (specify): Ll
Cooling
Wastewater
D
D
D
D
D
D
D
D
Sanitary
Wastewater
D
D
D
D
D
D
D
D
-------
11. OTHER REGULATORY IMPACTS AND COSTS
Federal, state or local regulations already established or under
development may have an economic impact on this plant's operation
Identify to the extent possible the nature of these additional
regulations and anticipated costs of compliance.
A. State or local water quality regulations (excluding Federal).
From 1975 to 1977 (projected)are there either state or local
water effluent regulations which will affect operating costs
yes no
BOD5 and TSS guidelines if possible)
of this
If yes,
plant?
explain
Estimate total combined investment and operating costs for state
or local compliance for next 4 years:
Total investment required _
Annual operating cost
(projected)
(projected)
B. Other regulatory cost impacts: Describe other environmental
controls (e.g., odor, thermal, solid waste) or other factors
(e.g., OSHA, etc.) which have resulted in significant cost
impacts.
Estimate total combined investment and operating costs other
regulatory considerations for next 4 years:
Total investment required
Annual operating cost
(projected)
(projected)
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11. OTHER REGULATORY IMPACTS AND COSTS (continued)
C. For plants on municipal system:
Total Cost Cost per 1,000 gal.
1. What are your user charges?
1974
1975
1977 projected*
* (includes payback requirements)
2. Does the municipal treatment facility that this plant discharges
into currently meet EPA's secondary treatment requirements?
yes no. If no, when is upgrading of this municipal
facilitiy expected? year
3. If pretreatment requirements are imposed, what problems do you
anticipate in implementing pretreatment controls.
12. COMMENTS: Please supply any other data or cqmments that you feel may be
helpful in evaluating the economic impact of possible effluent limitation
guidelines on leather tanning.
13. Thank you for your cooperation. Please enclose this form in the accompany-
ing envelope and mail directly to:
Development Planning and Research Associates, Inc.
P.O. Box 727
Manhattan, Kansas 66502
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