United State*
Environmental Protection
Agency
Office of Water
Regulations and Standards
Washington DC 20460
EPA-440-2-8 3-003
January 1983
Water
Economic impact Analysis
of Proposed Effluent
Limitations and Standards
for the Canmaking Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS OF
EFFLUENT LIMITATIONS AND STANDARDS
FOR THE CANMAKING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulations and Standards
401 M Street, Southwest
Washington, D.C. 20460
Submitted by:
JRB Associates
8400 Westpark Drive
McLean, Virginia 22102
February 1983
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TABLE OF CONTENTS
CHAPTER TITLE PAGE
EXECUTIVE SUMMARY 1-1
1.1 PURPOSE 1-1
1.2 INDUSTRY COVERAGE 1-1
1.3 METHODOLOGY 1-2
1.4 INDUSTRY CHARACTERISTICS 1-5
1.5 BASELINE PROJECTIONS 1-7
1.6 EFFLUENT GUIDELINE CONTROL OPTIONS AND COST 1-7
1.7 FINDINGS 1-8
1.8 ORGANIZATION OF REPORT 1-12
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 2-3
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES 2-5
2.5 STEP 4: PLANT-LEVEL PROFITABILITY ANALYSIS 2-5
2.6 STEP 5: CAPITAL REQUIREMENTS ANALYSIS 2-7
2.7 STEP 6: PLANT CLOSURE ANALYSIS 2-8
2.8 STEP 7: OTHER IMPACTS 2-9
2.9 STEP 8: NEW SOURCE IMPACTS 2-10
2.10 STEP 9: SMALL BUSINESS ANALYSIS 2-10
INDUSTRY CHARACTERISTICS 3-1
3.1 OVERVIEW 3-1
3.1.1 Industry Coverage 3-1
3.1.2 Product Characteristics and Manufacturing 3-2
Process
3.2 PLANT CHARACTERISTICS 3-3
3.3 FIRM CHARACTERISTICS 3-7
3.4 MARKET CHARACTERISTICS 3-11
3.4.1 Product Characteristics and Substitution 3-11
3.4.2 Shipment Trends 3-20
3.4.3 Foreign Trade 3-20
BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 4-1
4.1 DEMAND FORECASTS 4-1
4.2 SUPPLY FORECASTS 4-2
EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS 5-1
5.1 OVERVIEW 5-1
5.2 CONTROL AND TREATMENT TECHNOLOGY 5-2
5.3 COMPLIANCE COST ESTIMATES 5-2
5.3.1 Critical Assumptions 5-2
5.3.2 Compliance Costs of Existing Sources 5-3
5.3.3 Compliance Costs of New Sources 5-3
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TABLE OF CONTENTS (Continued)
CHAPTER
TITLE
PAGE
6 ECONOMIC IMPACT ANALYSIS 6-1
6.1 PRICE AND QUANTITY CHANGES 6-1
6.2 PROFIT IMPACT ANALYSIS 6-1
6.3 CAPITAL REQUIREMENTS ANALYSIS 6-4
6.4 PLANT CLOSURE POTENTIAL 6-4
6.5 OTHER ECONOMIC IMPACTS 6-7
6.5.1 Substitution Effects 6-8
6.5.2 Community and Employment Impacts 6-8
6.5.3 Foreign Trade Impacts 6-8
6.5.4 Industry Structure Effects 6-8
6.6 NEW SOURCE IMPACTS 6-9
7 SMALL BUSINESS ANALYSIS 7-1
7.1 SMALL BUSINESS ANALYSIS BASED ON SMALL BUSINESS 7-1
ADMINISTRATION DEFINITION
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT ANNUAL 7-2
PRODUCTION
7.3 SMALL BUSINESS ANALYSIS BASED ON PLANT NUMBER OF
LINES PER PLANT 7-2
7.4 SMALL BUSINESS ANALYSIS BASED ON PLANT FLOW RATES 7-4
8 LIMITATIONS OF THE ANALYSIS 8-1
8.1 DATA LIMITATIONS 8-1
8.2 METHODOLOGY LIMITATIONS 8-2
8.2.1 Price Increase Assumptions 8-2
8.2.2 Profit Impact Assumptions 8-2
8.2.3 Capital Availability Assumptions 8-3
8.3 SUMMARY OF LIMITATIONS 8-3
APPENDIX A: CALCULATION OF PROFIT IMPACT THRESHOLD VALUE A-l
APPENDIX B: ESTIMATION OF KEY FINANCIAL PARAMETERS OF CANMAKING INDUSTRY B-l
11
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LIST OF TABLES
NUMBER PAGE
1-1 ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES 1-9
1-2 NEW SOURCF COMPLIANCE COSTS 1-10
1-3 SUMMARY OF ESTIMATED POTENTIAL CLOSURES AMONG EXISTING 1-11
SOURCES AT TREATMENT LEVEL 4
3-1 METAL CAN INDUSTRY CHARACTERISTICS, 1977 3-5
3-2 NUMBER OF METAL CAN PLANTS BY EMPLOYMENT SIZE, 1977 (SIC 3411) 3-6
3-3 GEOGRAPHIC LOCATION OF 89 SEAMLESS CAN PLANTS WITH PROCESS 3-8
WASTEWATER
3-4 CHARACTERISTICS OF 49 SAMPLE PLANTS 3-9
3-5 DISTRIBUTION OF 49 SEAMLESS CAN SAMPLE PLANTS BY NUMBER OF 3-10
CAN LINES
3-6 CONCENTRATION RATIOS OF CANMAKING INDUSTRY, 1977 3-12
3-7 TOTAL SHIPMENTS OF BEVERAGE CANS BY MARKET 3-13
3-8 SELECTED FINANCIAL RATIOS FOR CANMAKING COMPANIES 3-14
3-9 METAL CAN SHIPMENTS, 1981 3-15
3-10 METAL CAN SHIPMENTS, 1976-1981 3-19
3-11 U.S. EXPORTS OF METAL CANS, 1977-1981 3-21
4-1 PROJECTIONS OF TWO-PIECE METAL CAN SHIPMENTS (BILLION CANS) 4-3
4-2 SUMMARY OF SUPPLY FORECASTS FOR BEVERAGE CANS INDUSTRY 4-5
5-1 ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES 5-4
5-2 NEW SOURCE COMPLIANCE COSTS 5-5
6-1 SUMMARY OF PROFIT IMPACT ANALYSIS 6-2
6-2 SUMMARY OF CAPITAL REQUIREMENTS ANALYSIS 6-5
6-3 SUMMARY OF ESTIMATED POTENTIAL CLOSURES AMONG EXISTING SOURCES 6-6
FOR TREATMENT LEVEL 4
ill
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LIST OF TABLES (Continued)
NUMBER PAGE
6-4 SUMMARY OF NEW SOURCE IMPACT ANALYSIS 6-10
7-1 SUMMARY OF SMALL BUSINESS ANALYSIS BY PLANT ANNUAL PRODUCTION 7-3
7-2 SUMMARY OF SMALL BUSINESS ANALYSIS BY PLANT NUMBER OF LINES 7-5
7-3 SUMMARY OF SMALL BUSINESS ANALYSIS BY PLANT FLOW RATE 7-6
IV
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LIST OF FIGURES
NUMBER PAGE
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
3-1 CANMAKING DRAW AND IRON (D&l) PROCESS 3-4
3-2 METAL CAN SHIPMENTS, 1976-1981 3-18
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1. EXECUTIVE SUMMARY
1.1 PURPOSE
This report identifies and analyzes the economic impacts which are likely
to result from the proposed effluent regulations on the canmaking industry.
These regulations include effluent limitations and standards based on Best
Practicable Control Technology Currently Available (BPT), Best Available Tech-
nology Economically Achievable (BAT), Best Conventional Pollutant Control
Technology (BCT), 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 (Public Law
92-500). The primary economic impact variables assessed in this study include
the costs of the proposed regulations and the potential for these regulations
to cause plant closures, price changes, job losses, changes in industry pro-
fitability, structure and competition, shifts in the balance of foreign trade,
new source impacts, and impacts on small businesses.
1.2 INDUSTRY COVERAGE
The canmaking industry for purposes of this study includes facilities
that manufacture and wash two-piece seamless cans. Two different processes
are used to fabricate two-piece cans:
• The draw and iron (D&I) process which involves drawing
a metal disc into a cup and lengthening the sides
through a series of ironing rings; and
• The draw/redraw (DRD) process where a metal disc is
drawn one or several times depending on the desired
depth of the container.
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The manufacture of seamless cans from coated stock, seamed three-piece cans
(which consist of a soldered-side-seam body), and can tops and ends are not
included in this study. These segments of the canmaking industry employ dry
manufacturing processes that do not require washing of the can bodies after
forming. Since these segments do not generate process wastewater, they are
excluded from regulation under Paragraph 8.
A total of 89 plants will be affected by the proposed regulation. These
include 7 direct dischargers, 81 indirect dischargers, and 1 zero discharger.
1.3 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 canmaking industry's conditions
to other effects such as employment, community, and balance of trade impacts.
These analyses were performed for six regulatory options considered by EPA.
The methodology of the study includes nine major steps. Although each step
is described independently, there is considerable interdependence among them.
Step 1: Description of Industry Characteristics
The first step in the analysis is to develop a description of basic
industry characteristics such as the determinants of demand, market structure,
the degree of intra-industry competition, and financial performance. The
resulting 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
EPA surveys of firms in the industry.
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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. Because market competition is strong, it is assumed that metal can
manufacturers will attempt to absorb their compliance costs and will not
increase prices.
Step 3: Cost of Compliance Estimates
Investment and annual compliance costs of the six treatment options were
estimated for each canmaking operation. These cost estimates form the basis
for the economic impact analysis.
Step 4: 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
return on investment after compliance with a minimum required return on invest-
ment .
Plants with after-compliance ROI below a threshold value of 7 percent are
considered potential plant closures. The 7 percent ROI threshold value corres-
ponds to 12 percent after-tax return on equity which is assumed to be the mini-
mum return for a business to continue operation. Due to the unavailability of
plant-specific baseline financial characteristics for the canmaking industry,
average industry financial and operating ratios were applied to each plant.
Step 5: Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a profita-
bility perspective, the ability of firms to make the initial capital investment
1-3
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needed to construct and install the required treatment systems was also
assessed. The analysis of capital availability was based on the ratio of
"compliance capital investment requirements to plant annual 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.
Step 6: Plant Closure Analysis
Plant closure estimates are based primarily on the quantitative estimates
of after-compliance profitability and ability to raise capital, developed in
Steps 4 and 5, respectively. Failure to comply with either profitability or
capital requirements criteria specified in the two steps mentioned above
indicates potential closure for an individual plant.
The identification of potential closures in this step should be inter-
preted as an indication of the extent of plant impact rather than as a predic-
tion of certain closure. The decision by a company to close a plant also
involves consideration of other factors, many of which are highly uncertain
and cannot be quantified.
Step 7: Other Economic Impacts
The substitution potential of other processes and materials, and possible
community, employment, foreign trade, and industry structure implications,
are addressed in this step.
Step 8: New Source Impacts
This step analyzes the effects of NSPS/PSNS guidelines upon new plant
construction and/or substantial modifications to existing facilities in the
canmaking industry. The analysis is based on model plants representing the
canmaking industry and their corresponding compliance costs for the alternative
treatment technologies.
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Step 9: 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 canmaking industry.
Most of the information and analytical techniques in the small business analy-
sis are drawn from the general economic impact analysis. The specific condi-
tions of small firms are evaluated against the background of general conditions
in the canmaking markets.
For purposes of regulation development, the following four alternative
approaches were considered to provide alternative definitions of small can-
making operations:
• The Small Business Administration (SBA) definition;
• Plant annual production;
• Plant number of can lines; and
• Plant wastewater flow rate.
For this regulation, the plant number of can lines may be an acceptable
definition of a small canmaking business since the same manufacturing technology
is used throughout the industry.
The impacts on small plants under each definition were assessed by exam-
ining the distribution by plant size of the number of canmaking plants, plant
revenues, wastewater volumes, compliance costs, and potential closures from
the proposed regulations.
1.4 INDUSTRY CHARACTERISTICS
EPA has identified 93 plants in the United States that manufacture
seamless two-piece metal cans. Eighty-nine of the plants wash their cans and
generate process wastewater and, therefore, are subjected to this regulation.
1-5
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The plants are dispersed throughout the country, with some concentration in
populated areas such as California, Texas, and New York/New Jersey. Total
employment by two-piece metal can plants is estimated to be about 29,800
people.
A data set of 49 of the 89 canmaking plants that generate process waste-
water was used to represent the industry for the economic impact analysis.
These data included information on volume of production, discharge status, and
compliance cost estimates. Approximately 90 percent of these plants are alumi-
num seamless can plants and most of the plants operate between two and four can
lines. The 49 sample plants operate a total of 147 lines, and about 50 percent
of the production is accounted for by plants with three or four lines.
Most metal cans are produced by commercial can manufacturers (i.e.,
Continental Can; American Can; National Can; Crown, Cork & Seal; Reynolds
Metals); however, in recent years, many breweries (i.e., Anheuser-Busch,
Coors, Miller, Schlitz) and food processors (i.e., Carnation, Campbell, Del
Monte, Van Camp) have increased their production of cans for their own use.
Beverage containers, the largest users of seamless two-piece metal cans,
accounted for 95 percent of total two-piece metal can shipments in 1981, and
the food and general packaging markets represented the other 5 percent.
Competition is strong, however, in both markets. Glass and plastic
bottles are the primary substitutes in the beverage container market; seamed
three-piece cans, retort pouches, aseptic packaging, and composite cans are
the primary substitutes in the food and general packaging markets.
Between 1976 and 1981 shipments of two-piece beverage cans increased at
an average annual rate of 16 percent. However, despite the strong growth in
shipments of two-piece cans, the industry reported excess capacity during
1981 and 1982 as new, more efficient facilities were added in recent years
to improve productivity, and as more captive plants were built by major
beverage and food processing companies.
1-6
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Imports and exports of metal cans have been insignificant, since trans-
portation costs for empty cans are high.
1.5 BASELINE PROJECTIONS
Baseline conditions in the canmaking industry were projected to 1990 to
assess the industry's status in the absence of additional effluent regulations.
These projections form the basic background for the economic impact conclusions,
It was projected that shipments of seamless cans would increase from 58.1
billion cans in 1981 to 79 billion cans by 1990, or an average of 2.5 percent
annually. It was also estimated that by 1985, 20 older and less efficient
can lines would be shut down and 20 new lines would be built.
1.6 EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS
Based on the analysis of the potential pollutant parameters and treatment
in place in the canmaking industry, EPA identified six treatment technologies
that are most applicable for the canmaking industry:
• Treatment Level 1: Chemical emulsion breaking,
dissolved air flotation, and precipitation and
clarification
• Treatment Level 2: Treatment Level 1 plus in-
process flow reduction
• Treatment Level 3: Treatment Level 2 plus
polishing filtration
• Treatment Level 4: Treatment Level 3, but substi-
tuting ultrafiltration for polishing filtration
• Treatment Level 5: Similar to Treatment Level 2
with the addition of nine-stage countercurrent
rinsing to further reduce wastewater flows
• Treatment Level 6: Treatment Level 5 plus polishing
filtration.
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Treatment Level 5 and Level 6 are limited to new sources only.
Table 1-1 presents the estimated investment and annual compliance costs
for the existing sources, and Table 1-2 summarizes the compliance cost esti-
mates of the new source treatment alternatives.
1.7 FINDINGS
Price and Quantity Changes
Because market competition is strong in the metal can industry, it is
assumed that metal can manufacturers will attempt to absorb their compliance
costs and will not adjust prices. Consequently, the price changes due to the
regulation would be zero and the quantities demanded would not change from the
baseline projections.
Plant Closure Potential
Treatment Levels 1, 2, and 3 were not expected to cause any plant closures;
however, nine plants were estimated to be potential closures at Treatment Level 4
because their after-compliance ROI are estimated to be below the threshold value.
Table 1-3 summarizes the results of the plant closure analysis for Treatment
Level 4 on the 49 sample plants and projected for the total 88 known dischargers
in the industry.
Substitution Effects
Because the two-piece metal cans face strong competition from other con-
tainers, price increases due to regulatory compliance costs will likely cause
a switch to other types of containers. For this reason, the can manufacturers
were expected to absorb their compliance costs and no substitution effects
were expected to result from the regulations.
1-8
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TABLE 1-1. ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES
All Discharging
Plants
Total for 49 Sample Plants
Number of Plants 49
Number of Lines 147
Compliance Capital Investment
(Thousand Dollars).!/
Treatment Level 1 19,319.3
Treatment Level 2 15,954.9
Treatment Level 3 17,881.5
Treatment Level 4 35,837.2
Annual Compliance Costs
(Thousand Dollars).!/
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Projected Total for All
Discharging Plants in Industry
Number of Plants 88
Number of Lines 224
Compliance Capital Investment
(Thousand Dollars).!/
Treatment Level 1 35,000.0
Treatment Level 2 28,360.0
Treatment Level 3 32,710.0
Treatment Level 4 46,800.0
Annual Compliance Costs
(Thousand Dollars).!/
Treatment Level 1 18,852.0
Treatment Level 2 17,170.0
Treatment Level 3 17,850.0
Treatment Level 4 35,200.0
Indirect
Dischargers
44
131
18,519.0
15,412.1
17,155.5
33,187.9
81
204
34,000.0
27,600.0
31,800.0
43,500.0
18,400.0
16,700.0
17,400.0
32,900.0
Direct
Dischargers
5
16
800.3
542.8
726.0
2,649.3
8,958.1
8,065.1
8,619.1
22,691.1
8,596.8
7,732.9
8,330.1
20,851.0
361.3
332.2
361.0
1,840.1
7
20
1,000.0
760.0
910.0
3,300.0
452.0
470.0
450.0
2,300.0
£/ First-quarter 1982 dollars.
SOURCE: Environmental Protection Agency.
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TABLE 1-2. NEW SOURCE COMPLIANCE COSTS
Typical New Source With
Compliance Capital Investment
(Thousand Dollars)£'
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Treatment Level 6
Annual Compliance Costs
(Thousand Dollars ).£'
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Treatment Level 6
1 Line
lent
443.6
364.0
385.9
578.3
331.1
348.5
201.2
176.9
181.0
329.5
188.0
196.3
2 Lines
672.3
557.7
584.9
876.6
499.9
528.2
305.0
268.1
274.4
499.4
283.8
297.5
3 Lines
857.5
703.6
746.0
1,118.0
640.0
673.7
389.0
342.0
350.0
637.0
363.4
379.5
4 Lines
1,019.1
836.2
886.5
1,328.6
760.6
800.6
462.3
406.4
415.9
757.0
431.8
450.9
5 Lines
1,165.1
956.0
1,013.6
1,519.0
869.5
915.3
528.5
464.7
475.5
865.5
493.6
515.5
6 Lines
1,299.7
1,066.5
1,130.7
1,694.6
970.1
1,021.1
589.6
518.4
530.5
965.5
550.7
575.1
£/ First-quarter 1982 dollars.
SOURCE: Environmental Protection Agency.
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TABLE 1-3. SUMMARY OF ESTIMATED POTENTIAL CLOSURES AMONG EXISTING SOURCES
AT TREATMENT LEVEL 4
Number of Potential Plant Closures
Number of Lines Affected by Closures
Annual Production Capacity Affected by
Closures (million cans)
Actual Annual Production of Closures
(million cans)
Market Share of Closures (% of total
shipment s)_£'
Average Capacity Utilization Rate (%)
Number of Employees Affected fay Closures^'
Projection
to Total
49-Plant
Sample
5
17
4,420
2,070
5.3
47
1,060
88 Discharging
Plants
9
31
8,060
3,730
6.4
46
1,900
JL' Total annual production for 49 sample plants was 39.2 billion cans; total
industry shipments of two-piece cans in 1981 were 58.1 billion cans.
_' Assume average productivity of 1.95 million cans per employee (as explained
in Section 3.2).
SOURCE: JRB Associates estimates.
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Community and Employment Impacts
Since there are no plant closures and substitution effects anticipated
for Treatment Levels 1, 2, and 3, there are no anticipated community and
employment impacts expected in the canmaking industry from these treatment
options. However, at Treatment Level 4, a total of 1,900 employees could be
affected by the potential plant closures.
Foreign Trade Impacts
Since it was assumed that there would be no price increases due to the
regulations, no foreign trade impacts were expected.
^Industry Structure Effects
Treatment Levels 1, 2, and 3 would have little effect on the structure
of the canmaking industry. At Treatment Level 4, nine plants were projected
to be potential closures and their market shares (6 percent of total industry
shipments) might be captured by other existing producers, thus increasing
the industry concentration ratios. However, the magnitude of the market share
loss does not appear to be great enough to change industry price-setting behavior,
New Source Impacts
Costs of the new source treatment alternatives are low and are not
expected to deter new entry.
1.8 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
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pollution control technologies considered by EPA and their associated costs;
the information in Chapter 5 is derived primarily from the technical Develop-
ment Document prepared by EPA's Effluent Guidelines Division. 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 businesses, and Chapter 8 outlines the major
limitations of the analysis and discusses the possible effects of the limita-
tions on the major study conclusions.
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2. STUDY METHODOLOGY
2.1 OVERVIEW
Figure 2-1 presents 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 camnaking industry, six regulatory options (only
four were considered for existing sources) were evaluated. The approach used
in this study was to (1) develop an operational description of the price and
output behavior of the industry and (2) assess the likely plant-specific
responses to incurring the compliance costs enumerated in Chapter 5.
The operational description of the price and output behavior, in conjunc-
tion with compliance cost estimates supplied by EPA, was used to determine new
post-compliance industry price and production levels for each regulatory
option. Individual plants were then subjected to a financial analysis that
uses capital budgeting techniques to determine potential plant closures.
Effects on employment, community, foreign trade, and industry structure are
also determined. Specifically, the study proceeded through the following
steps:
1. Description of industry characteristics;
2. Industry supply and demand analysis;
3. Analysis of cost of compliance estimates;
4. Plant level profitability analysis;
5. Plant level capital requirements analysis;
6. Assessment of plant closure potential;
7. Assessment of other impacts;
8. New source impacts; and
9. 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.
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis was to describe the basic industry charac-
teristics. These characteristics, which include the determinants of demand,
market structure, the degree of intra-industry competition, and financial
performance, are presented in Chapter 3 of this report.
The major sources of data used in this step are listed below:
• U.S. Environmental Protection Agency: EPA industry
surveys conducted in 1978 and 1982 under Section 308
of the Clean Water Act (of particular importance are
data on plant production volume);
• U.S. Department of Commerce: 1977 Census of Manu-
factures , Current Industrial Reports - Metal Cans,
U.S. Industrial Outlook;
• U.S. Department of Labor: Producer Prices and Price
Indexes;
• Federal Trade Commission: Quarterly Financial Report
for Manufacturing, Mining and Trade Corporations;
• Trade and business publications: Metal Can Shipments
Report (published by the Can Manufacturers Institute),
American Metal Market, Modern Metals, Packaging Engi-
neering, Food Engineering, Beverage World, Beverages,
Robert Morris Associates' Statement Studies, and
Standard and Poor's Industry Surveys; and
• Corporate annual reports.
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis was to determine the likely
changes in market prices and industry production levels resulting from each
2-3
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regulatory option. The estimates of post-compliance price and output levels
were used in the plant-level analysis to determine post-compliance revenue and
profit levels for specific plants. If prices are successfully raised without
significantly reducing product demand and 'companies are able to maintain their
current financial status, the potential for plant closings will be minimal.
On the other hand, 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: descrip-
tion of industry structure, determination of industry pricing mechanism,
projection of possible changes in industry structure to 1984 (the expected
effective date for the proposed regulation), and determination of plant- and
firm-specific operational parameters (e.g., production costs, profit rates).
As described in Chapter 3, the metal can industry appears to be highly
competitive. Competition is intense not only between steel and aluminum cans
but also between metal cans and other types of containers such as glass and
plastic bottles. The highly competitive nature of the container market
suggests that metal can producers would have difficulty raising the prices
of their products. For this reason, it was assumed that metal can producers
would attempt to absorb their compliance costs and would not raise their
prices. This assumption represents a worst-case situation and, to the extent
can prices could be increased to recover part of the compliance costs, would
overestimate the potential impacts of the regulations.
It was also necessary to determine if the key parameters in industry
structure would change significantly during the 1980s. Projections of indus-
try conditions began with a demand forecast. The demand during the 1980s
was estimated via trend analysis and market research analysis.
2-4
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2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
The estimated investment and annual compliance costs for the treatment
options, summary descriptions of the control and treatment technologies, and
assumptions for the compliance cost estimates appear in Chapter 5.
2.5 STEP 4: PLANT-LEVEL PROFITABILITY ANALYSIS
The basic measure used to assess the impact of the proposed regulations
on the profitability of individual plants was return on investment (ROI).
The use of this technique involves a comparison of the return on investment
after compliance with a minimum required return on investment.
The return on investment was defined as the ratio of annual profits
before taxes to the total assets of a plant. This technique has the virtues
of simplicity and common usage in comparative analyses of the profitability
of financial entities.
The profit impact assessment was determined by calculating the after-
compliance ROI for each plant. Plants with after-compliance ROI below the
threshold value were considered potential plant closures. The underlying
assumption was that plants could not continue to operate as viable concerns
if they were unable to generate an ROI at least equal to the opportunity
cost of other lower-risk investment alternatives.
The threshold value for ROI used in the analysis was 7 percent. Plants
with after-compliance ROI less than 7 percent were considered potential
closures. The 7 percent ROI threshold level was based on the condition that
plants could not continue to operate as viable concerns if they were unable
to generate for their owners/stockholders an after-tax return on their invest-
ments (i.e., stockholder's equity) equal to the opportunity cost of other
investment alternatives, which in this case was defined as the U.S. Treasury
bond yield expected to be in effect when the regulation is implemented.
2-5
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Data Resources, Inc. forecasts that interest rates on long-term U.S. Treasury
bonds will be about 12 percent in 1983-1984.I/, which is approximately the
time when the plants will have to make investment decisions on the treatment
facilities. It was determined that a before-tax ROI of 7 percent would yield
a 12 percent after-tax return on the liquidation value of the equity, assuming:
* Stockholders' equity of canmaking firms represents
about 50 percent of total assets (as discussed in
Section 3)
* The average corporate tax rate is 40 percent (fourth
quarter of 1981 for Fabricated Metal Products Industry)^./
• The average liquidation value of the plants is 85 per-
cent of their book values.
Appendix A describes the methodology that led to this ROI threshold level.
The after-compliance ROI (R0l2i) was estimated for each plant using the
following equation:
Profit]^ - ACCj[
= - Equation (1)
Profit]^ = PI x Qi£ x PMj_ Equation (2)
where
= after-compliance return on investment of plant i
Profit]^ = pre-compliance profit of plant i
±J Data Resources, Inc., U.S. Long Term Review, Summer 1981.
U Federal Trade Commission, Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations, Second Quarter 1982.
2-6
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= pre-compliance assets value of plant i
* annual compliance cost for plant i
= compliance capital investment for plant i
= pre-compliance price
= pre-compliance production of plant i
= pre-compliance profit margin.
The values of QH were obtained in industry surveys conducted by EPA in
1978 and 1982, and PI , PM^ , and A^ were estimated based on discussions with
industry representatives, analysis of industry-level data from the U.S.
Department of Commerce and Robert Morris Associates Statement Studies (1981
edition), and review of corporate annual reports.
Plants with after-compliance ROI below 7 percent are considered potential
closures. However, a low ROI for a given plant does not, by itself, necessar-
ily imply that the plant will certainly close. 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.
As discussed in Section 2.7, actual plant closure decisions made by individual
companies are usually based on a variety of financial and non-financial factors,
2.6 STEP 5: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing plant closure potential from a profitability
perspective, it was also necessary to assess the firm's ability to make the
initial capital investment needed to construct and install the required
treatment systems. Some plants, which were not initially identified as poten-
tial 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
2-7
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capital structure, profitability, and future business prospects, the industry's
business climate, the characteristics of the financial markets and the aggre-
gate economy, and the firm management's relationships with the financial com-
munity. The precise limit, considering all these factors, is difficult to
determine.
For this study, the analysis of capital availability was based on the
ratio of "compliance capital investment requirements to plant annual 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 plant and compared to a threshold
value. Assuming that reinvestment 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 this analysis, the
before-tax profit margin of a canmaking plant was estimated to be 5 percent
of revenues, and the corporate tax rate was assumed to be 40 percent; there-
fore, 3 percent (60 percent of 5 percent) of revenues was 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 inter-
nally generated funds without additional debt.
Although the CCI/R ratio provides a good indication of the relative
burden created by the compliance requirement, it does not provide precise or
universal conclusions regarding a firm's ability to make the investments.
For purposes of this analysis, a plant whose estimated compliance capital
requirement exceeded 3 percent of its annual revenues was identified as a
potential closure.
2.7 STEP 6: PLANT CLOSURE ANALYSIS
The plant level analysis examines the individual production units in
each product group to determine the potential for plant or production line
2-8
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closures. For this analysis, plant closure estimates are based primarily on
the quantitative estimates of after-compliance profitability and ability to
raise capital developed in Steps 4 and 5, respectively. Failure to comply
with either profitability or capital requirements criteria specified in the
two steps mentioned above indicates a potential closure for an individual plant.
The identification of plants as potential closures in this step was
interpreted as an indication of the extent of plant impact rather than as a
prediction of certain closure. The decision by a company to close a plant
also involves consideration of other factors, such as market and technological
integration and the existence of specialty markets. Many of these factors
are highly uncertain and cannot be quantified.
2.8 STEP 7: OTHER IMPACTS
"Other impacts" include economic impacts which result from basic price,
production, and plant-level profitability changes. These impacts include
impacts on substitution potential, employment, communities, industry structure,
and balance of trade.
As indicated in Step 2, the can manufacturers were expected to absorb
their compliance costs, thus no substitution effects were expected to result
from the regulations.
The community and employment impacts are the direct results of the
plant closure analysis. Employment estimates for production facilities
projected to close were based on individual plant production data obtained
from the EPA 308 Surveys and an estimate of production per employee. Community
impacts were assessed by comparing the number of job losses due to the regu-
lations to total employment in the community. Data on community employment
are available through the Bureau of the Census and the Bureau of Labor Statistics,
2-9
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The assessment of industry structure changes was based on examination of
the following before and after compliance with the regulation:
• Numbers of firms and plants;
• Industry concentration ratios; and
• Effects of plant closures on specialty markets.
Impacts on imports and exports are primarily a function of the change in
the relative prices charged by domestic versus foreign producers. In this
study, it was estimated that there would be no price increase due to the regu-
lations. Therefore, the regulations were expected to have no impact on the
imports and exports of metal cans. The role of imports and exports is quali-
tatively evaluated in Chapter 3 of this report.
2.9 STEP 8: NEW SOURCE IMPACTS
New facilities and existing facilities that undergo substantial modifi-
cations will be subject to NSPS/PSNS guidelines. This step in the study
analyzed the economic impacts of these guidelines on new sources.
The analysis was based on model plants developed for greenfield (new)
sites and the corresponding compliance costs of the treatment technologies.
The treatment costs for major modifications to an existing facility may be
less or more expensive than those for a greenfield (new) site of the same
size (the Agency invites comments from industry regarding this issue). For
the purpose of evaluating new source impacts, compliance costs of new source
standards were defined as incremental costs over the costs of selected stand-
ards for existing sources. The impacts of new source regulations were then
determined by comparing compliance costs to plant assets, revenues, and
profit.
2.10 STEP 9: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354) amends the
Administrative Procedures Act and requires Federal regulatory agencies to
2-10
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consider "small entities" throughout the regulatory process. The RFA requires
that an initial screening analysis be performed to determine if a substantial
number of small entities will be significantly affected. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
step in the study addressed these objectives by identifying the economic
impacts likely to result from the promulgation of regulations on small busi-
nesses in the canmaking industry. The primary economic variables covered
were those analyzed in the general economic impact analysis such as compliance
costs, plant financial performance, plant closures, and unemployment and
community impacts. Most of the information and analytical techniques in the
small business analysis were drawn from the general economic impact analysis
which is described above and in the remainder of this report. The specific
conditions of small firms were evaluated against the background of general
conditions in the metal can markets.
Four alternative approaches were examined to provide alternative defini-
tions of small canmaking operations for purposes of regulatory development.
These alternative approaches are based on the following factors:
• The Small Business Administration's (SBA) definition
of small businesses based on total firm employment;
• Plant annual production;
• Plant number of can lines; and
• Plant wastewater flow rates.
Based on the SBA definition of a small business for the canmaking indus-
try, none of the seamless can manufacturers would be considered small busines-
ses for they all employ more than 1,000 people. For this reason, alternative
definitions based on plant annual production and plant number of can lines
were evaluated to account for unit compliance cost differentials due to
plant size. Similarly, another alternative size definition based on plant
2-11
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wastewater flow rates was also examined since flow rates often vary with
plant size and are a major factor in the development of effluent guidelines.
For this regulation, the number of can lines in a plant may be an accept-
able definition of small canmaking business. Information on number of lines
in a plant is readily available; and since the manufacturing technology in the
seamless canmaking industry is very similar among the producers, the plant
number of can lines are indicative of its production capacity.
The impacts on small plants under each definition were assessed by
examining the distribution by plant size of the number of canmaking plants,
plant revenues, wastewater volumes, compliance costs, and potential closures
from regulations. The objective of this analysis was to estimate if any
plant size category (especially the small-sized plants) would incur dispro-
portional compliance costs. This was achieved by comparing the unit compli-
ance costs (in dollars per thousand cans) for a plant size category with
those of other size categories, and, also, by comparing its proportions of
total revenues and wastewater generated to its share of total compliance
costs.
2-12
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3. INDUSTRY CHARACTERISTICS
3.1 OVERVIEW
This chapter describes the characteristics of plants and firms in the
canmaking industry, the determinants of demand for metal cans, and the
price determining behavior of the industry. The primary operational charac-
teristics include the number, size, and location of plants and firms, 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, and the magnitude
of imports and exports. The industry and market characteristics are pertinent
to determining industry behavior, when faced with additional pollution con-
trol requirements. This information was used to estimate the expected baseline
characteristics of the industry during the 1980s, which are described in
Chapter 4, and to estimate the potential economic impacts of the proposed
regulations, which are described in Chapter 6.
3.1.1 Industry Coverage
The metal can may be defined as "a single-wall container constructed
wholly of tin plate, terne plate, black plate, aluminum sheet or impact
extrusions (slugs) designed for packaging products."!.' Currently, there are
more than 600 sizes, styles, and shapes of metal cans manufactured. Metal
cans are generally classified into two major types: seamed cans (primarily
three-piece cans) and seamless cans (primarily two-piece cans). Seamed
three—piece cans have side-seamed bodies formed from a flat sheet of metal
and two ends which are stamped from separate pieces of metal and attached
to the can body. Seamless cans have no side seams and have a top which is
stamped from a separate piece of metal.
I/The Can—Yesterday, Today and Tomorrow, Can Manufacturers Institute.
3-1
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Oil is used frequently as a lubricant during the forming of the seamless
body and must be removed before further processing can be performed. This is
typically accomplished by washing the can body in a continuous canwasher
using water-based alkaline cleaners. Thus, process wastewater is generated
by facilities which use oil as a lubricant during the forming of seamless can
bodies.
Oil is not used in the manufacture of seamless cans from coated coil,
seamed cans, can ends, and can tops; therefore, washing is not required after
forming. Since no process wastewater is generated from these canraaking
process segments, they are excluded from regulation under Paragraph 8 of the
Revised Settlement Agreement.
The canmaking industry, for purposes of this study, includes canmaking
facilities which manufacture and wash seamless cans. EPA has identified 89
plants that will be affected by this regulation. These 89 plants include 7
direct dischargers, 81 indirect dischargers, and 1 zero discharger.
3.1.2 Product Characteristics and Manufacturing Process
The seamless two-piece metal can was introduced in 1963 by Reynolds
Metals, Inc. In the beginning, virtually all seamless cans were made with
aluminum. However, due to fluctuations in aluminum prices in the late 1970s,
manufacturers of seamless cans began looking for alternative materials.
Thus, the shipments of seamless steel cans increased rapidly between 1977
and 1979. Although the seamless steel can is competing quite intensively
with the seamless aluminum can, aluminum still retains the largest market
share. There are several reasons for this: aluminum chills beverages faster
than steel; aluminum weighs less than steel; transportation costs are less
for aluminum than for steel; and recycling is more cost-effective for aluminum
cans than for steel cans, because steel cans have aluminum tops which must be
separated and because recycled steel cans produce a. lower grade of steel.
Although aluminum can prices are generally higher than seamless steel cans,
3-2
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the net cost to customers after rebate for recycled aluminum cans is comparable
to that of steel cans.
Two different processes are currently used to manufacture seamless two-
piece cans:
• The "draw-iron" (D&I) process: In the D&I process,
metal discs are cut and cupped in a press and then
the walls of the cup are drawn or extruded to the
desired height by forcing them through two or three
progressively smaller diameter ironing rings. Cans
made by this process are thinner and less rigid than
seamed three-piece cans and are primarily used for
beer and carbonated beverage cans. The carbonation
pressure makes the can stronger and more rigid when
it has been filled and sealed.
• The "draw-redraw" (DRD) process: In the DRD process,
drawn cans are punched from a metal disc. Shallow cans
may require one stamp, while deeper cans may require two
or three. Beading may be added to further strengthen
the sidewalls. Meats, spreads, snack foods, dog food,
etc., are the major products contained in these cans.
EPA has determined that virtually all plants that wash can bodies use
the D&I process. Figure 3-1 describes the D&I process employed by canmaking
plants.
3.2 PLANT CHARACTERISTICS
As indicated in Table 3-1, the U.S. Department of Commerce's 1977 Census
of Manufactures reported that there were 153 metal can companies operating 403
metal can plants (both seamless two-piece and seamed three-piece can plants)
in 1977. These plants employ about 50,200 metal can production workers (10,800
aluminum can workers) and 59,800 employees overall (13,600 at aluminum can
plants). Table 3-2 presents the distribution of the metal can plants by employ-
ment size. More than half of the plants have less than 100 employees but only
account for 16.8 percent of total value of shipments. This table also indicates
that metal can plants are highly specialized in the manufacture of cans (special-
ization ratio is 96 percent) and perform few other types of operations.
3-3
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TABLE 3-1. METAL CAN INDUSTRY CHARACTERISTICS, 1977
SIC 3411 SIC 34113 SIC 34114
Metal CansJL' Steel CansJL' Aluminum Cans
Number of Companies 153 73J1/ 25^7
Number of Establishments 403 253 52
Value of Shipments ($ millions) 8,142.8 4,852.7 1,620.4
Number of Cans Shipped (million cans) 88,311 61,761 26,550
Number of Employees (thousands) 59.8 42.3 13.6
Number of Production Workers (thousands) 50.2 36.1 10.8
Productivity (thousand cans per employee) 1,477 1,460 1,952
—' Includes both seamless two-piece cans and seamed three-piece cans. Only
seamless cans are covered by the proposed regulations.
_' Number of companies with shipments of 5100,000 or more.
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
3-5
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TABLE 3-2. NUMBER OF METAL CAN PLANTS BY EMPLOYMENT SIZE, 1977f/
(SIC 3411)
Plant Size
Establishments with:
1-19 employees
20 - 99 employees
100 - 499 employees
over 500 employees
Total*
Coverage Ratio.*!'
Specialization Ratio£/
No. of
Plants
103
117
165
18
403
% of
Total
Plants
25.6
29.0
40.9
4.5
100.0
Value of
Shipments
($ Millions)
117.8
1,255.2
5,345.1
1,424.8
8,142.8
% of Total
Value of
Shipments
1.4%
15.4%
65.6%
17.5%
100.0%
98%
96%
* Numbers may not add due to rounding.
!L' Includes plants that manufacture steel cans (seamed and seamless),
aluminum cans, and metal can lids, ends, and parts. Only seamless cans
are covered by the proposed regulations.
JL/ Coverage ratio is ratio of a given industry's primary product shipments
to total shipments of these products by all industries.
£_' Specialization ratio is ratio of primary product shipments to product
shipments for primary plus secondary products.
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
3-6
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EPA has identified 93 plants in the United States which manufacture seam-
less metal cans. Eighty-nine of the plants wash their cans and generate pro-
cess wastewater and are covered by this regulation. Table 3-3 presents the
geographic distribution of these 89 plants. The plants are dispersed through-
out the country, with some concentration in populated areas such as California,
Texas, and New York/New Jersey. Total employment by seamless two-piece
metal can plants is estimated to be about 29,800 people..-/
A data set of 49 of these 89 plants that manufacture and wash seamless
cans was used to represent the industry for the economic impact analysis.
These data included information on volume of production, discharge status,
and compliance cost estimates.dJ Table 3-4 presents summary characteristics
of these 49 sample plants. Approximately 90 percent of these plants are
aluminum two-piece can plants and most of the plants operate between 2 and 4
can lines. The 49 sample plants operate a total of 147 lines. Table 3-5
presents the distribution of the plants by the number of lines at each plant
and shows that about 50 percent of the production is accounted for by plants
with three or four lines.
•3.3 FIRM CHARACTERISTICS
The Department of Commerce estimated that there were 153 companies that
produced metal cans (both two-piece and three-piece cans) in 1977. The major
producers of metal cans are Continental Can; American Can; National Can; Crown
Cork and Seal; Reynolds Metals; Ball Corp.; Kaiser Aluminum and Chemical; and
2J Based on total shipments of seamless two-piece metal cans of 58.1 billion
cans in 1981 (see Section 3.4), and assuming a productivity of 1.95 million
cans per employee (productivity of aluminum can plants as reported in
the 1977 Census of Manufactures and shown in Table 3-1).
~J EPA found 88 plants operating 224 production lines that discharge wastewater.
EPA estimated compliance costs for 61 of these discharging plants. However,
production quantities were not available for 12 of these 61 plants, thus,
the 49-plant data set used in the analysis.
3-7
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TABLE 3-3. GEOGRAPHIC LOCATION OF 89 SEAMLESS CAN PLANTS WITH PROCESS WASTEWATER
State Number of Plants
Arizona 1
California 10
Colorado 2
Connecticut 1
Florida 5
Georgia 5
Hawaii 1
Illinois 2
Indiana 1
Maine 1
Maryland 2
Minnesota 3
Missouri 5
New Jersey 7
New York 4
North Carolina 3
Ohio 7
Oklahoma 1
Pennsylvania 2
South Carolina 2
Texas 11
Virginia 1
Washington 3
Wisconsin 6
Wyoming 1
Puerto Rico 2_
TOTAL 89
SOURCE: 1978 and 1982 EPA 308 Surveys.
3-8
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TABLE 3-4. CHARACTERISTICS OF 49 SAMPLE PLANTS
Number of Firms 12
Number of Plants:
Aluminum Cans 44
Steel Cans 3
Both 2
Total Number of Can Lines 147
Number of Plants with:
1 line 1
2 lines 22
3 lines 10
4 lines 11
5 lines 2
6 lines 3
SOURCE: 1978 and 1982 EPA 308 Surveys.
3-9
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TABLE 3-5. DISTRIBUTION OF 49 SEAMLESS CAN SAMPLE PLANTS
BY NUMBER OF CAN LINES
No. of
Types of Plants Plants
Plants with:
2 lines or less 23
3-4 lines 21
5 lines or more 5
No. of
Production
Production
Range
Lines Million Cans % of Total (Million Cans)
45 12,890.4 32.9
74 19,766.8 50.4
28 6,569.2 16.7
345.0 - 813.5
272.6 - 1,250.0
1,198.0 - 1,517.0
SOURCE: 1978 and 1982 EPA 308 Surveys.
3-10
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Diamond International. Table 3-6 indicates that the metal can industry is
moderately concentrated with the four largest manufacturers accounting for
over 50 percent of total industry shipments.
Most metal cans are produced for sale by commercial can manufacturers.
However, in recent year's, many breweries (e.g., Anheuser-Busch, Coors, Miller,
Schlitz) and food processors (e.g., Carnation, Campbell, Del Monte, Van Camp)
have increased their production of cans for their own use. Table 3-7 shows
that captive beverage can manufacturers increased their shipments from 20
percent to 25 percent of total beverage can shipments between 1979 and 1981.
Since beverage cans accounted for 95 percent of total two-piece can shipments
in 1981, these figures are representative of total two-piece can shipments.
Table 3-8 presents selected financial ratios of 18 canmaking companies
for which published financial data were available for the 1979-1981 period.
There are 11 commercial manufacturers and 7 companies with captive canmaking
operations in the group. This data shows that the profit performance (measured
by the firm's profit margin and return on equity) of most commercial can pro-
ducers are, in general, below that of both the companies with captive opera-
tions and the All Manufacturing average. In terms of capital structure, the
commercial can manufacturers are generally more leveraged and exhibit lower
equity to assets ratios than the captive producers and the all manufacturing
average.
3.4 MARKET CHARACTERISTICS
3.4.1 Product Characteristics and Substitution
Table 3-9 summarizes the shipments of all metal cans and seamless two-
piece cans by market in 1981. Beverage containers are the largest users of
seamless metal cans and accounted for 95 percent of total seamless metal can
3-11
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TABLE 3-6. CONCENTRATION RATIOS OF CANMAKING INDUSTRY, 1977
Class of Product
Metal Cans (SIC 3411)£/
Steel Cans (SIC 34113X2/
Aluminum Cans (SIC 34114)
Percent of Value of Shipments Accounted for by
4 Largest 8 Largest 20 Largest
Companies Companies Companies
56
62
55
71
79
79
89
92
99+
JL' Includes both seamless and seamed cans. Only seamless cans are covered by
the proposed regulations.
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
3-12
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TABLE 3-7. TOTAL SHIPMENTS OF BEVERAGE CANS BY MARKET
(BILLIONS OF CANS)
Year Total Shipments For Salef/ Own Use£/
1979 54.4 43.5 11.0
(80.0%) (20.0%)
1980 55.2 42.9 12.3
(77.7%) (22.3%)
1981 56.3 42.2 14.1
(75.0%) (25.0%)
*/ Numbers in parentheses represent percent of total shipments.
SOURCE: Can Manufacturers Institute, Metal Can Shipments Report, 1981.
3-13
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3-14
-------
TABLE 3-9. METAL CAN SHIPMENTS, 1981
Two-Piece Cans
All Cans
(Billion Cans)
Billion Cans
% of Total
Two-Piece Cans
All Metal Cans Shipments
by Market:
Beverage
Beer
Soft Drink
Food
General Packaging
Total
56.3
30.9
25.4
27.7
4.3
88.3
55.2
30.6
24.5
2.7
0.2
95.0
52,
42,
58.1
5.3
0.3
100.0
Aluminum Cans Shipments
by Market:
Beverage
Beer
Soft Drink
Food
General Packaging
Total
47.7
28.8
18.8
1.0
*
48.9
47.7
28.8
18.8
1.0
*
48.7
82.1
49.6
32.4
1.7
0.1
83.8
Steel Cans Shipments
by Market:
Beverage
Beer
Soft Drink
Food
General Packaging
Total
8.6
2.0
6.6
26.7
4.3
39.6
7.5
1.8
5.7
1.7
0.1
9.4
12.9
3.1
9.8
2.9
0.2
16.2
*Less than 0.05 billion cans.
SOURCE: Can Manufacturers Institute, Metal Can Shipments Report, 1981,
3-15
-------
shipments in 1981. Ninety-eight percent of all beverage can shipments in
1981 were seamless cans. The reasons for the popularity of the seamless can
are that it uses less metal, can be made faster and cheaper, has high integrity
(less prone to leakage), and is lighter to transport than the seamed can.
For beverage packaging, metal cans have the advantages of lighter weight
and ease of shipping and handling over other containers such as glass and
plastic bottles. However, competition from glass and plastic bottles is
strong. Glass bottles enjoy advantages over metal cans such as quality image
and lower cost (the cost of producing a bottle is higher, however, a bottle
can be reused many times), although this is partially offset by higher costs
in handling, bottling, and transportation. In addition, because they are
resealable, glass and plastic (also called PET—polyethylene terephthalate)
bottles have a clear advantage over cans in the large family-size beverage
container market.
Shipments of seamless cans in the food and general packaging markets
represent a relatively small portion of the market, accounting for 5 percent
of all seamless cans shipped in 1981 and for less than 10 percent of 1981
total metal can shipments in these two markets. The reason for this low
demand is that seamless cans lack rigidity needed for food packaging and can
only be made in small sizes; seamed cans are stronger and can be made in
many different sizes to meet the needs of food processors.
Competition for the food and general packaging markets also comes from
other types of containers, such as:
• Retort pouch: a flexible, lightweight, sterile,
laminated plastic and aluminum foil food package
that does not require refrigeration or preserva-
tives. Because it is easy to open, heat, transport,
and dispose of, this food package is very attractive
to a growing number of consumers. In addition, this
container has advantages of storage space savings of
99 percent and weight savings of 86 percent over metal
3-16
-------
cans of the same capacity when empty!/ and, therefore,
is easier to ship and handle. The disadvantages of
the retort pouch over metal cans are slow filling
speeds and high costs.
• Aseptic package: a flexible, sterile, laminated
container that is used to package juices so that
they do not need refrigeration.
• Composite can: a container that consists of many
layers of paper or heavy paperboard wrapped around
a mandrel to form a tube; foil or plastics are
laminated to the paper to add strength and impermea-
bility.
Until recently, the seamless metal cans found only limited use in packaging
noncarbonated beverages. This is because the carbonation, which is contained
in beer and carbonated soft drinks, helps pressurize and strengthen the can
which otherwise may collapse due to the thin sidewalls. A recent development
by Reynolds Metals using liquid nitrogen allows the use of seamless metal cans
for noncarbonated beverages such as wines, juices, and waters. In the new
process, a drop of liquid nitrogen is put in the filled can before sealing;
the nitrogen then expands and creates pressure against the sidewall.
Another recent technological development is the aluminum bottle (i.e.,
resealable can) developed by Continental Can. This container has a drawn
and ironed body and a dome cap with a resealable plastic closure (referred
to as a "clicker top"). This aluminum bottle may improve the metal can
industry's competitive position as it combines the advantages of both metal
cans (i.e., lightweight, ease of shipping and handling) and bottles (i.e.,
resealability).
h/ Food Engineering, October 1981.
3-17
-------
100-
go-
so-
70-
60-
50-
40-
30-
20-
10
9
8
7
6
5
Total Metal
Cans
Beverage Cans
Two-piece
Beverage Cans
Beer Cans
Two-piece Beer
Cans
Soft Drink Cans
Two-piece Soft
Drink Cans
1976
1977
1978
1979
1980
1981
Year
FIGURE 3-2. METAL CAN SHIPMENTS, 1976 - 1981
3-18
-------
TABLE 3-10. METAL CAN SHIPMENTS, 1976-1981
1976-1981
Average Annual
1976 1977 1978 1979 1980 1981 Growth Rate (%)
Total Metal Cans
Billion Cans
% Change
Beverage Cans
Total
Billion Cans
% Change
Two-Piece Cans
Billion Cans
% of Total
% Change
Beer Cans
Total
Billion Cans
% Change
Two-Piece Cans
Billion Cans
% of Total
% Change
Soft Drink Cans
Total
Billion Cans
% Change
Two-Piece Cans
Billion Cans
% of Total
% Change
82.6
46.4
26.4
56.9
26.9
20.3
75.5
19.5
6.1
31.3
86.9
5.2
51.2
10.3
33.1
64.6
25.4
27.9
3.7
23.6
84.6
16.3
23.3
19.5
9.5
40.8
55.7
89.8
3.3
54.4
6.3
39.9
73.3
20.5
28.9
3.6
26.4
91.3
11.9
25.5
9.4
13.5
52.9
42.1
89.3
(0.6)
54.4
0
44.7
82.2
12.0
28.7
(0.7)
27.0
94.1
2.3
25.7
0.8
17.6
68.5
30.4
87.9
(1.6)
55.2
1.5
50.8
92.0
13.6
29.5
2.8
28.9
99.0
7.0
25.7
0
21.9
85.2
24.4
88.3
0.5
56.3
2.0
55.2
98.0
8.7
30.9
4.7
30.6
99.0
5.9
25.4
(1.2)
24.5
96.5
11.9
1.4
4.0
16.0
2.8
8.7
5.7
32.9
SOURCE: Can Manufacturers Institute, Metal Can Shipment Report, 1981.
3-19
-------
3'4-2 Shipment Trends
As illustrated in Figure 3-2 and Table 3-10, shipments of seamless two-
piece beverage cans (which accounted for 95 percent of all seamless cans
shipped in 1981) have experienced strong growth between 1976 and 1981, aver-
aging a 16 percent increase per year. The increased demand for seamless cans
has been mainly at the expense of the seamed cans, as shipments of total
beverage cans grew at a more moderate average annual rate of 4 percent during
that same period.
Despite the strong growth in shipments of seamless cans, the industry
reported excess capacity as new, more efficient facilities were added in
recent years to improve productivity, and as more captive plants were built
by major beverage and food processing companies. This excess capacity has
put pressure on the industry's prices and profitability and has also forced
the shutdown of some older, less efficient operations.
3.4.3 Foreign Trade
Imports and exports of metal cans have been insignificant, since trans-
portation costs for empty cans are high. Table 3-11 shows that U.S. exports
of metal cans have always been less than 1 percent of total industry value
of shipments. Statistics on imports of cans are not available, however,
industry sources indicate that they are also insignificant due to high trans-
portation costs.
3-20
-------
TABLE 3-11. U.S. EXPORTS OF METAL CANS, 1977-1981
Year
1977
1978
1979
1980
1981
Value of
Shipments
($ Million)
8,242.8
8,972.3
9,822.7
10,600.0
11,100.0
Value of
Exports
($ Million)
45.0
36.7
52.1
85.9
90.0
Export/
Shipment
(%)
0.7
0.5
0.6
0.9
0.9
SOURCE: U.S. Department of Commerce, 1982 U.S. Industrial Outlook.
3-21
-------
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the canmaking industry
to 1990 in the absence of additional effluent regulations. These projections
will be used together with estimated compliance costs and other information to
assess the effects of the effluent control requirements on future industry
conditions.
The basic approach followed in developing the projections began with a
demand forecast. Then, using the resulting initial volume estimates, industry
supply factors were 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 FORECASTS
The primary reason for beginning the baseline projections with the demand
analysis is based on the hypothesis that the canmaking industry supply factors
will adjust to demand conditions. This results from two factors: (1) the
canmaking industry group is very small compared to 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 metal cans is a derived demand,
depending on the demand for beverage, food, and other consumer goods.
As indicated in Chapter 3, annual shipments of seamless two-piece cans
grew rapidly between 1976 and 1981, and by the end of 1981 98 percent of
total shipments were seamless cans. This rapid growth can be explained by
the preference of seamless cans over the seamed threepiece cans for beverage
packaging. Beverage cans have always been, by far, the largest market for
seamless cans, accounting for 95 percent of all seamless cans shipped in
1981 (see Table 3-9). Since there was no clear evidence that the above demand
4-1
-------
that the above demand patterns would change substantially during the 1980s,
it was, therefore, assumed that further growth of seamless can shipments
between 1982 and 1990 would approximate that of beverage cans.
For this study, projections of seamless can shipments were based on
industry forecasts of beverage can shipments published in Beverage magazine.!.'
These projections are shown in Table 4-1 and indicate that seamless can ship-
ments are expected to grow at an average annual growth rate of 4 percent to
reach 68 billion cans in 1985. Between 1985 and 1990, it was assumed that
shipments of seamless cans would grow at the same rate as beverage shipments,
2 /
which are projected to increase 3 percent a year during that time period .±J
The above projections are probably conservative forecasts, as recent
technological developments may open new markets for seamless cans. Some of
these innovations are described in Chapter 3 and include the aluminum bottle,
the use of liquid nitrogen in canning noncarbonated drinks, and the "draw and
redraw" steel food can. If these new products are well accepted by consumers,
then the growth of the seamless can industry will probably be faster than as
projected above.
4.2 SUPPLY FORECASTS
This section addresses the number of baseline closures and new sources
that might be expected during the 1980s. The increase in demand through the
1980s forecasted in Section 4.1 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.
.L Beverage, February 19, 1982, p. 16.
JL' Predicast, Inc., Predicast Forecasts, June 1982, p. A-23.
4-2
-------
TABLE 4-1. PROJECTIONS OF TWO-PIECE METAL CAN SHIPMENTS (BILLION CANS)
Year
1976
1977
1978
1979
1980
1981
Beverage Can Shipments^.'
Beer Soft Drink Total
26.9
27.9
28.9
28.7
29.5
19.5
23.3
25.5
25.7
25.7
46.4
51.2
54.4
54.4
55.2
30.9
25.4
56.3
Seamless
Two-Piece Can
Shipments
NA
NA
NA
NA
52.6
58.1
Projected
1985
1990
35. Ob/
31. O
66.0
76.5
68.0
79.0
Annual Growth
Rate (%)
1976-1980 2.3 7.1
1979-1980 2.8 0
1980-1981 4.7 -1.2
Projected Annual
Growth Rate (%)
1981-1985 3.2 4.9
1985-1990
1981-1990
4.4
1.5
2.0
4.0
3.0£/
3.5
NA
NA
10.5
4.0
3.0
3.5
.£' Includes both seamed and seamless cans.
b/ Industry forecasts (Beverage, February 19, 1982, p. 16).
£/ Predicast's forecast for beverage shipments (Predicast Forecast, June
1982, p. A-23).
SOURCE: JRB Associates estimates.
4-3
-------
As indicated in Chapter 3, there was substantial excess capacity in 1981.
Industry sources estimated that by the end of 1981, the seamless two-piece
beverage can industry had a production capacity of 65 billion cans.2.' Total
shipments in 1981 amounted to 55 billion cans, representing an average capacity
utilization of 85 percent. The overcapacity resulted from the combination of
the rapidly increasing capacity of captive can manufacturers (shipments by
captive beverage can plants increased from 11 billion cans to 14 billion cans
between 1979 and 1981) and the addition of new, more efficient facilities by
commercial manufacturers to improve productivity and profitability.
Table 4-2 summarizes the supply forecasts for beverage cans. This
table indicates that the commercial beverage can manufacturers are expected
to have an excess capacity of 5 billion cans by 1985. Assuming an average
production rate of 260 million cans per line,A' it is estimated that approxi-
mately 20 older, less efficient can lines may be shut down to eliminate the
overcapacity. During that time, the captive manufacturers are projected to
increase their production capacity by about 6 billion cans. This will require
the addition of 20 new beverage can lines that will cost between $200 and
$300 million.
Since beverage cans have always accounted for a very large share of
the seamless can market (95 percent of all seamless cans shipped in 1981), it
is assumed that the above supply forecasts would reflect the future supply
conditions of the seamless can industry.
As discussed in Section 3.4, imports and exports of metal cans have always
been insignificant because transportation costs for empty cans are high. This
situation is not expected to change in the future.
I Modern Metals, January 1982.
ft! It was estimated that there were 250 D&I can lines in operation in 1981
(Modern Metals, January 1982).
4-4
-------
TABLE 4-2. SUMMARY OF SUPPLY FORECASTS FOR BEVERAGE CANS INDUSTRY
All Commercial Captive
Producers Manufacturers Operations
1981 (Actual)
Shipments (Billion Cans) 55 41 14
Production Capacity (Billion Cans) 65£/ 51 14jl/
Number of Lines 250£/ 195 55
Capacity Utilization Rate (%) 85 80 100
Excess Capacity (Billion Cans) 10 10
1985 Forecasts
Shipments (Billion Cans) 66 46 20£/
Additional Capacity Needed between 1-56
1981-1985 (Billion Cans)
Number of Potential Baseline 20 2Ql/
Line Closures
Number of Additional New Lines 20 — 20£/
Capital Requirements for New Lines 200- — 200-
($ Million) 300 300£/
Total Number of Lines 250 175 75
^.'Industry estimate of seamless two-piece D&I beverage can capacity at end of
1981 (Modern Metals, January 1982).
k/It is expected that the beverage companies will operate their captive can-
making facilities at full capacity.
£/Assume shipments of beverage cans by captive plants will continue to grow
at the average 1979-1981 rate of 1.5 billion cans a year (see Table 3-7).
jL/Assume average capacity of 260 million cans per line.
fl/Assume average capacity of 300 million cans per new line, and investment
cost of $10-$15 million per line (telephone communication with Mr. R. Gere,
American Can Co., December 1982).
SOURCE: JRB Associates estimates.
4-5
-------
5. EFFLUENT GUIDELINE CONTROL -OPTIONS AND COSTS
5.1 OVERVIEW
The alternative water treatment control systems, costs, and effluent
limitations for the Canmaking Point Source Category are enumerated in the
Development Document. The Development Document also identifies various
characteristics of the industry, including 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 constituents of wastewaters. Using these
data, 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 for the industry. This involved an evalu-
ation of both in-plant and end-of-pipe technologies. This information was
then evaluated for existing surface water industrial dischargers to determine
the effluent limitations required for the Best Practicable Control Technology
Currently Available (BPT), the Best Available Technology Economically Achievable
(BAT), and the Best Conventional Pollutant Control Technology (BCT). Existing
and new dischargers to Publicly Owned Treatment Works (POTWs) are required to
comply with Pretreatment Standards for Existing Sources (PSES) and Pretreatment
Standards for New Sources (PSNS) , and new direct dischargers are required to
comply with New Source Performance Standards (NSPS), which require Best Avail-
able Demonstrated Control Technology (BDT). The identified technologies were
analyzed to calculate cost and performance. Cost data were expressed in
terms of investment, operating and maintenance costs plus depreciation, and
interest expense.
5-1
-------
5.2 CONTROL AND TREATMENT TECHNOLOGY
Based on the analysis of the potential pollutant parameters and treat-
ment in place in the canmaking industry, EPA identified six treatment tech-
nologies that are most applicable for the canmaking industry:
Treatment Level 1: Chemical emulsion breaking,
dissolved air flotation, and lime precipitation
and clarification
Treatment Level 2: Treatment Level 1 plus in-
process flow reduction
Treatment Level 3: Treatment Level 2 plus
polishing filtration
Treatment Level 4: Treatment Level 3, but substi-
tuting ultrafiltration for polishing filtration
Treatment Level 5: Similar to Treatment Level 2
with the addition of nine-stage countercurrent
rinsing to further reduce wastewater flows
Treatment Level 6: Treatment Level 5 plus polishing
filtration.
Treatment Level 5 and Level 6 are limited to new sources only.
5.3 COMPLIANCE COST ESTIMATES
5.3.1 Critical Assumptions
The assumptions made to estimate compliance costs are outlined in the
Development Document. Some of the critical assumptions are summarized below:
• All costs are expressed in first-quarter 1982
dollars.
• Plant compliance costs are functions of the plant
number of can lines (i.e., production capacity) and
not functions of plant actual production volume.
5-2
-------
• Provisions are made for equipment-in-place in esti-
mating compliance costs for existing sources.
• 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.
• Treatment Level 1 for existing sources does not require
flow reduction. For this reason, the compliance costs
of Treatment Level 1 are in many cases greater than
those of Treatment Level 2 which includes flow reduction
and allows for smaller-sized end-of-pipe treatment. In
such cases, it was assumed that dischargers would install
Treatment Level 2 instead of Level 1.
5.3.2 Compliance Costs of Existing Sources
Table 5-1 presents the total compliance capital investment and total
annual compliance cost estimate.s of Treatment Levels 1 to 4 for existing
sources in the canmaking industry. Total annual compliance costs for the 49
sample discharging plants for which production and compliance cost data are
available range from $9.0 million for Treatment Level 1 to $22.7 million for
Treatment Level 4. Total annual compliance costs projected for the 88 dis-
charging plants in the industry vary between $18.9 million for Treatment
Level 1 and $35.2 million for Treatment Level 4.
5.3.3 Compliance Costs of New Sources
As indicated in Section 5.2, two treatment technologies (Treatment Levels
5 and 6) are considered for new sources. Table 5-2 summarizes the compliance
cost estimates of these treatment technologies for typical new sources with
one to six can lines. These costs apply to existing facilities that are
substantially modified and to greenfield (new) plants.
5-3
-------
TABLE 5-1. ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES
All Discharging Indirect Direct
Plants Dischargers Dischargers
Total for 49 Sample Plants
Number of Plants 49 44 5
Number of Lines 147 131 16
Compliance Capital Investment
(Thousand Dollars)£/
Treatment Level 1 19,319.3 18,519.0 800.3
Treatment Level 2 15,954.9 15,412.1 542.8
Treatment Level 3 17,881.5 17,155.5 726.0
Treatment Level 4 35,837.2 33,187.9 2,649.3
Annual Compliance Costs
(Thousand Dollars).*'
Treatment Level 1 8,958.1 8,596.8 361.3
Treatment Level 2 8,065.1 7,732.9 332.2
Treatment Level 3 8,619.1 8,330.1 361.0
Treatment Level 4 22,691.1 20,851.0 1,840.1
Projected Total for All Plants in Industry
Number of Plants 88 81 7
Number of Lines 224 204 20
Compliance Capital Investment
(Thousand Dollars)^.'
Treatment Level 1 35,000.0 34,000.0 1,000.0
Treatment Level 2 28,360.0 27,600.0 760.0
Treatment Level 3 32,710.0 31,800.0 910.0
Treatment Level 4 46,800.0 43,500.0 3,300.0
Annual Compliance Costs
(Thousand Dollars).?/
Treatment Level 1 18,852.0 18,400.0 452.0
Treatment Level 2 17,170.0 16,700.0 470.0
Treatment Level 3 17,850.0 17,400.0 450.0
Treatment Level 4 35,200.0 32,900.0 2,300.0
£/ First-quarter 1982 dollars.
SOURCE: Environmental Protection Agency.
5-4
-------
TABLE 5-2. NEW SOURCE COMPLIANCE COSTS
Typical New Source With
Compliance Capital Investment
(Thousand DollarsXfL'
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Treatment Level 6
Annual Compliance Costs
(Thousand Dollars).*/
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Treatment Level 6
1 Line
ient
443.6
364.0
385.9
578.3
331.1
348.5
201.2
176.9
181. t)
329.5
188.0
196.3
2 Lines
672.3
557.7
584.9
876.6
499.9
528.2
305.0
268.1
274.4
499.4
283.8
297.5
3 Lines
857.5
703.6
746.0
1,118.0
640.0
673.7
389.0
342.0
350.0
637.0
363.4
379.5
4 Lines
1,019.1
836.2
886.5
1,328.6
760.6
800.6
462.3
406.4
415.9
757.0
431.8
450.9
5 Lines
1,165.1
956.0
1,013.6
1,519.0
869.5
915.3
528.5
464.7
475.5
865.5
493.6
515.5
6 Lines
1,299.7
1,066.5
1,130.7
1,694.6
970.1
1,021.1
589.6
518.4
530.5
965.5
550.7
575.1
£/ First-quarter 1982 dollars.
SOURCE: Environmental Protection Agency.
5-5
-------
6. ECONOMIC IMPACT ANALYSIS
This chapter provides an estimate of the economic impacts associated
with the costs of the effluent treatment technologies described in Chapter 5.
The analysis was based upon an examination of the estimated compliance costs
and other economic, technical, and financial characteristics of the 49 can-
making plants for which production and compliance costs data were available,
and used the methodology described in Chapter 2. The economic impacts exam-
ined include changes in industry profitability, plant closures, substitution
effects, changes in employment, shifts in imports and exports, and industry
structure effects.
The 49-plant sample represents approximately 55 percent of the discharg-
ing plants in the industry and contains a wide range of both large and small
plants. Therefore, the sample appears to adequately represent the industry
for the purposes of this study.
6.1 PRICE AND QUANTITY CHANGES
As described in Chapters 2 and 3, market competition is strong in the
metal can industry. For this reason, it was assumed that metal can manufac-
turers would attempt to absorb their compliance costs and would not adjust
prices. Consequently, the price changes due to the regulation would be zero.
It follows, also, that quantities demanded would not change because of the
regulations.
6.2 PROFIT IMPACT ANALYSIS
Table 6-1 presents the distribution of the annual compliance costs of
the 49 sample plants for each of the treatment alternatives for existing
sources (i.e., Treatment Level 1 to Level 4). Assuming a price of $90 per
6-1
-------
TABLE 6-1. SUMMARY OF PROFIT IMPACT ANALYSIS
Treatment Treatment Treatment Treatment
Level 1 Level 2 Level 3 Level 4
Number of Sample Plants with
Annual Compliance Costs to
Revenues between:
0 - 0.25 percent 24 24 25 1
0.25 - 0.50 percent 17 16 16 12
0.50 - 0.75 percent 67 6 14
0.75 - 1.00 percent 22 2 11
Over 1.00 percent 00 0 11
Number of Sample Plants with
After-Compliance ROI
Decrease (dROl) between:
0-0.5 percent 24 24 23 1
0.5 - 1.0 percent 13 12 12 10
1.0 - 2.0 percent 12 13 14 22
2.0 - 3.0 percent 00 0 11
over 3.0 percent!/ 00 05
5
.£/ Plants with dROI greater than 3 percent (i.e., with after-compliance ROI less
than 7 percent) are considered potential closures.
SOURCE: JRB Associates estimates.
6-2
-------
thousand cans (1982 dollars)!./ it is estimated that most of the plants have
annual compliance costs less than 0.5 percent of plant revenues at Treatment
Levels.1, 2, and 3. Such small compliance costs seem to indicate that the
impact on plant profitability will not be very significant. At Treatment
Level 4, compliance costs are substantially higher and there are eleven plants
with annual compliance costs greater than 1 percent of plant annual revenues.
As described in Section 2.5, the assessment of the impact of compliance
on plant profitability was based on the plants' after-compliance return on
investment (ROI) ratios, investment being defined as total plant assets
(i.e., current assets plus net property, plant and equipment). In the absence
of an industry financial survey, plant-specific baseline financial character-
istics (e.g., plant profit margin and assets value) were not available, thus
average industry financial ratios obtained from Robert Morris Associates'
Statement Studies (1981 edition) were attributed to each plant. The resulting
estimated baseline characteristics are described in Appendix B and summarized
below:
• Average before-tax profit margin (or return on sales)
is 5 percent
• Average total assets to sales ratio is 0.5 (i.e.,
turnover ratio is 2)
• Average before-tax ROI is 10 percent (return on sales
times turnover ratio).
Plants with after-compliance ROI less than 7 percent were considered to be
"potential" plant closures. Since the before-tax ROI is estimated to be 10
±J The U.S. Department of Commerce (Current Industrial Report-Metal Cans,
Summary for 1980) reported 41.91 billion aluminum seamless cans valued at
$3.63 billion were shipped in 1980, or an average selling price of $86.6
per thousand cans. Based on the Bureau of Labor Statistics Wholesale
Price Indexes of SIC 34112 (Aluminum Cans) for 1980 (150.1) and December
1981 (155.8), the price of aluminum cans was estimated to be approximately
$90 per thousand cans.
6-3
-------
percent, this means that plants with an ROI decrease (dROl) greater than 3
percent would be potential closures. Table 6-1 presents the distribution
of dROIs for the 49 sample plants. This table indicates that none of these
plants were found to be potential closures at Treatment Levels 1, 2, and 3.
At Treatment Level 4, five of the 49 sample plants were estimated to have
dROIs greater than 3 percent and were, therefore, considered to be "potential"
closures.
6.3 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 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
was calculated for each of the 49 sample plants and compared to the plants'
respective capital availability threshold values which were set at 3 percent.
Table 6-2 presents the results of the capital requirements analysis.
None of the plants were found to have CCI/R ratios greater than the threshold
value for all four treatment alternatives.
6.4 PLANT CLOSURE POTENTIAL
As indicated in the profit impact and capital requirements analyses,
Treatment Levels 1, 2, and 3 are not expected to cause any plant closures.
Meanwhile, at Treatment Level 4, five plants are estimated to be potential
closures on the basis of profitability impact.
Table 6-3 summarizes the results of the plant closure analysis for Treat-
ment Level 4 on the 49 discharging plants in the sample. As the table shows,
the plants projected to close at Treatment Level 4 operate 17 canmaking lines
6-4
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TABLE 6-2. SUMMARY OF CAPITAL REQUIREMENTS ANALYSIS
Treatment Treatment Treatment Treatment
Level 1 Level 2 Level 3 Level 4
Number of Sample Plants
with Compliance Capital
Investment to Annual
Revenues Ratios between:
0-1 percent 40 40 39 21
1-2 percent 9 9 10 22
2-3 percent 00 06
over 3 percent 00 00
SOURCE: JRB Associates estimates.
6-5
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TABLE 6-3. SUMMARY OF ESTIMATED POTENTIAL CLOSURES AMONG EXISTING SOURCES
FOR TREATMENT LEVEL 4
Number of Potential Plant Closures
Number of Can Lines Affected by Closures
Annual Production Capacity Affected
by Closures (million cans)
Actual Production of Closures
(million cans)
Market Share of Closures (% of
total shipments).!'
Average Capacity Utilization Rate (%)
Number of Employees Affected by Closures^.'
49-Plant
Sample
5
17
4,420
2,070
5.3
47
1,060
Projection to
Total 88
Discharging Plants
9
31
8,060
3,730
6.4
46
1,900
JL' Total annual production for 49 sample plants was 39.2 billion cans; total
industry shipments of seamless two-piece cans in 1981 was 58.1 billion cans,
B.' Assume average productivity of 1.95 million cans per employee (as explained
in Section 3.2).
SOURCE: JRB Associates estimates.
6-6
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and produce 2.1 billion cans per year. Assuming an average annual production
capacity of 260 million cans per line (as estimated on p. 4-4), these five
plants have a total annual capacity of 4.4 billion cans. The average capacity
utilization for these five plants is below 50 percent.
The above plant closure analysis focused on 49 sample plants with com-
plete data on production and compliance costs. Because the 49-plant sample
contains a wide range of plants of all sizes, the results of the analysis
appear to be representative of the impacts of the regulations on the total
industry and have been extrapolated to the total industry. Since there are
no potential plant closures estimated in the 49-plant sample for Treatment
Levels 1, 2, and 3, there would be no potential closures inferred for the
total 88 known dischargers in the industry. For Treatment Level 4, the
extrapolation of the plant closure analysis to all 88 discharging plants in
the industry is summarized in Table 6-3. This table shows that a total of
nine plants operating 31 can lines are projected to close at Treatment Level 4.
Total annual production of these nine plants is estimated to be approximately
3.7 billion cans and their annual capacity about 8 billion cans.
It should be noted that the baseline projections developed in Chapter 4
showed closures of 20 can lines by 1985 in the absence of additional regula-
tions. However, the identity of the plants that would close in the baseline
could not be determined because plant specific financial data were not avail-
able. It is possible that some of these plants were also projected to close
due to the regulations. Thus the number of plant closures due to the regula-
tions may be overestimated.
6.5 OTHER ECONOMIC IMPACTS
The proposed effluent regulations examined in this report may have
economic impacts other than the plant closure potentials discussed above.
The substitution potential of other processes and materials, and possible
community, employment, foreign trade, and industry structure implications,
will be addressed in the following sections.
6-7
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6.5.1 Substitution Effects
As indicated in Chapter 3, seamless two-piece metal cans face strong
competition from other types of containers. Price increases due to regulatory
compliance costs will likely cause a switch to other types of containers such
as glass and plastic bottles. However, as indicated in the profit impact analy-
sis described in Section 6.2, compliance costs are expected to be absorbed by
the can manufacturers. For this reason, no substitution effects are expected
to result from the regulations.
6.5.2 Community and Employment Impacts
Since there are no plant closures and substitution effects anticipated
for Treatment Levels 1, 2, and 3, there are no anticipated community and
employment impacts expected in the canmaking industry from these treatment
options. Meanwhile, at Treatment Level 4, a total of 1,900 employees could
be affected by the potential plant closures (see Table 6-3). The nine
facilities projected to close are each located in a different large municipality
where they account for a very small portion of the total labor force. Thus,
the impact on local employment situation will not be significant.
6.5.3 Foreign Trade Impacts
As stated in Chapter 3, foreign trade competition in the canmaking indus-
try is not significant. In addition, it is assumed that there will be no
price increases resulting from the regulations. Thus, no foreign trade impacts
are expected.
6.5.4 Industry Structure Effects
Since there are no projected plant closures at Treatment Levels 1, 2,
and 3, these treatment alternatives will have no effect on the structure of
the canmaking industry. At Treatment Level 4, nine plants are projected to
be potential closures. These plants account for 6 percent of total industry
6-8
-------
shipments (see Table 6-3), and their their market shares may be captured
by other existing producers thus increasing the industry concentration ratios.
However, the magnitude of this market share loss does not appear to be great
enough to change industry price-setting behavior.
6.6 NEW SOURCE IMPACTS
As reported in Section 5.2, two treatment alternatives (Treatment Level
5 and Level 6) are considered for canmaking new sources. Total system com-
pliance costs of these two alternatives for typical new sources are summarized
in Table 5-2.
For the purpose of evaluating the new source impacts, compliance costs
of new source standards were defined as incremental costs over the costs of
selected standards for existing sources. Table 6-4 presents the results of
the new source impact analysis assuming the selected treatment technology for
existing sources is Treatment Level 2. This table shows that incremental
annual compliance costs of new sources are less than 0.1 percent of annual
revenues for both new source treatment options; incremental costs of such
magnitude will not deter new entry. Meanwhile, compliance capital investment
costs for Treatment Levels 5 and 6 are-lower than Treatment Level 2 (because
the addition of nine-stage countercurrent rinsing to Treatment Levels 5 and
6 reduces the size of the treatment systems substantially relative to Treat-
ment Level 2); therefore the new source regulations will not impose dispro-
portionate capital requirements on new sources.
6-9
-------
TABLE 6-4. SUMMARY OF NEW SOURCE IMPACT ANALYSIS
Annual Production of a New Can Line (million cans) 300
Plant Costs ($ million) 15
Plant Revenues ($ million) 27
Treatment Level 5 CostsJ.'
Investment - $000 -32.9
Annual - $000 11.1
- % of Annual Revenues 0.04
Treatment Level 6 Costs£'
Investment - $000 -15.5
Annual - $000 19.4
- % of Annual Revenues 0.07
.£/ Incremental from Treatment Level 2,
SOURCE: JRB Associates estimates.
6-10
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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 affected. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
chapter addresses these objectives by identifying and evaluating the economic
impacts of the aforementioned regulations on small metal can producers. As
described in Chapter 2, the small business analysis was developed as an integral
part of the general economic impact analysis and was based on the examination
of the distribution by plant size of the number of can plants, plant production,
wastewater volumes, and compliance costs from the regulations.
As mentioned in Section 2, four alternative approaches were selected to
provide alternative definitions of small canmaking operations for purposes of
regulation development. These approaches were based on the following factors:
• The Small Business Administration (SBA) definition
of small business based on firm total employment;
• Plant annual production;
• Plant number of can lines; and
• Plant wastewater flow rates.
7.1 SMALL BUSINESS ANALYSIS BASED ON SMALL BUSINESS ADMINISTRATION DEFINITION
The Small Business Administration defined small canmaking businesses as
companies with less than 1,000 employees in total. Based on this definition,
7-1
-------
none of the identified two-piece can operations can be considered as small busi-
nesses as they are all owned by companies that employ more than 1,000 people.
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT ANNUAL PRODUCTION
Table 7-1 presents the distribution by annual production of the number
of can plants, plant production, flow rates, and compliance costs. The three
size categories considered are:
• Plants with annual production less than 500 million
cans;
• Plants with annual production between 500 and 750
million cans; and
• Plants with annual production between 750 million
and 1 billion cans.
Table 7-1 indicates that at Treatment Level 2, the eleven plants with
annual production less than 500 million cans discharge 16.6 percent of the
total wastewater discharged, while they account for 11.6 percent of total
annual production and 20 percent of total annual compliance costs. In con-
trast to these small plants, the eleven plants with annual production over
1 billion cans discharge 29.7 percent of the wastewater and incur only 20.7
percent of total annual compliance costs. Finally, this table also shows
that the unit annual compliance costs ($ per thousand cans) are also greater
for small plants ($0.35 for plants with less than 500 million cans in produc-
tion at Treatment Level 2) than for larger plants ($0.10 for plants with
production over 1 billion cans).
7.3 SMALL BUSINESS ANALYSIS BASED ON PLANT NUMBER OF LINES PER PLANT
Since the production technology -and equipment are quite similar among
plants in the two-piece can industry, the number of lines in a plant generally
7-2
-------
TABLE 7-1. SUMMARY OF SMALL BUSINESS ANALYSIS BY PLANT ANNUAL PRODUCTION
Plants With Annual Production (in Million Cans)
<5.00 500-750 750-1,000 > 1,000- Total
No. of Plants - Number 11 20 7 11 49
- % of Total 22.4 40.8 14.3 22.4 100.0
Flow Rate - 000 GPH 38.0 80.7 42.6 68.0 229.3
- % of Total 16.6 35.2 18.6 29.7 100.0
Annual Production - Billion cans 4.54 12.06 6.03 16.60 39.23
- % of Total 11.6 30.7 15.4 42.3 100.0
Treatment Level 1 Costs
Investment - $000 3,208 6,671 3,172 3,267 16,318
- % of Total 19.7 40.9 19.4 20.0 100.0
Annual - $000 1,563 3,197 1,449 1,595 7,805
- $/000 cans 0.34 0.27 0.24 0.10 0.20
- % of Total 20.0 41.0 18.6 20.4 100.0
Treatment Level 2 Costs
Investment - $000 3,194 6,489 3,114 3,158 15,955
- % of Total 20.0 40.7 19.5 19.8 100.0
Annual - $000 1,609 3,270 1,514 1,672 8,065
- $/000 cans 0.35 0.27 0.25 0.10 0.21
- % of Total 20.0 40.5 18.8 20.7 100.0
Treatment Level 3 Costs
Investment - $000 3,564 7,156 3,373 3,788 17,881
- % of Total 19.9 40.0 18.9 21.2 100.0
Annual - $000 1,689 3,410 1,733 1,787 8,619
- $/000 cans 0.37 0.28 0.29 0.11 0.22
- % of Total 19.6 39.6 20.1 20.7 100.0
Treatment Level 4 Costs
Investment - $000 6,995 13,779 6,028 9,035 35,837
- % of Total 19.5 38.5 16.8 25.2 100.0
Annual - $000 4,280 8,510 4,075 5,826 22,691
- $/000 cans 0.94 0.71 0.68 0.35 0.58
- % of Total 18.9 37.5 18.0 25.7 100.0
Potential Closures at
Treatment Level 4
Number of Plants 32005
Number of Lines 9 8 0 0 17
SOURCE: JRB Associates estimates.
7-3
-------
represents the production capacity of that plant. For this reason, a small
business analysis based on the plant number of lines per plant seems to be
appropriate.
Table 7-2 shows that the 23 sample plants with one and two lines discharge
36.5 percent of the total wastewater discharged and account for 32.9 percent
of total annual production and 38 percent of Treatment Level 2 total annual
compliance costs. On the other hand, plants with five can lines or more
generate 12.4 percent of total wastewater discharged and incur less than 10
percent of total annual compliance costs. In terms of unit compliance costs,
they vary between $0.23 per thousand cans for the small plants (with one or
two lines) and $0.12 per thousand cans for the larger plants (with five lines
or more), respectively.
7.4 SMALL BUSINESS ANALYSIS BASED ON PLANT FLOW RATES
For purposes of developing water pollution regulations, plant wastewater
flow rate is a reasonable definition of plant size, as flow rates often vary
with production volume. Additionally, plant flow rate often correlates with
pollutant volume.
Table 7-3 presents the distribution of the 49 canmaking sample plants by
plant flow rates for the number of plants, plant production, and compliance
costs. The plant size categories are as follows:
• Plants with less than 1,000 gallons per hour (gph);
• Plants with 1,000 to 2,000 gph;
• Plants with 2,000 to 5,000 gph; and
• Plants with 5,000 to 10,000 gph.
Table 7-3 indicates that about 8 percent (4 plants) of the 49 sample
plants discharge less than 1,000 gph. These "small" plants account for 0.2 per-
cent of total wastewater discharged and about 6 percent of total can production,
while they account for 14 percent of total annual compliance costs at Treatment
7-4
-------
TABLE 7-2. SUMMARY OF SMALL BUSINESS ANALYSIS BY PLANT NUMBER OF LINES
Plants With the Following Number of Lines:
2 or Less 3 4 5 or More Total
No. of Plants - Number
- % of Total
Flow Rate - 000 GPH
- % of Total
Annual Production - Billion cans
- % of Total
Treatment Level 1 Costs
Investment - $000
- % of Total
Annual - $000
- $/000 cans
- % of Total
Treatment Level 2 Costs
Investment - $000
- % of Total
Annual - $000
- $/000 cans
- % of Total
Treatment Level 3 Costs
Investment - $000
- % of Total
Annual - $000
- $/000 cans
- % of Total
Treatment Level 4 Costs
Investment - $000
- % of Total
Annual - $000
- $/000 cans
- % of Total
Potential Closures at
Treatment Level 4
Number of Plants
Number of Lines
23
46.9
83.7
36.5
12.89
32.9
5,906
36.2
3,004
0.23
38.5
5,897
37.0
3,068
0.24
38.0
6,516
36.4
3,367
0.26
39.1
13,152
36.7
8,244
0.64
36.3
1
2
10
20.4
40.6
17.7
7.08
18.0
3,275
20.0
1,549
0.22
19.8
3,230
20.2
1,615
0.23
20.0
3,597
20.1
1,682
0.24
19.5
7,319
20.4
4,555
0.64
20.1
1
3
11
22.4
76.6
33.4
12.69
32.3
5,656
34.7
2,479
0.20
31.8
5,342
33.5
2,595
0.20
32.2
5,929
33.2
2,699
0.21
31.3
10,792
30.1
6,917
0.55
30.5
3
12
5
10.2
28.5
12.4
6.57
16.7
1,481
9.1
772
0.12
9.9
1,486
9.3
788
0.12
9.8
1,839
10.3
872
0.13
10.0
4,574
12.8
2,975
0.45
13.1
0
0
49
100.0
229.3
100.0
39.23
100.0
16,318
100.0
7,805
0.20
100.0
15,955
100.0
8,065
0.21
100.0
17,881
100.0
8,619
0.22
100.0
35,837
100.0
22,691
0.58
100.0
5
17
SOURCE: JRB Associates estimates.
7-5
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Level 2. Meanwhile, the two plants with flow rates over 10,000 gph discharge
10.9 percent of the wastewater and account for only 5 percent of Treatment
Level 2 total annual compliance costs. Unit annual compliance costs vary
between $0.47 per thousand cans for "small" plants with wastewater flow rates
less than 1,000 gph to $0.28 per thousand cans for plants with over 10,000 gph.
7-7
-------
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 the data used in the analysis, 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.
In the absence of a financial survey for the canmaking industry, a
financial profile of the canmaking 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:
• The economic impact analysis was based on a sample
of 49 discharging plants for which both production
data (obtained from EPA 308 industry surveys) and
compliance cost estimates were available. This 49-
plant sample contains a wide range of plants of all
sizes and appears to be representative of the total
industry.
• Production data for most plants were reported in terms
of number of cans produced. For several plants produc-
tion data were reported in pounds and were converted to
number of cans assuming 34 aluminum cans per pound and
13 steel cans per pound.
8-1
-------
• An average industry price of $90 per thousand cans was
used to derive sales revenue estimates for each sample
plant.
• Lacking plant specific operating ratios such as profit
margin and asset values, industry average estimates
were applied to the plants. The methodology for esti-
mating these financial variables is explained in
Appendix B.
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 availa-
bility analyses,
8.2.1 Price Increase Assumptions
Because of strong competition within the canmaking industry and with other
types of packaging, it was assumed that the can manufacturers would attempt
to absorb their compliance costs and would not raise their prices. If prices
could be raised without significantly affecting demand, the impacts on can-
making firms would be lower than those estimated in Chapter 6.
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
8-2
-------
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 does not account for the time
value of money, it is widely used in comparative financial analyses and is
simple to apply. Moreover, in a situation such as the analysis conducted in
this study, both methods are likely to indicate the same impact (i.e., plant
closure) conclusions.
Finally, long-term profitability estimates were used to project closures
since major investment decisions are made primarily on the basis of long-run
expectations. Economic analysis generally distinguishes between long-run and
short-run outcomes. Decisions 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 fixes 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
The capital investment requirements 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 capital requirement.
8.3 SUMMARY OF LIMITATIONS
Although the above factors may affect the quantitative accuracy of the
impact assessments on specific canmaking plants, it is believed that the
results of this study represent a valid industry-wide assessment of the
economic impacts likely to be associated with effluent guideline control
costs.
8-3
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
To assess the impact of compliance on plant profitability, the plants'
after-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 EOUITY ASSETS
BTROE x
ASSETS
ATROE x
(1 - t)
EQUITY
ASSETS
(1)
where
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.
A-l
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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 A-l presents estimates of profit impact threshold values based on
various assumptions on assets liquidation value and equity-to-assets ratio.
A-2
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TABLE A-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)
Equity/Assets Ratio
0
0
0
0
0
0
0
0
0
.30
.35
.40
.45
.50
.55
.60
.65
.70
60%
*
*
*
1
2
3
4
5
6
.0
.0
.0
.0
.0
.0
70%
*
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
CORPORATE TAX
Assets
Equity/Assets Ratio
0
0
0
.60
.65
.70
60%
4
4
5
.3
.6
.0
75%
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
RATE:
Liquidation
70%
6.0
6.5
7,0
75%
6.8
7.4
8.0
80%
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
35%
Value
80%
7.7
8.3
8.9
85%
3
4
5
6
7
8
9
10
11
.0
.0
.0
.0
.0
.0
.0
.0
.0
(Percent
85%
8
9
9
.5
.2
.9
90%
4
5
6
7
8
9
10
11
12
of
.0
.0
.0
.0
.0
.0
.0
.0
.0
Book
90%
9
10
10
.4
.2
.9
100%
6.0
7.0
8.0
9.0
10.0
11.0
12.0
. 13.0
14.0
Value)
100%
11.1
12.0
12.9
A-3
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APPENDIX B
ESTIMATION OF KEY FINANCIAL PARAMETERS
OF CANMAKING INDUSTRY
-------
APPENDIX 3
ESTIMATION OF KEY FINANCIAL PARAMETERS
OF CANMAKING INDUSTRY
Table B-l presents the methodology for estimating three key financial
ratios used in the economic impact analysis: plant baseline return on sales
(profit margin), assets to sales, and stockholders' equity to sales ratios.
Data used to estimate these three ratios are obtained from Robert Morris
Associates' (RMA) Statement Studies, 1981 edition.
B-l
-------
TABLE B-l. SELECTED FINANCIAL RATIOS FOR CANMAKING INDUSTRY
Profit Before Taxes
(% of Sales)
Assets to Sales
Stockholders' Equity
(% of Total Assets)
1976 1977 1978 1979 1980
1.7 5.2 4.8 6.9 5.1
0.60 0.57 0.58 0.45 0.41
46.7 47.3 49.1 44.7 53.4
Estimated
Industrya/
Average~
5.0
0.53
47.7
.£/ Average of 1976-1980 ratios, excluding the lowest and the highest years,
SOURCE: JRB Associates estimates based on published financial data for
Metal Cans industry (SIC 3411) from Robert Morris Associates'
Statement Studies, 1981 edition.
B-2
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