-------
FOOTNOTES TO TABLE A-2a
I/ For this subcategory, BAT is equivalent to BPT. Since BPT is in
place and operating for all direct dischargers, there will be no
incremental costs over BPT required for compliance with BAT
limitations.
2/ Line closures. Impacted plants produce other products and will
likely continue to do so.
3/ Indirect dischargers will not incur any control costs under this
rulemaking.
4/ The control system for this subcategory is oversized. The control
costs and impacts are therefore overstated.
5/ All plants are currently achieving removal levels equivalent to BAT
limitations.
A-8
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FOOTNOTES TO TABLE A-2b
I/ For this subcategory, BAT is equivalent to BPT. Since BPT is in
place and operating for all direct dischargers, there will be no
incremental costs over BPT required for compliance with BAT
limitations.
2/ Line closures. Impacted plants produce other products and will
likely continue to do so.
3/ Indirect dischargers will not incur any control costs under this
rulemaking.
4/ The control system for this subcategory is oversized. The control
costs and impacts are therefore overstated.
5/ All plants are currently achieving removal levels equivalent to BAT
limitations.
A-10
-------
For the 122 direct dischargers, the incremental costs of compliance with
BAT limitations were determined to have no severe impacts in any of the
ten subcategories. Incremental costs will be incurred by 77 plants in
order to comply with BAT limitations. Total annualized costs for these
direct dischargers are estimated at approximately $13.8 million, with
their investment in pollution control equipment estimated at $13.9
million.
The combined incremental costs of compliance with effluent limitations
and RCRA-ISS requirements* are estimated for two subcategories. In the
chrome pigments subcategory plant closures are possible. However, the
incremental costs of RCRA-ISS compliance were not found to result in
additional plant closures; rather, the number of plant closures projected
is the same as that projected as a result of effluent control costs
alone.
In assessing the potential impacts of pollution control costs on each of
the ten subcategories, the following generalizations can be made:
• The costs of achieving first level control costs (BPT or base
level pretreatment) are much higher than the incremental costs
above BPT required to meet BAT limitations. Therefore, for
subcategories where all plants currently have BPT and pre-
treatment systems in place, economic impacts of incremental
effluent control costs are ve'ry small (e.g., hydrogen cyanide).
For subcategories in which plants do not have base level
treatment systems installed, potential economic impacts are
much higher (e.g., chrome pigments).
• Operating costs (the annual cost of labor, chemicals, and
maintenance required to operate the pollution control equip-
ment) will be more burdensome than investment costs in almost
every subcategory. Operating costs will rise over time with
other manufacturing costs, while investment costs are a one
time cash outlay. The ratio of investment costs to operating
*Note that the RCRA-ISS estimates overstate the costs associated with
effluent limitations because they include baseline RCRA costs as well as
the costs associated with solid wastes generated by effluent treatment.
However, since the overstated costs resulted in no significant incremental
impacts, baseline and after-effluent control RCRA costs were not separated
in the analysis.
A-ll
-------
costs ranges from a low of 1.0 (for hydrogen cyanide) to 4.39
(for nickel sulfate) with most subcategories having a ratio of
two to three.
Impacts, as measured by maximum price rise and profitability
decline, were generally more pronounced in the smallest model
plant in each subcategory. This results from most subcate-
gories experiencing economies of scale in both the effluent
removal systems and in manufacturing costs.
Total revenues for the subcategories were $2.5 billion dollars in 1977,
or 0.13 percent of the Gross National Product. The total incremental
annualized costs of meeting BAT and PSES limitations (estimated at $20.9
million in mid-1978 dollars) represent less than one percent of total
industry revenues. Since the costs are a small percentage of revenues,
the impact on inflation would be very slight.
The impact analysis suggests that two plants will close chrome pigments
production lines as a result of pollution control costs, affecting
approximately 60 employees.
There should be minimal balance of payments impacts since most inorganic
chemicals are low value products serving regional markets. The excep-
tions are titanium dioxide, copper sulfate and hydrogen fluoride. Only
titanium dioxide has a large enough world market to warrant an analysis
of potential balance of payments impacts. However, no consequential
impacts are expected to result from effluent regulations.
New source performance standards (NSPS) and pretreatment standards for
new sources (PSNS) are not expected to significantly discourage entry or
result in any differential economic impacts on new plants in the inorga-
nic chemicals industry. The pollution control capital investment requir-
ed to install a given treatment technology is the same for new and
existing producers in the industry. Therefore, at a given level, new
plants will not be operating at a cost disadvantage relative to current
manufacturers.
A-12
-------
Immediately following is a brief summary of the impacts of effluent
control costs on each subcategory. This section concludes with a brief
summary of the incremental impacts of RCRA-ISS costs for the affected
subcategories.
1. Aluminum Fluoride
For this subcategory, no incremental costs will be incurred to comply
with BAT limitations. BAT is equivalent to BPT and BPT is in place and
operating for the five plants (all direct dischargers) in the subcategory.
The following characterization data is presented for informational pur-
poses only.
Over 90 percent of aluminum fluoride is utilized in the production of
primary aluminum. Hence the profitability, growth and production of the
aluminum industry determine the demand for aluminum fluoride. The
aluminum industry is presently restraining capacity expansion in an
effort to increase capacity utilization. This will reduce growth in
aluminum fluoride demand. Decreased demand growth will also result from
EPA fluoride emissions standards which have resulted in increased fluoride
recovery and recycling among aluminum manufacturers.
In the merchant market, the price of aluminum fluoride is likely to
remain low due to vigorous intra-industry competition. This, coupled
with rising manufacturing costs, will keep profit margins low.
2. Chlorine
Because chlorine is a critical input for several processes, many pro-
ducers make it for their own use (captive production is over 60 percent
of total production). Chlorine's end markets are experiencing varying
growth rates. Overall, demand for chlorine is expected to parallel GNP
growth.
A-13
-------
Almost all chlorine is manufactured using one of two processes covered
in this study: diaphragm cell (74% of production) and mercury cell (20%
of production).
Rising costs, due to government regulations other than effluent guide-
lines and increased electricity prices, have combined with soft prices
(the result of industry overcapacity) to strain industry profitability.
However, chlorine's profitability is determined by the profitability of
its end products, since almost two thirds is used captively in the manu-
facture of construction materials. Demand for chlorine in most end
markets is expected to remain strong enough to justify continued chlorine
manufacture.
The economic effects of pollution control requirements were analyzed in
terms of four indicators:
• Price Rise (all pollution control costs passed through to
consumers): for the one indirect discharger in the sub-
category without treatment in place, the required price
increase to recover pretreatment costs is 2.2 percent. For
direct dischargers, the maximum price increase for either
mercury cell or diaphragm cell producers is 2.01 percent.
• Profitability Decline (all pollution control costs absorbed by
the firm): the decline in profitability for both processes
and for direct and indirect dischargers is less than 0.6
percentage points (as measured by ROI) in all cases. For the
two large model plant sizes, this decline reflects less than
a five percent decrease in profitability from the base case.
However, for the smallest model plant size, profitability
decreases 24.42 percent for the mercury cell process and 8.96
percent for the diaphragm cell process (based on ROI).
• Price Elasticity of Demand: assumed inelastic since 1) there
are no direct substitutes for chlorine in many end uses;
2) most chlorine production is used captively; and 3) cost
increases can be passed on through price increases for various
downstream products.
• Capital Ratio (pollution control capital costs as a percentage
of fixed investment): capital costs for technology required
for pretreatment by the one indirect discharger represent
A-14
-------
slightly over one percent of fixed investment. Additional
capital costs for BAT effluent limitations are only a fraction
of one percent of fixed investment for all plants.
Chlorine manufacturers using most of their production captively in other
downstream products should have little difficulty recovering pollution
control costs through price increases for final products. The facilitated
price pass-through should prevent any profitability decline of the magni-
tude projected for the small model size mercury cell plant. Merchant
producers may be unable to implement a complete and immediate price rise
of three percent and may suffer a short term decline in profits. However,
this profitability decline will not be of sufficient magnitude or duration
to seriously injure the industry.
3. Chrome Pigments
The chrome pigments subcategory is made up of chrome yellow and orange,
chrome green, chrome oxide green, molybdate chrome orange, and zinc
yellow. The profitability of the producers of lead-containing chrome
pigments is in doubt. Profitability will depend upon the ultimate costs
of meeting the OSHA regulations and the extent to which these costs can
be passed through in the form of higher prices. Demand forecasts range
from zero growth, at best, to a substantial decline in demand.
Two plants in this subcategory are currently meeting effluent limitations.
Three small indirect dischargers (2200 tons or less of annual production)
will be exempt from regulation. The remaining seven plants (two direct
dischargers and five indirect dischargers) will incur additional effluent
control costs to meet BAT/PSES limitations. The economic effects of
these effluent control costs were analyzed in terms of four indicators:
• Price Rise (all pollution control costs passed through to
consumers): the price rise required to pass through the costs
of PSES/BAT control ranges from 5.5 to 14.0%.
• Profitability Decline (all pollution control costs absorbed by
the firm): absorbing the costs of BAT/PSES removal would
result in a decline in profitability of almost 18 percentage
A-15
-------
points (as measured by ROI) for the smallest plant. The decline
represents a decrease in profitability of over 100 percent from
the base case. The other three models experience declines in IRR
ranging from ten to 12 percentage points or 26 to 57 percent of
baseline profitability.
Price Elasticity of Demand: assumed to be moderately elastic.
While organic substitutes are much more expensive than inorganic
pigments, lower priced imports may constrain domestic price
increases.
Capital Ratio (pollution control capital costs as a percentage
of fixed investment): capital costs required of all model
plant sizes to meet effluent regulations represent a serious
cost hurdle: approximately one-third of fixed investment.
Smaller chrome pigment plants are operating close to the breakeven point
and the profitability decline is likely to encourage them to cease oper-
ations. An examination of the two non-exempt plants that fall into this
"small" category suggests that one may close its chrome pigments produc-
tion line. One medium-size plant production line closure may also occur
within the next five years. These projected line closures will affect
60 employees. Note that the closure projections are in reference to
chrome pigments production only. The affected plants produce other pro-
ducts , and it appears likely that only the chrome pigment production
line, which accounts for a small part of plant production, would shut
down.
4. Copper Sulfate
For this subcategory, BAT and PSES are equivalent to BPT. All plants ex-
cept one indirect discharger are currently in compliance with BPT. The
costs the remaining plant will incur are associated with pre-treatment
standards already in effect, not the current rulemaking. Therefore, the
BAT/PSES compliance costs for this industry are zero. The following
economic data is provided for informational purposes only.
A-16
-------
Copper sulfate is a low volume chemical with a variety of applications
in agriculture and industry. Domestic production of copper sulfate has
declined dramatically over the last 25 years, due to a worldwide shift
away from copper sulfate as an agricultural fungicide. The once large
export market for copper sulfate is now nonexistent. However, a recent
upturn in copper sulfate sales has resulted in some industry optimism.
In 1977, imports captured nearly 10 percent of the copper sulfate market.
Low priced imports have forced domestic producers to sell copper sulfate
at less than published list prices in certain markets to remain competi-
tive. Rising copper prices, combined with strong competition from imports
and substitutes, may cause profit margins to decline in the near future.
5. Hydrogen Cyanide
Hydrogen cyanide (HCN) is a highly toxic chemical used as an intermediate
in the production of plastics, herbicides, and fibers. The hydrogen
cyanide industry is characterized by a high degree of captive use: over
90 percent is used by the manufacturers in the production of "downstream"
chemicals.
The major end use of hydrogen cyanide is in the production of methyl
methacrylate (MMA). MMA is polymerized to yield a durable plastic which
is used in a number of markets. A new, less costly, production process
has been developed that does not utilize HCN, and a number of companies
are considering adopting this new technology. The rate of adoption of
this new technology will determine future HCN demand.
Since HCN is almost entirely a captive input for production of other
chemicals, its profitability is determined by the profitability of its
end products. Most of these end products are currently produced profit-
ably. However, use of HCN is expected to decline due to the adoption of
the new MMA technology.
A-17
-------
The economic impacts of pollution control costs were analyzed in terms
of four indicators:
• Price Rise (all pollution control costs can be passed through
to consumers): the increase in price needed to recover the
incremental cost of BAT treatment is less than one percent for
all model plant sizes.
• Profitability Decline (all pollution control costs absorbed by
the firm): should producers be unable to pass on the cost
increases in higher downstream product prices, the decline in
profitability would be roughly one-fourth of one percentage
point of the IRR or less than 1.25 percent of baseline profit-
ability for each model plant size.
• Price Elasticity of Demand: assumed inelastic due to high
captive use and the inelastic demand for downstream products.
• Capital Ratio (pollution c:ntrol capital costs as a percentage
of fixed investment): in all model plant sizes, the capital
required for pollution control is one-half of one percent or
less of fixed investment.
The small increase in HCN cost could be easily passed on in higher
downstream product prices. The demand outlook for all products which
require HCN in their manufacture is sound enough to sustain the small
increase. The potential profitability decline is so slight that it is
not likely to give captive producers of HCN increased incentive to adopt
new manufacturing technologies, not dependent upon HCN.
6. Hydrogen Fluoride
Hydrogen fluoride (HF) has two main end uses: primary aluminum produc-
tion and fluorocarbon production. Demand in these markets is declining.
In the aluminum market, the decline is a result of extensive fluoride
recovery efforts by the aluminum manufacturers. The fluorocarbon end
market also has experienced severe cutbacks due to the EPA and FDA ban
on fluorocarbons in aerosols. In addition, the Environmental Protection
Agency is considering regulation of all fluorocarbon uses, which would
be another setback for the industry.
A-18
-------
The profitability of the hydrogen fluoride industry is dependent upon
the resolution of the uncertain demand factors in aluminum production
and fluorocarbon applications. Most of the reduction in HF demand will
be in captive uses. The merchant market is not expected to suffer, as
long as aluminum manufacturers shut down excess capacity rather than
sell HF on the merchant market.
The economic effects of pollution control requirements were analyzed in
terms of four indicators:
• Price Rise (all pollution control costs passed through to
consumers): passing on the incremental costs of BAT treatment
requires a price increase significantly less than one percent
for all model plant sizes.
• Profitability Decline (all pollution control costs absorbed by
the firm): absorbing the costs of BAT treatment would cause a
decline in IRR of one half of one percentage point or less for
all model plant sizes. For the two larger model plant sizes,
this represents less than 1.3 percent of the baseline profit-
ability. The small model plant size profitability decreases
11.61 percent.
• Price Elasticity of Demand HF demand is assumed to be moderately
price elastic due to imports' constraint on domestic prices.
• Capital Ratio (pollution control capital costs as a percentage
of fixed investment): the additional capital requirements for
BAT are minimal, representing only 0.6 percent of fixed
investment in all cases.
The price and profitability impacts of compliance with BAT limitations
are small for the two larger model plant sizes. Though profitability of
the small model plant size decreases 11.61 percent, the maximum price
rise required is small (less than one percent). Therefore, no plant
closures or secondary impacts are anticipated for this subcategory.
7. Nickel Sulfate
For this subcategory, BAT and PSES are equivalent to BPT. All plants ex-
cept two indirect dischargers are currently in compliance with BPT. The
A-19
-------
coses the remaining plants will incur are associated with pre-treatment
standards already in effect, not the current rulemaking. Therefore, the
BAT/PSES compliance costs for this industry are zero. The following eco-
nomic data is provided for informational purposes only.
Nickel sulfate is a low volume chemical used primarily in metal plating.
Total production of nickel sulfate has declined from a high of about
21,000 short tons in 1970 to 7,032 tons in 1977. Recycling efforts and
substitution of other materials will cause nickel sulfate production to
continue declining for the next few years. Profitability in the nickel
sulfate industry has been marginal in recent years and is expected to
erode still further due to declining sales, competitive pricing policies
and rising nickel costs. However, manufacturers are expected to continue
producing nickel sulfate to offer customers a complete line of electro-
plating chemicals.
8. Sodium Bisulfite
Sodium bisulfite is used in photographic processing, food processing,
tanning, textile manufacture, and water treatment. The principal markets
for sodium bisulfite should provide steady demand for sodium bisulfite
as they are well developed and secure. The two largest sodium bisulfite
manufacturers account for most of industry sales. Prices have always
been strong and producers have typically not offered discounts on list
prices.
Producers of sodium bisulfite have maintained strong profit margins by
successfully increasing prices as manufacturing costs rose. Based on
the past performance of the industry, future manufacturing cost increases
are likely to be passed through and profit margins are expected to
remain intact.
Only one plant, an indirect discharger, will incur incremental effluent
control costs. For direct dischargers, BAT is equivalent to BPT and BPT
A-20
-------
is in place and operating for all direct discharge plants. The economic
effects of pollution control requirements for the one plant incurring
costs were analyzed in terms of four indicators:
* Price Rise (all pollution control costs passed through to the
consumer): the price increase required to pass on pretreatment
costs is 8.97 percent.
• Profitability Decline (all pollution control costs are absorbed
by the firm): the maximum potential profitability decline
resulting from absorbing pretreatment costs is 5.41 percentage
points or 64 percent of the baseline profitability (as measured
by ROI) for the model representing the affected plant.
• Price Elasticity of Demand: assumed inelastic since there are
no close substitutes for sodium bisulfite in its major end
markets.
• Capital Ratio (pollution control capital costs as a percentage
of fixed investment): the capital investment required for
pretreatment is 6.9 percent of fixed investment for the
affected plant.
The price rise required for the affected sodium bisulfite plant is high,
almost nine percent. However, given that sodium bisulfite demand is
inelastic and that the affected plant enjoys a regional market advantage
as one of only two sodium bisulfite producers on the West coast, price
pass-through should be possible. Further, unlike all other sodium
bisulfite plants, this plant is currently not incurring effluent control
costs.
Therefore, it must be assumed the the plant has been operating at a cost
advantage and that pretreatment costs will bring its costs in line with
current cost levels experienced by the other plants already operating
effluent control equipment. Thus the impacts of pretreatment costs on
the sodium bisulfite subcategory are minimal.
A-21
-------
9. Sodium Dichromate
All plants are currently in compliance with BPT limitations. For this
subcategory, BAT is equivalent to BPT. Therefore no incremental costs
will be incurred to comply with BAT limitations. The following charac-
terization data is presented for informational purposes only.
Sodium dichromate (or sodium bichromate) is the principal source of
chromium for a variety of applications, including chrome pigments,
tanning agents, and wood preservatives. Sodium dichromate has rela-
tively secure end markets with few substitutes. Industry observers cite
possible OSHA regulations on worker exposure to hexavalent chromium as a
potential threat to growth in dichromate's main market, chromic acid.
If demand cutbacks due to OSHA regulations are not severe, growth should
average two to three percent annually and profit margins should remain
secure.
10. Titanium Dioxide
Titanium dioxide (TiO ) is a white pigment used to whiten or opacify
paints, paper, plastics, and several other products. It is a well
established, mature product having been produced for over 40 years.
Most of its many end markets are also mature, so demand growth is expected
to parallel GNP growth. Three processes are used to manufacture titanium
dioxide: the sulfate process, the chloride process, and the chloride-
ilmenite process. Chloride process plants are currently meeting BAT
limitations. Similarly, all three chloride-ilmenite plants are achieving
removal levels equivalent to BAT limitations and will incur no additional
effluent control costs. Therefore, the impacts of effluent control
costs are addressed only for sulfate process titanium dioxide producers.
Many titanium dioxide manufacturers incurred losses for several months
prior to mid-1978. The competitive pressures of imports and DuPont's
low cost chloride-ilmenite process have restrained prices. Future
A-22
-------
profitability for most producers will depend on strong demand and, in
the long run, utilization of lower cost technologies.
There are four sulfate process plants. One plant has BPT equipment in
place and operating. For this subcategory, BAT is equivalent to BPT.
Therefore, only three plants will incur additional effluent control
costs.
The economic effects of effluent control costs on sulfate plants were
analyzed in terms of four indicators:
• Price Rise (all pollution control costs passed on to the
consumer): The price rise required to pass through PSES/BAT
costs ranges from 2.11 to 10.11 percent.
• Profitability Decline (all pollution control costs absorbed by
the firm): The profitability decline resulting from BAT/PSES
is large. The maximum potential decline in IRR ranges from
0.75 to 4.64 percentage points or 6.86 to 61.62 percent of
baseline profitability.
• Price Elasticity of Demand: assumed highly elastic since
sulfate process price increases are constrained by imports and
lower cost domestic producers.
• Capital Ratio (pollution control capital costs as a percentage
of fixed investment) capital required to install BAT/PSES
control represents 0.08 to 3.17 percent of fixed investment.
One of the actual sulfate process plants incurring effluent control costs
corresponds to model size 3. For this plant, closure is very unlikely
because the profitability decline from absorbing all control costs is
minimal. Also, the plant is currently ocean dumping part of its waste
stream at a cost significantly below the cost of physical/chemical
wastewater treatment. This plant may incur additional pretreatment
costs for the portion of its effluent being discharged to a POTW. Given
that the plant will be allowed to continue ocean dumping through at
least 1989, its wastewater treatment costs will be lower than the costs
A-23
-------
of a total land-based treatment facility. In this case, it seems un-
likely that the plant would choose to close.
The remaining two producers correspond to the small model size. The
model plant analysis indicates substantial price and profitability im-
pacts for this size category. However, one of these two small producers
has already made a partial investment in waste treatment facilities which
is not reflected in the analysis; therefore, the price and profitability
impacts for this plant are overstated. Moreover, despite the additional
costs that would be incurred to reach full compliance, the producer has
publicly announced that it plans to continue production and foresees a
long-term market for the anatase grade pigment produced by the sulfate
process (Chemical Marketing Reporter, December 24, 1979). The final
regulation also incorporates specific changes requested by this manufac-
turer. Given these circumstances, it seems unlikely that the plant
would close.
The other plant has recently signed a court agreement to meet limitations
equal to those set forth in this final regulation and has agreed to in-
stall wastewater treatment controls and continue production in compliance
with the regulation. Accordingly, continued operation of the plant ap-
pears likely.
In summary, although the quantitative economic indicators-suggest possible
closure of these two plants, their actual circumstances are such that
closures appear highly unlikely.
Incremental Impacts of RCRA-ISS Costs
Table A-3 summarizes the incremental impacts of RCRA-ISS costs* over the impacts
of effluent control costs in terms of the required price increase, potential
*Note that the RCRA-ISS cost estimates used in this analysis also include base-
line RCRA costs and, therefore, overstate the RCRA costs associated with solid
wastes generated by effluent treatment. However, this analysis indicates no
significant incremental impacts even with the overstated costs.
A-24
-------
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A-25
-------
profitability decline, and capital requirements. The incremental impacts
of RCRA-ISS costs are generally minimal.
The incremental impacts of RCRA-ISS costs are most significant for small
chlorine mercury cell plants and chrome pigments plants. In the case of
small chlorine mercury cell plants, the additional RCRA-ISS costs are
not expected to result in plant closures because inelastic demand may
allow complete pass-through of both effluent control and RCRA-ISS costs
in final product prices.
In the case of chrome pigments plants, the same two plants (one small,
one medium-sized) identified as possible production line closures due to
effluent control costs alone would also be projected as closures due to
the combined impacts of effluent control and RCRA-ISS costs. Additional
closures are not anticipated due to the following reasons:
• Three small plants are exempt from BAT/PSES regulation.
Without the effluent guidelines control equipment in place,
they will produce no hazardous wastes attributable to BAT/
PSES.
• The remaining small plant produces only chrome oxide green, a
strong-selling product. In addition, this plant will face
none of the OSHA costs which the producers of lead-containing
pigments will incur.
• Of the two remaining medium-size plants, one is already in
compliance with the regulations and one produces only chrome
oxide green.
• Finally, the price and profitability impacts of the RCRA-ISS
costs on larger plants is insignificant.
A-26
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B. INDUSTRY OVERVIEW
This section briefly describes the chemical industry, the inorganic
chemicals segment of the industry, and the economic relationships
between chemicals and the general economy. The focus, which is empha-
sized in this section and applied throughout the report, is on the
interrelated nature of the chemical industry and the rest of the U.S.
economy. Virtually every sector of the economy, from heavy industry to
small scale service operations, uses chemicals in some fashion. Many of
these products which use chemicals are further manufactured to yield
final goods for general consumption. Because of this, there may be any
number of manufacturing steps involved between a chemical's manufacture
and final consumption.
The purpose of this characterization is to determine and evaluate those
factors which affect the economic condition of each of 10 inorganic
chemicals. To do this, two types of economic variables are addressed:
1) the economics of production and those of the immediate end markets
for the chemical, and 2) the final markets and the macroeconomic trends
which affect them. Thus, each chemical is tied to those sectors of the
economy where final consumption takes place. This provides a full
picture of the direct and indirect determinants of demand, supply, and
competition.
For each subcategory, the economic impact of pollution control regulations
is determined. The core of this economic impact analysis is a comparison
of the increase in costs due to control and the ability of the market to
absorb these costs. This is only possible having evaluated all of the
determinants of demand characterizing each subcategory.
B-l
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The subcategory characterization for each chemical is presented in five
sections: 1) Demand, 2) Supply, 3) Competition, 4) Economic Outlook, and
5) Characterization Summary.
B.I DEMAND
The demand for all chemicals is reflected in diverse product paths which
eventually lead to consumer products. The chemical industry can be
divided into three groups based, in part, on these routes to the final
market. Standard and Poors has developed a classification dividing the
industry into 1) Chemical Products, 2) Synthetics, and 3) Basic Chemicals.
The first group, chemical products, includes final products such as
paints, detergents, agricultural products, and Pharmaceuticals. Demand
for these chemicals flows directly from the end consumers to the chemi-
cal manufacturers. These products account for approximately 40 percent
of the chemical industry's sales.
A second group of chemicals (accounting for 20 percent of sales), syn-
thetics, is composed of man-made fibers, plastics, and synthetic rubber.
This group is characterized by relatively high growth rates and profit
margins although the fibers segment has experienced several bad years.
These chemicals reach the ultimate consumer indirectly in products such
as carpets, clothes, automobiles, and tires. As such, the demand ex-
perienced by chemical firms for acrylonitrile or nylon, for example,
will depend on the demand at the end markets for acrylic or nylon fibers
used in carpets and clothing.
The third group of chemicals (accounting for 40 percent of sales),
called basic chemicals, includes "building block" chemicals, or inter-
mediates, which are often used within the industry to make other chem-
icals. Most of the 10 chemicals of this study fall into this category.
These chemicals are characterized by mature markets, that is, they have
B-2
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low growth rates and relatively stable demand. Chlorine is a good
example of this type of chemical. It is widely produced at relatively
slim profit margins and two-thirds of its production is used captively.
Most producers manufacture chlorine in order to assure reliable supplies
of this important intermediate. Other examples of intermediates and
their uses include:
• Hydrogen cyanide as an input for methyl methacrylate
• Hydrofluoric acid as an input for fluorocarbons and aluminum
fluoride
• Sodium dichromate as an input for chrome pigments and other
chrome containing compounds.
Some of the 10 chemicals of this study are used directly by other in-
dustries. Included among these are:
• Aluminum fluoride which is used in the manufacture of aluminum
• Chrome pigments and titanium dioxide pigments which go into
various paints
• Copper sulfate which is used in agricultural chemicals, in
electroplating, and other industrial uses
• Nickel sulfate which is used in electroplating
• Sodium bisulfite which is used in photographic chemicals, in
effluent treatment, and as a food preservative.
In characterizing the demand for the 10 chemicals of this study, the
immediate markets and all of the downstream markets through final con-
sumption must be accounted for. For example, reduced airfares in 1978
increased demand for air travel. Airlines, in turn, substantially
increased their orders for aircraft. This increased the demand for
aluminum, and thus aluminum fluoride and hydrogen fluoride (see Figure
B-l). Although there were certainly other factors at work in these
markets, the example does give a good indication of the potential com-
plexity of demand for these chemicals.
B-3
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FIGURE B-l
CHEMICAL
Hydrogen
Fluoride
IN
DUSTRY
Aluminum
Fluoride
ALU]
MINUM INDUSTRY MANUFACTURE
Aluminum
Aircraft
C
FINAL
ONSUMPTION
Air
Travel
B.I.I Demand Summary
Having evaluated all of the individual elements of demand and the eco-
nomic forces at play, the total demand for each chemical is determined
by synthesizing the individual markets. This is done by taking into account
the portion of total demand represented by each submarket, the strength
of each market, and any relationships which may exist among end markets.
Finally, where applicable, a comparison is made between expected demand
growth and the growth in the gross national product (GNP). In cases
where the end markets for a chemical are very diversified and representa-
tive of the general economy, the chemical's total demand can be expected
to grow with real GNP. Often, however, the end markets will be in
faster growing markets (such as plastics) or slower growing markets
(such as some metal plating operations) and the total demand growth will
differ from that of GNP.
The individual end markets for these chemicals are useful in determining
demand strength. To fully understand demand, however, one must also
investigate the channels through which this demand flows, and the com-
petition encountered in each market. Demand channels are discussed
next, competition in a separate section.
B.I.2 Demand Channels
Channels of demand refers to the relationships between buyer and seller,
including the extent and type of vertical integration, the type of
contract, and the transportation of the product.
B-4
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Vertical integration (forwards or backwards) is a measure of the degree
to which one producer makes a series of chemicals in a continuous chain.
Backward integration usually represents an attempt to obtain inputs more
reliably and/or at lower prices. For example, aluminum companies have
integrated backwards into aluminum fluoride and hydrogen fluoride pro-
duction. Forward integration is a way of expanding a product line with
guaranteed input chemicals. In either type of vertical integration, the
result is captive production of a chemical. Captive production will
affect an assessment of demand in several ways. Normally a chemical's
production can be economically isolated so that price and profitability
measures can be applied. With captive consumption, this may only be
possible using confidential company data and a company-specific method
for transfer prices.
The type of contract in use is another factor which further defines
demand flows. There are many different types of purchasing arrangements
ranging from no contract at all (i.e., purchases on the merchant market)
to long-term contracts. From the purchaser's point of view, a long-term
contract may be the next best thing to backward integration, offering
sufficient security in price and availability. The other extreme for
consumers is either short-term contracts or purchases on the spot market.
This kind of arrangement may work best where there are many suppliers
and the spot market is well developed. For example, some chlorine con-
sumers make a portion of their needs, run their plants at high capacity
utilization rates, and make spot purchases as necessary for the remainder
of their needs.
A third factor which affects demand is transportation cost. The impor-
tance of these costs vary depending on the price of the chemical and the
difficulty of shipment (e.g., dry vs liquid and inert vs hazardous).
When a chemical has a relatively low unit value and is difficult to ship
(such as chlorine), transportation costs can be significant enough to
B-5
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limit the market of a producer to the immediate region. Hydrogen cyanide
is so poisonous that some firms are afraid to ship it and supply only
captive requirements.
These three factors, which describe the channels through which demand
flows, are considered in each subcategory and used to qualify the demand
estimates where necessary.
B.2 SUPPLY
B.2.1 Production
The index of production for all U.S. manufacturing increased at an
average three percent per year between 1967 and 1977. Chemical industry
production grew at twice that rate, or six percent, for the same period.
However, the inorganic chemicals segment, which includes many slow-growth
chemicals, experienced an average production increase of only two percent
per year.
TABLE B-l
CHEMICAL PRODUCTION
Total Manufacturing
Chemicals and Products
Inorganic Chemical, n.e.c.
Alkalies and Chlorine
Annual Change in Production
1967 - 1977
3%
6
2
2
SOURCE: Chemical and Engineering News, "Facts and Figures," June, 1978.
The production of all chemicals tends to fluctuate with GNP though the
swings in inorganic chemical production are less severe than those of
B-6
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organics. The 10 inorganic chemicals of this study are generally low-
volume chemicals with production of less than 0.5 million tons per year.
By comparison, the largest volume of chemical is sulfuric acid, with
production of 34 million tons in 1977. Table B-2 illustrates several
high volume chemicals. Two of the chemicals studied in this report rank
among the 50 highest volume chemicals. Also illustrated are five chemi-
cals which are related to some of the 10 chemicals of this report.
Acrylonitrile is co-produced with hydrogen cyanide. Ethylene dichloride,
vinyl chloride, and propylene oxide are end markets for chlorine.
Several interesting characteristics are indicated by the data:
• The highest volume chemicals show less variability than others.
They fell less in the 1975 recession, recovered less in 1976,
and have lower overall growth rates.
• Most chemicals had big production drops in the 1975 recession
with full recoveries in 1976. With some of the more volatile
chemicals like vinyl chloride, the changes were very large
(more than 20 percent).
• Chlorine and sodium hydroxide are co-produced and have very
close production volumes. Demand for the two products, how-
ever, is not always equal, causing problems for manufacturers
in balancing production for two products simultaneously.
• Growth rates have slowed for most chemicals in comparing the
latest five years with the latest 10 years.
In addition to chlorine and caustic soda, titanium dioxide is also a
rather high-volume chemical with production of 0.68 million tons in
1977. Titanium dioxide producers are faced with the dual problems of
high variability in demand and a very low growth rate.
B.2.2 Producers
The 10 chemicals of this study are typically produced by different sized
chemical companies. In addition, oil companies have been expanding into
the chemical field for several years and some of these chemicals are
B-7
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produced predominantly by petroleum firms. Non-chemical companies also
are involved in these chemicals. This usually represents backward
integration on their part. For example, Alcoa aluminum company makes
aluminum fluoride and hydrogen fluoride as inputs for aluminum manufac-
ture. The sales of these chemicals usually represent less than five
percent of corporate sales (typically around one percent).
Captive production is another important characteristic of these chemicals,
Some of the chemicals are produced at large complexes, frequently as one
of the preliminary chemicals in a product line. In this case, the
economic strength of a chemical is very much interrelated with that of
the other products.
B.2.3 Process
The process used to manufacture a chemical is of great importance, both
environmentally and economically. As inputs to a process become more
expensive or as pollution control requirements make a process more
costly, manufacturers have an increasing incentive to find cheaper or
"cleaner" processes. These forces have been acting on producers and
many processes have changed. To lower costs, producers direct their
efforts towards the most expensive elements of production. These in-
clude inputs such as energy, ores, and process chemicals.
The rising cost of energy is one of the greatest concerns of the chemical
industry, which uses about 30 percent of U.S. total industrial energy.
Of this "energy," 41 percent is used directly for feedstocks. The
inorganic chemicals use fewer of these energy sources as feedstocks than
other chemicals but are nonetheless very dependent on energy costs.
Chlorine production, for example, uses tremendous amounts of electricity.
Hydrogen cyanide uses natural gas for a feedstock. Hydrogen fluoride
and titanium dioxide production use a great deal of process heat.
B-8
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TABLE B-2
HIGH VOLUME CHEMICALS
1977
Production
Chemical (106 tons)
Sulfuric Acid
(top volume chemical)
Sodium Hydroxide
(co-product with chlorine)
••Chlorine
Ethylene Bichloride
(chlorine end market)
Vinyl Chloride
(chlorine end market)
Propylene oxide
(chlorine end market)
Acrylonitrile
(co-product with HCN)
^Titanium Dioxide
34.3
10.9
10.1
5.2
2.9
.95
0.82
.68
1976
Rank
1
7
8
15
23
41
44
49
Average Annual Change (%)
1976-77
2.7
4
1.9
30.3
2.3
4.0
8.2
-4.8
1972-77
2.0
1.3
1.4
6.1
2.7
4.5
8.1
-0.4
1967-72
1.8
2.6
3.2
10.2
9.1
8.8
9.4
1.4
* Studied in this report.
Source: Chemical and Engineering News, "Facts and Figures," June 1978.
B-9
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The cost of ores is a second factor in the determination of processes.
Titanium dioxide, for example, has two processes (chlorine and sulfate)
and two ores (rutile and ilmenite). The rutile ore is purer (resulting
in less process waste), more expensive, and in short supply. Because of
this, efforts have been made to upgrate ores and to make the chloride
process adaptable to lower-quality ores. Copper sulfate can be made
from ore (as a byproduct of copper production) or from scrap. In all of
these cases, the relative prices of the inputs will shape process deci-
sions.
A third factor affecting process is the cost _af process chemicals. Many
chemical prices have recently risen by 15 or more percent per year. The
price of sulfuric acid, a widely used chemical, increased 18 percent per
year between 1972 and 1978.
Process changes in general are directed towards a higher quality product
and/or lower production costs within constraints. These constraints
include pollution control, .capital rationing, and the market strength of
the chemical. Pollution control may make some processes prohibitively
expensive. Capital rationing and market strength are related in that
insufficient demand may force a shutdown decision rather than a shift in
process (even though a process may be more efficient, capital costs
could be prohibitive). Producers will invest first in those areas where
long-run profits look best (i.e., strong demand and reasonable costs).
B.3 COMPETITION
Having determined the end uses for a chemical, the demand within each
end use, the channels through which these demands will be met, and the
suppliers, we then turn to the competition in each market. This in-
cludes an analysis of three areas:
1. competitors selling the same product
2. substitution of other products
3. the market power of the sellers versus the buyers
B-10
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The most obvious competition takes place within a subcategory among all
of the producers of the product. The basic objective is to meet the
demands of the buyer (e.g., quality, service, quantity, timing, location)
at the lowest price. This seemingly simple process is complicated in
the chemical industry by several factors:
• Captive production; Some of these chemicals are produced
predominantly for use within a company as with chlorine. This
can make the remaining non-captive production more competitive
as purchasers have more of a buffer and actually compete with
the sellers.
• Foreign competition; Foreign competition can effectively put
a ceiling on the domestic price of a chemical. This is only
true for a few of these 10 chemicals which have high enough
prices to justify international shipping. The effect is
reduced within the U.S. as the distance increases from major
coastal ports.
• Economics of each process; Within many subcategories there
are significant differences in the cost of production due to
types of process, age, and size of the plant, capacity utili-
zation, availability of inputs, and many other factors.
• Distance to markets; The lower value chemicals of this study
are quite limited in their economical shipping distance.
Thus, a producer can compete by being closer to his markets if
shipping costs are significant.
• Product differentiation; Although these chemicals are gener-
ally "commodities," there are differences in the form (e.g.,
liquid versus dry), shipment size, and sometimes the additives
in these chemicals. Titanium dioxide, for example, has two
basic forms, several types of finishes, and can be shipped in
a dry or slurry form.
• Discounting; Some companies post list prices and sell their
chemicals at various discounts. Even within the industry,
competitors may not know each other's real prices.
Competition through substitution by other products can occur at any
point along the path of a chemical between production and final con-
sumption. When chemicals are sold directly to end markets (as with
B-ll
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paints, detergents, and fertilizers) there is one possibility for sub-
stitution. Titanium dioxide, which is used directly in paints, faces
potential substitution from paint extenders and surfaces which do not use
paint. When chemicals trace complex paths to final consumption, there
are usually several opportunities for substitutions. For example,
chlorine is used to make polyvinyl chloride which is used in pipes.
Substitutes along this line of products include metal pipes and plastic
pipes not using PVC.
The relative market power of sellers and buyers can have a major impact
on the competitive stature of a chemical market. Generally, there is
some balance of power between sellers and buyers but the extreme cases
are useful for illustrative purposes. One extreme is that of a seller's
market in which the demand for the product is strong and the buyers are
price takers. Typically this type of market will have one or only a few
sellers and many buyers. The other extreme is a buyers market in which
many sellers must compete actively for a limited market.
The chemical industry and its end markets are generally quite competi-
tive with few extremes of sellers or buyers markets. The 10 inorganic
chemicals of this study are similarly competitive. The aluminum fluo-
ride and hydrogen fluoride markets are buyers markets in that the aluminum
companies captively supply most of their needs and purchase the remainder
from chemical firms. Generally, however, the market power of buyers and
sellers in these chemicals is determined by the forces of the marketplace.
B.4 ECONOMIC OUTLOOK
Any characterization of an industry is necessarily based on historical
data. The impact of pollution control regulations, however, may occur
several years hence. Because of this potential incongruity, this cate-
gorization includes an analysis of the major forces shaping the future
of the chemical. This analysis is divided into three parts: 1) revenue;
B-12
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2) manufacturing costs; and 3) profit margins. The implications of this
flow is that revenues must increase at least as fast as manufacturing costs
in order to maintain profit margins. Revenues are divided into quantity
and price. The quantity outlook discusses the factors affecting demand
volume and estimates future growth. The price section discusses the likeli-
hood that demand will be adequate to 'allow price increases. The manufac-
turing cost section separates the major cost components and estimates a
likely rate of increase in total manufacturing costs. Finally, the profit
margin section estimates the likely outcome resulting from revenue and cost
increases.
B.5 CHARACTERIZATION SUMMARY
The predominant features in the chemical industry in 1977 and 1978 are
overcapacity and rising costs. The overcapacity results from the 1973-76
period in which capital spending increased 150 percent (see Table B-3).
The spending has slowed but capacity has still been growing.
TABLE B-3
CAPITAL SPENDING BY 20 MAJOR CHEMICAL FIRMS
millions of % Change from Year
1971 2,516 5
1972 2,416 4
1973 3,031 25
1974 4,873 61
1975 5,661 16
1976 6,125 8
1977 6,144* 0.3
* Planned capital spending in current dollars for 20 firms.
SOURCE: Chemical and Engineering News, "Facts and Figures," June 6,
1977.
B-13
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In general, markets have not expanded as quickly as capacity. In 1977,
producers added 10 percent to U.S. capacity and will add another eight
percent in 1973. However, capacity utilization is less than 30 percent
now and markets have been expanding at only three percent.
In addition to low capacity utilization, manufacturing costs have risen
precipitously. Raw material costs, which rose a total of 15 percent
during 1976 and 1977, are expected to rise seven percent in 1973. Wage
rates are expected to rise by eight percent and the cost of fuels and
electricity by 12 percent.
The result of the overcapacity and rising costs will be tougher compe-
tition. Because of low revenues, producers will want to raise sales
through price and/or volume increases. Price increases are less likely
to be accepted in times of overcapacity because all producers are in-
terested in capturing greater market share to increase volume. The
conditions in the 10 inorganic chemical subcategories vary, but the
conditions of overcapacity and cost increases are being felt in most
subcategories.
3-14
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C. METHODOLOGY USED IN ECONOMIC IMPACT ANALYSIS
1. INTRODUCTION
The purpose of this study is to determine the immediate economic effects
of effluent control costs on ten chemical subcategories. In addition,
the impacts of combined effluent and hazardous waste control costs
(required for compliance with the Resource Conservation and Recovery
Act's Interim Status Standards, i.e. RCRA-ISS) are determined for the
subcategories of the inorganic chemicals industry that will incur both
sets of compliance costs. The approach emphasizes the microeconomic
impacts on each subcategory. The secondary, economy-wide impacts are
given less consideration.
2. AREAS OF STUDY
The analyses of the economic impact of potential effluent guidelines on
the subcategories address nine general issues. These issues were chosen
by the EPA as indicative of the effects which regulations might have in
a wide variety of situations. In dealing with the chemical industry,
some will be more important than others. The nine areas of study are:
1. Price
2. Profitability
3. Growth
4. Capital
5. Number of plants
6. Production
7. Changes in employment
8. Community effects
9. Other
Although each of these issues is individually important, the interrelation-
ships and the combined effects in all of these areas indicate the total
C-l
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impacts of the effluent guidelines. In particular, the price and profit-
ability impacts largely determine the impacts in the other areas.
A number of questions can be asked in each impact area:
1. Price: What portion of the product price will go towards pollution
control? Will producers be able to pass costs on completely or
will margins be reduced?
2. Profitability: What will happen to total revenues, total costs and
profits? What secondary effects will a profitability change have?
3. Growth: Will capacity growth rates change? What will happen to
rates of modernization? Will there be plant closures? Will pre-
treatment regulations stimulate direct discharging? Will present
customers convert to substitutes or reduce demand?
4. Capital raising ability: Will pollution control expenditures
affect a company's capital raising capabilities?
5. Number of plants: Will regulations reduce the number of plants in
a subcategory?
6. Production: Will there be curtailments? Will product lines be
affected? What will be the long run effects?
7. Employment: Will there be employment reductions?
8. Communities: What will be the location of any cutbacks or curtail-
ments? Will dislocated employees be absorbed by the local workforce?
What secondary effects might occur?
9. Other: What other effects might there be? e.g., Balance of Payments,
foreign investment in U.S. companies.
In this report, price and profitability impacts form the core of the
analysis. All other impacts are derived from these two areas.
3. IMPACT METHODOLOGY
3.1 General Approach
The economic impact assessment is based on qualitative and quantitative
analyses of each of the subcategories in the inorganic chemicals industry.
C-2
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The qualitative side of the assessment consists of a detailed economic
characterization of each subcategory. The characterization is intended
to develop a detailed picture of industry trends in such areas as sales,
profitability, competition, and product price. This characterization is
used to depict a subcategory's current economic condition and its prospects
for the future. This provides the essential background for estimating
the economic impact of pollution control costs.
The quantitative side of the impact assessment consists of a "model
plant" analysis. An economic or engineering model is a simplified
representation of reality. Since there are too many plants in the
inorganic chemicals industry to study the economic impact of pollution
control costs individually on each one, models were used to represent
the real plants in the industry. For example, the chrome pigments
subcategory consists of 12 real plants which are represented in this
study by four model plants. One model is designed to be typical of the
five small plants in the subcategory, another of the three medium sized
plants, and so on through the large and extra-large plants.
These models in effect act as surrogates in the analysis for the real
plants they represent. The models are used in two respects:
• As engineering models, to estimate the cost of compliance with
effluent regulations and, where applicable, RCRA-ISS requirements
• As financial models used to estimate how compliance with
effluent control costs and, where applicable, RCRA-ISS costs
will affect the product selling price and profitability of the
real plants in the industry.
In the final step of the impact assessment the quantitative and qualitative
analyses are brought together. Essentially, the industry characterization
provides the background needed to evaluate the significance of the price
and profitability changes. An important contribution of the characteri-
zation is in estimating the price elasticity of demand an industry
subcategory faces (i.e., how responsive demand is to changes in
-------
price). If demand is inelastic (unresponsive), then even relatively
large price increase estimates for a model plant would be considered
relatively unimportant. However, the same level of model plant price
increases combined with elastic demand — that is, demand which would
fall off sharply with an increase in price — would indicate potentially
severe financial problems for the real plants represented by a model.
The following discussion will describe the elements of the methodology
in detail. The discussion is divided into the following sections:
• Costs of Pollution Control
• Model Plant Analysis
• Determination of Industry Impacts
The first section describes the estimates developed by a technical
contractor for effluent control costs and, where applicable, the costs
of compliance with RCRA-ISS regulations. The second section describes
the model plant analysis including 1) calculation of the maximum price
rise and profitability decline that could result from pollution control
costs; 2) a subjective estimate of price elasticity of demand based on
the subcategory characterization; and 3) a screening analysis, based on
these measures, designed to pinpoint model plants which may suffer
particularly high impacts and require futher study. In the final section,
the assessment of probable industry impacts (based on the model plant
analysis and market and industry information developed in the characteri-
zation section) is discussed.
These sections are discussed in more detail below. Much of the detailed
discussion of the financial assumptions and tools has been provided in
appendices in order to present the methodology more clearly and concisely.
C-4
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3.2 Costs of Pollution Control
3.2.1 Model Plant Parameters
Since, as noted above, it was impractical to examine every plant in an
industry, the pollution control costs were estimated for "model plants"
which represent the real plants in each subcategory. Some of the key
variables used to specify model plants include process type, production
capacity, flow rates, and pollutant loads. The appropriate number of
model plants for each subcategory depends on the variability in these
characteristics and the number of plants in the subcategory.
The model plants used in the analysis were specified by the technical
contractor (Jacobs Engineering Inc.). Model plants for each of the
subcategories were designed on the basis of annual production levels,
with the number of sizes and production levels selected to correspond to
the actual range of plants in each subcategory. Model plant financial
parameters were developed by EEA and an economic subcontractor.
3.2.2 Effluent Control Costs
For each of the model plants, effluent control cost estimates were
developed by the technical contractor. In this report, the cost estimates
represent the costs required for direct dischargers to comply with best
available technology economically achievable (BAT) limitations and for
indirect dischargers to comply with pretreatment standards for existing
sources (PSES).
3.2.3. Hazardous Waste Control Costs
Ten subcategories of the inorganic chemicals industry are included in
this report. However, these ten subcategories actually cover 13
chemical manufacturing processes. For example, the chlorine subcategory
covers two processes — mercury, and diaphragm cell. Likewise, the
titanium dioxide subcategory includes the chloride, chloride-ilmenite,
C-5
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and sulfate processes. Of the 13 processes covered in the 10 sub-
categories, only three processes will incur RCRA-ISS costs:
• Chlorine - Mercury cell
• Chlorine - Diaphragm Cell (Graphite Anode)
• Chrome Pigments
Other EPA analyses have also included titanium dioxide and sodium dichro-
mate as segments which will incur RCRA costs. However, these segments
are excluded in this analysis because trivalent chromium, the dominant
metal contaminant in both subcategories, is not a hazardous waste ac-
cording to the most recent established criteria for toxicity. Hydro-
fluoric acid and aluminum fluoride production will not incur RCRA-
ISS costs because the concentrations of toxic metals in these processes'
solid waste are low due to the large amounts of calcium fluoride and
calcium sulfate generated by the effluent treatment system. For all
other subcategories, the dominant metal contaminants in the solid waste
are not hazardous wastes according to EPA's most recent toxicity criteria.
RCRA-ISS costs were estimated for plants in the affected segments by
Jacobs Engineering Inc. on the basis of EPA's Office of Analysis and
Evaluation "Draft Final Guidance Document For RCRA-ISS Costs." The
costs are based on regulations promulgated through May 1980 for Sections
3001, 3002, 3003, and 3004 of the Resource Conservation and Recovery
Act. Note that the costs developed for this analysis overstate the RCRA-
ISS costs associated with solid wastes generated by effluent treatment
because the estimates also include baseline RCRA costs (i.e., those that
would be incurred even in the absence of effluent limitations).
Either model plant cost estimates or plant-specific cost estimates were
developed for each subcategory. For example, in a subcategory such as
the chlorine mercury cell segment, which has 25 plants incurring costs,
cost estimates were developed for, three model plants to represent the
C-6
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entire subcategory. However, in the chlorine-diaphragm cell segment,
only six plants will incur costs, thus permitting the development of
plant-specific costs.
These cost estimates may not match the costs used in other EPA analyses
for two reasons:
• RCRA-ISS regulations have been revised repeatedly. The cost
estimates used in this analysis reflect RCRA-ISS requirements
promulgated through May 1980. Cost estimates in other analyses
may reflect RCRA-ISS regulations promulgated through earlier
or later dates.
• Previous analyses have developed "worst case" cost estimates
reflecting the costs of on-site waste disposal for the affected
plants. Further analysis has shown EPA that some of these
plants will be more likely to dispose of their wastes off-site
at lower costs.
In accordance with the Guidance Document, Jacobs Engineering Inc. estimated
RCRA-ISS costs on the basis of the activities required for compliance
with the regulations. The compliance activities were divided into two
categories -- technical and nontechnical. As a general rule, activities
in the technical category are defined as those which directly affect the
design and operation of a waste disposal facility. Under this nomenclature.
for example, a runoff control system is a technical cost, while sampling
or recordkeeping is not. For RCRA-ISS, the technical activities are:*
• Runoff collection and treatment or disposal for land treatment
and landfills. These systems must be in place within 12
months after promulgation.
• Closure for landfills. It was assumed that wastes would be
disposed in one cell for a one year period, after which the
cell would be closed. Therefore, closure is an annual event.
• The management of wastes at off-site waste disposal facilities.
(In this case, management fees are incurred annually.)
The following summary of applicable RCRA-ISS costs is taken from the
"Draft Final Guidance for RCRA-ISS Costs," Office of Analysis and
Evaluation, EPA, December 1980.
c-:
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The activities in the nontechnical category were defined as those which
had an indirect impact on facilities design and operation. Activities
in this category included:
• Administration -- These activities are complementary to record-
keeping and reporting and are often implicitly rather than
explicitly specified in RCRA-ISS. Some activities, such as
maintaining an operating log, are evident; while others, such
as general administration, are not.
• Recordkeeping and Reporting -- These activities are explicitly
required and involve maintaining a manifest system and pre-
paring reports.
• Monitoring and Testing — Activities include installing and
maintaining a system of test wells, sampling and analysis of
groundwater, and maintaining records and reports.
• Training — Employees must be instructed and provided on-the-
job training.
• Contingency Planning — Activities include provision for
security (usually a fence); emergency preparedness and preven-
tion; and Contingency Plan and Emergency Procedures. The most
significant activities include a provision for fencing, the
preparation of a contingency plan, and the provision of safety
equipment.
• Financial Requirements -- All facilities must demonstrate
ability to provide for site closure. Disposal facilities
where wastes remain after closure must demonstrate the ability
to provide long term care. While several mechanisms will be
available through which facilities can meet the financial
requirements, this analysis assumes that plants establish a
trust fund for closure and a trust fund for post-closure moni-
toring and maintenance.
The RCRA-ISS control costs were divided into four categories, of
which three are:
• Annual Operating — These are incurred each year the plant is
in operation.
• Capital -- One-time capital expenses, such as for fences.
• Initial — Other one-time expenses, such as for setting up the
manifest system for tracking wastes. These are treated in the
model as capitalized expenses.
C-8
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The fourth category, which is payments into the closure fund, requires
special attention. Each plant must establish a fund to pay for the
costs of closing its disposal facilities and post-closure maintenance.
In this analysis, it is assumed that the trust fund will be built up
over twenty years in accordance with the RCRA-ISS specifications for finan-
cial requirements.* Note that this is a conservative assumption; other
less costly mechanisms (e.g., securing a surety bond or letter of credit)
would also be available.
It is important to note that the closure fund payments made via the trust
fund mechanism are not a tax-deductible expense. This greatly magnifies
their impact on the plant. In fact, the cost impact is almost doubled.**
3.2.4 Estimation of Investment and Annualized Control Costs for the Subcategory
Pollution control investment costs for each subcategory are estimated on
the basis of model plant pollution control investment costs (developed
by the technical contractor) and actual plant sizes. In this analysis,
the investment cost for each actual plant is taken as the pollution
control investment cost for the closest corresponding model plant.
* Federal Register, Volume 46, No. 7, January 12, 1981, Rules and Regulations
page 2821.
**
Consider the following simplified calculation for net income after taxes:
NIAT = (R - C) (1 - t)
where: NIAT = Net Income After Taxes
R = Revenue
C = Cost
t = Tax Rate
In this study, 1-t equals 0.53 (see Appendix A). By multiplying through,
the equation can be rewritten as:
NIAT = 0.53R - 0.53C
But if the cost is not tax-deductible, as in the case of the closure
fund, the equation becomes:
NIAT = 0.53R - C
Thus, the effect of the cost is almost doubled. Note that in cal-
culating annualized RCRA-ISS costs, the annual closure fund payment
is divided by (1-t), or 0.53, in order to reflect this effect.
C-9
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Total annualized control costs for each subcategory are estimated on the
basis of model plant control costs, developed by the technical contractor,
and current industry production levels. Model plant annualized control
costs are calculated on a per ton basis and include the following:
• Annual operating costs
• Annualized capital costs obtained by multiplying the pollution
control investment by a capital recovery factor (see Appendix A)
• Where applicable, the non-tax deductible closure fund payment
required for RCRA-ISS compliance.
Plant specific capacity information and the technical contractor's
estimate of capacity utilization were used to determine the tons of
actual production corresponding to each model plant size for each sub-
category. Total estimated control costs for each subcategory were
obtained by multiplying the per-ton control costs for each model size by
the corresponding production in each size category.
3.3 Model Plant Analysis
This section describes the model plant analysis used to predict potential
industry impacts. There are four indicators used to evaluate the impacts
of pollution control costs for each subcategory.
• Price Rise Calculation
• Maximum Potential Profitability Decline
• Price Elasticity of Demand
• Capital Ratio
These indicators are discussed below.
3.3.1 Price Rise Calculation
The price rise analysis assumes that the chemical manufacturer can
immediately pass through all costs of pollution control in higher prices.
-------
It is assumed that the price can be raised by the full amount necessary
without resulting in any decline in physical sales volume, i.e. that
demand is completely inelastic. To fully recover all pollution control
costs, the price increase must include both the annual operating costs
plus an annualized portion of the initial capital investment. The
annual operating costs are simply divided by the number of tons produced
to obtain cost per ton. The capital costs are annualized using a capital
recovery factor. In this analysis, the recovery factor used is 0.218
(i.e., 21.8 percent of the capital costs must be recovered each year).
This implies that all of the capital costs will be recovered in about
five years. The annualized capital costs are added to the annual
operating costs to obtain total annual pollution control costs. These
total costs are divided by sales to derive a product price increase.
Appendix A describes the capital recovery factor and the price pass-
through analysis.
3.3.2 Profitability Decline
The profitability analysis assumes that no price pass-through is possible,
i.e. demand is infinitely elastic. Therefore, the manufacturer must
absorb all pollution control costs in the form of reduced margins or
increased losses. The first step is to determine the baseline profita-
bility (that is, the profitability of the plant before pollution control
costs are incurred) for each model plant. Then, the after control
profitability is calculated and compared to the baseline profitability.
The magnitude of the profitability decline is used in conjunction with
the other impact indicators to evaluate the potential impacts. Two
measures of profitability are calculated using a discounted cash flow
model: return on investment (ROI) and internal rate of return (IRR).
3.3.2.1 Return on Investment
The return on investment (ROI) is defined as the yearly cash income
divided by the total investment. This measure is similar to the ROI
C-ll
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figure often quoted by the industry. The difference is that the industry
commonly uses earnings after taxes (net earnings) divided by investment,
whereas this ROI is cash earnings (net earnings plus depreciation)
divided by investment. Since the difference in ROI before and after the
pollution control expenditure is what is to be examined, the cash ROI
serves as well as the traditional ROI.
The ROI change from year to year depends on the cash position of the
firm (which will vary with depreciation schedules and changes in oper-
ating costs). The analysis relied on an examination of the decline in
ROI during the fourth period. This year was chosen for three reasons:
Since the pollution control costs are introduced in the second
period, pollution control operating costs are included in the
cash position that year.
Both initial capital investment in plant and equipment and
pollution control investment costs are still subject to depre-
ciation expense in that period. (Both plant and equipment are
straight line depreciated for 10 years and control equipment
for five years.)
Since the calculations are made in nominal dollars, the assumed
inflation rate of 6% annually has not yet distorted the costs
and revenues upon which the ROI calculation is based.
The reasons cited above would have justified the third, fifth, sixth,
and seventh period as well. However, the cash flows in those periods
were not significantly different from that in the fourth (inflation
accounts for the only differences.)
3.3.2.2 Internal Rate of Return
While the return on investment is easily calculated and used, it does
not capture the effects of the investment life or the cash flow timing.
These factors are taken into account in the discounted cash flow model
C-12
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which yields the internal rate of return as the profitability measure.
The internal rate of return is calculated for each model plant as follows:
• The cash flow position is calculated for each of 27 years in
the assumed life of the plant. (Simply stated, cash flow per
period is defined as after tax profits plus depreciation, less
any capital costs incurred during the period.)
• Using the opportunity cost of capital (discount rate) each
future cash flow to the present period is discounted. This
step allows for the fact that $1 earned in the future is worth
less than a dollar earned today.
• The discounted cash flows are added to yield the model plant's
net present value (NPV).
• The discount factor is adjusted to yield a net present value
of 0. This discount factor is the internal rate of return.""
For some of the model plants, the baseline internal rate of return or
the return after control costs was negative. This is the result when
the cash flows are such that there is no discount factor which can raise
the net present value to 0 (e.g., when the cash flows in all periods are
0). Since the IRR is therefore indeterminate, nothing can be deduced
from differences in IRR. In these cases, therefore, changes in the
other profitability measure, return on investment, were used.
3.3.2.3 Sources of Uncertainty in the Profitability Analysis
Profitability is dependent upon price, cost, and capital investment.
The calculation of baseline profitability is made using the best estimate
of these financial parameters presented in the characterization section.
However, these point estimates have a wide variance, especially the
estimate of price. List price and average unit value may differ by as
* Appendix B discusses the assumptions and calculations used to derive
the ROI and IRR. For a more thorough discussion of cash flow analysis,
theory and uses, see Managerial Finance (Weston and Brigham; Dryden
Press: Hinsdale, Illinois).
C-13
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much as 30-40 percent from actual selling price. Therefore, if the
calculated profitability is inconsistent with profitability estimates
developed through conversations with industry sources, the point estimate
of price is adjusted (within the range suggested by the price data).
This is an important step in the analysis because baseline profitability
is the critical starting point for examining the profitability decline.
The component variables driving the profitability estimate need only be
within a reasonable range surrounding the best estimate in order to
gauge the profitability decline resulting from pollution control costs.
This profitability analysis is not intended to specify precisely the
actual returns accruing to each subcategory. This would only be possi-
ble using detailed confidential industry data. For this analysis,
manufacturing costs estimated by a subcontractor and EEA were used to
calculate profitability. This is consistent with the intent of the
analysis — that is, to determine the change in profitability that
occurs when pollution control costs are included in the cash flow stream.
3.3.3 Price Elasticity of Demand
Generally, neither of the extreme assumptions of completely inelastic or
elastic demand will be appropriate. A firm will usually be able to pass
through a portion of the increased production costs from pollution
control. An estimate of the potential for cost pass-through is a key
consideration in the impact analysis. Pass-through is dependent upon
the magnitude of the price rise and the price elasticity of demand.
Price elasticity of demand (rigorously defined as the percentage change
in the quantity purchased given a one percent change in product price)
is a function of:
• The number, closeness, and relative cost of available sub-
stitutes
• "Importance" to the purchaser's budget
• The relevant time period (short vs. long run).
C-14
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Because there are many problems with historical data, econometric es
of price elasticity of demand were judged to be of limited value. Thus,
the analysis relies on subjective estimates of price elasticity, based
on market information developed in the characterization.
3.3.4 Capital Analysis
The impacts of pollution control can go beyond increased annual costs
and the annualized portion of capital costs. Pollution control facili-
ties themselves can pose a significant one time expense, especially for
smaller manufacturers. To determine the relative size of pollution
control capital costs, they are compared with the fixed investment in
plant and equipment. This comparison is expressed as pollution control
capital expenditures as a percentage of dollar fixed investment in
place. Because the capital intensity of the ten subcategories varies,
this measure will give a useful indication of the relative burden of a
new capital expenditure.
Because capital construction costs have experienced large increases in
the 1970's, the fixed investment will vary widely in plants of various
ages. The difference in age will also affect the accumulated deprecia-
tion. (Depreciation in this analysis is calculated as 10 year straight
line for plants and equipment and as five year straight line for pollu-
tion control facilities.)
The cost of land represents a significant portion of initial costs for
many of the proposed technologies. In an accounting sense, its value is
not depreciable. The land may have equal or greater value in the dis-
tant future but physical depletion of the land, as well as the heavily
discounted present value of any residual sales value may reduce its
value. In any case, the initial expense of the land must be recovered
so it is considered part of the capital constraint.
C-15
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3.3.5 Model Plant Closure Analysis
An important part of the economic impact analysis of pollution control
costs on the industry is to identify potentially "high impact" plants
and closure probabilities. The EPA considers the price increase, prof-
itability decline, and price elasticity of demand useful in providing an
initial indication of high shutdown probability.
For each subcategory and for each of the pollution control options, a
table is presented that summarizes the price elasticity of demand,
necessary product price rise, and maximum potential profitability de-
cline. Under the EPA's closure criteria, a model plant is considered a
possible closure candidate if the demand is elastic, the price increase
is greater than one percent, and the resulting profitability decline (in
the case of no pass-through) is greater than one percentage point or
exceeds ten percent of the baseline (before control) profitability.
Price increases of one percent or less are assumed to have little effect
on consumers or producers since a product price may fluctuate by at
least one percent due to granting of discounts to volume purchases and
also due to short-term supply and demand surges and declines. A profit-
ability decline of less than or equal to one percentage point is assumed
to have an insignificant impact on a plant's decision to curtail produc-
tion or shut down as long as the absolute decline does not exceed ten
percent of the plant's baseline profitability. Determining both the
absolute percentage point decline and the percentage decline relative to
baseline profitability facilitates the identification of plants which
may close as a result of the potential profitability declines. In this
way, model plants that are potential closure candidates are screened for
further detailed analysis. The "Industry Impacts" section discusses the
likelihood of actual plant closures as well as secondary impacts on
unemployment, the community, etc.
C-16
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3.4 Determination of Industry Impacts
This section describes the determination of industry impacts based on
the model plant results described above. The probable industry price
rise, profitability decline, and resulting impacts are determined for
all manufacturers in each subcategory.
3.4.1 Price and Profitability Impacts
The model plant analysis suggests the maximum plant price rise and
profitability decline. The model plant calculations must be evaluated
in light of market information (developed in the characterization section)
to estimate 1) the extent to which the price is likely to increase, and
2) the actual industry profitability decline that will result. If a
significant price increase is needed to maintain profitability, an
evaluation of the probability of achieving that increase is important.
Pass-through is dependent upon a host of factors including industry
competitiveness, available substitutes and product demand, with the
relationships among these factors made more complex by the action of
market variables over time.
Profitability impacts are examined wherever complete pass-through is not
possible. The portion of pollution control costs not recovered by price
increases must be absorbed by producers in the form of reduced margins
or increased losses. The likelihood of price pass-through and resultant
impact on plant profitability form the basis for projections of other
impacts in each subcategory.
3.4.2 Plant-Specific Impacts
Once the closure criteria are applied to the model plants, the probability
of closure for the corresponding actual plants is examined in detail based
on plant-specific factors and actual market conditions. The detailed
analysis evaluates the extent to which profitability will decline if
017
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immediate and complete price pass-through is not possible. Thus, the
model plant analysis serves to identify potentially high impact plants
(based on EPA's closure criteria); the plant closure projections are
made only after detailed evaluation of actual plant and market conditions.
3.4.3 Other Impacts
The nine impact areas studied in this report are highly interrelated.
As previously indicated, the price and profitability effects are the
keystone of the analysis. Price (and pricing history) is a measure
which summarizes a wide variety of economic variables. It reflects
supply conditions such as manufacturing costs, shipping costs, variation
in the costs of manufacture, and the number of producers. Price re-
flects demand conditions as it measures the value of a chemical as an
input to other processes. It also reflects competitive factors such as
the price and availability of substitutes, foreign competition, capacity
utilization, growth rates, and the number of producers.
Profitability levels in an industry directly affect the number of pro-
ducers in an industry. As profitability declines, plants may be forced
to shut down until industry capacity is more in line with demand. Thus,
the profitability decline analysis can be used to help determine the
number, location, and type of plants in a subcategory that may close due
to the regulation; the course of future growth in the subcategory, and
the role of foreign competition. This, in turn, can provide indications
of secondary impacts on the community, employment, and the balance of
payments.
C-18
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D. SUBCATEGORY .ANALYSIS
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1. ALUMINUM FLUORIDE
1.1 CHARACTERIZATION
(NOTE: As discussed below in Section 1.2, this industry subcategory in-
curs no compliance costs. The following characterization data is pre-
sented for informational purposes only.)
Aluminum fluoride is a small but essential input in primary aluminum
production. Together with cryolite it forms a molten electrolyte used
to reduce metallic aluminum from alumina. In the reduction process,
alumina (aluminum oxide) is dissolved in this electrolytic bath, and an
electrical current is passed through it. At the carbon anode, oxygen
from the alumina joins with carbon forming carbon dioxide and freeing
aluminum metal. Aluminum fluoride is also used to a minor extent as a
metallurgical and ceramic flux for welding and glazing, and in secondary
aluminum production for the removal of magnesium from molten scrap.
Over 90 percent of the aluminum fluoride (A1F_) produced is consumed by
one end use: the production of primary aluminum. Given this market
structure, the profitability, growth, and current production technology
in the aluminum industry largely determine demand for A1F . Accordingly,
this characterization analyzes those facets of the aluminum industry
which affect A1F_.
1.1.1 Demand
Since aluminum fluoride's major industrial function is primary aluminum
production, demand for A1F_ is determined by conditions in the aluminum
end market.
1-1
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Demand for aluminum has risen in almost all of its end use markets since
the setback suffered by the industry in 1975. In 1978 production was
9.6 billion pounds, and 1979 output is expected to exceed the record
1974 level of 9.8 billion pounds. Figure 1-1 illustrates aluminum
fluoride's position in the aluminum production stream relative to its
raw material inputs and ultimate end markets.
In order to depict the total demand for aluminum (and thus A1F-), the
conditions in the individual end markets are summarized below.
1.1.1.1 End Markets
Transportation -- The transportation industries have led the resurgence
in aluminum demand. In 1976, deliveries of aluminum to the transporta-
tion markets rose 44 percent and accounted for 19.3 percent of industry
shipments. This increase reflects aluminum's increasing penetration of
the automobile market. In an effort to improve gas mileage by lowering
weight, automobile makers have incorporated an average of 114 pounds of
lightweight aluminum in their 1978 models. This trend is expected to
continue with estimates of aluminum usage per vehicle ranging from 150
to 200 pounds by 1980 and from 225 to 425 pounds by 1985.
Airline deregulation and the need to replace aging jet fleets have also
increased aluminum consumption in the transportation sector. With
passenger traffic and profits sharply higher, airlines are ordering new
equipment at a record pace. Aluminum shipments to aircraft manufac-
turers have therefore increased substantially.
Building And Construction -- Building and construction constitute alum-
inum's largest end market, accounting for 23.1 percent of total 1977
shipments. Aluminum has penetrated the markets of both steel and wood
in residential and industrial siding, doors, and windows. Due to their
design these products can offer good insulating properties. Together
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with foil backed fiberglass and foam insulation they should help
strengthen aluminum's position in the building and construction market,
as consumers attempt to conserve energy through improved home construc-
tion and insulation.
Other Markets — Aluminum continues to penetrate the containers and
packaging market, despite recent price increases. Aluminum offers the
advantages of light weight, corrosion resistance, and relative ease of
recycling. Moreover, steel and plastic, aluminum's primary competitors
in this sector, have also posted recent price increases. Containers and
packaging accounted for 20.8 percent of aluminum's shipments in 1977.
Shipments to the electrical market (10 percent of the 1977 total) are
expected to remain strong. These shipments consist primarily of alum-
inum cable and towers. Shipments to the machinery and equipment sector,
as well as to the consumer durables industries, are tied to general
business conditions. Recessionary pressures may cause a short term
decline in capital investment and consumer spending in these areas, but,
in the long run, these markets should grow at approximately the rate of
GNP growth. These two markets accounted for a combined total of 14.8
percent of 1977 aluminum shipments.
1.1.1.2 Demand Summary
In general, predictions for growth of demand in the aluminum industry
range from four to seven percent annually through 1982. However, based
upon known expansion plans in 1978, aluminum capacity will grow less
than two percent annually through 1982. The aluminum industry is con-
sciously restraining major capacity expansions in an attempt to drive up
price and return on equity, and to avoid the excess capacity which
severely damaged the industry1-s price and profit positions during demand
downturns in 1970 and 1975. The difference between the rates of growth
of demand and capacity should raise capacity utilization in the industry
1-4
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from the 92.5 percent of the first half of 1978 to approximately 95 per-
cent and imports should increase their market share. Capacity utiliza-
tion, however, is not expected to increase further. Production effi-
ciency decreases beyond a capacity utilization of approximately 95
percent, because increased energy input is required per ton of aluminum.
Increased natural gas and electricity prices will force industry to sac-
rifice output for efficiency. Thus, while aluminum demand will remain
strong, growth in aluminum fluoride demand will be restrained by the
industry's hesitance to expand capacity.
The outlook for A1F., is further clouded by technical developments in the
o
areas of waste recovery and reduction technology. EPA standards on
fluoride emissions have caused the industry to remove fluorides from air
and water streams and from spent pot linings. These fluorides are then
recycled and returned to the production process. Because aluminum
fluoride is consumed only through mechanical and vapor losses, and not
in the reduction reaction, these reclamation efforts can substantially
reduce A1F- requirements. Industry sources estimate that up to 50
percent of consumed fluorides can be recovered through waste reclamation
efforts.
The same sources differ regarding the remaining amount of fluoride
recovery to be accomplished. Some sources indicate that as much as 25
percent of planned recovery equipment is not yet on line in the indus-
try. Others maintain that virtually all economical fluoride recovery is
currently being accomplished, and that further reductions will not occur
without a substantial technological breakthrough. If further fluoride
recovery is accomplished, slackening of aluminum fluoride demand may
occur.
In addition to this possibility, there is a longer term threat to alum-
inum fluoride demand. Alcoa has developed a smelting process using a
1-5
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chloride instead of fluoride in reducing alumina. A 15,000 ton/year
pilot facility in Anderson County, Texas has been in operation since
1976, and another 15,000 ton line has been added recently. Alcoa has
plans to further expand this facility. The process is particularly
attractive, as it has demonstrated electricity savings of 30 percent
over the best Hall Cell technology and 44 percent over the industry
average of 16,000 kilowatt hours per ton of aluminum. The process
offers tremendous cost advantages, particularly at a time when the
industry faces soaring electricity costs and difficulty securing the
long-term power contracts essential for capacity expansion. The process
is not yet commercially available due to technical difficulties. How-
ever, when perfected it will be licensed by Alcoa and made available to
the entire industry.
Based upon the age of existing smelting facilities and the current
status of the chloride technology, industry sources expect the Hall-
Heroult process to remain the dominant production technology well into
the 1990's. Until that time aluminum fluoride manufacture should remain
a viable industry.
1.1.2 Supply
1.1.2.1 Production
As Table 1-1 illustrates, aluminum fluoride production has not grown
substantially since 1968, despite a 39 percent increase in the produc-
tion of primary aluminum. (See also Graph 1-1.) This is primarily due
to fluoride recovery by aluminum producers. The large fluctuations in
production during 1974 and 1975 reflect a period of rapid growth followed
by contraction in the aluminum industry. Aluminum fluoride production
should remain stable or decrease slightly over the next few years due to
limited aluminum capacity expansions and continuing fluoride recovery
efforts.
1-6
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GRAPH 1-1
ALUMINUM FLUORIDE PRODUCTION AND PRICE
175.00-
131.25-
VOLUME 87.50-
(000's of tons)
43.75-
0.00-'r-
1968
AVERAGE
UNIT
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(dollars)
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1972
YEAR
I I
1972
1976
I I
1976
YEAR
SOURCE: Department of
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1.1.2.2 Producers
There are three bulk manufacturers of aluminum fluoride operating four
plants. The two leaders, Alcoa and Kaiser, are integrated forward to
aluminum, and account for 76 percent of total industry capacity. The
third bulk producer is Allied Chemical Corporation, which sells its A1F»
on the merchant market. In addition to these producers, the Ozark
Mahoning Corporation produces a highly pure form of A1F_ on a special
order basis for use as an additive in dentifrices. Table 1-2 summarizes
current producers and facilities.
Alcoa and Allied Chemical are completely integrated to the two major
inputs, hydrofluoric acid and alumina hydrate. Kaiser has recently shut
down its hydrofluoric acid facility, but maintains an internal source of
alumina hydrate.
The supply situation for A1F_ changed in late 1978 when the Stauffer
Chemical Corporation closed its Greens Bayou, Texas facility, reducing
domestic supply by approximately 10 percent. The facility, which was
integrated with Stauffer's hydrofluoric acid unit at Greens Bayou was
closed primarily due to the shrinkage of the HF market following EPA's
and FDA's ban on fluorocarbons. Stauffer had previously supplied Union
Carbide with hydrofluoric acid for fluorocarbon production until the
latter closed its plant due to the regulation.
Two of the three leading aluminum producers, Alcoa and Kaiser, are pro-
ducers of aluminum fluoride. The third, Reynolds Aluminum, is essen-
tially integrated to A1F except for the processing step. Reynolds
provides acid grade fluorspar and alumina hydrate to Allied Chemical
Corporation, which has a long-term contract to convert these raw mate-
rials to ALF on a toll basis for use in Reynolds smelting facilities.
All other aluminum manufacturers purchase A1F on the merchant market
from either Alcoa, Kaiser, or Allied.
1-9
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1.1.2.3 Process
Aluminum fluoride is produced by the reaction of hydrated alumina and
hydrofluoric acid. Hydrated alumina is an intermediate obtained in the
processing of bauxite ore to alumina. Hydrofluoric acid is produced by
the reaction of the mineral fluorspar with sulfuric acid. The manufac-
ture of aluminum is governed by the following reaction:
A12°3'3H2° + 6KF "* 2A1F3 * 6H2 + 3°2
The process generates no by-product waste materials. However, some
process wastes are generated by gas scrubbers, leaks, and spills.
Estimated material requirements and costs for A1F production are found
in Table 1-3.
A1F_ can also be produced using fluosilicic acid as a starting material.
Fluosilicic acid is a by-product of phosphoric acid manufacture. Cur-
rently Alcoa operates one plant in Fort Meade, Florida using this process.
It is anticipated, however, that the fluosilicic acid route will continue
to constitute only a minor part of total aluminum fluoride production.
Phosphoric acid manufacturers have a market for fluosilicic acid in
water treatment, and seem unwilling to integrate aluminum fluoride
production into their existing operations.
1.1.3 Competition
There are currently no commercial substitutes for aluminum fluoride in
aluminum manufacturing. Alcoa's chloride process may offer competition
when it becomes commercially available. However, the determining factor
is expected to be potential electricity savings rather than price compe-
tition with aluminum fluoride because on a per unit of product basis
electricity is a much more costly input than either electrolyte.
1-11
-------
TABLE l-3a
ESTIMATED COST OF MANUFACTURING ALUMINUM FLUORIDE*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
25,400 tons/year
17,500 tons/year
(69% capacity utilization)
$9.7 million
VARIABLE COSTS
• Materials
- Fluorspar (97%)
- Sulfuric Acid (98%)
- Alumina trihydrate
• Utilities
- Electricity
- Fuel
Total Variable Costs
Unit/Ton
$/Unit
$/Ton
1.59 tons
1.98 tons
.935 tons
130 kWh
2.04 MMBtu
73.33
39.98
107.75
.03
2.50
116.60
79.20
100.70
3.90
5.10
$305.50
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
19.60
27.60
$ 47.20
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
SOURCE: Contractor and EEA estimates
4.90
55.20
8.30
$ 68.40
$421.10
*See Appendix C
1-12
-------
TABLE l-3b
ESTIMATED COST OF MANUFACTURING ALUMINUM FLUORIDE*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
57,300 tons/year
39,500 tons/year
(69% capacity utilization)
$15.8 million
VARIABLE COSTS
• Materials
- Fluorspar (97%)
- Sulfuric Acid (98%)
- Alumina trihydrate
• Utilities
- Electricity
- Fuel
Total Variable Costs
Unit/Ton
$/Unit
1.59 tons
1.98 tons
.935 tons
130 kWh
2.04 MMBtu
73.33
39.98
107.75
.03
2.50
116.60
79.20
100.70
3.90
5.10
$305.50
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
SOURCE: Contractor and EEA estimates
10.90
19.90
$ 30.80
2.70
39.80
6.00
$ 48.50
$384.80
"See Appendix C
1-13
-------
TABLE l-3c
ESTIMATED COST OF MANUFACTURING ALUMINUM FLUORIDE*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
73,900 tons/year
51,000 tons/year
(69% capacity utilization)
$18.3 million
VARIABLE COSTS
• Materials
- Fluorspar (97%)
- Sulfuric Acid (98%)
- Alumina trihydrate
* Utilities
- Electricity
- Fuel
Total Variable Costs
Unit/Ton
$/Unit
1.59 tons
1.98 tons
.935 tons
130 kWh
2.04 MMBtu
73.33
39.98
107.75
.03
2.50
116.60
79.20
100.70
3.90
5.10
$305.50
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
10.20
18.00
$ 28.20
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
SOURCE: Contractor and EEA estimates
2.50
36.00
5.40
$ 43.90
$377.60
Appendix C
1-14
-------
Aluminum fluoride is an essential but relatively low volume input in
aluminum manufacturing, and therefore primary aluminum producers seek
reliable supplies. Alcoa and Kaiser have achieved reliable supplies
through backward integration, while other producers have established
long-term contracts and firm supplier-customer relationships. According
to industry sources, contractual arrangements range from one and two
year agreements to long-term toll conversion contracts and changes of
suppliers are rare. Thus, there is very little short-term competition
between domestic producers in the A1F market. Imported A1F, also
offers little competition because in recent years ocean shipping rates
have made it noncompetitive, particularly in a market with excess domestic
capacity.
1.1.4 Economic Outlook
An industry's profitability is the difference between total revenues and
total costs. There are factors that influence these independently so it
is useful to present a revenue outlook and cost outlook separately.
1.1.4.1 Revenue
Total revenue is the product of the quantity sold and the average unit
price. Though these two variables are discussed separately below, it
should be recognized that they are interrelated.
1.1.4.1.1 Quantity
The quantity of aluminum fluoride produced and sold domestically should
remain stable or decrease slightly through 1984, then grow at the rate
of expansion of Hall cell reduction facilities into the 1990's. Wide
scale commercialization of Alcoa's chloride reduction process will
eventually eliminate A1F_ use in aluminum processing, but this should
not occur until the mid-1990's. Important factors which will influence
demand for this commodity are the following:
o Strength of the aluminum market
1-15
-------
o Lack of planned capacity expansion among primary aluminum producers
o Potential for further fluoride recovery by the aluminum industry
o Alcoa's development of energy conserving chloride reduction
technology, which could ultimately eliminate need for A1F. in
aluminum processing.
Thus, while there are some conflicting forces and trends, the aluminum
fluoride industry appears to have matured and little future growth is
expected.
1.1.4.1.2 Price
A great deal of the aluminum fluoride produced by both Alcoa and Kaiser
is used captively. In this captive segment of the market the price of
A1F., has little meaning. The profitability of the entire aluminum
production stream is the relevant criterion for making production deci-
sions, rather than the merchant market price.
Aluminum fluoride is an essential ingredient in primary aluminum pro-
duction although a relatively insignificant input in terms of cost. It
represents less than two percent of the current aluminum ingot price.
With aluminum prices rising and demand strong, necessary price increases
in ALF could be sustained in the merchant market. This assessment is
based on the following factors:
o Demand for A1F is inelastic. Consumption cannot be curtailed
without cutting primary aluminum production. This will not occur as
long as it remains profitable.
o Three firms control the entire industry.
o There is little competition among producers, with the merchant
market characterized by long-term, stable supplier-consumer
relationships.
There seems to be, however, a chance of increasing competition in the
future. There is currently excess capacity in the industry, with 1977
1-16
-------
capacity exceeding consumption by 16 percent, or 27.9 thousand tons.
The situation has improved somewhat with the closure of Stauffer's 16.5
thousand ton per year facility in Texas, but extensive fluoride recovery
could again depress capacity utilization in the industry.
The downward pressure exerted by excess capacity on the prices of A1F
could be intensified by the current market structure. Alcoa and Kaiser,
the two producers who are integrated downstream to aluminum, produce
A1F primarily to meet their own needs. Both, however, have excess
capacity which they attempt to utilize by selling aluminum fluoride on a
merchant basis.
If the excess production is sold at a price above the cost of the vari-
able inputs, then utilizing this productive capacity lowers the unit
cost of the aluminum fluoride they consume captively, as fixed costs are
allocated among a greater number of units produced. Thus, there is an
incentive for the integrated aluminum producers to keep the price low
and capacity utilization high. If this situation develops, Allied must
follow similar pricing policies to remain competitive. Thus, the possi-
bility of increasing profit margins in an industry facing excess capacity
and a demand downturn is substantially lowered. In fact, if demand
declines, margins may shrink as producers compete more vigorously to
maintain high capacity utilization.
1.1.4.2 Manufacturing Costs
Aluminum fluoride production requires two major inputs; hydrofluoric
acid and alumina hydrate. The process for manufacturing HF is rela-
tively energy intensive, and manufacturing costs will climb as energy
prices rise.
Alumina hydrate is an intermediate obtained in the processing of bauxite
to alumina, and thus its cost is a function of current bauxite prices.
About 90 percent of all bauxite used by the domestic aluminum industry
1-17
-------
is imported from member countries of the International Bauxite Associa-
tion (IBA). The IBA has been trying to agree on a common price formula,
but to date has been unable to do so. However, the successful negotia-
tion of a cartel pricing arrangment could raise the price of bauxite
ore, and thus the cost of producing alumina hydrate.
The overall outlook is for the cost of manufacturing A1F to increase at
a moderate rate. The cost of the hydrofluoric acid input should in-
crease fairly rapidly but total cost increases should be moderated
somewhat by lower increases in bauxite costs.
1.1.4.3 Profit Margins
Much of the aluminum fluoride produced is used captively; as such, it
has no "price" and therefore no profit margins.
In the merchant market, the price of aluminum fluoride is likely to
remain low due to vigorous intra-industry competition for market share.
This, coupled with rising manufacturing costs, is likely to keep profit
margins on merchant A1F fairly slim during the next few years.
o
1.1.5 Characterization Summary
Aluminum fluoride manufacture should remain a stable industry into the
1990's. As an essential ingredient in aluminum processing, A1F« will be
produced as long as aluminum manufacture by the Hall process is prof-
itable.
Growth, however, is not expected to be strong. The aluminum industry is
restraining major capacity expansions to increase prices and return on
equity, and thus market growth will be small. In addition, fluoride
recovery technology will continue to reduce A1F consumption per ton of
aluminum produced.
1-18
-------
In the long-term, Alcoa's chloride smelting process could potentially
eliminate demand for AlF^. However, due to the lifetime of current
smelting facilities and the magnitude of the capital investment neces-
sary to install the new process, it is not expected to have a major
impact until the 1990's.
1.2 IMPACT ANALYSIS
This section analyzes the potential economic impacts of requiring the
aluminum fluoride industry to comply with BAT effluent control standards.
A survey by the technical contractor revealed that all five aluminum
fluoride manufacturers are direct dischargers having BPT in place and
operating. For this subcategory, BAT is equivalent to BPT. Since there
will be no incremental costs above BPT required for compliance with BAT
regulations, effluent regulations will have no impacts on the aluminum
fluoride subcategory.
1.2.1 Pollution Control Technology and Costs
As noted above, no new pollution control costs will be incurred by the
aluminum fluoride subcategory. The following detail on pollution control
technology and costs is provided for informational purposes only.
Capital and operating cost estimates developed by the technical contrac-
tor for pollution control equipment designed to meet BPT effluent limita-
tions (already in place and operating) are shown in Table 1-4. The
process reaction for forming aluminum fluoride generates no by-product
waste material. Wastewater flows, however, are generated by air pollu-
tion control scrubbers, leaks, spills and washdown.
The treatment process involves three steps to achieve BPT removal:
Equalization: Wastewater streams are collected in an
equalization tank.
1-19
-------
Lime Precipitation: Lime is added to raise the pH to six or
seven. The wastewater is then transferred to a mixing tank
where the pH is raised to ten. Fluorides are precipitated as
calcium fluoride, and metals as metal hydroxides.
Settling: Solids are settled in a lagoon, and the effluent
overflow is discharged after final pH adjustment.
Pollution control cost estimates have been developed for three model
plant production sizes: 17,500 tons per year (TPY), 39,500 TPY, and
51,000 TPY. These costs are summarized in Table 1-4.
1-20
-------
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1-21
-------
2. CHLORINE
2.1 CHARACTERIZATION
Chlorine is a very large volume chemical with a great number of end uses
in organic chemicals, inorganic chemicals and other industrial applica-
tions. Because it is a critical input for several processes, many
producers make it for their own use; two-thirds of the chlorine is used
captively. Because chlorine is a low value commodity, economical shipping
distances are limited. Therefore, competition occurs on a regional
basis and foreign trade is negligible.
Chlorine is manufactured through the electrolysis of salt using vast
amounts of electricity. Sodium hydroxide is produced as a coproduct in
approximately the same volume. Balancing the demand for these two
products and coping with the rapidly rising cost of electricity are two
of the major concerns of chlorine manufacturers.
2.1.1 Demand
Chlorine and sodium hydroxide (caustic soda) have a very wide variety of
uses, none of which make up a predominant portion of total product
demand. In 1977, end uses for chlorine were as shown in Figure 2-1.
Because of this diversity of uses, demand for these chemicals is not
overly dependent on fluctuations in any one market. In addition, since
over 60 percent of chlorine production is captive, its internal use is
subject to the demand fluctuations of the final products made by each
producer, such as PVC and pulp and paper. Caustic demand, however, is
dissimilar to chlorine in that its merchant sales represent 67 percent
of production and only 33 percent is captive. Thus, many producers who
produce chlorine based upon their needs for downstream chemicals may not
2-1
-------
produce the optimum amount of caustic (and vice versa). This problem is
ameliorated somewhat by the large merchant market for caustic and rela-
tively strong demand. Although this analysis concentrates on chlorine
and its end markets, it should be kept in mind that manufacturers must
continuously balance the demands of the two chemicals. In order to
depict the total demand for chlorine, the conditions in the individual
end markets are summarized below.
2.1.1.1 End Markets
Polyvinyl Chloride
Polyvinyl chloride (PVC) is chlorine's strongest market, accounting for
approximately 17 percent of chlorine consumption. PVC is a plastic used
in building and construction, electrical applications, household appli-
cations, and consumer goods. The market for PVC has grown rapidly (7.2
percent annually, 1971 through 1978) and is expected to continue growing.
Some sources have predicted annual growth rates as high as 8 percent.
The vinyl siding market may contribute significantly to this growth.
Although demand is strong, capacity utilization fell to 75 to 80 percent
when Diamond Shamrock opened a 500,000 ton/year plant in 1978 (the
average plant is half this size). Reduced capacity utilization has
created weak prices. Several other producers are planning expansions
which may contribute to continuing utilization and pricing problems for
several years.
Propylene Oxide
Propylene oxide (PO) is used in the production of polyurethane foam
products and unsaturated polyester fabricated products. These, in turn,
go into automobiles, refrigerators, furniture, and textiles. Propylene
oxide is produced by the chlorohydrin process, using chlorine, water,
2-2
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2-3
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propylene, and caustic soda or lime. The chlorine is used as an oxi-
dizing agent and is released as a waste product. Several alternate
processes have been proposed for PO production. Oxirane has developed a
direct oxidation process now being used in several plants. Increased
use of any of these new processes could reduce chlorine consumption.
However, the chlorohydrin process may remain competitive with these
other processes if means of increasing efficiency, such as chlorine
recycling, are adopted.
Ethylene Dichloride
Ethylene dichloride (EDC) is an intermediate chemical with end markets
in the production of vinyl chloride (80 percent of EDC's market), chlor-
inated solvent intermediates (10 percent), and other uses (10 percent).
Vinyl chloride is used in the production of polyvinyl chloride. There-
fore, future demand for EDC is tied closely to that of PVC. EDC demand
is expected to grow by four to five percent annually.
In 1978, the question of EDC's carcinogenic potential was raised. Vinyl
chloride producers had similar problems a few years earlier. Although
most EDC is consumed captively, there is a potential for costly EPA or
OSHA regulation.
Ethylene dichloride and vinyl chloride are good examples of chlorine's
end uses. They also point out the potential for increased downstream
costs due to government regulation of carcinogens. The cumulative effects
of regulations have the potential to dampen downstream demand for chlorine
through increased manufacturing costs or outright bans.
2.1.2 Supply
2.1.2.1 Production
Chlorine production reached 10.6 million tons in 1977, placing it eighth
in production volume for all U.S. chemicals. Production volume grew at
2-4
-------
a strong and steady rate throughout the 1950's and 1960's; annual increases
of 10 percent were not uncommon. In the 1970's, two recessions caused
temporary drops in volume. However, the long-term growth trend appears
to have been reduced significantly also. The average annual growth rate
between 1970 and 1977 was 1.1 percent. In the next five years, demand
is expected to keep pace with the GNP. Rapid growth in some end markets,
such as plastics, could cause chlorine demand to outpace GNP by one or
two percentage points. Table 2-1 and Graph 2-1 show production and
average price data for 1968 to 1977.
2.1.2.2 Producers
Chlorine is produced by more than 30 companies; six producers account
for over 70 percent of the total industry capacity. Dow Chemical is the
largest, with 30 percent of the capacity (see Table 2-2).* This industry
concentration statistic can be misleading, however, because some manu-
facturers (not necessarily the largest) specialize in merchant markets,
whereas others (including some large producers) produce primarily for
captive consumption. Olin, PPG, and Diamond Shamrock are the largest
merchant producers.
Most chlorine (over 60 percent) is produced for captive use. In chemical
companies, downstream products include a wide variety of chlorinated
inorganic and organic compounds. Nonchemical companies generally use
chlorine and caustic more directly, e.g., for bleaching pulp and paper;
included in the list of manufacturers are several pulp and paper and
aluminum companies. Backward integration by all of these companies
allows them to control the cost and availability of critical raw mate-
rials. A captive producer can lower costs by running his plants at a
high capacity utilization rate. (In general, there is less captive use
of caustic soda, so a large and predominantly captive producer of chlo-
rine may be a major supplier of caustic.)
*Note that only chlorine plants using mercury or diaphragm cells will be
covered by effluent regulations.
2-5
-------
Productive capacity has grown faster than demand for several years.
Although several plants have shut down since 1975, capacity additions
have exceeded shutdowns. Further expansions have been planned for the
1980's, even though capacity utilization has dropped.
2.1.2.3 Processes
About 94 percent of all U.S. chlorine is produced by the electrolysis of
salt. The coproduct, caustic soda (sodium hydroxide), is produced in
nearly the same volume (ratio of 1:1.13).
Production is governed by the following reaction:
2 NaCl + 2 H20 direct current> Cl,, + 2 NaOH + ^
The two major manufacturing methods use either mercury cells (20 percent
of the capacity) or diaphragm cells (74 percent of the capacity). The
trend away from mercury cells is increasing; there have been no new
mercury cells built in the U.S. since 1970. Manufacturing costs were
estimated for three model plants for each process. Table 2-3 presents
cost estimates for mercury cell plants and Table 2-4 presents cost
estimates for diaphragm cell plants.
The two electrolytic processes have many similar characteristics.
Regardless of the process, the brine solution needs to be purified.
Several manufacturers obtain their brine from nearby salt domes through
steam injection. The brine is purified and then sprayed into the elec-
trolytic cells. A typical chlorine plant has rows of cell lines. Thus,
capacity is somewhat flexible. Older electrolytic plants produced from
65 to 475 metric tons of chlorine per day; newer plants generate 725 to
900 metric tons per day. Some plants and expansions under construction
will yield 1000 or more metric tons per day.
2-6
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2-7
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GRAPH 2-1
CHLORINE PRODUCTION AND PRICE
VOLUME
(000,000'sof
tons)
11.00-
8.25-
5.50-
2.75-
0.00
1968
1972 1976
YEAR
AVERAGE
UNIT
VALUE
(dollars)
100.00—
75.00-
50.00
25.00-
0.00-1 —
19^68
1972
1976
YEAR
SOURCE: Department of
-------
TABLE 2-2
CHLOR-ALKALI PRODUCING COMPANIES, PLANTS, AND CAPACITIES
Companies and Plant
Locations
(Dec. 1980)
AMAX Specialty Metals Corporation
Rowley, UT
BASF Wyandotte Corporation
Geismar, LA
Brunswick Chemical Company
Brunswick, GA
Ihampion International Corporation
Canton, NC
Houston, TX
Convent Chemical Corp. (B.F. Goodrich)
Calvert City, KY
Diamond Shamrock Chemical Company
LaPorte, TX
Delaware City, DE
Mobile, AL
Muscle Shoals, AL
Deer Park, TX
)ow Chemical Company
Freeport, TX
Midland, MI
Pittsburg, CA
Plaquemine, LA
B.I. duPont de Nemours S Co. Inc.
Corpus Christi, TX
Niagara Falls, NY
Bthyl Corporation
Baton Rouge, LA
7MC Corporation
S. Charleston, WVA
'ormosa Plastics Corporation USA
Baton Rouge, LA
Annual Chlorine
Capacity
(Jan. 1979)
(1000 tons)
20
179
30
51
128
1,335
4,133
281
68
292
172
Type Of Year Built
Process (Year Cells Installed)
1977
1
1
1
1
2
1
2
2
2
1,2
1,6
1
1
1
1
4
4
1
1
1959, 1969
1967
1916
1936
1966
1974
1965
1964
1952
1938
1940
1897
1917
1958
1974
1898
1938
1916 (1973)
1937 (1968)
2-9
-------
TABLE 2-2
(Continued)
CHLOR-ALKALI PRODUCING COMPANIES, PLANTS, AND CAPACITIES
Companies and Plant
Locations
(Dec. 1980)
Fort Howard Paper Company
Green Bay, WI
Muskogee, OK
General Electric
Mt. Vernon, IN
Georgia-Pacific Corporation
Bellingham, WA
P1aquemine, LA
Hercules
Hopewell, VA
Hooker Chemical Corporation
Montague, MI
Niagara Falls, NY
Tacoma, WA
Taft, LA
Hooker-IMC Joint Venture
Niagara Falls, NY
International Minerals and Chemical
Corporation
Ashtabula, OH
Orrington, ME
Kaiser Aluminum and Chemical Corporation
Gramercy, LA
Linden Chlorine Products, Corporation
Acme, NC
Brunswick, GA
Linden, NJ
Moundsville, WVA
Syracuse, NY
Mobay Chemical Corporation
Baytown, TX
Monsanto Company
Sauget, IL
Annual Chlorine
Capacity
(Jan. 1979)
(1000 tons)
124
55
720-825
31
1,137
47
119
205
504
90
44
Type Of
Process
1
7
2
1
1
1
1
1
3
2
2
2
2
2
1,2
Year Built
(Year Cells Installed)
1968
1980
1976
1965
1975
1939
1954
1898 (1974, 1978)
1929
1966 (1975)
1971
1963
1967
1958
1963
1957
1956 (1963, 1969)
1953
1927 (1-1968, 1977)
(2-1953)
1972
1922
2-10
-------
TABLE 2-2
(Continued)
CHLOR-ALKALI PRODUCING COMPANIES, PLANTS, AND CAPACITIES
Companies and Plant
Locations
(Dec. 1980)
Olin Corporation
Augusta, GA
Charleston, TN
Mclntosh, AL
Niagara Falls, NY
Pennwalt Corporation
Calvert City, KY
Portland, OR
Tacoma, WA
Wyandotte, MI
PPG Industries, Inc.
Barberton, OH
Lake Charles, LA
New Martinsville, WVA
RMI Company
Ashtabula, OH
Shell Chemical Company
Deer Park, TX
Stauffer Chemical Company
Henderson, NV
Lemoyne, AL
St. Gabriel, LA
Titanium Metals Corp. of America
Henderson, NV
Vertac Chemical Company
Vicksburg, MS
Vulcan Materials Company
Denver City, TX
Geismar, LA
Wichita, KS
Port Edwards, WI
Weyerhauser Company \
Longview, WA \
Annual Chlorine
Capacity
(Jan. 1979)
(1000 tons)
948
462
1,523
77
77
348
33
544
Type Of
Process
2
2
1,2
2
2
1
1
1
1
1,2
1,2
4
1
2
2
1
1
1
2
140
Year Built
(Year Cells Installed;
1965
1962
1952 (1-1977, 1978)
1897 (1960)
1953 (1967)
1947 (1967)
1929
1898 (1960)
1936
1947 (1-1977, 1980)
(2-1969)
1943 (2-1958)
1949
1966
1942 (1976)
1965
1970
1943
1962
1947
1976
1952 (1975)
1967
1957 (1975)
2-11
-------
TABLE 2-2
(Continued)
CHLOR-ALKALI PRODUCING COMPANIES, PLANTS, AND CAPACITIES
KEY
Type of process:
1-Diaphragm cell electrolytic plant producing chlorine, caustic soda and
other products.
2-Mercury cell electrolytic plant producing chlorine, caustic soda and
other products.
3-Mercury cell electrolytic plant producing chlorine and caustic potash
but not caustic soda.
4-Electrolytic plant producing metallic sodium and chlorine.
5-Electrolytic plant producing chlorine ad hydrogen from hydrochloric acid.
6-Electrolytic plant producing magnesium and chloride from molten magnesium
chloride.
SOURCES: Stanford Research Institute, Directory of Chemical Producers, 1979
The Chlorine Institute, North American Chlor-Alkali Industry Plants
and Production Data Book, January 1981
2-12
-------
TABLE 2-3a
ESTIMATED COST OF MANUFACTURING CHLORINE - MERCURY PROCESS*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
28,000 tons/year
21,000 tons/year
(75% capacity utilization)
$15.3 million
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
- Cooling Water
- Steam
- Process Water
- Electricity
Total Variable Costs
Unit/Ton
1.819 tons
7.42 mgal
2.04 mlb
1.1 mgal
3500 kWh
$/Unit
10.00
.10
3.25
.75
.03
$/Ton
18.20
10.80
.70
6.60
.80
91.00
$128.10
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
37.50
29.10
$ 66.60
15.30
72.60
14.50
$102.40
$297.10
130.00
$167.10
*See Appendix C
2-13
-------
TABLE 2-3b
ESTIMATED COST OF MANUFACTURING CHLORINE - MERCURY PROCESS*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
140,000 tons/year
105,500 tons/year
(75% capacity utilization)
$47.1 million
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
- Cooling Water
- Steam
- Process Water
- Electricity
Total Variable Costs
Unit/Ton
1.819 tons
7.42 mgal
2.04 mlb
1.1 mgal
3500 kWh
$/Unit
10.00
.10
3.25
.75
.03
$/Ton
18.20
10.80
.70
6.60
.80
91.00
$128.10
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
27.20
17.90
$ 45.10
11.60
44.80
9.00
$ 65.40
$238.60
130.00
$108.60
See Appendix C
2-14
-------
TABLE 2-3c
ESTIMATED COST OF MANUFACTURING CHLORINE - MERCURY PROCESS*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
- Cooling Water
- Steam
- Process Water
- Electricity
Total Variable Costs
280,000 tons/year
210,500 tons/year
(75% capacity utilization)
$76.4 million
Unit/Ton
1.819 tons
7.42 mgal
2.04 ralb
1.1 mgal
3500 kWh
$/Unit
10.00
.10
3.25
.75
.03
$/Ton
18.20
10.80
.70
6.60
.80
91.00
$128.10
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
23.70
14.50
$ 38.20
10.60
36.40
7.30
$ 54.30
$220.60
130.00
$ 90.60
*See Appendix C
2-15
-------
TABLE 2-4a
ESTIMATED COST OF MANUFACTURING CHLORINE-DIAPHRAGM PROCESS*
Plant Capacity
Annual Production
Fixed Investment
(Mid-1978 Dollars)
28,000 tons/year
21,000 tons/year
(75% capacity utilization)
$13.9 million
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
- Cooling Water
- Steam
- Process Water
- Electricity
Total Variable Costs
Unit/Ton
1.76 tons
46.75 mgal
12.4 mlb
5.38 mgal
2,900 kWh
$/Unit
10.00
.10
3.25
.75
.03
$/Ton
17.60
2.70
4.70
40.30
4.00
75.40
$144.70
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
42.80
26.40
$ 69.20
17.30
66.00
13.20
$ 96.50
$310.40
130.00
$180.40
*See Appendix C
2-16
-------
TABLE 2-4b
ESTIMATED COST OF MANUFACTURING CHLORINE - DIAPHRAGM PROCESS*
(Mid-1978 Dollars)
Plant Capacity
Annual Production
Fixed Investment
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
Cooling Water
Steam
Process Water
- Electricity
Total Variable Costs
140,000 tons/year
105,500 tons/year
(75% capacity utilization)
$42.8 million
Unit/Ton
$/Unit
1.76 tons
46 . 75 mgal
12.4 mlb
5.38 mjal
2,900 kWh
10.00
.10
3.25
.75
.03
17.60
2.70
4.70
40.30
4.00
75.40
$144.70
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
29.30
16.30
$ 45.60
12.40
40.70
8.10
$ 61.20
$251.50
130.00
$121.50
'See Appendix C
-------
TABLE 2-4c
ESTIMATED COST OF MANUFACTURING CHLORINE - DIAPHRAGM PROCESS*
Plant Capacity
Annual Production
Fixed Investment
VARIABLE COSTS
• Materials
- Salt
- Other
• Utilities
- Cooling Water
- Steam
- Process Water
- Electricity
Total Variable Costs
(Mid-1978 Dollars)
280,000 tons/year
210,500 tons/year
(75% capacity utilization)
$69.5 million
Unit/Ton
$/Unit
1.76 tons
46.75 mgal
12.4 mlb
5 38 mgal
2,900 kWh
10.00
.10
3.25
.75
.03
17.60
2.70
4.70
40.30
4.00
75.40
$144.70
SEMI-VARIABLE COSTS
• Labor
• Maintenance
Total Semi-Variable Costs
FIXED COSTS
• Plant Overhead
• Depreciation
• Taxes & Insurance
Total Fixed Costs
TOTAL COST OF MANUFACTURE
Coproduct credit: Caustic soda
NET PRODUCTION COST
SOURCE: Contractor and EEA estimates
27.00
13.20
$ 40.20
11.80
33.10
6.60
$51.50
$236.40
130.00
$106.40
rSee Appendix C
2-18
-------
The location of chlorine plants usually is determined by access to
inexpensive sources of power and salt. Electricity can represent as
much as 60 percent of total manufacturing costs. The plants which use
chlorine usually are located near their critical inputs such as petro-
chemicals and natural gas. This has led to a large number of plants
being located along the Gulf coast and in the Pacific Northwest where
hydroelectric power has, historically, been plentiful. Because of
chlorine's relatively low value, transportation costs also play an
important role. To control these costs, shipping distances are limited.
2.1.3 Competition
Chlorine and caustic soda compete predominantly on the basis of price.
(Chlorine comes in one grade—technical—99.9 percent). Because they
are high tonnage/low value products, transportation charges are impor-
tant and producers have tried to locate near their markets. About half
of the chlorine produced is consumed in Texas and Louisiana. The more
efficient Gulf Coast producers can economically ship their chlorine well
into the central regions of the country.
Although there is some concentration in the chlorine industry (the top
four producers account for more than half of production), pricing of the
remaining noncaptive chlorine (40 percent) is competitive. In 1978, the
f.o.b. list price was $135 per ton, while spot prices went as low as $80
per ton. This spread illustrates the wide variations common in spot
prices. In 1977, under similar conditions, the average price was $97
per ton, indicating considerable discounting. Low capacity utilization,
plant expansions, uneven caustic demand, and rapidly rising costs
complicate chlorine pricing patterns.
Capacity utilization, historically in the mid-90 percent range, dropped
to the 75 to 80 percent range around 1974-75 and is not expected to
recover very much in the foreseeable future. This is due to the large
2-19
-------
capacity additions recently made and in progress. This type of low
capacity utilization leads to "weak prices" (often in the form of discounts
on list prices) as the individual firms become more competitive for
market shares.
Although no one substitute is likely to take over all of chlorine's
diverse uses, several substitutes may make some inroads. For example,
in chlorine's largest single market (polyvinyl chloride—17 percent of
Cl consumption), hydrogen chloride can be substituted for chlorine. In
£.
pulp and paper, there is increasing use of sodium chlorate and oxygen
bleaching methods. The manufacture of aerosols composed of fluorocarbons
was prohibited after October 1978. Even the water treatment market is
experiencing competition from chemicals such as ozone.
Because of chlorine's low value, imports and exports are negligible
(less than one percent). Caustic soda exports however are expected to
equal five percent of 1978 production. Increased domestic demand has
reduced the caustic soda available for export.
While some chlorine uses are declining, others such as urethane, poly-
ester, and PVC are growing. Overall, a growth rate of three to four
percent appears likely.
The cost of producing chlorine and caustic soda has been rising since
1969, with a particularly steep rise between 1973 and 1975 (primarily
due to rapid electricity rate increases). Chlorine prices rose in
response to these cost increases, with a high degree of pass-through
until 1976. In the 1967 to 1975 period, electricity prices increased by
9.1 percent/ year, chlorine prices by 7.9 percent/year, and value of
shipments by 11.2 percent/year, while the consumer price index rose 6.1
percent/year. However, this situation changed after 1975. Prices did
not increase through 1975, 1976, 1977, and much of 1978. Thus the real
1-20
-------
price was falling while energy, salt, and other costs continued to rise.
However, chlorine prices alone do not cover the full cost of chlorine-
caustic soda production. Currently, the caustic soda market is stronger
than the chlorine market and consequently in a better position to support
price increases. Late in 1978, one of the main merchant producers
raised their price by $10/ton. Actual selling prices were around $110
to $125 per ton. Several producers followed suit and the price increase
may be successful (sometimes price increases are remanded). If it is
successful, it will temporarily ease producers' profitability problems.
2.1.4 Economic Outlook
2.1.4.1 Revenue
Chlorine sales forecasts generally call for annual growth rates of 3 to
7 percent with expected values around 3.5 percent. The last decade
(1967-76) saw annual growth rates of 3.1 percent, so recent forecasts
show a small increase in the growth rate. Recent and planned capacity
additions have significantly added to capacity and will continue to do
so. As discussed, chlorine prices have been weak for three years. With
capacity utilization likely to remain at relatively low levels, price
recovery will be slow.
2.1.4.2 Manufacturing Costs
Manufacturing costs for chlorine are increasing due to rapidly increasing
energy prices. A total of 99.5 percent of chlorine is produced by the
electrolytic process, typically using 2,600 to 3,300 kwh per metric ton
3
of chlorine (plus 1.13 metric tons of NaOH and 315 m of H?). Energy
costs currently represent 45 to 60 percent of production costs and may
reach the 75 percent level in the early 1980*s due to the exceptionally
rapid increases in energy prices. Increased energy costs will affect
the chlorine end products as well, since many require petrochemicals as
feedstocks. For example, 55 percent of the chlorine produced is used in
2-21
-------
chlorinating organic compounds. As the relative prices in these products
rise due to rising feedstock costs, users will seek less expensive
substitutes. This will also reduce chlorine demand as these end prod-
ucts become less competitive internationally.
Because chlorine is such a critical input to a great number of other
chemicals, many manufacturers are conducting research on reducing costs
and perhaps the energy intensity of chlorine manufacture. For example,
Diamond Shamrock and DuPont are working jointly on a new "membrane cell"
technology. Diamond Shamrock feels that membrane cells will be more
competitive at low capacity plants, with diaphragm cells remaining more
efficient at high capacity plants. The membrane cell produces a salt-free
concentrated caustic, thus reducing the need for evaporation. Further
development of this new technology may yield significant savings.
Experimentation is continuing on their two-membrane cell installations
in Painesville, Ohio, and Muscle Shoals, Alabama.
Other researchers are studying different types of membranes, different
anodes, and varying cell structures. In addition, chlorine recovery
from hydrogen chloride (HC1) may become increasingly attractive. HC1
often is released in the chlorination of organic chemicals. As chlorine
prices continue to rise, the benefits from chlorine recovery will increase.
2.1.4.3 Profit Margins
Chlorine is predominantly a captively produced chemical. As such, its
economics are intricately tied up with those of the end products such as
PVC, refrigerants, and polyurethane. For most producers, profit margins
on chlorine are of secondary importance to the profitability of the
whole product line. Although prices may be "weak" on some of these end
products, strong long run demand and efficient processes are likely to
contribute significant earnings to the producers.
2-22
-------
2.1.5 Characterization Summary
Chlorine is an important high volume chemical with a variety of end
uses. These include:
• Polyvinyl chloride (17 percent of chlorine consumption) - a
widely used plastic
• Propylene oxide - used in the production of polyurethane foam
products
• Ethylene dichloride - an intermediate used in the manufacture
of polyvinyl chloride.
Chlorine is produced by over 30 firms in the U.S. Of the 10.6 million
tons produced in 1977, almost two-thirds was used captively by the
producers. Because products are energy intensive, manufacturing costs
are likely to rise during the next few years. Since most chlorine
production is used captively, its profitability is determined by the
profitability of its end products. Demand for products using chlorine
in their manufacture is expected to remain strong enough to justify
continued chlorine production.
2.2 IMPACT ANALYSIS
This section analyzes the potential economic impacts of requiring the
chlorine subcategory to comply with PSES and BAT effluent control standards
The technical contractor has designed effluent control technologies
which can be used to achieve these standards. The cost of each tech-
nology is used to make an assessment of the economic impacts that effluent
limitations will have on the subcategory. In addition, the impacts of
combined effluent control and hazardous waste disposal costs are examined
for chlorine plants affected by the Resource Conservation and Recovery
Act's Interim Status Standards (RCRA-ISS).
2-23
-------
There are 25 mercury cell chlorine plants. Two plants are indirect
dischargers, both of which are already in compliance with PSES limita-
tions and will therefore incur no incremental effluent control costs.
The remaining 23 mercury cell plants will incur additional costs above
BPT treatment for compliance with BAT limitations. All mercury cell
plants will incur additional hazardous waste disposal costs in order to
comply with RCRA-ISS requirements. However, not all of these hazardous
waste disposal costs are attributable to effluent limitations.
There are 36 diaphragm cell chlorine plants. One plant is an indirect
discharger not currently pretreating wastewater. Therefore, this plant
will incur BPT treatment costs, which are equivalent to PSES for this
subcategory. The remaining chlorine diaphragm cell plants will incur
only the incremental costs of BAT for compliance with effluent limita-
tions (BPT effluent limitations are already in effect and are being met
by all direct discharge diaphragm cell plants). Only diaphragm cell
plants using graphite anodes will incur additional hazardous waste
disposal costs in order to comply with RCRA-ISS requirements.
Thus, the impact analysis will examine:
1) The impacts of the incremental costs required for direct discharge
mercury cell plants to comply with BAT effluent limitations
2) The impacts of the combined cost of compliance with effluent limita-
tions and RCRA-ISS requirements for all mercury cell plants
3) The impacts of pretreatment costs for the single diaphragm cell
indirect discharger
4) The impacts of the incremental costs required for direct discharge
diaphragm cell plants to comply with BAT effluent limitations
5) The impacts of the combined cost of compliance with effluent limita-
tions and RCRA-ISS requirements for chlorine diaphragm cell plants
using graphite anodes.
2-24
-------
2.2.1 Pollution Control Technology and Costs
Almost all chlorine is manufactured using one of the following pro-
cesses:
o Diaphragm cell - this process accounts for 74 percent of all
chlorine manufacture and is used in 36 plants.
o Mercury cell - there are currently 25 plants which employ this
technology to produce 20 percent of all chlorine. Production
by this process is declining due to environmental problems.
The remaining six percent is produced using a number of other tech-
nologies for which no effluent control costs will be required. Treat-
ment systems for the two major processes will be considered separately.
2.2.1.1 Mercury Cell Plants
In mercury process plants, the raw waste streams must be segregated into
brine mud and mercury bearing process wastes before treatment.
The mercury bearing wastewater results from several sources: cell room
wastes, chlorine condensate, spent sulfuric acid, tail gas scrubber
liquid, caustic filter washdown, and hydrogen condensate. The toxic
pollutants found in these wastewaters include: antimony, arsenic,
cadmium, chromium, copper, lead, mercury, nickel, silver, thallium, and
3
zinc. The model plants assume a unit flow of 2.1 m /kkg of product.
For mercury cell plants, pollution control costs were estimated by the
technical contractor for two levels of effluent treatment. BPT treatment,
now in place under Best Practicable Technology regulations (BPT), requires
three steps:
o Effluent separated into brine mud and mercury-bearing waste
streams
o Brine mud is settled in a lagoon
2-25
-------
o Mercury stream ±s collected and pH adjusted; sodium bisulfite
is added to precipitate mercury; and flow is filtered
BAT treatment requires a dechlorination step. In addition, plants will
have to meet more stringent mercury limitations in order to comply with
BAT.
Pollution control cost estimates were developed for three sizes of
mercury cell plants. Model plant annual production rates are 21,000,
105,500, and 210,500 tons per year. Approximately 60 percent of diaphragm
and mercury cell chlorine production occurs in plants within the pro-
duction range specified by the model plants. Those plants falling
beyond the range are reasonably approximated by the largest or smallest
model plants.
Estimates of the investment and operating costs of BPT and BAT treatment
for mercury cell model plants are found in Table 2-5a. Costs of compliance
with RCRA-ISS requirements are also included in the table. Note that the
RCRA costs account for all hazardous wastes produced by the model plant,
not just the incremental wastes attributable to BAT treatment. The analy-
sis thus overstates the RCRA costs impacts which are directly attributable
to BAT.
Manufacturing costs for mercury process chlorine plants were estimated
to be $177.20, $111.50, and $92.60 per ton of chlorine for the small,
medium, and large model plants respectively. These estimates are based
on the estimates presented in Table 2-3 and include the costs of meeting
BPT effluent limitations. Financial parameters are summarized in Table
2-6a.
Investment and annual control costs for mercury cell chlorine producers
are summarized in Table 2-7a. These costs are based on the model plant
pollution control costs and current industry production levels. Subca-
tegory compliance with BAT limitations would require additional annua-
2-26
-------
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lized costs of approximately $1.3 million. The additional cost required
to comply with RCRA-ISS costs increases the subcategory's total annualized
costs to $4.3 million.
2.2.1.2 Diaphragm Cell Plants
In the diaphragm cell process, segregation of waste streams is required
before treatment. The streams are segregated into brine mud, cell wash,
and other metals-bearing process water. The brine mud stream is identical
in content to the brine mud stream resulting from mercury cell production,
and a unit flow of 8.8 m /kkg was assumed.
For the diaphragm process chlorine plant, the technical contractor has
developed technologies designed to meet BPT and BAT levels of removal.
BPT requires three treatment steps:
o Equalization: Brine mud settled in a lagoon
o Alkaline Precipitation: Metal is precipitated
i
o Settling: After filtration, solids are landfilled
BAT adds dual-media filtration and dechlorination to BPT treatment.
Pollution control cost estimates were developed for three sizes of
diaphragm cell plants. Model plant annual production rates are the same
as for mercury cell plants: 21,000, 105,500, and 210,500 tons per year.
Estimates of the investment and operating costs of BPT and BAT treatment
for diaphragm cell model plants are found in Table 2-5b. Compliance
with PSES limitations will require BPT treatment only. Costs of compli-
ance with RCRA-ISS requirements are presented separately since only the
six plants with graphite anodes will incur these additional costs. Note
that as in the case of the mercury-cell plants, the RCRA-ISS costs
account for disposal of all hazardous wastes produced by the model
2-29
-------
plants. The analysis thus overstates the incremental RCRA costs which
are directly attributable to the effluent limitations.
The manufacturing costs used to evaluate the impacts of pollution control
costs on diaphragm plants are summarized in Table 2-6b. Manufacturing
cost estimates are presented with and without the costs of BPT treatment.
Investment and annualized effluent control costs for diaphragm cell
chlorine producers are summarized in Table 2-7b. These costs are based
on the model plant pollution control costs and current industry produc-
tion levels. The table presents the costs required for compliance with
both PSES and BAT limitations. Currently, there is only one indirect
discharge plant and its estimated annual control costs for meeting PSES
limitations are $570,580. Direct dischargers1 compliance with BAT
limitations would require additional annual costs of approximately $4.05
million.
Tables 2-7c presents subcategory compliance costs separately for the six
diaphragm cell plants which will incur RCRA-ISS costs; Table 2-7d presents
subcategory compliance costs for the remaining 30 plants which will not
be affected by RCRA-ISS. Table 2-7c indicates that compliance with both
effluent and RCRA-ISS regulations by graphite anode diaphragm cell
plants will require approximately $0.4 million annually. Adding these
costs to the effluent control costs shown in Table 2-7d yields a total
annual cost of approximately $4.1 million required for diaphragm cell
plants to comply with both effluent control and RCRA-ISS regulations.
2.2.2 Model Plant Analysis
This section outlines the results of the model plant analysis used to
determine industry impacts. Four indicators which help define the
magnitude of the control cost impacts are presented:
o Price Rise - the calculation of the price increase required to
fully recover the increased pollution control costs.
2-30
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