vvEPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington DC 20460
EPA 440/2-82-017
November 1982
Water
Economic Impact Analysis
of Proposed Effluent
Guidelines and Standards
for the Aluminum Forming
Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS
OF PROPOSED
EFFLUENT GUIDELINES AND STANDARDS
FOR THE
ALUMINUM FORMING INDUSTRY
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulations and Standards
Washington, D.C. 20460
November, 1982
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PREFACE
The attached 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 alternative BPT, BAT, PSES, NSPS and
PSNS effluent standards and limitations established under the Federal
Water Pollution Control Act, as amended.
The study supplements the technical study (EPA Development Document) support-
ing the proposed regulation. The Development Document surveys existing
and potential waste treatment control methods and technology within particular
subcategories in the aluminum forming industry 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 employment and the continued viability of affected plants,
effects upon foreign trade and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Analysis and Evaluation of EPA. This report was submitted in fulfillment
of Contract No. 68-01-6348 by JRB Associates, Inc. The analysis was completed
in November 1982.
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule-
making. It will be considered along with the information contained in
the Development Document and any comments received by EPA on either document
during the public comment period to establish final regulations.
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TABLE OF CONTENTS
CHAPTER TITLE PAGE
SUMMARY . S-l
1 INTRODUCTION 1-1
1.1 PURPOSE 1-1
1.2 INDUSTRY COVERAGE 1-1
1.3 INDUSTRY SEGMENTATION 1-2
1.4 ORGANIZATION OF REPORT 1-4
2 STUDY METHODOLOGY 2-1
2.1 OVERVIEW 2-1
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS 2-3
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS 2-4
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES 2-9
2.5 STEP 4: PLANT-LEVEL SCREENING ANALYSIS 2-10
2.6 STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS 2rlO
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS 2-13
2.8 STEP 7: PLANT CLOSURE ANALYSIS 2-14
2.9 STEP 8: OTHER IMPACTS 2-15
2.10 STEP 9: NEW SOURCE IMPACTS 2-16
2.11 STEP 10: SMALL BUSINESS ANALYSIS 2-16
3 INDUSTRY CHARACTERISTICS 3-1
3.1 OVERVIEW 3-1
3.2 PLANT CHARACTERISTICS 3-2
3.3 FIRM CHARACTERISTICS 3-8
3.4 FINANCIAL PROFILE 3-11
3.5 PRODUCTS AND MARKETS 3-11
3.6 FOREIGN TRADE 3-18
3.7 PRICE DETERMINATION 3-22
3.7.1 Price Elasticity of Demand 3-22
3.7.2 Industry Competition 3-25
3.7.3 Summary of findings on Price Determination 3-26
4 BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 4-1
4.1 DEMAND-RELATED FACTORS 4-1
4.2 SUPPLY FACTORS 4-3
4.2.1 Number of Industry Establishments in 1990 4-3
4.2.2 Product Price and Profitability 4-5
4.3 SUMMARY OF BASELINE CONDITIONS 4-6
5 COST OF COMPLIANCE 5-1
5.1 OVERVIEW 5-1
5.2 POLLUTANT PARAMETERS 5-1
5.3 CONTROL AND TREATMENT TECHNOLOGIES 5-2
5.4 COMPLIANCE COST ESTIMATES 5-3
5.4.1 Cost Factors, Adjustments, and Assumptions 5-3
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TABLE OF CONTENTS (Continued)
CHAPTER
TITLE
PAGE
5.4.2 Compliance Costs of Existing Sources 5-4
5.4.3 Compliance Costs of New Sources 5-8
ECONOMIC IMPACT ANALYSIS 6-1
6.1 BASELINE CONDITIONS 6-1
6.2 PRICE AND QUANTITY CHANGES 6-2
6.3 RESULTS OF SCREENING ANALYSIS 6-2
6.4 PROFIT IMPACT ANALYSIS 6-2
6.5 CAPITAL REQUIREMENTS ANALYSIS 6-6
6.6 PLANT CLOSURE ANALYSIS 6-9
6.7 OTHER IMPACTS . 6-13
6.7.1 Employment, Community, and Regional Effects 6-13
6.7.2 Substitution Effects 6-15
6.7.3 Foreign Trade Impacts 6-15
6.7.4 Industry Structure Effects 6-15
6.8 NEW SOURCE IMPACTS 6-15
7
8
SMALL BUSINESS ANALYSIS
LIMITATIONS OF THE ANALYSIS
8.1 DATA LIMITATIONS
8.2 METHODOLOGY LIMITATIONS
8.2.1 Price Increase Assumptions
8.2.2 Profit Impact Assumptions
8.2.3 Capital Availability Assumptions
8.3 SUMMARY OF LIMITATIONS
7-1
8-1
8-1
8-2
8-2
8-2
8-3
8-3
APPENDIX A: SELECTED FINANCIAL RATIOS
B: CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
C: ESTIMATION OF ALUMINUM FORMING PLANT ASSETS VALUES AND
RETURN ON SALES
A-l
B-l
C-l
11
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LIST OF TABLES
NUMBER TITLE PAGE
S-l TOTAL COSTS BY INDUSTRY SEGMENT, ALUMINUM FORMING INDUSTRY S-9
S-2 SUMMARY OF PLANT CLOSURE ANALYSIS FOR ALL TREATMENT OPTIONS S-10
3-1 ALUMINUM FORMING INDUSTRY CHARACTERISTICS, 1977 3-4
3-2 NUMBER OF ALUMINUM MILL PRODUCT PLANTS BY EMPLOYMENT SIZE,
1977 3-5
3-3 CONCENTRATION RATIOS OF ALUMINUM FORMING INDUSTRY, 1977 3-9
3-4 GROSS SHIPMENTS OF ALUMINUM FORMING PRODUCTS BY TYPE OF
PRODUCER, 1980 3-10
3-5 SELECTED MEASURES OF FINANCIAL STATUS OF ALUMINUM FORMING
INDUSTRY BY PRODUCT GROUP ' 3-12
3-6 SALIENT MARKET CHARACTERISTICS OF ALUMINUM FORMING PRODUCTS 3-14
3-7 CONSUMPTION OF ALUMINUM MILL PRODUCTS BY MAJOR MARKET 3-19
3-8 IMPORTS AND EXPORTS OF ALUMINUM FORMING PRODUCTS, 1970-1981 3-20
• 3-9 IMPORTS OF ALUMINUM FORMING PRODUCTS AS A .PERCENT OF TOTAL
CONSUMPTION, 1970-1981 3-21
3-10 ALUMINUM PRODUCT GROUP PRICE ELASTICITY ESTIMATES 3-24
4-1 PROJECTIONS OF DOMESTIC CONSUMPTION OF ALUMINUM FORMING
PRODUCTS 4-4
5-1 TOTAL COSTS BY INDUSTRY SEGMENT, ALUMINUM FORMING INDUSTRY 5-5
5-2 COMPLIANCE COSTS FOR DIRECT DISCHARGERS 5-6
5-3 COMPLIANCE COSTS FOR INDIRECT DISCHARGERS 5-7
6-1 ANTICIPATED INDUSTRY PRODUCT PRICE AND PRODUCTION CHANGES 6-3
6-2 DISTRIBUTION OF PLANT ANNUAL COMPLIANCE COST TO REVENUE
RATIOS 6-4
6-3 RESULTS OF SCREENING ANALYSIS 6-5
6-4 BASELINE CHARACTERISTICS OF ALUMINUM FORMING INDUSTRY 6-7
111
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LIST OF TABLES (Continued)
NUMBER TITLE PAGE
6-5 AFTER COMPLIANCE ROI OF PLANTS WITH HIGH PROFIT IMPACT 6-8
6-6 CAPITAL INVESTMENT REQUIREMENTS OF PLANTS WITH POTENTIAL
CAPITAL AVAILABILITY DIFFICULTY 6-10
6-7 SUMMARY OF POTENTIAL FOP CLOSURES DUE TO REGULATION 6-11
6-8 SUMMARY OF PLANT CLOSURE ANALYSIS FOR ALL TREATMENT OPTIONS 6-14
7-1 DISTRIBUTION OF ALUMINUM FORMING PLANTS BY PRODUCTION VOLUME 7-2
7-2 SUMMARY OF SMALL BUSINESS ANALYSIS FOR TUBE AND EXTRUDED
SHAPES PRODUCT GROUP 7-4
7-3 SUMMARY OF SMALL BUSINESS ANALYSIS FOR CONDUCTOR WIRE AND
CABLE PRODUCT GROUP 7-5
IV
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LIST OF FIGURES
NUMBER TITLE PAGE
1-1 RELATIONSHIP BETWEEN SIC-BASED SUBCATEGORIES AND ECONOMIC
SUBCATEGORIES OF THE ALUMINUM FORMING INDUSTRY 1-3
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
2-2 PRICE AND MARKET SHARE ADJUSTMENTS 2-8
3-1 ALUMINUM FORMING PROCESS 3-3
3-2 GEOGRAPHICAL LOCATION OF ALUMINUM FORMING PLANTS 3-6
3-3 CONSUMPTION PATTERNS AND GROWTH RATES FOR ALUMINUM FORMING
PRODUCTS, 1970-1981 3-13
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SUMMARY
INTRODUCTION
Purpose
This report provides an identification and analysis of the economic
impacts which are likely to result from the proposed effluent regulations on
the aluminum forming industry. These regulations include effluent limitations
and standards based on Best Practicable Control Technology Currently Available
(BPT), Best Available Technology Economically Achievable (BAT), New Source
Performance Standards (NSPS), and Pretreatment Standards for New and Existing
Sources (PSNS and PSES) which are being proposed under authority of Sections
301, 304, 306, 307, and 501 of the Federal Water Pollution Control Act, as
amended by the Clean Water Act of 1977. The primary economic impact variables
assessed in this study include the costs of the proposed regulations and
potential for these regulations to cause plant closures, price changes,
unemployment, changes in industry profitability, structure and competition,
shifts in the balance of foreign trade, industry growth, and impacts on small
businesses.
Industry Coverage and Segmentation
The aluminum forming industry, as defined in this study, includes the
following six technical (or process) subcategories:
• Rolling with neat oils
• Rolling with emulsions
• Extrusion
• Forging
S-l
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• Drawing with neat oils
• Drawing with emulsions or soaps.
For the purpose of assessing the economic impacts of the regulations,
the aluminum forming industry is divided into the following seven major
product groups:
• Sheet and plate
• Foil
• Tube and extruded shapes
• Forging
• Conductor wire and cable
• Sheet and plate; foil; and tube and extruded shapes
• Rod, bar, and bare wire; and conductor wire and cable.
This market-oriented segmentation was selected to facilitate consideration
of product market characteristics and industry pricing behavior and, in
turn, the likely price and output impacts of the regulations.
METHODOLOGY
The approach used to assess the economic impacts likely to occur as a
result of the costs of each regulatory option is to (1) develop an operational
description of the price and output behavior of the industry and (2) assess
the likely plant-specific responses to the incurrence of the compliance costs
enumerated in the body of this report. Thus, industry conditions before and
after compliance with the proposed regulations are compared. Supplemental
analyses are used to assess linkages of the aluminum forming industry's condi-
tions to other effects such as employment, community, and balance of trade
impacts. These analyses were performed for five regulatory options considered
by EPA. Specifically, the methodology can be divided into ten major steps.
Although each step is described independently, there is considerable interde-
pendence among them. The ten steps are described in the following paragraphs.
S-2
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Step 1: Description of Industry Characteristics
The first step in the analysis is to develop a description of basic indus-
try characteristics such as the determinants of demand, market structure, the
degree of intra-industry competition, and financial performance. The result-
ing observations indicated the type of analysis needed for the industry. The
sources for this information include government reports, trade association
data, discussions with various trade associations and industry personnel, and
an EPA survey of firms in the industry.
Step 2: Supply - Demand Analysis
The second step in the analysis is a determination of the likely changes
in market prices and industry production levels resulting from each regulatory
option. The estimates of post-compliance price and output levels are used in
the plant-level analysis (Steps 5, 6, and 7) to determine post-compliance
revenue and profit levels for specific plants in each group.
A cost-plus-markup pricing strategy is assumed as an approximation of
industry-wide price increases. This strategy is applied to the average com-
pliance cost per dollar of revenue across all plants in the industry for which
data were available. The post-compliance market price levels are used, in a
later step, to assess the financial condition of individual aluminum forming
facilities.
Step 3: Compliance Cost Estimates
Investment and annual compliance costs for each of the five treatment
options were estimated in a separate EPA study for each aluminum forming
establishment. These cost estimates form the basis for the economic impact
analysis.
S-3
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Step 4: Screening Analysis
A screening analysis based on plant annual compliance cost to revenue
ratio (ACC/R) is performed to identify plants which require detailed financial
analysis to determine the likelihood of closure. Plants with ACC/R ratios
greater than one percent are selected for further financial analysis. Those
with ratios below one percent are assumed to have a low probability of closure
due to the regulations.
Step 5: Plant-Level Profitability Analysis
The basic measure of financial performance used to assess the impact of
the proposed regulations on the profitability of individual plants is return
on investment (ROI). Plants with after-compliance ROI below a threshold
value of 7 percent are considered potential plant closures. The 7 percent
ROI threshold value corresponds to 12 percent after-tax return on equity
(given a number of assumptions described in the report) which is assumed to
be the minimum return for a business to continue operation. Due to the
unavailability of plant-specific baseline financial characteristics for the
aluminum forming industry, average industry financial and operating ratios
were applied to each plant.
Step 6: Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a profita-
bility perspective, it is also necessary to assess the ability of firms to make
the initial capital investment needed to construct and install the required
treatment systems. The analysis of capital availability was based on the ratio
of "compliance capital investment requirements to plant revenues" (CCI/R).
This ratio was calculated for each plant and compared to a threshold value
to help determine the potential for significant plant-level impacts.
S-4
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Step 7: Plant Closure Analysis
The decision to close a plant, like most major investment decisions, is
largely based on financial performance, but is ultimately judgmental. This is
because the decision involves a wide variety of considerations, many of which
cannot be quantified or even identified. Assessments of the degree of impacts
on individual plants were made by evaluating the above financial variables in
conjunction with nonfinancial and nonquantifiable factors, such as substitut-
ability of products, plant and firm integration, the existence of specialty
markets, and expected market growth rates.
Step 8: Other Impacts
"Other impacts" which result from the assessment of basic price, produc-
tion, and plant-level profitability changes, include impacts on employment,
communities, industry structure, and balance of trade. These impacts are
estimated via supplementary analyses that are explained where the results are
reported in appropriate portions of the report.
Step 9: New Source Impacts
This step analyzes the effects of NSPS/PSNS guidelines upon new plant
construction and substantial modification to existing facilities in the
aluminum forming industry. The analysis is based on a comparison of the
compliance costs of the alternative new source treatment technologies to
those of the selected BAT and PSES treatment options.
Step 10: Small Business Analysis
The Regulatory Flexibility Act requires Federal regulatory agencies to
evaluate small entities throughout the regulatory process. This analysis
identifies the economic impacts which are likely to result from the promulga-
tion of the effluent regulations on small businesses in the aluminum forming
S-5
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industry. Most of the information and analytical techniques in the small
business analysis are drawn from the general economic impact analysis. The
specific conditions of small firms are evaluated against the background of
general conditions in the aluminum forming markets.
For purposes of regulation development, a small business definition based
on plant output volume was selected. The impacts on small plants were assessed
by examining the distribution by plant size of the number of aluminum forming
plants, plant revenues, compliance costs, and potential closures resulting from
the regulations.
INDUSTRY CHARACTERISTICS
The EPA identified 279 aluminum forming plants in operation in 1977 (two
have since discontinued their operations). Total employment of these 279 plants
is approximately 31,200 people.
For this study, production, value of shipments, and compliance cost data
for 238 plants form the basis for the economic impact analysis. This plant
sample contains a wide range of both large and small plants and appears to
adequately represent the industry for the purposes of this study.
The U.S. aluminum forming industry is dominated by 12 integrated producers
which accounted for 75 percent of total aluminum forming product shipments in
1980. The market shares of the integrated firms vary among the product groups
studied from 85 percent for sheet and plate to 42 percent for tube and extruded
products.
The major markets for aluminum forming products are the building and
construction, transportation, and containers and packaging markets. The
metallurgical properties of aluminum make its use more advantageous in many
applications than other materials. Some of these properties are aluminum's
ligfit weight, high strength-to-weight ratio, high electrical conductivity,
corrosion resistance, heat reflectivity, and easy maintenance.
S-6
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The aluminum forming industry exhibits some characteristics of both
competitive and noncompetitive markets. The evidences of noncompetitive
market are generally inelastic demand, high industry concentration, high
capital intensity, and instances of "price leadership." At the same time,
there is also indication of competitive pricing situations such as the exist-
ence of relatively homogeneous products, relatively "normal" profit rates in
the industry, and periodic oversupply resulting in price discounts.
BASELINE PROJECTIONS
Conditions in the aluminum forming industry to 1990, under the assumption
that there would be no water pollution control requirements, are projected and
summarized below:
• Industry demand for aluminum forming products will grow
moderately
• The number of establishments will not change significantly
during the 1980's and there will be no baseline closures
• Industry profitability will remain consistent with historical
patterns.
COST OF COMPLIANCE
Based on the analysis of the potential pollutant parameters and treat-
ment in place in the aluminum forming industry, EPA identified 6 treatment
technologies that are most applicable for the reduction of the selected
pollutants. These treatment technologies are described in detail in the
Development Document and are listed below:
• Treatment Option 1: Hexavalent chromium reduction
and chemical emulsion breaking (where applicable);
oil skimming; chemical precipitation; sedimentation;
cyanide removal (where applicable)
• Treatment Option 2: Option 1 plus flow reduction by
recycle, hauling or regeneration of chemical baths,
and counter-current rinsing
S-7
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• Treatment Option 3: Option 2 plus polishing filtration
after settling
• Treatment Option 4: Option 1 plus flow reduction through
in-process controls plus thermal emulsion breaking to
achieve zero discharge of emulsified lubricants
• Treatment Option 5: Option 4 plus polishing filtration
• Treatment Option 6: Option 5 plus granular activated
carbon as a preliminary treatment step.
EPA's evaluation of Treatment Option 6 concluded that this technology
would provide only minimal incremental removal of pollutants at significantly
higher costs than the other options. For this reason, Treatment Option 6 was
eliminated from consideration.
Table S-l presents the estimated investment and annual compliance costs
for the existing sources.
FINDINGS
Plant Closure Impact
No plant closures are projected for the sheet, foil, rod and bar, or
forging product groups. Of the 68 discharging tube and extruded shapes
plants, three plant closures are projected, and of the 13 discharging con-
ductor wire and cable plants, 5 are considered potential plant closures at
all five treatment options. The plant closure findings are summarized in
Table S-2. All eight closures are expected to be relatively small aluminum
forming plants; the extrusion plants each produce less than 3 million pounds
a year, and wire plants each produce less than 1 million pounds annually.
S-8
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Employment, Community, and Regional Effects
As shown in Table S-2, there is potential for 8 plant closures involving
a loss of about 185 jobs. None of these plants account for a significant
portion of community employment, hence the community and regional impacts
seem to be insignificant.
Substitution Effects
The effects of the alternative regulations on substitution potential are
insignificant, since the price increases associated with the compliance costs
and the corresponding quantity reductions are small.
Foreign Trade Impacts
Since the price increases estimated to result from the regulations are
small, such price increases would not alter the trading pattern substantially.
Industry Structure Effects
The impact of the alternative regulations on the industry structure is
negligible since only a small proportion of industry output is accounted for
by the plants projected to close.
New Source Impacts
The alternative treatment technologies for new sources are identical to
the treatment options for existing sources. The selected treatment technology
for existing sources is Treatment Option 2. Since no additional closures are
estimated for existing sources under the more expensive options 3, 4, and 5,
it is anticipated that the new source regulations would not cause additional
plant closures or constitute a significant hindrance to the addition of new
capacity to the industry.
S-ll
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Impact on Small Entities
The economic impacts of the alternative regulations are highest among
the smaller plants. All the wire drawing plants projected to close produce
less than 1 million pounds annually and all extrusion plants expected to close
produce less than 3 million pounds annually.
S-12
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1. INTRODUCTION
1.1 PURPOSE
This report identifies and analyzes the economic impacts which are likely
to result from the proposed effluent regulations on the aluminum forming
industry. These regulations include effluent limitations and standards based
on Best Practicable Control Technology Currently Available (BPT), Best
Available Technology Economically Achievable (BAT), New Source Performance
Standards (NSPS), and Pretreatment Standards for New and Existing Sourcees
(PSNS and PSES) which are being proposed under authority of Section 301, 304,
306, 307, and 501 of the Federal Water Pollution Control Act, as amended by
the Clean Water Act of 1977. The primary economic impact variables assessed
in this study include the costs of the proposed regulations and potential for
these regulations to cause plant closures, price changes, unemployment,
changes in industry profitability, structure and competition, shifts in the
balance of foreign trade, and impacts on small businesses.
1.2 INDUSTRY COVERAGE
The aluminum forming industry examined in this study is defined as those
manufacturing activities classified under the following SIC groups:
• SIC 3353 - Aluminum Sheet, Plate, and Foil
• SIC 3354 - Aluminum Extruded Products
• SIC 3355 - Aluminum Rolling and Drawing, not elsewhere
classified
• SIC 3357 - Nonferrous Wiredrawing and Insulating. (This
category includes all nonferrous wire and cable manu-
facturers, but only plants drawing aluminum wire are
examined in this study.)
• SIC 3463 - Nonferrous Forgings. (Only aluminum forging, SIC
34631, is examined in this study).
1-1
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1.3 INDUSTRY SEGMENTATION
For the purpose of setting effluent standards, EPA designated the
following six technical (or process) subcategories in the aluminum forming
industry group:
• Rolling with neat oils
• Rolling with emulsions
• Extrusion
• Forging
• Drawing with neat oils
• Drawing with emulsions or soaps.
While this subcategorization scheme may be appropriate from a technical
viewpoint, it is expected that the economic impacts of the regulations will
vary with the type of aluminum forming product. The major types of aluminum
forming products are:
• Sheet and plate
• Foil
• Tube and extruded shapes
• Forging
• Rod, bar and bare wire
• Conductor wire and cable.
Figure 1-1 shows the relationships of the SIC groups included in this study
and the six major aluminum forming product groups above.
The plants in the industry are generally, but not always, specialized in
one of the above mentioned product groups. Survey data collected by EPA on
238 aluminum forming plants indicate that 25 plants manufacture more than one
type of product. Of these, 19 produce sheet and plate, foil, and tube and
extruded shapes and 6 produce rod, bar and bare wire, and conductor wire and
cable. Because compliance costs for these plants were estimated for the
total plant and there is insufficient information to allocate these costs to
1-2
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SIC-BASED
SUBCATEGORIES
ECONOMIC
SUBCATEGORIES
SIC
3354
SIC
3355
SIC
3357
and Bar
Extruded Pipe
and Tube
Other
Extruded Shapes
Rolled & Contin-
uous Rod & Bar
Ingot, Billet3
Aluminum
Wire & Cable
Other ".,'onferrous
Wire & Cable3
—f
_/
•> »
> *-
Tube & Pipe
Extruded
Shapes
Rod, Bar &
Bare Wire
Conductor
Wire & Cable
SIC
3463
Forging
Other Nonferrous
Forgings a
Aluminum
Forging
3 Not included in this study
FIGURE 1-1. RELATIONSHIP BETWEEN SIC-BASED SUBCATEGORIES
AND ECONOMIC SUBCATEGORIES OF THE ALUMINUM FORMING INDUSTRY
1-3
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each individual product, the analysis of economic impacts on these 25 indus-
trial plants required the establishment of separate categories for multi-
product plants. For this reason, the aluminum forming industry is organized
into the following seven segments to represent the different types of plants
in the industry:
Product Groups
• Sheet and plate
• Foil
• Tube and extruded shapes
• Forging
• Conductor wire and cable.
Sheet and plate; foil; and tube
and extruded shapes
Rod, bar, and bare wire; and
conductor wire and cable
Technical Subcategories
• Rolling with neat oils; rolling
with emulsions
• Rolling with neat oils; rolling
with emulsions
• Extrusion; drawing with neat
oils; drawing with emulsions
• Forging
• Drawing with neat oils; drawing
with emulsions
• Rolling with neat oils; rolling
with emulsions; extrusion;
drawing with neat oils; drawing
with emulsions
• Rolling with neat oils; rolling
with emulsions; extrusion;
drawing with neat oils; drawing
with emulsions.
1.4 ORGANIZATION OF REPORT
The remainder of this report consists of seven chapters. Chapter 2
describes the analytical methodology employed, Chapter 3 provides the basic
industry characteristics of interest, and Chapter 4 projects some of these key
characteristics to the 1985 - 1990 time period, when the primary economic
impacts of the proposed regulations will be felt. Chapter 5 describes the
pollution control technologies considered by EPA and their associated costs.
The information in Chapter 5 is derived primarily from the companion technical
study and is published in the Development Document for Effluent Limitations
Guidelines and Standards for the Aluminum Forming Point Source Category (EPA
440/1-82/073-b, November 1982) prepared by EPA's Effluent Guidelines Division.
1-4
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Chapter 6 describes the economic impacts projected to result from the cost
estimates presented in Chapter 5. Chapter 7 presents an analysis of the
effects of the proposed regulations on small business and Chapter 8 outlines
the major limitations of the analysis and discusses the possible effects of
the limitations on the major study conclusions.
1-5
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2. STUDY METHODOLOGY
2.1 OVERVIEW
Figure 2-1 shows an overview of the analytical approach used to assess
the economic impacts likely to occur as a result of the costs of each proposed
regulatory option. For the aluminum forming industry, six regulatory options
were considered; however, based on the high costs and the low pollutant
removals, one of the options is excluded from further evaluation. The
approach used in this study is to (1) develop an operational description of
the price and output behavior of the industry, and (2) assess the likely
plant-specific responses resulting from the compliance costs estimated for
each regulatory option in Chapter 5.
The operational description of the price and output behavior is used, in
conjunction with compliance cost estimates supplied by EPA, to determine
post-compliance industry price and production levels for each regulatory
option and for each of the aluminum forming product groups. Individual plant
data is then analyzed under conditions of the post-compliance industry price
levels, for each regulatory option, to isolate those plants that have a high
potential for significant profit decline as a result of the proposed regu-
lations. Plants with a high potential for significant profit decline are
subjected to a financial analysis that uses capital budgeting techniques to
determine likely plant closures. If necessary, the industry description is
then revised, for each regulatory option, to incorporate the reduced supply
into the analysis. Finally, other effects which flow from the basic price,
production, and industry structure changes are determined. These include
employment, community, and foreign trade impacts. Specifically, the study
proceeded in the following ten steps:
1. Description of industry characteristics
2. Industry supply and demand analysis
3. Analysis of cost of compliance estimates
4. Plant level screening analysis
5. Plant level profitability analysis
6. Plant level capital requirements analysis
7. Assessment of plant closure potential
8. Assessment of other impacts
9. New source impacts
10. Small business analysis.
2-1
-------
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Although each of these steps is described separately in this section, it is
important to realize that there are significant interactions between them, as
shown in Figure 2-1.
The major sources of data used in this study are listed below.
• U.S. Environmental Protection Agency: EPA industry survey conducted
in 1978 under Section 308 (of particular importance for this study are
data on plant production volume and value of shipments), EPA estimates
of compliance costs and the Development Document.
• U.S. Department of Commerce: 1977 Census of Manufactures; Current
Industrial Reports - Aluminum Ingot and Mill Products.
• U.S. Bureau of Mines: Mineral Commodity Profiles - Aluminum.
• Federal Trade Commission: Quarterly Financial Report for
Manufacturing, Mining and Trade Corporations.
• U.S. Department of Labor: Producer Prices and Price Indexes.
• Council on Wage and Price Stability: Aluminum Prices 1974-1975,
September 1976.
• Trade publications such as American Metal Market, Aluminum Statistical
Review, Metal Statistics and Modern Metals.
• Interviews with industry representatives
• Corporate annu-al reports.
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in this analysis is to describe the basic industry
characteristics. These characteristics, which include the determinants of
demand, market structure, the degree of intra-industry competition, and
financial performance, are described in Chapter 3 of this report. The sources
for this information include those listed above, such as government reports,
trade association data, discussions with various trade association
representatives and individuals associated with the industry.
2-3
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2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis, step 2 of the study approach,
is to determine the likely changes in market prices and industry production
levels resulting from each regulatory option. The estimates of post-com-
pliance price and output levels are used in the plant-level analysis to
determine post-compliance revenue and profit levels for specific plants in
each product group. If prices are raised without significantly reducing
product demand and companies are able to maintain their current financial
status, the potential for plant closings will be minimal. If prices cannot be
raised to fully recover compliance costs because of the potential for a
significant decline in product demand or because of significant intra-industry
competition, the firms may attempt to maintain their financial status by
closing higher-cost/less-efficient plants. The supply-demand analysis was
divided into four basic components: determination of industry structure,
projection of possible changes in industry structure during the 1980's,
determination of plant- and firm-specific operational parameters (e.g.,
production costs, profit rates, etc.), and development of price-quantity
algorithms.
Short run pricing behavior depends upon the market structure of the
industry, which can range from competitive to monopolistic competition, to
oligopoly and to monopoly situations. Many economic impact studies begin by
assuming perfect competition. However, as described in Chapter 3 the product
groups covered in this study exhibit some characteristics that are indicative
of not perfectly competitive pricing mechanisms.
The perfectly competitive market structure is one in which there are many
buyers and sellers and the actions of any one of these do not significantly
affect the market. Firms in a competitive market generally earn a "normal"
rate of return on their assets and any industry-wide cost increase will
require the firms to raise prices to maintain profitably. The extent of the
price increases is determined by the interaction of the elasticities of supply
and demand. That is, the amount of the cost increase that will be passed
through into higher prices is:
2-4
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(Equation 1)
, + E
d s
where E is the elasticity of supply and E is the elasticity of demand.
a d
The oligopolistic pricing scheme is applicable for those product
categories which exhibit the following market characteristics:
• Few firms in the product group
• High industry concentration
• Low degree of foreign competition (less than 10 percent of U.S. sales)
• Abnormally high profitability
• Low demand elasticities
• Highly capital intensive
• Large degree of integration of production, marketing, and distribution
• Large degree of specialized knowledge.
Industries which exhibit the first three of these characteristics are
those in which the pricing and output actions of one firm will directly affect
those of other firms in the industry. While these conditions do not guarantee
oligopolistic behavior, they are necessary conditions and good indicators that
oligopolistic behavior exists. Abnormally high profits in an industry would,
in time, tend to attract new entrants to the industry, thereby increasing
price competition (because there are more competitors) and industry marginal
cost (to the extent that new entrants have higher costs). However, very high
profits over long periods of time which are not explained by such factors as
excess risk, unusual amounts of technological innovation, or firm size may be
an indicator that an imperfect market structure exists. Such conditions may
I/
In a competitive market price = marginal cost, therefore
E = x = " x , where me = marginal cost, P = market price, and
dP Qs dmc Qs Qs = quantity supplied.
See Levenson, Albert M., and Solon, B.S., Outline of Price Theory, Holt,
Rinehart and Winston, Inc.,pp. 56-59, 1964.
2-5
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occur when entry into an industry is difficult. The last three of the above
points are indicators of difficulty of entry into the market.
As described in Chapter 3, the domestic aluminum forming industry
exhibits some characteristics of non-competitive markets such as high
concentration ratios, high capital intensity, high integration and little
foreign competition. On the other hand, the industry also exhibits some
characteristics that are indicative of competitive markets such as generally
"normal" profitability and periodical oversupply resulting from cyclical
fluctuations in the economy. Because of the conflicting information regarding
the industry's market structure, no single conclusion is drawn regarding an
underlying principle or model which could precisely describe the industry's
pricing behavior in all market situations. Instead, the magnitude of the
price increase is assumed to be at a level which would maintain the
industry-wide initial return on sales (i.e., cost-plus-markup pricing
II
strategy) . This pricing strategy is incorporated in the following
algorithm:
dP_
P
ACC.
(Equation 2)
where
where
ACC.
R, •
TC.
dP = industry-wide price increase
P
annual compliance cost of plant i
total cost of goods sold for plant i
pre-compliance sales revenue of plant i
(Equation 3)
2/
Beeause of variation of unit compliance costs among plants in the industry
some plants will be affected more than others by the regulations, as
described in Figure 2-2.
2-6
-------
PM. = industry average pre-compliance profit margin
n = total number of plants in the product group
The values of R.. were collected for 238 aluminum forming plants (which form
the basis for this economic impact study) in the EPA industry survey, and PM,
is estimated based on discussions with industry representatives and analysis
of industry level data from Census of Manufactures and the Federal Trade
Commission.
This price change algorithm implies some important dynamics in the
interaction of competing firms in determining prices. Figure 2-2 illustrates
how the model assimilates the differential compliance costs of four plants
producing a similar product. Assume initially that each plant will raise its
price from P. to an amount equaling the compliance cost per unit of its
production. Demand would then tend to shift from plants C and D to plants A
and B because their prices are now substantially less. As a result of this
shift, plants C and D would be under pressure to lower their prices while
plants A and B would be able to raise their prices. An equilibrium price, P.,
will be established, with plants C and D absorbing part of their compliance
costs. In this manner, the model serves as the basis for estimating the price
and production impacts for each product group as well as the basis for
identifying plants that may have to absorb a significant portion of their cost
of compliance.
Some of the sample plants included in the EPA survey are multi-product
plants. To estimate the industry-wide price increase for each product group,
these plants' total revenues and compliance costs are segregated and allocated
to the appropriate product groups. The allocation of compliance costs is
based on each plant's distribution of flow rate by product group. When the
breakdown of flow rate by product is not available, it is assumed that
compliance costs are proportionate to production volume and allocated to each
product group accordingly.
2-7
-------
Price/
Unit
EQUILIBRIUM BEFORE COMPLIANCE
<
4J
c
0)
P-
m
U
a
cd
fu
0
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c
CO
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C
CD
i— 1
0-
Market
inares
Price/
Unit
2B
P2A
INITIAL PRICE REACTIONS TO COMPLIANCE COSTS
Demand Shift
from ..Plants -
C & D
to Plants A & B
Compliance
Costs
Market
Shares
Price/
Unit
EQUILIBRIUM PRICE AFTER COMPLIANCE
Portion of
Compliance Costs
which must be
absorbed by the
plants
Market
Shares
FIGURE 2-2 PRICE AND MARKET SHARE ADJUSTKEOTS
-------
Using the basic price elasticity equation and the dP/P ratios calculated
above, the rate of change in quantity demanded dQ/Q for each product group is
determined as follows:
_ dQ . dP (Equation 4)
E= - -
dQ _ dP _. (Equation 5)
- - -X
where E = Coefficient of price elasticity of demand (estimated in
Section 3.6)
Since all plants in an industry group would raise their prices by the
industry-wide price increase dP/P, it is initially assumed that each plant
would experience the same proportionate reduction in quantity dQ/Q.
It is necessary to determine if the key parameters in industry structure
would change significantly during the 1980's. Projections of industry
conditions begin with a demand forecast. The demand during the 1980's is
estimated via trend analysis and market research analysis. It is determined
from the projections of industry conditions that only minor changes in market
structure would occur in the base case. For this reason it is concluded that
the market structure previously described can be used to determine price
changes due to the regulation.
The post-compliance market price levels are used, in a later step, to
assess the financial condition of individual aluminum forming facilities.
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
Investment and annual compliance costs for five of the six identified
treatment options were estimated for each of the 238 plants providing survey
information. 'A summary description of the control and treatment technologies
and assumptions for these compliance cost estimates appear in Chapter 5.
2-9
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2.5 STEP 4: PLANT-LEVEL SCREENING ANALYSIS
The screening analysis uses a basic criterion to separate those plants
with obviously small impacts from those with potentially significant impacts.
The criterion uses the ratio of total annual compliance cost to revenue for
each plant; if this ratio is less than one percent, the plant is considered a
"low impact", plant. For such plants, the effect of compliance costs on plant
profitabilities would be very small. Although some of these plants would
experience some drop in their profitabilities, they are not considered
candidates for closure. Estimates of profitability changes for these plants
are recorded, but they are not subjected to a detailed financial analysis.
Plants with compliance cost to revenue ratios greater than 1 percent are
subjected to a more detailed financial analysis to determine if they are
likely plant closures. Fifty-six plants have compliance costs exceeding one
percent of revenues for the most costly option considered.
2.6 STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS
The basic measure of financial performance used to assess the impact of
the proposed regulations on the profitability of individual plants is return
on investment (ROI). The use of this technique involves a comparison of the
measure after compliance with a minimum required return on investment.
The return on investment is defined as the ratio of annual profits before
taxes to the total assets of a plant. This ratio is based on accounting
income rather than cash flows and it fails to account for the timing of cash
flows, thereby ignoring the time value of money. However, this technique has
the virtues of simplicity and common usage in comparative profitability
analyses of financial entities.
For each of the 56 plants whose annual compliance costs exceeded one
percent of revenues, the profit impact is assessed by calculating the after-
compliance ROI and comparing it to a threshold value based upon general
long-term interest rates in the economy. Plants with after-compliance ROI
below the threshold value are considered potential plant closures. The
underlying assumption is that plants cannot continue to operate as viable
concerns if they are unable to generate a return on investment that is at
2-10
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least equal to the opportunity cost of other lower risk investment
alternatives. It should be noted that the pre-compliance ROI is the same for
each plant in a product segment; the post-compliance ROIs, however, reflect
plant-specific compliance cost estimates.
The critical value for ROI used in the analysis is 7 percent. Plants
with after-compliance ROI less than 7 percent are considered potential
closures. The 7 percent ROI threshold level is based on the condition that
plants cannot continue to operate as viable concerns if they are unable to
generate for the owners/stockholders an after tax return on their investments
(i.e., stockholders' equity) equal to the opportunity cost of other investment
alternatives, which in this case is defined as the U.S. Treasury bond yield
expected to be in effect when the regulation is implemented. Data Resources,
Inc. forecasts that interest rates on long-term U.'S. Treasury bonds will be
about 12 percent in 1983-1984 , which is approximately the time when the
plants will have to make investment decisions on the treatment facilities. A
12 percent after-tax return on the liquidation value of the equity requires a
before tax ROI of 7 percent, assuming:
stockholders' equity of aluminum forming firms represents about
4/
/L /
50 percent of total assets
the average corporate tax rate is 40 percent
the average liquidation values of the plant assets are 85 percent of
their book values.
Appendix B describes the methodology that led to this ROI threshold level.
The after compliance ROI (ROI^.) is estimated for each plant using the
following equations:
PROFIT.. + DPROFIT.
ROI . = ^ * (Equation 6)
A. + CCI.
i 1
3/
, Data Resources, Inc., U.S. Long Term Review, Summer 1981
Average for Nonferrous Metals Industry group as reported in the Federal
Trade Commission's Quarterly Financial Report for Manufacturing, Mining and
Trade Corporations, Second Quarter 1981.
2-11
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where PROFIT,. = Pre-compliance profit of plant i
DPROFIT. = Change in profit of plant i
A. = Pre-compliance assets value of plant i
i
CCI. = Compliance capital investment for plant i
The variables in Equation (6) are further defined as follows:
PROFIT.. = R.. x PM . (Equation 7)
DPROFITi = (Rj. - a.PliQ2. - FC. - ACC.) - (RU - a.P^.-
= (R2i - RU) - (a.^ x E x dP x RU) - ACC.^
(Equation 8)
R0. = R. . , I + dP . ( 1 + dP , (Equation 9)
2i 11 v. -— ) v, -— c. ;
where RI. = Pre-compliance revenue of plant i
R?. = After-compliance revenue of plant i
PM.. = Pre-compliance profit margin of plant i (gross profits as
a percent of sales)
P.. = Pre-compliance price of plant i
Q.. = Pre-compliance production of plant i
0-. = After-compliance production of plant i
a. = Variable cost to pre-compliance price ratio of plant i
FC. = Fixed cost of production of plant i
ACC. = Annual compliance cost of plant i
dP = Industry-wide price increase
P
E = Price elasticity coefficient of demand
The values of Q.. and R.. were collected in the EPA industry survey,
while dP/P is calculated by Equation (2) presented in Section 2.3. In the
absence of plant-specific data, the values of A., PM.. and a. are product
group averages estimated from Census of Manufactures, Federal Trade Commis-
sion, company published financial data, and various inputs from industry
sources. Finally, the demand price elasticity E was developed in Step 2.
2-12
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A low ROI for a given plant does not, by itself, necessarily imply that
the plant will close. As discussed in Section 2.8, actual plant closure
decisions made by individual companies are usually based on many factors.
However, the profitability ratio (ROI) relates profits to plant total assets,
and provides a means of evaluating the attractiveness of the plant as an
investment opportunity compared to other opportunities that may be available
to stockholders and potential lenders.
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing the potential for plant closures from a
profitability perspective, it is also necessary to assess the ability of firms
to make the initial capital investment needed to construct and install the
required treatment systems. Some plants which are not initially identified as
potential closures in the profitability analysis may encounter problems
raising the amount of capital required to install the necessary treatment
equipment. The limit on a given firm's ability to raise capital to finance
investment expenditures is quite variable, depending upon factors such as the
firm's capital structure, profitability, future business prospects, the
industry's business climate, the characteristics of the financial markets and
the aggregate economy, and the firm management's relationships with the
financial community. The precise limit, considering all these factors, is
ultimately judgmental. Even given firm-specific data, a limit on a firm's
ability (or willingness) to raise funds for capital investment would be
difficult to estimate.
Because firm-specific data for this study is scarce, the analysis of
capital availability is based on the ratio of "compliance capital investment
requirements to plant revenues" (CCI/R). This ratio provides an indication of
the relative magnitude of the compliance capital investment requirements.
The ratio CCI/R was calculated for each of the 56 "high impact potential"
plants identified in the screening analysis and compared to a threshold value.
Assuming that re-investment in plant and equipment equals depreciation, the
plant's net after tax profit margin is a measure of the internally generated
funds available for pollution control investment. For example, if the average
2-13
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before-tax profit margin is 6 percent of revenues (as assumed for one of the
subcategories in Table 6-4) and the average corporate tax rate is 40 percent,
3.6 percent (60 percent of 6 percent) of revenues is taken to be the capital
availability threshold. If a plant's CCI/R ratio is less than the threshold
value, the investment may be financed out of a single year's cash flow,
without additional debt.
The CCI/R ratio does not provide precise or universal conclusions
regarding a firm's ability to make the investments. However, this ratio
provides a good indication of the relative burden created by the compliance
requirement, and is used in combination with other factors discussed in Step 7
to determine the potential for significant plant-level impacts.
2.8 STEP 7: PLANT CLOSURE ANALYSIS
The plant level analysis examined the individual production units in each
product group to determine the potential for plant closures and profitability
changes. The decision to close a plant, like most major investment decisions,
is ultimately judgmental. This is because the decision involves a wide
variety of considerations, many of which cannot be quantified or even
identified. Some of the most important factors are:
• Profitability before and after compliance
• Ability to raise capital
• Market and technological integration
• Market growth rate
• Other pending Federal, state, and local regulations
• Ease of entry into market
• Market share
• Foreign competition
• Substitutability of the product
• Existence of specialty markets.
Many of these factors are highly uncertain, even for the owners of the
plants. However, this analysis is structured to make quantitative estimates
of the first two factors, as described above, and to qualitatively consider
2-14
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the importance of the others. In this analysis, the first two factors are
given the greatest amount of weight and the importance of the other factors
varies from plant to plant.
2.9 STEP 8: OTHER IMPACTS
"Other impacts" include economic impacts which flow from the basic price,
production, and plant level profitability changes. These impacts include
impacts on employment, communities, industry structure, and balance of trade.
The estimate of employment effects flows directly from the outputs of the
industry level analysis and the plant closure analysis. Employment estimates
for production facilities projected to close are available from the EPA 308
Survey.
Community impacts result primarily from employment impacts. The critical
variable is the ratio of aluminum forming industry unemployment to total
employment in the community. Data on community employment are available
through the Bureau of the Census and the Bureau of Labor Statistics.
The assessment of industry structure changes is based on examination of
the following before and after compliance with the regulation:
• Numbers of firms and plants
• Industry concentration ratios
• Effects of plant closures on specialty markets.
A decrease in the first factor and an increase in the second would indicate an
increase in industry concentration and may change the pricing behavior of the
industry. Such potential changes were qualitatively evaluated.
Imports and exports are important determinants of pricing behavior in the
aluminum forming industry. The role of these variables is qualitatively
evaluated in Chapter 3 of this report. Basically, impacts on imports and
#
exports are a function of the change in the relative prices charged by
domestic versus foreign producers. In this study, the price changes due to
2-15
-------
the regulations are estimated to be small. Therefore the resulting changes in
imports and exports of aluminum forming products are estimated to be small.
2.10 STEP 9: NEW SOURCE IMPACTS
Newly constructed plants and plants undergoing substantial modifications
will be subject to NSPS/PSNS guidelines. The effects these guidelines will
have upon new plant construction in the aluminum forming industry are analyzed
in this step.
For the purpose of evaluating new source impacts, compliance costs of new
source standards are defined as incremental costs over the costs of selected
standards for existing sources. The impacts of new source regulations are
then determined by comparing compliance costs to plant revenues and profit.
2.11 STEP 10: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980, (P.L. 96-354) which amends
the Administrative Procedures Act requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. The RFA requires
an initial screening analysis to be performed to determine if a substantial
number of small entities will be significantly impacted. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. These
objectives are addressed in this step by identifying the economic impacts
which are likely to result from the promulgation of BPT, BAT, NSPS, PSES, and
PSNS regulations on small businesses in the aluminum forming industry. The
primary economic variables covered are those analyzed in the general economic
impact analysis such as plant financial performance, plant closures, and
unemployment and community impacts. Most of the information and analytical
techniques in the small business analysis are drawn from the general economic
impact analysis which is described above and in the remainder of this report.
The specific conditions of small firms are evaluated against the background of
general conditions in the aluminum forming markets.
A specific problem in the methodology is the development of an acceptable
definition of small entities. The Small Business Administration's standard
definition of small entities in the aluminum forming industry is based on
2-16
-------
company size, and size is measured by the number of employees. However,
alternative definitions can be used if they would be more appropriate. This
report uses a definition of small business which is more consistent with the
overall economic impact analysis of pollution control requirements, and which
uses more readily available data; plants are used as the entities of analysis,
rather than companies, and size is measured by production, rather than
employees.
More specifically, because of economies of scale in pollution control
technologies, unit compliance costs generally increase significantly as plant
size decreases. Because the impacts of control requirements are more closely
related to plants than companies and closure decisions are generally based on
the profitability of a plant, the basic analysis of impacts is done on the
plant as a unit and information is collected on a plant basis. In addition,
pollutant loadings and the cost of waste treatment facilities tend to be more
closely related to production than employment; hence, production is used as a
measure of size.
For the aluminum forming industry, four alternative size definitions for
plants based on plant output volume are selected for examination. These are:
plants with production of less than 1 million pounds, 1-3 million pounds, 3-5
million pounds, and greater than 5 million pounds annually. The use of
several different size definitions provides EPA with alternatives in defining
small aluminum forming plants for purposes of regulation development.
The impacts on small plants under each definition are assessed by
examining the distribution by plant size of the number of aluminum forming
plants, plant revenues, compliance costs and potential closures from
regulations.
2-17
-------
3. INDUSTRY CHARACTERISTICS
3.1 OVERVIEW
This chapter describes the operational characteristics of plants and
firms in the aluminum forming industry, the determinants of demand for
aluminum forming products, and the price determining behavior of the industry.
The primary operational characteristics include the number, size, and loca-
tions of plants and firms, the nature of the production processes, trends in
production technology, degree of integration and industry concentration, and
financial performance. The primary determinants of demand are the nature of
the end-use markets, the nature of competitive products, price elasticity, and
the role of imports and exports. The industry and market characteristics are
pertinent to determining industry behavior when faced with additional pollu-
tion control requirements. This information is used in Chapter 4 to describe
the expected characteristics of the industry in the 1985 to 1990 period, and
in Chapter 6 to estimate the potential economic impacts of the proposed
regulations.
The primary economic unit considered in this study is the individual
establishment or product line. This is the basic unit around which capital
budgeting decisions are made. That is, a single-plant or multi-plant firm
will make decisions regarding opening, closing or modifying operations on a
plant-by-plant basis. For example, a specific plant considered unprofitable
for one company may still be a viable operation for another, and if sold, may
remain in operation. In addition, financial and economic characteristics at
the company and industry levels must also be examined because they affect
investment decisions at the plant level. By examining some basic industry
parameters such as number, size, and location of plants and firms, employment,
and financial characteristics, this chapter provides the basic descriptive
information used to model the pertinent behavioral characteristics which lead
to plant closings and other economic impacts.
3-1
-------
3.2 PLANT CHARACTERISTICS
As indicated in Chapter 1, the aluminum forming industry as defined in
this study includes the plants that roll, draw, extrude, and forge aluminum
semi-fabricated products. Figure 3-1 describes the typical production
processes employed by the aluminum forming plants (also often referred to as
aluminum mill product plants).
As shown in Table 3-1, the Census of Manufactures indicates that there
were about 300 operating aluminum forming plants in 1977, These plants employ
about 51,000 production workers and 65,000 employees overall. Table 3-2
presents the distribution of the aluminum forming plants by employment size.
The aluminum sheet, plate, and foil segment (SIC 3353) is dominated by large
plants. Thirty-three percent of the plants in this industry segment have over
500 employees and account for over 85 percent of total industry shipments in
1977. The other segments are characterized by a significant number of small
and medium sized plants (i.e., those employing fewer than 500 employees).
Plants in all segments also appear to be highly specialized, with specializa-
tion ratios ranging from 88 to 94 percent.
In terms of geographic concentration, the majority of the aluminum
forming plants are located in the Midwest and Northeast portions of the United
States (see Figure 3-2).
EPA's survey of the aluminum forming industry indicates there were
279 aluminum forming plants in operation in 1977 . For 248 plants that
reported employment information, the number of production workers totaled
about 28,600 people. This would project to 31,200 production employees for
279 plants, considerably lower than the Census of Manufactures figure. The
reasons for the difference are not known at this time.
Data on production and value of shipments are obtained from the EPA
survey, and compliance costs are estimated for 238 plants. This 238 plant
data base forms the basis of the economic impact study. It contains a wide
1/Since then, two plants were found to have discontinued their aluminum
forming operations.
3-2
-------
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• B.r.W.r.
•fc Rolled and Continuous Cast Rod and B:
• ACSR and Cabl> and/or Insulated
or Covered Wir. and Cfblm
FIGURE 3-2
GEOGRAPHICAL LOCATION OF ALUMINUM FORMING PLANTS
3-6
-------
FIGURE 3-2
_2 (Continued)
• Forgingt .nd/of lmp.cU
0 Powti.r «o«J P«
^. Or.~n .~l/o'
SOURCE The Aluninu-i Association ^
-------
range of both large and small plants, thus appears to adequately represent the
industry for the purposes of this study.
3.3 FIRM CHARACTERISTICS
The Department of Commerce estimates of the number of aluminum forming
firms and plants are contained in Table 3-1. The extruded shapes group has
the largest number of plants and firms with 193 plants owned by 129 firms.
Table 3-3 lists the concentration ratios computed for each of the major
product groups in the aluminum forming industry. With the exception of
extruded products, the United States aluminum forming industry is highly
concentrated with a large share of the market held by a few horizontally and
vertically integrated multi-national firms such as Aluminum Company of America
(ALCOA), Reynolds Metals, Kaiser Aluminum and Chemical Corporation, and Alcan
Aluminum Corporation (subsidiary of Aluminium Company of Canada, Ltd.).
The degree of diversification outside the aluminum industry varies among the
aluminum companies. Of the four largest aluminum producers, Kaiser has the
most diversified operations while the other three companies are more highly
specialized in aluminum processing and fabricating. Most of the other major
aluminum fabricators, such as Arco Petroleum (owns Anaconda), R.J. Reynolds
Industries (owns R.J. Archer, Inc.), and Martin Marietta Corporation, are also
highly diversified companies. However, most of the small aluminum extrusion
companies are not significantly diversified.
Most aluminum forming products are produced by highly integrated
companies. Table 3-4 indicates that the 12 integrated aluminum producers
(companies that produce primary aluminum as well as formed products) accounted
for 75 percent of the total U.S. aluminum forming product shipments in 1980.
However, the market predominance of the integrated firms is not uniform
throughout the various product subcategories. For example, the market share
of integrated firms for the sheet and plate segment is about 85 percent while
their corresponding share of tube and extruded shape products is approximately
42 percent.
3-8
-------
TABLE 3-3
CONCENTRATION RATIOS OF ALUMINUM FORMING INDUSTRY, 1977
Percent of Value of
Shipments Accounted for by
Class of Product
Aluminum Sheet, Plate, and Foil
(SIC 3353)
Aluminum Sheet
Aluminum Plate
Aluminum Foil
Aluminum Extruded Products
(SIC 3354)
Rod, Bar, and other Extruded
Shapes
Extruded and Drawn Tube
Aluminum Rolling and Drawing, n.e.c.
(SIC 3355)
Nonferrous Wiredrawing and Insulating
(SIC 3357)
Aluminum Wire (SIC 33571)
4 largest
Companies
73
75
87
74
37
37
59
81
37
64
8 largest
Companies
90
91
(D)
95
54
56
76
93
52
87
20 largest
Companies
99+
100
100
100
73
76
95
99+
74
(D)
Nonferrous Forgings (SIC 3463)
61
77
90
(D) Withheld by Bureau of the Census
Source: U.S. Bureau of the Census, 1977 Census of Manufactures,
3-9
-------
TABLE 3-4
GROSS SHIPMENTS OF ALUMINUM FORMING PRODUCTS
BY TYPE OF PRODUCER, 1980
Gross Shipments (Millions of Ibs)
Total By Integrated By Nonintegrated
Producers Producers
Total 10
Sheet and Plate 6
Foil
Rod, Bar (Rolled and Con-
tinuous), and Bare Wire
Cable and Insulated Wire
Tube and Extruded Products 2
Forgings
Note: Numbers in parentheses
Source: Department of Commerce
,917 8,151
(75%)
,282 5,348
(85%)
830 733
(88%)
628 482
(77%)
763 540
(71%)
,281 959
(42%)
133 89
(67%)
are market share proportions.
, Current Industrial Reports:
2,766
(25%)
934
(15%)
97
(12%)
146
(23%)
223
(29%)
1,322
(58%)
44
(33%)
Aluminum Ingot
and Mill Products, 1981.
3-10
-------
3.4 FINANCIAL PROFILE
To assess the financial status of the aluminum forming industry, finan-
cial data from publicly available corporate annual reports were collected.
Table 3-5 illustrates the financial ratios of the sample firms by product
group [return on equity (ROE), profit margin (profits to sales) and long-term
debt to equity (D/E) ratios] for the 1976-1978 period compared to similar
ratios for all manufacturing firms calculated from the Federal Trade
Commission's Quarterly Financial Report. This time period is chosen because
it reflects some, but not extreme, cyclical behavior in the aggregate economy
and because it is the approximate time period of the EPA survey of the alum-
inum forming industry. The data in this table are derived from Appendix A,
which lists the data for the specific firms. In general, the profit perform-
ances (ROE and profit margin) of most companies with aluminum forming
operations are worse than the all manufacturing average. In terms of capital
structure, the sample firms are generally more leveraged and exhibit higher
debt to equity ratios than the overall manufacturing average.
3.5 PRODUCTS AND MARKETS
Since the 18€0s, when commercially feasible processes were developed for
fabricating aluminum, aluminum has become the second most widely used metal
(steel being the highest). The variables influencing present demand con-
ditions are closely related to the metallurgical properties of aluminum, which
make its use more advantageous in many applications than that of other
substitutes. In general, the use of aluminum forming products advanced in
areas where light weight, strength, high electrical conductivity, corrosion
resistance, heat reflectivity, easy maintenance, economy, and aesthetic appeal
were desired.
Figure 3-3 presents 1970-1981 consumption patterns and growth rates for
the aluminum forming products. Most product groups showed healthy growth
patterns, except conductor wire and cable consumption which remained virtually
static, and rod, bar, and bare wire consumption which was highly erratic.
Table 3-6 provides a product-by-product summary of the market character-
istics of the aluminum forming products, including average growth rates, major
markets, reasons for growth, availability of substitutes, prospects for
3-11
-------
TABLE 3-5
SELECTED MEASURES OF FINANCIAL STATUS OF
ALUMINUM FORMING INDUSTRY BY PRODUCT GROUP
Than AIL
Manufacturing
Ho. of Firms w/
Profit Margin
Worse Than All
Manufacturing
D/E
Than All
Manufacturing
1978 1977 1976 197819771976 197819771976
•
Sheet and Plate
Foil
Tube and
Extruded Shapes
Rod and Bar
Wire and Cable
Forgings
.-
Source: Federal
-ii ~
15
13
38
10
14
7
Trade
__—
8
5
19
5
8
1
— " ""*
Commission
—
11
8
21
7
10
4
—
12
8
24
8
9
4
_
Quarterly
—
7'
4
22
3
6
4
.
10 10
7
27
8
11
5
__.
Financial
7
26
8
10
5
Report^
• —
9
7
29
8
10
6
.
— —
12
7
26
8
10
6
- — -—
_.
11
7
29
10
11
7
and Corporate
annual reports.
3-12
-------
Million Pounds
10.00C
9, OCX
8.00C
7, OCX
6.00C
5.00C
4.00C
3.00C
2.00C
l.OOC
90C
80C
70C
600
500
400
300
200
100
90
80
70
60
50
40
30
20
10
Sheet & Plate
(+4.4%)
Tube 5. Extruded
Shapes (+1.0%)
Foil (+3.4%)
iConductor Wire
& Cable (<-0.1%)
Rod, Bar &
iBare Wire
(+6.9%)
Forging
(+3.92)
70 71 72 73 74 75 76 77 78 79 80 81
Note: Value in parentheses represents 1970-1981 annual growth rate.
FIGURE 3-3. CONSUMPTION PATTERNS AND GROWTH
RATES FOR ALUMINUM FORMING PRODUCTS, 1970-1981
3-13
-------
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substitution, and foreign trade. Table 3-7 contains a more detailed breakdown
of quantities consumed by major markets and uses for the six product groups.
In recent years, energy shortages and rising crude oil prices have
fostered efforts to conserve energy which, in turn, have spurred demand for
aluminum products used in energy saving technologies. Examples of aluminum
forming products used for energy saving include such items as aluminum storm
windows and doors, and automobile body and engine components (the metal's
lightweight properties improve the gas mileage of automobiles).
Increased shipments to these and other end-use markets have caused a
shift from under-utilization of capacity during the 1950s through the early
1970s, to capacity shortages in the aluminum industry during the late 1970s.
However, the industry's capacity utilization remains largely dependent upon
the aggregate economic conditions. During the 1980-81 recession, demand for
aluminum forming products dropped sharply to cause an excess of capacity in
the industry.
3.6 FOREIGN TRADE
As shown in Table 3-8, the United States has always been a net exporter
of aluminum forming products and imports and exports have historically been a
small factor in the domestic aluminum forming market. In recent years less
than 10 percent of domestic consumption was from imports (see Table 3-9).
Imports of aluminum forming products generally increase during periods of
shortage in domestic supply. For example, as shown in Table 3-8, there were
net imports of 142 million pounds of sheet and plate in 1978. Prior to this
occurrence in 1978, the rod, bar, and bare wire product group is the only one
of the six product groups for which imports accounted for more than 6 percent
of consumption.
In addition to direct imports of aluminum mill products, a considerable
amount of these products enter the U.S. indirectly via imported finished
products, such as transportation equipment, computers, cameras, and electronic
equipment. To the extent that U.S. share of the world markets for these
3-18
-------
tS FOR ALUMINUM
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TABLE 3-9
IMPORTS OF ALUMINUM FORMING PRODUCTS
AS A PERCENT OF TOTAL CONSUMPTION, 1970-1981
(percent)
.1
Year
•i
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
— _ — — — —
__— •
Sheet and
Plate
""
3.8
3.3
3.0
1.8
1.3
2.8
2.8
2.2
6.7
5.7
2.3
4.3
•
_— — — —
Foil
5.4
4.8
4.0
2.6
2.1
0.9
1.6
1.4
2.6
1.8
1.1
1.6
— •"
. — •
Rod, Bar, and
Bare Wire
-
_
9.8
6.6
6.4
3.8
5.3
6.0
6.6
7.4
6.5
11.0
4.9
14.7
. •
.
Tube and
Extruded
Shapes
' '"
0.3
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
_ • —
— —
Conductor
Wire and
Cable
0.3
0.1
0.1
0.1
0.2
0.1
0.1
0.1
*
*
*
NA
.
•
Forgings
_^_^— •^••i •
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
*Less than .05 percent.
NA = Not available
Source: The Aluminum Association, Aluminum Statistical R_e_yj.e_w.
3-21
-------
products increase or decrease, demand for domestic aluminum forming products
will iacrease or decrease.
3.7 PRICE DETERMINATION
Increased costs of aluminum forming will, in the whole or in part, be
passed through to customers in the form of higher prices. The amount that can
be passed through depends on the price-setting behavior within the industry
(i.e. intra-industry competition) and the market acceptance of price increases
as measured by the price elasticity of demand. The following discussions
cover these topics.
3.7.1 Price Elasticity of Demand
The price elasticity of demand measures the degree of responsiveness of
quantity demanded to price changes. An elasticity coefficient of between -1.0
and 0 refers to a generally inelastic (less responsive) market reaction to
price increases, while a coefficient of -1 or less will portray an elastic
(more responsive) market reaction. A price increase for a product with an
inelastic coefficient will yield a less than proportional reduction in
quantity demanded while a similar price increase for a product with an elastic
coefficient will result in a more than proportional reduction in quantity
demanded. For example, if a product with a price elasticity coefficient of
-0.6 experiences a price increase of 2 percent, the quantity demanded will
decrease by 1.2 percent (i.e., 0.6 times 2) which is less than the price
increase.
In general, the price elasticity of intermediate products such as the
aluminum forming products, are influenced by two main factors:
1) The number and closeness of substitutes and components
2) The proportion of the aluminum forming product cost in relation to
the total cost of the final product.
Substitutions can occur at several levels from raw materials to inter-
mediate to end products. At the taw or intermediate material level, manufac-
turers using aluminum forming products can either switch to other materials or
3-22
-------
redesign their products to reduce their dependence on aluminum. If increased
aluminum prices cause increases in the prices of intermediate and end
products, the quantity demanded of these products may decline. These effects
are variable from one product to another, depending upon ease of substitution
and the ratio of the aluminum forming product cost to the total cost of the
end products. The greater this ratio, the greater the potential impact on the
final product's price. Moreover, the greater this ratio, the greater the
likelihood that aluminum users will consider or search for substitutes.
For this study, both an econometric model and an evaluation of market
characteristics were used to estimate the demand elasticities for each of the
six aluminum forming products and to project their demand for 1985 and 1990.
A description of the model appears in Appendix D (not included in this
report).
Table 3-10 summarizes the price elasticity estimates.-'—"
All the elasticity estimates are inelastic (i.e. less
than one). This is consistent with our a priori expectations for each of the
product groups.
The price elasticity estimates shown in Ta-ble 3-10 range from -.4 for the
sheet and plate group to -.8 for the rod, bar and bare wire group. These
elasticity estimates, derived from the empirical model (except for aluminum
foil and forging), are used in the impact analysis described in Chapter 6.
The empirical analysis to determine the price elasticities for foil and
forging was inhibited by statistical deficiencies in the model. Therefore, a
qualitative analysis of the determinants of elasticity for aluminum foil and
forging was undertaken.
About 73 percent of aluminum foil is consumed in containers and
packaging. In this market, foil competes with plastic film and paper on both
a price and performance basis. However, due to its special physical proper-
ties aluminum foil cannot be easily substituted in many applications and,
therefore, is believed to be moderately price inelastic. Foil is also used
in= durable goods manufacturing, where it competes with copper in a number of
3-23
-------
TABLE 3-10
ALUMINUM PRODUCT GROUP
PRICE ELASTICITY ESTIMATES
Aluminum
Product
Group Elasticities
Sheet and Plate
Foil -.6'
Tube and Extruded -.45
Shapes
Rod, Bar, and Bare Wire -.8
Conductor Wire and -.7
Cable
3.
Forgings -.5
Qualitative estimate because of data limitations!
Source: JRB Associates estimates.
3-24
-------
applications. The cost of the aluminum foil represents a small portion of the
cost of the durable goods final product, and therefore demand is not price
elastic. Considering these characteristics, a moderately inelastic
coefficient of -0.6 is assigned to this product group.
Because of its high strength-to-weight property, aluminum forgings are
preferred to other materials in many applications. For this reason, the
demand for aluminum forging is considered price inelastic and is assigned an
elasticity coefficient of -0.5.
3.7.2 Industry Competition
As described in Chapter 2, the level of competition is assessed through
the evaluation of industry concentration, product specialization, pricing
practice, profitability, capacity utilization rates, and capital intensity.
The four-firm and eight-firm concentration ratios shown in Table 3-3
indicate that the products which account for most of the output of the
aluminum forming industry are highly or moderately concentrated. Thus, the
pricing and output decisions of each firm in the market will have significant
effects on that of the other firms.
Most aluminum forming products are relatively undifferentiable. They
have well-defined physical and performance properties that generally conform
to standards specified by users. Thus, efforts at creating separate markets
through such means as advertising and marketing do not significantly affect
the price-setting behavior of firms in this industry.
It is difficult for a firm in the aluminum forming industry to increase
its market share simply by a price reduction. This is because a price cut
will usually be met by other firms in the industry. This condition hinders
pricing competition and sometimes develops into what is known as "price
leadership." A firm holding a large or the largest market share for a product
acts as a "price leader". When the "price leader" raises or lowers quoted
prices of the product, other major firms in the industry follow. The pricing
3-25
-------
history of the industry indicates that the action of price leaders seems to
have been a significant determinant of pricing behavior.
Nevertheless, there is evidence of a certain degree of price competition
in the industry. On previous occasions, the attempts of price leaders'
attempts to change prices failed due to consumer resistance, other firms'
anticipation of consumer resistance to a price increase, or the reluctance of
other firms to drop prices during periods of high capacity utilization. The
discounting of orders, which has been a prevalent practice in the industry,
especially in times of excess supply, is further evidence of competitive
behavior. Comprehensive information is not available on the extent of
discounting on an industry-wide basis since it is done on an individual firm
basis and no publicly available records were available.
As shown in Section 3.4, profit rates in the aluminum forming industry
are not excessive. In addition, the industry is highly cyclical and profit-
ability varies with the economic activity.
Capital intensity varies among the product groups. For most of the
industry's output it is high, with asset turnover ratios (i.e., sales to
assets) about 1.25. This is an indication of difficulty of entry into this
industry. Also, this suggests that firms consider it important to sustain
high levels of capacity utilization; therefore, in periods of low demand,
price competition may become an important factor.
3.7.3 Summary of Findings on Price Determination
The analysis of market structure and performance of the aluminum forming
industry reveals some characteristics that are indicative of competitive
markets and some that are indicative of non-competitive markets. The
industry's characteristics that are indicative of non-competitive markets
include generally inelastic demand, high concentration, high capital
requirements (which indicate difficulty of entry into the market) and
instances of "price leadership." At the same time, the industry exhibits
characteristics of competitive pricing situations such, as the existence of
3-26
-------
relatively homogeneous products, relatively "normal" profit rates, and
periodic oversupply resulting in price discounts. Because of the conflicting
information regarding the industry's market structure, no clear, consistent,
definitive characterization of the industry's pricing conduct can be made.
3-27
-------
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the aluminum forming
industry to 1990 under the assumption that there would be no water pollution
control requirements resulting from the Clean Water Act. These projections
are used together with estimated costs and other information to assess the
effects of the effluent control requirements on future industry conditions.
The baseline projections in this report provide a general point of
reference for the analysis and are not intended to be a comprehensive,
authoritative forecast of future industry conditions. These projections
provide a plausible picture of future developments, and thus can be used a's a
benchmark for comparison. Although minor changes to the baseline may result
from a more comprehensive treatment of forecasting techniques, they are not
likely to significantly alter the study's overall conclusions regarding the
extent of the economic impacts of the effluent guidelines.
The basic approach followed in developing the projections begins with a
forecast of demand—related factors. Then, using the resulting initial volume
estimates, industry supply factors are assessed to determine if there would be
any significant changes in the level of capital requirements and anticipated
growth in terms of the number of plants and quantity of production.
4.1 DEMAND-RELATED FACTORS
The primary reason for beginning the baseline projections with the demand
analysis is based on the hypothesis that the aluminum industry supply factors
will adjust to demand conditions. This results from two factors: (1) the
aluminum industry group is a small proportion of the total economic activity
in the U.S. and is, therefore, more likely to react to general trends rather
than influence them; and (2) the demand for aluminum products is a derived
demand, depending on the sales and use of thousands of other products that use
aluminum, such as automobiles, refrigerators, air conditioners, and other
electrical products.
4-1
-------
Demand forecasting is an inexact discipline, with considerable dependence
on individual judgment and simplifying assumptions. Each forecasting
technique has its own particular advantages and disadvantages, which could
result in different types of errors. The requirement for this study is not a
precise, comprehensive forecast of industry conditions; instead this study
requires an approximate estimate of the likely trends in quantity of aluminum
forming products demanded. To make this approximation, regression analysis
was performed.
Regression analysis is a statistical technique used to summarize the
relationship between the fluctuations in the value of a variable and that of
the variables that are believed to cause these fluctuations, or explanatory
variables. 'It is an empirical tool that is extensively used in business and
economic analysis to explain relationships between variables and to predict
market phenomena. In demand analysis this technique is used to relate changes
in quantities of a product demanded to the level of activity in economic
entities that use the product and to product prices and prices of substitute
and complementary products. Once such a relationship is established, a
forecast of the future demand conditions can be made based on exogenous
predictions of the explanatory variables.
In this analysis, it is assumed that there is a causative flow of
activity that runs from macroeconomic activity to activity in industries that
produce investment and consumer goods to activity in industries that produce
fabricated metal products to the aluminum forming industry itself. Thus,
activity variables were sought for which exogenous forecasts are readily
available from such sources as the Wharton EFA model, Predicasts Inc., and
the Data Resources Inc. model. These activity variables consisted of general
economic indicators, such as the Federal Reserve Board industrial production
indexes, GNP, and personal consumption expenditures. The price of aluminum
products is expressed relative to other metal products. The prices of
substitute and complementary products were tested, but found to be statis-
tically insignificant.
4-2
-------
After testing a variety of functional forms, different estimation time
periods and price variables, a dynamic model of the log-log form employing a
Koyck distributed lag structure was selected for use in the baseline forecast.
The explanatory variables, time period, structure, and statistical properties
of this model are described in Appendix D (not included in this report). The
projections derived from the model are reported in Table 4-1.
The demand for aluminum forming products is found to be highly cyclical,
primarily because they are used in the manufacture of durable goods, the
demand for which is highly cyclical. However, the projections shown in Table
4-1 indicate a trend ranging from about one percent annually for the wire and
cable product group to four percent annually for the foil group. Thus,
aluminum mill products demand growth will range from just over the long term
growth rate of the real Gross National Product (about 3 percent since World
War II) to significantly below it.
4.2 SUPPLY FACTORS
The primary supply factors of interest are the number of industry
establishments, prices, profits and industry locations.
4.2.1 Number of Industry Establishments in 1990
This subsection addresses the number of baseline closures and new sources
that might be expected during the 1980s. The above forecasted increase in
demand through the 1980s can be supplied by (a) increasing capacity
utilization at current plants, (b) modifying current plants to increase their
capacity, (c) constructing new plants, and (d) increasing imports. Since
aggregate industry output is expected to increase, baseline closures would not
likely result from economic trend.
During the 1980-82 period, capacity, utilization at aluminum mill products
plants has been low. A significant portion of the increased demand during the
1980s- can be met by increasing operating levels at existing facilities.
Therefore it is unlikely that a substantial number of new plants will be
4-3
-------
TABLE 4-1
PROJECTIONS OF DOMESTIC CONSUMPTION OF ALUMINUM FORMING PRODUCTS
(Millions of Pounds)
Tube and
Sheet
and
Extruded
Year Plate J^^J--____
_ ,- •
1974
1975
1976
1977
1978
1979
1980
1981
Projected
1985
1990
5314
3882
5376
5821
6488
6209
5551
5756
— ••
6978
8261
745
606
769
803
886
884
802
842
_ •
1024
1263
2287
1549
2043
2286
2474
2390
2178
1082
•
2633
2886
Growth Rate (%)
1970-1980
1975-1980
1979-1980
1980-1981
Projected_
1980-1985
1985-1990
55.8
43.0
-10.6
3.7
.
25.7
18.4
37.6
32.3
-9.3
5.0
. • —
27.7
23.3
24.2
40.6
-8.9
-4.4
20.9
9.6
Rod, Bar
and
Bare Wire
410
257
376
206
390
409
379
324
478
638
66.2
47.5
-7.3
-14.5
26.0
33.7
Conductor
Wire and
Cable
980
644
598
671
-.754
815
734
637
956
1482
-0.9
14.0
-9.9
-13.2
30.2
55.1
Forgings
109
79
80
100
116
123
104
106
123
153
55.2
31.6
-15.4
1.9
18.6
23.9
Source: JRB Associates estimates
4-4
-------
opened during the 1980s. There may, however, be modifications at existing
plants. There is insufficient information to determine the number of
modifications that will be substantial enough to be subject to new source
standards.
As discussed in Section 3.8, the U.S. has always been a net exporter of
aluminum mill products and time series data does not indicate any shift in
this situation. Moreover, imports and exports are a small proportion of total
domestic consumption. However, as history indicates, periodic strains on
domestic capacity may cause aluminum mill product users to turn to foreign
suppliers.
For the above reasons, there is no reason to expect significant changes
in the number of aluminum mill products plants during the 1980s.
4.2.2 Product Price and Profitability
If the price of aluminum forming products were to change substantially
relative to those of competing products, then the aforementioned demand
relationships may change. In addition, changes in industry profitability will
change the industry's ability to finance the pollution control equipment. To
account for these possible situations, a review of the factors affecting costs
was conducted to determine the likelihood of such changes during the 1980s.
The primary factors of production in this industry are raw materials,
energy, capital, and labor. Although energy costs are potentially volatile,
no reasonable consensus is available to use as a forecast. Instead, it is
assumed that energy costs will change at the rate of general price levels
(i.e. GNP deflator). Labor, capital and other costs are expected to increase
at the same rate as those of other industries. Because the industry's cost
structure and market structure is not expected to change significantly during
the 1980s, there is no reason to expect significant changes in the
profitability of aluminum forming.
4-5
-------
4.3 SUMMARY OF BASELINE CONDITIONS
The following summarizes the major conclusions of. the baseline analysis:
• Industry demand for aluminum forming products will grow moderately.
• Prices of aluminum forming products will increase at about the same
rate as those in the general economy.
• The number of establishments will not change significantly during the
1980s and there will be no baseline closures.
• Insufficient information is available to reliably estimate changes in
profitability measures for the industry. However, no reason was found
to expect it to change and the economic analysis was conducted under
the a-ssumptions that profit rates remain at current levels.
These conclusions are used in Chapter 6, in conjunction with other
information, to estimate the likely economic impacts to result from the
regulations.
4-6
-------
5. COST OF COMPLIANCE
5.1 OVERVIEW
The recommended water treatment control systems, costs, and effluent
limitations for the aluminum forming industry are enumerated in the Develop-
ment Document for Effluent Limitations Guidelines and Standards for the
Aluminum Forming Point Source Category, cited earlier. That document
identifies various characteristics of the industry, including the
manufacturing processes; products manufactured; volume of output; raw waste
characteristics; supply, volume, and discharge destination of water used in
the production processes; sources of waste and wastewaters; and the constit-
uents of wastewaters. Using the data in the Development Document, pollutant
parameters requiring limitations or standards of performance were selected by
EPA.
The EPA Development Document also identifies and assesses the range of
control and treatment technologies within each industry subcategory. The
assessment procedure involved an evaluation of both in-plant and end-of-pipe
technologies that could be designed for each subcategory. Information about
these technologies for existing surface water industrial dischargers was
evaluated to determine the effluent limitations required for the Best
Practical Control Technology Currently Available (BPT), and the Best Available
Technology Economically Achievable (BAT). A similar evaluation was performed
for existing dischargers to publicly owned treatment works (POTWs) to develop
Pretreatment Standards for Existing Sources (PSES). Finally, New Source
Performance Standards (NSPS) and Pretreatment Standards for New Sources (PSNS)
were developed. The identified technologies were analyzed to calculate cost
and performance of each. Cost data were expressed in terms of investment,
operating and maintenance costs, depreciation, and interest expense.
Pollution characteristics were expressed in terms of volume of wastewater
produced per unit of mass of product (gal/ton or 1/kkg) for each subcategory.
5.2 POLLUTANT PARAMETERS
The selection of pollution parameters for the application of effluent
limitation guidelines was primarily based on a review of laboratory analyses
5-1
-------
of wastewater samples from 20 aluminum plants and responses to a mail survey
submitted to all known aluminum manufacturers. This information was used to
estimate the concentration of each of the 129 priority pollutants as well as
other variables considered to be "conventional pollutants" in the study of
water pollution. The specific approach to selecting pollutant parameters is
presented in Sections V, VI, IX and X of the Development Document.
5.3 CONTROL AND TREATMENT TECHNOLOGIES
Based on the analysis of the potential pollutant parameters and treatment
in place in the aluminum forming industry, EPA identified 6 treatment
technologies that are most applicable for the reduction of the selected
pollutants. These treatment technologies are described in detail in the
Development Document and are listed below:
• Treatment Option 1: Hexavalent chromium reduction and chemical
emulsion breaking (where applicable); oil skimming; chemical
precipitation; sedimentation; cyanide removal (where applicable)
• Treatment Option 2: Option 1 plus flow reduction by recycle, hauling
or regeneration of chemical baths, and counter-current rinsing
• Treatment Option 3: Option 2 plus polishing filtration after settling
• Treatment Option 4: Option 1 plus flow reduction through in-process
controls plus thermal emulsion-breaking to achieve zero discharge of
emulsified lubricants
• Treatment Option 5: Option 4 plus polishing filtration
• Treatment Option 6: Option 5 plus granular activated carbon as a
preliminary treatment step.
EPA evaluation of treatment option 6 concluded that this technology would
provide only minimal incremental removal of pollutants at significantly higher
costs than the other options. For this reason, treatment option 6 was
•eliminated from consideration. Consequently, the economic impact analysis
concentrated on treatment options 1 through 5 only.
5-2
-------
5.4 COMPLIANCE COST ESTIMATES
5.4.1 Cost Factors, Adjustments, and Assumptions
In developing the compliance cost estimates, a number of critical factors
were estimated, and adjustments and assumptions were made by EPA. These
assumptions, as outlined in the Development Document, are as follows:
• All costs are expressed in January, 1978 dollars.
• The cost of electricity used is 4.0 cents per kilowatt
hour, which is based on the average value reported in the
industry survey.
• Capital costs are amortized at 10 years and 12 percent
interest. The annual cost of depreciation was calculated
on a straight line basis over a 10-year period.
• Subsidiary costs associated with system construction are
included in the system cost estimates. These include:
- major amd auxiliary equipment
- piping and pumping
sh-ipping
sitework
- installation
- contractors' fees
electrical and instrumentation
- enclosure
- contingencies
- engineering, and
yard piping.
• Sludge disposal costs are included in the cost estimates,
where applicable.
• The cost of land has not been included in the cost
estimates.
• Where a batch, continuous, or haul-away treatment system
was possible, the system with the lowest life cycle cost
(over a 10-year period) was selected for presentation in
the system cost table.
• A labor rate of 20 dollars per man-hour, including fringe
benefits and plant overhead was used to convert the
man-hour requirements into annual cost.
5-3
-------
5.4.2 Compliance Costs of Existing Sources
The economic analysis covers 277 aluminum forming plants. However, the
compliance costs do not affect 153 "zero discharge" plants—i.e.,plants at
which wastes are completely recycled or hauled away. Those affected are 124
plants discharging wastes: 58 plants discharging to surface waters (direct
dischargers) and 66 discharging to publicly owned treatment works (indirect
dischargers). Plant-specific compliance costs estimates are available for a
sample of 104 plants (49 direct and 55 indirect), and these are extrapolated
to estimate the costs for all 124 dischargers in the industry.
Table 5-1 shows that total industry annual compliance costs range between
$28.2 million for treatment option 1 and $49.9 million for treatment option 5
in 1978 dollars. Capital investment requirements vary between $56.6 million
for treatment option 1 and $144,4 million for treatment option 5. Although
there are no compliance costs for the 153 zero dischargers, they are included
in the number of plants.
Table 5-2 and 5-3 summarize the compliance costs for direct and indirect
dischargers respectively. The selected option for both the direct and
indirect dischargers is Option 2. These tables show that the costs of the
regulations as measured by the annual compliance cost to revenue ratios are
higher for the indirect dischargers than for the direct dischargers. This is
primarily because direct dischargers generally have more treatment equipment
already in place.
In connection with the impact analysis in the next Chapter, it may be
noted that while the compliance costs increase substantially in going from
Option 1 to Option 5, they are concentrated in a few large plants. Annual
costs for the plants in the sample increase from $23.7 to $42.0 million, an
increase of 77 percent. However, five large plants in the Sheet and Plate and
SFE categories account for $10.9 million (60 percent) of the increase.
'The 1978 EPA survey identified 279 plants in operation in 1977. Since then
two have discontinued aluminum forming production.
5-4
-------
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5.4.3 Compliance Cost of New Sources
The proposed new source treatment technology is similar to Option 3 for
existing sources. The data relied upon for the selection of New Source
Performance Standards (NSPS) for direct dischargers and Pretreatment Standards
for New Sources (PSNS) were primarily the data developed for existing sources.
Tables 5-2 and 5-3 indicate that annual costs for Option 3 are 7 percent
larger than Option 2 for direct dischargers, and 6 percent larger than Option
2 for indirect dischargers. It is also believed that compliance costs could
be lower for new sources than for the corresponding options for existing
sources, because production processes can be designed on the basis of lower
flows and because there would be no costs associated with retrofitting the
in-process controls.
5-8
-------
6. ECONOMIC IMPACT ANALYSIS
This section provides an assessment of the economic impacts which are
likely to occur as a result of the costs of the proposed effluent treatment
technologies described in Chapter 5. It is based upon an examination of the
estimated compliance costs and other economic, technical, and financial
characteristics of 238 plants for which EPA has received production and value
of shipments data and particularly the 104 discharging plants for which
compliance costs have been estimated. The analytical methodology used is
described in Chapter 2. The primary economic impacts discussed include
changes in industry profitability, plant closures, substitution effects,
changes in employment, shifts in imports and exports, and industry structure
effects.
The 238 plant sample represents about 86 percent of the plants in the
industry, and contains a. wide range of both large and small plants.
Furthermore, this sample includes 104 (84 percent) of the 124 known
discharging plants in the industry. Therefore, the sample appears to
adequately represent the industry for the purposes of this study.
6.1 BASELINE CONDITIONS
As presented in Chapters 3 and 4 of this report the following factors
point to a'favorable baseline projection:
• The demand for aluminum forming products, although cyclical, has
exhibited an upward trend,
• A continuation of this growth pattern is projected through the 1980s,
• The number of plants in the industry has been generally constant
through the 1970s.
For these reasons, there is no evidence of general industry conditions that
would lead to attrition in the baseline number of plants, volume of produc-
tion, or number of employees in the industry. Therefore, all impacts
6-1
-------
identified throughout this report will be completely attributable to
regulatory impacts.
6.2 PRICE AND QUANTITY CHANGES
Table 6-1 shows the industry-wide price increases and the resulting
quantity changes for each compliance option estimated from the cost-plus-
markup pricing strategy model described in Chapter 2. The price increases are
generally small, not exceeding three quarters of a percent for any option.
Similarly, the quantity changes are also very small. The percentage changes
in price and quantity are small in comparison to the growth rate projected in
Chapter 4 for the aluminum forming industry. The small changes in quantity
demanded suggest that the major impacts to the extent they exist, will be
intra-industry. That is, the degree to which the unit compliance costs are
unequally distributed across the industry will determine the extent of the
impacts.
After the industry-wide price and quantity adjustments were determined,
attention focused on the individual plant impacts. The plants that were
subjected to a detailed impact analysis were selected by a screening analysis
described in the following section.
6.3 RESULTS OF SCREENING ANALYSIS
As described in Chapter 2, a ratio of annual compliance cost to plant
revenues (ACC/R) of one percent is used as a threshold value below which
plants are considered to have low impacts from the regulations. Based on this
screening analysis, 56 of the 104 dischargers were selected for further
financial analysis to determine the likelihood of closure. Table 6-2 lists
the distribution of the ACC/R ratios for the 238 aluminum forming sample
plants, and Table 6-3 presents the results of the screening analysis.
6.4 PROFIT IMPACT ANALYSIS
As described in Chapter 2 above, the assessment of the impact of
compliance on plant profitability is based on the plants' after compliance
return on investment (ROI) ratios, investment being defined as total plant
6-2
-------
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Table 6-3
RESULTS OF SCREENING ANALYSIS
Number of
Plants in
Product Group Study
Sheet and Plate
Foil
Tube and Extruded Shapes
Conductor Wire and Cable
Sheet and Plate/Foil/Tube
and Extruded Shapes (SFE)
Rod, Bar and Bare Wire/
Conductor Wire and Cable (RBW)
Forging
TOTAL
19
5
141
32
19
6
16
238
Number of Plants
Number of with Potential ,
Dischargers Significant Impact
11
0
56
8
12
5
12
104
2
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40
5
0
2
7
56
I/
Screening analysis is based on compliance costs of treatment option 5. For
the other options, the number of potentially high impact plants would be
equal or less than these numbers.
Source: EPA 308 Survey and JRB Associates estimates.
6-5
-------
assets (i.e. current assets plus net property, plant and equipment). Because
plant-specific baseline financial characteristics (e.g., plant profit margin,
assets value, variable and fixed costs of production) are not available,
average industry financial ratios for each aluminum forming product group is
imputed to each plant. The resulting estimated baseline characteristics are
summarized in Table 6—4. The differences in profitability among the various
product groups are due primarily to different market and competitive condi-
tions across product groups. Appendix C describes the methodology for esti-
mating the two key financial variables: plant average profit margin and
asset value.
Plants with post-compliance ROI less than 7 percent were considered to be
"potential" plant closures. The 7 percent ROI threshold level is based on the
assumption that plants cannot continue to operate as viable concerns if they
are unable to generate for the owners/stockholders an after tax return on
their investments (i.e. return on equity) equal to the opportunity cost of
other investment alternatives, which in this case is defined as the U.S.
Treasury bond yield expected to be in effect when the regulation is imple-
mented.
One extrusion plant and three wire and cable plants have estimated ROIs
below the critical value at each of the proposed options. Table 6-5
summarizes the estimated post compliance ROIs of the highly impacted plants.
6.5 CAPITAL REQUIREMENTS ANALYSIS
As presented in Chapter 2, the ratio of "compliance capital investment to
revenues" (CCI/R) was used to evaluate a firm's ability to raise the capital
necessary to install the proposed pollution control systems. Although the
CCI/R ratio does not precisely indicate whether or not firms can afford to
make the required investments, it provides a good indication of the relative
magnitude of the compliance capital investment requirements. The ratio CCI/R
is calculated for each of the 56 "high impact potential" plants and compared
to a capital availability threshold value which is defined as the net after-
tax return on sales for the particular product group in which a plant is
classified (shown in Table 6-4).
6-6
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-------
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At Treatment Options 1, 2, and 4, four extrusion plants and four wire
plants have CCI/R ratios greater than the threshold values. At Treatment
Options 3 and 5, two additional plants (one extrusion and one wire plant) have
high compliance capital investment requirements. Table 6-6 presents data on
these plants. The CCI/R criterion by itself does not mean that these ten
plants will be considered potential plant closures. Several of these plants
remain fairly profitable after compliance. Therefore, they may be able and
willing to raise the necessary funds to acquire the treatment systems.
Furthermore, three of these plants (two wire plants and one extrusion plant)
are owned by very large companies and the required compliance capital invest-
ment represents only 1 percent or less of their total annual capital
expenditures; these three firms would not have much difficulty financing the
required pollution control systems.
6.6 PLANT CLOSURE ANALYSIS
While financial parameters are the paramount determinants of plant-
closures, non-financial factors are also important and, may dominate the
decision process. Therefore, the plant closure decision, like most investment
decisions, ultimately involves managerial judgment. For this reason, decision
makers consider a number of other factors, in addition to financial variables.
Some of these other factors are market growth potential, contribution to total
firm's product line, diversification, integration, intra-industry competition,
and substitution potential for the products.
Table 6-7 summarizes a number of factors relevant to the investment
decisions relating to the ten highly impacted aluminum forming plants
identified in the above profit impact and capital requirements analyses (four
of the ten are highly impacted on the basis of both the ROI and the capital
requirements analysis). Among the 238 sample plants, five plants (two small
extrusion plants—El and E3—, and three small wire plants—Wl, W2 and W3—)
are projected to have a high probability of closure as the result of the
proposed treatment options. All five potential closures are relatively small
aluminum forming production facilities; the two extrusion plants each produces
less than 3 million pounds a year, while annual production of each of the
three
6-9
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6-12
-------
wire plants are Less than 1 million pounds. The three aluminum wire
A
production facilities are part of much larger plants engaged in other
non-ferrous manufacture. One of the two extrusion plants (plant El) is a new
'plant and the reported aluminum production volume is significantly lower than
its capacity level; therefore, the estimated impacts for that plant may be
overstated.
Since the potential closures are limited to small plants, the impacts of
the regulations could be minimized if these smaller plants were exempted from
regulations. Chapter 7 further addresses the impacts of the proposed
regulations on small business.
Table 6-8 summarizes the results of the plant closure analysis on the 104
discharging plants in the sample and extrapolates the impacts to all 124 dis-
charging plants in the industry. As the table shows, three extrusion plants
and five wire plants are projected to close under all the recommended
treatment options. Other impacts of the regulations such as employment,
community and regional effects, substitution effects, foreign trade impacts,
and industry structure effects are examined in Section 6.7.
6.7 OTHER IMPACTS
6.7.1 Employment, Community, and Regional Effects
As shown in Table 6-8, there is potential for 8 plant closures involving
a loss of about 185 jobs. The employment in each of the five sample plants
projected to close is compared to the employment in their communities and none
of the plants account for a significant portion of community employment; hence
there are no significant community or regional impacts likely.
Meanwhile, the industry price increases due to regulations result in less
than 0.4 percent reduction in quantity of aluminum forming products demanded
(see Table 6-1). Since most aluminum forming plants have less than 500
employees (see Table 3-2), such small quantity reduction would affect on the
average less than 2 employees per plant. Such small employment effect will
not have much significant community or regional impacts.
6-13
-------
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6.7.2 Substitution Effects
The price increases due to regulatory compliance costs will frequently
lead to substitution by other products and materials which, in turn, results
in a decrease in the quantity of product demanded.
However, the compliance costs of the proposed regulations for the
aluminum forming industry are relatively small and the price increases due to
compliance are projected to be less than one percent for all industry
segments. As shown in Table 6-1, such low price increases will result in
changes in quantity demanded ranging from zero percent for some product groups
to 0.4 percent for others. Thus, the proposed regulations will cause rather
insignificant shifts to the use of other materials.
6.7.3 Foreign Trade Impacts
As described in Chapter 3, foreign trade is becoming an important factor
in some segments of the aluminum forming industry. If there is a. significant
price effect from the regulations, the U.S. competitive position could be
damaged. However, as shown in Table 6-1, the price increases estimated to
result from the regulations are quite small, amounting to fractions of a
percent for all product groups. Price increases of this magnitude would not
be large enough to change the trading pattern.
6.7,4 Industry Structure Effects
As discussed in Section 6.6, it is estimated that three small extrusion
plants and five small wire plants will probably close due to the proposed
regulations. Since these plants account for very small portions of industry
output, their closures are not expected to significantly change the concen-
tration ratios and the structure of these industry groups.
6.8 NEW SOURCE IMPACTS
The proposed new source effluent limitation is based on Treatment Option
3 for both new direct dischargers and new indirect dischargers. Based on the
6-15
-------
cost data for existing sources, as indicated ^ ^ ^ Option 3
6-16
-------
7. SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. The RFA requires
an initial screening analysis to be performed to determine if a substantial
number of small entities will be significantly impacted. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
analysis addresses these objectives by identifying and evaluating the economic
impacts of the aforementioned regulations on small aluminum forming plants.
As described in Chapter 2, the small business analysis is developed as an
integral part of the general economic impact analysis and is based on the
examination of the distribution by plant size of the number of aluminum
forming plants, plant revenues, wastewater volumes, compliance costs and
potential closures from the regulations.
As explained in Section 2.11, rather than define small business in terms
of firm total employment (i..e., SBA definition), a more appropriate definition
for the present analysis is in terms of plant size, with size measured by rate
of production. Four plant size definitions based on plant annual production
are used to provide the EPA possible alternative definitions of small aluminum
forming plants. These are:
• Plants with less than 1 million pounds in production
• Plants with 1 million to 3 million pounds in production
• Plants with 3 million to 5 million pounds in production
• Plants with over 5 million pounds in production.
Table 7-1 shows the number of aluminum forming plants falling into each
size category as well as the potential plant closures due to regulation.
7-1
-------
TABLE 7-1
DISTRIBUTION OF ALUMINUM FORMING PLANTS
BY PRODUCTION VOLUME
Sheet - Total
Dischargers
Zero Dischargers
Potential Closures
Foil - Total
Dischargers
Zero Dischargers
Potential Closures
Tube and Extruded
Shapes - Total
Dischargers
Zero Dischargers
Potential Closures
Conductor Wire and
Cable - Total
Dischargers
Zero Dischargers
Potential Closures
SFE - Total
Dischargers
Zero Dischargers
Potential Closures
RBW - Total
Dischargers
Zero Dischargers
Potential Closures
Forging - Total
Dischargers
Zero Dischargers
Potential Closures
Total Industry
Dischargers
Zero Dischargers
Potential Closures
Total
Number of
Sample
Plants
19
11
8
0
5
0
5
0
141
56
85
2
32
8
24
3
19
12
7
0
6
5
1
0
16
12
4
0
238
104
134
5
Number of Plants with Production
(in million pounds)
<1
1
0
1
0
0
0
0
0
9
1
8
1
17
4
13
3
0
0
0
0
1
0
1
0
8
6
2
0
36
11
25
4
1-3
1
1
0
0
1
0
1
0
21
6
15
1
3
0
3
0
0
0
0
0
0
0
0
0
2
0
2
0
28
7
21
1
3-5
1
1
0
0
1
0
1
0
16
5
11
0
3
1
2
0
1
0
1
0
0
0
0
0
0
0
0
0
22
7
15
0
>5
16
9
7
0
3
0
3
0
95
44
51
0
9
3
6
0
18
12
6
0
5
5
0
0
6
6
0
0
152
79
73
0
Source: JRB Associates estimates.
7-2
-------
The five projected closures among the 104 dischargers, if all dischargers
were required to comply with the effluent limitations, are in the following
two categories and size classes:
• Tube and extruded shapes: two potential closures; one with less than
1 million pounds and the other with between 1 and 3 million pounds in
annual production
• Conductor wire and cable: 3 potential closures, all with annual
production less than 1 million pounds.
Tables 7-2 and 7-3 present the distribution of plant production and
compliance costs by plant size for the two product groups with potential plant
closures as a result of regulation; extruded shapes and wire product groups,
respectively. These tables show that should the indirect dischargers
producing less than 3 million pounds per year in the extrusion subcategory and
less than 1 million pounds per year in the wire and cable subcategory be
excluded from the regulations, there would be no plant closures. Tables 7-2
and 7-3 also indicate that these "small" extrusion and wire drawing plants ,
account for 0.6 percent and 2 percent of total production of the discharging
plants, respectively. Assuming the level of pollution is correlated to
production level, the above results suggest that the exemption of "small"
extrusion and wire drawing plants would not cause significant additional
pollution problems.
7-3
-------
TABLE 7-2. SUMMARY OF SMALL BUSINESS ANALYSIS FOR
TUBE AND EXTRUDED SHAPES PRODUCT GROUP
All Plants
Number of Plants
Production - 10 x Ibs
All Plants
Discharging Plants
Revenues - $ millions
Direct Dischargers
Number of Plants
Production - 10 x Ibs ,
- Z of disch. '
Treatment Option 1
Investment - $000
Annual - $000
- *Vlb
Treatment Option 2
Investment - $000
Annual - $000
- 5
9
5
b/
27
0
0
0
NA
MA
NA
NA
NA
NA
NA
NA
NA
0
1
b/
b/
10
11
b/
10
11
b/
10
11
b/
1
data.
21
46
12
74
3
5
0.4
542
296
5.9
547
310
6.2
610
3J8
6.6
0
3
7
0.6
975
413
6.1
997
428
6.3
1,121
464
6.8
1
Values
16
64 1
b/ 1
65 2
1
b/
b/
79 11
41 5
b/
22 12
50 5
b/
22 13
50 5
b/
0
4
16
1.3
500 8
297 3
1.9
722 9
370 4
2.3
785 10
388 4
2.4
0
are reported
95
,848
,208
,731
22
828
67.9
,735
,000
0.6
,775
,528
0.7
,998
,855
0.7
0
22
364
29.8
,433
,793
1.0
,389
,523
1.2
,174
,741
1.3
0
in
7-4
-------
TABLE 7-3. SUMMARY OF SMALL BUSINESS ANALYSIS FOR
CONDUCTOR WIRE AND CABLE PRODUCT GROUP
All Plants
Number of Plants
Production - 10 x Ib8
All plants
Discharging plants
Revenues - $ millions
Direct Dischargers
Nunber of Plants
Production - 10 x Ibs ,
- Z of disch.
Treatment Option 1
Investment - $000
Annual - $000
- i/lt>
Treatment Option 2
Investment - $000
Annual - $000
- e/lb
Treatment Option 3
Investment - $000
Annual - $000
- e/lb
(all treatment options)
Indirect Dischargers
Number of Plants
Production - 10 x Ibs ,
- X of disch.
Treatment Option 1
Investment - $000
Annual - $000
- 5
17
5
2
40
0
0
0
NA
NA
NA
NA
NA
NA
NA
NA
NA
0
0
2
2.0
185
113
5.7
185
113
5.7
185
113
5.7
3
3
6
0
6
0
0
0
NA
NA
NA
NA
NA
NA
HA
NA
NA
0
1
0
0
NA
NA
NA
NA
NA
NA
NA
NA
NA
0
3
13
b/
22
0
0
0
NA
NA
NA
NA
NA
NA
NA
NA
NA
0
2
b/
b/
23
53 ,
1.2d/
23
53,,
1.2d/
23
53d/
1.2 '
0
9
208
99
176
1
b/
b/
263
115.,
0.5d/
263
115.,
0.5d/
295
12*j/
0.5d/
0
b/
b/
873
374,W
0.8d/
873
374 ,
0.8d/
939
393 ,
0.9d/
0
a'May not add up due to rounding errors.
Withheld to avoid disclosure of confidential data.
c/Percent of discharging plants.
To avoid disclosure of confidential data, average production per plant for
each size category is used to calculate unit compliance cost.
NA: Not applicable.
Source: JttS Associates estimates.
7-5
-------
8. LIMITATIONS OF THE ANALYSIS
This section discusses the major limitations of the economic impact
analysis. It focuses on the limitations of the data, methodology, assump-
tions, and estimations made in this report.
8.1 DATA LIMITATIONS
The accuracy of the conclusions of this report depends largely on the
accuracy of fche data used in the analyses, especially that of the estimated
compliance costs, and plant financial and economic characteristics.
A critical data input to this study is the compliance cost estimates. The
assumptions relating to the estimation-of compliance costs are outlined in the
technical Development Document and summarized in Section 5.3 of this report.
Total plant compliance costs were estimated for the multiple product plants.
In older to estimate the prise itiereasa-s for each product group, the plant
compliance casts were allocated to e-aeh product proportionately to flow rates,
or if the flow rate breakdown by product was not available, proportionately to
production.
In the absence of a detailed financial survey for the aluminum forming
industry, a financial profi-le of the aluminum forming industry was developed
based on extensive review of trade literature and published financial reports.
This financial profile is subject to the following major assumptions and
limitations:
• Plant value of shipments were surveyed by EPA, however, there were
missing data for a few plants. Thus, based on plant output volume
reported in the EPA survey plant revenues were estimated for these
plants using 1977 prices published in the Bureau of Labor Statistics
Producer Prices and Price Indexes.
• Lacking plant specific operating ratios such as profit margin, assets
value, fixed and variable costs of production, industry average
estimates were applied to the plants. The methodology foi es3timatiny
these financial variables are explained in Appendix C.
8-1
-------
Only a single year's plant production and value of shipments data
(1977) were collected in the EPA industry survey. Multiple years
production data would have enabled a more in-depth analysis,
encompassing the cyclical nature of the industry. As shown in Figure
3-3 in Chapter 3, the 1977 period was neither a peak nor a trough for
the industry and the general economy and is, therefore, considered to
be representative of average conditions in the industry over the long
run.
8.2. METHODOLOGY LIMITATIONS
In addition to the data limitations described above, this study is also
subject to limitations of the methodology used. These limitations are related
to critical assumptions on price increase, profit impact, and capital
availability analyses.
8.2.1 Price Increase Assumptions
Because the aluminum forming industry exhibits characteristics of both
competitive and non-competitive market behavior, it is assumed that the
industry's pricing behavior will follow a cost-plus-markup strategy. This
assumption appears to be fairly reasonable since the demand price elasticities
for aluminum forming products are relatively inelastic.
8.2.2 Profit Impact Assumptions
In studies where detailed, plant-specific data are available, potential
plant closures can be identified by using discounted cash flow analyses.
Using this approach, a judgment can be made about the ability of a plant to
continue in business after compliance with effluent regulations, by comparing
the discounted value of the plant's cash flow with the plant's estimated
salvage value. The application of this approach requires plant-specific data
on cash flows and salvage values, and since data at this level of specificity
were not available for this study, this approach was not deemed to be
practical. As an alternative method, profitability impacts were measured
through the use of return on investment (assets) analysis. Although this
financial ratio analysis is based upon accounting data and do not account for
the time value of money, it is widely used in comparative financial analyses
and is simple to apply.
8-2
-------
Another limitation relates to the ability of the profit impact
methodology to assess the combined effects of the business cycle and the
timing of the effective date of the regulation. As previously mentioned,
portions of the study rely on inferences from only one or a few years of data.
Where this occurred, care was taken to insure that any point estimate was not
taken for an extreme year, such as a trough of a recession or a peak of an
expansion. As shown in Figure 3-3, the 1977 time period was neither a peak
nor a trough for the industry or the general economy; and is, therefore,
considered to be representative of average conditions in the industry over a
long period of time.
Finally, long term profitability estimates were used to project closures
since major inves-tmen-t decisions are made primarily on the basis of long run
expectations. Economic analysis generally distinguishes between long run and
short run outcomes. Decis.ioms regarding variable costs and relatively small
amounts of resources are generally made on short run criteria. On the other
hand, decisions regarding large investment in fixed assets are made on the
basis of long run expectations. This means that large capital expenditures
are generally made based on the expected return on the investment over a
period of years. Cyclical fluctuations in the general economic conditions
usually do not affect the outcome of these decisions but only their timing.
8.2.3 Capital Availability Assumptions
Because data on the current debt-equity position of many of the firms
were not available, an analysis of impacts of compliance costs on debt service
coverage could not be performed. Therefore, the capital investment require-
ments analysis was assessed through an evaluation of compliance investments in
comparison to cash flow. Although this technique does not provide a precise
conclusion on a firm's ability to make the investment, it does provide a good
indication of the relative burden of the requirement.
8.3 SUMMARY OF LIMITATIONS
Although the above factors may affect the quantitative accuracy of the
impact assessments on specific aluminum forming plant, it is believed that the
8-3
-------
results of this study represent a valid industry-wide assessment of the
economic impacts likely to be associated with effluent guideline control
costs.
8-4
-------
APPENDIX A
SELECTED FINANCIAL RATIOS
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APPENDIX B
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
-------
APPENDIX B
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
To assess the impact of compliance on plant profitability, the plants'
post-compliance return on assets (ROI) ratios were calculated and compared to
a threshold value. The threshold value was set at a level that would generate
to the stockholders/owners a return on the liquidation value of their invest-
ment (after taxes return on their equity) equal to the opportunity cost of
other investment alternatives, which in this case is defined as the U.S.
Treasury bond yield. The first step in relating the ROI threshold value and
•the opportunity return is the following equation:
BTROI
NPBT « NPBT x EQUITY
ASSETS EQUITY ASSETS
= BTROE x EQUITY
ASSETS
ATROE x
(1 - t)
EQUITY
ASSETS
where
(1)
BTROI = Target before taxes return on assets
NPBT = Net profit before taxes
ASSETS = Asset book value
EQUITY = Equity book value
BTROE = Target before taxes return on equity
ATROE = Target after taxes return on equity
t = Average corporate tax rate.
Using the above equation, a projected U.S. Treasury bond yield (or target
after taxes ROE) of 12 percent, corporate tax rate of 40 percent, and equity
to assets ratio of 50 percent, the before taxes ROI threshold value would be
10 percent.
B-l
-------
However, the liquidation value of a plant is generally a fraction of its
book value. Assuming that the liquidation value is 85 percent of the book
value, the liquidation value of stockholders' equity is only 85 - 50 = 35 or
35/50 = 70 percent of its value if liquidation value equaled book value:
Percent
Asset book value 100
Asset liquidation value 85
Book value of equity 50
Debt 50
Liquidation value of equity
(Assets liquidation value - debt) 35
As a result, a 12 percent return on equity book value (ATROE) would yield
an effective ATROE on liquidation value of 17 percent (12 * .70). That is,
ATROE (effective) = ATROE/(.70).
By similar reasoning, to get an effective ROE of 12 percent liquidation value
requires an 8.4 percent ATROE (12 x .70). Based on equation (1), the corres-
ponding before taxes ROI will be 7 percent (.084 * (1 - .4) x 50/100 = .07).
Table B-l presents estimates of profit impact threshold values based on
various assumptions on assets liquidation value and equity to assets ratio.
B-2
-------
TABLE B-l. ESTIMATED ROI THRESHOLD VALUES THAT GENERATE 12 PERCENT ROE
ASSUMING VARIOUS ASSETS LIQUIDATION VALUES AND EQUITY TO ASSETS RATIOS
CORPORATE TAX RATE: 40%
Assets Liquidation Value (Percent of Book Value)
r/Assets Ratio
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
60%
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CORPORATE TAX RATE: 35%
Assets Liquidation Value (Percent of Book Value)
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0.65
0.70
60%
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4
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11.1
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12.9
B-3
-------
APPENDIX C
ESTIMATION OF ALUMINUM FORMING PLANT ASSETS
VALUES AND RETURN ON SALES
-------
APPENDIX C
ESTIMATION OF ALUMINUM FORMING PLANT ASSETS
VALUES AND RETURN ON SALES
Tables C-l and C-2 present the methodology for estimating plant total
assets and return on sales used in the economic impact analysis. For the
purpose of this analysis, the following critical assumptions were made:
• Plant total assets is defined as plant property,
plant and equipment net of depreciation, plus
inventories and other current assets
• Plant total operating costs include payroll, cost
of material, annual depreciation charge, interest
and other overhead expenses.
Data used to estimate plant assets and return on sales are obtained from the
1977 Census of Manufactures and the Federal Trade Commission's Quarterly
Financial Report for Manufacturing, Mining and Trade Corporations.
C-l
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