United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-82-011
November 1982
Water
Economic Impact Analysis
of Proposed Effluent
Limitations and Standards
for the Copper Forming
Industry
QUANTITY
-------
ECONOMIC IMPACT ANALYSIS
OF PROPOSED EFFLUENT
LIMITATIONS AND STANDARDS
FOR THE
COPPER FORMING INDUSTRY
November 5, 1982
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
401 M Street, S.W.
Washington, D.C. 20460
Submitted by
JRB Associates
8400 Westpark Drive
McLean, Virginia 22102
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent standards and limitations issued under Sections 301,
304, 306, and 307 of the Clean Water Act to the Copper Forming industry.
The study supplements the technical study (EPA Development Document) sup-
porting the issuance of these regulations. The Development Document surveys
existing and potential waste treatment control methods and technology within
particular industrial source categories and supports certain standards and
limitations based upon an analysis of the feasibility of these standards in
accordance with the requirements of the Clean Water Act. Presented in the
Development Document are the investment and operating costs associated with
various control and treatment technologies. The attached document supplements
this analysis by estimating the broader economic effects which might result
from the application of various control methods and technologies. This study
investigates the effect in terms of product price increases, effects upon employ-
ment and the continued viability of affected plants, effects upon foreign trade,
and other competitive effects.
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TABLE OF CONTENTS
CHAPTER TITLE PAGE
1 INTRODUCTION 1-1
1.1 PURPOSE 1-1
1.2 SCOPE 1-2
1.2.1 Industry Coverage 1-2
1.22. Regulatory Options Considered 1-2
1.3 METHODOLOGY, DATA, AND ASSUMPTIONS 1-3
1.3.1 Overview of Approach 1-3
1.3.2 Description of Industry Characteristics 1-4
1.3.3 Base Case Analysis 1-5
1.3.4 Compliance Cost Estimates 1-5
1.3.5 Price Impact Analysis 1-6
1.3.6 Capital Availability Analysis 1-7
1.3.7 Plant Closure Analysis 1-7
1.3.8 Other Impacts 1-8
1.3.9 Social Costs 1-8
1.3.10 Small Entity Analysis 1-9
1.4 SUMMARY OF ECONOMIC IMPACT ESTIMATES 1-9
2 MARKET DESCRIPTION 2-1
2.1 INDUSTRY OVERVIEW 2-1
2.1.1 Industry Segmentation 2-1
2.1.2 Production Processes 2-2
2.1.3 Production Trends 2-4
2.2 END-USE MARKETS 2-4
2.2.1 Building and Construction 2-6
2.2.2 Electrical and Electronic Products 2-6
2.2.3 Industrial Machinery and Equipment 2-6
2.2.4 Consumer and General Products 2-8
2.2.5 Transportation 2-8
2.3 TECHNOLOGICAL CHANGE AND SUBSTITUTION 2-8
2,3.1 Direct Material Substitution 2-9
2.3.2 Technological Change in End-Use Markets 2-10
2.3.3 More Efficient Uses of Copper 2-10
2.4 IMPORTS AND EXPORTS 2-11
2.4.1 The Trade Balance 2-11
2.4.2 Factors Affecting the Trade Balance 2-13
2.5 PRICES 2-15
2.5.1 Industry Price Determination 2-15
2.5.2 Recent Copper Price Trends 2-16
2.6 SUMMARY OF MARKET DESCRIPTION 2-17
3 INDUSTRY STRUCTURE AND PERFORMANCE 3-1
3.1 OVERVIEW 3-1
3.2 TYPES OF MARKET STRUCTURE 3-1
3.3 MARKET STRUCTURE OF THE COPPER FORMING INDUSTRY 3-4
3.3.1 Conceptual Problems in Determining Market Structure 3-4
3.3.2 Industry Concentration 3-5
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TABLE OF CONTENTS (Continued)
CHAPTER TITLE PAGE
3.3.3 Integration 3-6
3.3.4 Product Differentiation 3-10
3.3.5 Barriers to Entry 3-10
3.3.6 Summary of Industry Structure Characteristics 3-11
3.4 FINANCIAL PERFORMANCE OF THE COPPER FORMING INDUSTRY 3-12
3.4.1 Financial ;5tatus of Copper Forming Companies 3-13
3.4.1.1 Profitability at Corporation Level 3-13
3.4.1.2 Capital Structure Analysis at the 3-16
Corporation Level
3.4.2 Financial Status of Reporting Entities 3-18
3.4.3 Plant Level Assessment 3-23
3.5 CONCLUSIONS 3-23
4 BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 4-1
4.1 DEMAND-RELATED FACTORS 4-2
4.1.1 Theoretical Considerations 4-2
4.1.2 Econometric Analysis and Considerations 4-3
4.1.2.1 Long-Run Dynamic Adjustment Process 4-4
4.1.2.2 Data Availability 4-6
4.1.3 Empirical Results 4-7
4.1.4 Demand Forecasts 4-10
4.2 SUPPLY FACTORS 4-12
4.2.1 Theoretical and Empirical Considerations 4-12
4.2,1,1 Long-Run Dynamic Adjustment Process 4-12
4.2.1.2 Data Availability 4-13
4.2.2 Empirical Results 4-14
4.2.3 Supply Forecasts 4-17
4.3 ANTICIPATED GROWTH AMONG TYPES OF PLANTS 4-19
5 COST OF COMPLIANCE 5-1
5.1 INTRODUCTION 5-1
5.2 CONTROL TREATMENT OPTIONS 5-2
5.3 ESTIMATED OPTIONS COSTS 5-3
6 ECONOMIC IMPACT ANALYSIS 6-1
6.1 INTRODUCTION 6-1
6.2 PRICE AND PRODUCTION IMPACTS 6-2
6.2.1 Measuring Cost Increase Impacts on Price 6-2
6.2.2 Price Impact Model 6-3
6.2.3 Price Impact Model Results 6-4
6.3 CAPITAL AVAILABILITY ANALYSIS 6-6
6.3.1 Capital Effects (Existing Plants) 6-9
6.3.2 Capital Effects (New Sources) 6-9
6.4 PLANT CLOSURE ANALYSIS 6-10
6.4.1 Plant Closure Methodology 6-10
6.4.2 Predicted Plant Closures 6-11
6.5 OTHER IMPACTS 6-12
11
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TABLE OF CONTENTS (Continued)
CHAPTER TITLE PAGE
6.5.1 Employment Impacts 6-12
6.5.2 Community Impacts 6-12
6.5.3 Balance of Trade Impacts 6-13
6.6 SOCIAL COSTS 6-13
6.6.1 Conceptual Framework 6-13
6.6.2 Social Cost Analysis 6-14
6.7 SMALL ENTITY ANALYSIS 6-16
6.7.1 Defining Small Entities 6-16
6.7.2 Impact on Small Entities 6-16
111
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LIST OF TABLES
NUMBER TITLE PAGE
1-1 SUMMARY OF ESTIMATED ECONOMIC IMPACTS DIRECT DISCHARGERS 1-10
1-2 SUMMARY OF ESTIMATED ECONOMIC IMPACTS INDIRECT DISCHARGERS 1-11
2-1 CONSUMPTION OF COPPER IN THE UNITED STATES 1980 2-3
2-2 PRODUCTION LEVELS FOR THE DOMESTIC COPPER FORMING INDUSTRY OVER 2-5
SELECTED YEARS (MILLIONS OF POUNDS, METAL WEIGHT)
2-3 CONSTRUCTION OF COPPER PRODUCTS BY MAJOR END USE MARKETS 2-7
2-4 IMPORTS AND EXPORTS OF COPPER FORMING PRODUCTS 1970-1980 2-12
3-1 INDUSTRY CONCENTRATION RATIOS 3-7
3-2 KEY PROFITABILITY RATIOS FOR CORPORATIONS PERFORMING COPPER FORMING 3-14
3-3 KEY FINANCIAL RATIOS FOR FINANCIAL ASSESSMENT OF CORPORATIONS 3-15
PERFORMING IN COPPER FORMING BY SIZE CATEGORIES 1976-1979
3-4 KEY CAPITAL STRUCTURE FINANCIAL RATIOS OF CORPORATIONS INVOLVED IN 3-17
COPPER FORMING
3-5 CAPITAL STRUCTURE BY SIZE OF CORPORATION INVOLVED IN COPPER 3-19
FORMING 1976-1978
3-6 KEY FINANCIAL RATIOS FOR THE COPPER FORMING REPORTING ENTITIES 3-21
3-7 PROFITABILITY ASSESSMENT BY SIZE OF THE REPORTING ENTITY 1976-1979 3-22
3-8 SAMPLE OF COPPER FORMING PLANTS AND PRODUCTION BY EMPLOYMENT SIZE 3-24
IN 1979
4-1 EMPIRICAL RESULTS OF ANALYSIS OF DEMAND FOR COPPER FORMING PRODUCTS 4-8
4-2 PRICE ELASTICITY ESTIMATES FOR THE DEMAND FOR COPPER FORMING 4-9
PRODUCTS
4-3 COPPER FORMING PRODUCTS DEMAND FORECASTS 4-11
4-4 EMPIRICAL RESULTS OF ANALYSIS OF SUPPLY FOR COPPER FORMING PRODUCTS 4-15
4-5 SUPPLY PRICE ELASTICITY ESTIMATES FOR THE COPPER FORMING INDUSTRY 4-16
4-6 COPPER FORMING PRODUCTS SUPPLY FORECASTS 4-18
IV
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LIST OF TABLES (Continued)
NUMBER TITLE PAGE
5-1 COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY DIRECT DISCHARGERS 5-4
5-2 COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY INDIRECT DISCHARGERS 5-5
6-1 DEMAND/SUPPLY ASSESSMENT OF EACH PRODUCT GROUP IN THE COPPER 6-5
FORMING INDUSTRY
6-2 EXPECTED PRICE INCREASES BY COPPER FORMING PRODUCT GROUP 6-7
6-3 TOTAL SOCIAL COSTS FOR THE COPPER FORMING INDUSTRY 6-15
6-4 ANALYSIS OF COPPER FORMING SAMPLE PLANTS BY EMPLOYMENT 6-17
CLASSIFICATION
LIST OF FIGURES
NUMBER TITLE PAGE
2-1 U.S. EXPORTS AND IMPORTS OF COPPER FORMING PRODUCTS 2-14
v
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1. INTRODUCTION AND SUMMARY OF FINDINGS
1.1 PURPOSE
The purpose of this study is to analyze the economic impacts which are
likely to result from the promulgation of EPA's effluent regulations on the
copper forming industry. The effluent standards and limitations which are
issued under authority of Sections 301, 304, 306, 307, 308 and 501 of the
Federal Water Pollution Control Act of 1972, as amended by the Clean Water
Act of 1977 (P.L. 95-217), require the Administrator (EPA) to establish the
following:
Effluent limitations based on the Best Available Tech-
nology Economically Achievable (BAT) to be met by
industrial dischargers by 1984;
New Source Performance Standards (NSPS) to be
met by new source industrial dischargers;
Pretreatment Standards for Existing Sources (PSES) for
existing dischargers to publicly-owned treatment works
(POTW's);
Pretreatment Standards for New Sources (PSNS) for new
dischargers to publicly-owned treatment works (POTW's).
In order to establish these limitations, this study explicitly assesses the
effects of pollution control regulatory options upon the costs (fixed and
variable) of production, capacity expansion and replacement, profitability,
and the potential for plant closures in the U.S. copper forming industry. In
addition, the impacts on employment, communities, foreign trade, and small
business, and the social costs of the regulation are considered.
1-1
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1.2 SCOPE
1.2.1 Industry Coverage
For purposes of this study, the copper forming industry includes 176
plants that form refined copper and scrap copper into intermediate and finished
copper and copper alloy products. The industry is classified under the fol-
lowing Standard Industrial Classification (SIC) groups:_'
SIC 3351 - Copper Rolling and Drawing
SIC 3357 - Copper and Copper-Base Alloy Wire, and other
copper wire product segments of the nonferrous
wire drawing and insulating industry group.
This SIC grouping is further disaggregated into the following major
products manufactured by copper forming plants:
Brass Mill Products
- Sheet, Strip, and Plate,
- Rod, Bar, and Mechanical Wire,
- Commercial and Plumbing Tube and Pipe;
Wire Mill Products.
1.2.2 Regulatory Options Considered
EPA considered three treatment and control options for the BPT, BAT,
NSPS, PSES, and PSNS regulations. These are:
Option 1: End-of-pipe treatment consisting of lime
precipitation and settling, and, where necessary,
preliminary treatment
Option 2: Option 1 plus flow reduction for three
waste streams
_L/ Included in this analysis of the copper forming industry is all of SIC 3351
and some, but not all, of SIC 3357.
1-2
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Option 3: Option 2 plus filtration for further
reduction of toxic metals and TSS.
A more comprehensive description of these technologies and associated com-
pliance costs is contained in Chapter 5.
1.3 METHODOLOGY, DATA, AND ASSUMPTIONS
This section summarizes the methodology, assumptions, and data used to
analyze the economic impacts of the proposed effluent regulations on the cop-
per forming industry. It describes the ways in which information on industry
characteristics (from the 308 Economic Survey and from published sources) are
used together with estimated compliance costs (from a separate study) to iden-
tify plants that may not be in a position to afford the installation of pollu-
tion control equipment. This section also summarizes the approaches used to
identify potential plant closures, employment, price, and other impacts on
plants in the industry. More detailed descriptions of the analytical tech-
niques, data, and assumptions used appear, where appropriate, throughout the
remainder of the report.
1.3.1 Overview of Approach
In general, effluent regulations impose added costs on plants in the
industry. These costs include capital expenditures on pollution control equip-
ment (fixed costs), and operating and maintenance expenses (variable costs),
both of which cause the average production costs of a plant to increase. Under
such conditions plant owners have the following options:
A. Raise the price of their products and pass through some or
all of the increased costs to purchasers;
B. Absorb the increase in costs;
C. Shut down the operation and go out of business.
1-3
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The approach to this study begins with a determination of which of these
option(s) producers in the industry are most likely to follow, and what the
resulting price and output levels are likely to be. Then, capital budgeting
techniques are used to evaluate the financial status of copper forming plants
under conditions of the estimated post-compliance price and output levels.
Other impacts such as employment, community and foreign trade effects are
evaluated based on the industry impacts.
1.3.2 Description of Industry Characteristics
The first step in the analysis is to describe the basic industry charac-
teristics that will be related to the impacts of the regulation. These char-
acteristics include the determinants of demand, market structure, financial
performance, and the degree of intra-industry competition. These basic
characteristics are described in Chapters 2 through 4 of the report.
The sources for this information are many. They include government
reports, text books, trade association data, the trade press, discussions
with individuals associated with the industry, and, of particular importance,
a plant and firm level survey conducted by EPA under authority of Section 308
of the Clean Water Act (the 308 Economic Survey).
The survey questionnaire was mailed to every known plant in the copper
forming industry. A total of 103 plants (i.e., approximately 59 percent of
all copper forming plants) responded to the 308 Economic Survey, and the
information obtained from these responses is included in the analysis.
The survey was designed to provide accurate and current information on
the economic and financial characteristics of the industry's plants and firms.
Data collected included information on market structure, profitability, invest-
ment in new capital, and value added. These data, together with estimates of
the costs of alternate pollution control options, served as the basis of the
economic impact analysis of the proposed regulation on this industry.
1-4
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All questionnaires were returned directly to EPA by the respondents, and
procedures were employed to protect the confidentiality of the data. These
procedures included EPA removing the identification section from each question-
naire and assigning a code number to each questionnaire before it was forwarded
to the contractor for processing.
1.3.3 Base Case Analysis
The economic impact analyses presented in this report are based on a
series of projections made for each product group and compared against a set
of baseline projections. The baseline projections represent an estimate of
the economic characteristics of the industry over the impact period in the
absence of the proposed regulations. When the impact projections are compared
against the baseline, the difference represents the estimated impact over the
base case. In general, small changes in the baseline projection will have
little effect on the incremental impacts.
1.3.4 Compliance Cost Estimates
The water treatment control systems, costs, and effluent limitation and
pretreatment standards recommended for the copper forming industry were derived
in a separate analysis by EPA. A comprehensive description of the methodology
and the recommended technologies and costs are provided in the EPA's proposed
Development Document for Effluent Limitations Guidelines and Standards for the
Copper Forming Point Source Category. EPA considered treatment and control
options based on BPT, BAT, NSPS, PSES, and PSNS for facilities within the
copper forming category.
Option 1: Option 1 is end-of-pipe treatment consisting
of lime precipitation and settling, and, where necessary,
preliminary treatment consists of chemical emulsion break-
ing and chromium reduction. This combination of techno-
logy reduces toxic metals, conventional pollutants, and
also toxic organics through oil skimming.
1-5
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Option 2: Option 2 is equal to Option 1 plus flow reduc-
tion for three waste streams: annealing water, solution
heat treatment, and pickling rinse. Flow reduction of
the annealing water and solution heat treatment streams
is based on recycle, and flow reduction of the pickling
rinse stream is based on spray rinsing and recirculation.
The Option 1 flows for these streams are reduced by
approximately 60 percent, and this reduction will result
in a similar decrease of toxic metals and conventional
pollutants.
Option 3: Option 3 is equal to Option 2 plus filtration
for further reduction of toxic metals and TSS.
The costs associated with these pollution control options were determined
in a separate analysis and provided to the economic analysis study team for
use in the analysis.
1.3.5 Price Impact Analysis
The extent to which the proposed pollution control costs can be passed
through to the customers is very important and is analyzed separately. The
increase in price which is likely to occur if pollution controls are required
is determined by a microeconomic demand/supply analysis of the product markets
in the copper forming industry. Compliance with effluent limitations will
increase the production costs of t.he firms. This cost increase can be trans-
lated as an upward movement in the supply curve of the firms in the industry.
The impact of an increase in costs on price in a single product market depends
on the elasticities of supply and demand in that market. Furthermore, the
percent price (p) increase resulting from a one percent increase in pollution
control costs at the margin (MC) can be expressed precisely in the algebraic
form:
(1.1) dp/p = n
dMC/MC n-e
where n and e are the supply and demand elasticities, respectively. Conse-
quently, if we know n and e, we can estimate the likely changes in the price
1-6
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of copper forming products which would result from changes in costs. Demand
and supply curves are constructed to provide these elasticity estimates. Based
on these estimates, the potential for the price of the copper forming products
to rise due to the costs of pollution control required by the proposed regula-
tion can be calculated. The percent price pass throughs estimated with equa-
tion (1.1) are used in conjunction with the additional per unit pollution
control costs for the selected technologies to calculate the likely price
increases for each product sector market.
1.3.6 Capital Availability Analysis
The capital availability analysis examines the ability of participants
in the industry to finance investments in new capacity, both with and without
pollution control. The approach focuses on the ability of participants to
finance capital investments from their current cash flow, without relying on
outside sources of capital. An implicit assumption in this approach is that
if a plant can invest in pollution control and still remain profitable, then
given the current cost of capital, the capital market would also be willing
to provide the money for the pollution control investment. A capital budget-
ing approach that considers the profitability of the plant assuming that it
decides to install the pollution control equipment is used. If the plant
has a positive cash flow after the investment, it can afford to purchase the
equipment. If not, it could not install the pollution control equipment and
remain profitable.
1.3.7 Plant Closure Analysis
In general, the proposed pollution control requirement will force a
rational plant manager to decide (a) whether to make an additional investment
and incur additional fixed and operating costs, or (b) to sell the plant.
His alternatives are:
(1) Sell the planteither as an operating entity or as scrap.
(2) Make the investment and realize the value of the cash flows
expected from remaining open.
1-7
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Because a plant will remain open for several years if the manager invests
to meet the pollution control limitations, the analysis takes into account the
expected returns over the life of the plant plus the salvage value of the plant
at the end of the last period. The future returns are discounted back to the
present year, using a discount rate equal to the firm's cost of capital. The
plant will be kept open if the expected discounted cash returns less investment
costs exceed the expected salvage value of the plant. If the discounted cash
flow less investment cost is less than the salvage value, a rational owner will"
sell the plant because he would receive a larger return from liquidating than
from operating the plant.
1.3.8 Other Impacts
The proposed regulation may have both direct and indirect impacts on
employment, balance of trade, industry structure, and earnings in the community.
Direct employment and earnings impacts would result from plant closures, and
indirect impacts would result from price increases and the subsequent produc-
tion decreases. Given the changes that may result from the regulation these
additional impacts can be estimated.
1.3.9 Social Costs
The total social costs that are associated with the proposed effluent
regulations are determined. These costs provide a measure of the value of
goods and services lost by society because of regulatory actions. They may
include the use of resources to implement and enforce a regulation, the value
of the output that is foregone because of a regulation and the added costs of
the products to consumer because of a regulation.
For this analysis only the real resource costs are considered. This pro-
vides a reasonable estimate of social costs, since in this case other costs to
society are insignificant, (e.g., the price effects are zero). Social costs for
this analysis are calculated by adding the discounted stream of the estimated
1-8
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total annual operating and maintenance costs to the initial capital investment.
The results suggest that the social costs of the regulatory options range from
$25 million for Option 1 to $50 million for Option 3.
1.3.10 Small Entity Analysis
The Regulatory Flexibility Act (RFA) requires Federal regulatory agencies
to consider small entities throughout the regulatory process. A small entity
analysis of the copper forming industry is performed to determine if small
entity will be significantly impacted by the proposed regulation and to ascer-
tain if a Regulatory Flexibility Analysis is needed for this industry. The
definition of small entity is not precise or universal and several criteria
(e.g., plant production, employment, wastewater flows, etc.) were examined
for establishing small plants in the copper forming industry.
Based on our analysis the impact on small entities does not appear to be
more significant or different than for plants of larger sizes. Since there
are no plant closure impacts in any size category, a formal regulatory flexi-
bility analysis for copper forming industry is not required.
1.4 SUMMARY OF ECONOMIC IMPACT ESTIMATES
Of the 176 plants in the copper forming industry, 94 plants were excluded
from the analysis because they were identified as having no wastewater dis-
charges and, therefore, would incur no additional treatment costs as a result
of the proposed regulations. Of the remaining 82 plants that have wastewater
discharges, 45 are indirect dischargers and 37 are direct dischargers. Tables
1-1 and 1-2 summarize the results of the economic impact assessment for the
alternative pollution control options for direct and indirect dischargers,
respectively.
The industry-wide compliance costs in 1982 dollars for each of the pollu-
tion control treatment options are provided in these tables. They show the
1-9
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TABLE 1-1. SUMMARY OF ESTIMATED ECONOMIC IMPACTS
DIRECT DISCHARGERS
IMPACT VARIABLE
Number of Plants
Incurring Costs Out of
Total of 37
Total Industry Pollution^
Control Investment
Costs ($000)
Total Industry Pollution^-
Operating & Maintenance
Costs ($000)
Price Changes (Percent)
Output Changes (Percent)
Predicted Capital
Impacts
Predicted Plant
Closures
Employment Impacts
Foreign Trade Impacts:
OPTION
1
11
2,429
465
0
0
0
0
0
0
OPTION
2
30
6,191
634
0
0
0
0
0
0
OPTION
3
30
9,252
859
0
0
0
0
0
0
1 1982 dollars
SOURCE: Compiled by JRB Associates.
1-10
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TABLE 1-2. SUMMARY OF ESTIMATED ECONOMIC IMPACTS
INDIRECT DISCHARGERS
INDUSTRY
SEGMENT
Number of Plants
Incurring Costs Out of
Total of 45
Total Industry Pollution1
Control Investment
Costs ($000)
Total Industry Pollution1
Operating & Maintenance
Costs ($000)
Price Changes (Percent)
Output Changes (Percent)
Predicted Capital
Impacts
Predicted Plant
Closures
Employment Impacts
Foreign Trade Impacts
OPTION
1
30
4,153
2,227
0
0
0
0
0
0
OPTION
2
38
7,088
3,562
0
0
0
0
0
0
OPTION
3
38
11,177
3,830
0
0
0
0
0
0
1 1982 dollars
SOURCE: Compiled by JRB Associates.
1-11
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total capital outlays and the annual operating and maintenance costs that are
associated with the various pollution control options. The greatest costs
are for option 3. The total copper forming industry would have to spend
approximately $20.4 million to install, and $4.7 million annually to operate
and maintain the pollution control treatment systems at the option 3 level.
The tables also summarize the estimated economic impacts. Although the
added cost of pollution control systems will impact the profitability of the
plants, the profit reductions are not significant enough to cause any plant
closures or job losses. Our analysis also indicates that the copper forming
plants should be able to afford to install, operate, and maintain the pollu-
tion control systems. The impacts of the added pollution control costs on
prices of copper forming products and the balance of trade are expected to
be negligible. Our results also indicate that small plants would not be
adversely affected by the proposed effluent regulation.
1-12
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2. MARKET DESCRIPTION
This chapter provides an overview of the copper forming industry. It
describes the main characteristics of the industry and the factors that may
affect the growth of the industry's markets. Particular attention is given
to end-use markets for copper products, substitution, foreign competition,
and price trends, because these factors determine the future outlook and
competitiveness of the industry, and producers' ability to afford additional
capital outlays for pollution control equipment.
2.1 INDUSTRY OVERVIEW
2.1.1 Industry Segmentation
The copper forming industry consists of approximately 176 plants that
transform refined copper and copper scrap into intermediate and finished
articles. This industry consists of two major groupsbrass mills and wire
mills. In 1980 these two groups consumed approximately 2.5 million tons of
copper, about 86 percent of the copper consumed in that year..!/ Wire mills
which produce wire and cable products consumed approximately 49 percent of
refined copper and scrap. Brass mills which are involved in the fabrication
of shapes such as sheet, strip, and plate, tube, pipe and mechanical wire,
consumed approximately 37 percent of refined copper and scrap. Other indus-
tries consuming copper include ingot makers and foundries that use mainly
scrap to manufacture their products account for approximately 6 and 4 percent
of the total copper consumed, respectively.^./ The remaining 5 percent of
±J Copper Development Association, Annual Data 1981.
±J For purposes of this economic analysis, the copper forming industry includes
only wire and brass mills. Other industries consuming copper are covered
by other regulations, e.g., the regulation on foundries.
2-1
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U.S. copper consumption is accounted for by power mills and a variety of
other industries. U.S. consumption of copper by the major copper using indus-
tries is shown in Table 2-1.
2.1.2 Production Processes
The copper forming industry is comprised of plants engaged in forming
basic shapes (plate, sheet, strip, rod, tube, and wire) from cast forms,
such as slabs, billets, and cakes. These plants employ a number of basic
processes to form the copper or copper alloy, alter its mechanical properties,
and change the condition of its surface. The basic operations are hot rolling,
cold rolling, extrusion, drawing, and forging.
The wire mill segment is involved in drawing bare wire and the production
of manufactured copper wire. Refined copper is heated, broken down by rolling
or extrusion, and rolled into rods. The rods are then put through dies to
make wire and cable of various sizes, ranging from thick electric power cables
to hairlike wires for electronics equipment. Other wire mill products include
high voltage overhead electricity transmission cables which are usually bare,
and manufactured copper wire products which are generally insulated with a
variety of materials.
The brass mills segment of the copper forming industry generally consumes
large amounts of copper scrap and refined copper. Brass mill products, which
are made of both alloyed and unalloyed copper, can be grouped into three basic
shapes: sheet, rods, and tubes. The primary alloyed items, brass and bronze,
are formed by melting scrap copper with primary copper and one of several
possible alloying metals, such as zinc for brass and tin for bronze. Depend-
ing on the thickness to which they are rolled , brass sheets are classified
as either plates or strips. Brass rods are produced by drawing and those
that are subjected to additional drawing become mechanical wire (which is
different than electrical wire). Brass tubes are produced by extruding
copper in a variety of diameters, wall thicknesses, and configurations,
including square and rectangular.
2-2
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TABLE 2-1. CONSUMPTION OF COPPER IN THE UNITED STATES
1980£/
MARKET SEGMENT
Copper Formers
Brass Mills
Wire Mills
Subtotal
Other Consumers
Foundries
Powder Plants
Ingot Makers
Other Industries*!/
TOTAL
COPPER CONTENT, THOUSANDS OF SHORT TONS
REFINED COPPER
564.0
1,442.8
2,006.8
18.5
10.0
2.7
19.0
2,057.0
SCRAP
531.9
-0-
531.9
97.8
17.0
171.0
94.0
911.7
TOTAL
1,095.9
1,442.8
2,538.7
116.3
27.0
173.7
113.0
2,968.7
% TOTAL
36.9
48.6
85.5
3.9
0.9
5.9
3.8
100.0
2J Preliminary.
_/ Include chemical, steel, and aluminum industries.
SOURCE: Compiled by JRB Associates from the Copper Development Association,
Annual Data 1981 Report.
2-3
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2.1.3 Production Trends
Table 2-2 provides information on various copper forming products and
gives annual production levels for the industry in 1970, 1975, and 1980.
The industry's overall production dropped from 4,936 million pounds in 1970
to 4,142 million pounds in 1975, and then recovered to 5,386 million pounds
in 1980. The cyclical movement in the overall economy over this period was
a major factor affecting the downswing and upswing in the production of this
industry. During the recession period of 1974-1975 the industry had to reduce
its output as demand for copper products slackened. After the 1974-1975 reces-
sion period, as the economy improved, copper formers were able to increase their
production levels. The growth of the industry's output has not been uniform
over all of the various products. Major increases in output have been achieved
by wire mills, which grew 18 percent over the 1970-1980 period. On the other
hand, the output from brass mills has remained relatively constant.
2.2 END-USE MARKETS
The demand for copper forming products is a derived demand. Copper
forming products are generally used in the production of final products and
are not the final products themselves. For example, the housing, automobile,
and electrical appliance industries use copper fabricated products to produce
a variety of items such as radiators, heaters, and. utensils. As a result,
the demand for specific copper forming products depends on, and is influenced
by, the behavior of key industrial sectors or end-use markets in the economy.
There are five major end-use markets for copper forming products. In
order of importance, the major market segments are as follows:
Building and construction;
Electrical and electronic products;
Industrial machinery and equipment;
Consumer and general products; and
Transportation equipment.
2-4
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TABLE 2-2. PRODUCTION LEVELS FOR THE DOMESTIC COPPER FORMING INDUSTRY
OVER SELECTED YEARS (MILLIONS OF POUNDS, METAL WEIGHT)
Copper Forming Products
Brass Mill Products
Sheet, Strip and Plate
Rod, Bar and Mechanical Wire
Plumbing Tube and Pipe
Commercial Tube and Pipe
Total Brass Mill Products
1970
1975
1980
2,516
Wire Mill Products
Bare Wire
Communication Wire and Cable
Other Wire Products
Total Wire Mill Products
226 167 204
735 584 897
1,462 1,312 1,733
2,423 2,063 2,870
TOTAL INDUSTRY
4,936 4,142
5,386
SOURCE: Copper Development Association, Annual Data 1981.
2-5
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Table 2-3 shows copper consumption by major end-use markets in the United
States over 1976 to 1980. A description of each of these end-use markets is
given below.
2.2.1 Building and Construction
The building and construction industry was the leading end-user of copper
products in 1980. This segment consumed approximately 30 percent of the pro-
ducts manufactured by the copper forming industry. Most of the products used
by this market are in the form of wire mill products. Copper has also been
widely used for plumbing, roofing, and decorative items in public buildings
and homes, largely because of its corrosion resistant properties.
2.2.2 Electrical and Electronic Products
The electrical and electronic products market segment was the second
largest end-user of copper forming products in 1980, representing about 28 per-
cent of domestic copper products consumption. Copper is a preferred material
for applications such as electrical lighting, wiring, and cable because of its
superior electrical conductivity and energy efficiency. Other specific appli-
cations include telecommunications equipment, electric motors, generators, and
numerous miscellaneous electrical parts.
2.2.3 Industrial Machinery and Equipment
The industrial machinery and equipment end-use segment accounted for
approximately 18 percent of the 1980 U.S. copper consumption. This market
segment uses brass and wire mill products in fittings, valves, bearings,
screws, and pumps. Many of these parts are machined from extruded rod.
Copper tubings in this market segment are used for heat exchangers in refrig-
erators, air conditioners, freezers, and water coolers.
2-6
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TABLE 2-3. CONSTRUCTION OF COPPER PRODUCTS BY MAJOR END USE MARKETSl./
DOMESTIC MARKETS
Building Construction
Electrical and Electronic
Products
Industrial Machinery and
Equipment
Consumer and General Products
Transportation Equipment
Total
MILLIONS OF POUNDS BY METAL WEIGHT
1976
1,707
1,449
1,501
798
835
5,840
1977
1,942
1,639
1,137
820
909
6,447
1978
2,095
1,711
1,215
930
882
6,833
1979
2,107
1,820
1,229
994
846
6,996
1980
1,792
1,632
1,056
823
599
5,902
% 1980
30.4
27.7
17.9
13.9
10.1
100.0
.£' Products from wire mills and brass mills account for most of these totals,
but products from foundries, etc., are also included.
SOURCE: Copper Development Association, Inc., Annual Data 1981.
2-7
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2.2.4 Consumer and General Products
Consumer and general products accounted for approximately 14 percent of
domestic copper use in 1980. This market segment consumes copper to manufac-
ture durables such as washing machines, radios, televisions, phonographs, tape
recorders, cutlery, watches, clocks, microscopes, projectors, and many types
of gages. Solid copper, brass, and bronze are also popular materials in
utensils, furnishings, jewelry, and other decorative items.
Miscellaneous uses of copper forming products include shell castings,
projectile fuses, and rotating bands for ordnance. Copper also has important
applications in coinage in the United States.
2.2.5 Transportation
In 1980 the transportation equipment sector accounted for 10 percent of
U.S. copper consumption. This industry segment uses copper in automobile,
airplane, railroad, and marine components. For example, the automobile indus-
try alone uses approximately 25 pounds of copper per vehicle. Most of this
goes into radiators, air conditioners, power windows, seats, and brakes.
Copper is also used in producing heaters, defrosters, bushings, carburetors,
oil lines, and wiring in cars and other vehicles. Large quantities of copper
are used in diesel locomotives, railroad passenger cars, and switching and
signal devices.
2.3 TECHNOLOGICAL CHANGE AND SUBSTITUTION
There are three types of activities other than price that affect the
demand for copper forming products. These factors are:
Direct substitution of one material for another,
Technical change in end-use markets,
More efficient use of copper.
2-8
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Each of these activities affect the demand for copper and is considered here
to establish factors other than the proposed regulation which may affect the
industry over the regulatory impact period.
2.3,1 Direct Material Substitution
Direct substitution of copper forming products from materials such as
aluminum, plastic, steel, and others is widespread. Aluminum has made great
inroads into traditional copper markets because of its similar properties, its
lighter weight, and lower cost. The greatest replacement of copper by aluminum
has been in the transmission of electricity at high voltages. Some 40 percent
of the insulated power cable, and over 90 percent of bare conductor applica-
tions, are now provided by aluminum..!/ Because of its weight advantage over
copper, aluminum-conductor, steel reinforced cable has been used for for most
long-distance power transmission lines for more than a decade. Aluminum
alloys are also being used as conductors on overhead transmission lines.
In the building industry, substitution of aluminum for copper has also
been increasing. The amount of substitution is directly related to the size
of the wire, i.e., the larger the wire size, the greater the percentage of
aluminum building wire used. Substitution of aluminum for copper in small
building wire sizes has been hampered because of safety problems in residential
applications. At current prices copper still remains the first choice for
automotive wiring. In areas where space in an existing design is not a pro-
blem, the use of the larger sizes of aluminum wire will increase. Examples
of such applications are battery cables, air conditioners, clutch coils, alter-
nators, anti-skid devices, horn coils, and some accessory motors.^' Plastic
has also replaced copper in many plumbing applications.
"L Bureau of Mines, Mineral Commodity Profiles, Copper, September 1979.
o /
_' Raymond F. Mikesell, The World Copper Industry, Baltimore, Johns Hopkins
University Press, 1979, pp. 160-163.
2-9
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In addition, copper and aluminum are mutually interchangeable in some
heat exchanger applications. Copper has been used predominately in this area
because of its heat transfer properties, corrosion resistance, ease of fabri-
cation, and ease of joining the various components by conventional soldering
techniques. The largest use of copper in this area, automobile radiators, is
vulnerable to aluminum. However, the inability to repair aluminum radiators
is inhibiting widespread application. Copper tubing is still the predominant
primary surface in heat exchangers for commercial refrigerators and freezers,
and for room, central residential, and commercial air conditioners. Aluminum
tubing is used in less than 10 percent of these products. Aluminum alloy
tubing in air conditioners may have twice the wall thickness of copper, but
still maintain a weight and cost advantage. However, extensive manufacturing
development is necessary before aluminum could completely replace copper in
these applications.
2.3.2 Technological Change in End-Use Markets
Technological substitution has also significantly impacted the demand for
copper. The most obvious development is that of microwave technology and com-
munication satellites, which have substantially reduced the demand for undersea
and long distance copper cables. Current developments in fiber optic trans-
mission technology for intracity communication transmission lines may reduce
or eliminate much of the market for copper wire products over the long run.
2.3.3 More Efficient Uses of Copper
The demand for copper forming; products has also been affected by the
more efficient uses of copper. For example, improved copper alloys have made
it possible to make thinner walled copper tubing, with the result that it
requires substantially less copper to produce a foot of copper tubing of the
same inside diameter today than it: did ten years ago. Automobile radiator walls
today are made thinner, thus reducing the amount of copper used in radiators.
2-10
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2.4 IMPORTS AND EXPORTS
Copper forming products are traded worldwide. Additionally, foreign
competition from overseas copper forming plants has increased. As a result,
domestic producers must take into account the actions of foreign suppliers in
their pricing policies or they could lose a portion of their markets to
foreign producers.
2,4.1 The Trade Balance
The balance of trade in copper products has historically been unfavorable
to the United States. Until recently, domestic producers had little incentive
to develop an export market for their fabricated products primarily because of
a widespread belief that they could not compete effectively in international
markets because of subsidized production, tariff and nontariff barriers, and
low input costs in foreign countries._' Therefore, they concentrated their
marketing efforts on domestic and traditional customers.
Recently, however, the competitive position of U.S. domestic suppliers
in the world has changed to the point where the trade balance has improved
substantially. As shown in Table 2-4, imports of copper mill products have
dropped by 44 percent over the 1978-1980 period, from 492.6 million pounds
in 1978 to 294.0 million pounds of copper mill products in 1980. Meanwhile,
exports have increased by approximately 50 percent, from 209.4 to 312 million
pounds over the same period. Thus, the trade deficits of 283.2 and 187 million
pounds in 1978 and 1979, have changed to a trade surplus of 18 million pounds
of copper in 1980. In general, brass mill products accounted for the largest
ZJ U.S. Department of Commerce, The Export Potential of Copper Mill Products,
July 1979.
2-11
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TABLE 2-4. IMPORTS AND EXPORTS OF COPPER FORMING PRODUCTS 1970-1980
(Millions of Pounds)
YEAR IMPORTS EXPORTS TRADE-BALANCEj./
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
202.4
249.2
297.7
308.7
257.6
195.3
353.5
359.4
492.6
436.0
294.0
69.9
77.9
84.3
127.8
161.4
137.1
130.1
165.5
209.4
249.0
312.0
-132.5
-171.3
-213.4
-180.9
-96.2
-58.2
-223.4
-193.9
-283.2
-187.0
18.0
JL' Calculated by JRB Associates, from import and export data in the Copper
Development Association, Inc., Annual Data 1981.
2-12
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relative share of imports and lowest relative share of exports (see Figure 2-1).
On the average, imports of brass mill products have been three times as great
as exports. On the other hand, exports of wire mill copper products were
four times as large as imports in 1980.
2.4.2 Factors Affecting the Trade Balance
There are many factors that account for the favorable change in the balance
of trade for copper forming products in 1980. As stated earlier, the U.S.
copper forming industry has not had a strong export performance. A study by
the Department of Commerce Industry and Trade Administration Office suggests
that the recent surge in U.S. exports and corresponding decline in imports
for copper forming mill products is a result of the following major factors:_'
The dramatic change in the pricing policies of U.S.
producers which has made U.S. copper fabricated pro-
ducts more competitive, domestically and abroad. Before
1978, producers of copper mill products generally based
their prices on the producer's list price. In mid-
1978 domestic copper producers switched their pricing
policies and began basing their prices on quotations
directly or closely related to the New York Commodity
Exchange (COMEX) prices. This move improved the com-
petitiveness of U.S. products domestically and abroad,
especially during periods of slack demand, when producer
prices were generally higher than imported mill products.
The decline in the U.S. dollar over the 1978-1980 period
served to make U.S. mill products cheaper and thus more
attractive to foreign purchasers.
« Increasing foreign input costs, especially energy related
costs, have narrowed the competitive advantage foreign
suppliers had over their U.S. counterparts.
Some foreign economies and markets have been increasing
at a faster rate than that of the U.S. The rapid surge
in the demand in the Middle East countries is a prime
example.
U.S. Department of Commerce, 1980 U.S. Industrial Outlook (for 200 indus-
tries with projection to 1984), January, 1980.
2-13
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2-14
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The somewhat concurrent occurrence and timing of these factors have served
to enhance the foreign trade position of the U.S. Assuming these trends con-
tinue in the future, the,U.S. copper forming industry is expected to continue
to improve its competitive position in the world market. Other incentives,
including various export development programs of the Department of Commerce,
and trade liberalization policies negotiated in the Tokyo Round of Multilateral
Tariff Negotiations should also enhance U.S. producers' position abroad in
future years.
2.5 PRICES
2.5.1 Industry Price Determination
Historically, copper mill products were marketed at prices based on two
major price systems. One system consisted of producer prices set independently
by major primary United States and Canadian producers. The second price
system consisted of prices related to quotations on a metal/commodity exchange.
The London Metal and the New York Commodity Exchanges (LME and COMEX) are
two organized metal exchanges (markets) where most international copper trad-
ing occurs.
U.S. producers have traditionally sold their products at their published
prices. These producer prices were influenced by the COMEX and LME copper
price, but they were relatively stable over long periods of time. Generally,
producer prices moved slowly and at times were above or below the exchange or
"outside market" price. During periods of strong demand, U.S. producers
tended to change their prices slowly and not by the magnitude often experienced
by the COMEX/LME prices so that the producers' prices have generally remained
well below those set by the "outside market," thus giving their customers an
advantage on raw material costs and retarding substitution by other materials.
During periods of weak demand, domestic U.S. producer prices were usually
higher than the metal exchange market prices as producers attempted to recover
their costs of production.
2-15
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This behavior resulted in the. existence of a two-tier price system for
copper products which was characterized by a wide divergence between the
outside market price for copper (i.e., the LME price) and the domestic pro-
ducer price. This system seemed to work as long as the market did not weaken.
However, since 1975 a combination of factors appears to have had substantial
restraining influence on the pricing decision of the domestic primary producers.
Between 1975 and 1978, the world copper market weakened, and "outside market"
prices, or imported prices, fell substantially below those of the U.S. producers,
Many U.S. copper consumers increasingly switched their purchases to the lower
priced copper fabricated product imports. This situation climaxed in the new
producers' price policies of mid-1978 when key U.S. producers decided to base
their prices on the daily quotes of COMEX. Since 1978, Kennecott Copper and
Anaconda Co. have based their spot prices on the daily quotes of the nearest
copper futures contracts on COMEX, plus a fixed premium. Other producers have
maintained a fixed-price system, but competitive forces have compelled them to
change their quotes very frequently. In effect, most companies' prices have
become very responsive to changes on the commodity exchange.
2.5.2 Recent Copper Price Trends
In February 1980 copper prices reached a high of Si.45 per pound. This
high price resulted from (1) the significant decline in copper stockpiles in
1979, and (2) speculation in a number of metals markets in early 1980. Average
prices in 1979 sharply exceeded those in 1978, resulting in substantial earning
gains. However, by early April 1980, major producers were charging $0.91 to
$0.95 a pound for refined copper, down from February's (1980) domestic high of
$1.45. Two major factors influenced the decline in the price of copper. They
are:
The decline in gold and silver prices, and the subsequent
speculative spillover effects;
The Federal Reserve action to raise interest rates;
The worldwide recession.
2-16
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The record U.S. copper price of $1.45 a pound reflects a spillover of the
speculative demand for precious metals. Copper is viewed as an inexpensive
inflation hedge by speculators, therefore, as the price of gold reached a high
of,$875 an ounce in '1980 compared with $200 in 1974, and silver hit $50 an ounce
versus the 1974 record of $6.50, the price of copper soared. However, as gold
and silver prices declined in the latter half of 1980, the speculative spillover
from these markets dried up and the price of copper receded.
Higher interest rates have also contributed to the recent fall in the
prices of copper. High interest rates decrease the demand for durable goods,
increase the probability of and/or severity of recessions. The 1981-1982
recession has had a bearish influence on copper prices since copper demand is
closely tied to industrial activity. Furthermore, since many copper consumers
finance their inventories with short-term credit, the increased cost of money
has forced many of them to trim their inventories and capital outlays. This
situation is expected to continue as long as these conditions prevail.
2.6 SUMMARY OF MARKET DESCRIPTION
The analysis suggests that the copper forming industry is involved in
producing products that are very sensitive to the behavior of the overall
economy. In periods of expansion, the industry's end-use markets expand and
the supply, demand, and prices for copper forming products increase. On the
other hand, during periods of recession and high interest rates, the end-use
markets contract and the output, demand, and prices of copper products fall.
Substitution from other products and new technologies do exist, but they
are not significant enough to reduce the growth of the copper industry market.
In 1980 the export of wire mill products increased while imports of some
copper forming products stabilized or decreased slightly. This trend is
expected to continue as long as U.S producers can continue to market their
products aggressively at home and in the world market.
2-17
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3. INDUSTRY STRUCTURE AND PERFORMANCE
3.1 OVERVIEW
The impact of the proposed effluent regulations on the copper forming indus-
try will be influenced by the performance and pricing behavior of the partici-
pants (firms) in the industry. In general, the performance of a firm (partici-
pant) in an industry is determined by the conduct (i.e., the pricing and pro-
duction strategies) of the firms in the market. The firm's market conduct is,
in turn, dependent upon the structure and market conditions prevailing at the
time. Certain market structures (e.g., monopoly) imply that the participants
have higher profit margins and would be able to absorb added costs with less
financial difficulty than other firms (i.e., firms in competitive markets).
This chapter examines the market structure, conduct, and financial per-
formance of the copper forming industry. The results of this examination
are used in Chapters 4 and 6 to estimate how the industry would behave when
faced with the decision to invest in the proposed pollution control equipment.
The various types of industry structure and their role in determining economic
impacts are discussed. The observed market structure of the copper forming
industry is described and key financial ratios are analyzed which establish
the profitability and capital structure of the industry.
3.2 TYPES OF MARKET STRUCTURE
The range of market structures is bound by perfect competition and
monopoly. The perfectly competitive industry is characterized by:
A very large number of firms (buyers and sellers) where
each firm accounts for an imperceptible share of the market;
A homogeneous or standardized product;
3-1
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A market in which each member is well informed about product
quality and each other's arices;
Relatively easy exit and entry into the industry.
In a perfectly competitive market no individual firm has influence over the
market price. The price is given to the firm and the firm decides only how
much to produce and sell at the prevailing price. Because each firm's output
is an imperceptible part of the total output of the industry, output decisions
have no influence on the market price. Also, since the products of the firms
are perfect substitutes for one another, the price elasticity of demand facing
the firm is infinite. For these reasons, the price that the firm observes is
determined by the interactions of supply and demand forces in the entire market
where all firms participate.
The type of market structure at the other end of the spectrum is monopoly.
This market structure is characterized by:
One firm in the industry;
No close substitutes for the product;
Substantial barriers to entry.
The latter characteristic is important for the maintenance of monopoly power
in the long run. Barriers to entry must exist if the monopolist can remain
the sole producer of goods in the long run, while at the same time earning
large profits which induce entry. Barriers to entry may exist because of
(1) weak demand conditions, (2) control of raw materials by one firm, (3)
legal and institutional factors imposed by governments, (4) scale economies
that satisfy the entire market, (5) large capital requirements, and (6) the
lack of technological expertise by outsiders.
In general, the monopolist can fix price and let demand conditions deter-
mine output or he can fix output and let demand conditions determine price.
He maximizes his profits at the output at which his marginal revenues equal
3-2
-------
marginal costs. At any given quantity of output sold, the marginal revenues
and costs will be less than price, because the demand curve of the industry
is downward sloping. By way of contrast with the perfectly competitive firm,
the monopolist may (1) charge a higher price, (2) produce fewer units, and
(3) operate a less than optimal scale plant.
Between these two extremes are other forms of market structure. Closely
related to the perfectly competitive market is monopolistic competition. This
market structure is associated with industries in which there are very many
firms, but the product which is produced is somewhat differentiated (e.g., the
toothpaste industry). As a result, the demand facing the individual firm is
not perfectly elastic, but its price elasticity is high due to the existence
of close substitutes produced by other firms in the industry. Firms in this
market attempt to create separate markets for their products through advertis-
ing and product design, in order to have some control over their price and
output decisions. To the extent that they can create a separate market for
their products, their price will be higher and their output lower than under
a perfectly competitive market structure. The difference between monopoly
and monopolistic competition is that in the latter barriers to entry are not
significant.
Another market structure within this spectrum is the oligopolistic market,
which is characterized by a few sellers. There are at least five different
types of oligopoly models that are recognized in the economic literature. How-
ever, the assumption that unifies them is that the number of sellers in the
market is sufficiently small that they recognize the joint mutual interdepen-
dence of their activities. One seller recognizes the fact that his actions
affect other sellers and the other sellers are likely to react in some fashion
to his activities. Since there is no way to determine, a priori, the inter-
actions that may result because of a decision, the market solutions to this
type of market structure are indeterminate. The pricing behavior of this
market structure is sometimes characterized by price leadership and follower-
ship, long periods of stable prices, or by periods of price wars to capture
3-3
-------
market share. The airline industry provides a good example of this type of
market structure.
Market structure influences pricing policy in an industry and, hence, the
financial condition and performance of individual firms in the industry. In a
perfectly competitive market firms realize normal profit, i.e., profits approach
the market rate of interest plus a premium for the risk associated with that
business. In a monopoly market, the firm has market power and can earn a
greater profit than under perfect competition. The profits of the firms in
the other market structures are somewhere betwen these two market extremes.
3.3 MARKET STRUCTURE OF THE COPPER FORMING INDUSTRY
Market structure can be assessed by evaluating the following four factors:
(1) buyers and sellers concentration, (2) vertical integration, (3) product
differentiation, and (4) ease of entry into the industry.J_' Each of these
factors in turn affect the individual firms' performance and price/output
decisions.
3.3.1 Conceptual Problems in Determining Market Structure
It is difficult to analyze the financial condition and performance of
participants in the copper forming industry in a precise manner because of
the heterogeneity of the units (i.e., diverse nature and size) and because of
the ownership relationships. The problems arise because some of the partici-
pants are subsidiaries of large corporations that are involved in producing
and selling products unrelated to copper forming (e.g., oil companies). Others
are involved in earlier stages of copper manufacture such as mining, smelting,
and refining. To overcome these problems and alleviate some of the biases
that these conditions create in analyzing the performance of the participants
in the copper forming industry, the analysis was disaggregated into three
JL' James V. Koch, Industrial Organization and Prices, Englewood Cliffs, N.J.,
Prentice-Hall, Inc., 1974.
3-4
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broad categoriescorporate, reporting entity, and plant. This grouping pro-
vides a more precise definition of the participants in the industry and allows
for a meaningful analysis of the financial condition of the industry.
The financial condition at the corporate level provides information on
the overall economic and financial viability of all the entities that make
up the corporation, and its ability to incur debt or finance new investment
in plant, machinery, and equipment. At this level, the analysis is not con-
cerned with the copper forming manufacturing facility, per se. It is mainly
concerned with the overall financial picture of the entire company, whether
it be a copper producing company or an oil conglomerate that includes a copper
forming plant.
The analysis at the reporting entity level provides information on the
financial condition of the unit to which individual copper forming plants
report directly. This unit may be separate from the parent corporation which
may be involved in producing other kinds of products or it may be the copper
forming company itself (i.e., if it is engaged in producing only copper form-
ing products). At this level of analysis the unit or reporting entity which
is most closely related to the copper forming plants is identified and analyzed.
Finally, the analysis at the plant level examines the profitability of
individual copper forming plants. The disaggregation at this level is important
because it is doubtful whether a corporation (whether a copper company or an oil
company) would continue to subsidize and/or invest further in a sector of its
organization that was not making profits over the long run, even though the
parent company was making large profits or had the cash flow to invest in pol-
lution control capital equipment.
3.3.2 Industry Concentration
A measure of the industry concentration provides information on the number
and size distribution of sellers in the market. It indicates how much of the
3-5
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market sales (or some other unit of output measurement) is held by a portion
of firms in that market. For example, it provides the percentage of sales
accounted for by the 4, 8, 20, and 50 largest firms in that market. Generally,
when concentration is low, there is a large number of firms, and each individual
firm's share of the market will be so small that no individual firm would be
able to influence prices significantly (i.e., firms are price-takers and not
price-setters). On the other hand, in markets where concentration is high,
the pricing and production decisions of any one firm will have some effect
on the pricing and output of other firms in the relevant market. Consequently,
price and output determination by the firms will be interdependent.
Table 3-1 summarizes concentration ratios for the copper forming reporting
entities and corporations (including single plant firms) responding to the 308
Economic Survey..?/ Based on this survey, the largest four reporting entities
in 1979 accounted for approximately 52 percent, and the largest eight reporting
entities accounted for 74 percent of sales in the industry. The concentration
ratios for the corporations are higher. In 1979, the largest four corporations
accounted for 69 percent, and the largest eight corporations accounted for
82 percent of sales in the industry.
The concentration ratios at the reporting entity level are considered to
be low when compared to other manufacturing industries, such as automobile,
steel, and even other stages of copper manufacture. For example, six companies
in the copper refining segment controlled over 90 percent of the U.S. refining
capacity in 1973.U
3.3.3 Integration
The degree of integration is an important determinant of the industry's
conduct and performance. For example, in a firm that is highly vertically
The concentration ratios shown in the table are greater than those for the
entire copper forming industry,
Raymond F. Mikesell, The World Copper Industry, Baltimore, Johns Hopkins
University Press, 1979, p. 31-33.
3-6
-------
TABLE 3-1. INDUSTRY CONCENTRATION RATIOS
NUMBER OF
PARTICIPANTS
Top 4
Top 8
Top 16
Total3
REPORTING ENTITY
CONCENTRATION
RATIO (Z)
51.7
73.9
93.3
100.0
CUMULATIVE
1979 SALESb
($000) j
2,965,620
4,237,793
5,352,251
5,737,039
CORPORATION INVOLVED
IN COPPER FORMING
CONCENTRATION
RATIO (Z)
69.4
82.1
96.0
100.0
CUMULATIVE
1979 SALESb
($000)
32,709,911
38,706,266
45,267,312
47,161,297
A total of 41 reporting entities and 43 corporations.
Not all of the sales of these reporting entities and corporations are
due to copper sales.
SOURCE: Compiled from data provided in the 308 Economic Survey.
3-7
-------
integrated, material costs may be somewhat insulated from the market demand
forces at intermediate stages of production. This does not mean that producers,
in making price and output decisions, can ignore market forces. Rather, it
means that producers have control over some, but not all, of the relevant
demand forces emanating from downstream markets.z.'
In addition, the existence of a high degree of integration in a particular
market can constitute an effective barier to entry into the industry. For
example, a potential entrant to the copper forming stage could face a dilemma
if most of the existing firms are highly integrated. Suppose that a firm
enters into the copper forming industry when 90 percent of the production of
both copper ingots and copper forming products are controlled by vertically
integrated firms. If the firm buys from a nonintegrated ingot producer, the
copper forming firm can depend on only 10 percent of the industry's ingot
capacity, and might find itself dealing in a thin market. The entrant avoids
this problem, of course, if the f:lrm enters as an integrated producer. But
that strategy may not be possible if one of the production stages is large-
scale and capital intensive. The entrant must choose between the costs of
integrated entry (high capital investments in fixed assets) and the risks of
unintegrated entry so as to minimize his disadvantage. The existence of such
barriers to entry into the industry is important it affords opportunities for
firms in the industry to indulge in noncompetitive pricing behavior and produc-
tion behavior of the existing producers.
Several of the domestic primary producers participate either directly or
through subsidiaries in all five stages of production: mining, milling, smelt-
ing, refining, and fabrication (i.e., copper forming). The principal domestic
producers such as Anaconda (ARCO), Inspiration, Kennecott (Standard Oil of
Ohio), ASARCO, Magma, Phelps Dodge, and White Pine are all integrated. Of
these, Phelps Dodge, ASARCO, Kennecott, and Anaconda control copper forming
facilities that account for 50 percent of domestic copper consumption. This
2/ Buyer concentration is important because copper fabricated products are
intermediate goods rather than goods going to final consumers. In times
of recession, strong buyers can force prices below average costs.
3-8
-------
is a high level of integration but may not be an overriding influence on price
and output decisions because of the existence of significant capacity at other
domestic and foreign independent producers and because of other market factors
discussed below.
Kennecott, the largest U.S. copper producer, is vertically integrated
downstream into copper forming through its wholly owned subsidiary, Chase
Brass and Copper. Anaconda participates in copper forming through Anaconda
Brass and Anaconda Wire and Cable. These subsidiaries consume more copper
than is produced by Anaconda. Phelps Dodge produces wire, wire rod, and
copper tubes at facilities which consume about 30 percent more copper than
the primary production at Phelps Dodge. Similarly, Cities Service owns New
Haven Copper and Chester Cable; Cyprus mines (AMACO) owns Cyprus Wire and
Cable, and El Paso Natural Gas owns Narragansett Wire. While ASARCO does
not own copper forming capacity directly, it owns 33 percent of Revere._'
The copper forming divisions, subsidiaries, and affiliates of the major
copper producers are believed to account for roughly 35 to 55 percent of the
total copper forming capacity. Of the three major producers, Anaconda appears
to consume the highest percentage of its own copper, Phelps Dodge the next
highest, and Kennecott the least. However, the vagaries of the market from
year to year and the fact that companies buy and sell to and from each other
complicate the picture._'
The degree of integration is believed to influence the price-output deci-
sions of the companies in several ways. The Standard and Poor's Corporation,
in its 1975 Nonferrous Metal Survey, noted that integrated companies have
traditionally considered the copper forming stage as an outlet for the primary
_' Economic Impact of Environmental Regulations on the United States Copper
Industry (prepared for the U.S. Environmental Protection Agency, Washington,
D.C., by Arthur D. Little, Inc., January 1978), p. 111-24 and Copper,
Supplement to American Metal Market, September 28, 1981, p. 8A.
_' Economic Impact of Environmental Regulations on the United States Copper
Industry, op. cit., p. IV-13.
3-9
-------
copper produced. For this reason, companies have typically endeavored to
maintain low prices on copper forcing products, relying on the sale of the
primary metal for the bulk of their profits. The largest expense for most
independent copper formers is the cost of copper; thus, profitability depends
substantially on the copper former's mark-up or spread. As a result, there
is often a struggle occurring in the market. The integrated producers seek
to keep product prices on its copper forming products low enough to boost
demand and provide an expanding ms.rket for the more profitable primary and
refined output, while the independent copper formers strive to raise their
prices and margins. Both groups prosper in a high demand - high price market
such as in 1974, but independents suffer less in recessionary periods - low
price markets such as 1975, because they can benefit from the lower raw
materials costs. During recessions the integrated producers can have sub-
stantial sales and earning losses because of their high fixed costs, reduced
operating rates, as well as reduced prices.
3.3.4 Product Differentiation
Product differentiation is an important determinant of market share and
price/output decisions in some industries. Some firms may significantly
influence their profit margins by differentiating their products (i.e., by
creating separate markets) which enhance their market share or provide them
with the market power to raise prices. However, product differentiation does
not play an important role in the copper forming industry. Copper forming
products are relatively homogeneous, in that they have well defined physical
and performance properties conform to generally accepted standards in the
industry. For this reason, copper formers' efforts in advertising and product
differentiation are small.
3.3.5 Barriers to Entry
A barrier to entry is simply any advantage held by existing firms over
those firms that might potentially produce in a given market. Examples of
3-10
-------
barriers to entry include the control of sources of key raw materials by
existing companies, large capital and technological requirements, the cost
and source of financing investment, and vertical and horizontal integration
of existing companies.U For example, the size of the investment that is
necessary to install a new steel plant and the technology that is required by
individuals entering a new area of manufacture may be significant deterrents
to entry.
As described in Section 3.3.3 above, vertical integration and access to
captive sources of raw materials represent only minor potential barriers for
copper formers. Moreover, this industry is not as capital intensive as other
manufacturing industries or other stages of copper manufacturing, such as
smelting and refining. For these reasons, barriers to entry into the industry
are not a significant factor in price determination for copper forming products,
Another factor that has affected the copper forming market structure is
the increasing number of new firms and the growing level of production in
foreign countries. In recent years foreign countries have been moving into
the downstream stages of copper manufacturing and building copper forming and
processing plants near the source of the raw material. However, because of
the growing demand for copper products abroad and the change in pricing
policies of U.S. copper formers over the past four years, the impacts of
these overseas developments have been mitigated to some degree.
3.3.6 Summary of Industry Structure Characteristics
After reviewing the four basic industry structure measures it can be
inferred that this industry is characterized by (1) relatively moderate four-
firm and eight-firm concentration ratios, (2) a moderate degree of vertical
integration which has some, but not overriding, effects on market price
2J -J. S. Bain, Industrial Organization New York, John Wiley and Sons, 1968,
pp. 251-301.
3-11
-------
formations, (3) a low degree of product differentiation, and (4) moderate
entry requirements. For these reasons a relatively high degree of competition
exists among the participants of this industry.
As discussed previously, competitive industries are expected to earn
"normal" rates of profit. Thus, review of industry financial ratios serve a
useful function of checking the conclusions regarding market behavior. In
the next section the financial performance of the industry is examined and
found to support the conclusion that a fairly competitive market structure
operates in the industry.
3.4 FINANCIAL PERFORMANCE OF THE COPPER FORMING INDUSTRY
This section describes the financial condition and performance of parti-
cipants in the copper forming industry. The financial analysis focuses on
measures of profitability, capital structure, and productivity. Measures of
these variables provide information on whether the participants in the copper
forming industry can raise the required capital for expenditures in pollution
abatement equipment, from retained earnings (internally), or from borrowing
in the stock or bond markets (externally). Furthermore, they provide indi-
cators of the financial viability (including plant closure potential) of par-
ticipants under present circumstances, and in the event of the EPA effluent
regulation being imposed.
The analysis examines the actual performance of forty-three copper
forming corporations^.' and forty-one reporting entities^.' that operate 103
~J For purposes of this analysis, copper forming corporations include not only
oil corporations and other conglomerates whose subsidiaries include copper
formers but also smaller corporations whose only operation is copper forming.
2.' "Reporting entity" for purposes of this analysis is defined as the manage-
ment structure that most clearly reflects copper forming operations and
only copper forming operatins. Some plants report directly to a corporation
and the data from that corporation may not properly be considered data from
a "reporting entity" because the corporation may include noncopper forming
operations.
3-12
-------
copper forming plants. Key financial ratios for the participants in this
industry are evaluated over time by entity and firm size. Evaluating the
data over a period of time is important because it mitigates the potential
for distortions caused by unusual years when losses or gains may have been
large. Reviewing the data by entity size provides information on whether size
plays an important part in determining performance, i.e., whether economies or
diseconomies of scale exist. The information in this section also provides
useful benchmarks for comparing the performance of individual participants
later in the analysis of high impact plants.
3.4.1 Financial Status of Copper Forming Companies
3.4.1.1 Profitability at Corporation Level
Table 3-2 provides a summary of profitability measures for the corpora-
tions involved in copper forming. The data suggest that the performance of
the corporations as a whole has been poorer than that of related industries.
Over the period of analysis the profit margins after taxes increased slightly
from about 2.0 percent in 1976 to 2.5 percent in 1979. The returns on net
worth (equity) and assets after taxes were low but showed steady improvements
over the 1976-1979 period. The industry averages for these two financial
measures increased from approximately 8.5 and 7.4 percent in 1976 to 11.0
and 10.3 percent in 1979, respectively. Despite the recovery during this
period, the profitability of the corporations involved in copper forming is
still below the average of the total fabricated metal products industry.
The profit margin and return on equity after taxes for the fabricated metals
products industry as a whole in 1978 were 4.7 and 16 percent, respectively..]^/
Table 3-3 shows the four year average profitability ratios for these cor-
porations disaggregated by size. The data reveals that the the profit margin
jL2/ Federal Trade Commission, Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations, First Quarter 1979.
3-13
-------
TABLE 3-2. KEY PROFITABILITY RATIOS FOR CORPORATIONS
PERFORMING COPPER FORMING
(Percentage)
CORPORATE LEVEL FINANCIAL RATIOS
Profit margin before taxes (returns on sales)
Profit margin after taxes (returns on sales)
Return on equity before taxes
Return on equity after taxes
Return on assets before taxes
Return on assets after taxes
1976J^ 1977
4.12
1.96
17.17
8.46
14.86
7.41
4.54
2.33
16.30
9.30
14.01
7.09
1978
4.64
2.70
20.06
13.37
15.24
8.82
1979
5.74
2.49
23.62
11.01
24.13
10.31
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
3-14
-------
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after taxes for the large corporations is 4.5, compared to 2.5 for all corpo-
rations involved in copper forming. The return on equity and return on assets,
however, show mixed results. Return on assets for large corporations being
significantly greater than for snail ones, but the reverse is true for return
on equity. Larger firms appear t:o have higher profit margins, but lower asset-
turnover rates. Other than these observations, there does not appear to be a
direct relationship between profitability and size. The superior performance
of the larger corporations may not necessarily reflect the performance of
large firms in the copper forming segment, per se, becasue the larger firms
are generally conglomerates, and copper forming is only subsidiaries of an oil
or coal corporation. The analysis at the reporting entity level (Section 3.4.2)
provides further insights into profitability and whether size plays a part in
the performance of the copper forming segment of these companies.
3.4.1.2 Capital Structure Analysis at the Corporation Level
The capital structure is exctmined to provide information on the ability
of the corporations involved in copper forming to finance initial capital
outlays. Six key ratios that provide a profile of the industry debt structure,
leverage, and ability to finance current debt are summarized in Table 3-4.
The first measure, the debt coverage ratio, is the ratio of net profits before
interest and taxes to interest expense. Based on the 308 Economic Survey data
this ratio is high for the industry as a whole. A high ratio suggests that
the corporations are able to service their debts in the near term.
The debt/equity and the long-term debt/total capitalization ratios provide
measures of credit-worthiness anc financial risk involved in the manufacture of
copper forming products (see Table 3-4). The debt/equity ratio provides a
measure of debt to net worth of the corporation, while the long-term debt/total
capitalization provides a measure: of the long-term capital structure of the
corporations. These ratios indicate that the industry debt structure has been
deteriorating since 1976. In 19/9 the debt/equity ratio of the corporations
reached 64,5 percent.
3-16
-------
TABLE 3-4. KEY CAPITAL STRUCTURE FINANCIAL RATIOS OF
CORPORATIONS INVOLVED IN COPPER FORMING
(Percentage)
CORPORATE LEVEL FINANCIAL RATIOS
Debt coverage ratio
Long term debt/total capitalization
Debt/equity
Capital expenditures/sales
Pollution capital expenditures/sales
Assets/sales
1976
697.88
31.39
51.78
3.90
.93
40.28
1977
680.33
33.90
54.62
5.35
.66
41.39
1978
850.28
36,60
67.33
4.99
.41
37.22
1979
931.36
33.68
64.49
4.79
.37
32.80
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
3-17
-------
The fourth parameter, the capital expenditures to sales ratio, is rela-
tively low for the industry. This is expected because of the slow growth of
this industry and the longevity of the capital equipment. Investment in other
pollution abatement equipment, the fifth parameter, is also low for the indus-
try as a whole. Since 1976 there has been a decline from 0.9 percent of sales
for these types of expenditures to 0.4 percent of sales in 1979. The assets
to sales ratio, the sixth parameter, is high, but there are indications that
the industry as a whole has been utilizing its assets in a more efficient
manner over the four year period. The assets/sales ratios dropped from 40.3
percent in 1976 to 32.8 percent in 1979.
Table 3-5 provides a profile of the capital structure of corporations by
size classifications. The debt coverage ratio of the medium sized corporations
appears to be in a better position than the rest of the corporations in the
industry. The other data shows no clear pattern in financial health related
to corporate size.
3.4.2 Financial Status of Reporting Entities
The financial profile of the reporting entities is provided in this sec-
tion. The analysis at this level is important because it examines the unit or
corporate structure that is most closely related to the copper forming opera-
tions. As stated earlier, copper forming is carried out by many different types
of companies. Some copper forming operations are segments of large vertically
integrated metal products companies; some are subsidiaries of other types of
large corporations (e.g., subsidiaries of oil companies). By identifying the
reporting entity and analyzing this segment, a better understanding of the
financial condition of the copper forming industry segment is realized.
Two important groups of profitability ratios are analyzed. The first
group shows profitability in relation to the long-term investments of the
copper forming reporting entities: return on gross and net assets. These
ratios provide information on the earning power of the reporting entities'
3-18
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assets. The second group of ratios shows profitability in relation to sales -
profit margins before taxes and profit margins before taxes and metal input
expense (gross profit margin). Examination of these two ratios at the report-
ing entity level provides greater insights into the efficiency of the copper
forming operations than by examining a single ratio. For example, if the
gross profit margin (i.e., profit margin before taxes and the cost of metal
inputs) is unchanged over a period of years, but the profit margin before
taxes has declined over the same period, then this change can be attributed
to the higher costs of the metal inputs. On the other hand, if the gross
profit margin falls, then the cost of the metal inputs in relation to sales
is going down. This type of analysis is especially important when vertically
integrated plants are involved, since integrated plants can benefit or suffer
depending on the price of the metal input, especially during periods of high
or low demand for copper forming products.
Table 3-6 provides a summary of the average profitability ratios for 43
copper forming reporting entities over the 1976-1979 period.ii/ The data
suggest that the profitability of the reporting entity has been improving,
although they suffered slight profit losses in 1977. For example, the return
on gross assets dropped from 19.2 percent in 1976 to 18.6 percent in 1977,
but recovered to 21.8 percent in 1978, and by 1979 the return on gross
assets reached 23.7 percent. The profit margins for the reporting entities
also shared a similar trend. The reporting entities experienced a small
decrease in profit margins in 1977, but their profitability improved from
5.2 percent for that year to 6.1 percent in 1979. The spread between the
profit margin before taxes, and the profit margin after taxes plus the cost
of metal inputs, remain relatively constant, suggesting that the metal input
price did not fluctuate significantly over the period of analysis.
Table 3-7 summarizes the data that are available on the profitability of
the copper forming reporting entities by size classifications. Four-year
JJL' A copper forming reporting entity may include one or more copper forming
plants.
3-20
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TABLE 3-6. KEY FINANCIAL RATIOS FOR THE COPPER FORMING REPORTING ENTITIES
(Percentage)
FINANCIAL RATIOS
Return on Gross Assets
Return on Net Assets
Profit Margin Before Taxes (Net)
Profit Margin Before Taxes and Cost of Metal
Input (Gross)
1976 1977 1978 1979
19.17 18.56 21.82 23.67
36.41 36.92 45.17 49.37
6.01 5.19 6.06 6.11
13.01 11.95 13.06 13.60
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
3-21
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TABLE 3-7. PROFITABILITY ASSESSMENT BY SIZE OF THE REPORTING ENTITY 1976-19793
(Percent)
TOTAL 1979
SALESb
($ MILLIONS)
Very Large
2,000 - 500
Large
499 - 100
Medium
99 - 25
Medium-Small
24-5
Small
under 5
All Entities
RETURN ON
GROSS ASSETS
22.29
15.68
25.38
21.35
22.23
20.79
RETURN ON
NET ASSETS
43.05
31.53
44.40
47.99
45.90
41.88
PROFIT MARGIN
BEFORE TAXES
6.40
4.32
7.00
7.05
4.85
5.85
PROFIT MARGIN
BEFORE TAXES
AND METAL INPUT
8.68
10.73
16.55
12.24
10.72
12.96
a Average financial ratios for the 1976-1979 period.
k Not all of these sales are due to copper forming. 1979 dollars.
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
3-22
-------
averages are analyzed to mitigate the effects of annual variances in perform-
ance. The data indicate no reason to expect variances in financial performance
because of entity size. Moreover, they indicate that there are differences in
the operating characteristics among the entities that cannot be explained by
the given data. These differences include such items as asset turnover rates,
metal costs, depreciation schedules used, and product mix.
3.4.3 Plant Level Assessment
Although a more comprehensive analysis at the plant level is presented
in Chapter 6, this section briefly reviews some important characteristics of
the copper forming plants. It is estimated that there are about 176 plants
in the copper forming industry. These plants can be divided into two basic
categories: "brass mills" that are involved in producing brass and bronze pro-
ducts (sheet, plate, rod and bar, etc.) and "wire mills" involved in producing
only copper wire. A sample of 99 of these plants (see Table 3-8) indicates
that there are many small to medium sized plants in the industry. Only seven
of the copper forming plants responding to the 308 Economic Survey had over 1,000
employees, whereas 78 of the plants had less than 500 employees. The average
annual production of the plants was approximately 60 million pounds of copper.
3.5 CONCLUSIONS
The analysis on the market structure and on conduct and performance of
the copper forming industry reveal that the industry is relatively competitive.
Although a large segment of the market is vertically integrated, the nature of
the copper forming industry is such that individual firms are unable to control
or influence market forces or prices in a perceptible manner. Market concentra-
tion is low and entrance into the industry is relatively easy. The empirical
data on the industry's performance confirm this finding. The financial data
reveal that the industry as a whole is earning profits below that of comparable
industries, although not alarmingly low. Moreover, the industry appears to be
in a position to finance moderate levels of additional debt. The results also
suggest that economies of scale are not an important factor in this industry.
3-23
-------
TABLE 3-8. SAMPLE OF COPPER FORMING PLANTS AND PRODUCTION
BY EMPLOYMENT SIZE IN 1979
NUMBER OF EMPLOYEES
1-24
25 - 49
50 - 99
100 - 199
200 - 299
300 - 399
400 - 499
500 - 999
> 1,000
TOTAL IN SAMPLE
NUMBER OF
PLANTS
6
4
13
25
15
8
7
14
7
99b
AVERAGE
PRODUCTION
(000 lbs)a
2,303
7,868
14,888
23,085
30,563
60,849
151,994
153,791
164,404
60,406
a Average per plant production for employment-size classification.
" 176 plants in total but only 99 of the copper forming plants responding
to the Section 308 Economic Survey provided enough data to be included
in this table. Four additional copper forming plants which responded to
the 308 Economic Survey did not provide the data needed for this table.
SOURCE: Compiled by JRB Associates from data provided in the 308 Economic
Survey.
3-24
-------
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of economic conditions that are likely
to exist in the copper forming industry markets over the 1980-1990 time per-
iod. The baseline projections assume compliance with the Clean Air Act Amend-
ments of 1970 and 1977, and the Federal Water Pollution Control Act Amendments
of 1972. These baseline projections assume that no water pollution control
requirements mandated by the Clean Water Act, including the proposed regula-
tion, are imposed on the copper forming industry during this period. The
demand and supply projections and parameter estimates of the equations devel-
oped in this section, will be used together with other information, including
estimated compliance costs, to assess the effects of the effluent control
requirements on future industry conditions.
The baseline projections in this report provide a general point of ref-
erence from which the relative and absolute magnitudes of the impacts from
EPA's proposed copper forming regulation can be measured. These projections
provide a plausible picture of future developments and are to be used as a
benchmark for comparison, and not as a comprehensive, authoritative fore-
cast of future industry conditions. However, even though minor changes to
the baseline projections may result from more sophisticated forecasting
techniques, they are not likely to significantly alter the study's overall
conclusions.
The basic approach followed in developing the projections begins with the
development of explicit demand and supply functions that explain the behavior
of the copper forming market over the 1960-1979 historical period. The fore-
casts of the future levels of demand and supply are then calculated based on
the established historical relationships and on projections of the explanatory
4-1
-------
variables in the demand and supply functions. Supply factors were also assessed
to determine if there would be any significant changes in the level of capital
requirements or growth in the number of plants over the regulatory impact
period.
4.1 DEMAND-RELATED FACTORS
The demand for copper forming products refers to the quantity buyers are
willing to purchase at different prices, everything else being equal. However,
an analysis of demand requires a distinction between the uses and the demand
for copper forming products. These variables are not definitionally identical.
Uses of copper refer to the disposition of copper on hand (e.g., copper is used
in the transportation, building, and communication industries). On the other
hand, demand for copper forming products refers to specific types of copper
products (e.g., copper sheets, plates, tubes, etc.). Moreover, since data on
copper forming product flows are usually collected in terms of production,
consumption by end-use, inventories, imports, and exports, it is necessary to
determine the annual demand for copper forming products. The copper forming
products' demand is estimated by adding imports to, and subtracting exports and
changes in inventories from, the annual production figures. Using this approach,
the quantity demanded is estimated (i.e., point estimates of demand over time)
for four copper forming product categories: sheet, strip and plate; rod, bar,
and mechanical wire; tube and pipe; and wire mill products.
4.1.1 Theoretical Considerations
There are a number of factors that must be considered when analyzing the
demand for copper forming products. First, the demand for copper forming
products is inversely related with its price [i.e., as the relative price
rises (falls), the demand for copper products decreases (increases)]. Second,
the demand for copper is a derived demand which arises from the final demand
for the goods for which it is an input. Consequently, there is a direct
4-2
-------
relationship between the general utilization of copper forming products and
the industrial production of durable manufactured goods. As industrial
production of durable manufactured goods increases, the demand for copper
forming products increases. For greater specificity, the demand for each of
the copper forming products can be analyzed by relating it with its specific
end-use. The demand for wire mill products, for example, can be associated
with the demand for communication and building materials. Finally, the demand
for copper is directly related to the price of substitute goods. In the manu-
facturing process of various end-users of copper forming products, there exist
other materials which could be used instead of copper, even though they are
not "perfect" substitutes. The most important substitutes for copper include
aluminum, stainless steel, fiber optics, and plastics. Each substitute is a
competitor to copper in limited situations. For example, aluminum is a sub-
stitute for copper mainly in wire products, and plastics are more important
substitutes in the case of consumer products. Each of these factors are
considered in the estimation of explicit demand functions for the copper
forming industry segments.
4.1.2 Econometric Analysis and Considerations
Econometric analysis is a statistical technique which is used within an
economic framework to analyze the relationship of key explanatory variables
to the movement of select variables under study. It is an empirical approach
that is extensively used in economic and business analysis to quantify rela-
tionships among variables and to predict market phenomena. In demand analy-
sis it is used to quantify and empirically test the influence of the product's
price, the prices of substitutes and complements, and general income levels
(i.e., economic activity) on the demand for a product. Once a relationship is
made explicit (i.e., a forecast of future demand), conditions can be based on
predictions of the explanatory variables and the estimated behavioral coeffi-
cients .
4-3
-------
4.1.2.1 Long-Run Dynamic Adjustment Process
In this analysis the demand for copper forming products is specified as
a function of its relative price and the level of economic activity related
to the specific copper forming product. However, since the purchasers of
copper forming products do not generally change their consumption patterns
in response to short-term movements in the price or changes in price within
a given time period, a dynamic moael specification is used to capture this
long-run adjustment process.
In general, purchasers of copper forming products would not reduce their
consumption of copper, due to short-run movements in the price or activity
variables, because of technological and institutional constraints. This is
so because, even though aluminum, steel, wood, and plastics are some of the
materials that can be substituted for copper products in some applications,
it is often not possible to make a direct substitution of one material for
another in an ongoing manufacturing process as the price of copper increases.
Substitution generally requires new types of manufacturing equipment or major
modifications to existing equipment, and the substitute material must offer
rather decisive advantages in cost and performance over the long term to
justify the cost of adopting a new manufacturing process or designing and
constructing a new manufacturing plant to use it. As a result, the substitu-
tion of one material for another usually takes place over a relatively long
period of time and then, only under overwhelming conditions such as the
following:
The substitute material maintains desirable properties
at low costs;
The substitute is perceivad to be available in suffi-
cient quantities;
The substitute is adaptable to commercial manufacturing
processes.
4-4
-------
In most cases, major consumption decisions are made on the basis of changes
that occur over an extended period of time and not to changes in a single point
in time. In the short run, producers may not be able to switch to substitutes
because of higher prices. If prices are expected to remain high in the long
run, copper producers may switch to aluminum. Hence, short- and long-run elas-
ticities of demand may be different. Also, in the copper forming industry, less
copper per dollar of output may be used in the long run as compared to the short-
run, i.e., there is induced technological change as the price of raw copper
rises (or falls).
To explain this type of demand behavior in the copper forming industry, a
distributed lag equation structure (Koyck model specification) is used to cap-
ture the long run adjustment process that is observed as prices and the indus-
trial activity variables (income) change over time. An example of a demand
function of the Koyck type (i.e., assuming that the lag weights decline geo-
metrically) is given in equation (4.1) below.
n
(4.1) ct - a0 + aj Z X yt_1 + ^ Z X pt_1
i=0 i=0
where:
ct = consumption of copper forming products in period t
yt = industrial activity or income in period t
pt = price of copper in period t
and where X is defined as the reaction coefficient and takes on values from
0 <_ X <_ 1. Estimated values of X are normally obtained through the use of a
transformed equation. This requires multiplying the above equation lagged one
period by X,
n n
(4.2) Xct_1 = XaQ + a Z X1 yt_1 + a2 Z X1 P(._1
4-5
-------
and subtracting it from the original equation to obtain
(4.3) ct = a0(l-X)
Equation (4.3) can be stated in a set of composite coefficients and a stochastic
disturbance term that would result from estimation.
(4.4) ct = b0 + b;Pt + b2Yt + b3ct-l + ut
Since the parameters X, ao> a^, and 3.2 can be determined uniquely from bQ, b^,
b2, and b3, equation (4.3) is approximately identified and can be estimated
using the ordinary least squares regression method. The estimated parameters
would correspond as follows:
A = b3 al = ^1
a0 - b0/(l-A) a2 = b2
A useful property of the Koyck lag function is that it permits a distinc-
tion to be drawn between short run and long run adjustments or elasticities.
The estimates of b^ and b2 represent the short run income and price coefficients
and the values of b^(l-X) and b2(l~X) represent the respective long run
elasticities..!/ A priori, the short run adjustment (elasticity) must be less
than the long run elasticity, sirce in the long run consumers have time to
switch over to substitutes.
4.1.2.2 Data Availability
The specification of the above model was developed and estimated using
annual time series data over the 1960-1979 period. The historical consumption
data were derived from information provided by the Copper Development Associa-
tion. Since actual consumption figures are not available, an estimate of the
JL' Walter C. Labys, Dynamic Commodity Models: Specification, Estimation, and
Simulation, Chicago, Lexington Books, 1973.
4-6
-------
apparent consumption for each year is calculated by subtracting exports and
inventory changes from, and adding imports to, production. The price of copper
wire bar is used as a proxy for the price of copper forming products. This is
appropriate since this price is used as the basis for changes in the copper
forming industry price. Generally, the price of copper forming products is
determined by adding a fixed processing fee (toll) to the price of wire bar.
The annual average price quotations for wire bar products were obtained from
the American Metal Market, 1979 Metal Statistics. The price series was trans-
formed into constant dollars or relative prices by dividing the current price
series by the copper mill price index. Since the demand for copper forming
products is highly related to changes in the total fabrication metal industry,
the Federal Reserve Board production index for fabricated metal products was
used as the activity variable.
4.1.3 Empirical Results
The ordinary least squares technique was used to estimate the demand
functions (equation 4.4) for each of the copper forming products. The results
of the analysis for each of the product groups, including the total brass mill
product group, are shown in Table 4-1. The signs of all the coefficients meet
with a priori expectations (i.e., the signs of price coefficients are all nega-
tive and the signs of the income coefficients are all positive for each of the
product groups). The coefficients are significant at the 90 percentile level
for all segments, except those of the plumbing and commercial tube and pipe
subcategory. The relatively high R^ indicates that the explanatory variables
are explaining most of the movement in the dependent variable.
In addition to these statistical criteria, the price elasticities from
each of the structural equations were calculated and evaluated. The price
elasticities of demand (calculated at the means) for each product group are
shown in Table 4-2. In each case the implied long run elasticity is greater
than the short run elasticity. Moreover, the short run elasticity estimates
are consistent with other elasticity estimates calculated for the entire copper
4-7
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TABLE 4-2. PRICE ELASTICITY ESTIMATES FOR
THE DEMAND FOR COPPER FORMING PRODUCTS£/
DEMAND PRODUCT GROUPS
Sheet, Strip, and Plate
Plumbing and Commercial
Tube and Pipe
Rod, Bar, and Mechanical Wire
Wire Mill Products
SHORT RUN PRICE
ELASTICITY
-1.3
-0.4
-0.9
-0.5
LONG RUN PRICE
ELASTICITY
-1.4
-0.9
-1.0
-0.7
.£/ Elasticity estimates are calculated at the means,
SOURCE: Compiled by JRB Associates.
4-9
-------
industry..!/ The short run elasticity estimate ranges from a high of -1.3
(fairly elastic) for the sheet, strip, and plate product group, to -0.4
(inelastic) for the tube and pipe product group.
4.1.4 Demand Forecasts
The demand forecasts were generated by fitting the estimated coefficients
with predictions of future values for the explanatory variables. In the base-
line projections it is assumed tha.t the industry prices will increase in rela-
tion to the level of inflation in the economy over the forecast period. Since
relative prices and not current prices are considered in a demand function, the
real price of copper does not change over the entire forecast period. The
forecast of the FRB fabricated metal index is based on the growth rate of the
fabricated metal products index provided fay Predicast.
Table 4-3 provides the results of the forecasting exercise for each of the
product groups. Overall, the results indicate that the demand for copper form-
ing products is not likely to increase uniformly over the 1980-1990 period.
Increases (in relative terms) are predicted to be the greatest for the sheet,
plate, and strip product group which is expected to expand to 1.7 billion pounds
or by 65 percent over its 1980 level. The smallest increases in demand growth
is projected for the commercial plumbing tube and pipe subcategory. This sub-
category is forecast to decrease in 1981, then to increase to 928 million pounds
by 1990. The quantity of products demanded for the rod, bar, and mechanical
wire, and the wire mill product groups are expected to increase by approximately
54 percent over the 1980-1990 period.
Estimates of elasticities are provided in the following publications:
Charles River Associates, Policy Implications of Producer Country Supply
Restrictions: The World Copper Market, Cambridge, Massachusetts, August 1976;
and F. N. Fisher, P. H. Coutneau, and M. N. Baily, "An Econometric Model of
the World Copper Industry," Bell Journal of Economics and Management Science,
Vol. 2 (Autumn 1972), pp. 568-664.
4-10
-------
TABLE 4-3. COPPER FORMING PRODUCTS DEMAND FORECASTS!/
YEAR
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
DEMAND PRODUCT GROUPS (MILLIONS OF POUNDS)
SHEET, STRIP,
AND PLATE
1,020.0
1,246.5
1,324.1
1,392.0
1,459.2
1,526.4
1,561.2
1,593.9
1,626.5
1,659.0
1,691.5
PLUMBING AND
COMMERCIAL
TUBE AND PIPE
1,008.8
807.4
846.3
871.4
888.4
900.8
909.3
915.4
920.1
924.1
927.6
ROD, BAR, AND
MECHANICAL WIRE
859.4
1,042.1
1,080.9
1,125.3
1,169.6
1,213.9
1,234.4
1,255.9
1,277.3
1,298.7
1,320.2
WIRE MILL
PRODUCTS
2,730.6
2,913.8
3,104.3
3,296.9
3,490.1
3,490.1
3,806.0
3,908.0
4,004.1
4,098.4
4,192.3
£/ 1980 actual figures and forecasts for the 1981-1990 period.
SOURCE: Compiled by JRB Associates.
4-11
-------
4.2 SUPPLY FACTORS
In this section baseline projections for future levels of supply are pro-
vided for each of the four groups. In addition to the projected production
levels, estimates are provided for capital expenditures in plant and equipment
and the growth in new plants necessary to satisfy the projected production
levels. These baseline estimates assume that no additional resources are
expended to meet effluent pollution control requirements that may result from
the Clean Water Act.
4.2.1 Theoretical and Empirical Considerations
4.2.1.1 Long Run Dynamic Adjustment Process
The supply of copper forming products refers to the quantity of products
producers are willing to produce (supply to the market) at a given price,
assuming other factors remain constant. A priori, the supply of copper form-
ing products is positively related to the relative price of copper [i.e., as
relative prices increase (decrease;) the supply of copper forming products
increases (decreases)].
Prices, however, are not the only variable that influences the supply of
copper forming products. The ability to expand output in this industry also
depends on variable costs and/or the ability to utilize the current stock of
machinery more intensively. For example, it is doubtful whether a plant could
expand its production significantly if wages or other production costs per unit
of output increase precipitously as output expands or if the machinery is being
used at its full capacity. Therefore, information on the level of capacity
utilization of the copper forming industry would provide some indication of
this industry's ability to expand its output over time. At low levels of
capacity utilization current production would be low and expansion of output
possible. On the other hand, at high levels of capacity utilization the indus-
try would be producing close to its limit and at this point the industry would
4-12
-------
not be able to significantly increase its output in the short run. Increased
output can be forthcoming only as new plants and machinery come on stream or
as existing plants are expanded.
Furthermore, the supply response to price changes is not immediate in most
cases, but is spread over a long period of time. It takes time to build up new
productive capacity (i.e., to train new workers, and construct new plants). To
capture this long run response the supply function uses the Koyck lag structure,
as explained above. The supply curves are expressed in the form:
(4.5) St = o0 + o^P,. + Qt2cut + a3st-l + et
where
S = supply of copper forming products
P = price of copper forming products
CU = level of capacity utilization in the copper forming industry
t = annual time period
and aQ, a^, 0,2, and a-j are the estimated coefficients of the explanatory vari-
ables, and et is the stochastic error, respectively. The distributive lag form
of this model (i.e., the Koyck model specification) is derived similarly to the
demand model above. It assumes that the supply response is dependent on price
and industry capacity changes spread over a long period of time.
4.2.1.2 Data Availability
Annual time series data over the 1960-1979 period are used for each of the
product groups. The annual production data for each of the four product groups
are obtained from the Copper Development Association, Annual Data Reports. The
price information is from the American Metal Market, 1979 Metal Statistics.
For brass mill products the price of copper scrap is used as a proxy for the
price of the brass products. Copper scrap prices are a good proxy for the
brass mill product sectors for the following reasons:
4-13
-------
A significant amount of scrap is consumed by these
product groups
Prior to 1978 producer list prices were relatively
stable, while scrap prices varied according to market
forces.
One possible reason for relatively stable prices in the domestic market may be
because producers tend to provide discounts (which are not observable) to their
customers while maintaining their list prices on the books. Scrap prices, how-
ever, are competitive and do reflect changes in the market. On the other hand,
wire mills do not consume any scrap, therefore, the use of this variable would
be inappropriate for explaining copper wire supply. In the wire mill product
group equation the price of copper wire is used.
The data on capacity utilization for the copper forming industry are from
the Federal Reserve Board. The time series data from this source has missing
observations for years prior to 1966 (and had to be estimated). Since the level
of capacity utilization is highly related to the level of demand in the copper
forming industry, the 1960-1966 capacity utilization levels are estimated from
established relationships between these two variables over the period for which
data are available. Using the capacity utilization/demand relationship and data
on the industry demand over 1960-1966, estimates of the missing observations are
generated.
4.2.2 Empirical Results
The results of the empirical analysis for the supply of copper forming
products are provided in Table 4-4. Overall, these results are reasonable.
All the price variable coefficients, except for the wire mill category, are
statistically significant at the 95 percentile level. Both the signs and
magnitudes of the price coefficients are consistent with our a priori expec-
tations. The signs on all the price coefficients are psitive, and the respon-
siveness of supply in the short and long run are consistent, i.e., the long run
coefficients are greater than the short run coefficients (see Table 4-5). The
4-14
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CQ
as
-J
a
4)
a
o
CJ
I
o
CO
4-15
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TABLE 4-5. SUPPLY PRICE ELASTICITY ESTIMATES FOR
THE COPPER FORMING INDUSTRY^/
j
SUPPLY PRODUCT GROUPS
Sheet, Strip, and Plate
Plumbing and Commercial
Tube and Pipe
Rod, Bar, and Mechanical Wire
Total Brass Mill Products
Wire Mill Products
SHORT RUN
ELASTICITY
0.3
0.4
0.1
0.3
0.1
LONG RUN
ELASTICITY
0.3
0.4
0.2
0.3
0.2
JL' Elasticity estimates are calculated at the means.
SOURCE: Compiled by JRB Associates
4-16
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short run elasticity estimates (calculated at the means) range from a low of
0.1 for the wire mill product group to a high of 0.4 for the rod, bar, and
mechanical product group. The supply price elasticities are slightly more
responsive in the long run.
4.2.3 Supply Forecasts
Predictions of the explanatory variables are fitted to the estimated
coefficients to generate forecasts for each of the product groups over the 1980-
1990 period. Since it is assumed that prices will increase at the same rate as
inflation, real prices are assumed to remain constant over the forecast period.
The forecast of capacity utilization for the copper forming industry is based
on future levels of copper consumption in the economy. The relationship that
is established to provide estimates of the missing data for the capacity
utilization levels (i.e., over the 1960-1966 period) is used to predict values
for the copper forming capacity utilization rates over the 1980-1990 period.
Using the supply functions developed above, forecasts of production levels
for each of the product groups are generted based on the estimated coefficients
and forecasts of the explanatory variables in each product group. Table 4-6
shows the results of the baseline supply forecasts for the copper forming
industry. Overall, the rate of growth in the future supply of copper forming
products is less than the rate of increase in the demand forecasts. The sheet,
strip, and plate product group is forecast to increase the most over the regula-
tory impact period. This segment of the industry is projected to increase by
about 47 percent over its 1970 level of production. The supply of rod, bar,
and mechanical wire products shows the next largest increases. This product
group is expected to increase by 40 percent over the 1980-1990 period. The
tube and pipe product group is expected to grow the least, at about 32 percent
above its 1980 levels. The supply forecast for wire mill products is expected
to be about 33 percent over its 1980 production level.
4-17
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TABLE 4-6. COPPER FORMING PRODUCTS SUPPLY FORECASTS^./
YEAR
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
DEMAND PRODUCT GROUPS (MILLIONS OF POUNDS)
SHEET, STRIP,
AND PLATE
908
1,050.7
1,110.5
1,154.5
1,195.5
1,235.9
1,259.4
1,279.7
1,299.3
1,318.9
1,338.4
PLUMBING AND
COMMERCIAL
TUBE AND PIPE
748
855.3
881.4
9C1.1
920.4
939.6
949.7
959.1
968.4
977.7
987.0
ROD, BAR, AND
MECHANICAL WIRE
860
1,006.3
1,035.7
1,073.8
1,111.2
1,148.7
1,165.4
1,183.7
1,201.8
1,220.0
1,238.1
WIRE MILL
PRODUCTS
2,870
2,883.5
2,975.8
3,102.2
3,243.2
3,390.6
3,496.1
3,583.6
3,663.2
3,739.5
3,814.3
£/ 1980 actual figures and forecasts for the 1981-1990 period.
SOURCE: Compiled by JRB Associate's.
4-18
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4.3 ANTICIPATED GROWTH AMONG TYPES OF PLANTS
Growth in industry can come about in at least four different ways:
(1) By expanding the current capacity of the plant (i.e., assuming that
there is some excess capacity or the plant is not working at 100
percent of its capabilities a plant can produce more by working its
machinery and labor more intensively);
(2) By addition of new plant, equipment, and technology to the existing
plant. Given the space and the existence of scale economies a plant
may expand its output by replacing old machinery with new or adding
to existing machinery;
(3) If adjacent space is limited and scale economies do not exist, firms
may build new plants in order to expand; or
(4) Assuming the rate of return is much higher than the market rate of
interest and the risk associated with the copper forming, new firms
may enter the industry.
In recent years the copper forming industry has been operating below its
production capacity. This has been especially true during periods of cyclical
fluctuations in the economy, and/or when the producer price deviates widely
from the prices quoted on the commodity markets. In periods of recession,
producers in the copper forming industry reduce their production significantly
or carry large inventories. In periods when the domestic producers' price was
higher than the commodity market quotations, purchasers bought copper forming
products from abroad; consequently, producers were forced to cut back levels
or increase inventories. Additionally, the profitability of these copper form-
ing companies has not been significantly above that of companies with comparable
risk. These factors have tended to keep the copper forming industry output
below its potential capacity levels in most years and to discourage new entries
into this segment of the industry.
The copper forming industry is a very mature industry that has not grown
rapidly during the last decade. Generally, most of the new capacity has come
from existing plants and from new plants built overseas where low cost inputs
4-19
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are available. This trend appears likely to continue when the high costs in
meeting environmental and other regulations for new sites are considered. New
productive capacity over the next decade is likely to come predotninantely from
investment in improvements to machines in place, introduction of new machines,
and from the construction of new plants abroad.
4-20
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5. COST OF COMPLIANCE
5.1 INTRODUCTION
The water treatment control systems, costs, and effluent limitations and
pretreatraent standards recommended for the copper forming industry are enumer-
ated in the Development Document for Effluent Limitation Guidelines and
Standards of Performance for the Copper Forming Point Source Category. That
document identifies various characteristics of the industry including manufac-
turing processes, products manufactured, volume of output, raw waste character-
istics, sources of waste and wastewaters, and the constituents of wastewaters.
Using that data, pollutant parameters requiring effluent limitations and
pretreatment standards were selected by EPA, and the costs of the treatment
control systems to achieve certain standards of performance were estimated.
The EPA Development Document identifies and assesses the range of control
and treatment technologies which apply to copper forming wastes. This assess-
ment involved an evaluation of both in-plant and end-of-pipe technologies that
could be designed for this category. This information was then evaluated for
existing direct industrial dischargers to determine the effluent limitations
achievable based on the "best practicable control technology currently avail-
able" (BPT), and the "best available technology economically achievable" (BAT).
Similar evaluations were performed for new direct dischargers to develop new
source performance standards (NSPS). Finally, pretreatment standards for
existing sources (PSES) and pretreatment standards for new sources (PSNS) were
developed for dischargers to publicly owned treatment works (POTW). Each of
the technologies identified was analyzed to calculate cost and performance.
Cost data were expressed in terms of investment and operating and maintenance
costs.
5-1
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A further discussion of the cost methodology is provided in Section VIII
of EPA's Proposed Development Document for Effluent Limitations Guidelines
and Standards for the Copper Forming Point Source Category.
5.2 CONTROL TREATMENT OPTIONS
EPA considered the following treatment and control options as the basis
for BPT, BAT, NSPS, PSES, and PSNS for facilities within the copper forming
industry.
Option 1 - Option 1 is end-of-pipe treatment consisting of lime precipi-
tation and settling, and preliminary treatment, where necessary, consisting
of chemical emulsion breaking, oil skimming, and chromium reduction. This
combination of technology reduces toxic metals, conventional pollutants, and
also toxic organics through oil skimming.
Option 2 - Option 2 is equal to Option 1 plus flow reduction for three
waste streams: annealing water, solution heat treatment, and pickling rinse.
Flow reduction of the annealing water and solution heat treatment streams is
based on recycle, and flow reduction of the pickling rinse stream is based on
spray rinsing and recirculation. The Option 1 flows for these streams are
reduced by approximately 60 percent, and this reduction will result in a
similar decrease of toxic metals and conventional pollutants.
Option 3 - Option 3 is equal to Option 2 plus filtration for further
reduction of toxic metals and TSS.
Option 4 - Option A is equal to Option 3 plus further flow reduction
gained by countercurrent cascade rinsing applied to the pickling rinse stream.
This technology is demonstrated in the copper forming category, as well as
other industries, and is proven as an economical and technically effective
means of reducing water use and pollutant discharges.
5-2
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Option 5 - Option 5 is equal to Option 1 plus filtration for further
reduction of toxic metals and TSS. This option is different from Option 3 in
that flow reduction is not included.
Each of these proposed control options is expected to generate more solid
wastes than are generated by the current treatment systems in use in copper
forming plants. The costs of the proposed control options include estimates
for the cost of hauling and disposing of these additional solid wastes. The
cost estimates reflect EPA's view that the solid wastes generated by the pro-
posed control options are not expected to be classified as hazardous under the
regulations of the Resource Conservation and Recovery Act (RCRA).
5.3 ESTIMATED OPTIONS COSTS
The number of plants in the copper forming industry is estimated at 176.
Of this total number, 37 plants are considered direct dischargers and 45
plants indirect dischargers (i.e., they discharge their wastewater to POTWs).
The remaining 94 plants do not discharge any wastewater and therefore would
not incur treatment costs.
Tables 5-1 and 5-2 provide the estimated total industry costs in 1978
dollars for the first three pollution control options considered for BAT and
PSES. The total industry investment costs for direct dischargers are approxi-
mately $1.8 million, $4.6 million, $6.9 million, and the annual costs which
include the operating and maintenance costs plus depreciation and interest
are $0.7 million, $1.5 million, and $2.2 million for Options 1, 2, and 3,
respectively..!/ For the indirect dischargers the total industry investment
costs range from $3.0 million to $8.3 million, with annual costs of $2.3
million to $4.7 million.
±f Annual costs are calculated using a capital recovery factor of 0.22,
5-3
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TABLE 5-1. COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY DIRECT DISCHARGERS!./
POLLUTION CONTROL
TECHNOLOGIES
Option 1
Option 2
Option 3
NUMBER OF
PLANTS NEEDING
ADDITIONALb/
TREATMENT ~
11
30
30
TOTAL COSTS ENTIRE INDUSTRY
INVESTMENT
$1,812,926
$4,620,227
$6,910,309
O&M I ANNUAL0/
$347,208
$473,341
$641,436
$ 746,052
$1,489,791
$2,161,704
£/ Costs are in 1978 dollars. To convert to 1982 dollars, multiply by 1.34
jl' Out of total of 37 direct dischargers.
SJ Includes O&M plus depreciation and interest expenses. The capital recovery
factor is 0.22.
SOURCE: Compiled by JRB Associate:; from data provided by EPA, Effluent Guide-
lines Division.
5-4
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TABLE 5-2. COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY INDIRECT DISCHARGERS.!/
POLLUTION CONTROL
TECHNOLOGIES
Option 1
Option 2
Option 3
NUMBER OF
PLANTS NEEDING
ADDITIONALb/
TREATMENT ~
30
38
38
TOTAL COSTS ENTIRE INDUSTRY
INVESTMENT
$3,099,090
$5,961,420
$8,341,425
O&M
$1,662,045
$2,657,850
$2,858,160
ANNUAL0/
$2,343,845
$3,969,362
$4,693,274
£/ Costs are in 1978 dollars. To convert to 1982 dollars, multiply by 1.34
b/ Out of total of 45 direct dischargers.
S.' Includes O&M plus depreciation and interest expenses. The capital recovery
factor is 0.22.
SOURCE: Compiled by JRB Associates from data provided by EPA, Effluent Guide-
lines Division.
5-5
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Options 4 and 5 are not costed for existing sources because early in the
evaluation process, they were rejected for existing sources based on engineer-
ing judgment. However, Option 4 is considered for new sources (NSPS and PSNS).
EPA estimates that Option 4 will not cost more for new sources than Options 2
or 3 are estimated to cost for existing sources. Option 4 is based on Option 2
plus filtration and greater flow reduction achieved by countercurrent rinsing.
For new sources, countercurrent rinsing can be designed and built at less cost
than for existing sources, where countercurrent rinsing involves expensive
retrofit costs. The additional costs of filtration for Option 4 are estimated
to be offset by the lower treatment costs associated with smaller wastewater
flows using countercurrent rinsing. Therefore, new sources, regardless of
whether they are plants with major modifications or greenfield sites, would
have costs for Option 4 approximately equal to the costs existing sources
would incur in achieving Option 2.
5-6
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6. ECONOMIC IMPACT ANALYSIS
6.1 INTRODUCTION
This chapter describes the economic impacts likely to occur as a result
of the costs of alternative pollution control regulatory options on the copper
forming industry. The results focus on the following:
Price and Output Impacts: An analysis of the impact
of the pollution abatement costs on price and output
in the U.S. domestic market;
New Capital Financing Impacts: An analysis of the
ability of plants in the copper forming industry to
invest in new capacity and pollution control equip-
ment out of current and future income;
Plant Closures: An analysis of a) baseline plant
closures (i.e., plant closures that may result even
without the costs of the regulation), b) plant closures
as a result of the regulation, and c) impact of the
regulation on new plants;
* Employment Effects: An analysis of the amounts of lay-
offs that may result due to the estimated plant closures
and the reduction in the output levels;
Commmunity Impacts: An analysis of indirect effects
on employment and earnings outside the copper forming
industry as a result of layoffs in the copper forming
industry within specific geographic areas;
Balance of Trade Impacts: An analysis of the effects
of price increases on the international competitiveness
of domestic copper formers.
Social Costs: An analysis of the value of goods and
services that may be lost to society because of the
effluent regulations;
Small Entity Impacts: An analysis of the impacts of
the proposed pollution control options on small copper
forming plants.
6-1
-------
The impact assessment procedure uses the estimated investment and annual oper-
ating and maintenance costs for each option as the basis for the potential
impacts. If these costs are small for individual plants in the industry, then
there are likely to be no significant impacts. On the other hand, if the costs
are large, the industry and related industries may face serious problems if the
proposed pollution control systems are required.
6.2 PRICE AND PRODUCTION IMPACTS
6.2.1 Measuring Cost Increase Impacts on Price
Compliance with the effluent: regulations impose added costs of doing
business on copper forming plants. Assuming that these plants can raise the
necessary capital funds to install the proposed pollution control systems the
plants will attempt to adjust their price and output decisions so that their
financial performance after compliance is as good as it was prior to regulation,
This implies that a plant will attempt to recover annualized compliance costs
by raising their product prices. The success of this attempt will be governed
by the ability of the plants to raise prices without experiencing large losses
in sales volumes and profits.
The extent of the impacts of the pollution control costs on specific
plants in the copper forming industry, therefore, would depend on the ability
of plants in the industry to pass along the added costs to their customers.
If all or a significant amount of the added costs can be passed through to the
customers without affecting the volume of sales of plants in the industry,
then the impacts of the proposed effluent regulation on the plants would be
small. On the other hand, if the pollution control costs cannot be passed
along to the customers of the copper forming products in the form of higher
prices or if significant reductions in quantity demanded result from the price
increases, then the plants in the industry will have to bear the burden of the
proposed effluent regulation. Consequently, it is important to estimate the
likely extent of the price pass through that may occur in the copper forming
product markets.
-
-------
The effects of an increase in production cost on price depends on both
demand and supply conditions in the industry. In markets where the demand for
the product is growing and price inelastic (i.e., the demand is insensitive to
price changes) producers can usually pass cost increases through to their cus-
tomers without losing sales. Under other market conditions (e.g., a stagnant
product market and elastic product price) a smaller amount of the increased
costs is likely to be passed through since the firms would lose significant
amounts of sales if they raised their prices significantly. Under the latter
circumstances firms have to absorb some or all of the increased costs, which
may result in reduced output and profit levels in the short run and probable
closures in the long run. Furthermore, price increases are more likely to be
generated on the supply side when capacity utilization in the industry is high.
In such times prices may rise faster than costs. When excess capacity exists
in the industry, suppliers are less likely to bid up prices and may be more
willing to absorb some of the regulatory costs.
An approach to measure the impacts of additional costs on price, that
capture these market forces, is to construct explicit demand and supply curves
for each of the industry product markets. These curves can then be used to
estimate the effects the increase in production costs (attributable to pollution
control) may have on the prices of specific products in the copper forming
industry.
6.2.2 Price Impact Model
In general, the impact of additional costs on a firm can be interpreted
as a shift in the supply curve (i.e., an increase in the marginal costs) of
the firm. The increase in price is determined in the market by the interaction
of the supply curve to a new position on the demand curve. As long as the
price increase is not too large, the assumption about the change in the supply
curve due to the change in costs can be measured precisely from information
provided by the supply and demand curves. It can be shown that the change in
price (AP) due to a change in cost (AMC) is equal to:
6-3
-------
(6.1)
where TI represents the supply price elasticity, and e the demand price elasti-
city for the specific copper forming product. Using Equation (6.1) the price
increase due to change in pollution control cost can be estimated as follows:
(6,2) AP = n x AMC
n - e
where AMC represents the additional pollution control costs per pound.
6.2.3 Price Impact Model Results
Table 6-1 summarizes the results of the price impact assessment. The
demand and supply elasticities for each product group are used together with
the formula above (Equation 6.1) to calculate the change in prices that may
result from a change in costs. The analysis presented here uses the long-run
price elasticities for the specific copper forming product groups. This is
necessary because short run adjustments in the copper forming markets are
small, while in the long run, the quantity of a product demanded and supplied
may change significantly, since consumers and suppliers have sufficient time
to adjust to price changes.
The results suggest that the price increases due to changes in costs are
predicted to be small. The predicted ratio of price change due to cost increase
is shown to be fairly small for each of the copper forming product segments.
The results of the analysis indicate that as the per unit cost of production
increases at the industry level, the price of the product groups would increase
by a much smaller percentage. The price change would range from about 0.2-0.3
percent for each percentage change; in costs for the range of products in the
copper forming market.
6-4
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TABLE 6-1. DEMAND/SUPPLY ASSESSMENT OF EACH PRODUCT GROUP
IN THE COPPER FORMING INDUSTRY
PRODUCT GROUPS
Sheet, Strip, and Plate (1)
Rob, Bar, and Mechanical
Wire (2)
Commercial and Plumbing
Tube and Pipe (3)
Wire Mill Products (4)
DEMAND OUTLOOK
(PREDICTED
ANNUAL GROWTH
RATE 1981-1990)
3.3
2.6
1.4
4.0
DEMAND
ELASTICITY
(Long-Run)
-1.4
-1.0
-0.9
-0.7
SUPPLY
ELASTICITY
(Long-Run)
0.3
0.2
0.4
0.2
PREDICTED
RATIO OF PRICE
INCREASE TO
COST INCREASE
0.18
0.17
0.31
0.22
SOURCE: Compiled by JRB Associates.
6-5
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The price increases that may occur from the proposed regulation are esti-
mated using Equation 6.2. The results of the price impact assessment for each
copper forming product (i.e., the last column in Table 6-1) are multiplied by
the additional average annual compliance costs per pound of copper for the
three pollution options (from Chapter 5). Table 6-2 presents the results of
this exercise. The results show the expected price increases that may result
from the average added pollution control costs for each of the copper forming
product groups. The results indicate that the added pollution control costs
will have a negligible impact (i.e., less than 0.02
-------
TABLE 6-2. EXPECTED PRICE INCREASES BY COPPER FORMING PRODUCT GROUP
POLLUTION CONTROL
TREATMENT OPTIONS
Option 1
Option 2
Option 3
PRODUCT GROUP
SHEET, STRIP,
AND PLATE
.01026
.018
.02286
ROD, BAR, AND
MECHANICAL WIRE
.00969
.017
.02159
TUBE AND PIPE
.01767
.031
.03937
WIRE
.01254
.022
.02794
£/ 1979 dollars
SOURCE: Compiled by JRB Associates,
6-7
-------
A capital budgeting approach is used to determine whether a plant can
afford to install the required pollution control equipment. For each plant,
the present value of the future stream of revenues (cash flow) is calculated
assuming that the plant invests in pollution control. The expected future
cash flows of the plant are discounted back to the present year, using an
interest rate that reflects the plant's current cost of capital. The analysis
takes into account the cash returns expected over the life of the plant and
equipment, because the plant will remain open for many years if the operator
invests to meet pollution control standards.
The plant will make the investment in pollution control, if the expected
future revenues are greater than the future annual expenditures, plus the
capital investment in pollution control. The capital availability analysis is
summarized in the formula below.
(6.4) Npv = £ -E -I
where
NPV = net present value
CASH n = cash flow over n periods
i = average cost of capital
C = annual pollution costs
I = capital investment in pollution control.
The decision rule is if the NPV is positive the plant would invest; if the
NPV is negative or zero the plant could not afford to invest in pollution con-
trol. Furthermore, it can be assumed that if the firm can invest in pollution
control and still remain profitable, then the financial markets would also be
willing to finance the installation of the pollution control equipment.
The capital impact analysis uses the information provided by the copper
forming industry 308 Economic Survey to calculate the expected cash flows for
6-8
-------
the individual plants. This analysis assumes that the cash flow of the plant
will remain constant in real terms over the expected life of the plant (10
years). The estimated cost of capital over this period is 13 percent.
6.3.1 Capital Effects (Existing Plants)
The capital availability analysis examines a sample of plants in the copper
forming industry to predict the number of plants that should be able to afford
to install the proposed pollution control systems. The use of sample plants
is necessary because adequate financial data and compliance cost information
are not available for all the 82 plants that discharge wastewater (i.e., infor-
mation on profits and depreciation). Of the 103 plants responding to the 308
Economic Survey, only 39 that provided adequate financial data for inclusion
in this capital availability analysis were wastewater dischargers. Of these,
20 are indirect dischargers and 19 direct dischargers. Additionally, actual
compliance cost estimates were not available for all of the 39 plants. For
those plants without actual compliance cost information, the analysis was
carried out using the highest compliance cost that was estimated for a plant
in the sample. The results of the capital availability analysis indicate that
all of the plants examined can afford to install any of the proposed pollution
control options. Based on the sample of copper forming plants examined, all
the copper formers can afford to install the proposed pollution control options,
6.3.2 Capital Effects (New Sources)
Based on available information, we concluded that no new plants will be
built in the United States over the next ten years. In the past five years
all of the new copper forming capacity has come from expansion of existing
plants and from overseas operations. This trend is expected to continue in
the future. Additionally, for reasons explained in 5.3 above, available infor-
mation indicates that the costs of treatment controls for new sources would be
no more than the treatment control costs for existing sources. The analysis
of capital availability for new sources is analagous to that of existing
6-9
-------
sources. Based on this analysis, we do not expect any of the proposed pollution
control requirements to impose significant barriers to entry for new sources,
whether these new sources are plants with major modifications or greenfield
sites.
6.4 PLANT CLOSURE ANALYSIS
6.4.1 Plant Closure Methodology
The decision to close a plan1: is extremely complex, involving an array
of factors, many of these subjective. Some of the more important factors to
consider are:
Present and expected profitability of the plant;
Current market or salvage value of the plant, i.e.,
the opportunity costs of keeping the plant open;
Required pollution control investment;
Expected increase in annual costs due to pollution
control requirements;
Expected product price, production costs, and pro-
fitability of the plant after pollution control
equipment is installed anc operating;
Other major economic developments expected for the
plant (i.e., change in the competitive position,
market growth, etc.).
Each of these factors is addressed to some extent in this plant closure analysis,
Our efforts at this stage are to identify the plants that may close under the
alternative regulatory options.
In general a manager faced with pollution control requirements must decide
whether to make the additional investment or to sell the plant. A rational
manager would decide to keep the plant, if the before and after pollution
control cash flows are greater than the salvage value of the plant. If the
expected cash flows are less than the salvage value the manager would be
6-10
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better off selling his plant. Since the plant will remain open for many years
if the investment is made in pollution control, the analysis takes into account
the cash flow expected over the life of the plant and equipment plus the salvage
value at the end of the last period. The present value of future cash flows is
calculated by discounting the expected income stream by the current cost of
capital. The plant will remain open if the present value of the expected cash
flows less the costs of investing in pollution control exceed the expected
salvage value. If the expected cash flows are less, the owner will sell the
plant. Thus, the owner will close the plant if:
n CASH^ n c sn
(6.5) S > E - I + - I
where S is the salvage value of the plant and the other variables are the same
as defined above.
Plant specific financial data (i.e., profits, depreciation, and salvage
value) were provided by the copper forming industry 308 Economic Survey. The
annual cash flow of the plants are predicted to remain constant in real terms
(i.e., increase at the level of the inflation rate) over the life of the plant
and the cost of capital is estimated at 13 percent. The investment and annual
operating and maintenance costs for each of the pollution control options were
determined in a separate study.
6.4.2 Predicted Plant Closures
The analysis examines a sample of plants (discussed above) to predict the
number of plant closures that may result from the regulation. The cash flow
plant closure analysis is based on data from 39 plants that responded to the
308 Economic Survey. These 39 plants include all the survey respondents that
both discharge wastewater and also provided the adequate data. The results of
the plant closure analysis indicate that although the profitability of the
plants will be reduced, none of the plants is likely to close if any of the
proposed pollution control options are imposed. Based on this plant closure
6-11
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analysis, we do not expect any of the copper forming plants in the industry to
close as a result of the proposed effluent regulation.
An analysis using the 308 Economic Survey data was also conducted to
determine baseline closures and our results indicated no closures. However,
it should be noted that recent market conditions in a number of the product
sectors may produce a number of baseline closures even in the absence of the
proposed regulation. Generally, the smaller, older, nonintegrated plants will
be more vulnerable to a combination of increased competition from abroad and
the recession over the 1981-1983 period. This situation is likely to affect
the brass mills (especially tube s.nd pipe plants) more significantly than the
wire mills. The results of the market analysis and the closure analysis
indicate that, though neither brass nor wire mill closures are expected as a
result of the proposed regulation, wire mills are in a better financial and
market position to afford the costs of pollution controls than the brass mills.
6.5 OTHER IMPACTS
6.5.1 Employment Impacts
The proposed pollution control options are not expected to cause any loss
of jobs in the copper forming industry. Layoffs are not expected because no
plant closures or output reductions are predicted to result from the proposed
pollution control options considered.
6.5.2 Community Impacts
Since no plant closures or unemployment is expected for any of the pollution
control options examined, the proposed regulation will not create any community
impacts.
6-12
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6.5.3 Balance of Trade Impacts
The regulation would impact on the balance of trade depending on (1) the
extent that copper forming product prices in the domestic market rise faster
than prices in the rest-of-world market, and (2) the extent to which the domes-
tic production losses are replaced by imports from foreign countries. There
should be no foreign trade impacts since the regulation will have only negli-
gible price or domestic output capacity effects..!' Thus, domestic producers'
competitive position vis-a-vis foriegn producers will not change.
6.6 SOCIAL COSTS
This section assesses the total social costs that can be associated with
the alternative pollution control options proposed by EPA on the copper forming
industry. Social cost is a measure of the value of goods and services lost by
society because of a given regulatory action. These costs generally include
the use of resources needed to comply with a regulation, the use of resources
to implement and enforce a regulation, the value of the output that is foregone
because of a regulation, and the welfare loss (i.e., the added costs of the
product to consumers because of the regulation).
6.6.1 Conceptual Framework
The partial equilibrium analytical framework is conceptually the most
practical means for estimating total social costs. This framework, in its
most sophisticated form, is based on an analysis of supply and demand rela-
tionships in the directly affected market(s). When an industry is regulated,
compliance requirements result in increased unit costs of production. This,
in turn, leads to an upward shift in the industry's supply curve. The supply
curve shift normally results in higher prices and a lower production level.
J_' Price increases, if they occur at all, are expected to be negligible. See
Section 6.2 above.
6-13
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Compliance costs, production losses, and net welfare losses incurred by pro-
ducers and consumers due to decreased output are measurable within this frame-
work. There are other costs that are not measurable within this framework.
Costs of implementing and enforcing a regulation must be added. Also, other
social costs do not appear in this static analysis such as productivity effects,
innovation impacts, and costs of reallocating resources that become unemployed.
Unfortunately, the data are not available to carry out such analysis for the
copper forming industry at this time, and a compromise which captures the major
costs to society was carried out.
6.6.2 Social Cost Analysis
For this analysis only the real resource costs are considered. This pro-
vides a reasonable estimate of social costs, since in this case other costs
to society are estimated to be insignificant. For example, the costs associ-
ated with the regulation are not Likely to affect the prices of copper forming
products. Consequently, there are not going to be any price increase and out-
put reductions in the copper forming market because of the regulation. As a
result, the costs to consumers or producers from price increases or from out-
put losses would be zero.
Social cost in this analysis is calculated by adding the discounted
stream of the estimated total annual operating and maintenance costs to the
initial investment costs. The analysis assumes a 10 percent discount rate
over perpetuity.
Table 6-3 summarizes the results of this analysis for each of the pollu-
tion control treatment options by the discharge status of the copper forming
plants and for the total industry. The social costs of the regulation will
be greater for the indirect dischargers than for the direct dischargers.
The greatest social costs are expected under treatment option 3. If the
proposed regulation was imposed on the entire industry, treatment option 1
would create the least cost on society.
6-14
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TABLE 6-3. TOTAL SOCIAL COSTS FOR THE COPPER FORMING INDUSTRY
TECHNOLOGIES
Option 1
Option 2
Option 3
THOUSANDS OF 1978 DOLLARS
DIRECT
5,285
9,353
13,324
INDIRECT
19,719
32,539
36,923
TOTAL INDUSTRY
25,004
41,894
50,247
THOUSANDS OF
1982 DOLLARS
TOTAL INDUSTRY
33,505
56,557
67,331
SOURCE: Compiled by JRB Associates.
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6.7 SMALL ENTITY ANALYSIS
Public Law 96-354, known as the Regulatory Flexibility Act, states that
all Federal regulatory agencies must perform a Regulatory Flexibility Analysis
for any regulation that has a significant impact on a substantial number of
small entities. If there is a significant impact, the act requires that alter-
native regulatory approaches be examined to minimize significant economic
impacts on small businesses. This small entity analysis is performed to iden-
tify whether or not small entities of the copper forming industry are signifi-
cantly impacted by the proposed regulation and to ascertain if a Regulatory
Flexibility Analysis is needed for this industry.
6.7.1 Defining Small Entities
The definition of small business is not precise or universal. The Small
Business Administration (SBA) definition of "small business" generally means a
specific number of employees for each manufacturing industry by Standard Indus-
try Classification (SIC). For service, wholesale, retail, and other nonmanu-
facturing businesses, "small" is limited in SBA regulations by dollar amount
of gross sales. On the other hand, EPA has used discharge volumes of plants
on a substance-by-substance basis as a size standard. For some of its regula-
tion limiting effluent discharge, this standard may make more sense than either
employees or gross sales. However, this definition may not be useful for all
cases.
6.7.2 Impact on Small Entities
Several techniques (e.g., plant production, employment, wastewater flows,
etc.) establishing discrete size criteria among plants in the copper forming
industry were analyzed. However, based on available data, no criteria that
provide distinct size classifications or reveal unique biases could be found.
For example, Table 6-4 presents a disaggregation of the sample of 39 plants by
employment size classification for key variables. It shows the discharge status
6-16
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(i.e., direct and indirect dischargers), value added, output, and the average
profit margins of the copper forming plants in each employment category. The
information on profit margins indicates that medium-sized plants with 300-499
employees are in the worst financial position. Consequently, they would be
likely to be most affected by the regulation. It also indicates that the
smallest plants (those with less than 100 employees) and the largest plants
(those with more than 1,000 employees) are in the best financial position, and
are likely to be be least impacted by the regulation. Based on this preliminary
analysis, the impact on small entities does not appear to be more significant
or different than for plants of larger sizes. Therefore, a formal Regulatory
Flexibility Analysis for the copper forming industry is not required.
6-18
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