•SK.
             United States
             Environmental Protection
             Agency
            Effluent Guidelines Division
            WH-552
            Washington OC 20460
EPA 440/2-83404
March 1983
             Water and Waste Management
                         Impact Analysis
for Proposed Effluent
Limitations and  Standards
forjthe Organic Chemicals,
Plastics and Synthetic
Fibers Industry
                         QUANTITY

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     This document is an economic impact assessment of the recently-proposed
effluent guideline.  The report is available to the affected industry and
other parties wishing to comment on the rule.  The report is also being
distributed to EPA Regional Offices and state pollution control  agencies,
where it is directed to the staff responsible for writing industrial
discharge permits.  The report includes detailed information on  the
costs and economic impacts of various treatment technologies.  It should
be helpful  to the permit writer in evaluating the economic impacts on an
industrial  facility that must comply with BAT limitations or water quality
standards.   The report is also being distributed to EPA Regional  Libraries.
     If you have any questions about this report, or if you would like
additional  information on the economic impact of the regulation,  please
contact the Economic Analysis Staff in the Office of Water Regulations
and Standards at EPA Headquarters:
                       401 M Street, S.W. (WH-586)
                       Washington, D.C. 20460
                       (202) 382-5397
The staff economist for this project is Harold D. Lester (202/382-5380).

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ECONOMIC IMPACT ANALYSIS OF PROPOSED EFFLUENT LIMITATIONS AND
                          STANDARDS
                  FOR  THE ORGANIC  CHEMICALS,
                PLASTICS AND SYNTHETIC FIBERS
                           INDUSTRY
                        Prepared for

            U.S. Environmental Protection Agency
              Office of Analysis  and Evaluation
                   Washington,  D.C.   20460

                             by

                      Meta Systems Inc
                  Cambridge/ Massachusetts
                             and

           incorporating information prepared by

                    Data Resources,  Inc.

                     Chem Systems Inc.

                     Pace Company, and

                    JRB Associates,  Inc.

                       February 1983

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MENTION OF TRADE NAMES OR COMMERCIAL PRODUCTS DOES NOT
   CONSTITUTE ENDORSEMENT OR RECOMMENDATION FOR USE

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                                 PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA).
The purpose of the study is to analyze the economic impact which could
result from the application of effluent standards and limitations (issued
under Section 301, 304, 306 and 307 of the Clean Water Act) to the coal
mining industry.

The study supplements the technical study (EPA Development Document)
supporting the issuance of these regulations.  The Development Document
surveys existing and potential waste treatment control methods and
technology within particular industrial source categories and supports
certain standards and limitations based upon an analysis of the feasibility
of these standards in accordance with the requirements of the Clean Water
Act.  Presented in the Development Document are the investment and
operating costs associated with various control and treatment technologies.
The attached doucment supplements this analysis by estimating the broader
economic effects which might result from the application of various control
methods and technologies.  This study investigates the effect in terms of
product price increases, effects upon employment and the continued
viability of affected plants, effects upon foreign trade and other
competitive effects.

The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA.  This report was submitted in
fulfillment of Contract No. 68-01-6426 by Meta Systems, Inc.  The analysis
was completed in February 1983.

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                              Table of Contents
 Section  1.   Executive Summary	1-1
         Introduction	1-1
         The  Economic Assessment Methodology	1-1
         Industry  Profile 	   1-3
         Estimation  of Treatment Costs	1-5
         Economic  Impact Analysis Results ...  	   1-6
         Limits  of the Analysis	1-8

 Section  2.   Methodology	2-1
         Introduction 	   2-1
         Structure of the Industry	2-1
         Treatment Cost Estimates 	   2-9
         Impact  Analysis.	2-9

 Section  3.   Industry Profile  	   3-1
         Overview	3-1
         Basic and Intermediate  Chemicals  	   3-2
         Finished  Chemicals:   Market Characteristics	3-5
         Companies	3-6
         Financial Profile	3-7
         Establishments	3-7

 Section  4.   Effluent  Control  Guidelines and Costs	4-1
         Treatment Technologies  	 ....   4-1
         Treatment Costs	4-1

 Section  5.   Economic  Impact Analysis 	   5-1
         Summary of Results	5-1
         1985 Base Case	5-1
        Best Practicable Technology (BPT) Regulations	5-4
        Toxic Pollutant Regulations	5-6

Section  6.  Limits of Analysis  	 ....... 	   6-1
        Introduction  	   6-1
        Treatment Costs	6-2
        Industry-wide Analysis 	  6-2
        Detailed Product Study 	  6-3
        Sensitivity  Analysis .	6-4

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                              Table of Contents
                                 (continued)
Appendix 2A.  Capital Recovery Factory	    2A-1

Appendix 2B.  Demand/Supply Methodology 	    2B-1
         General Approach 	    2B-1
         Development of Base Case	    2B-10
         Resource Conservation and Recovery Act 	    2B-21
         BPT Methodology	    2B-21
         BAT and PSES Analysis Methodology	„  .    2B-26
         NSPS/PSNS Regulations	    2B-26

Appendix 2C.  Methods of Estimating Impacts 	    2C-1
         Total Costs of Compliance	    2C-1
         Product Impacts	    2C-1
         Closure Analysis 	    2C-2
         Process Impacts	    2C-5
         Establishment Impacts	    2C-7
         Employment Impacts	    2C-7
         Capital Availability 	    2C-8
         Balance of Trade Impacts 	    2C-11
         Small Business Impacts 	    2C-11

Appendix 3A.  Industry Profile.	    3A-1

Appendix 4A.  Modification of Original GPC Costs	    4A-1
                                         11

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                           List of Tables
Table 1-1.
3-1.
4-1.
4-2.
4-3.
5-1.
5-2.
5-3.
5-4.
5-5.
5-6.


Regression Coefficients and Statistics for



Base Case Price and Production Forecast
Product Group Cost Increases Due to BPT .....
Differential Impact of BPT
Product Group Cost Increases Due to BAT and PSES . .
Products Significantly Affected by
Page
1-7
3-3
4-3
4-7
4-7
5-2
5-3
5-5
5-7
5-8
5-10
5-7.   Processes with Reductions in Cash Flow
          of Three Percent or More.	   5-10

5-8.   Processes with Increase in Cash Flow
          of Three Percent or More	   5-11
                                  111

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                           List of Tables
                             (continued)
                                                               Page

5-9.   Effects of Toxic Pollutant Regulations on Chemicals
          Judged Vulnerable  In International Markets.  .  . .    5-13

5-10.  Differential Impact of. BAT/PSES Costs on Establish-
          ments at Small and Large Firms	    5-14

2A-1   Alternative Derivations of the Capital Recovery
          Factor	    2A-5

2B-1.  Algebraic Representation of
          Aggregate Supply Model	    2B-5

2B-2.  Process Economics for Bthylene from Ethane 	    2B-6

2B-3.  Capsule Summary of the Long-Term Forecast	    2B-11

2B-4.  Capsule Summary of the Economy:
          TRENDLONG 0682.	    2B-13

2B-5.  Energy Product Price Forecast
          (Gulf Coast, Contact Basis)	    2B-14

2B-6.  Share of Total Production Covered
          by LP Model	    2B-16

2B-7.  Input Cost Shares for Nonmodel Product Groups. . . .    2B-19

2B-8.  Forecasts of Cost Indices,  1979 to 1985	    2B-20
                                   iv

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                                List of Figures



                                                                       Page

Figure 2-1.   Depiction of Industry Database	      2-2

       2-2.   Relationship of Establishments,
                 Plants and Processes	      2-4

       2-3a.   Product/Process Relationships ... 	      2-6

       2-3b.   Input/Output Matrix Representation	      2-6

       2-4.   Relationship of Major Analytical Segments 	      2-8

       2-5.   Base Case	      2-11

       3-1.   Derivation of Benzene	        3-4

       2B-1.   Demand  Forecast Methodology  	      2B-3

       2B-2.   Demand/Supply Solution Procedure	      2B-9

       2B-3.   Information Flows  for Base Case
                 Forecast of Model and  Nonmodel
                 Product Groups  	      2B-17

       2B-4.   Flow Chart of BPT  Methodology	      2B-22

       2B-5.   Information Flows  of Toxic Pollutant Analysis . . .       2B-27

       2C-1.   Capital Availability Analysis	        2C-9

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                                    Section  1

                                Executive  Summary
 Introduction

     This report provides an identification and analysis of the economic
 impacts which are likely to result from the promulgation of EPA's effluent
 regulations on the Organic Chemicals and Plastics Industry.  The regula-
 tions include effluent limitations and standards based on Best Practicable
 Control Technology Currently Available (BPT), Best Available Technology
 Economically Achievable (BAT),  New Source Performance Standards (NSPS),
 and Pretreatment Standards for  New and Existing Sources (PSNS and PSES),
 which are being proposed under  authority of Section 301, 304, 306,  307,
 and 501 of the Federal Water Pollution Control Act, as amended by the
 Clean Water Act of 1977 (Public Law 95-217).   The primary economic  impact
 variables assessed in this study include the  costs of the proposed
 regulations and potential for these regulations to cause plant closures,
 price changes,  unemployment, changes in the industry structure and
 competition, shifts in the balance of foreign trade, new source impacts,
 and impacts on small businesses.

     The organic chemicals and plastics industry is defined as establishments
 which manufacture organic chemicals,  plastic  resins and synthetic fibers.
 EPA has estimated that as many  as 2100 manufacturers may be affected by this
 regulation.   This estimate is based on a projection.  EPA identified 1481
 establishments  from available data sources with sufficient data to  conduct
 an  economic impact analysis. These include 1175 establishments which have
 their primary line of business  in Standard Industrial Classification (SIC)
 groups:   SIC 2821 (Plastics Materials and Resins),  SIC 2823 (Cellulosic
 Manmade Fibers),  SIC 2824 (Organic Fibers Noncellulosic),  SIC 2865  (Cyclic
 Crudes and Intermediates),  and  SIC 2869 (Industrial Organic Chemicals;  not
 elsewhere classified),* and establishments which manufacture major  volume
 organic  chemicals or plastics but  do  not  have their primary line of  business
 in  these five SIC groups.   Therefore,  the total data base  included  in the
 analysis contains the 1,481 establishments identified which manufacture
 organic  chemicals,  plastic  resins  and synthetic fibers.
The Economic Assessment Methodology

    The principal elements of the assessment methodology are:  an
industry-wide establishment level impact analysis and a detailed product
study.  The impacts of the proposed regulations on the organic chemicals
and plastics industry are measured in terms of change in prices,
production, capacity expansion, establishment closures, plant (product
line) shut downs, and employment.  These impacts can result from two types
of increases in production costs:  1) increases due to compliance with the
   * Standard Industrial Classification Manual, Executive Office of the
President, Office of Management and Budget, 1972.  List of establishments
based on information from Economic Information Systems (EIS) and NPDES
permits.

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proposed  regulations;  and  2)  increases  due  to  increases  in  the  prices  of
feedstock  chemicals.   These feedstock chemical price  increases  are  due to
treatment  costs  that would result from  installing  the treatment
technologies on  which  these proposed regulations are  based.

    The industry-wide  establishment level analysis  is conducted on  the
basis of  the 1,481 establishments identified above.   The  total  cost to the
industry  of each proposed regulation is calculated  from  estimates of
treatment  costs  for individual establishments.  The impact  of the
regulations on individual establishments is analyzed  in terms of the ratio
of treatment costs to  annual  sales, plus information  on the competitive
positions  of establishments.  The impact on product prices  is estimated on
the basis  of treatment costs, forecasts of increases  in production  costs,
and information  on price changes derived from the detailed product  study.

    The detailed product study is based on a supply-demand model of  a
large part (68 percent) of the industry.  This analysis produces a
baseline estimate of price, outputs, operating levels of processes,  and
capacity forecasts; and then estimates the impact of  the waste  treatment
costs on these variables.  The model consists of individual production
processes, not establishments.  The 1985 demand estimates are derived  by
linking a  long-range forecast of the nation's economy with demand
equations  for end-use products.*  The end-use product demand forecasts are
translated upstream to intermediate and basic chemical production demand
forecasts  through the operation of the supply model.  The supply model is
a linear programming (LP) model constructed to minimize the costs of
meeting the chemical demands for the industry (as represented by the
model) subject to various chemical mass balance and production cost
requirements.   It is based on a representation of the major chemical
processes, and incorporates the multiple levels of production which
characterize this industry.  Changes in prices at the basic chemical level
filter through to the more refined products; changes in the demand for
end-use products are translated back to the basic chemical level through
derived demand for the basic and intermediate chemical products needed to
make the end-use products.

    The impacts  are measured by incremental changes from the preceeding
level of regulation.  BAT and PSES are therefore incremental to BPT.  BPT
impacts are incremental to current treatment in place.

    Based on the results of the product case study, the following impacts
are analyzed:   plant closures, changes in employment,  impacts on capital
availability and prices impacts on the balance of trade and impacts on small
businesses.
   * These forecasts are based on models developed by Data Resources Inc.
(DRI).
                                      1-2

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 Industry Profile*

     The chemical industry is large, placing fourth in sales among 20
 manufacturing industries in 1979.  Chemical companies are becoming more
 diversified.   Before 1950, most producers were firms with over 50 percent
 of their sales in chemicals.  In 1979, only 37 of the top 100 producers
 could be called traditional chemical companies; and of the top 10, five
 were oil companies.

     Employment by the industry is 2.8 percent of total employment for the
 manufacturing sector.  Total employment is estimated at 295,000 persons.
 Average sales per employee vary within the industry from $174,000 for
 agricultural  chemicals to $63,000 for cellulose fibers.  The industry
 average was twice the average for all of manufacturing in 1977.

     The industry is  a net exporter and thus contributes to the nation's
 balance of payments.   In 1979,  the net balance for the industry was about
 $10 billion.
     Companies

     Firms  are  described by  firm groups,  sales,  and  employment.   Sixteen
 firm groups  are  used  to classify a  sample  of  600  firms  that  manufacture
 organic  chemicals.  The groups  cover  a  wide range of  enterprises from
 specialty  chemical  companies  to multi-industry  companies  whose  major
 business activities are not those of  chemical production.  Company sales
 data were  available for only  395 firms.

     o   Based  on the  395 firms,  thirty-six percent  of the  firms have
         annual sales  of less  than $25 million,  while  5  percent  have
         annual sales  of $10 billion or  more.  However,  the top  5
         percent  account for 62  percent  of  total sales while  the
         bottom 36 percent of  firms  account for  less than one percent
         of total sales.

     o    Petroleum,  Natural  Gas  and  Chemicals  firms account for  about
         7 percent of  the total  number of firms  but 53 percent of
         total sales.

     o    The parent  firms tend to  be large, with 25 percent of the
         firms having  10,000 or more employees.  The lowest
         concentration (5 percent) of  firms is in the  smallest
         employment category of fewer  than  20 employees.
   * Based largely on the Kline Guide to the Chemical Industry, Fourth
Edition, Industrial Marketing Guide IMG 13-80.
                                      1-3

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    Financial Profile

    The financial profile describes  the  178 publicly-owned  companies  for
which 10-K  reports are available.  Comparable data  are  not  available  for
privately-owned firms.

    o   Nearly half of the publicly  owned  companies fall  in an
        intermediate sales category  of $1  to $10  billion.   About  20
        percent of the firms are in  the  smallest  sales  category
        (under $250 million), and 11 percent are  in. the largest
        category (over $10 billion).

    o   High profits generally correlate with high  volume of sales.
        Petroleum, Natural Gas and Chemicals firms  account  for the
        highest profits, 50 percent of the total.   The  Multi-Industry
        firm group is ranked second and accounts  for 17 percent of
        total profits.

    o   Capital expenditures (and also total assets) are high for
        firms with high sales and profits.  The firm group  Petroleum,
        Natural Gas and Chemicals accounts for 62 percent of all  the
        capital expenditures.  Multi-Industry firms  rank second and
        account for 14 percent.
    Establishments
    Establishments were categorized according to type of manufacturing,
employment, sales, geographical location, discharger status, types of
products and ownership.  Some of the most significant establishment
characteristics are as follows:

    o   Total sales of the 1,167 establishments was $50.6 billion in
        1979, with average establishment sales of $130 million for
        the Basic Chemicals establishment group, $120 million for the
        Intermediate Chemicals group, and $30 million for the End-Use
        Chemical groups.

    o   About 84 percent of the establishments are in the End-Use
        Chemicals group with 55 percent of total sales.  Eleven
        percent are in the Intermediate Chemicals establishment group
        with 30 percent of total sales.  About five percent are in
        the Basic Chemicals group with 15 percent total sales.

    o   In terms of employment, only 12 percent of the Basic Chemical
        establishments are in the small employment category and 21
        percent of the Intermediate Chemicals establishments are
        small.   By contrast,  in th€: three End-Use Chemical groups
        combined, 41 percent of the; establishments are small.
                                      1-4

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      The parent companies of the establishments were identified and related
 to products.

     o   The firm group Industrial Chemicals and Synthetic Materials
         owns  the most  establishments  with  361  (31  percent of  the
         total).

     o   Ownership of establishments  in the Basic Chemicals group is
         concentrated in the  Petroleum Natural  Gas  and Chemicals firm
         group with 25  establishments  (44 percent),  and in the
         Industrial Chemicals and Synthetic Materials firm group with
         18  establishments (32 percent).

     o   Ownership of establishments in the Intermediate Chemicals
         group is concentrated in the  Industrial Chemicals and
         Synthetic Materials  firm group with 72  establishments (57
         percent).

     o   Ownership of establishments in the three End-Use Chemicals
         groups  is also  concentrated in the Industrial and Synthetic
         Materials firm  group with 271 establishments (28 percent).
Estimation of Treatment Costs
    EPA developed BPT cost estimates for a sample of 169 actual facilities
and BAT/PSES costs for 55 model facilities called Generalized Plant
Configurations  (GPCs).  Relationships were estimated between these costs and
characteristics of the facilities, for BPT costs and for BAT/PSES costs,
separately.  These relationships were used to estimate treatment costs for
the other establishments, and in some cases the production processes used by
establishments.

    EPA developed data on wastewater flow, effluent levels and the costs of
meeting a long term average of 20 mg/1 for BOD5 and TSS for 169 direct
dischargers.*  Relationships estimated from these data in turn were used to
estimate costs at each remaining direct discharger.  Of the 1,481 establish-
ments in the analysis, 566 are direct dischargers.  Therefore, 397
establishments required cost estimates.  The total cost of complying with
the proposed BPT regulation is the sum of costs for these 566 direct
dischargers.

    All of the BAT and PSES cost estimates are based on cost estimates for
55 GPCs reported in the Technical Development Document.**  BAT costs apply
   * Walk, Haydel and Associates, Inc., Contractor's Engineering Report:
Analysis of Organics and Plastics Industries, for EPA Effluent Guidelines
Division, 1981.

   ** Contractors Engineering Report;  Analysis of Organic Chemicals and
Plastics/Synthetic Fibers Industries, Toxic Pollutants, Volume 1. EPA,
November 16, 1981, Contract No. 68-01-6024.
                                     1-5

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to wastewater flows discharged directly to surface waters and PSES  costs
apply to flows discharged into Publicly Owned Treatment Works.  While  the
procedures for estimating BAT and PSES costs are the same, the costs for
the two regulations are not identical.  The treatment sequence for  each GPC
takes into consideration the economies of scale provided by treating the
combined effluents of different plants in an establishment.  The BAT and the
PSES costs differ due to differences in the pollutants controlled and
because of the BPT treatment in place for direct dischargers.  Costs for all
regulations are estimated for both individual establishments and specific
products and processes.
Economic Impact Analysis Results

    This section examines the total costs to the industry and the asso-
ciated economic impacts of proposed treatment regulations.  The results of
these analyses are summarized in Table 1-1.

    BPT impacts

    The BPT costs place a relatively small burden on the industry as a
whole.  The impacts are summarized as follows:

    o   Total Cost of Compliance.  The total annualized* cost of compliance
        is $84.9 million; the total capital cost is $254.6 million. These
        figures may be compared with estimated 1985 total sales of $50.6
        billion.

    o   Establishments.  Out of 1,481 establishments, 566 are direct
        dischargers subject to regulation and 405 are required to upgrade
        treatment.

    o   Product Groups.  The largest percentage cost increase experienced by
        a major product is 0.16 percent for Plasticizers.

    o   Closure.  No closures are likely.

    o   Employment.  No employment changes are expected to result from the
        regulation.

    o   Capital Availability.  No impacts are predicted.

    o   Balance of Trade.  No impacts are predicted.

    o   Small Business Impacts.   No differences in impacts are predicted
        between small and large  finns.
   *The basis for annualization is a capital recovery  factor  of  .22.
                                      1-6

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                      Table  1-1.   Impact Analysis Summary
                                 (1979 dollars)
                                                       Total  for All
                                                       Toxic  Pollutant
                             I  BPT  |   BAT* |   PSES* I   Regulations
 Number  of  Establish-
   ments Incurring  Costs       405     453    1093          1346

 Cost  of Compliance
   (millions  $)
   -   Total Annualized           84.9   195.7    324.9          523.5*
   -   Capital                   254.6   418.5    708.7        1,133.5*

 Establishment -
   Average Cost-to-        .
      Sales Ratios                0.12%    1.38%   1.18%         1.25%

 Closures
   -   Plants                       N.A.    9      12            21
   -   Establishments              053             8

 Employment Loss                  0     376     117            493
   * The regulations affect new capacity.  These costs are not included in the
BAT/PSES costs shown here.  The additional costs for new capacity in 1985 are
estimated to be $4.1 million capital costs for BAT and $2.2 million for PSES.
These costs are included in the total costs.
    Toxic Pollutant Regulations

    The impacts of the toxic pollutant regulations are incremental over
BPT.  The impacts are summarized as follows:

    o   Total Cost of Compliance.  The total annualized cost of
        compliance is $523.5 million, of which:  BAT costs are $195.7
        million; PSES costs are $324.9 million; NSPS costs are $1.9
        million; and PSNS costs are $1.0 million.

    o   Establishments.   The average cost to sales ratio for all
        establishments with toxic regulation costs is 1.25 percent.
                                      1-7

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    o   Products and Product Groups.  For the fourteen major product
        groups, the average cost increase resulting from BAT is 0.2
        percent, and the average increase from PSES is 0.3 percent.
        The average price increase for products in the detailed
        product study is 0.58 percent with a decrease of 0.22 percent
        in their total 1985 production.

    o   Processes.  Six processes experience a reduction in cash flow
        of three percent or more.

    o   Closures.  Eight establishments are likely to close.  In
        addition, 21 plants (or product lines) may close.

    o   Employment.   Closing the eight establishments will affect 344
        persons, and the closing of 21 plants will affect 149 persons.

    o   Capital Availability.   An increase in capital expenditures of
        15 percent is predicted to result from the proposed
        regulations.

    o   Balance of Trade.  No  impacts are predicted.

    o   Small Business Impacts.  No differences in impacts are
        predicted between small and large firms.
Limits of the Analysis

    Treatment Costs

    o   Treatment costs were based on a set of model establishments
        which were not defined in terms of site-specific information.

    o   PSES costs might be overestimated.  The technology basis for
        BAT and PSES is the same, although in fact indirect
        dischargers might not use biological treatment;  and all
        plants not known to be direct dischargers  were assumed to be
        indirect dischargers.

    o   Since the 308 data was collected in the late 1970's,  the
        industry has made improvements since then  in treatment in
        place.


    Industry-wide Analysis

    o   Because of limitations in the data,  the establishment closure
        analysis was limited to examining  the treatment  cost  to sales
        ratio.   This ratio is  likely  to be a good  measure of  the
        burden felt by establishments.

    o   For the 306 establishments included in the analysis whose
        primary line of business is not organic chemicals,  the

                                  1-8

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    proportion of sales for organic chemicals  is unknown,
    therefore cost  to  sales ratios could not be computed.
    However, the impacts on the organic chemical and plastic
    production was  analyzed in the detailed product study.
Detailed Product
    Process economics and treatment costs are "typical'and do not
    represent specific plants.  This is not a serious limitation.

    Some processes in the model do not have treatment cost
    estimates.  These represent less than four percent of
    production.
Sensitivity Analysis

o   Using model processes to represent a group of plants gives
    good overall results except in cases where the process
    economics must represent many plants smaller than the typical
    plant.

o   The impact results are very sensitive to shifts in the final
    demands for end-use products, the demand elasticity and
    treatment costs.
                                  1-9

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                                  Section 2
                                 Methodology
 Introduction

     This section describes the methodology for analyzing the economic
 impact  of the proposed effluent guidelines on the Organic Chemicals/
 Plastics and Synthetic Fibers Industry.   The first step of the analysis is
 to forecast  the  status of  the industry in 1985 in the absence of  the
 proposed effluent guidelines.  This is called the base case.   Treatment
 costs are then added  to the base case to estimate the likely condition of
 the industry with the proposed effluent  guidelines.   This section presents
 the highlights of the methodology and the appendices  give a more  detailed
 description.

     The topics in this section are organized into four parts:

     o   Industry  Structure;
     o   Base  Case Forecast;
     o   Treatment Cost Estimates; and
     o   Impact Analysis.
    The  components of  the  impact  analysis  are:

    o  closure;
    o  prices and production;
    o  capital availability;
    o  employment;
    o  balance of trade  impacts;  and
    o  small business  impacts.
    This study analyzes the potential  impacts of proposed regulations for
BPT, BAT, PSES, NSPS, and PSNS.  Costs and other impacts associated with
each regulation are incremental in nature.  BPT costs are calculated from
estimated levels of current treatment  in place, with BAT and PSES costs
calculated from BPT.

    In addition to the industry-wide analysis, there is a detailed product
study which utilizes a linear programming (LP) model of a large segment of
the industry.  The detailed product study provides information about the
impacts on specific chemicals and production processes which is also used
to refine the industry-wide analysis.
Structure of the Industry

    A schematic representation of the relationships of the databases is
shown in Figure 2-1.  The industry database consists of 1,481 establish-
ments, of which 1,175 establishments have their primary line of business

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                                 Figure 2-1

                      Depiction of  Industry Databases
                              Total Database:
                            1,481 establishments
563 establishments in LP Model
         (263)
(300)
    306 other
    establishments
    producing organic
    chemicals
                 1175  establishments having
                 their primary line  of
                 business  in the  five SIC
                 groups
                                      2-2

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 in the five organics and plastics SIC groups.*  Three hundred and six other
 establishments also produce organic chemicals, but not as their primary
 line of business.**  The LP model used in the detailed product study
 includes 563 establishments, 300 from the five SIC groups and 263 from the
 306 other establishments.

     The major units of the industry are the process, product, plant,
 establishment and firm.
     process.  A process refers to a specific chemical reaction or series
 of reactions which uses a set of chemical inputs and generates outputs.
 There may be multiple organic chemical inputs or outputs as well as other
 non-organic inputs and by-products.***


     Product.  A product is any organic chemical, plastic resin or
 synthetic fiber which is an output of any of the processes considered in
 the analysis.   Products are referred to as basic chemicals, intermediate
 chemicals or end-use chemicals.
     Plant.   A plant is a facility which employs a single process.
     Establishment.   An  establishment includes all plants at a particular
 location owned  by  a  single firm.   This is comparable to the use of the
 term by  the  U.S. Bureau of the Census.  Treatment facilities for con-
 ventional pollutants such  as BODs  are usually constructed to handle all
 the wastewater  streams  at  an establishment.   (See Figure 2-2, Relationship
 of  Establishments, Plants  and Processes.)
     Firms.   Firms are  financial  entities  {usually  incorporated)
 controlling  one or more  establishments.   In  addition to the  organic
 chemical establishments  under  study,  the  firm  may  own facilities  producing
 other products.
    The  relationship between  these  industry  units  at  various  stages  of
production defines the structure of the  industry.   Products which  are the
outputs  of certain processes  are the  inputs  for  other processes.   Figure
2-3a is  a schematic description of  this  structure.  Four major kinds of
products are identified:  feedstocks, basic  chemicals, intermediate
chemicals, and end-use chemcials.   These are denoted by lower-case letters
   * SIC 2821 (Plastics Materials and Resins), SIC 2823  (Cellulosic Man-
made Fibers), SIC 2824 (Organic Fibers Noncellulosic), SIC 2865  (Cyclic
Crudes and Intermediates), and SIC 2869  (Industrial Organic Chemicals; not
elsewhere classified).

   **In this report, organic chemicals refers to organic chemicals,
plastics and synthetic fibers.

 *** The amount of input or output (in terms of pounds per process unit)
required for one unit of the production is specified based on the
properties of the chemical reaction and commercially obtainable yields.
                                      2-3

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        Figure 2-2.  Relationship of Establishments,
                     Plants and Processes
Plant/Establishment
Process
           I  Plant 1A

    Establishment 1
         Other
     Establishments
                              2-4

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 in boxes.  The processes (denoted by capital letters in circles) provide
 the pathways between the various stages.  Figure 2-3b shows the same set
 of relationships as an input-output matrix; minus signs indicate inputs
 and plus signs indicate outputs.  This is the form of the linear pro-
 gramming model describing the industry supply relationships which is used
 in the detailed product study.

     Figure 2-3a shows several important characteristics of the industry.
 The same chemical  product may be produced by different processes, and may
 have multiple uses as an input  in "downstream"  processes.   Product k is
 produced by processes C and  D,  and is used in processes E and G.  In addi-
 tion,  a single process may produce more than one chemical.  For example,
 process C produces both products j and k.  The  cost of a chemical depends
 in part on the prices of all "upstream" chemicals which are inputs to
 previous stages of production.   For example, the cost of end-use chemical
 z is dependent in  part on the price of chemicals j, k,  a,  b,  c  and d.
 Therefore,  the impact of treatment requirements on a given process and  its
 products depends not  only on the treatment costs associated with that
 process,  but  also  on  the treatment costs of all the upstream processes
 which  make necessary  inputs.  The structure of  the linear  programming (LP)
 model  captures this  treatment cost cascade effect.
     Base  Case Forecast

     Data  were collected  on production  levels,  supply and  demand  relation-
 ships, individual plant  and establishment  capacities,  establishment  waste-
 water characteristics, discharge  status, and  sales.   The  Industry  Profile,
 which summarizes this industry  information, is  presented  in  Section  3  and
 Appendix  3A of this report.  Of the  1,481  establishments  in  the  database,
 566  discharge at least part of  their effluent to  surface  waters  and  thus
 are  subject to the BPT and BAT  regulations.   Flow characteristics,
 production, location, sales, and  treatment costs  were  collected  or
 estimated for most of the 1,481 establishments.   Where available,
 information on parent company profitability,  sales and assets was gathered.

     For each plant (covering 563  establishments)  included in the detailed
 product model, the 1979  and 1985  capacities are known  or  estimated.  For
 each process, total capacity, average  capacity  utilization treatment
 costs, and the process economics  are estimated.   Process  economics give
 the proportions of all inputs,  including feedstocks, energy, labor and
 capital needed by that process.

    A forecast of the status of the industry  in the  absence  of new
 regulations is made and  is referred to as the base case.   The base case
 includes estimates of price and output for individual  chemicals and for
 fourteen major product groups.  The forecast for  the chemical industry is
 driven by Data Resources' Inc.  (DRI's)  Fall 1982 macroeconomic forecast  of
 1985; particularly by the prices of feedstocks and other  energy inputs,
 wages and capital costs,  and the growth rates of  the industrial sectors
which consume organic chemicals, plastics and synthetic fibers. (Appendix
 2B describes the DRI  forecasts  in more  detail.)  For product groups not
 entirely included in  the  LP model, forecasts are based on the results of
 the model plus cost data  from the International Trade  Commission, and
                                      2-5

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                  Figure  2-3a.   Product/Process Relationships
Feedstocks
Processes
Basic Chemicals
Processes
Intermediate Chemicals
Processes
End-Use Chemicals
                   Figure 2-3b.   Input/Output Matrix Representation




                                              processes
Products
Feedstocks
a
b
Basic Chemicals
c
d
Intermediate Chemicals
j
k
1
End-Use Chemicals
X
V
z
lAlBlClDlElFlG
1 - 1 1 1 I 1 1
1 1 - 1 1 1 I 1
1 + 1 1 - 1 1 - 1 1
1 1 + 1 - 1 - 1 1 1
1 1 1 + 1 1 - 1 - 1
1 1 1 + 1 + 1 - 1 1 -
1 1 1 1 + 1 1 1 -
1 1 1 I I 1 + 1
1 1 1 1 i | + | +
1 I 1 1 1 + ! I
                                    2-6

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 input share data from the U.S. Census of Manufactures.  The capacity in
 the base case for 1985 is the existing capacity, plus additions to
 capacity minus plant retirements which have been announced in the trade
 literature.  Production costs for 1985 are based on the current process
 economics with wages/ costs of energy, utilities, and feedstocks and other
 production input variables escalated to 1985.*

     A simplified version of the base case for a typical end-use chemical
 is shown in Figure 2-4.  The horizontal axis shows production in millions
 of pounds per year and the vertical axis shows price and unit costs in
 dollars per pound.  Demand for the chemical is represented by the demand
 curve DD1 which relates the amount demanded by end-use chemical users to
 the price.**  In this example, it is assumed that the chemical is produced
 by two processes,  A and B, with A the low-cost process.  Process A can
 produce the quantity On at a unit cost of Oa.***  Process B can produce
 the quantity nn1  at a unit cost of OP.  Therefore,  the supply curve is
 given by the line abed, roughly equivalent to the marginal cost curve.
 The intersection of the demand and supply curves yield a price of OP and
 an output,  or production,  of OQ.   It is important to note that Process A
 operates at total capacity,  while Process B operates at less than total
 capacity.  This is demonstrated in the figure by an unutilized capacity of
 Qn1.  The higher  cost process (Process B)  absorbs all the unutilized
 capacity because  of the assumption that all plants  using the same process
 have the same unit production cost.   Therefore,  for any process the mar-
 ginal cost  equals  the average cost.

     Unit production costs  (in dollars per pound)  are the sum of operating
 and  maintenance (O&M)  costs  and annualized capital  costs;  the latter
 includes interest  and depreciation on the capital investment of the
 plant.   A capital  recovery factor of .22  (see Appendix 2A for its deriva-
 tion)  is used to calculate the annualized capital costs.****  As shown in
 Figure  2-4,  unit production  cost  Oa  is less than  unit production cost  OP,
 which is equal  to  the  price.   The low-cost process  is earning a higher
 rate of  return  on  investment  than the high-cost  process.

     In  some  cases  the  high-cost process represents  new capacity.   If the
 total unit production  cost,  including  capital  costs  with depreciation,  of
   * In constant 1979 dollars.
  ** The demand for basic and intermediate chemicals  (see Figure 2-3A) depends
on the demand for the end-use chemicals which are made from these basic and
intermediate chemicals.  Similarly, the demand for e'nd-use chemicals is
derived from the demand for consumer products and services which use the
end-use chemicals in their manufacturing cycle.

 *** In this discussion, the letters refer to points in Figures 2-4 and 2-5
(shown later) except for A and B which are processes.  Naming two points
refers to the linear segment between them in the figures; naming four points
refers to the area enclosed, unless noted otherwise in the discussion.
**** For most processes, annualized capital costs pertain to the industry
costs of capital under average plant condition and lifetime.   In certain
cases,  however,  this amount is adjusted to reflect current and expected levels
of profitability (at newer plants)  for the process.   Thus, the adjusted
annualized capital costs represent  the average for all capacity using that
process.
                                      2-7

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                        Figure 2-4.'  Base Case
Price,
Unit Cost

                                                        n'
                                                   Production
                                 2-8

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 the new capacity was not higher than the costs of existing processes/ then
 the capacity would have been added already.  As the demand increases over
 time, new capacity is added until the price is such that the new capacity
 is just earning its required rate of return.*  In Figure 2-4, assuming
 only the capacity of process A existed and that process B represents
 unannounced new capacity, the amount of new capacity is nQ.


 Treatment Cost Estimates**

     EPA supplied BPT treatment cost estimates for a sample of 169 direct-
 discharging establishments, with costs for several alternative levels of
 conventional pollutant control.  These data are analyzed to determine the
 relationships between the treatment costs and wastewater flow and concen-
 trations of BOD5 and TSS.  In deriving the above relationships,  a dis-
 tinction is made in the type of production carried out at the establishment
 (i.e.,  organic chemical production versus plastics and synthetic fibers
 production).   These relationships are specified in equations which were
 used to estimate BPT costs for the remaining direct dischargers.  Since
 BPT regulates direct dischargers only,  it was not necessary to estimate
 treatment costs for indirect dischargers.

     Both BAT  and PSES treatment costs are estimated on the basis of model
 establishments called generalized plant configurations (GPCs).   The treat-
 ment sequence for  each GPC takes into consideration the economies of scale
 provided by treating the combined effluents of different plants  in an
 establishment.   The BAT and the PSES  costs differ due  to differences in
 the pollutants controlled and because of the BPT treatment in place for
 direct  dischargers.   Costs for all regulations are estimated  for both
 individual  establishments and specific  products and processes.   The
 product/process cost  is necessary for the detailed product study.   BPT
 treatment costs are  estimated for 566 establishments and BAT/PSES  costs
 were estimated  for  1468 establishments*** to obtain a  total cost of
 compliance.   Section 4  describes the  calculation of compliance costs for
 the industry.


 Impact  Analysis

     Establishment treatment  costs and sales data  are used  to  estimate  the
 total costs of  compliance  and  to  estimate the  treatment  cost  to  sales
 ratio.   In  the  detailed  product  study,  the  process level treatment  costs
 are combined with production  relationships.   These cost  functions  and
 estimates of demand for  end-use  chemicals  are  used to determine  the
 effects of  treatment costs on  specific  products, processes, and  plants.
 The  results of  the two  are used  to determine the  impacts.  The effects of
 treatment costs on the supply curve in  the  detailed  product study  are
 described in the next section.
    * This rate of return is calculated for each process based on its
capital requirements.
  ** See Section 4, Effluent Control Guidelines and Costs, for a more
detailed discussion.
 *** Insufficient information was available on 13 establishments to
estimate BAT/PSES treatment costs.
                                      2-9

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     Supply  Curve With  Treatment Costs

     Figure  2-5 shows the  impact of treatment costs  on  the  supply  curve,
 the  price and the  quantity produced.  The  addition  of  treatment costs
 causes  unit production cost to increase; the effect is portrayed  by  an
 upward  shift of supply curve to a"b"c"d".  This  increase in costs for each
 process is a function  of  the treatment costs and the increased prices of
 feedstocks due to  treatment costs.  The addition of unit treatment costs
 alone for each process, i.e. unit O&M plus the annualized  capital cost of
 the  pollution control  equipment, is: represented by  the supply curve
 a'b'c'd1.  In addition, each process may bear costs from the input price
 changes due to treatment  costs incurred by upstream processes, which
 shifts  the supply  curve to a"b"c"d".  If the process has only one product
 output,  then this  cost increase equals the price increase  for each
 feedstock input multiplied by the amount of the input  used per pound of
 output,  summed for all the inputs to the process.*

     The upward shift in the supply curve results in a post-regulation
 price OP1 and output OQ1.  The increase in price PP1 is equal to  the sum
 of direct treatment cost  (cc1) and feedstock price  increases (c'c").  As
 before,  the high cost process B absorbs all of the  loss in output, with a
 reduction in output of Q'Q.  Although, unit cash flow is unchanged for
 Process B, the total cash flow of the process is reduced by the regulation
 because  of the resulting  reduction in output.  This complete pass-through
 of treatment cost  to price is a direct result of step-wise horizontal
 supply  curve.  This assumption that costs are fully passed through to the
 consumer of the chemical  is appropriate when the high cost process repre-
 sents capacity expansion and the full costs can be passed on to the
 consumer in the long run.**  These effects as modeled by the LP are used
 to determine closure, price and production impacts.


    Products, Price and Production

    The  impact measures for products are changes in price and output, P'P
 and Q'Q  in Figure 2-5,  respectively.   The amount that output changes for
   * A process often produces multiple outputs.  Thus, a "process unit" is
used to define all inputs and outputs for a given process.  The process
unit relates all inputs and outputs to the primary output, which is
usually the largest volume output.  One only needs to focus on the
production of the primary output which is accompanied by a specified
amount of a secondary output.  The production of the primary output and
accompanying secondary outputs requires different quantities of various
inputs.  These inputs (or feedstocks) are specific quantities that are
consumed per unit of the primary production produced.
  ** If new capacity is not installed this assumption may not hold in the
short-run.  Firms may choose in the short-run to reduce the unit price
rather than reduce output by the full amount Q'Q.  However, this latter
limitation is not likely to harm the results seriously.  The long-run
changes in price and output are a function of the elasticities of both
supply and demand.  An inelastic demand also allows for complete
passthrough of costs.  If all plants using the high cost process have
identical production costs, then the supply curve is horizontal in the
relevant area.
                                      2-10

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               Figure 2-5.  Impact o'f Treatment Costs
Price,
Unit Costs
        P'
                                     Q1
                                                 Production
                                2-11

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 any given price change depends  on  the  sensitivity of demand foe the
 chemical to changes in price, i.e.,  the  price  elasticity of demand.  If
 the price elasticity is high, the  increase  in  prices could  lead to a sign-
 ificant reduction in demand  and subsequently to  a decrease  in output.
     Process Impacts

     The impact  measures for processes are  the change  in  output  and  the
 change in  cash  flow on  both a unit and a total basis.*   The  change  in
 process cash flow shows the extent to which increased costs  were  success-
 fully passed through, i.e., unchanged cash flow  implies  a complete  cost
 pass-through with a negligible drop  in demand.   The reduction in  cash flow
 depends on the  elasticity of demand  for the product.

     Figure 2-5  shows the two major cash flow outcomes for processes,
 depending  on whether or not they are the high cost process.**   If the
 process is not  high cost, its output level does  not change.  Its  cash flow
 either rises or falls depending on whether the price increase is  greater
 than or less than the unit cost increase.  For the high  cost process, unit
 cash flow  does  not  change but the production decrease equals the  reduction
 in  product demand.
     Closure

     The closure analysis is conducted at the establishment and plant
 levels.  The establishment level closure analysis uses the ratio of estab-
 lishment treatment costs to establishments sales, plus information on the
 competitive positions of establishments.  A four percent costs/sales ratio
 is used as the screening criteria Jior closure candidates.  Candidates are
 then analyzed to determine which ones are likely to close based on:  1)
 treatment-in-place; 2) diversity of production (diversity was determined
 by whether or not the establishment had production in more than one of the
 production categories); and 3) the size of the parent company measured in
 terms of yearly chemical sales, greater or less than $150 million.  When
 two of the three factors are negative the establishment is considered a
 closure.

    The plant level analysis (for plants in the LP)  uses a screening
 criteria that compares the production level at each  plant with the total
 drop in production of that plant's process to identify possible closure
 candidates.***  Plants with a production level greater than twice the
 total process production drop will remain open.  This is a conservative
   * For purposes of this analysis,  cash flow is defined as revenues minus
variable costs.  Unit cash flow is equal to price minus unit variable costs.

  ** The only outcome not covered in Figure 2-5 is where the drop in output is so
great that process B stops producing entirely and price is determined by the
costs of the A process (process switch).  The case is rare, but if it did occur,
the impact measures are analogous.

 *** See Appendix 2B—Demand/Supply  Methodology for a more complete presentation.


                                     2-12

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 assumption  because  it  is  likely  that  a drop in production will be spread
 among  several  plants.

     The  plant  closure  candidates are  examined according to five criteria:
 1)  scale of  the plant;  2)  unit costs  of compliance;  and 3) the presence or
 absence  of  vertical integration; 4) production decline due to the regula-
 tion and 5)  the level  of  announced capacity expansion.

     A  scoring  scheme is used  to  assess the likelihood of closure for each
 closure  candidate.   A  plant Closure Index  is then calculated  by adding the
 scores of each category.   A plant Closure  Index  greater than  zero indi-
 cates a  likely closure  candidate.  The criteria  and  their weights are
 described in Appendix  2-C.  For  each  process,  plants are closed in order
 of  descending  Closure  Index until closing  an additional plant exceeds the
 target closed  capacity.   To get  the target,  the  production drop estimated
 for  each process is  converted to the  comparable  drop in capacity by
 dividing the utilization  rate.   When  two or  more plants have  the same
 closure  index, the  smallest plants are closed  first  to avoid  under-
 estimating the number  of  closures.
    Employment Impacts

    Impacts on employment due to the proposed  regulations can be measured
in two ways:  job losses due to plant and establishment closures and  job
changes due to the overall change in output of a given product.

    The results of the closure analysis of BPT and BAT/PSES impacts are
used directly to calculate employment changes due to closure.  For those
establishments identified as closures, the employment figures from the Dun
& Bradstreet data base are used as the impact, where available.  Other-
wise, employment data from EIS is used.

    Because BAT/PSES costs are defined on a process level, plant closures
due to BAT/PSES (based on the detailed product study) are assumed to
affect individual plants or combinations of plants.  Labor requirements
for a given process are obtained from the process economics in the model.
The total employment impact due to BAT/PSES for a process is the labor
requirement per unit level of the process, multiplied by the total produc-
tion level lost due to closure, i.e., the amount of capacity closed, K^,
multiplied by the average capacity utilization, u^.  Thus, for process i

             Employment.  =  L.   *  u. *   K.
               ^11      i      i

where L^ is the unit labor requirement.
    Capital Availability Impacts

    The capital availability analysis examines the ability of the organic
chemical industry to finance investments in new capacity and in pollution
controls required by the proposed guidelines.  Three different criteria
are examined.  The first two indicate the total added burden of the regula-
tion compared  to the industry's historical demand for capital and its
                                      2-13

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 supply  of  internally  generated  funds.   They  compare total capital costs of
 compliance with  first,  capital  costs  of capacity expansion and second,
 cash  flow.   The  third criteria  is  the  effect of  treatment costs in terms
 of  the  decrease  in  the  amount of new  capacity predicted by the supply
 model.   Increased production costs  result  in lower  rates of return and
 thus  less  new  capacity  expansion.
    Balance of Trade  Impacts

    Three  indicators  are used  to derive  an  assessment  of  the  impacts on
foreign trade: (1) 1985 base case estimates of  the  ratio  of exports or
imports to total U.S. production for each chemical  in  the product  model;
(2) the difference between projected 1985 U.S.  and  European chemical
prices; and (3) a qualitative  assessment of market  conditions  based on
trade literature.  These indicators are  used to identify  a list  of
susceptible chemicals.  The balance of trade impact of the regulations is
identified by comparing this list of chemicals  to those which  experience  a
significant price increase or  production decrease.
    Small Business Impacts '

    The differential impact of the proposed regulations on small  versus
large businesses is examined.  Small businesses are defined in terms  of
the size of the firm, not the individual establishment.  The Small
Business Administration (SBA) definition of small businesses (which
qualify for loans) ranges from maximums of 750 to 1000 employees  for  the
industries covered in these regulation (SIC groups 2821, 2823, 2824,  2865,
and 2869).*

    About half of the firms in the industry would be classified as small
according to this definition.  However, a definition which categorized 21
percent of the firms as small was used.  The relevant characteristic
distinguishing  a small firm is one that may have significant barriers to
entry due to factors such as limited capital access.  This led to the
definition of a small firm as one with fewer than 50 employees.

    Using this definition, establishments are identified as belonging to
either small firms or large firms.  For each of the regulations, the
average treatment cost to sales ratio for establishments owned by small
firms is compared to that for establishments owned by large firms to
determine if there are significantly greater relative costs on small firms.
   * SBA,  Part 121,  SBA Rules and Regulations, August 1, 1980, pg. 23,
                                      2-14

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                                    Section 3

                                Industry Profile*
     The organic chemical industry is defined in terms of establishments which
 manufacture organic chemicals, plastic resins and synthetic fibers.  A major
 portion of this industry is covered by SIC (Standard Industrial Classifica-
 tion)  groups: SIC 2821 (Plastics Materials and Resins),  SIC 2823 (Cellulosic
 Manmade Fibers), SIC 2824 (Organic Fibers Noncellulosic),  SIC 2865 (Cyclic
 Crudes and Intermediates),  and SIC 2869 (Industrial Organic Chemicals; not
 elsewhere classified).  The industry is analyzed from several perspectives
 including chemical products and their markets,  and the companies and estab-
 lishments that manufacture  chemicals.  Although the SIC classification system
 is  used to collect information from manufacturers on a uniform and periodic
 basis,  this information is  supplemented by other sources to develop a profile
 of  this complex industry.
 Overview**

     The  chemical  industry was fourth in sales among  20 manufacturing
 industries  in  1979.   Different manufacturing  sectors,  including  steel  and
 petroleum,  have found chemical manufacturing  attractive,  often because they
 have the  necessary  raw materials.   In particular,  several major  oil companies
 have major  chemical  manufacturing  businesses.

     Before  1950,  most producers were firms  with  over  50 percent  of their
 sales in  chemicals.   In 1979  only  37 out  of the  top  100 producers could be
 called traditional chemical companies.  Of  the top ten, five were oil
 companies.  Other companies with an important component of sales from
 chemicals are manufacturers of metals and minerals, machinery and fabricated
 metals, food and  beverages and health care  products.

     One aspect of the complexity of this  industry  is  the  degree  to which
 organic chemicals, plastics,  and synthetic  fibers  are  produced by establish-
 ments which primarily produce  other products.  Based on U.S. Census of
 Manufacturing data for  1977,  the proportion of the products which are
 produced  by establishments in  that  SIC  group  ranges from  67 percent for
 cyclic crudes and intermediates  to  97 percent for  organic  fibers
 noncellulosic.***

     The market concentration  is  not  as  high as in  some other industries.  The
 top  eight chemical producers account  for  33 percent of sales compared to
   * See Appendix 3A for a more complete discussion and for the tables on
which this description is based.

   ** The Overview draws heavily on information in the Kline Guide to the
Chemical Industry, Fourth Edition, Industrial Marketing Guide IMG 13-80.

   *** See "Description of SIC Groups" in Appendix 3A

-------
 99 percent  for  motor  vehicles  and  car bodies,  98 percent, for primary copper
 and 56  percent  for  petroleum  refining.   However, the level of concentration
 varies  for  different  types  of  chemicals.

     The chemical  industry emphasizes  research  and development efforts.   In
 1977, the chemical  industry accounted for  36.9 percent  of all funds spent
 on basic research in  the manufacturing  sector.  The R &  D results in
 product and process innovations  which,  in  turn,  impose  relatively high
 capital requirements  on the industry.

     Average profitability for  the  chemical  industry  has not  been outstand-
 ing in  recent years.   In 1979, the profit margin on  sales was 6.2 percent
 compared to 5.5 percent for all  manufacturing.   While the profitability in
 terms of return on  net worth was higher than that for all manufacturers
 between 1975 and  1977, since 1978  the  industry  has had  a. below average
 return  on net worth.   There is a wide  range in profitability  among
 different components  of the chemical  industry.

     Employment by the industry is  2.8 percent of the total for the manu-
 facturing sector.   Average  sales per  employee  vary within the industry
 from $174,000 for agricultural chemicals, to $63,000 for  cellulose fibers.
 However, the industry average  was  twice the average  for  all of manufactur-
 ing  in  1977.

     The  industry  is a net exporter and thus contributes  to the nation's
 balance  of  payments;  in 1979,  the  net balance was  about  $10 billion.
Basic and Intermediate Chemicals

    Basic chemicals are obtained from hydrocarbon feedstocks such as
natural gas, naphtha and gas oil.  Further downstream processing converts
the basics into intermediate and finished chemicals.  Six of the most
important basic chemicals are ethylene, propylene, butadiene, benzene,
toluene and xylene.  Of these, ethylene is produced in the largest volume
by far, with 30 billion pounds in L979; the others were propylene 14.2,
benzene 12.6, xylene 7.5, toluene 7.4 and butadiene 3.6 billion pounds.
In 1979, price per pound was in the range of 15 to 30 cents, depending on
the specific basic chemical.  See Table 3-1.

    The mix of intermediate and finished chemicals that can be derived
from the basics can be varied to miset demands. Figure 3-1 illustrates the
major uses of benzene.  Similar figures for the other basic chemicals are
in Appendix 3A.  Some of the typic.il downstream uses for the three largest
basic chemicals are:

    o   ethylene:   20 percent used for ethylene oxide, 45 percent for
        polyethylene, 15 percent for ethylene dichloride; major
        end-uses include anti-free,ze, polyester fibers, polyethylene,
        vinyl chloride, plastics and styrene elastomers.
                                      3-2

-------
f £
NA = Not Reported by DRI or Kline Guide. Percent of U.S. production owned by
rr
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-------
        benzene:  50 percent used for  ethyl  benzene/  17 percent for
        cyclohexane, 15 percent  for  cumene;  major  end-uses  include nylons/
        plastics/ resins, styrene elastomers and acrylic  sheet.
        propylene:  15 percent  used for  acrylonitrile/  10 percent  for
        propylene oxide, 25 percent for  polypropylene,  10 percent  cume
        percent for isopropanol; major end-uses include acrylic fibers
        resins, elastomers/ plastics/ acrylic sheet, paints and drugs.
10
    This interrelated structure of the  industry is captured by the detailed
case analysis based on an LP model of a major portion of the industry.  A
change at one level/ such as a cost increase/ will result in adjustments both
in basic chemical inputs and end-products.  Conclusions about the rest of the
industry are based on the results of the detailed product study.
Finished Chemicals:  Market Characteristics
    Economic impacts of pollution controls will depend on the market response
to chemical price changes induced by control costs.  If markets for finished
chemicals change, upstream producers of intermediate and basic chemicals will
also be affected.  Again/ this chain of relationships is expressed quantita-
tively in the LP model.

    Nine markets for finished chemicals are identified:  1)  Dyes and Organic
Pigments, 2) Flavors and Perfume Materials/ 3) Plastics and  Resin Materials/
4) Rubber Processing Chemicals, 5) Elastomers, 6) Plasticizers, 8) Manmade
Fibers, 7) Surface Active Agents, and 9) Miscellaneous End-Use Chemicals
{which includes Medicinals and Pesticides).  The following observations are
based on 1979 data.

    o   Plastics and Resin Materials account for 58 percent  of 72
        billion pounds total production for the nine market
        categories.   This share is about 4.5 times the production for
        the second largest category, Manmade Fibers.

    o   Plastics and Resin Materials account for 43 percent  of total
        value of merchant shipments, followed by Manmade Fibers with
        23 percent.

    o   Average unit value of sales range from $0.40 per pound for
        Surface Active Agents to $4.62 per pound for Medicinal
        Chemicals.

    o   Over the 1970s decade,  value of shipments increased  at an
        average annual rate  ranging  from 0.6 percent for Dyes,  to 9.1
        percent for  Plastics and Resins,  in terms of constant
        dollars.   (Medicinal Chemicals,  part of the Miscellaneous
        category,  grew at 10.2  percent per year.)
                                      3-5

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 Companies

     Firms  are  described  in  terms  of  firm  groups,  sales and employment.  This
 profile  is based on a  sample  of 600  companies  which manufacture organic
 chemicals,  plastics, and  synthetic fibers.   Because the economic analyses
 require  information on sales  for  specific establishments/  these data are
 collected  for  1167 establishments whose primary products are  covered by the
 five SIC groups discussed at  the  beginning  of  this  section.*   The 600
 companies  are  the parent  firms of these establishments.  Since the U.S.
 Census of  Manufacturing data  do not  include establishment  specific nor  firm
 specific data, these samples  of establishments and  firms are  the basis  for
 the  following  discussions.

     Firms  are  classified  into sixteen  (16)  groups.   The  groups cover a  wide
 range of enterprises from specialty  chemical companies to  multi-industry
 companies  whose major  business activities are  not those  of chemical
 production.  Corporate sales  data are  available for  395  firms  (employment
 data for slightly fewer firms).   These firms show the  following
 characteristics:

     o    Thirty six percent  of the firms are in the  smallest sales
         category with  annual  sales less than $25 million,  while  5
         percent are very  large with  sales of 310 billion or more.
         However, the 5 percent of firms with large  sales account  for
         62 percent of  total sales while the 36 percent of  firms  with
         small  sales volume account for less than one percent of  total
         sales.

     o    The number of  firms in the group  Petroleum, Natural Gas  and
         Chemicals accounts for less  than  10 percent of the total
         number of firms, but  has  a. greater  portion  (53 percent)  of
        total  sales than any other group.   (This group includes  some
         of the large oil companies whose  major sales are from
         refining and other activities not classified in the SIC
        systems as part of the organic chemicals industry.)  The
        second ranked firm group  is Multi-Industry which accounts for
         18 percent of total sales.

    o   The firm group with the most firms  (18 percent of  the total)
        is Industrial Chemicals ard Synthetic Materials.  The firm
        group with fewest companies  (0.5 percent of the total) is
        Fertilizers and Pesticides,.

    o   The highest category of employment  (10,000 or more) has the
        highest concentration (about 25 percent)  of firms.   The
        lowest concentration (5 percent)  of  firms is in the smallest
        employment category of fewer than 20 employees.
   * Economic Information Systems (EIS) identified the establishments
and estimated their sales.
                                      3-6

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 Financial Profile

     The financial profile is based on 10-K reports for 1980 which publicly
 owned companies are required to file with the SEC.  Comparable data are not
 available for privately owned firms.  The financial profile describes 178
 companies compared to the 395 firms in the industry sample discussed above.
 The 178 is a subset of the industry representing large companies; for
 example,  their sales average $4.7 billion compared to a $2.1 billion average
 for the 395 firms, and only four of the 178 firms have sales less than $25
 million.   A summary of the 178 firms,  classified by sixteen firm groups and
 four sales categories, is as follows:

     o  Nearly half of the publicly owned companies fall in an
        intermediate sales category of $1 to $10 billion.   About 20
        percent of the firms are in the smallest sales category ($0
        to $250 million),  and 11 percent are in the largest category
         (over $10 billion).

     o  The Multi-Industry firm group  has the most firms,  33 (or 19
        percent)  followed  by the Industrial Chemicals and  Synthetics
        firm group with 32 firms.

     o  The firm  group Petroleum,  Natural Gas and Chemicals has the
        greatest  volume (55 percent) of  sales of any  group, as is the
        case with the  industry sample  of 395 firms discussed earlier.

     o  High profits generally correlate with high volume  of sales.
        Petroleum,  Natural Gas and  Chemicals firms account for the
        highest profits,  50 percent of the total.   The Multi-Industry
        firm group is  ranked second and  accounts for  17 percent of
        total  profits.

     o  Firms  with  a relatively high average ratio of  profit to net
        worth  are:   Fertilizers and Pesticides,  Pharmaceuticals,  and
        Paints.   Relatively low ratios occur  for:   steel coke,  tires,
        and  colors  and  dyes.

     o  Capital expenditures  (and also total  assets) are high  where
        sales  and profits  are  high.  The  firm group Petroleum,
        Natural Gas  and Chemicals accounts  for  62 percent  of all  the
        capital expenditures.   Multi-Industry firms rank second and
        account for  14 percent.
Establishments

    The 1,167 establishments are selected and categorized according to type
of manufacturing, employment, sales, geographical location, discharge status,
types of products and ownership.  Five types of manufacturing are:  1) Basic
Chemicals, 2) Intermediates, 3) End-Use Chemicals, Plastics, 4) End-Use
Chemicals, Organics, and 5) End-Use Chemicals, both.
                                      3-7

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    Three employment categories define small (less than 50 employees), medium
(50 to 500), and large (500 or mor«) establishments.  Eight sales categories
cover a range from $5 million or less to $500 million and over.  Locations
are identified by five regions of the U.S.  Direct and indirect discharges
are analyzed.  A summary of establishments by these characteristics is as
follows:

    o   Total sales of the 1,167 estabishments was $50.6 billion in
        1979, with average establishment sales of $130 million for
        the Basic Chemicals establishment group,  $120 million for the
        Intermediate Chemicals group, and $30 million for the three
        combined End-Use Chemical groups.

    o   About 84 percent of the establishments are in the End-Use
        Chemicals group with 55 percent of total  sales.   Eleven
        percent are in the Intermediate Chemicals establishment group
        with 30 percent of total sales.  About five percent are in
        the Basic Chemicals group with 15 percent total  sales.

    o   Comparing the eight sales categories (across all five
        establishments group),  60 percent of total sales are
        accounted for by all 11 percent of establishments which are
        in the top three sales  categories with over $100 million in
        sales.  Another 14 percent of total sales are by 67 percent
       of the establishments,  all of which are in the three lowest
        sales categories with  less than $25 million in sales.

    o   Comparing establishment groups and employment categories
        (across all eight categories of sales), sales are  greatest
       for the Intermediate Chemicals group with large  employment
       which has $12.5 billion (25 percent of  the total sales)  at 50
       establishments (4 percent  of the total  number).

    o  If small,  medium,  and  large employment  categories  are aggre-
       gated,  the establishment  group with greatest  sales is End-Use
       Chemicals,  Other  which  has $18.2 billion  (36  percent of  total
       sales)  542 establishments  (46 percent of  the  total number).

    o  Number  of  establishments  is greatest in the  End-Use  Chemicals,
       Other  group,  with  medium  size employment  which has 265 estab-
       lishments  (23 percent of  the total)  and 16 percent of total
       sales.

    o  Comparing  three major estaialishment  groups—Basic,  Intermed-
       iate,  End-Use Chemicals—and aggregating  the  three employment
       categories, we  note:  estaialishment  sales  of  two groups
       (Basic  Chemicals  and Intermediate  Chemicals)  are predominant-
       ly by  large establishments  (i.e.,  83 percent  of the group's
       sales  are  by  individual establishments  with, sales  of $100
       million  or more).  By contrast,  in  the  three  End-Use
       Chemicals  groups combined,  only  43 percent of  the  sales  are
       by  establishments  with  salas of $100 million  or more.
                                     3-8

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    o   Comparing the three employment categories, establishments in
        the Basic and Intermediate Chemical groups are mostly in the
        large and medium size categories; only 12 percent of the 57
        Basic Chemical establishments are in the small employment
        category and only 21 percent of the 126 Intermediate
        Chemicals establishments are small.  By contrast, in the
        three End-Use Chemicals groups combined, 41 percent of the
        984 establishments are small.

    On a regional basis, the Northeast claims the most establishments.  Of
the 1,167 establishments, 34 percent are in the northeast, followed by the
North Central region with 22 percent.  However, establishment sales are
greatest in the Southeast with 34 percent of the $50.6 billion total, while
the Northeast has 25 percent and the North Central region has 17 percent.
Other regional characteristics of the industry are as follows:

    o   Northeastern establishments are predominantly producers of
        finished, or end-use, chemicals which account for 95 percent of
        that region's establishments.  The Northeast has 38 percent of
        the total establishments and 35 percent of sales of the End Use
        Chemical Groups.  (The Southeast region has almost the same sales
        with only 20 percent of the establishments in the three End-Use
        Chemical groups; i.e., on the average,  the establishments in the
        Southeast are bigger producers than in the Northeast.)

    o   The Southeast and West South Central regions (which include
        Texas,  Louisiana, Arkansas and Oklahoma)  together have 63 percent
        of the 126 Intermediate Chemical establishments and  account for
        72 percent of the $15.2 billion sales by that establishment group.

    o   The West South Central region includes  states which produce and
        import hydrocarbon feedstocks;  basic chemicals plants tend to
        locate near raw materials sources.   The region contains 37 of the
        57 establishments (65 percent)  in the Basic Chemicals groups with
        68 percent of the sales by that establishment group.

    o   Establishments that  are direct  dischargers are of relatively
        greater economic importance than indirect  dischargers.   The 405
        direct  dischargers account for  35 percent  of  all  establishments
        and 67 percent of total sales.   This pattern  is observed  in each
        region,  e.g.,  in the West South Central region, 86  percent  of
        sales  are by direct  dischargers which account for 69  percent of
        the number of  establishments  in the  region.

    o   Of the  405 direct dischargers with  $34  billion in sales,  63
        percent are  in the End-Use Chemical  groups  with 42 percent  of
        direct  discharger sales,  25 percent  are in  the Intermediate
        Chemicals group  with 40 percent  of  the  sales  and  12 percent  are
        in the  Basic Chemicals group  with about 18  percent  of sales.

    o   The most  frequently  manufactured  product types are Miscellaneous
        End-Use Chemicals (made by  530  establishments)  and  Plastics  and
                                      3-9

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        Resins (by 521 establishments).  (Six of the product types are
        made by fewer than 50 estabishments) .

    o   Establishments in the three End-Use  Chemical groups do not make
        Basic or Intermediate types of products.

    o   Establishments in the Intermediate Chemicals group make none of
        the Basic Chemical product types.  However, some of these
        establishments make some oi: the end-use product types/
        particularly Plastics and Resins, and Synthetic Fibers.

    o   Few establishments in the Basic Chemicals group make end-use
        types of products except for Plastics and Resins (made by 25
        establishments),  Miscellaneous End-Use Chemicals (by 27 estab-
        lishments)  and Generalized Compounds (by 36 establishments).

    The parent companies  of the establishments are identified.  Different
types of parent companies are distinguished using the 16 firm groups
(referred to earlier in the discussion of companies).

    o  The firm group Industrial Chemicals and Synthetic Materials owns
       the most establishments, 361,  (31 percent of the total); the
       Fertilizer and Pesticide firm group owns the fewest, eight
       establishments.

    o  Ownership of establishments in the Basic Chemicals group is
       concentrated in the Petroleum Natural Gas and Chemicals firm group
       with 25 (or  44 percent of those establishments in the Basic
       Chemicals group),  and in the Industrial Chemicals and Synthetic
       Materials firm group with 13 establishments (32 percent).

    o  Ownership of establishments in the Intermediate Chemicals  group is
       concentrated in the Industrial Chemicals and Synthetic Materials
       firm group with 72 (or 57 percent of  those establishments).

    o  Ownership of establishments in the three End-Use Chemical  groups is
       also concentrated  in the Industrial  Chemicals and Synthetic
       Materials  firm group with 271  establishments (or 28  percent of
       those in the End-Use Chemic.il  groups).
                                     3-10

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                                    Section 4

                      Effluent Control Guidelines and Costs
     The alternative waste treatment control systems, costs and effluent
 limitations for the Organic Chemical Point Source Category are described in
 the Technical Development Document.  The Development Document identifies
 various characteristics of the industry, describes data collected for this
 regulation, and discusses analyses supporting the proposed limitations for
 the industry.  The report describes manufacturing processes, products,
 production levels, raw waste characteristics, sources and volumes of process
 wastewater, and levels of pollutants.  EPA uses these data to select
 pollutants requiring limitations or standards of performance.

     The Development Document also describes and assesses the range of
 treatment technologies within the industry.  This includes an evaluation of
 many treatment technologies, in-plant and end-of-pipe,  which could be
 designed or are currently operating in the industry.  This information is
 then evaluated for existing surface water industrial dischargers to determine
 the effluent limitations required for the Best Practicable Control Technology
 Currently Available (BPT),and the Best Available Technology Economically
 Achievable (BAT).   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),  which
 require Best Available Demonstrated Control Technology  (BDT).


 Treatment Technologies

     Based on its study of pollutant parameters,  treatment in place in the
 organic chemicals  industry,  and the variety of  possible treatment
 technologies,  the  Agency has refrained from specifying  a particular  set  of
 control technologies as  the  basis for  BAT and PSES.   The range of
 technologies currently practiced  to control toxic  pollutant  discharges covers
 the  available set  of technologies for  industrial waste  treatment.  Therefore,
 the  BPT,  BAT and PSES  technology  used  as  a  basis for  cost  in  the economic
 analysis  is  some combination  of in-plant  controls, physical/chemical
 treatment  of one or several  specific process  wastestreams, biological
 treatment  of combined  wastestreams, and post-biological  treatment.


 Treatment  Costs

    Overview

    Treatment costs for BPT and BAT/PSES are estimated independently.  The
Agency developed establishment-specific BPT costs for a sample of
establishments and BAT and PSES costs for 55 model establishments.  Based on
these costs, plus information supplied by EPA concerning effluent levels,
treatment technologies used and proposed guidelines, costs were estimated for
the establishments in the industry.  This section describes the procedures
used to estimate treatment costs for the industry.

-------
     BPT

     The economic impact of the proposed BPT regulations is based on the cost
 of  improving  an  establishment's wastewater treatment facility to meet the
 proposed standards of performance.   Of the 1481 establishments in the data
 base,  566 are direct  dischargers.   The Agency calculated specific incremental
 costs  of the  proposed BPT effluent  limitations for 169 establishments.
 Therefore an  additional 397  establishments required cost estimates.

     The Agency then developed  a se'i: of statistical relationships between
 total  annual  costs,*  wastewater flows  and  different levels of biological
 oxygen demand (BOD5)  an<3  total suspended solids (TSS),  from the  sample  of
 169  establishments.**  Four separate equations were developed,  with the  data
 divided according  to  the  type  of products  manufactured  and the type of
 wastewater treatment  at an establishment.   The form, of  the equation is:

                                     2                       2
     Ln  (K) =  a + b,Ln(Q)  + b.[Ln(Q)]   + b,Ln(E)  +  b,[Ln(E)]
                   12            34


 where:   K = total  costs ($l,000/yr)

         Q = wastewater  flow  (MGD)

         E = effluent performance =  BOD5 +  TSS (mg/1)


 Table  4-1 presents  the  coefficients  for each  equation.

     In  order  to calculate incremental  costs for  the  397  additional
 facilities, the Agency  collected information  on  current  effluent  levels,
 flow, and type of wastewater treatment from NPDES  permits  for  each
 establishment.  The procedure  for calculating  incremental  treatment costs is
 as follows.   First, the annualized  costs of the  treatment  in place  is
 obtained by evaluating  the appropriate equation  at current effluent levels
 (BOD5 and TSS).  Then the annualized costs of meeting the  target  is
obtained, using desired effluent levels.  The difference between  these costs
gives the incremental cost used in  the analysis.   Target effluent levels used
 in the equations are 20 mg/1 8005 
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     BAT and PSES

     To develop toxic effluent limitations for the organic chemicals industry,
 EPA analyzed 147 organic chemical process wastewaters and 29 plastic and
 synthetic fiber process wastewaters for the presence of priority pollutants.
 The results of this analysis were combined with information from the industry
 technical 308 survey to develop a computer model to calculate the costs of
 complying with proposed BAT and PSHS limitations.

     Numerous manufacturing routes (product/processes) are employed by the
 industry.  This characteristic,  combined with the variety of toxic pollutants
 and waste treatment technologies in use in the industry,  precluded the
 engineering costing of  establishments.   Instead,  the Agency developed 55
 model establishments ("generalized plant configurations", or GPCs) to
 represent typical  combinations  of product/processes  in the organic chemicals
 industry.  Each GPC is  a group  of organic chemical and plastic product/
 processes that represent entire  establishments or major portions of
 facilities.

     In 1980,  the Agency developed treatment  technologies  and costs for the
 GPCs  using a  stringent  set of potential effluent  limits.   The effluent limits
 used  to develop these original  cost  estimates do  not match the effluent
 limits that were actually proposed.  The original treatment  systems were
 overdesigned,  and  thus  the costs  were overestimated.   In  order to more
 accurately estimate costs that  reflect  the proposed  effluent limits,  the
 Agency modified the technologies  and the 55  GPC cost estimates.   The
 procedures used to  modify these costs are described  in Appendix  4A.

    Since these models  do not specifically cover  all establishments  or
 products  in the industry,  the Agency also developed  a  procedure  to estimate
 establishment  specific  compliance  costs.
    Establishment Specific Treatment Costs.  Treatment costs for the 1481
establishments are estimated on the basis of the amount of production
specifically covered by the 55 GPCs.  The proportion of production covered by
GPCs can be used to divide establishments into three categories:

    (1) establishments that have all production covered by the 55 GPCs;
    (2) establishments that have some production covered by the 55 GPCs; and
    (3) establishments that have no production covered by the 55 GPCs.
Treatment costs are determined by .a separate costing method for each category.
    Category I.  If an establishment can be represented entirely by GPCs,
treatment cost is estimated as follows.
    Step 1.  For each GPC, calculate the unit treatment cost for all products.
Recognizing that the wastestreams for various products will not all be treated
by the same technology, the cost for each treatment unit is divided among the
                                      4-4

-------
 vastest reams passing through it according to the amount of production.  The
 cost for a product is, then, the total over all units through which its
 wastestream passes.  Dividing by production gives the unit cost.
     Step 2.  Obtain the cost for production pertaining to the GPC, using
 production at the establishment.  While an establishment may have a
 configuration of processes that resembles a certain GPC, the establishment
 will not necessarily produce all products found at the GPC, nor will it
 produce them in the same proportions.  So the treatment cost for that portion
 of production included in the GPC is calculated by multiplying production
 with unit cost and summing over the products of the GPC.
     Step 3.   Sum the costs for all GPCs at the establishment.


     Category II.  If an establishment has some production covered by the 55
 GPCs,  then the  following steps are used to estimate costs.  Estimation of the
 non-GPC part is in terms of flow.   It is assumed that flow is proportional to
 production.

     Step 1.   Determine total wastewater flow at the establishment.   Total
 flows  at individual establishments are derived from NPDES permits.
 Additional flow data are obtained  from the technical 308 survey.   If total
 flow for an  establishment is not available,  then flow is estimated  from a
 statistical  equation relating sales and total flow.   These equations are
 contained in Table 4-2.

     Step 2.   Determine the amount  of total wasteflow at  each  establishment
 that is not  estimated  by the GPCs.   For establishments in Category  II,  part
 of  the total flow  will not be modelled by the GPCs.   From the total
 wastewater flow, the industry-wide  fraction  of flow  which is  not  connected to
 production  (i.e.,  cooling water or  sanitary  wastewater)  and the amount  of
 flow covered by  GPCs is  removed.   The  remaining flow pertains to  all
 production not  represented by the  GPCs—including many products which are not
 organics  or  plastics.  For each establishment,  the industry-wide  average
 (35%)  of  this flow is  assumed to be derived  from products covered by the
 regulations.

     Step  3.  Estimate  treatment costs  at  the  establishment.   For  the
proportion of flow covered  by GPCs  the  cost estimate  is calculated  in the
same manner  as Category  I.  For the portion that is not covered,  costs are
estimated from statistical  relationships  between annual costs and flows  for
the GPCs, which are detailed  in Table  4-3.  These costs are then  combined to
determine the incremental treatment cost for the specific facility.


    Category III.  If none of the flow  at an establishment is modelled by
GPCs, treatment  costs are estimated as follows:
                                      4-5

-------
    Step 1.  Estimate total wastewater flow at the establishment.  Total
wastewater flow at the facility is obtained either from NPDES permits, 308
technical survey information, or is estimated from total sales for the
facility.  (The same procedure followed for Category II, Step 1.)

    Step 2.  Estimate treatment costs at the establishment.  Using 35 percent
of the estimated flow (as in Category II, Step 2), incremental treatment
costs are determined using the same statistical equations of annual costs and
flows discussed in Category II, Step 3.

    Total industry compliance costs are calculated for ElAT and PSES by adding
the respective treatment costs estimated for each establishment.   Total
investment and annual costs for BAT are $418.5 million ($519.8 million in
1982 dollars) and $195.7 million ($243.1 million in 1982 dollars).  PSES
investment costs are $708.7 million ($880.2 million in 1982 dollars)  and
annual costs are $324.9 million ($403.5 million in 1982 dollars).
                                      4-6

-------
                Table 4-2.  Results of Flow to Sales Regressions
                                Flow  = a  (Sales)b
Data Group
SIC 2865
SIC 2869
Plastics
I Number of I
I Establishments I
20
95
146
1 1
R2 | Coefficients
1 a
.25 0.00215
(3.99)
.49 0.00383
(10.29)
.39 0.00494
(12.86)
1
*
b
1.120
(2.43)
1.16
(9.33)
1.052
(9.48)
   *Numbers in parentheses .are t-statistics for each coefficient.  All
parameters are significant at the .10 level.
            Table  4-3.   Equations  Used  to  Estimate  Cost  from  Flow
Regulation I Flow Interval
0.1 MGD
BAT
0.1 MGD
0.1 MGD
PSES
0.1 MGD
I Equation
Cost = 4240.1
Cost = 834.4
Cost = 10,740
Cost = 3,055

* Flow
* Flow- 294
* Flow
* Flow 454
                                     4-7

-------

-------
                                    Section 5
                        Economic Impact Analysis Results
 Summary  of  Results*

     BPT

     The  costs  of  BPT  are  small  ($84.9 million total annualized cost)
 compared to estimated 1985  sales  for  the  industry  ($50.6  billion).   These
 are  summarized in Table 5-1.  BPT requires  0.17  percent of  industry
 revenues.   Prices and production  remain essentially unchanged,  though
 production  costs  increase slightly.   No establishments are  expected  to
 close  under BPT regulations.  Capital costs are  estimated at  $254.6
 million.
     Toxic Pollutant Regulations

     Total annualized costs of compliance  for  the BAT  regulation  is  $195.7
million, with capital costs of $418.5 million.  Total  annualized costs  for
the  PSES regulation is $324.9 million with  capital  costs  of  $708.7
million.  Production costs are expected to  increase by 0.2 percent  due  to
BAT  and 0.3 percent due to PSES.  Based on  the detailed product  study,
prices for all toxic regulations are estimated to increase 0.58  percent
and  production to drop 0.22 percent.  Eight establishments and 21 plants
are  considered likely to close.  The total  loss in  employment is estimated
to be 493 jobs.  The capital costs of compliance represent approximately a
15 percent increase in capital requirements for the industry.
1985 Base Case

    Price and Production

    Table 5-2 presents 1979 and 1985 prices and production levels and
assumed growth rates for each product group in the absence of regulations.
The overall average annual decrease in price is 0.7 percent and the overall
average annual growth rate of production is 1.6 percent.

    Based on the 1985 capacities of the processes studied and their unit
profit margins,  the cash flow is estimated to be $5.4 billion (1979 $).
Total capacity expansion in the Base Case is estimated at 18.5 billion
process units at a capital cost of $4.3 billion.  These estimates combined
with the product characterization describe the industry before the
proposed regulations.
   * In 1979 dollars.

-------
                      Table 5-1.  Impact Analysis Summary
                                 (1979 dollars)
                                                       Total for
                                                       Toxic Pollutant
                              BPT   |  BAT*  |  PSES*  |  Regulations
Number of Establish-
  ments Incurring Costs       405     453    1093           1346

Cost of Compliance
  (millions $)
  -  Total Annualized          84.9   195.7   324.9          523.5
  -  Capital                  254.6   418.5   708.7        1,133.5

Establishment -
  Average Cost-to-
     Sales Ratios               0.12%   1.38%   1.18%          1.25%

Closures
  -  Plants                      N.A.   9      12             21
  -  Establishments             053              8

Employment Loss                 0     376  .117    .        493
   * The regulations affect new capacity.  These costs are not included in
the BAT/PSES costs shown here.  The additional costs for new capacity in 1985
are estimated to be $4.1 million capital costs for BAT and $2.2 million for
PSES.  These costs are included in the total costs.
    International Trade

    The outlook for the Organic Chemical Industry is for a significant
change from current trade levels.  Exports are expected to decrease
significantly and imports to increase.

    Individual large volume organic chemicals were assessed as to how
susceptible each was to an adverse foreign trade impact.  Seven
intermediate products were assessed as susceptible.  These are:
benzene; butadiene; ethylbenzene; hexamethylene diamine; styrene;
para-xylene; and polybutadiene rubber.  All except butadiene are
aromatics, the chemical group most susceptible to foreign competition
in 1985.
                                      5-2

-------
             Table 5-2.  Base Case Price and Production Forecast for
                              Major Product Groups
Price* ($/lb)

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.


Primary Aliphatics
Primary Aromatics
Interm. Aliphatics
Interm. Aromatics
Dyes and Pigments
Flavors and
Fragrances
Plastics and Resins
Rubber Processing
Elastomers
Plasticizers
Surfactants
Synthetic Fibers
Miscellaneous
End-Use Chemicals
General/ Inorganic
Industry Totals
1979
0.104
0.140
0.241
0.329
3.81
1.75
0.418
1.23
0.581
0.455
0.400
0.690
1.58
**
I0'280 1
1 1985
0.
0.
0.
0.
3.
1.
0.
1.
0.
0.
0.
0.
1.
123
128
236
302
91
80
366
26
573
472
410
635
62
**
0.
269
Production
(billion Ibs/year)
| Average
I Annual
I Percent
I Growth 1979
2
-1
0
-1
0
0
-2
0
-0
0
0
— 1
0
.8
.4
.4
.4
.4
.5
.2
.4
.2
.4
.4
.4
.4
**
1 -°
.7
89
34
95
51
0
0
41
0
5
2
.3
.0
.3
.9
.35
.20
.9
.40
.86
.13
4.95
9.37
5.41
**
,341.1 (
1
1
1985 |
101.
34.
108.
53.
0.
0.
48.
0.
5.
2.
4.
9.
6.
7
1
4
1
38
21
0
46
58
33
93
60
02
**
374.
8 ,
Average
Annual
Percent
Growth
2.2
0.03
2.2
0.4
0.05
1.0
2.3
2.5
-0.8
1.5
-0.5
0.4
1.8
**
1.6
   Source:  Inernational Trade Commission, Data Resources/ Inc., Meta Systems
estimates.

   * Prices are in 1979 dollars.

  ** The general/inorganic product group represents other organic chemical
products (such as PVC pipe) as well as inorganic chemicals.  Since such
products are not of primary interest in this study, no numerical values are
given.  The category merely acknowledges the existence of other chemical
products at establishments producing chemicals relevant to this study.
                                      5-3

-------
 Best  Practicable  Technology  (BPT)  Regulations

    BPT costs  in  the  aggregate,  on the  establishment  level  and on a product
 group level  are presented  along  with  the  results  of other impact analyses.
     Total  Costs  of  Compliance

     Total  annualized  costs  of compliance  for  the  industry  is  $84.9 million.
 Total capital costs for the industry  is $254.6 million.  When compared  with
 an estimated 1985 industry  sales figures  of $50.6  billion,  total  annualized
 costs are  no greater  than 0.2 percent of  industry  sales, and  capital  costs
 are  approximately 0.5 percent.
    Establishments
    Out of the 1,481 establishments;, 566 are direct dischargers and,
therefore, might have costs under EiPT.  In many cases an establishment's
waste flow already met BPT requirements so further treatment would not be
required under BPT regulations. There are 405 establishments that incur BPT
costs.

    In order to assess the relative burden of these costs, they are compared
with the establishments' estimated 1985 sales figures where possible.  Out of
305 direct dischargers having both BPT costs and 1985 sales data, six
establishments incur costs in excess of four percent of estimated sales.
Thirty-five establishments fall in the one to four percent range.
    Product Groups

    Table 5-3 shows price increases for each product group under BPT.  The
results show that the price effects; are small.  The largest price increase is
0.386^/lb (a 0.10 percent increase) for Dyes and Pigments.  The largest
percentage increase is 0.16 percent for Plasticizers.  On average the prices
rise by 0.08 percent for all product groups.  Because the price increases are
so small, no changes in output are expected to occur.

    Closures

    Analysis of these costs indicates that it is unlikely that BPT regula-
tions will result in any establishment closures.  Adverse impacts, measured
in terms of compliance costs relative to sales, are not severe enough to
cause any closures.
    Employment

    No impacts on industry employment are expected to occur due to either
establishment closure or output changes.
                                      5-4

-------
              Table 5-3.   Product Group Cost Increases Due to BPT
                                    (1979 $)

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

14.


Primary Aliphatics
Primary Aromatics
Interm. Aliphatics
Interm. Aromatics
Dyes and Pigments
Flavors & Fragrances
Plastics & Resins
Rubber Processing
Elastomers
Plasticizers
Surfactants
Synthetic Fibers
Miscellaneous
End-use Chemicals
General/ Inorganic
Overall Average
1979 Cost
Increase
<*/lb)
0.004
0.012
0.020
0.028
0.386
0.200
0.039
0.159
0.033
0.074
0.044
0.056

0.045
*
0.022
Percent
of 1979
Price
0.04
0.08
0.08
0.08
0.10
0.11
0.09
0.13
0.06
0.16
0.11
0.08

0.33
*
0.08
    Source:   Meta  Systems estimates

    *  Since  some establishments  bearing  costs  produce  these  products,  some  of
 that  cost would be  allocated  to products  in this  group/  but no  estimate  can be
 made  of  the  magnitude  of the  cost  increase.
    Capital Availability

    Total capital costs of compliance with BPT are estimated to be $254.6
million in 1985.  For the detailed product study, the capital costs of
compliance are $118.0 million, while annual cash flow under BPT is estimated
to be $5.4 billion, and annual costs of capacity expansion $4.3 billion.
Therefore, incremental BPT capital costs represent less than five percent of
Base Case capital requirements and less than four percent of cash flow.  (The
actual impact will be somewhat less, since price increases due to BPT will
provide some additional revenues.)  Given this, BPT costs should not have a
significant impact on capital availability in the industry.
                                      5-5

-------
     Balance  of  Trade

     BPT is not  expected to affect  the  industry's  balance of  trade situation.
 None of the  seven  chemicals identified as  susceptible to foreign trade
 impacts has  significant cost increases.
     Small  Business  Analysis

     The  differential  impact  of  BPT  on  small  (fewer  than  50  employees)  versus
 large  firms  is shown  in  Table 5-4.   This  table  shows  the relative  distribu-
 tion of  the  cost  to sales  ratio between establishments belonging to  large  and
 small  firms.  Three out  of 39 establishments associated  with small firms show
 an  impact  greater than four  percent, while only two out  of  213  large firm
 establishments do so.*   In the  intermediate range of  the cost to sales  ratio
 of  one to  four percent the situation improves for small  establishments, but
 remains  out of proportion.   On  average, small firm establishments  have  a cost
 to  sales ratio of 1.37 percent  with  large firm establishments at 0.48 percent.
 The  standard deviation of the mean for small firms is .24.  The mean for
 large  firms  is nearly four standard deviation units away from the  mean  for
 small  firms.  Establishments of  small firms do have higher  ratios.  The
 difference is mitigated  by the  fact that the costs applied  to small firm
 establishments may  be overestimated.  However this difference is not
 significant since this ratio is  not high enough to cause closures  under BPT.
Toxic Pollutant Regulations
    Total Cost of Compliance

    The total annualized cost of compliance for the industry is estimated to
be $523.5 million.  BAT costs are $195.7 million; PSES costs are $324.9
million.
    Establishment Impacts

    The impact of the proposed regulations is assessed by a comparison of
treatment costs to establishment sales.  The average cost to sales ratio for
all establishments is 1.25 percent.
    Product and Product Group Impacts

    Table 5-5 shows the estimated production cost increases, for 14 product
groups, expected to result from BAT/PSES regulations.  On average,  the cost
increase is 0.05 cents per pound for BAT, 0.09 cents per pound for  PSES, and
taking the sum of these, 0.14 cents per pound for the combined regulations.
These represent increases of 0.2, 0.3, and 0.5 percent, respectively, when
compared with average prices in 1S79.
   * Sixty-one of the establishments incurring BPT costs belonged to firms
which could not be classified as small or large.
                                      5-6

-------
                   Table 5-4.  Differential Impact of BPT Cost
                   on Establishments at Small and Large Firms*

                      Statistics  for  BPT  Cost  to  Sales  Ratio
                                  (as a Percent)
                                           Size of Firm
                                      Small
             I    Large
               Mean
               Standard
               Deviation
               Standard
               Deviation of
               Mean
               Number  of
               establishments
               with cost  to
               sales ratio of
               0-1%
              1-4%
              4+%
 1.37
 1.5
   ,24
26
10
              Total Number of **
              Establishments  ,
39
    Source:  Meta Systems estimates.
  0.48
   0.94
   .064
189
 22
213
   * Small firms defined as having fewer than 50 employees.

   **These totals represent establishments for which the firm could be
classified by employment as a large or small firm and for which there is
sales data.  These totals do not reflect the total establishments incurring
costs.
                                      5-7

-------
                Table 5-5.  Product Group Cost Increases Due to
                           BAT and  PSES (1979 dollars)
                              BAT
I
PSES
I   BAT and PSES
                     I  Cost   | Percent I  Cost     I Percent. I   Cost  I  Percent
                     (Increase! of  19791  Increaselof  1979(Increase!  of 1979
                     I  (jzf/lb)  I Price   I  (i*/lb)   I  Price  Ktf/lb)   I  Price
Primary Aliphatics
Primary Aromatics
Interm. Aliphatics
Interm. Aromatics
Dyes and Pigments
Flavors and
Fragrances
Plastics and Resins
Rubber Processing
Elastomers
Plasticizers
Surfactants
Synthetic Fibers
Miscellaneous
End-Use
Chemicals
General/ Inorganic*
Industry Totals
0.01
0.05
0.04
0.07
0.47
0.27
0.08
0.18
0.09
0.07
0.06
0.21
0.09
**
0.05
0.08
0.3
0.2
0.2
0.1
0.2
0.2
0.1
0.2
0.1
0.2
0.3
0.06
**
0.2 ,
0.01
0.02
0.07
0.11
1.7
0.82
0.27
0.46
0.10
0.17
0.11
0.10
0.10
**
0.09
0.09
0.2
0.3
0.3
0.4
0.5
0.6
0.4
0.2
0.4
0.3
0.1
0.06
**
0.3 ,
0.02
0.07
0.11
0.18
2.1
1.1
0.35
0.64
0.19
0.24
0.17
0.31
0.19
**
0.14
0.2
0.5
0.5
0.6
0.6
0.6
0.8
0.5
0.3
0.5
0.4
0.4
0.1
**
,0.5
   * Since some establishments bearing costs produce these products, some of
that cost would be allocated to products in this group, but no estimate can
be made of the magnitude of the cost increase.
  ** The general/inorganic product group represents other organic chemical
products (such as PVC pipe) as well as inorganic chemicals.  Since such
products are not of primary interest in this study, no numerical values are
given.  The category merely acknowledges the existence of other chemical
products at establishments producing chemicals relevant to this study.
                                      5-8

-------
     In percentage terms, primary aroraatics and synthetic fibers are most
 affected by BAT, with cost increases of 0.3 percent of price while plastics
 and resins are most affected by the PSES and combined regulations, at the 0.6
 and 0.8 percent level respectively.  Dyes and Pigments have the highest
 absolute cost increase of 2.1 cents per pound for BAT and PSES combined.
 Because of the relative inelasticity of demand with price, all of the cost
 increases are expected to be passed through as nearly identical price
 increases.

     The detailed product study analysis of the impact of these costs on
 chemicals included in the model show an average price increase due to
 these proposed regulations of 0.26 cents per pound (in 1979 dollars),
 representing an increase of 0.58 percent in the average price.  Only one
 product experiences a price increase of 10 percent or more.   (See Table
 5-6.)   The overall production decrease for all products analyzed is 0.58
 billion pounds,  or 0.22 percent of total 1985 production.  Only three
 products experience a production decrease of four percent or more.
     Processes

     The detailed product study analysis of the impact of these costs on
 specific production processes shows that the costs are concentrated in
 relatively few processes.   Eight of the 150 processes in the model which
 had treatment costs and which were operating in either 1979 or 1985 or
 both have a reduction in cash flow of three percent or more.  (See Table
 5-7.)*

     For some processes, the cash flow increases by more than three
 percent.   These increases  result from either increased process activity
 due to  a process switch or higher unit profitability due to its having
 unit treatment  costs  lower than the price  increase.   See Table 5-8.
     Closure  impacts

     The  screening procedure  identified  41  establishments  as closure
candidates.  Of these, eight  (less  than one percent of all establishments)
were judged  likely to close.**  Most of these  eight establishments are
   * Cash flow analysis takes  into account changes in price and output
which result from the treatment costs.  A large reduction in cash flow may
be due to high direct treatment costs, large increases in feedstock
chemical prices, the process being a marginal one, or to process
switches.  As described in Section 2, the structure of the LP model
results in the marginal process absorbing all the reduction in output.  In
reality, the impact would probably be spread more evenly among competing
processes as long as cost differences were not large.  Therefore, impacts
due to being the marginal process are probably overestimated.
   ** Three other establishments were identified by the closure
methodology but were determined not to be closures.  Two of these are
(continued on page 12)
                                      5-9

-------
Table 5-6.  Products Significantly Affected  by  Toxic  Pollutant Regulations
Product
Mononitrobenzene
Isobutanol
Isopropanol
Decrease in
Production,
Percent
31.0
8.5
6.0
Increase in
Price,
Percent
11.8
0.0
0.2
          Source:  Meta Systems  estimates.
           Table 5-7.  Processes with Reductions in Cash Flow of
                           Three; Percent or More
Process
Acetone-Isopropanol
Deh.
Aniline-Mononitro-
Benzene
Benzene from Coal
Tar
Isopropanol Sulfuric
Acid
Maleic Anhydride-
Benzene
Mononitrobenzene
Naphthalene-Heavy
Ref ormate
2-Ethylhexanol:
Cobalt-Hydrocarb
Source: Meta Systems
1 1
1 Production I
I Increment I
1 (mm pu/yr)* 1
-107.91
-192.33
0.00
-121.36
-3.82
-259.53
0.00
-64.51
1 1
estimates.
Production
Increment
(percent)
-19.44
-31.86
0.00
-6.19
-4.87
-31.05
0.00
-17.71

I Product
I Value
I Change
I (percent)
0.21
9.85
0.16
0.24
9.38
11.78
-1.35
2.09
1

I Cash
1 Flow
I Impact
1 (percent)
-19.44
-31.86
-19.57
-6.19
-4.87
-31.05
-6.43
-17.71
1

* Million process units per yee:r.  See note, p. 2-12.
                                   5-10

-------
           Table 5-8.  Processes with an Increase in Cash Flow of
                            Three  Percent  or  More



Process
Acetone/Phenol/AMS-
Cumene
Acrylic Acid-
Acetylene
Aniline from Phenol
(Meta)
Aniline-Byp. Iron
Oxide
Cumene-Benzene ,
Propylene
Dimethyl Terephthalate-
CTPA
Dimethyl Terephthalate-
Oxyest.
Ethylene Glycol-
Ethylene Dir.
Ethylhexanol-Propylene
Rhodium
Hydroquinone from
Cumene
LDPE-Tubular Reactor
Maleic Anhydride-
N Butane
MDI-Arco Process
Phenol from Cumene
Propionic acid-
Nitroparaff in
Propylene Oxide-
Isobutane
Propylene Oxide-
Ethylbenzene
Vinyl Chloride from
Acetylene
1 1
I Production 1
I Increment I
I (mm pu/yr)* I

168.57

0.00

180.00

0.00

242.73

0.00

0.00

0.00

0.00

0.00
0.00

0.00
0.00
0.01

0.00

0.00

0.01

1 °-°° 1

Production
Increment
(percent)

6.37

0.00

100.00

0.00

5.64

0.00

0.00

0.00

0.00

0.00
0.00

0.00
0.00
0.00

0.00

0.00

0.00

0.00
I Product
I Value
I Change
I (percent)

0.88

1.70

9.85

9.85

0.22

1.31

1.31

0.75

2.59

1.70
0.74

9.38
5.49
0.90

2.60

1.70

1.71

1 °'62 1
I Cash
1 Flow
I Impact
I (percent)

6.37

5.79

2018.63

13.18

5.64

15.30

13.17

3.19

10.43

3.41
14.37

39.40
5.67
7.29

9.83

8.51

13.83

20.24

Source:  Meta Systems estimates.
* Million process units per year.  See note, p.  2-12.
                                   5-11

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 small (all  have  less  than $10 million in sales and less than 40 million
 pounds in production),  manufacture  only plastics and resins,  and employ from
 21  to 75  employees.   Five of  the eight establishments projected to close are
 direct dischargers.

     The plant  closure methodology identified  153 plants (process lines) that
 were possible  closure candidates.   Of these plants,  21 are likely to close.
 Total production loss at  these 21 plants is under 500 million pounds.   Most
 of  the production loss  is in  two related products,  aniline and mononitro-
 benzene,  which experience very high treatment  costs;  110  million pounds of
 aniline and  167  million pounds of mononitrobenzene.   Thirteen of the closed
 plants produce plastics and resins,  including  ten phenolic resins plants.
 The  plastics and resins plants are  small producers, producing less than
 55 million pounds  altogether.
    Employment Impacts

    The  impact of these regulations on employment in the industry  is
estimated on the basis of the drop in production due to closures of
establishments and plants reported above.  The eight establishments expected
to close are estimated to employ 344 persons.  The 21 plants employ 149
persons.  Since the establishments and plant closures were calculated
separately, the total number of closures will be less than the sum of these
two.  For a given process, closure of plants resulting from establishment
closings will mean that other plant closure candidates remain open.
    Capital Availability

    Based on the detailed product study, the cash flow for that part of the
industry after implementation of toxic pollutant regulations is $4.4 billion
(1979 dollars).  This represents a small decrease in cash flow of 0.19
percent from the BPT situation.  The estimated capacity expansion of the
industry under the regulations drops only 0.1 percent from the BPT level.
The capital costs of this capacity expansion are $3.1 billion, about 71
percent of cash flow.

    For the portion of the industry (representing 68 percent of production)
included in the detailed product study, the BAT, PSES, NSPS, and PSNS
regulations are estimated to require capital expenditure for treatment
systems of SO.49 billion.  This increase represents a 15 percent increase in
   ** (continued from page 9) classified by the NPDES Permits List in an SIC
other than the five organics and plastics SIC groups.  Thus,  their total
wastewater flow, which affects cost, would include flow not covered by the
regulation.  The sales figure for the third establishment understates the
total sales value.  This establishment produces chemicals with a higher
product value than the average price for the SIC group used to estimate the
sales.  Therefore, this establishment was eliminated as a closure candidate.
                                      5-12

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 the capital requirements.   It is possible to fund all of the capital costs of
 projected capacity expansion and of treatment systems out of cash flow.
     Balance of  Trade

     The  discussion  of  trade  in the  Base Case section identified seven
 chemicals  whose international  market  position is likely to be sensitive to
 domestic price  changes.   Of  these none experienced significant price
 increases  or production  decreases as  a result of BAT/PSES regulations.  (See
 Table 5-9.)  Thus,  BAT/PSES  regulations are  not  expected to have an
 appreciable effect  on  the international trade of organic chemicals.

       Table 5-9.  Effects of Toxic Pollutant Regulations on Chemicals
                  Judged  Vulnerable  in International Markets
1
Chemicals |
Benzene
Butadiene
Ethylbezene
Hexamethylene Diamine
Styrene
Para-Xylene
Polybutadiene Rubber
1
Price 1
Increase (%) I
0.13
0.0
0.53
0.08
0.54
0.24
0.003
1
Production I
Decrease (%) I
-0.9*
0.2
-1.7*
0.1
0.4
0.1
0.0
1
Net
Effect
Negligible
Negligible
Negligible
Negligible
Negligible
Negligible
Negligible

   * Production increases for this process.
    Small Business Analysis

    The statistics on the cost to sales ratio for the BAT and PSES regu-
lations (Table 5-10) show that establishments at small firms experience less
of an impact.  The number of establishments with a ratio greater than 4
percent is smaller for small firms (one out of 80) than for large firms (37
out of 829).  The mean ratio also is smaller for small firms than for large
firms (.92 versus 1.32).  It does not appear that small firms will face a
disproportionate hardship under these regulations.
                                     5-13

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              Table 5-10:   Differential Impact of BAT/PSES Costs
                 on Establishments at  Small and  Large  Firms*

                 Statistics for BA:?/PSES Cost to Sales Ratio
                                (as a Percent)
                                           Size  of  E'irm
                                      Small
            I    Lcirge
              Mean
0.92
1.32
              Standard
              Deviation
0.46
3.06
              Standard
              Deviation of
              Mean
              Number of
              establishments
              with cost to
              sales ratio of
0.05
    Source:  Meta Systems estimates.
0.11
0-1%
1
1-4% .
1
1
Total Number of **
Establishments .
25

20

1
80

580
1
. 212
1
1 37
829
\
   * Small firms defined as having fewer than 50 employees.

   **These totals represent establishments for which the firm could be
classified by employment as a large or small firm and for which there is
sales data.  These totals do not reflect the total establishments incurring
costs.
                                      5-14

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                                    Section 6
                             Limits of  the Analysis
 Introduction

     The  organic chemicals industry is large and diverse, and many plants in
 the  industry are highly complex.   EPA estimates that the industry includes
 about 2,100 manufacturers producing over 25,000 different organic chemicals,
 plastics and synthetic  fibers,  which are polymerized from organic chemicals.
 Some plants produce chemicals in  large volumes,  while others produce only
 small volumes of "specialty"  chemicals.   Large volume production tends toward
 continuous  processes, while  small volume production tends toward batch
 processes.   Continuous  processes  are generally more efficient than batch
 processes in minimizing water use and optimizing  the consumption of raw
 materials in the process.

     Different products  are made by varying  the raw  materials,  chemical
 reaction conditions, and the  chemical engineering processes.   Furthermore,
 the  products being  manufactured at a single large chemical plant usually vary
 on a weekly or  even daily basis.   Thus,  a single plant may simultaneously
 produce  many different  products in a variety of continuous and batch
 operations,  and  the product mix may change  frequently.

     To control  the  wide variety of pollutants discharged by  the  industry,  a
 broad range of  in-plant controls,  process modifications  and  end-of-pipe
 treatment techniques are  used.  At most  plants, programs have  been implemented
 that  combine  elements of  both in-plant control and  end-of-pipe wastewater
 treatment.   The  configuration of  controls and technologies differs from plant
 to plant, corresponding to the  differing  mixes of products manufactured by
 different facilities.

     This  analysis is designed to  capture  these complex industry
 characteristics.  It analyzes the  industry  at  the manufacturing  complex.
 It further  examines effects of  the  regulation  for major  product  groups  and
 a large portion of  specific product processes  in the industry.   Employing
 this  multi-level approach provides  the means  to investigate more detailed
 and different aspects of the  industry.  However, the analysis  is limited by
 available data and methods necessary  for  the  analysis.   Major  limitations
 of data and methodology are discussed in  three sections  covering treatment
 costs, industry analysis and  the detailed product study.   Following  this is
a discussion of the sensitivity analysis.

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 Treatment  Costs

     1.   The  estimation  of  treatment:  costs  for  a sample of the industry was
 used to  estimate  treatment costs  at  specific establishments.   This extrapola-
 tion contains  uncertainty  because we do  not have complete site-specific
 information  of the facilities' ages,  production wastewater flow,  types and
 quantity of  pollutants,  and  related  factors.   The extrapolation of process
 and  treatment costs  is  based on sales data because of  the lack of specific
 information  on products, production  levels or  processes used.   The use of
 this data  and method provides a good  overall estimate  as  shown when the
 industry-wide total  is  checked against the detailed product study.  Since the
 product  study gives  accurate and  detailed  information  on  that  part of  the
 industry it  represents,  it provide:;  a reliable source  against  which to
 interpret  impacts across the industry and  against  which to assess the  relia-
 bility of  impact estimates for the industry as a whole.   The  detailed  product
 study total  annual compliance cost for BAT/PSES  is $324 million.   Since the
 detailed study represents  68 percent  of  industry production,  a simple  total
 industry extrapolation  estimated  on  the  assumption of  equal cost  per unit
 production would be  $480 million, which  compares favorably with the estimate
 from the industry-wide  analysis of $523.5  million.

     2.   The  technology  basis for  BAT  and PSES  cost estimation  is  the same.
 Some plants  that discharge to POTWs might  not  use  biological treatment for
 their process wastewater due either to removal credits in individual loca-
 tions that make it possible to achieve these proposed  standards without the
 recommended  technology, or to the possible use of  less expensive  physical/
 chemical treatment designed and operated for specific  waste streams that
 achieves priority pollutant limitations without  relying upon biological
 treatment.   Therefore,  the PSES costs  may  be overestimated.

     3.   The  treatment cost estimates  are based on  308  information collected
 in the late  1970's as to treatment in  place.   Since  then,  the  industry has
 made significant additions of wastewater treatment  equipment.   Thus treatment
 in place will likely reduce the incremental cost needed to  achieve the
 proposed regulations.

    4.   Assumptions used in developing costs for indirect dischargers  are
conservative in that any plant in the data base not.  known to be a  direct
 discharger is assumed to be an indirect discharger.  Since  some of  these
plants actually discharge no process wastewaters,  this overestimates the
costs associated with the PSES regulation and therefore total  industry  costs.
Industry-wide Analysis

    1.  Limitations in the types and quality of data available restrict the
establishment closure analysis to the use of the cost to sales ratio as the
determinant of closure candidates.  The closure methodology is based on the
assumption that the treatment cost to sales ratio is a measure of the burden
felt by the establishment. This is a good assumption in that an establishment
is assumed to be a price taker (no pass through of treatment cost).  The
                                      6-2

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 ratio gives a conservative picture of the impact of treatment costs on
 profitability.

     2.  Total sales are known for the establishments in the 5 SIC codes whose
 primary  line of  business is organic chemicals production.  For the 306 estab-
 lishments included in the analysis whose primary line of business is not
 organic  chemicals,  the proportion of sales for organic chemicals is unknown,
 therefore,  cost  to sales ratios could not be computed.  Of these establish-
 ments, 263  are included in the detailed product study and are therefore
 adequately  covered in the analysis.  Thirty are plastics establishments for
 which total production and flow are known but sales cannot be estimated from
 current  data.  For the remaining thirteen establishments process only
 wastewater  flow  is known.
 Detailed  Product  Study

     1.  The process  economics  and  treatment  costs in the  model  are "typical*
 estimates.  They  are not  intended  to  represent  specific plants.   A
 sensitivity analysis shows  that  this  is  not  a  serious limitation overall.
 However,  estimates for  small plants tend to  be  less  reliable.

     2.  Some processes  in the  model do not have treatment cost  estimates.
 This could bias the competitive  positions of plants  with  treatment costs.
 However,  no process  switches were  caused by  this.  Costs  are  likely to be
 underestimated for products produced  by  these processes.   This  limitation
 affects 28 products, which  represent  less than  four  percent of  the production
 of plants in the  product  study.

     3.  The breakdown of  compliance costs into  BAT,  PSES,  for the detailed
 study depends on  the following assumptions:

     a.  Five percent of capacity becomes obsolete  in each  year of
        operation.

    b.  To calculate capacity growth  between 1984  and  1985, it is
        assumed that the  capacity  change  in  the model  between 1979
        and 1985  occurs at a uniform  rate.

    c.  For each process  the percentage  of capacity  which  discharges
        to POTWs  is calculated.  This percentage is  used to
        calculate the proportion of total compliance cost  which  is
        assigned  to NSPS  and PSNS.  No allowance is made for zero
        dischargers.

    4.  The solution of the linear programming model is sensitive to small
differences in production costs.   For example,  when a product is produced by
more than one process,  the model  causes the  high cost process to absorb the
full amount of an output  reduction, even though cost  differences among
processes may be well within the  band of uncertainty  about those costs.
                                      6-3

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     5.   The capacity utilization figures for 1985 are overestimated since the
 model will provide only as much "new"  capacity as needed, and will only do so
 after fully utilizing less costly existing capacity.  Hence, a chemical
 market  which has  had a historical equilibrium capacity utilization of 70
 percent may show  a 90 percent capacity utilization in our 1985 forecast.
 Sensitivity Analysis

     These observations  about  the  sensitivity  of  the results are based on
 previous  costs  and macro-economic projections.   Howeveri  most of the
 observations are  still  valid.   Time constraints  made it impossible to
 rerun  these analyses  after  the  proposed  regulation was decided upon.

     Sensivitity analyses  were conducted  for:   1)  process  economics; 2)
 macroeconomic variables;  3) produce demands;  and 4)  wastewater treatment
 costs.  The baseline  forecast was updated  to  reflect the  Fall 1982 DRI
 macroeconomic forecast.   This forecast is  more current and less optimistic
 about  industry  growth than  the  Spring 1981 version previously employed.   The
 total  reduction in end-use  demand for 1985 between the old and new forecast
 is  about  16 percent.  Treatment cost estimates were  revised downward from
 earlier analyses.  Following are  the conclusions from the sensitivity
 analyses:

     1.  The results of  the  process economic analysis show that the impacts
 of  regulation costs are negatively  correlated with production costs as
 represented by  process  economics.   Therefore, if  production costs  were to
 increase  and regulation costs remain constant, the impact of  BAT costs would
 be  smaller.

     2.  The  impact of the regulations is proportional  to  the  treatment
 costs.  Therefore, any  error in estimation of treatment costs will be
 directly  reflected in impacts.  However, treatment costs  are  a small
 percentage  of total production cost.

     3.  Using model processes to  represent a group of  plants  gives good  over
 all  results except in cases where  the process economics must  represent many
 plants smaller  than the "typical" plant.

     4.  Feedstock costs make up the majority of production  costs.   The
 effects of  error in the feedstock  prices are large and overwhelm the  effect
 of errors in other components of production costs, including  treatment
 costs. This is  important during periods of unstable  oil prices.  The  impact
 estimates are more dependent on the assumptions for  the macro-economic model
 and  on initial  specification of basic and  intermediate chemical prices than
on treatment cost estimates.

     5.  The impact results are very sensitive to shifts in the final demands
for end-use products,  the demand elasticity, and treatment costs.
Therefore, incorrect estimates of any of these paramaters will change the
competitive position of the process producing the chemical.
                                      6-4

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                                   Appendix 2 A

                             Capital Recovery Factor
     The capital recovery factor (CRF) measures the rate of return that an in-
 vestment must achieve each year in order to cover the cost of the investment
 and maintain net earnings, including depreciation and taxes.  It is the ex-
 cess of revenues over variable costs/ per dollar of invested capital, needed
 to cover the cost of borrowing, depreciation and net profit-related taxes,
 while preserving the market value of the firm's stock.

     The formula for CRF used in previous analyses was:
                   A(N,K )  - td
           CRF   =	                                       (2A-1)
                      1 - t
 where:
     N          =   lifetime of  investment
     Kf         =   average after-tax  cost  of  capital
     A(N,Kf)    =   annuity whose present value is 1,
                   given N and Kf  [Kf/(l-(l+K£)-N)]
     d          =   depreciation rate
     t          =   corporate income tax  rate
Recent changes in  the  tax code  allowing for more  rapid  depreciation  and
greater  investment  tax credits  require alterations  in the  formula  for
calculating the capital recovery factor.   These changes result  in  a  lower
value for the CRF,  for any given cost of capital  and life  of the asset.
The revised formula is:
                   A(N,K )(.9-c)
          CRF  =  - - -                                      (2A-2)
                     1 - t


where:      c  =   V1 - -
                   r.
                  3=1
where:
       n      =  depreciation lifetime under tax code
       d'     =  new depreciation rate

       Other variables as above.

The assumptions and data used to obtain values for the above variables are
described below.

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     Average Cost of Capital

     The cost of capital, Kf,  is the average percentage return that
 suppliers of debt and equity  demand.  For firms which have more than one
 type of capital,  Kf is calculated as the average of the after-tax costs
 of  debt and the costs of equity,  weighted by the share of market value of
 each relative to the total market value of the firm.   In equation form:

           K*  =  bi(l-t) + (l-b)r                                  (2A-3)


 where:

          *
        Kf   =  average after-tax  cost  of capital
        i    =  average cost of  debt
        r    =  average cost of  equity
        t    =  corporate income tax rate
        b    =  share of debt  financing


     The costs of  debt and equity  are measured  by the  current  market  value
 of  outstanding debt  and stock,  rather  than the original costs when the
 debt  and equity were issued.  The argument that projects  should  be evalu-
 ated  using the weighted average cost of  capital as  the  discount  factor has
 been  made elsewhere* and includes several  noteworthy  assumptions.  Firms
 are assumed to always have  an optimal  debt/equity ratio (or at least  some
 preferred debt/equity ratio).   In addition,  it is assumed  that new projects
 do  not  alter the  overall risk position of  the  firm.   (A change in  the risk
 level might  result  in a change  in the  debt/equity level,)  Therefore,  new
 projects,  on average,  will  be financed with  these same  desired fractions
 of debt  and  equity.

    Cost of  Debt.  Since firms  often have  more than one debt  issue, it is
 necessary  to calculate  an average cost within  a  company as well  as across
 companies.   The following information  on the debts of 40 chemical  companies
 was obtained  from Standard  and  Poor's  Bond Guide  (August 1979)**.

    1) yield to maturity;
    2) debt  outstanding;
    3) closing price.
   * See, for example, J. Fred Weston and Eugene F. Brigham, Managerial
Finance  (6th ed.), Dryden Press, 1978, Chapter 19.

   ** See:  Draft Industry Description:  Organic Chemical Industry,
Vol. I, December 1979, pages 3-7 through 3-16, for a detailed presentation
of the data.
                                      2A-2

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     First,  the  total  market value of each bond issue is calculated as the
 bond price  multiplied by the amount of debt outstanding.  Second, the
 average cost  of debt  is calculated as a weighted average of the various
 values for  yield to maturity,  where the weights equal the ratio of the
 market value  of each  bond issue to the total value of debt.  The average
 bef ore-tax  cost of  debt for these companies is 9.89 percent.

     Cost of Equity.   A firm's  cost of equity can be expressed in equation
 form as:
                                                                      (2A-4)
 where  e  is  the  annual  dividend,  P is the  stock price,  and g the expected
 growth rate of  dividends.*   To estimate the firms'  cost  of equity,  the
 following data  were  obtained from Standard  and Poor ' s  Stock Guide (August
 1979):

     1)   dividend yield;
     2)   closing price;
     3)   number  of shares outstanding.
     Information was collected for common  stocks.   The  existence  of  pre-
ferred stocks complicates the calculations  substantially,  since  a preferred
stock is more nearly a stock-bond hybrid.   Preferred stocks are  ignored
except where they represent a signficant  portion  of equity (more than  10
percent of the market value of all stocks).   In those  cases, the company
was  removed from the sample.

     An estimate of the expected growth  rate of dividends  (g) was obtained
using data from the OSITC Organic Chemicals (1977) and the DRI Chemical
Review (Spring 1981), based on the growth rate of  sales.   A weighted
average of annual growth rates for plastics,  fibers, and elastomers sales
was  obtained for the entire industry:

          g  =  .745{.071) + .125(.016) + .130(.038)   =  .06         (2A-5)
                 Plastics    Elastomers       Fibers
    Depreciation

    Depreciation is normally defined as the fraction of revenues set aside
each year to cover the loss in value of the capital stock.  Due to recent
changes in the federal tax code, the useful life of a capital item is now
considerably longer than the depreciation life for tax purposes.  Based on
earlier work the lifetime of capital stock for this industry is assumed to
   *See, for example, J. Weston and E. Brigham, op.cit.
                                      2A-3

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 be about 10 years.*  The depreciation rate for most personal property now is
 straight-line-over five years (20 percent).   These values are used in the
 revised calculation of the capital recovery  factor.
     Tax  Rate

     The  current  federal  corporate income tax rate is 20 percent on the first
 $25,000  of  profits,  22 percent  on the next  $25,000,  and 46 percent on all
 profits  over $50,000.  For  this anedysis, plants are assumed to be paying an
 even 46  percent  federal  tax on  all profits,   A study by Lin and Leone**
 indicates that state and local  income taxes  also are a significant factor in
 pollution control  investments.   State corporate income tax rates may be as
 high as  9.5 percent.   In their  study,  a  weighted average of 7 steel-producing
 states yielded an  average state corporate income tax rate of 7.55 percent.
 State income taxes,  of course,  are deductible expenses in computing corporate
 income tax.   A state  corporate  income tax rate of 8  percent is assumed here.
 Deducting this figure  before computing the federal income tax rate reduces
 the  net  effect of  the  8  percent rate  to  about 4 percent.   Thus,  the overall
 effective income tax  rate is approximately 50 percent.
    Sensitivity Analysis

    Table 2A-1 presents various values for the capital  recovery  factor,
assuming various weighted costs of capital (Kf) and different  formulations
allowing for changes in the federal tax code.  Both rapid depreciation  and
the investment tax credit serve to lower the capital  recovery  factor, thus
reducing the return necessary to justify a given investment.

    The weighted cost of capital is estimated based on  the current costs as
reflected in the current prices and yields of a sample  of corporate stocks
and bonds for that industry.  In August of 1979, the  weighted  cost of capital
for the organic chemical industry was estimated to be about 10 percent.
There are two major assumptions in using this method.   First,  current prices
and yields accurately reflect future costs of capital.  iSowever, interest
rates have increased significantly since the summer of  1979.  Second, the
current portfolio mix will remain constant over the next several years.
Given changes in tax codes, and changes in the availability of certain
sources of capital such as industrial revenue bonds, this is unlikely.
Therefore the cost of capital is expected to be higher than 10 percent.
Because of uncertainty about future interest rate levels, the weighted cost
of capital was conservatively assuired to be close to 15 percent.
   *Draft Industry Description:  Organic Chemical Industry, Vol. I, December
1979.

   **An Loh-Lin and Robert A. Leone, "The Iron and Steel Industry," in
Environmental Controls, (Robert A. Leone, ed.), Lexington, MA:  Lexington
Books (1976), p. 70.
                                      2A-4

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                                  Table  2A-1
            Alternative  Derivations  of  the  Capital Recovery  Factor
Variable
Weighted cost of
capital (K )
Values
.10 .15 .20 .10 .13

.15 .20
Life of asset  (N)

A(N, Kf)

Depreciation life (n)

Depreciation rate (d)

Tax rate (t)

c

CRF(l)

CRF(2)

CRF(3)
 10     10     10     10     10     10     10

.163   .199   .239   .163   .185   .199   .239
10
.10
.50
10
.10
.50
10
.10
.50
5
.20
.50
5
.20
.50
5
.20
.50
5
.20
.50
.226   .298   .378
.379   .352   .335   .299



.201   .240   .265   .335

.169   .202   .225   .288
where:  CRF(l) is original formula (2-1 in text)
        CRF(2) allows for rapid depreciation but  not investment tax credit
        CRF(3) allows for both rapid depreciation and investment tax credit
        (2-2 in text)
                                     2A-5

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    A single, industry-wide CRF equal to 22 percent: has been used in our
analysis.  For a given investment, a firm's CRF will vary with their cost of
capital and mix of financing.  However, it was not possible to estimate a
separate CRF for each establishment or firm.
                                     2A-6

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                                   Appendix 2B
                            Demand/Supply Methodology
                        Used in the Detailed Product Study
                        (Including Product Group Analysis)
     This appendix describes the steps taken to transfer the demand/supply
 framework/ described in Section 2, into an analytical model.  The first
 section describes the models used in the detailed product study.  The second
 section presents the development of the 1985 base case.  The following
 sections cover specific procedures used in the demand/supply portions of the
 BPT, BAT, PSES, NSPS, and PSNS regulations.  The impact measures used in
 these analyses are described in detail in Appendix 2D.
 General Approach

     The principal tools of the demand/supply analysis are econometric
 demand forecasts and a linear programming (LP) supply model of the organic
 chemicals industry.

     In economic terms, using the linear programming model framework to
 minimize the costs of meeting a given set of final demands is equivalent
 to assuming perfect competition in the industry's response to a given set
 of final demand relationships.  The solution of this model for a parti-
 cular set of final demands is a set of prices for all intermediate and
 final products.  Given a set of demand equations one can solve the linear
 programming model iteratively and the set of demand equations for a con-
 sistent set of  prices and quantities.  This consistent set is, in fact,
 the competitive equilibrium given the structure of the model.  Of course,
 this model diverges from the real world in many ways, but it provides a
 useful approximation in capturing both technological and economic behavior
 in the industry.

     Although the  analysis is done using data for a single time period,  it
 can be described  as "medium-term."   The analysis allows  for  a demand
 response of two to three years rather than just the first year elasticity
 of demand.   The handling of  capacity changes in the supply model  can also
 be considered as  medium-term.   Any  existing  or  previously announced plants
 stay  open  as long  as  they  can  cover  variable costs.   However,  unannounced
 new plants  will be constructed only  if  they  earn the market  rate  of
 return.  Moreover,  their  supply  response  is  infinitely elastic, i.e.,
 sufficient  new  capacity  will be generated to bring  price  up  to the  point
 where  market rate  of  return  is  just  achieved.*

    An important characteristic of this structure  is the  capability to
 vary assumptions and parameters  (e.g., future costs  of energy,  labor and
 capital) which  can affect  the  outcome of  the  analysis.  While  the choice
   *As discussed in the section on calibrating the model to the current
year, the aggregate model appears to be long-run in that existing
processes are allocated some depreciation and return on investment
(r.o.i.).  However this allocation is based on current values and does not
necessarily imply that a long-term equilibrium r.o.i. is being used.

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 of  prices  used  in  this analysis  is  consistent  with  Data  Resources,  Inc.
 (DRI) macroeconomic forecasts, the  sensitivity of the  results  to extreme
 variations  in factor prices  is investigated.
     Demand Forecast

     As  shown in Figure  2B-1, the fature demand  for  the organic  chemicals
model is derived from a long-range forecast of  the  nation's economy
together with demand equations for end-use products.  That forecast  is
generated by a macroeconomic model of the economy which, in turn,  is
driven  by a set of demographic, policy, and energy  costs assumptions.  The
macro model consists of equations that relate the aggregate economic
variables.  Energy policies are important to the organic: chemical  industry
for  two reasons.  First, energy costs are part  of the overall cost of
production.  Second, refinery products derived  from crude oil and  natural
gas  are prin- cipal feedstocks used to produce  organic chemicals, and when
oil  and gas prices rise, prices of chemicals and chemical-based end
products are directly influenced.

     The econometric demand models developed by  DRI  consist of a set  of
equations relating a forecast of the national economy to the consumption
of 19 major products in three major groups of end-use chemicals, i.e.,
Plastics and Resins, Synthetic Fibers, and Elastomers.  The equations relate a
chemical's production in a given year to its price  and a set of relevant
macroeconomic variables.  For example, the demand for styrene butadiene rubber
is positively correlated to automooile tire production.

     The demands generated by these equations account for only part of the
demand for the chemicals analyzed.   The other, or exogenous,  demand
relates either to highly diversified end markets or to end markets which
do not tie in well to the DRI macro model.  It was therefore necessary to
supplement the econometric model demand equation with other forecasts,
such as those published in trade journals or the SRI Chemical Economics
Handbook (CEH),  and those made by rough correlation of historical trends
to a macroeconomic indicator.

    All supplementary forecast assumptions are compared  for consistency with
the DRI macroeconomic model.  For example, isobutanol is consumed by di-
isobutyl phthalate plasticizer (65 percent), and isobutyl acetate,  other
coating solvents and fuel additivies (35 percent).   A recent  forecast in the
1978 Chemical Economics Handbook estimates total demand  growth for  propylene
to be 2 to 3 percent per year.   By directly relating the forecast to the DRI
housing construction (a major user  of plasticizers)  index,  a plasti- cizer
growth of  about  4 percent is indicated.   No forecast was available  for
isobutyl acetate,  but growth,  based  on several sources,  for all  acetate esters
is expected to be 2 to 3 percent between 1978 and 1985.   Solvents are a very
fractionated market; general growth  is expected to  be about 2 percent (CEH
estimate)  during the next five years, but generally product growth  of a
specific chemical is not known.   The exogenous demand for isobutanol was
therefore  approximated by applying  a 3 percent annual growth  rate.
                                      2B-2

-------
                            Figure 2B-1

                    Demand  Forecast Methodology
Energy and
Feedstock Price
Forecasts
Demographic
and Policy
Assumptions
                              DRI Macro Model
 Initial
 Estimates
 of Product
 Prices
Forecast of GNP,
Price Levels, etc
                              Initial End Use
                              Demand Estimates
Demand
Equations,
Market
Information
                              2B-3

-------
     The  econometric demand  equations  require  initial  price  assumptions for a
 demand to -be estimated.  Any  subsequent  change  in  this price  assumption will
 cause a  change  in the demand  estimate.   The procedure for adjusting  the rough
 demand estimates is similar.   Initial price assumptions  are assumed  to be
 consistent with the DRI macro-model assumptions of prices.  Elasticity esti-
 mates for these demands are based on observations  of  price-demand  behavior in
 the  various end use markets.   Any price  changes affect the demand  forecasts
 as a simple function of these  elasticity estimates.
    Supply Model
    Model structure and Data Requirements.  The supply model is a  linear
programming model constructed to minimize the costs of meeting the chemical
demands confronting the organic chemical industry, subject to the  relevant
chemical mass balance and production cost constraints. The model is based on a
representation of various chemical processes used in the industry.  It  incor-
porates over 250 processes used to produce 135 major chemicals, and their
associated by-products.  Each of these processes utilizes one or more raw
material inputs, involves a variety of processing costs and associated  capital
costs, requires a minimum return on investment, and produces one or more out-
puts.  In addition, the model includes inorganic chemicals used as feedstocks
or as by-products to the production of organic chemicals.  The model,
presented in algebraic form is shown in Table 2B-1.

    The six principal data requirements of the model are:

    1.  Process economics.  These show the relationship of all inputs and
outputs of each process in the model. For example. Table 2B-2 represents
the process economics for producing ethylene from ethane for a one billion
pound per year plant brought on stream in 1975.  The DRI model includes 93
products with process economics fo;: 156 different processes.  To this,
Meta Systems added 42 products and 94 processes.  The sources for the
additional process economics included Chemsystems, Inc., the Pace Company,
and the SRI Process Economics Program.

    2.  Treatment costs (capital and variable costs).  These are based on
costs, either on a model-plant basis or for a sample of plants, provided
by EPA.  These are incremental costs, BPT costs are calculated from
estimated current levels of treatment and BAT/PSES costs are incremental
to BPT.

    3.  Exogenous demand for end-use chemicals.  These are estimated from
the DRI demand models and from published forecasts of demand in different
industry sectors, as discussed earlier.

    4.  Imports, exports and inventory change.  The DRI Chemical Service
forecasts imports, exports and inventory change for all chemicals in their
supply model.  For these chemicals, and also those added by Meta Systems,
the annual statistics of U.S. imports and exports compiled by the U.S.
Bureau of the Census and forecasts published in the trade literature,  have
been the principal sources of data.
                                      2B-4

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Minimize cost
        s.t.
                     Table  2B-1

Algebraic Representation of Aggregate  Supply Model

= .   [OP+MN.  + OFXCST.  + DEP.   + ROI.  + GA.   + (UTIL.  * UTILPR)
  11          i       i        11          i

                 + (LABOR..^  X  LBRPR) + .(BCHEM. .   * BCHMPR) ] * X
    (CHEM. .  * X.  )  + IMP. - EXP. - INV. = DEMAND
for all j
                          X.  <_ EFFCAP.
                                       for all i
       OP+MN., OFXCST., DEP., ROI., GA., UTIL., LABOR., BCHEM. ., X., IMP., EXP.
Where:
        OP+MN^   =  operating and maintenance costs for process i

       OFXCST^   =  other fixed costs (including taxes , insurance , and plant
                    overhead) of process i
                 =  depreciation of process i

                 
-------
                                   Table  2B-2
                   Process Economics for  Ethylene from Ethane
   Variable Name
Units
   Source:  Data Resources, Inc.
Coefficients*
1-3 Butadiene
Butane
Ethane
Ethylene
Fuel Gas
Propylene
Pyrolysis Gas
Cooling Water
Electricity
Labor
Natural Gas
Process Water
Steam
Operating and
Maintenance Costs
Other Fixed Costs
Sales and Admini-
strative Costs
Depreciation
Return on Investment
1
Ib.
Ib.
Ib.
Ib.
Ib.
Ib.
Ib.
gal.
kwh
mhr
MM Btu
gal.
Ib.

$
$

$
S
$
1
.0180
.0075
-1.3120
1.0000
.0090
.0380
.0370
-42.0000
-.0170
-.0001
-.0066
-.0500
-4.3000

-.0068
-.0064

-.0068
-.0149
-.0298

   *The coefficients in the upper portion of the table (1-3 Butadiene through
steam) have units of pounds, gallons, kwh (or some other  physical unit)  per pound
of output.  The coefficients in the lower portion of the  table have units of
dollars per pound of output.  A minus sign designates an  input,  otherwise an
output.
                                      2B-6

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     5.   Prices  for  the  different  factor inputs which contribute to produc-
 tion costs (e.g.  utilities/  wages/  basic feedstocks, etc.).  These are    '
 estimated  from  cost indices  provided  by the DRI macro model.

     6.   Effective capacity levels {a  fraction of nameplate capacity)  for
 each process-product combination.   These have been estimated  as part  of
 each set of process economics.  The  nameplate capacity estimates for a
 given process are summations of the individual plant capacity estimates.
 The  sources used  to determine individual plant capacities include: the
 DRI  Chemical Service, the SRI Directory of  Chemical Producers,  Chemical
 Marketing  Reporter,  the industry  survey conducted by EPA, the different
 sources  of process  economics,*  reports  in the various chemical industry
 periodicals**.
    Capacity Expansion.  Two methods  are  used  to  add new plant  capacity  to
the supply model to project the  1985  Base Case.   Announced  new  capacity  is
treated  in the same manner as existing capacity,  with adjustments  in pro-
cess economics necessary only for the depreciation  cost  estimate.   In  this
instance, the plant is the newest plant using  the specified process, and
becomes  the model plant represented in the process  economics.   The second
method involves unannounced capacity  expansion that is necessary to meet
the demand for a product. This capacity is represented in most  instances
as an infinitely elastic supply  of a  product,  given the  costs associated
with the new construction.  If demand is  sufficient to make the new capa-
city profitable (i.e. to allow market rate of  return on  the investment)
then unannounced capacity will be added.

    Economics for the unannounced capacity expansion are  developed from
existing and/or announced plants with comparable  process  economics, modified
if necessary to reflect future costs  and  technological changes  that can  be
identified.  For example, the supply  model contains  two sets of process
economics for ethylene derived from ethane.  One  set,  X1ETYL, represents
existing or announced ("X" process) capacity,  the other set, designated
Y1ETYL,  represents a potential new but as yet  unannounced ("Y* process)
capacity that could be built if needed to meet long-term production require-
ments.   The set of *Y" process economics  in the long-term models differs from
the "X"  economics in the following manner:

    a.   The "Y" processes contain a depreciation coefficient relevant
        to the  year in question (e.g., 1985).  The  "X* processes have
        a depreciation coefficient associated with the latest plant
        built or  announced using the process.

    b.   The  "Y" processes incorporate any known technological
        improvements  such as  improved yield factors.

    c.   Additional  "Y" processes were added to reflect potential new
       processes or process  alternatives.
   *  The  Pace  Company,  Chem Systems,  inc.,  JRB Associates,  Inc.

   ** Chemical Week,  Hydrocarbon Processing,  Chemical Engineering News
                                     2B-7

-------
    Unlike the existing processes,  the  *Y" processes  have  no  capacity
constraints, with the  exception of  those processes  that  use feedstocks  which
have  limited availability.  For example, the availability  of  propane  to make
ethylene  in future years might be limited due  to  declining production of
natural gas and high demand for alternate uses of propane. Therefore,  it  is
necessary to constrain the use of propane in both the "X"  and "Y" processes.

    To meet projected  final product demands and production requirements at
minimal cost, the supply model can  select and test  different  amounts  of
existing plus announced capacity and/or unrestrained  amounts  of new capacity.
Generally, where only  one process Eor a given product  is represented, the
model will use all of  the "X" process capacity before  using the "Y" process,
because capital costs  for existing and announced plants are lower than  for
new, unannounced plants using the same prpcess.

    Where more than one process can be used to produce a chemical, the  model
will select processes on the basis of relative factor prices  in order to
minimize costs.  In this situation,  all the existing and announced capacity
need not be used before new capacity is incorporated into  the model solution.
    Calibration

    Prior to its use as a forecasting tool, the supply model is calibrated
with historical prices, costs, capacities, production, and international
trade. Using the average contract prices and production levels for 1979
(the most recent year with complete price information) and considering all
production costs, depreciation and selling expenses, the model is solved
for before-tax return on investment (r.o.i.) for each process in the
model. These estimates of r.o.i. are then examined relative to capacity
utilization, market competitiveness, and known market conditions . If
r.o.i. estimates are not reasonable, adjustments are made in the other
elements of the process economics.

    The estimates of r.o.i.  are ussd as the basis for setting initial prices
in the baseline forecast for those products where price is not determined by
the costs of unannounced new capacity (see below).
    Baseline Forecasts

    The baseline forecast provides a set of prices, outputs, capacity
utilization and production costs which are consistent with the demand and
supply model,  including forecasts of exogenous demand variables.  Figure
2B-2 shows the steps of the analysis.  The determination of the initial
estimates of product prices and end-use demands was described above in the
subsection on the demand forecast.

    Costs are minimized by the supply model (described earlier) in rela-
tion to the end-use demands and the specifications of the technologies.
Process costs are adjusted from the calibration year on the basis of
projected energy and other input costs.  The forecast accounts for both
                                      2B-8

-------
           Figure  2B-2

Demand/Supply Solution Procedure
          Initial Demand,
          Price Forecast
            Solve Demand
             Equations
          End-Use Demands
          Solve  Meta/DRI
           Supply  Model
1
r
Price Estimates
  No      / Price/
            Output
            Converg
                Yes
                                       Process
                                      Treatment
                                        Costs
Calibration
  to 1985
              2B-9

-------
 announced and unannounced  changes in capacity.   Depreciation and r.o.i. are
 adjusted from the  calibration year to account for inflation.  As noted
 previously,  although the process economics include r.o.i.  and depreciation,
 the  model should not be interpreted as being  long-run.   Rather,  the amount
 above variable cost  should be interpreted  as  reflecting the current level of
 profitability for  new plants.

     Given the above  constraints,  the supply model is solved to determine the
 production levels  and prices  of  all chemicals and the activity levels of all
 processes in the model.  The  resulting prices of  the end-use chemicals are
 then compared with the initial estimates used to  derive the final demands for
 these chemicals.   If they  differ,  the new  prices  are used  to generate a new
 set  of final demands,  and  the procedure is continued until prices and outputs
 converge.  This process  is rapid  because the  supply  curve  is actually a step
 function,  with  each  step representing  the  costs of a certain process  and the
 length of  the step equal to effective  capacity.   (See Figures 2-5 and 2-6 in
 Section  2.)
Development of 1985 Base Case

    This section describes the methodology and assumptions that were used to
develop a base case for 1985.  (The base case estimates are presented in
Section 4.)  The base case includes estimates of price and output for indi-
vidual chemicals and for fourteen major product groups.  The forecast for the
chemical industry is driven by DRI's macroeconomic forecast, particularly by
the prices of feedstocks and other energy inputs, wages and capital costs,
and the growth rates of the industrial sectors which consume the end-use
products.  However, the forecasts for the major product groups include a
number of groups not covered in the LP model.  Forecasts; of the chemicals
included in the LP model are based on a solution derived from DRI's fall 1982
forecast for 1985.  Forecasts of the remaining product groups are derived
from a revised methodology and are consistent with DRI forecasts.

    The subsections below describe the DRI macroeconomic forecast, the
forecast for chemicals in the LP model, the methodology and results of
extending this forecast to the rest, of the industry.
    Macroeconomic Forecast
    As stated above, the future demand for organic chemicals is obtained
from a long-range forecast of the nation's economy.  That forecast is
generated by a macro model of the economy which, in turn, is driven by a
set of demographic, policy, and energy cost assumptions.  Table 2B-3 lists
the assumptions made about different variables driving the macro model.

    The specific forecast used is DRI's TRENDLONG0682 scenario, a 15-year
projection which incorporates the Economic Recovery Tax Act of August 1981
and the recent revisions of the National Income and Product Accounts.
                                     2B-10

-------
                                 Table 2B-3

                  Capsule Summary of  the  Long-Term Forecast
 I.  Principal Assumptions
       Demographic
       Foreign oil
       Natural gas
II.  Principal Policy Dimensions
     Taxes
       Personal tax cuts
       Social Security
       Corporate tax cuts

     Budget  deficit
     Monetary policy
     Energy policy


     "Superfund" for waste
     site clean-up
 Assumes slower population growth
 which decreases labor force growth
 rate and curtails expansion of
 potential output.  Also results in
 an older population.

 Real prices of foreign oil to
 decline by 12 percent in 1982 and
 3  percent in 1983,  followed by an
 annual average rate of increase of
 3.7 percent.

 Prices reflect natural gas pricing
 legislation passed  in November of
 1978 and assume controls will be
 extended through 1990.   After
 1990,  prices equivalent to No. 2
 fuel oil.
 Personal taxes  cut  by  25 percent
 between end of  1981 and end of
 1983, followed  by further cuts due
 to CPI indexing  in  1985.

 1985 increase foregone.
 Progressive liberalization of
 depreciation allowances.

 Large deficits of 4.5 percent of
 GNP in 1982, falling to 1 percent
 of GNP in 1995.

 Continuation of the Fed's New
 Monetary Policy, targeting the
 growth of both Ml and M2; while
 fairly constrictive it will result
 in a highly volatile financial
 atmosphere.

 President's timetable for
decontrol assumed.

Costs were not included in the
forecast,  since structure of taxes
will likely change.
                                    2B-11

-------
TRENDLONG0682 assumes that the U.S. economy will be  relatively  free  of  major
external shocks over the forecast  Interval.  In a scenario free from the
threat of war and large scale energy embargoes/ a smooth long-term growth
path is projected.  The forecast incorporates a personal tax cut of  five
percent in late 1981, with subsequent 10 percent cuts in personal tax rates
in the third quarter of the following two years.  Federal Reserve policy is
expected to remain fairly constrictive and cause a highly volatile financial
atmosphere.  The unemployment rate is assumed to be close to 9  percent  in
1983, and after a slow deceleration in the early 1980's will hover about the
6 percent level between 1988 and 1995.  The implicit price deflator  averages
6.5 percent per year over the forecast.

    In the long run, output can be viewed as supply-determined,  such that
real GNP growth will be ultimately limited by the rate of growth of  potential
output.  In the short run, actual output (GNP)  is generally below potential.
In the relatively smooth shock free world of TRENDL.ONG0682, real GNP averages
a 2.7 percent annual rate of increase between 1979 and 1995.  This projection
is 0.8 percent lower than the 3.5 growth recorded in the previous 15-year
period.  Table 2B-4 shows the forecast of major components of GNP and some
other important economic indicators.

    Energy policies are important to the organic chemical industry for  two
reasons.  First, energy costs are part of the overall costs of production.
Second, refinery products derived from crude oil and natural gas are the
principal feedstocks used to produce organic chemicals.   Table  2B-5  shows the
details of the energy product price forecast used as input to the macro model
and also as input to the chemical Industry supply model to derive the
feedstock costs.  The latest DRI forecast assumes prices of domestic crude
will be decontrolled in 1981 and that foreign oil prices (in current dollars)
will remain stable for the next year and increase slowly after that.   Natural
gas prices are assumed to be controlled until 1990 in a further extension of
the Natural Gas Price Act of 1978.

    The econometric demand models developed by  DRI are a set of equations
relating the national economic forecast to the  consumption of 19 major
products in the three dominant groaps of end chemicals:   Plastics and Resins,
Synthetic Fibers, and Elastomers.  The demands  generated by these equations
account for only part of the demand for the chemicals covered by the linear
programming model.  Therefore it was necessary  to supplement the econometric
demand equation with less sophisticated forecasts based  on published fore-
casts and historical trends.

    Given the final demands,  the linear programming model is solved to find
prices and outputs of primary and intermediate  chemicals.  The solution is
iterated with the demand equations  to obtain consistent  price and output
estimates.
                                     2B-12

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                                  Table 2B-4

                Capsule  Summary of  the  Economy:   TRENDLONG0682


                    GNP and Its Components  (Billions $72)
                                  1979
                                         History
                  1980
               Forecast
                 1985
Consumption
Investment
Government
Net exports
Gross National Product

    Rate of change
  927.6
  236.3
  278.3
   37.2
1,479.4

    2.8
  930.5
  208.4
  284.6
   50.6
1,474.0

   -0.4
1,064.6
  256.7
  301.2
   45.8
1,668.3

    2.6
                             Other Key Measures
Industrial Production Index
  (1967 - 1)
    Rate of change
Capacity Utilization
  (Total Mfg.)
GNP deflator (percent change)
Unemployment rate
    1.525           1.470
    4.4            -3.6

    0.856           0.791
    8.7             9.3
    5.9             7.2
                    1.714
                    3.2

                    0.810
                    6.3
                    7.3
Source:  DRI Chemical Review, Fall 1982, page 19.
                                     2B-13

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                                 Table  2B-5
                        Energy Product Price Forecast
                         (Gulf Coast,  Contract  Basis)
I Benchmarks |


Crude oil*
Light naphtha
Full range naphtha
Gasoline - regular
No. 6 fuel oil
Natural gas
Ethane
Propane
N-butane
I-butane
Butylenes
I (Current
1 1980 I
$/Bbl 27.9
tt/Ib 13.9
tf/lb 13.6
jrf/gal 87.6
jrf/lb 7.3
ef/MMBTU 274.0
«f/lb 9.3
ft/lb 9.9
izf/lb 13.7
tl/lb 18.7
Jf/lb , 12.5 {
$) 1
1981 1
35.6
17.1
16.7
100.4
8.9
310.6
7.4
11.2
14.0
15.5
17.9 .
Forecast
(1980 3)
1985
31.6
15.3
15.0
93.0
8.5
387.0
10.4
12.6
14.4
16.3
13.7
*Average U.S. refiner acquisition cost (foreign and domestic crude),
Source:  DRI Chemical Review, Fall 1982, page 33.
                                  2B-14

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     Product  Group Forecasts

     The  LP model has good coverage of organic chemicals in the following
 product  groups:   Primary and Intermediates (both Aliphatics and Aromatics),
 Plastics and Resins, Elastomers,  and Synthetic Fibers.   Table 2B-6 shows the
 shares of production of  each product group covered in the DRI model.
 Forecasts for these groups were extrapolated directly from the overall
 average  result for each  group.   Overall 1979 production figures for each
 product  group were taken from the International Trade Commission (ITC) and
 projected to 1985 using  the overall growth rate for LP model chemicals in
 that group.   1979 ITC prices for  the overall product groups were inflated to
 1985 levels  using the production  weighted price increase for model chemicals
 in each  group (see Figure 2B-3A).

     The  LP forecast is also used  as a basis for forecasting price and output
 in those product groups  which are not covered in the DRI model.   These
 groups include Dyes and  Pigments, Flavors and Fragrances,  Rubber Processing
 Chemicals, Surfactants and Miscellaneous End-Use Chemicals.  There is only
 spotty coverage  for plasticizers  within the DRI model,  so they are included
 with these product groups as well.   The forecasts for these product groups
 are  constructed  from four main  elements:  1979 production and price levels
 from ITC; cost shares for various inputs developed primarily from data in
 the  U.S.  Census  of Manufactures;  forecasts of input cost indices from the
 DRI  model; and assessments of output growth rates from  a variety of sources,
 particularly the Kline Guide.

     Figure 2B-3B also shows the procedure followed.   Price and production in
 1979 from the ITC are the baseline.   Cost shares attributable to labor,
 materials, fuel,  purchased electricity and capital are  developed for  each
 product  group from 1977  Census  of Manufactures data.  Prices in  1985  for  each
 product  group are calculated by taking the weighted average of the increases
 in the cost  indices for  each input  group forecast  by  DRI  between 1979  and
 1985.  The weights are the cost shares of each input  in each product  group.
 Increases in  output  are  forecasted based on  assessments of  demand  and  supply
 prospects for  each product group.

    For a variety  of  reasons, prices  are  not  adjusted to  account for  elasti-
 city of demand or  changes  in  capacity  utilization.  First of  all,  there is
 not  enough information to  determine  how  our price  estimates  compare with  the
 implicit prices underlying other  output  growth  rate projections.  Second, the
 resulting price adjustment would  be well  within  the band of  uncertainty
 surrounding  the price estimate.   Finally,  small changes in  the base price
will not significantly affect the estimate of the change in price due to the
proposed  regulation.

    The following  sections describe the procedures and intermediate results
used to derive the base case forecasts.  Lastly, the results for the model
and nonmodel  product groups are described and compared.
                                     2B-15

-------
                                         2B-6

                 Share of Total Production Covered by LP Model
          Percent of               ;           Production in
        Product Group              I              Model
Primary Aliphatics*                                45
Primary Aromatics                                  89
Intermediate Aliphatics                            70
Intermediate Aromatics                             88
Plastics and Resins                                88
Elastomers                                         91
Synthetic Fibers                                   81
   *Model does not include ethane, propane, C5 hydrocarbons, and "all
other" categories in ITC.

Source:  Meta Systems estimates.
                                     2B-16

-------
                             Figure  2B-3

          Information  Flows  for  Base Case  Forecast  of  Model
                    and  Nonmodel  Product  Groups
                      A.  Model Product Groups
              LP Model
            1985 Solution
              1979 ITC
              Prices and
                Outputs
          Average Price and
          Output Increases
                                 1985 Prices
                                 and Outputs
                   B.   Nonmodel Product  Groups
 LP
1985
Model
1
w
Input
Cost
Indices
Census
Data


  ITC 1979
   Prices
and Outputs
Input
Cost
Shares


  Market
Assessments
                               2B-17

-------
     Input  Cost  Shares.  Cost data from  the  1977  U.S.  Census  of  Manufactures
were  used  to develop cost  shares for  the  nonmodel  chemical groups.   The
categories are  labor  (including both  production  and overhead labor),  raw
materials  (primarily chemical feedstocks),  fuel  consumption,  purchased
electricity, and fixed costs.*  This  breakdown corresponds very  closely to
the way  that cost increases between 1979  and  1985  are allocated  in model
processes.  For example, in the model,  overhead  labor is a linear function of
production labor costs, and both are  inflated using the Petrochemical Wage
Index.**  Nonlabor fixed costs in the model,  including taxes  and insurance,
general  and administrative, depreciation  and  return on investment, are all
inflated using the Petrochemical Construction Index.**

    Table  2B-7 shows the cost shares developed for the nonmodel  product
groups.  In general, products with higher prices tend to have lower cost
shares due to feedstocks, which have a higher value added resulting from
their specialized characteristics.  Three of the product: groups  (Flavors and
Fragrances, Rubber Processing Chemicals and Plasticizers) are grouped
together in the same 5-digit SIC group 28692.  Therefore, separate cost
shares could not be derived for them.  Because plasticizers dominate the
group with 80 percent of production and their price is significantly lower
than those of the other two product groups, the share of raw materials costs
for Flavors and Fragrances and Rubber Processing Chemicals is probably
overestimated.
    Input Cost Indices.  To make the price forecasts for the nonmodel product
groups consistent with those for the model groups, the cost indices from the
LP model were used.  The cost indices for labor, fuel, purchased electricity
and fixed assets are, respectively, the Petrochemical Wage Index, the price
index for No. 6 fuel oil, the index of Industrial Electrical Power, and the
Petrochemical Construction Index.  Table 2B-8 shows DRI's forecasts of the
increases of these indices in real terms between 1979 and 1985.

    The cost index for raw materials was the weighted average of the
forecast's real cost increase of Intermediate Aliphatics and Intermediate
Aromatics.  The weights for each product group were the shares of total sales
of aromatics and aliphatics for each product group given in the 1979 ITC
report.
   *Fixed cost is set equal to the residual between the other cost items
and the total value of sales.  This assumption creates some problems,
since it makes this item very sensitive to short-term fluctuations in
sales and prices.

  **Data Resources, Inc., Chemical Review, Fall 1982, p. 31.
                                     2B-18

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                                   Table 2B-7
                  Input  Cost  Shares  for  Nonmodel  Product  Groups
                                 I    Raw
                           Labor I  Materials
                 I   Purch.   |   Fixed
           Fuel  I   Elec.    |   Costs
Dyes and Pigments          .164
Flavors and Fragrances     .110
Rubber Processing          .110
Plasticizers               .110
Surfactants                .112
Medicinals                 .121
Pesticides                 .086
Miscellaneous end-use      .094
.488
.529
.529
.529
.595
.337
.370
.527
.044
.061
.061
.061
.020
.027
.043
.057
.016
.018
.018
.018
.009
.013
.013
.018
.288
.281
.281
.281
.264
.502
.488
.306
Source:  U.S.  Census of Manufactures,  Meta  Systems  estimates.
                                    2B-19

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                                 Table 2B-8
                   Forecasts  of  Cost  Indices,  1979  to  1985
Petrochemical Wage Index
Price of No. 6 fuel oil
Industrial Electricity Index
Petrochemical Construction Index
Intermediate Aliphatics
Intermediate Aromatics
    Ratio of 1985
    to 1979 Value
(in constant dollars)

         1.16
         1.33
         1.55
         1.04
         0.98
         0.92
   Source:  DRI Chemical Review,  Fall,  1982,  Meta Systems estimates.
                                     2B-20

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     Market Growth Assessments.  The growth prospects for each product group
 were assessed  in the Industry Profile.   An average annual growth rate was
 chosen for each product group based on  these assessments and applied to the
 1979 ITC production levels.


 Resource Conservation and Recovery Act  (RCRA)

     RCRA costs  were supplied  by EPA for 36 establishments in the SIC-defined
 industry data  base.   Industry-wide costs were  developed by Meta Systems for
 an  additional  815 establishments based  on the  average  establishment-level
 costs for the  off-site disposers.*

 BPT Methodology

     This section describes the  procedure used  to  assess the economic impacts
 of  Best  Practicable Technology  (BPT)  regulations  on the Organic Chemicals
 Industry.   The  goals of this  part  of  the work  are:   1)  to estimate  the  likely
 costs incurred  at  each establishment  due to BPT regulations;  2}  to  determine
 the effect of  BPT costs on each model chemical and  all  major  product groups
 (model and non-model);  and 3)  with the information provided  by the other
 two,  to  evaluate the impact of  the BPT  regulations  on  individual
 establishments  and  the industry as a  whole.

     The  major  steps  of the methodology  are summarized  in Figure 2B-4.   Prices
 and production  levels  for  1985  are estimated as a point  of  reference for
 computing  incremental  costs.  The  costs of complying with  new BPT regu-
 lations  (including costs due  to higher  prices for feedstocks  purchased  from
 other  establishments in the industry) are  estimated  and  assigned to each
 plant.   The contribution by individual  model chemicals and  by model and non-
 model product groups to these costs are  then estimated.   Finally/ these data
 and  the  assigned BPT costs are  used to  assess the effects of  the effluent
 regulations on  the production and  prices  in the organic  chemicals market  as
 well  as  the effects  on  particular  establishments.
    Base Case Extension:  Establishment Sales Estimates

    First, the methodology must provide a reference point to compare the
industry in the presence of BPT regulations with the situation in their
absence for the year 1985.   Since establishment sales is the primary measure
used to assess the size of the impact of BPT costs, it is necessary to
describe the procedure for projecting our estimates of establishment-level
sales to 1985.

    There are several major assumptions involved in the 1985 sales
estimates.  First, although forecast changes in industry production between
   * EPA, Office of Analysis and Evaluation, Guidance Manual for Estimating
RCRA Subtitle C compliance Costs, July 1981.
                                     2B-21

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                                 Figure 2B-4
                        Flow Chart  of BPT Methodology
Price and Output
Forecasts for Non-
Model Product Groups
Meta Model for Price
and Output Forecasts
of Model Chemicals
and Product Groups
                          Estimation of 1985
                          Base Case
                          Assignment of Direct
                          BPT Costs to Each
                          Establishment
Assignment of
BPT Costs to
Model Processes
Meta Model for
Price and Output
Forecasts:  BPT
Induced Price
Changes for
Model Chemicals
                          Allocation of
                          Total BPT Costs
                          to Model and Non-
                          model Product
                          Groups
        Establishment
        Level Impacts
                                                           Estimate Price
                                                           and  Output
                                                           Changes For
                                                           Non-model
                                                           Product Groups
                                     2B-22

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 1979 and  1985,  assume  that  production remains  constant  at  existing  establish
 ments with  all  growth  occurring  at  new facilities.   Consequently,  1985 sales
 and  BPT cost  estimates apply  to  current output.   This was  done  because the
 wastewater  flow and pollutant  loading data  used  to  assign  BPT costs to estab
 lishments are taken from  data  based on current (1979) production  levels,

     The volume  of sales of  a particular product  group at a particular
 establishment is unknown.   Lacking  more complete data,  sales are  assumed  to
 be distributed  equally among product  groups known to be produced  at the
 establishment.  Given  this  assumption,  establishment sales in 1985  can be
 estimated based on the price increases of existing  production according to
 the  following equation:
                      ni    1          Pk
       SJ85  =  Sj79
where:
             =  1979 sales* of establishment j  (1979 $);
    Sj85     =  1985 sales of establishment j (1979 $);
    HJ       =  number of product groups produced at establishment j;
    P79jj     =  average 1979 price of product group k  ($/lb);
     P^      =  change in price between 1979 and 1985  ($/lb).
Establishment sales are estimated by EIS by the following method:  For each
4-digit SIC group, using Census of Manufactures data, total establishment
sales are divided by total establishment employment to obtain an average
sales/employment ratio for that SIC group; sales at each establishment in
that SIC group are then obtained by multiplying employment at that
establishment by this average ratio.  Because the Census of Manufactures
definition of establishment sales does not include the value of production
consumed internally at an establishment, the average sales to employment
ratio reflects the average degree of integration of that SIC group as a whole.

    An alternative assumption is to allocate sales to each product group in
proportion to total industry sales.  For example, an establishment producing
chemicals in two product groups would be assigned sales in proportion to
total sales for the corresponding groups.  If the dollar volume of one
product group is twice that of the other at the industry level, that same
relationship would be applied at the establishment level.  This method is
used as part of the sensitivity analysis.  The differences in impact
estimates are not large.
  * Estimates of 1979 establishment sales are taken from the Economic
Information Systems, Inc. (EIS)  X/Market Data Base.
                                     2B-23

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    Estimation of BPT Costs for Products and Processes

    Establishment level cost estimation is discussed in some detail in
Section 4.  These establishment costs are converted into costs imposed on
individual model chemicals and major product groups.  Then, the relative
effects of BPT costs on prices and output of different products are compared
and cost increases for producers of a given product group are examined.

    BPT costs for individual model chemicals produced at an establishment are
allocated on an equal dollar per unit of wastewater flow basis, given the
capacity of each process and the relationship between pounds of output and
wastewater flow.  Let:

    DCj     =  direct BPT costs at the jtn establishment;
    E^      =  average flow per unit of production for process i;
    FJ      =  .total flow at establishment j;
    c^      =  unit BPT costs for production by process i at establishment j.
Then:

                    E.
       Ci '  =  DCj  F1 *                                             (2B-2)


    Several assumptions are implied by the above equation.  First, the
industry-wide capacity utilization rate is assumed to apply to each estab-
lishment that has a given process.  Although the capacity of each process is
known at every plant we do not know how much of that capacity is actually
used.  Second, each plant is assumed to have an effluent per unit production
that is characteristic to the particular product made and process used at
that plant.  In fact, the ratio of effluent to unit production varies some-
what among the different plants using the same product/process.   A third
assumption implicit in our equation is that the sum of model process flows
for every establishment is less than or equal to the total flow (Fj), i.e.,

       m .
      4*   E.X. .  < F.                                               (2B-3)
       1=1  i 13      D
where:
     ij   -  volume of production Eor process i  at establishment  j,
             xij =  uiKij'  in 1985 with BPT in Place?
     ^    =  average industry-wide capacity utilization  of  process  i;
     IJ   =  capacity of process i at establishment  j;
                                     2B-24

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 There  are  three possible  situations  where  this  may  not  be  true.   First,  the
 standard process  values of  E^ may  not  apply  to  the  particular  establishment
 in question.  Second, the total wasteflow  at an establishment  may not  simply
 be the  sum of each process1 wasteflow.   Finally,  since  the flow,  Fj, was
 chosen  out of a range in many cases, it  may  not be  consistent  with the
 process flows.

    In  those cases where the sum of  the  model process flows is greater than
 the total  flow (i.e., equation 2B-3  is not true), the following alternative
 formula is used.  (This adjustment was required for  roughly 25 percent of the
 establishments):

                       E.
                        i
         ^  =  DC.   m_.                                               (2B-4)
                    £  E.X..
                         1 13
where mj is the number of model processes at establishment j.  This ensures
that no more than total direct BPT costs are assigned to model processes.

    The next step is to aggregate the establishment level c^j's to a single
value for each process which will be used in the linear programming model.
This can be done in two ways—a production weighted mean and a production
weighted median for each process.  The values produced by both methods were
compared, and found to be very close.  The mean was used in the analysis.  We
calculate the production weighted mean according to the following equation:


               Vi       X..
       C.  =  ^-r c    v.                                            (2B-5)
               -
where X^j is the production by process i at establishment j and Vj_ is the
number of establishments using model process i.

    The production-weighted median is computed as follows:

    1. Rank all plants producing by process i in ascending  order of unit
       treatment costs
       For each plant,  calculate the cumulative production of all plants
       with unit treatment costs less than or equal to that plant.
       Select the plant with lowest unit costs which has cumulative
       production greater than half of total production.  This plant's unit
       cost is the one  chosen for the aggregate (i.e.,  all plants) process.
                                     2B-25

-------
    -Given  the  unit costs c^ for each process described above,  the  linear
 programming model is  solved to obtain price increases for  all  model  chemicals.
 These  are  used to calculate average price increases for primary  and  inter-
 mediate aromatics and aliphatics which are used in the later steps.   Indirect
 costs  of BPT,  i.e./ treatment cost induced feedstock price increases,  were
 considered and found  to be negligible.
 BAT and PSES Analysis Methodology

    Figure 2B-5 shows the flows of information in the detailed product study
 impact analysis.  The BAT/PSES base case solution of the supply model
 includes weighted average BPT costs for each product/process.  Unit BAT costs
 and unit PSES costs  (described in Section 4) are added to each product/
 process.  The supply model is solved again, including an iteration with the
 demand side, to yield the effects of BAT costs on prices, production, product
 value and cash flow of the chemicals in the supply model.  Overall average
 price and production impacts for the major product groups, as well as changes
 in the activity levels and profitability of the processes in the model are
 also computed. Prom these the cash flow impact ratio is calculated for each
 process.  A revised capacity expansion forecast, which is used in the NSPS
 and capital availability analyses, is developed from the BAT model solution.

    The next step is to calculate plant-level impacts.  These are converted
 to individual establishments based on plant capacity data.  The cash flow
 impact ratio assesses the effect of the regulation on cash flow.  The overall
 impacts for all model chemicals at an establishment are the sum of the impact
 for each process multiplied by the activity level of that process.

    Because unit BAT cost increases are sometimes large and the industry
 structure is integrated, many processes and establishments experience
 increased costs of inputs from upstream producers in addition to their own
 direct costs of compliance.   The integrated characterization of chemical
 processes in the  linear programming model makes it a very appropriate tool
 to analyze these relationships.

    Processes will vary in their ability to pass on price increases due to
 the derived elasticity of demands for their products.  Products with low
 elasticity of demand will be able to pass the full increase with little
fall in output, while those with close substitutes may face significant
 losses in output,  or a particular process may close down entirely.   One
measure of the net impact on a given process is the change in total cash
flow,  and hence profitability, borne by the process resulting from BAT
costs.  (See Appendix 2C).
NSPS/PSNS Regulations

    Since treatment requirements for new plants will not be higher than for
existing planes, it is not necessary to investigate in detail  the effect of
the regulations on the relative profitability of new capacity.   There  will be
no incremental compliance costs above BAT and PSES for new capacity.   The
                                     2B-26

-------
                                   Figure  2B-5
                  Information  Flows of Toxic Pollutant Analysis
NSPS/PSNS
Costs
BAT/PSES
Unit Process
Costs
Capacity
Expansion
Forecast
Analysis
  Base
  Case
Individual
Plant
Capacity
Data
                             Solve  Aggregate j
                                  Model      )
          Price/ Output
          Capacity Utilization
          after toxics regulation
Determine share
of new capacity
subject to
NSPS/PSNS
          Calculate Establishment
         .Level BAT/PSES Costs  J
                             Establishment BAT/PSES
                                    Costs
NSPS/PSNS Costs
of Compliance
          Qlvaluate Impacts,
          'otential Closures,/
                                     2B-27

-------
overall  effects of production cost  increases on investment in new capacity
are discussed in the context of Capital Availability Analysis.  The amount of
new capacity in 1985 (assuming proposal in 1982), the share of new capacity
subject  to NSPS and PSES, and the unit capital costs of compliance for NSPS
and PSNS are estimated.

    As mentioned above, the inclusion of BAT and PSES costs in the supply
model leads to a revised capacity expansion forecast for each process.  The
structure of the model implies that, in response to an increase in the costs
of new capacity, there will be a sufficient reduction in capacity expansion
so that  the remaining new capacity earns a competitive rate of return.  The
estimate of new capacity determines the total costs of compliance which is
borne by new capacity.   (The remaining share will be subject to BAT/PSES
regulations.)  The change in the capacity forecast also measures the effect
of NSPS  regulations on investment in the industry.

    The  1985 Base Case forecast pravides the basis for the capacity expansion
estimate over the period 1979-1985,  which is used in turn to develop the one
year new capacity estimate for 1985.  Because year-to-year capacity expansion
will fluctuate with anticipated market conditions, it is preferable to look
at average annual capacity expansion assuming a steady long-term growth trend
for the  industry.

    Let  X79^ and X85i represent the total production levels of process i
in 1979 and 1985, respectively.   Then the average annual compounded growth
rate is:
           r.
            i
                   X85.
                   X79.
- 1
(2B-6)
The increment to the activity level in 1985,  assuming this growth rate,  is:

             A  X .  =  X85. -  X84.
                 i        i       i
                       1 -
                            1 + r.
         X85. ,
            i
                                                                    (2B-7)
The assumption is made that the capacity utilization for new capacity is 1.0,
so that the change in capacity equals the change in production.

          AKGROSS. = AX.   +6 .K84.
                 11       11
                       AX.   +  6 .  K85.  (1 + r.)
                         111        i
                                               -1
                                     (2B-8)
                                     2B-28

-------
where A KGROSS^ is the gross increment to capacity, Ui the average
capacity utilization, and 6^ the physical rate of depreciation of existing
capacity.

    Given an overall estimate of capacity expansion, it is necessary to
determine both the fraction of that capacity which will be classified as a
new source, and the split of that share between direct and indirect dis-
chargers.  There is a great deal of uncertainty about the amount of new
capacity which will occur as greenfield plants or major expansions of
existing establishments.

    The relative shares of direct and indirect dischargers are determined for
each process based on data for existing sources on discharge status and
capacity.
                                    2B-29

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                                   Appendix 2C

                          Methods of Estimating Impacts
     The impacts of the treatment costs are measured at the industry level in
 terms of total cost of compliance,  product group price changes, and closure
 as well as impacts on processes, establishments/ employment, capital
 availability,  balance of trade, and small businesses, based on the detailed
 product study.  The following paragraphs review the methods used to estimate
 the impacts and discuss their implementation.
 Total Costs of Compliance

     The total capital and annual costs of installing and operating the
 pollution control equipment required by the regulations is estimated by
 summing up costs estimated for each establishment over all establishments.
 This is done for the BPT, BAT, and PSES regulations.

     Total cost of compliance for NSPS and PSNS are calculated based on the
 detailed product study.   As part of the detailed product study,  the amount of
 activity for each process expected to be covered by NSPS and PSNS regulations
 is  estimated.   These activities are multiplied by the corresponding unit
 treatment cost for each  process.  This product is then summed over all
 processes for  total annualized and capital cost of compliance.


 Product Impacts

     Specific products and product groups may sustain price changes and
 production shifts as a result  of treatment costs.   The price changes are
 estimated as a function  of direct and indirect treatment costs (with indirect
 costs  reflecting  the price increase in feedstock chemicals).  Assuming
 complete pass-through of production cost increase  to price,  the  conservative
 (or maximum) price increase  is calculated  as the manufacturing cost increase.
 Resulting  production changes are estimated for specific products using price
 elasticity  estimates.

    For  the  product groups,  treatment  costs assigned to establishments are
 allocated  to each of  the fourteen groups to estimate treatment-induced pro-
 duction  cost increases and subsequent  price and  production  changes.   The
methodology  is based  on  the  groups  of  products manufactured  at each estab-
 lishment,  the  industry-wide  production of  each product  group,  and  the
 treatment costs for  each  establishment.

    Since  the data  relating  to production  at  each  establishment  are  not
available and the  relative strength and  volume of  wasteflow  for  the  product
groups are not well documented,  it  is  assumed  that  the  treatment cost  is
divided equally among product groups known  to  exist  at  the establishment.*
   * This assumption implicitly allocates production to the product groups
over all the establishments.  For product groups where this implicit industry
production exceeds total industry production, its relative weighting was
reduced until implicit production was less than total production.

-------
 For example,  if three product groups are manufactured at an establishment,
 the cost of treatment allocated to each group is one-third of the total
 establishment cost.
 Let:
     DCj    =   direct cost at establishment j;
     HJ     =   number of product groups produced at establishment j;
     Cfcj    =   direct cost at establishment j allocated to product group k.

 Then:

                DC.
     Ck.    =    	^                                                   (2C-1)

      '         "j

 The  direct cost,  C^j,  is summed over  all  establishments and  divided by  total
 industry production  to estimate the cost  increase.   The calculation is
 performed  for  each product  group.
 Let:
     Zfc      =   total  industry production  in product group  k;
     cj(      =   unit cost  increase  of product group k due to treatment  costs,
Then:
    Ck    "    ^  C kj /  \                                         (2C-2)
    In the calculation, both the treatment cost and industry production are
adjusted to reflect 1985 conditions.  The final step is to estimate price and
production changes resulting from the regulatory induced cost increases.
This determination is based on qualitative information about the strength of
demand for the product group in the market.
Closure Analysis

    Closure analyses are performed for establishments for all levels of
regulation and are based on the detailed product study for plants as a result
of the toxic pollutant regulations.  Each analysis consists of a preliminary
screening followed by a more detailed investigation of those production
facilties identified in the screening.
    Establishment Closure
    The basis for screening establishment closures is the establishment sales
figure as reported by EIS.  (The definition of establishment sales used by
                                      2C-2

-------
 EIS excludes production consumed internally at the establishment, and is
 based on the average level of integration for the SIC group as a whole.
 Therefore,  for a highly integrated establishment, sales may underestimate its
 size.)   The impact ratio is total costs of compliance for an establishment
 divided  by  establishment sales.   The cutoff value for screening is four
 percent.*

     Closure candidates are examined for:   1)  treatment-in-place;  2)
 diversity of production (diversity was determined by whether or not the
 establishment had production in  more than one of the production categories);
 and 3) the  size of the parent company measured in terms of yearly chemical
 sales, greater or less than $150 million.   When two of the three factors were
 negative  the establishment was considered  a closure.
     Plant  Closure

     Plant  closure  is  analyzed  for  plants  in the  detailed product study.

     Screening  Procedure.   The  first  step  is to eliminate from consideration
 those  plants which will  remain open  by  comparing the  production level  at each
 plant  with the total  drop  in production of  that  plant's  process.**   Plants
 with a production  level  greater  than twice  the total  process  production  drop
 are  eliminated from consideration.   This  is a  conservative  assumption  because
 it is  likely that  a drop in production  will be spread among several  plants.

     Determining Likelihood of  Closure.  The second  step  is  to conduct  careful
 examination of plant  and process specific information.***   Five criteria are
 examined.  Three of these are  related to  plant-specific  information:   1)
 scale  of the plant; 2) unit cost of  compliance;  and 3) the  presence  or
 absence of vertical integration.   The other two  criteria are  related to
 process information the production decline  due to the regulation and the
 level  of announced  capacity expansion.  If  the regulation has little effect
 on the production  for a process, plants using  that  process  are  unlikely  to
 close.  If considerable capacity expansion  has been announced for a  process,
 that process must  enjoy a strong market position and  plants using that
 process are less likely to close.
    * The establishments included in the five SIC categories are screened
using the ratio.  The remaining establishments can not be included in the
establishment screening because the sales for the organic chemical portion
can not be determined from the total sales.
   ** The production level was estimated by applying the capacity utilization
rate of that process to the plant's capacity.

  *** According to microeconomic theory, in the short-run, a plant will
remain open as long as revenues exceed variable costs.  Because plant level
data on variable costs was not available, a straighforward quantitative
comparison of revenues with variable costs was not possible.  Therefore, a
more qualitative assessment was adopted.
                                      2C-3

-------
    A scoring scheme is used to consistently  assess  the  relative  likelihood
of closure  for each closure candidate.  The weights  used for  the  five
criteria are an attempt to reflect  the  relative  importance  of  that  criterion
to the possibility of closure.  For  example,  the  plant's cost  of
compliance  relative to the cost experienced by other  plants using that  same
process is  considered more important  than  vertical integration.

    A plant Closure Index is calculated by adding the scores of each
category.  A plant Closure Index greater than zero indicates a likely closure
candidate.  The criteria and their weights are as follows:

    Treatment Cost Ratio:  the ratio  of plant treatment  costs  to  average
process treatment costs.

    If the plant cost is:

    1.  above the average, weight equals 5;
    2.  below the average, weight equals -6.

If the process and plants experience no treatment costs,  then  the plant under
consideration is assigned a zero for this category.

    Relative Scale:  the ratio of plant capacity  to the median capacity of
all plants using the process.

    If the plant capacity is:

    1.  smaller than median,  weight equals 2;
    2.  equal to median,  weight equals -1;
    3.  greater than median,  weight equals -3.

    Vertical Integration:  if the establishment also operates processes which
are either upstream or downstream of the plant, then the plant is defined as
vertically integrated.

    If a plant is:

    1.  not vertically integrated , weight equals 2;
    2.  vertically integrated,  weight equals -3.

    Production Decline:   if the production decline of the process due to the
regulation is:

    1.  greater than 10%,  weight  equals 3;
    2.  between 1% and  10%, weight  equals  -1;
    3.  less than 1%,  weight  equals -4.
    Capacity Changes:   if announced capacity increase for the process between
1979 and 1985 is:
                                     2C-4

-------
     1.   less than zero,  weight equals 3;
     2.   greater than zero and less than 10%,  weight equals -1;
     3.   greater than 10%,  weight equals -4.

     The  final step in the closure analysis involves the  determination of the
 actual number of closures.   The production drop estimated  for each process is
 converted to the comparable drop in capacity  by dividing the utilization
 rate.  For each process/  plants are closed in order of descending "closure
 index" until closing an  additional plant exceeds the target closed capacity.
 When two or more plants  have the same closure index, the smallest plants are
 closed first to avoid underestimating the number of closures.   The following
 provides an example of the  methodology.

     Production drop due  to  regulation =  50 M  Ibs;
     Capacity Utilization  =  70 percent;
     Possible Closed Capacity = 50/0.7 =  71 M  Ibs.
    Plant

       A
       B
       C
       D
       E
       F
Capacity
(M Ibs)

    12
    15
    10
    10
    20
    30
Closure
 Score

   5
   5
   3
   3
   1
   1
   Cumulative
Closed Capacity

        12
        27
        37
        47
        67
    Plants A, B, C, D, and E would be closed.  Plant F would remain open.
The remaining four million pounds of capacity shutdown (71-67) is assumed to
be spread among several plants with none of them closing.  In addition, all
plants with a low likelihood of closure (zero or negative Closure Index)
would remain open.
Process Impacts

    Process impacts are calculated as part of the analysis of BAT, PSES,
NSPS, and PSNS proposed regulations based on the detailed product study.  If
a certain product is produced with more than one process, and costs of com-
pliance vary significantly among competing processes, the impact on a partic-
ular process may be much more severe than the overall impact on the product.
Impact measures examined are direct costs due to compliance and changes in
cash flow.

    The cash flow impact is a net measure of impact adjusted for an increase
in revenues due to price increases of the chemical produced.  The cash flow
impact measures the effect of the regulation on cash flow,  taking into
account the combined effects of cost and revenue changes and the elasticity
                                     2C-5

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 of  demand.   It  indicates the ability of  a particular process to pass on
 treatment  costs,  and  by  implication, the effect of the regulation on the
 attractiveness  of new investments  in that process.

     Cash flow is  defined here as the differenc-e between product value and
 variable costs.   In the  supply model,  each process is represented as a linear
 activity,  where unit  variable cost  does  not depend on the level of the
 activity.   For  a  given price,  cash  flow  is the  product of the activity level
 and the  unit cash flow.   Let VCi =  unit  variable costs,  PVi  = unit
 product  value,  B^ unit cash  flow for process i,  and CFi  total cash flow
 for process i.  We then  have:

           CF^^ = Xi( pvi- VCi)                                         (2C-3)


              = Xi Bi                                                 (2C-4)


 A change in cash  flow  can result from  either  a  change in the activity level
 or  the unit cash  flow, i.e.,
        ACF.  =  B.  AX. +  AB.   (X. +  Ax-)'                         (2C-5)
Or,
                                                                      (2C_6)
                  Xi      Bi       Xi Bi
Since the last term is second order (product of two small numbers) and
negligible the approximation becomes
                                                                     (2C_7)
                 X.      B.
                  i       i
The change in cash flow is the sum of the changes in output and unit cash
flow.  A direct implication of this formula is that even if price rises
enough to offset the amount of the treatment costs, profitability will
decrease if there is some elasticity of demand which causes demand to fall.
In that case, the impact is just proportional to the change in output.
                                      2C-6

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     It should be noted that the linear structure of the supply model implies
 that if  a  process is marginal and hence is the price-setting process in both
 the  base case and the regulated case,  then the unit cash flow for that
 process  will  not change.   The price rise will just cover the increase in
 direct and indirect  costs.   This is an effect of the way prices are set by
 linear programming models.
 Establishment  Impacts

     The  ratio  of  treatment  cost  to sales is estimated using treatment costs
 for  each  establishment.   This  ratio gives the relative burden of the
 regulation  in  terms  of  a  measure of financial size (sales).  These costs are
 accumulated for the  different  regulations (BPT,  BAT and PSES)  to generate a
 measure  of  total  cumulative impact at  each establishment.

     The  treatment cost/sales ratio is  a  good  indicator of  two  impacts,
 profitability  and product price  change.   The  ratio is a conservative,  in
 effect worst case, indicator of  the impact of treatment costs  on profits of
 the  establishment, assuming treatment  costs cannot be passed on.   The  ratio
 is also a conservative  indicator of the  impact of  treatment costs on product
 group prices,  in  this case,  assuming full pass through of  costs.
Employment Impacts

    The results of the closure analysis of BPT and  BAT/PSES  impacts  are  used
directly to calculate employment changes due to closure.  For those
establishments identified as closures, the employment figures from the Dun  &
Bradstreet data base are used as the  impact, where  available.  Otherwise,
employment data from EIS is used.

    Plant closures due to BAT/PSES  (based on the detailed product study) are
assumed to affect individual plants or combinations of plants, because
BAT/PSES costs are defined on a process level (a plant analysis was  not  done
for BPT).  Labor requirements for a given process are obtained from  the
process economics in the model.  The  total employment impact due to  BAT/PSES
for a process is the labor requirement per unit level of the process,
multiplied by the total production level lost due to closure, i.e.,  the
amount of capacity closed, K^, multiplied by the average capacity
utilization,  u^.   Thus, for process i

             Employment. =  L.  *  u. *   K.                           (2C-8)
                       i     i      i      i


where L^ is the unit labor requirement.
                                      2C-7

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 Capital  Availability
                                       I
     The  capital availability  analysis  examines  the  ability  of  the  industry  to
 finance  investments  in new  capacity  and pollution controls  required  by  the
 proposed regulations.   Two  different approaches  are used  in the  analysis.   In
 the  first  approach/  total capital costs of compliance are compared with
 annual costs  of capacity expansion and estimates of industry cash flow.  This
 indicates  the total  added burden of  the regulation  compared  to the industry's
 normal demand for  capital and  its supply of  internally generated funds.  The
 second approach examines the effect  of the imposition of  treatment costs on
 the  amount of new  capacity  predicted by the  supply  model.   This  impact
 reflects the  fact  that  higher  production costs will reduce demand and hence
 industry growth.

     Figure 2C-1 shows  the steps and  information flows of  the detailed product
 study capital availability  analysis.  The BPT and BAT/PSES model solutions
 supply estimates of  pre- and post-treatment  cash flow, capacity  expansion,
 and  total  capital  costs of  compliance.  Process economics for new capacity
 are  used to derive the  costs of capacity expansion.
    Costs of Capacity Expansion.  The development of estimates of 1985
capacity expansion for each process are discussed in the section on NSPS
methodology.  As noted there, these estimates are based on the assumption
that capacity expansion over the period of 1979-85 will occur at a constant
rate.  Total capital costs of this expansion are calculated by multiplying
the 1985 gross increment in capacity for each process (including replacement
of existing capacity) by the unit capital cost for that process.  The unit
capital cost is based on the cost of a new world-scale plant in 1985.  Let
 AKGROSSi be the increment to capacity of process i in 1985 and KCAP^ the
unit capital cost.*  The total capital costs of capacity expansion are:
    EXPCOSTi  =   KCAPi *  AKGROSSi                                  (2C-9)


where EXPCOST^ is the total capacity expansion cost for process i.  Total
expansion costs for the industry are obtained by summing over all processes.


    Capital Costs of Proposed Regulations.  Capital costs of compliance for
the detailed product study are obtained by multiplying the unit capital costs
of compliance for each discharge category (direct and indirect) by the
production level of each process that has been classified under that
discharge category.  As noted before, although the assignment of capacity
between existing and new sources is rather arbitrary, this does not affect
total costs of compliance since the treatment requirements for each category
are the same.**  Total capital costs for each process for BAT are given by:
   * See the earlier discussion of process costs under the Supply Model
(Appendix 2B).
  ** This neglects possible cost advantages of designing new plants as
opposed to retrofitting existing ones.
                                      2C-8

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                                Figure 2C-1
                       Capital Availability Analysis
    BAT Aggregate
    Model Solution
Calculate
Post-BAT
Cash Flow
for
Product/
Process
Capacity
Expansion
Forecast,
Change from
Base Case
                                  BAT/PSES
                                  Costs of
                                  Compliance
                    Capital Req'ts
                    for Capacity
                    Expansion
                          Capital Availability
                               Assessment
                                      2C-9

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         CAPBAT  =  KCBAT.   *   XBAT.                                   (2C-10)


 where  KCBAT^  is the unit capital  cost  of  treatment  for  the  BAT  discharge
 and XBATi  is  the activity  level for  BAT.   Similarly,  capital  costs  for  PSES
 are calculated and  summed  for  total  capital  cost  in the detailed  product
 study.   The capital costs  include those borne  by  new  capacity in  each case.
     Cash Flow.   The methodology for estimating cash  flow for each process  and
 the  industry  as  a  whole  is described  in Appendix  2C.   In general/ the  cash
 flow is  obtained by multiplying the activity level of  each process  in  the
 model by the  unit  cash flow.  Unit cash flow is defined as the difference
 between  product  value and variable costs for the  process.  Cash flow
 estimates for the  Base Case and the proposed regulation.'; are developed.
     Investment.   Investment for capacity expansion in each process is assumed
to  adjust  sufficiently to changes in demand and profitability so that the
incremental profitability of new capacity in that process does not change.
Therefore  the change  in the level of that process activity due to the
proposed regulations  corresponds to a change in the amount of new capacity.
This  change can be taken as an indicator of the effect of the proposed
regulations on the profitability of that process.  The specific measure used
in  the  impact analysis is the change of capacity expansion between the BPT
case  and the BAT/PSES case:
         KI. =  AKi                                                   (2C-11)
           1     Ki  •


Assuming a constant rate of utilization for new capacity, which is
consistent with the assumption of constant profitability, the change in
capacity is proportional to the change in activity level, i.e.,


                                                                     (2C-12)
    If the base case does not include any new capacity for a given process,
then the capacity of that process in 1985 is assumed to be unaffected by the
proposed regulations.  The only impact is to reduce the profitability of the
existing capacity.  Therefore the cash flow impact ratio (CFIR^)  developed
for the BAT/PSES analysis is also appropriate here,, assuming that all plants
using that process operate at the same capacity utilization.  If  older
plants suffer a disproportionate amount of the reduction in output,  the
profitability of new plants will be affected correspondingly less.
                                     2C-10

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 Balance  of  Trade  Impacts

    A qualitative  assessment  of  foreign  trade  susceptibility is based on
 three indicators:   1) DRI's 1985 Base  Case  estimates  of  the ratio of  exports
 or  imports  to total U.S. production  for  each chemical;  2)  the difference
 between  projected  1985 U.S. and  European chemical  prices;  and 3)  a
 qualitative assessment of  world  market conditions  based  on trade  literature.
 These indicators  identify  chemicals  sensitive  to increased production costs
 and ones where exports are or would  be an important part of production.   The
 impact of the treatment regulations  is assessed by comparing this set of
 chemicals to those which experience  a  significant  price  increase.
Small Business Impacts

    The Regulatory Flexibility Act requires an examination of the differen-
tial impact of the proposed regulations on small businesses.  Separate
analyses are made for BPT, BAT and PSES costs.  Small firms are defined  in
terms of the size of the firm, not the individual establishment.  The
definition of small businesses used in this analysis is any firm with less
than 50 employees.  This differs from guidelines developed by the Small
Business Administration (SBA).  The SBA definition of small businesses which
qualify for loans ranges from maximums of 750 to 1000 employees for SIC
groups 2821, 2823, 2824, 2865, and 2869.*  This definition would classify
about half the firms in our data base as small businesses.  We believe it is
more appropriate to define the small business cutoff as 20 percent of the
firms in the industry with the smallest employment.  Using a cutoff value of
50 employees yields a subset of 80, or 21.0 percent, of the 381 firms for
which firm employment data were available.

    The analysis is made only at the establishment level.  Establishments are
divided into two groups, large and small,  based on the size of the parent
firm.   Impact ratios for the different regulations are calculated and aver-
ages computed for small firms and the rest of the industry.  These averages
are compared to determine whether small firms bear a disproportionate
burden.
   *  SBA,  Part  121,  SBA Rules and Regulations,  August 1,  1980,  pg.  23.
                                     2C-11

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    Appendix  3A




Industrial Profile

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                                   Section 1

                                 Introduction
 Project Orientation

     Our starting point for describing the focus of this study of the
 chemical industry is the set of definitions used in the Standard
 Industrial Classification (SIC) system.*  The system is used widely on a
 continuing basis to gather statistical information from all sectors of the
 national economy.  It was developed by the federal government to promote
 the collection and analysis of data on a uniform basis and it prescribes a
 comprehensive method for classifying industrial establishments based on
 the dominant activity in which they are engaged.  Industry information
 organized by the SIC system is published periodically by the U.S.
 Department of Commerce,  Bureau of Census in the Census of Manufactures.

     The subject of this  study is the chemical industry, defined as all
 establishments in five SIC groups.   These are:   SIC 2821 (Plastics
 Materials and Resins), SIC 2823 (Cellulosic Manmade Fibers), SIC 2824
 (Organic Fibers Noncellulosic)  SIC  2865 (Cyclic Crudes and Intermediates)
 and SIC 2869 (Industrial Organic Chemicals,  not elsewhere classified).
 These establishments manufacture some products  that are classified outside
 the five designated SIC  groups and  such products are included in our
 analysis.

     Because of the establishment orientation of the SIC system,  some
 important  characteristics relevant  to our definition of the organic
 chemicals  industry cannot be described without  resorting to classification
 methods and data sources that  supplement  the SIC system.  In particular,
 SIC data on establishments are  not  adequate  for describing  types and sizes
 of  companies which produce chemicals.   Many  firms  cannot be classified by
 a single SIC code designation  because they operate multiple establishments
 that  make  different products, and furthermore,  the chemical manufacturing
 operations often are  not their  primary  business.   Also,  the SIC  system is
 not a convenient  way  to  characterize  manufacturing  establishments  by
 general  classes  of chemicals — e.g.,  basic,  intermediates,  and  end-uses
 chemicals  —  and  these distinctions are desirable  for the evaluation of
 pollution  control  costs.   Finally, a  description of  the  organic  chemical
 industry by product types  — such as  Dyes  and Pigments,  Fibers,  Flavors
 and Fragrances —  is  needed in  order  to understand  the  current and  future
 demand for  the different products in different markets.  For the above
 reasons, an  industry profile cannot be developed using  only the
 information developed for  the SIC system.  Therefore, other sources  were
   *Standard Industry Classification Manual, prepared by the Statistical
Policy Division, Executive Office of the President, Office of Management
and Budget.

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 used  and  include publications  by Dun  and  Bradstreet,  EIS  (Economic
 Information Systems  Inc.), DRI  (Data  Resources  Inc.), C.  H. Kline &  Co.,
 ITC  (International Trade Commission)  and  10-K reports filed by  some  firms
 with  the  SEC  (Securities and Exchange Commission).
Report Organization

    The remainder of this Industry Profile report  is presented  in  seven
sections.  Following this introductory section, a  brief overview is
presented  in Section 3 and discusses the chemicals industry as  a component
of the manufacturing sector of the economy.

    Sections 4 and 5 describe three major categories of chemicals produced
by manufacturers.  In Section 4, basic and intermediate chemicals are
described.  In Section 5 finished chemicals—derived from the basics and
intermediates—are discussed with respect to the markets in which they are
used.

    Section 6 describes the five SIC groups addressed in this project.
Summary information from the U.S. Census of Manufactures is presented for
each of the SIC groups.

    Section 7 describes a sample of firms in the chemical industry.
Sixteen company groups are used to show the distribution of firm sizes.

    Section 8 is a financial profile of large publicly owned firms that
make chemicals.  The profile does not include privately owned firms
because they are not required to file 10-K forms with the SEC.  The
privately owned firms are generally much smaller than the publicly owned
firms.

    Section 9 describes 1,167 establishments  that manufacture chemicals.
Five establishment groups are defined and used to present distributions
that describe sales,  -employment, geographical location,  discharger status,
types of products and ownership.
                                   3A-1-2

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                                   Section 2
                       Overview of the Chemical Industry
     The companies, establishments and chemicals markets  that  are  of
 central interest to this study are just a part of a  large,  interdependent
 group of diverse production activities.  The activities  include the
 extraction and processing of natural raw materials into  a succession of
 organic and inorganic intermediate materials and finished products.  The
 Department of Commerce definition of the Chemicals and Allied Products
 (SIC 28) sector of manufacturing does not include some industries that are
 important participants in organic chemical production; these other
 industries include mineral extraction, petroleum refining, primary metal
 industries and the photographic equipment and supplies industry.  The
 Kline Guide* has developed a description of the chemicals industry that
 includes portions of these participating industry sectors that are
 relevant to organic chemicals.   While this description excludes several
 industries classified within the SIC 28 sector as Allied Products (e.g.,
 paints,  Pharmaceuticals,  toiletries), the Kline Guide description is used
 in this  overview discussion to  describe the chemicals industry with
 respect  to the total manufacturing sector of the nation's economy.

     In 1979,  the chemical industry was ranked fourth in sales among 20
 manufacturing  industries, behind food,  transportation equipment, and non-
 electrical machinery.   In 1980,  its total shipments (about $122 billion)
 accounted for  over  6.5 percent  of overall output of the combined U.S.
 manufacturing  industries.

     Many different  industries,  including  steel,  petroleum and agriculture,
 have access  to,  or  control  of,  raw materials used  in  making  the  chemicals
 which, in  turn,  have  varied uses  in many  sectors of manufacturing.
 Forward  (or downstream) integration has been attractive to some  feedstock
 and  chemical producers.   In particular,  several major  petroleum  companies
 have integrated  forward to  use their  hydrocarbon feedstock and  refinery
 products to capture  the attractive profits  from manufacturing  intermediate
 and  finished chemicals.   Other firms  have sought backward (or  upstream)
 integration to better  control their access  to raw materials.

     Prior to 1950, most chemicals  were made  by "true"  chemical companies
 — defined as  those firms with chemical sales in excess of 50 percent of
 total sales.   In  1979, however, in the group of 100 top chemical pro-
 ducers, only 37 could  be  labeled  as traditional chemical  companies and
 their aggregate sales  accounted for only about 50 percent of the total
 sales of the group.  By contrast,  32 petroleum companies were in the top
   *The Kline Guide to the Chemical Industry, Fourth Edition,  Industrial
Marketino Guide IMG 13-80.

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 100 and their Gales were 28 percent of the total.  Moreover, five of the
 top ten chemical producers were oil companies in 1979.  Other firms with
 an important component of sales from chemicals are manufacturers of metals
 and minerals, machinery and fabricated metals, food and beverages, health
 care products,  and highly diversified companies with no single dominant
 product line.  A number of non-chemical companies make chemicals primarily
 for use in their various end products (e.g., the food and beverage sector
 makes flavor chemicals and the health care industry makes surfactants).

     Unlike other capital intensive industries, the chemical industry shows
 a relatively low concentration.   The top four companies in the chemical
 industry  account for  23 percent of total sales and the top eight account
 for 33 percent.   By contrast,  in other sectors of manufacturing, the top
 eight companies  account for 99 percent of the motor vehicles and car
 bodies, 98 percent of  primary  copper shipments,  and 56 percent of
 petroleum refining.

     Segments of  the chemical industry show considerable variation in their
 concentration ratios.   The  most  concentrated are  cellulosic fibers,
 synthetic fibers,  and  carbon black,  and  for these,  the top four  companies
 account for over  70 percent of merchant  shipments.   The least concentrated
 segments  are  fertilizers, cyclic crudes  and intermediates,  adhesives,
 plastics  materials and synthetic resins  and surfactants,  and for these,
 the top ten companies  account  for less than 40 percent of  total  merchant
 shipments.

    By emphasizing research and  development,  the  chemical  industry has
 shown  sustained and dramatic growth  over  a  span of  fifty years.   The
 industry  was  among the  first to  support  in-house  research  laboratories,
 and with  the exception of the  electrical  and  communications  equipment  •
 industry,  the chemical industry  invests more  of its corporate  funds
 (versus federal funds) for  R & D than  any other industry.

    The chemical  industry also is  unusual compared  to other manufacturing
 sectors in  its support of basic  research.   In  1977,  the manufacturing
 sector overall invested  2.7 percent  of the  corporate R&D in  basic research
 compared to 10.1 percent for the  chemical industry.  In 1977, the chemical
 industry  accounted for 36.9 percent  of all  the funds spent on basic
 research in the manufacturing  sector.  Attention  to basic research is in
 part responsible for a continuing  pattern in  the  chemical industry whereby
 new market opportunities are found for existing products and new products
 are discovered which generate  new  demand.

    The industry's R & D efforts have  resulted in new chemical products
 and new manufacturing processes.   These innovations result in high capital
 requirements.  Continual and frequent  innovation  results in rapid
obsolescence of plant and equipment, therefore annual rates of capital
 investment typically are high  if a company  is to  remain competitive.   The
 amount of  capital expenditures varies within the  industry.  The cyclic
crudes and intermediates sector oi: the industry and the synthetic fibers
sector invest the most (17.4 percent and 12.1 percent of sales,
                                   3A-2-2

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 respectively)  while  the  elastomers and adhesives sectors spend the least
 (2.2 percent and  2.1 percent).

     Since  1950, profitability,  measured with respect to sales, has been
 above average  for  the  chemical  industry relative to other manufacturing
 sectors.   In 1979, the profit margin on sales was 6.2 percent  compared to
 5.5  percent for all of manufacturing.  However,  profitability  for the
 chemical industry  measured  by return on net worth (stockholder's equity),
 was  below  average  between 1949  and 1966.   In more recent years/  between
 1975 to 1977,  the  return on net worth for the chemical industry  was higher
 than for most  other manufacturers. It then declined in 1978  and  continues
 to be below the average  return  on net worth.

     Within the chemical  industry,  different firms and different  chemicals
 reveal a wide  range of profitability.   For example,  the  large  volume
 commodity chemicals supplied by  several producers for multiple uses tend
 to show lower profitability than the  speciality  chemicals.

     In 1977, the chemical industry employed 2.8  percent of the total work
 force of the manufacturing sector.  Within the chemical manufacturing
 sector, sales per employee varied  among different industry groups,  with
 agricultural chemicals having the  highest  ($174,000)  and cellulosic fibers
 having the lowest  ($63,000).  The  average  sales  per chemical industry
 employee for 1977 was $143,000 compared to $73,000  for all manufacturing.

     The chemical industry makes  a  significant contribution to the nation's
 balance of payments.   The industry  is one  of the  largest net exporters.
 In 1979,  the industry accounted  for $17.4  billion, or 9.8 percent of total
 merchandise exports and $7.5 billion, or 3.7 percent of all goods imported
 for domestic consumption.  Exports are also important in terms  of the
 chemical industry itself  and account for 16 percent of total shipments.

    Basic  and intermediate  chemicals are the largest group of exported
chemicals  and accounted for  35 percent of the industry's exports  in 1979.
 Polymers and plastics materials  accounted for another 31 percent  of the
1979 exports.   In 1979, the  only chemical types for which imports
outweighed  exports were flavors  and fragrances and surfactants.
                                  3A-2-3

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                                  Section 3

                       Basic and Intermediate Chemicals
     Chemicals  are  often described with respect to three major categories/
 1)  basic,  or primary,  chemicals,  2)  intermediates and 3)  finished,  or
 end-use  chemicals.   This classification is useful for discussing  the
 industry outputs in  light of  the  vast  number  of chemicals manufacturered
 (about 10,000  chemicals are  listed in  the  SRI directory*.)   Basic
 chemicals  are  those  obtained  from the  conversion of  raw materials such as
 natural  gas, naphtha and gas  oil.   Further downstream processing  converts
 the basic  chemicals  into intermediate  chemicals which,  in turn, are used
 to  produce finished  chemicals.   (In some cases a chemical is used both as
 an  intermediate and  a  finished chemical; e.g.  ethylene  glycol).   Finished
 chemicals  are  used in  processes such as molding,  extruding,  mixing  and
 weaving  to manufacture products for  the consumer  market or to use in other
 industrial sectors.  The chemical  characteristics of  finished chemicals
 usually  are not changed in these  final  stages of  manufacturing.

     The  major  chemicals from  which finished chemicals are derived are  the
 subject  of this section.   There is considerable variability  in the  mix of
 intermediate and finished chemicals  that can  be produced  from the basic
 chemicals.  The mix  is based  primarily  on  market  demands, production and
 process  technology and feedstock  characteristics.  The  intent of  this
 section  is twofold:  1)  to provide a simplified overview  using typical,  or
 average, values describing how basic chemicals are used to produce
 intermediate and final  products, and 2) to present quantitative
 information on production capacity,  prices and foreign  trade  for  current
 and  projected  conditions.  The next  section of  the report will describe
 finished chemicals and their  end-uses.
Basic Chemicals
    Table 3-1 presents production, consumption, capacity and other
information for six of the most important basic chemicals, both aromatics
and aliphatics.  The data are for 1979 and for 1985 based on projections
by the Data Resources Inc. (DRI) Chemical Service.  Production of ethylene
was greater than any of the others and more than double the output of
benzene which ranked second in 1979.  Also, consumption of ethylene was
greater than for the other basic chemicals.  As a group, the aliphatics
were almost twice the production of the aromatics.  Quantities of basic
chemicals imported or exported were less than 10 percent of U.S.
production except for butadiene in which case imports were 15 percent of
   *SRI International 1979 Directory of Chemical Producers, United States
of America.

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 production.   Merchant shipments of the basic chemicals ranged from 38 to
 70 percent of total production.

     The industry concentration, defined as the percent of production
 captured by the top 4 manufacturing firms, ranged from 22 to 49 percent in
 1979 with butadiene exhibiting the highest ratio.  Capacity utilization
 was 82 percent for both ethylene and benzene; however, the yield of basic
 chemicals will vary based on the properties of the feedstocks and the
 market demands for the chemicals.

     The 1985 projection shows an increase in production capacity for
 benzene of 27 percent over 1979 and a projected utilization of 74
 percent.  For ethylene,  capacity is projected to increase by 17 percent,
 and projected utilization is 87 percent.   By 1985,  unit prices are
 projected to increase,  in constant dollars,  by 82 percent over 1979 prices
 for ethylene and 21 and  24 percent for benzene and butadiene,
 respectively.
     Intermediate Chemicals

     Figures 3-1 through  3-6  show the  major  intermediate  chemicals and the
 products derived from  the six major basic chemicals.   The  figures identify
 the  approximate proportions  in  which  the basic  chemicals are  consumed for
 production of the intermediates and also, how the  intermediates  are  used
 for  some of the important finished chemicals.
     Benzene Derivatives.  Figure  3-1 shows  the downstream derivatives of
 benzene.  Seventeen percent of  the  benzene  consumed  in 1979 was  for
 production of cyclohexane, 15 percent for cumene, and 50 percent for
 ethylbenzene.  These intermediates  in turn, are used to synthesize
 styrene, phenol, acetone and nylon.  Styrene accounts for 96 percent of
 ethylbenzene consumption.  Ethylbenzene and styrene account for the major
 consumption of benzene, therefore,  if market changes occur in the end-uses
 for  styrene  (e.g., styrene plastics), the effect on demand for benzene
 will be high relative to changes  in markets for other end-use products
 derived from benzene.

    Table 3-2 shows production, consumption, sales and other data for the
 major benzene derivatives.  Production and consumption of ethylbenzene in
 1979 was about 8.5 billion pounds, more than double that of cumene, the
 second largest intermediate derived directly from benzene.

    There is considerable variation in import and export volumes as
 percentages  of total production.  No ethylbenzene was imported in 1979,
 and one percent of total production was exported.  Exports  of cyclohexane,
 on the other hand, amounted to almost 20 percent of U.S.  production.
 Merchant market shipments show a wide variation with ethylbenzene sales of
 only 4.3 percent of total production and cyclohexane amounting to about 99
percent of total production.
                                   3A-3-3

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     The concentration ratio/  expressed as the percent of production
 capacity accounted  for by the four largest producers, ranges from 36
 percent to 60 percent with styrene and phenol (respectively) at the
 extremes.

     Capacity utilization in 1979 for ethylbenzene,  cumene and cyclohexane
 was below 80 percent; the capacity utilization for  both phenol and styrene
 was about 90 percent  that year.   The DRI forecast projects that the
 capacity for ethylbenzene will increase by 12 percent by 1985, but also
 projects a shortfall  of 732 million pounds in the same year.  A shortfall
 in 1985 is projected  for both cumene and phenol,  estimated to be 50
 million pounds and  66 million pounds respectively.   Capacity utilization
 for cyclohexane  and styrene is expected to be below 85 percent in 1985.

     Overall price increases of 17 percent for styrene and 66 percent for
 phenol  are projected  (in constant dollars)  by 1985.


     Xylene and Toluene Derivatives.   Figures  3-2  and 3-3 show the
 intermediate and end  uses of  toluene and xylene.  These two  basic
 chemicals  are used primarily  in  gasoline blending — over 90 percent.   The
 extent  to  which  they  are employed for other end uses is determined  mainly
 by the  requirements of gasoline  producers.

     Depending  on market  demand and  the price  of benzene,  toluene may be
 used to produce  additional benzene  if desired.  Mixed xylenes are used as
 a  gasoline additive and  separated into para-,  ortho- and meta-xylene.

     Table  3-3  shows production,  consumption and capacity for  the two major
 xylene  derivatives.   In  1979,  the production  of para-xylene  was  more than
 four  times that  of ortho-xylene.  Exports of  ortho-xylene, shown by  a
 percent  of total U.S.  production, were more than  twice  those  of
 para-xylene.

     Capacity  for para-xylene  in  1979  was  5.2  billion pounds  (89  percent
 utilization) and is expected  to  be almost constant over  the next  six
 years.   The projected  growth  in  production  should result  in essentially  no
 change  from  the  1979 level of  capacity  utilization in 1985.   Capacity for
 ortho-xylene production was 1.4  billion pounds {77 percent utilization)  in
 1979.  Projected growth in production and capacity should result in a 1985
 capacity utilization of 74 percent.  Overall price increases of  27 percent
 and 30 percent are projected  (in constant dollars) for para- and
 ortho-xylene, respectively by  1985.

    The primary uses for toluene are as a gasoline additive and as a
 feedstock for benzene; no tabular data are presented for these uses which
are considered "non-chemical uses" by the industry.
    Ethylene Derivatives.  Figure 3-4 illustrates that 45 percent of the
ethylene is consumed in the production of polyethylene,  which is an end
                                  3A-3-11

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 use product.  Fifteen percent of the ethylene is used to make ethylene
 dichloride, 60 percent of which is consumed for vinyl chloride
 production.  The downstream use patterns for ethylbenzene and ethylene
 oxide are more complicated and are affected by several end-use markets
 (e.g., antifreeze and polyester fibers are made from ethylene oxide).

     Twenty percent of ethylene is used for ethylene oxide, 60 percent of
 which is used to make ethylene glycol.  Ethylbenzene, derived from
 ethylene and benzene (discussed earlier),  consumes about 10 percent of the
 ethylene production.

     Table 3-4 shows that production of low density and high density
 polyethylene amounts to 13 billion pounds,  or 41 percent of the total
 quantity of the  major ethylene derivatives.  Ethylene dichloride
 production is the next  largest derivative  of ethylene,  about 12 billion
 pounds.   Ethylene derivatives were not imported in 1979.  About 11 percent
 of the polyethylenes and ethylene dichloride and one percent of ethylene
 oxide were exported.  Industry concentration ratios ranged from 32 to 47
 percent  for the  various derivatives.

     Capacity utilization in 1979 for  the various ethylene derivatives
 ranged from 90 to 99 percent and by 1985 is forecast to  range from 73 to
 87 percent depending on the specific  product.

     Overall price increases of 44 and 59 percent are projected  (in
 constant dollars)  for high density polyethylene  and ethylene  oxide
 respectively by  1985.
     Propylene Derivatives.  Figure  3-5  identifies  the  numerous and diverse
end-uses for propylene.   Polypropylene, accounting for  25 percent of
propylene consumption,  is the  largest single use for this basic chemical.
The  four intermediates  derived from propylene  (isopropanol, acrylonitrile,
propylene oxide, and cumene) account for between 10 and 15 percent of
propylene consumption.  The diagram shows the different end-uses that are
of major economic  importance.

     Table 3-5 shows that  polypropylene  accounts for about 40 percent of
the  production volume of  all propylene  derivatives.  Acrylonitrile,
propylene oxide, and isopropanol each accounts for about 20 percent of
production of all derivatives.

     Imports for all propylene  derivatives were less than 5 percent of U.S.
production in 1979.  Exports,  as percent of production,  ranged from 10
percent to 20 percent with acrylonitrile at the upper end of this range.
Merchant market sales ranged from 40 percent to 72 percent of total
production.

    The concentration ratio ranges from 41 percent for  acetone to 91
percent for  isopropanol.  Each of the three chemicals with the highest
concentration ratios is manufactured by only six firms.
                                  3A-3-13

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    Capacity utilization in 1979 ranged from  65 percent  for  isopropanol to
 87 percent for acrylonitrile.  The production requirements for
 polypropylene are forecast to increase 47 percent overall between 1979  and
 1985 while capacity is expected to increase by 3.6 percent.  This is
 anticipated to cause a shortfall of 1.2 billion pounds by 1985.   Acetone
 production requirements are expected to exceed capacity  in 1985  by 42
 million pounds.

    Overall production growth for the other propylene derivatives is
 expected to range from 8 percent for acrylonitrile to 20 percent for
 propylene oxide by 1985.  Overall price increases of 26 and 44 percent  are
 forecast (in constant dollars) for propylene oxide and acrylonitrile
 respectively by 1985.
    Butadiene Derivatives.  Figure 3-6 indicates that nearly all butadiene
consumption is for the manufacture' of synthetic elastomers.  Forty-five
percent of butadiene is for the production of styrene-butadiene-rubber
(SBR) with polybutadiene the next largest consumer of this basic
chemical.

    Table 3-6 shows that SBR accounts for 78 percent of the total
production volume of all butadiene derivatives while polybutadiene
accounts for about 22 percent of derivative production.

    Imports of SBR were about 4 p€>rcent of the 1979 production and imports
of polybutadiene were 11 percent.  Exports of SBR were 9 percent of total
production and those of polybutadiene were about 7 percent.

    In 1979/ the capacity utilization for SBR production was 81 percent.
Little, if any,  change is anticipated in production, but capacity is
expected to decline by 1985 resulting in a utilization of 89 percent.
Production requirements for polybutadiene (with 88 percent capacity
utilization in 1979)  are expected to increase 12 percent by 1985 and with
no capacity additions anticipated,,  a shortfall of 33 million pounds is
projected.

    Overall price increases of 18 and 30 percent are projected (in
constant dollars)  for SBR and  polybutadiene respectively for 1985.
                                  3A-3-16

-------
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-------

-------
                                    Section 4

                   Finished Chemicals:  Market Characteristics
     The economic impacts of pollution controls will depend in large part on
 the response of chemical markets to price changes induced by the costs of the
 improved controls.   If the markets for finished chemicals are affected,  then
 the intermediate and basic chemicals from which the finished chemicals are
 manufactured will also be affected.  These linkages—between basic,
 intermediate,  and finished chemicals—are incorporated explicitly in the
 Meta/DRI model developed for the study and discussed in Volume I.

     This discussion  will identify some of the major end-uses and markets for
 finished chemicals and,  where possible,  the trends that will influence future
 production.  Where information is available,  market and production levels are
 projected for  1985 and in some cases,  two sources may be cited.   Data
 Resources Inc.  (DRI)  has made six year projections of production — from 1979
 to  1985 — for some  major chemical groups.   The Kline Guide  has  projected
 1985 value of  shipments  for  some of the  finished chemicals.

     We  define  nine markets for finished  chemicals.   The nine chemical markets
 are listed in  Table  4-1.
                                    Table  4-1

                       Identification of Chemical Markets
     1. Dyes and Organic Pigments
     2. Flavors and Fragrances
     3. Plastics and Resins
     4. Rubber Processing Chemicals
     5. Elastomers
     6. Plasticizers
     7. Surface Active Agents
     8. Manmade Fibers
     9. Miscellaneous End-Use Chemicals*

   * We have included Medicinals and Pesticides under the Miscellaneous
market group because they are the subject of other EPA agencies.
    These specific market groups were selected because information about the
products of individual establishments is presented by these groups in
the SRI Directory.**  The classification is also quite similar to that used
by the U.S. International Trade Commission.  These two documents are primary
data sources for the study.
   **SRI International, 1979 Directory of Chemical Producers.

-------
     Descriptions of the nine market categories in this section will not be
 limited to the finished chemicals associated .with the five SIC groups
 discussed in the following section.  This is reasonable because a change in
 the production of a specific finished chemical should be anticipated based on
 the entire market in which the chemical is involved.   For example, synthetic
 chemicals are only a part  of the  flavors and fragrances industry, and natural
 substances are used to complement or substitute for  synthetics.  Therefore,
 to forecast changes in production of the synthetics,  the entire market should
 be analyzed.

     Information describing ultimate uses of  finished  chemicals is available
 primarily from the International  Trade  Commission,* and the  Kline Guide.
 Table 4-2 summarizes the information on number  of manufacturers,  production,
 sales and uses of the finished products.   With  the exception of Manmade
 Fibers,  the production and sales  data in Table  4-2 are for  synthetic
 chemicals,  i.e.,  the data  do not  include the natural  chemicals that are used
 in conjunction with the synthetics  in some end-use applications.   For Manmade
 Fibers,  synthetic and cellulosic  fibers are  listed because both are included
 in our definition of the chemical  industry;  i.e.,  SIC 2823 and SIC 2824.   For
 Flavors  and Fragrances, the data  shown  are only for the synthetic chemicals,
 however,  the  later discussion of  the Flavors and Fragrances  market includes
 both  natural  and  synthetic chemicals.   For Pesticides,  the data shown are
 only  for  the  chemicals that are 100 percent  active materials and  do not
 include materials such as  diluents  and  emulsifiers.   However,  the discussion
 of  Pesticides includes formulated products as well as active chemicals.

    Differences between sales  quantities  and total production in  Table 4-2
 are attributable  to inventory  changes,  processing  losses  and,  perhaps most
 importantly,  captive consumption.   That  is,  the  sales  data shown  in the table
 pertain only  to the amounts sold outside  the manufacturer's  firm,  on what  is
 often called  the  merchant  market.   Merchant  sales  exclude the  chemicals
 consumed  by the same corporate entity or  a wholly  owned subsidiary.

    We can  observe  from Table  4-2 that  Plastics  and Resin Materials  is the
 category  with  greatest production volume  —  accounting  for 58 percent  of the
 nine  group  total  production of 71.8  billion pounds —  and is about  4.5 times
 the production for  the  second  largest category,  Manmade Fibers.   The  third
 and fourth  ranked categories based  on production are  the Miscellaneous group
 and Elastomers, respectively.  The  total  value of  all merchant  shipments in
 1979 was  $35.8 billion and Plastics and Resin Materials accounted for 43
percent of  that total, followed by Manmade Fibers with 23 percent.   If number
of manufacturers  is  the ranking criterion, then Plastics and Resins again is
first.

    For finished products that are sold outside the manufacturing company,
average unit value of sales ranges from 40 cents per  pound (for Surface
Active Agents) to $4.62 per pound (for Medicinal Chemicals).   However, within
a category  there can be wide variation;  for example,  organic pigments range
   International Trade Commission, Synthetic Organic Chemicals USITC
Publication 1099.
                                   3A-4-2

-------




































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 from $2.54 per pound (for miscellaneous toners) to over $14.00 per  pound
 (for some of the red pigments).

     Table 4-3 summarizes the historical and projected growth rates  of
 value of shipments (in constant dollars) for the finished chemicals, which
 are discussed later in this section.  The value of Medicinal Chemicals
 grew at the highest rate (10.2 percent) during the 1970s but is
 anticipated to grow at a reduced rate  (5.0 percent) between 1980 and
 1985.  Plastics and resins, the second fastest growing product type
 between 1970 and 1979 (9.1 percent), are expected to grow at an increased
 rate (9.8 percent)  from 1980 to 1985.  The slowest growing product  type
 during the 1970s was the dyes (0.6 percent)  and their position of slowest
 growing,  relative to the other  products, is  expected to continue through
 1985 with a growth rate of 1.9  percent.
                                  Table 4-3

           Growth  Rates of Value of  Shipments (in constant dollars)
     Product Type
Historical
(1970-1979)
   Projected
.   (1980-1985)
     Dyes                               0.6%

     Organic Pigments                   3.2%

     Flavors & Fragrances               5.5%*
     Plastics & Resins                  9.1%

     Rubber Processing Chemicals        3.9%

     Elastomers                         1.9%
     Plasticizers                       **

     Manmade Fibers                     6.7%
     Surfactants                        3.8%*
     Miscellaneous

       Pesticides                      3.8%

       Medicinal Chemicals     ,      10.2%
                        1.9%
                        5.0

                        4.0%

                        9.8%

                        5.9%

                        3.0%
                        5.0%

                        6.5%
                        2.9%


                        **

                        5.0%
Note:  Growth rates are for total shipments unless rated by *, in which case
rate is based on merchant shipments.

   **insufficient data

Source:  Kline Guide
                                   3A-4-5

-------
 Dyes and Organic Pigments

     Historical View.   The end-uses for dyes and organic pigments are
 primarily textiles (76 percent of dyes)  and printing inks (45 percent of
 organic pigments).  Other uses for dyes are in the paper industry (20
 percent), plastics,  leather,  food, gasoline,  and the manufacture of  organic
 pigments; organic pigments are used in paints (35 percent)  and plastics (10
 percent)  as well as  the printing  inks mentioned above.   There is very little
 captive consumption  of dye materials, while between 15  and  20 percent of
 organic pigments production is consumed  captively.

     Production of dyes in 1979 was 266 million pounds compared to 235 million
 pounds  in 1970,  an overall increase of 13 percent.   During  the same  period  the
 value of  total shipments rose from $397  to  $795 million which amounts to an 8
 percent average  annual increase.   In constant dollars,  this is a .64 percent
 annual  increase.   A  shift to synthetic fibers,  which require more expensive
 dyes, and an increase  in unit prices explain  most of the difference  between
 volume  and dollar growth rates.   Using a 1967 base  of 100,  the average
 manufacturers price  index for synthetic  organic dyes was 197.6 in 1979.

     Organic pigments have displayed a stronger  growth performance than dyes
 over the  past decade.   Production increased by  54 percent overall between 1970
 and  1979,  from 57 to 88 million pounds,  and the value of total shipments
 increased from $147 million  in 1970 to $415 million  in  1979.   This represented
 an average annual increase of  12  percent in current  dollars,  but  a 3.0 percent
 average annual increase in constant dollars.  The 1979  price  index for organic
 pigments  increased to  222.9  from  the 1967 base  of 100.

     Unlike many  high volume organic chemicals,  the colorants  are  both imports
 and  exports for  the United States.   Dyes have traditionally  shown trade
 deficits  which reached  an all-time high of $84  million  in 1978.   Organic
 pigments,  on  the  other  hand,  have  traditionally shown trade  surpluses which
 reached $51 million in  1979.
    Outlook.  In general, the consumption of dyes and organic pigments will
follow the growth trends of the textile, printing, and paint manufacturing
industries.  However, the outlook for U.S. manufacturers is mediocre.  Costs
are rising at the same time that the market is softening, and competition is
becoming more intense.  The outlook for organic pigments is for an average
annual growth rate of 5 percent in total shipments between 1980 and 1985 when
total shipments are expected to reach $925 million; this estimate, derived
from the Kline Guide, is based on constant 1980 dollars.  The growth rate for
dyes, again in 1980 constant dollars and is expected to be about 1.9 percent
annually until 1985 when total shipments should be $550 million.
Flavors and Fragrances

    Historical view.  The flavors and fragrance industry accounts for one
percent of total chemical industry sales and a very small part of the
                                   3A-4-6

-------
  industry's total production.  The industry  is  involved  in  the  production  of
  flavors and fragrances, flavor enhancers and synthetic  sweeteners/  with
  flavors and fragrances accounting for the bulk of  the production  and  sales.

     Flavors and fragrances are ultimately blends of different  substances  and a
 company may be involved in (1) synthesis of aroma  or flavor chemicals,
  (2) production or purchase of natural oils  and other products,  and  (3)
 blending the synthetic and the natural substances  to achieve the  desired
 flavor or aroma.  Table 4-4 shows the merchant shipments of the various
 end-use products in the industry and includes natural and synthetic chemicals
 and blended compounds.  The total flavors and fragrances merchant sales of
 $890 million is almost four times the value of the synthetic chemical
 component of those shipments listed in Table 4-4.
                                    Table  4-4
       End-Use of Flavors, Fragrances and Related Products — 1970 and 1979
           End-Use Product
   Merchant Sales
      (million $)
1970             1979
         Flavors  and fragrances
         Flavor enhancers (MSG)
         Synthetic  sweeteners

         Total
320

 20

 10

350
830

 33

 27

890
   Source:  Kline Guide.
    The primary end—use for flavors is soft drinks, with 60 percent of the
total volume going to that market.  About two thirds of the fragrances
produced are used in cosmetics and toiletries and the  remaining third is
used in scented candles, household cleansers and industrial deodorizers.

    Monosodium glutamate (MSG) is the only flavor enhancer of economic
significance and in 1979 it had sales of $33 million.  Saccharin is the only
commercially important synthetic sweetener since cyclamates were removed
from the market in 1969.  In 1979, sales of saccharin were $27 million.  In
1979, production of the synthetic chemicals was 194.5 million pounds of
which 69 percent was sold on the merchant market for $236.4 million.

    Table 4-4 indicates that the flavors and fragrances industry overall has
shown considerable growth over the past decade with its individual
components growing at different rates.  In current dollars, merchant
                                   3A-4-7

-------
 shipments of flavors and fragrances have increased from $320 to  $830 which
 represents an average annual growth rate of 11 percent,,  Merchant  sales of
 MSG and synthetic sweeteners have grown at average annual rates  of 5.7
 percent and 12 percent, respectively.  The average annual rate of  growth of
 the industry overall is 11 percent which translates into a constant dollar
 growth rate of 5.5 percent.

     According to the ITC, there aire 39 firms producing flavors and
 fragrances.  The top five companies account for 40 percent of industry
 shipments and the top nine, for 56 percent.  The industry is uncommon in the
 large number of successful small privately owned companies it accommodates.
 These firms tend to specialize in raw materials, while the larger  companies
 tend to integrate vertically and compound the materials as well as supply
 them.   Several large end-users (e..g.,  Colgate-Palmolive/  Proctor and Gamble)
 develop their own fragrances.

     In 1979,  U.S.  foreign trade in flavors  and fragrance  amounted to $219
 million in  imports  and  $197 million in exports.   The majority of the imports
 are  in essential oils and other natural products and are  important to the
 industry because  very few of the plant materials used  for  fragrances are
 grown  on this continent.   U.S.  exports are  composed primarily of blended
 compounds and  synthetic aroma  chemicals.
    Outlook.  The demand  for  flavors  and  fragrances  and  their  related
products is expected to increase  through  1985.   Increased  consumption of
fragrances for toiletries and cosmetics is  -likely  because,  in  addition to
increasing sales, the average fragrance content  of those products is also
increasing.  The soft drink market has increased 50  percent since 1970 and
the continued increase in consumption means an increase  in  production of
both flavorings and synthetic sweetners.  The major  markets for  the
industry's output (cosmetics  and  toiletries, soft  drinks, and  flavors and
flavor enhancers) are projected to grow at  a rate  of about  4 percent
annually based on Kline Guide  information,  with  shipments of $1.14 billion
in 1985 (in constant 1980 dollars).
Plastics Materials & Synthetic Resins

    Historical View.  Plastics materials and synthetic resins manufacturers
make up a large and profitable part of the chemical industry.  While the
terms "plastics" and "resins" are often used interchangeably, the products
are different in that plastics can be formed into solid shapes with good
mechanical properties while resins are used in coatings, adhesives and for
other uses where binding properties are needed.  The polymers used to make
plastics are  similar to those used for fibers and several of the polymers
are used for  both finished products.  Shipments of plastics and resins have
grown at an average annual rate of almost 17 percent since 1970 and now
account for about 17 percent of all shipments of the chemical industry.  In
1979, 42.1 million pounds of plastics and resins were produced, of which
                                   3A-4-8

-------
 36.8 million pounds  (or 94 percent) were  oold  on  the  merchant market  with
 sales equalling $15.6 million.

    These finished chemicals are extremely  versatile  in both mechanical
 properties and potential end-uses.  Much  of the growth in  the plastics and
 resins  industry is a consequence of these products •'being  acceptable
 replacements for natural materials such as metals, glass/  wood, and paper.
 While there are about forty different plastic  materials with commerical
 applications, four major types accounted  for 75 percent of total sales (in
 pounds) in 1979.  These major types are polyethylene, vinyls, styrenes, and
 polypropylene.

    Table 4-5 shows that polyethylene, both in terms of production and
 sales, is the most important plastic produced.  It accounted for 31 percent
 of the quantity and 25 percent of the value of all plastics sold on the
 merchant market in 1979.  Polyethylene production has increased at an
 average annual rate of 8.5 percent the past ten years.  End products made
 from polyethylene tend to be strong, flexible and resistant to extremes in
 temperature and moisture.   The major end products are rigid containers,
 flexible wraps, and trash bags.  In 1979,  nine percent of the total
polyethylene produced- was used in trash bags.
                                 Table  4-5
            Production and Sales Statistics for Plastics — 1979
1 Production 1 Merchant Shipments
Plastics
Type
polyethylene
vinyl resins
styrene resins*
polypropylene
other plastics
Total
(nun Ib)
1
12,408
7,624
6,329
3,824
11,937
42,124
Quantity Value
(mm Ib) (nun $)
1 1
11,588 $3,844
6,558 2,520
6,121 2,673
3,494 1,006
9,056 5,544
36.817 15,587
(% of Merchant
Quantity
1 1
31%
18%
17%
9%
25%
1 10°% 1
Shipments)
Value
1
25%
16%
17%
6%
36%
100% .
  *Figures for styrene include
       acrylonitrile-butadiene-styrene  (ABS)
       styrene-acrylonitrile  (SAN)
       straight polystyrene and other styrenes

  Source:  Kline Guide.
                                  3A-4-9

-------
     Vinyl-resins accounted for 16 percent of the value of merchant ship-
 ments in 1979  and total production has grown 7.5 percent annually over the
 past ten years.   Polyvinyl chloride (PVC) is an old and versatile plastic
 that accounted for 81 percent of the vinyl production :Ln 1979.  It is used
 primarily in construction; PVC pleistic pipes represent one of the fast-
 est growing end  products of any chemical.  Packaging and adhesives are
 other end-uses for vinyl resins.

     Styrene resins are an important plastic group because they can be
 easily modified  and custom made to fabricator's specifications.   They
 accounted for  17  percent of the 1979 value of  merchant shipments of all
 plastics and total production.   This group has grown at  an average annual
 rate of 6.6 percent over the past decade.   Currently,  the primary uses for
 styrene are in packaging (styrofoam cups),  housewares,  and construction
 (drain pipes), and given the plastic's versatility,  other markets can be
 expected to open  up.

     Polypropylene, while ranking  fourth of  the top  four  plastics in
 production and sales,  is  the fastest  growing of  the  plastics materials.
 In  1979 polypropylene  accounted for  only  9  percent  of  total plastics
 production (in pounds) and  6 percent  of the value of merchant  shipments.
 However,  in the ten years  from  1959-1979, polypropylene  production grew at
 an  average annual rate of  13.4 percent.  The major end-uses for
 polypropylene are packaging  and automobile  parts.

     Table 4-6 shows the amount of each  type of plastic consumed  in 1979 by
 different end-uses.  Total consumption  of 46.4 billion pounds  exceeded
 production by approximately  10 percent.  The table is useful in  showing
 the  mix of plastics consumed  for  each  end-use  (read vertically)  as well as
 the  distribution of end-uses for  each type of plastic (read horizon-
 tally).  For  example,  of a total  of 10.107 billion pounds of plastics
 consumed in 1979 for packaging, 50 percent  (5.0 billion pounds)  was
 polyethylene,  5 percent  (530 million pounds) was vinyl, 14 percent  (1.39
 billion pounds) was styrene, and  6 percent  (625 million pounds)  was
 polypropylene.   Also Table 4-6 shows that of the 12.841 billion  pounds of
 polyethylene consumed, 39 percent was used for packaging, 6 percent in
 construction, 36 percent for housewares and other domestic uses, and 13
 percent was exported.

    The plastics industry, with over 200 firms, is the largest sector of
 the synthetic chemical industry.  The top four companies account for about
 36 percent of the shipments and the next four account for an additional
 13.2 percent.   The top 30 producers account for 75 percent of  the total
 shipments. There is considerable vertical integration in the  industry,
with the majority of  the processing companies being at. least partially
owned by end-users or  materials suppliers.

    Plastics and  resins account iior close  to 20 percent of the value of
 total chemical  industry exports of S3.24 billion in 1979.  Polyethylene
accounted for about 40 percent oi:  the total amount of plastics exports.
The quantity of polypropylene, while accounting for  only 9 percent of
total plastics  production, was 13  percent  of the total  amount  exported in
                                  3A-4-10

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 1979.   Imports  are  about  one  fifth  the  dollar  value  of  exports and are
 growing at a slower rate .than  exports.
     Outlook.  The Kline Guide  forecasts  a  growth  rate  for  value of  total
 value of basic plastic products  shipments  of  4.0  percent annually out  to
 1986, when projected  sales  reach $26  billion  in teems  of 1981  constant
 dollars.  This growth rate  will  undoubtedly vary  among the  four major
 plastics types as some markets are more  affected  by a  downturning economy
 than others.  Polypropylene, used extensively in  the faltering  automotive
 industry, may experience a  decline; in growth, as  may the vinyl  resins  that
 are  used in the construction industry.   The DRI projections indicate a 5.7
 percent average annual growth in the  volume of domestic demand  of plastics
 and  resins over the period  from  1981 to  1985.
Rubber Processing Chemicals

    Historical View.  Rubber-processing chemicals are used to facilitate
processing, or to improve the finished rubber product, for example, by
retarding rubber's deterioration by oxygen.  Tires and related products
consumed almost 65 percent of all production, followed by mechanical goods
(18.5 percent), footwear (6 percent), latex foam products (3.5 percent),
and wire and cable (1 percent).

    Production in 1979 was 395 million pounds, up 33 percent overall from
298 million pounds in 1970.  Total shipments in 1979 were valued at $495
million.  This represents an average annual growth rate of 12.6 percent
since 1970, when the value of total shipments was $170 million.  In
constant dollars, this is an average annual growth rate of 3.9 percent.
Volume of merchant shipments increased 23 percent overall from 228 million
pounds to 280 million pounds between 1970 and 1979.

    The three largest producers of rubber processing chemicals, which
account for 50 percent of total production, are major tire manufacturers
who use a large part of their production captively.
    Outlook.  In 1985 the value of total shipments is projected in the
Kline Guide to be $700 million (in constant 1980 dollars) compared to $495
million in 1979.  Production is expected to grow at an average rate of 5.5
percent annually according to DRI.  The combination of lower average auto
speeds, fewer miles driven and the record low sales for the U.S. auto
industry will likely have an effect on the rubber-processing chemicals
market.  Also, manufacturers are increasing the life of tires and thereby
decreasing the consumption of both rubber and rubber-processing
chemicals.  In addition, if, following the example of U.S. tire makers,
foreign tire manufacturers begin to make and consume these chemicals
captively, then foreign production can be expected to reduce the need for
U.S. exports and hence, U.S. production.
                                   3A-4-12

-------
 Elastomers

     Historical View.  Elastomers are organic polymers used in place of
 natural rubber.  Table 4-7 shows the major end-uses in 1979.  The auto-
 mobile industry is by far the largest consumer of synthetic rubber/ using
 64.3 percent of total production for tires, 5.5 percent for molded auto-
 motive parts, and lesser amounts for belts, gasoline hose, gaskets, etc.
                                  Table  4-7
                        U.S. Consumption of Synthetic
                         Rubber by Major  End-Use-1979

                            Percentage of tonnage
                Tires,  tubes  and  tire  products          64.3%
                Molded  goods
                  Industrial  rubber                      9.2
                  Automotive                             5.5
                Footwear                                 2.5
                Plastic impact modifiers                 2.4
                Belting hoses and gaskets,  etc.          2.1
                Wire  and cable                           1.7
                Adhesives                                1.5
                Coatings                                 1.5
                Other                                    9.3

                       TOTAL                          100.0%

 Source:  Kline  Guide.
    Table 4-8 shows that production of elastomers in 1979 was 5,860
million pounds compared to 4,438 million pounds in 1970, an overall
increase of 32 percent.  Value of total shipments was $2,835 million in
1979, compared to $1,114 million in 1970.  In constant dollars this
amounts to a 1.9 percent average annual growth rate.
                                 Table  4-8
                      U.S. Production and Shipments of
                            Synthetic Elastomers
  Production         	Merchant Shipments	        Total  Shipments
 million Ibs         million Ibs      million $            million  $
1970     1979        1970    1979    1970    1979         1970        1979
4,438    5,860       3,820   4,002   1,032   2,325       1,114       2,835

Source:  Kline Guide.
                                  3A-4-13

-------
     Merchant  shipments  of  4,002  million pounds in 1979^ were up 5 percent
 overall over  the  1970 shipments  (3,820 million pounds)  and the value of
 these  merchant  shipments  rose  at an  average annual rate of 5.2 percent in
 current dollars or  0.5  percent in constant dollars.

     Exports of  elastomers  have been  about 550 to 650 million pounds in
 recent years.   In 1957, United States  exports of 451 million pounds were
 18 percent of U.S.  production; in 1964,  exports were 719 million pounds or
 21 percent of total production.   By  1979 exports had decreased to 643
 million pounds  or 11 percent of  the  total produced.   In that year the
 exports were valued at  $416 million.   Imports have increased from 242
 million pounds  valued at $54 million in  1972 to 465  million  pounds valued
 at $125 million in  1979.   This represents a 92 percent  increase in the
 amount imported and a 13 percent  average annual growth  rate.
    Outlook.  The elastomer industry's growth rate  is expected to slow
down.  As noted above, exports have declined and this situation is
expected to continue as foreign capacity grows.  Two other reasons to
expect a decline in growth are the saturation of elastomers in the natural
rubber markets  (82 percent) and the tire manufacturer's continued ability
to increase the wearlife of tires.  However, nontire applications are
expected to grow 10 percent a year and the value of total elastomer
shipments should reach $3.7 billion by 1985  (in constant 1980 dollars)
according to the Kline Guide.  DRI projections of production quantities
indicate an average annual growth rate of 1.3 percent from 1979 to 1985.
Plasticizers

    Historical View.  Plasticizers are organic chemicals that are mixed
with plastic polymers to alter the latter's physical qualities.  They can
be used to improve processability or to modify the final product, mainly
by increasing flexibility.  Roughly 85 percent of total plasticizer
shipments are used in plastics, the remainder being utilized in rubber
compounding and in applications unrelated to the plastics market.

    Production of plasticizers in 1979 was 2,134 million pounds compared
to 1,257 million pounds in 1970,  an overall production increase of 70
percent.  Merchant shipments were.' 1,814 million pounds in 1979 and were
valued at $827 million.  Data are not available for dollar value of
shipments in 1970.  Data shown in Table 4-9 include most of the chemicals
primarily used as plasticizers, however some of the chemicals,
particularly phosphates and adipates, also have non-plasticizer
applications.
                                  3A-4-14

-------
                                  Table 4-9
                U.S. Production and Shipments of Plasticizers
               Production

               million  Ibs
                         Merchant Shipments
                                            Total Shipments
                   million Ibs
                                 million $
                            million $
 Antholates

 Phosphates

 Epoxies
1970


 839

  44

  95
                      1979
        1977
1979
1977
Adipates  and
  Sebacates     63

Polymeric      47

               169

Total       1,257

Source:   Kline  Guide.
1,291  1,155

  125     88

  120    114


   76     69

   56     37

  466    194

2,134  1,657
1,233    341

  105     61

  122     53
1,
65
48
241
814
36
36
99
626
1979


 456

  82

  65


  36

  36

 152

 827
 1979


  N.A.

  N.A.

  N.A.


  N.A.

  N.A.

  N.A.

1,025
N.A.  Not available in Kline Guide,
    Outlook.  The growth prospects of plasticizer chemicals are tied to the
growth of the plastics additives industry.  Plasticizers account for 58
percent of the total volume of plastics additives consumed.  Value of
plastics additives consumed is estimated to increase 5 percent annually
according to the Kline Guide and we assume that growth in the value of
Plasticizers will be at the same rate.
Manmade Fibers

    Historical view.  Finished chemicals in this market category include
synthetic fibers and cellulosics such as rayon and acetate that are de-
rived from wood pulp and cotton.  The major synthetics are nylon,  poly-
ester, acrylics and polypropylene.  Manmade fibers (including glass fibers)
accounted for almost 66 percent of all fibers consumed in U.S. textile mills
in 1979.  Cotton ranks second to manmade fibers, accounting for about 30
percent with wood being less than 2 percent.  Table 4-10 summarizes value of
shipments and production data for 1979 for the manmade fibers.
                                   3A-4-15

-------
                                   Table 4-10

                U.S. Production and Shipments of Manmade Fibers
  Nylon

  Other

  Polyester
  Rayon
  Acetate
Value of U.S.
million $
6,785
2,500
4,285
11
) 1,280
270
710
Shipments in 1979 Production
% of total
84
31
53
11
16
7
9
million Ibs
8,438
2,721
5,717
4,179
930
606
324
Average
Annual Growth
1970-79
10%
8%
11%
12.6%
-4%
-3.5%
-4.0%
Total                8,065

Source:  The Kline Guide.
100%
9,368
7.3%
In 1979, polyester was almost 45 percent of the total manmade fibers
production compared to nylon with a 29 percent share.  Polyester production
passed that of nylon in 1970.  Over the last decade the synthetics group has
grown 10 percent a year on the average while the cellulosic group declined 4
percent.  Industry shipments of all manmade fibers in 1979 ($8.1 billion)
were 260 percent of the 1970 value.  Most of the growth has been in the
synthetic fibers which have averaged 12.6 percent annually over the decade.

    Consumption of manmade fibers in the U.S was about 9.9 billion pounds in
1979.  Table 4-11 shows some of the major end-use products which utilize
manmade fibers.
                                   3A-4-16

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                                    Table 4-11

                          Uses of Manmade Fibers1 - 1979
                                                              % of 1979
                                                            U.S. Consumption

 Industrial and Other Consumer Goods                                 36

      Reinforced plastics and electrical                             14
   -  Tires                                                           6
      Other (e.g.,  medical, surgical products
      rope, coated  fabrics)                                          16

 Home Furnishings                                                    32

   -  Carpet,  rugs                                                    22
   -  Other (e.g.,  draperies,  upholstery, curtains
      sheets blankets)                                                10

 Apparel                                                              32

   -  Bottom weight fabrics                  .                   '11
      Topweight  fabrics                                                6
   -  Other apparel                                                  15

 Source:  Kline  Guide.
  Includes  glass fibers  which  are not separable from available data.
    There were 75 producers  of  manraade fibers in 1977 and, of  these, only
 10 were cellulosic manufacturers.   In the 1950's,  patents on nylon,
 polyester and acrylics  limited  the  number of firms.   The expiration of the
 patents and the development  of  new  fibers brought  new producers  into the
 industry.  Nevertheless,  in  1979  the  top three firms  had two thirds of the
 market in terms of value  of  shipments.   DuPont alone  captured  about one
 third of the value.

    Because of raw material  shortages,  prices for  synthetic and cellulosic
 fibers began to increase  in  1973.   Prior to  that date, synthetic fiber
 prices were in decline  and cellulosics  had been constant for several
years.  Between 1974 and  1979 the price  index for  synthetics went from
 81.9 to 102.6 (based on 1967 =  100) while the index for cellulosic fibers
 rose from 218.8 to 268.9; the composite  index went from 103.7 to 129.8
over the same interval.

    Balance of trade in manmade fibers and apparel was negative in the
early 1970's,  but has changed, and  reached a  positive trade balance of
$1.280 billion in 1979.  The shift  from  deficit to surplus was due
                                   3A-4-17

-------
 primarily  to agreements  with  Asian Governments  to limit their exports in
 the  U.S.
     Outlook.   Production  of  textiles  traditionally  has  been cyclical with
 volume  of dollar  sales declining  us fiber  producers have  added  capacity.
 When demand  increases/ this  formerly  excess  capacity is no longer idle and
 prices  have  risen.  Nevertheless,  synthetic  fibers  are  expected to
 continue to  displace  natural fibers.   Total  consumption of all  fibers
 should  increase due to increasing  textile  consumption.  In particular,
 home furnishings  should continue  to be a large volume market.   Between
 1980 and 1985  shipments of manmade fibers  are projected to increase  about
 6.5  percent  annually  according to  the  Kline  Guide,  reaching  a level  in
 1985 of $13.065 billion (in  constant  1980  dollars).  Domestic demand
 between 1981 and  1985 as  projected by  DRI  will increase at an average rate
 of 3.2 percent annually.
Surface-Active Agents

    Historical View.  Surface-active agents — often referred to as
surfactants — are organic chemicals that reduce the surface tension of
water and other solvents.  Solutions with surfactants added may remove and
suspend dirt, penetrate porous materials, emulsify oil and grease and/or
act as foaming agents.  While end-use products may possess more than one
of the above attributes, the finished chemicals usually are developed and
marketed for one particular purpose.  On a weight basis, about half of the
surfactants produced are used in household cleaning preparations and
cosmetic products, and half are used for industrial purposes.  Table 4-12
shows the pattern of consumption for surfactants.


                                 Table 4-12

                  Surfactant Consumption by End-Use - 1979
                              Production          % of total
      End-Use	(million Ibs. )    Surfactant Production

      Soaps and detergents;
      household and industrial    2173                  56%

      Diverse industrial           961                  25%

      Textiles                     600                  15%

      Food                         141                   4%

      Total                      3,875                 100%

Source:  Kline Guide.

                                  3A-4-18

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     The retail products containing surfactants include dry synthetic
 detergents (used for laundry and dish washing purposes), and liquid
 detergents and soaps (toilet,  bar and laundry soap).   Industrial uses are
 more difficult to specify because the market is fragmented,  consisting of
 many different formulations and end-uses,  however,  the cleaning compounds
 category is the most important.  Cleaning  compounds are used in products
 for firms such as commercial laundries,  firms providing maintenance
 services,  car washes and in dairies.   Surfactants are also used in oil
 drilling operations and oil recovery,  ore  flotation,  pesticide formulation
 and textile and metal processing operations.   Other end-uses of
 surfactants include foods,  paints,  elastomers,  other  polymers and
 lubricants.   In recent years,  about half of  the total production has been
 consumed within the surfactant manufacturer's firm.

     In  1979,  5.9 billion pounds of  surfactants  were produced,  of which 58
 percent were  sold  on a merchant market for $1.1 billion.   Between 1970 and
 1979, the production of surfactants rose 2.7  percent  annually,  while the
 sales value of merchant shipments rose 12.8 percent annually in current
 dollars.   The substantial rise in sales  value stems from climbing prices
 which characterize most sectors of  the synthetic organic chemicals
 industry.   Using a 1967 base of 100,  the average manufacturer's price
 index for  surfactants in 1979  was 222.2.  The average annual growth rate
 (in constant  dollars)  was 3.8  percent  between 1970  and 1979.

     The surfactants industry has  several tiers  with many companies
 operating  on  multiple levels.   In 1979 there  were 163 surfactant
 producers.  The  group of producers  responsible  for  the highest  volume of
 surfactants are  those with  captive  uses  (ie:  soap companies  -  Proctor &
 Gamble,  Colgate-Palmolive).  According to the Kline Guide, 36 percent of
 total surfactant production is consumed  captively.
    Outlook.  It is difficult to predict an overall rate of growth in an
industry that is so varied in both chemical output and end-use
consumption.  The chemicals that have experienced the highest growth rates
over the past decade have tended to be components of soaps and detergents
and this trend will probably continue.  The Kline Guide estimates that
merchant sales for surfactants in 1985 will reach $1.5 billion (in
constant 1980 dollars), an annual average growth rate of 2.9 percent.
Miscellaneous Chemicals

    This category includes medicinals, pesticides, and other miscellaneous
chemicals.

    Medicinals.  These are complex compounds used in Pharmaceuticals, or
food and animal feed supplements.  The industry is closely related to the
drug industry, and most of the largest producers are drug companies which
use much of their products captively.   Chemical firms manufacture the
simpler compounds that do not require  the complex techniques and equipment
                                  3A-4-19

-------
 used  by  the  drug  companies.   The  chemical  producers  have no captive
 outlets.

    Production  of medicinals  was  313 million  pounds  in .1979,  up 34 percent
 overall  from 1972.   Total  shipments were valued  at $3.7 billion in 1979,
 which represented a  14.4 percent  average annual  increase over 1970.   In
 constant dollars, the  1970-1979 growth  rate was  10.2 percent.   Exports  of
 medicinals in 1979 were 42.8  percent of total production value while
 imports were 22.6 percent  of  total U.S.consumption.  The balance of trade
 has been positive over the last decade and in 1979 exports  exceeded
 imports by $780 million.

    The outlook for medicinals is for an annual  growth  rate of  5 percent
 to 1985, with the value of shipments reaching $5.4 billion, in  constant
 1980  dollars according to  the Kline Guide.  This projected  rate compares
 to an average annual rate  of  14.5 percent during the 1970's.
    Pesticides.  Pesticides control destructive plants and animals that
interfere with agricultural crops and livestock and are also used in the
maintenance of landscapes, and preservation of wood, paint, and other
industrial products.  The pesticide group is comprised of synthetic
organic basic toxicants and formulated products.  Production of basic
toxicants was 1.3 billion pounds in 1979 and merchant shipments by basic
producers was $3.3 billion.  According to the Kline Guide, some of the
basic toxicant producers sell toxicants as unformulated active ingredients
and others sell the toxicants as formulated products; the figure for
merchant shipments is a combination of both.  Safe and effective use of
the toxicants usually requires miscing or compounding with nontoxic
ingredients.

    The production of toxicants and the formulation of end products are
carried out by two tiers in the industry.  The toxicants producers are
mainly large chemical firms, and in 1979 there were 79 producers of which
8 accounted for $2.88 billion (or 74 percent of the total) in sales.  The
formulation business includes independents,  cooperatives,  and captive
formulators.  About 80 percent of the formulating business is controlled
by the basic toxicant manufacturers.  The value of shipments of formulated
pesticides in 1979 was approximately $3 billion according to the Kline
Guide.  This $3 billion value represents a 16 percent eiverage annual
growth rate.  In constant dollars,  the growth rate was 3.8 percent.
Exports have exceeded imports over  the past  decade and the net balance of
payments grew from $209 million in  1970 to $804 million in 1979.

    The outlook for the value of shipments of formulated products is for a
growth rate of 5 percent per year according  to the Kline Guide^  This
growth rate is reasonable because although environmental problems have
resulted in the banning of some toxicants, substitutes will be developed
to fill what is perceived to be an  essential role in U.S.  agriculture.
Since foreign markets are far from  saturated, pesticide exports can be
expected to grow.
                                   3A-4-20

-------
    Others.  There are a number of end-use synthetic chemicals that are
not included above.  These include gasoline and oil additives, tanning
agents, enzymes, paint driers, and photographic chemicals.  In 1979, their
aggregate production was approximately 5.0 million pounds of which 2.3
million pounds were sold on the merchant market at a value of $1.7
billion.
                                  3A-4-21

-------
                                    Section 5
                            Description of SIC Groups


     The five major SIC groups,  specified at the 4-digit level in the SIC
 hierarchy,  that are the subject of this project are:

                                 Primary Products of
        SIC                   Manufacturing Establishments

        2821                 Plastics Materials and Resins
        2823                 Cellulosic Manmade Fibers
        2824                 Organic Fibers,  Noncellulosic
        2865                 Cyclic Crudes and Intermediates
        2869                 Industrial Organic Chemicals,
                             not elsewhere classified
     In  all,  there  are  about  150  SIC groups  defined at the  4-digit  level  for
 the  manufacturing  sector of  the  national  economy.   Based on information
 collected  and published in the Census  of  Manufactures by the federal  govern-
 ment, all  establishments engaged in manufacturing  are classified by the  SIC
 code.   A company operating at more  than one location is required to report on
 each of the  establishments.

     An  establishment is classified  in  a particular industry (i.e.,  SIC group)
 if its  shipments of primary  products defined for that industry  are  greater
 than the value of  its  shipments  of  products defined for any other single
 industry.  The total value of an establishment's shipments  include  those
 products assigned  in the SIC code to an industry (primary products),  those
 considered primary to  other  industries (secondary  products),  and receipts for
 miscellaneous non-manufacturing  activities  such as merchandising and  resales.

     Tables 5-1 through 5-5 summarize important characteristics  associated
 with each of the five SIC groups.  The summary data  are excerpts or deriva-
 tions from the Census of Manufactures* for  the year  1977.   The  information is
 presented for primary and secondary products  only  and excludes  miscellaneous
 receipts.  The tables are divided into three major parts.   The  top part
 describes the sales value of primary products of the  establishments in the
 4-digit SIC group and the portion of that value generated by the SIC group
designated in the title of the table.  The middle part of the table describes
 the establishments that are classified in the designated 4-digit SIC group.
The bottom of the table identifies other establishments (i.e.,  not in the
designated 4-digit SIC group) which produce primary products of the desig-
nated SIC group  as secondary outputs.

    From an overview of the information presented in the five tables,  impor-
tant  characteristics of the different industry groups can be compared.  Note,
for example,  the  value  of  primary products range from a high of $19 billion
     1977 Census of  Manufacturers,  U.S.  Department of Commerce.

-------
                                    Table 5-1




                       Product! and I «t »b)J m*v»e nt « A«ioel«trd
SIC
N=.
2821

Name
Plastic
Materials k
Resins
PRIMARY PRODUCTS
VALUE Or SHIPMENTS
Total, All
Establishment!
5
12,181
by Litablithmentt
Deilonated SIC 2871
$
8,968
% of Total
(coverage
ratio)
74
By Other Eitabll ihntents
$
3,213
t of Total
26
                            For Establishments  Designated as SIC 2821
VXLUE OF SHIPMENTS

Primary t
Secondary
Products
$
10.557













* That Is
Pr unary
Products
(Speciali-
zation Ratio)
BS













NO. OF ESTAE LISHXTNTS



Total in
This SIC
397














Vlth Spe>
cialization
Fatio 75%
Or More
312













SECONDARY PRODUCTS SHIPPED




Name
Miscellaneous Plastic
Products
Cyclic Crudes t
Intermediates
Others — e.g., msdicin-
als, soaps, surfactants.
fertilizerSf syntJietic
rubber, etc.








SIC
Product
Croup
3079

2865

2295, 2298
2621, 2649
2822, 2813
2819, 2822
2824, 2933
2841. 2B43
2861, 2869
2873, 2879
2911, 3231
3861


;
Value of
Shipments
406

110




B23






                 For Other EstablLshmgnts That  MaXe  SIC  2823  Primary Products
SIC Classification a:'.
Other Establishment:;
No.
2869
2865
7851
2412
Jlhezs: 2819
2322. 2824,
2943. 2861,
2879. 2891
2892. 2899.
2911. 3079.
3229
Name
Industrial Organic Chemicals n.e.c
Cyclic Crudes t Intermediates
Paints s. Allied Products
Alkalies (. Chlorine

Others




Value ot Primary Products of SIC 2821
Shipped By Other Establishments
5
1,320
384
138
109

7S2




\ of Total
of. All Establishments,
Making Primary Products
15
3
-1
-1

6




Notes:  J are v\ millions;  n.e.c. • not elsewhere classified)   Data are  for  1977.
                                    3A-5-2

-------
                                     Table  5-2




                        fludu.tl  «n<3  L>t abl 1 lIuM-nt » »t>ocl«lid With SIC /'H.'j





S2C
K3
2B2J

PRIMARY PRODUCTS





Nam*.-
Cellulosic
Man-Made
Tiber
VALUC Or SHIPMENTS
Total. AJ)
Eitabl lihments


5
851

By E«t.aLlJiniT.cnti
Deiiqnaled SIC 7623


$
(D)

» of Tot*)
(coverage .
ratio)
_


By Other Eitabli ihment i


I
(D)



* of Total


                             For Establishments Designated  as  SIC  2823
VALUE OF SHIP.".ENTS
Primary I
Secondary
Products
5

( D)
960*


» That Is
Prm»ry
Products
(Speciali-
sation Ratio)

(D)



NO. OF ESTABLISHMENTS
Total in
This SIC

10



With Spe-
cialization
Ratio 75%
Or More

9



SECONDARY PRODUCTS SHIPPED
Name
Organic fibers,
noncellulosic
Industrial inorganic
chemicals n.e.c.
Surface-active agents
Industrial organic
chemicals n.e.c.
SIC
Product
Group
2824
2819
2843
2864

$
Value of
Shipment!
(0)
(D)
(D)
( D)

                  For Other Establishments That Hake SIC 2B23 Primary Products
SIC Classif ication oi
Other Establishments


No.

2824







Name

Organic fibers, noncellulosic





Value of Primary Products of SIC 2823
Shipped By Other Establishments


$

( 0}





\ of Total
of All Establishments
Making Primary Products
•Estimated from Census
of Manufactures, based
on total receipt less
2* for miscellaneous
receipts derived from
data for SIC 2821 and
2824.
Notet:  $ are in millions;    n.e.c.  - not  elsewhere classified;  Data are for  1977.




         (D) - Withheld to avoid disclosing operations of individual firms.
                                   3A-5-3

-------
                                       Tablo 5-3
                                 jnd  t >i Jl-l < shi»rnt i  AnucJaUd Witli SJCTM.'J




SIC
Nc.
2824


PK1J'/LK* pR-1rri~- " ' ""





K«mp
Organic
fiber*, norr
cellulosic
VALUr Or SHIPMENTS
Total, All
Establishments


S

5,472

B,- Lilubl ishnenis
Deuonatrd SIC 2824


$

5,309

% OS Total
(coverage
ratio)

97


By Other Establishments


S

163



% of Total

3

                             Tor Establishments Designated as SIC 2824
VW.UT OF SHIPMENTS
Primary I
Secondary
Products
$
6.411
» That Is
Prinary
Products
(Speciali-
zation Ratio)
84
NO. OF ESTABLISHMENTS
Total in
This SIC
66
With Spe-
cialization
Ratio 75%
Or More
53



SECONDARY PRODUCTS SHIPPED
Name
Plastic materials C
Resins
Cellulosic man-made fiber
Non-woven fabrics
Other yarns excl. wool
Textile goods, n.e.c.
Industrial Organic
Chemicals, n.e.c.
Adheaives t Sealants:
Misc. Plastic Products
Industrial Inorganic:
Chemicals, n.e.c.
Cyclic Crudes s Intermeds.
SIC
Prod uct
Croup
2821
2823
2297
2281
2299
2869
2991
3079
2819
2B65
$
Value of
Shipments
(D)
(0)
(D)
(D)
(D)
(0)
(D)
(D)
(D )
(D )
                  For Other Establishments That Malte SIC 2824 Primary Products
SIC Classification of
Other Establishments


No.
22B4
2869



Nan?
Thread Hills
Industrial Organic Chemicals,
n.e.c.
Value of Primary Products of SIC 2834
Shipped By Other Establishments


$
(D)
( D)

» of Total
of All Establishments
Making Primary Products



Notes:   S  are in millions:   n.e.c. - not elceuhere classified)  Data are for 1977.
        (D) • Withheld  to avoid  disclosing operations of individual firms.
                                      3A-5-4

-------
                       Piodurti «r,d 1
                                         Table  5-4




                                         l li,)v»rnt t At.i.e>cl«trd
                                                                  SIC ?N<





si;
No.
286!>


FRJPIAXr PRODUCT:





Name
Cyclic Crudes
I Intermed-
iates
vM.ur or SHIPMENT!.
Total, All
Establishments


$

1. 514

By Establishments
Drsionstrd EIC 2865


$

3,700

» of Total
(coverage
ratio)

67


By Other Establishments


{

1,814 '



% of Total

33

                            Tor Establishments Designated as SIC 266S
VM.UE OF SHIPMENTS

Primary t
Secondary
Products
$

5470












» That is
Primary
Products
(Speciali-
zation Ratio)

68












NO. OF ESTABLISR1ENTS



Total in
This SIC

191













With Spe-
cialization
Ratio 75%
Or More

145












SECONDARY PRODUCTS SHIPPED




Name
Plastic Materials t Resins
Synthetic Org. Chcm. n.e.c
Inorganic pigments
Paints ( Allied Products
Others, e.g.: Alkalies C
Chlorine, Industrial gases.
Synthetic rubber, nedici-
nals. Surface active
agents. Polishes, Toilet
Preparations, Ag. Chemi-
icals n.e.c., etc.





SIC
Product
Croup
2821
2869
2816
2S51
2869, 2812
2813, 281?
2822, 2833
2842, 2843
2844, 2873
2879, 2891
2893, 2899
2911, 2952
3072, 3291
3679


$
Value of
Shipment!
384
121
1 67
17










                 For Other Establishments That Make SIC 2865 Primary  Products
SIC Classification of
Other Establishments


No.
2821
2911
2869
Others:
2812, .2816
2819. 2824
2834, 2843
2873, 2879




Name
Plastic Materials t Resins
Petroleum Refining
Industrial Organic Chemicals n.e.c
Alkalies & Chlorine, Inorganic pig-
Bents, Industrial inorganic chem-
icals n.e.c., Orgaoac. fibers, non-
cellulosic, pharmaceutical prep-
arations, surface active agents.
agricultural chemicals and
fertilizers
Value of Primary Products of SIC 2865
Shipped By Other Establishments


$
110
110
54



1,540



% of Total
of All Establishments
Makina Primary Products
2
2
1



28



NOUS;   $  are In millions;  n.e.c.
                                     not  elsewhere classified:  Data are fnr 1977.
                                      3A-5-5

-------
                               Tabier'5-5
               lroduct» »nd tn «bl I »hr»*nt « A«»ocl • t y




SIC
NO.
2869



PHlMARr PKOnUCTS





Nary?
Industrial
Oi9anic
Chenical*
n.e.c.
VJU.UC OF SHIfMXNTS
Total, All
E»t abl 1 • hmor.t •


S

19,378


By C«ta£l nhjrw.net
Deilonatcd SJC 2869


S

K.,240


% of Total
(coverage
ratio)

84



By Other E«t «bli invents


S

3,139




% of Total

16


                     For Establishments Designated in STC 3869
VMUT or SHIPMENTS
Primary t
Secondary
Product!
5



















\ That Is
Prisvary
products
(Speciali-
zation Ratio)



















NO. OF ESTABLISHMENTS
Total in
This SIC



















With Spe-
cialization
Ratio 75»
Or More



















SECONDARY PRODUCTS SHIPPED
Name
Plastic materials t Itesins
Petroleum Refining
Cyclic Crudes t Interned.
Synthetic Rubber
Surface Active Agents

Others:












SIC
Product
Croup
2821
2911
2865
2S22
2843
1321, 2022
2035, 2048
2085, 2611
2812, 2813
2816, 2819
2824, 2831
2833, 2834
2842, 2844
2851, 2873
2874, 2879
2891, 2892
2992, 3079
3551. 3693
3832
$
Value of
Shipments
1,820
1,329
1,167
405
251






2,354







          For Other Establishments That Make SIC 2S69  Primary Producta
SIC Classification of
Other Establishments


No.
2911
2873
2819
2822
2046, 2812
2816, 2821
2823, 2824
2833, 2834
2841, 2842
2843, 2844
2861. 2865
2379, 2891
2899, 3311
J079. 3861


Name
Petroleum Refining
Nitrogenous fertilizers.
Industrial Cheaucals. n.e.c
Synthetic Rubber
Wet corn Billing, alkalie t chlor-
ine, inorganic pigments, plastic
•aterials t resins, cellulosic f.
organic fibers, nedicirals, phar-
oaceuticals, surface active agent:
adhesive* & sealants, tires, etc.




Value of Primary Product* of SIC 2869
Shipped By Other Establishments


S
242
16S
163
109



2.180






% of Total
of All Establishment*
Making Primary Products
1
1
1
1



12






Notes:  $ are  in millions;   n.e.c.  • not  elsewhere claisified;    Data are  for  1977
                             3A-5-6

-------
 for  SIC 2869  (Industrial  organics,  n.e.c.),  down to $851 million for SIC 2823
 (Cellulosic Manmade  Fibers),  a ratio of twenty one to one.   These two SIC
 groups  also account  for the  greatest and fewest number of establish- ments
 and  companies;  there are  548  establishments  owned by 388 firms in SIC 2869
 and  only 10 establishments owned by 5 firms  in SIC 2823.

     Establishments classified within a specific SIC group do not manufacture
 all  the primary products  defined for that SIC group.  For example,  the top
 part of Table 5-5 shows that  establishments  classified in SIC group 2865 only
 account for 67* percent of the total value of Cyclic Crudes and Intermediates
 manufactured while 33 percent is contributed by other establishments (i.e.
 not  classified  as SIC 28695)  which  make Cyclic Crudes and Intermediates as
 secondary products.   These other establishments are identified by their SIC
 at the  bottom of the table and the  value of  their products  that are primary
 for  SIC 2865 are listed.  In  all, there are  eleven other establishment groups
 that make primary products of SIC 2865 with  shipments valued at $1.8 billion
 which is 33 percent  of the total.   Of  these  eleven groups,  three are SIC
 groups  included in the study  scope;  i.e.,  SIC's 2821,  2823,  2824.

     Compared to the  lowest coverage  ratio of 67 percent  for  SIC 2865,  the
 highest ratio is 97  percent for  SIC  2824,  Organic Fibers Noncellulosic.
 (Note that this observation,  and some  of the subsequent  comparisons,  omits
 consideration of SIC 2823 because data for that industry are withheld  in the
 Census  of Manufactures to avoid  disclosing operations  of individual com-
 panies. )

     A chemical  manufacturing  establishment usually produces  a  variety  of
 chemicals in addition to the  primary products  identified by  its SIC code and
 the  total value of its shipments is  made up  of  primary and  secondary pro-
 ducts;  the fraction  of that total value that  is primary  products is the
 specialization  ratio.  As an  industry  group,  establishments  in SIC  2821  and
 2824  have the highest specialization ratio,  about  85 percent.**   The least
 specialized are SIC  2865 and  2869 with  primary  products  accounting  for about
 two  thirds of the value shipments.   Considering  the  specialization  of  indi-
 vidual  establishments within  a SIC group,  90 percent of  the  ten  establish-
 ments in SIC 2823 have a specialization  ratio of  75 percent  or more.   In  each
 of the  other four SIC groups,  establishments  having  such a specialization
 ratio account for only 75 to  80 percent  of the  total establishments in their
 group.
   * This percent is the coverage ratio as defined in the Census of
Manufactures.
   ** As noted in Table 5-2, some of the information on value of shipments
for SIC 2823 is not published because it could identify specific firms.
While we have approximated the value of shipments of primary and secondary
products, we do not have sufficient information to estimate specialization
ratio for SIC 2823.  However, we know that establishments in only one othet
SIC group (2824)  make primary products of SIC 2823 from information in the
Census of Manufactures.
                                   3A-5-7

-------
    The number of secondary products of a SIC group may  be few or many.
Relatively few secondary products—defined at the 4-digit SIC code  level of
detail—are made by establishments in SIC 2823,  (establishments that manu-
facture Cellulosic Manmade Fibers) and SIC 2824  (Organic Fibers Noncellu-
losic).  That is, for SIC 2823 there are only four and for SIC 2824 there are
ten secondary products.  In contrast, establishments designated as  SIC 2869
produce 34 types of secondary products; SIC 2821 and SIC 2865 produce 24 and
22 secondary products, respectively.

    Table 5-6 summarizes the above information for the year 1977.  Overall,
the five SIC groups include 1233 establishments.  (The number of firms owning
establishments cannot be totaled for the five SIC groups because one firm may
own establishments in more than one group).   The value of shipments by all
establishments of all primary and secondary products is $47 billion.  Of the
1233 establishments 953 have a specialization ratio of 75 percent or greater.

    For the five SIC groups considered individually, their secondary products
total 94.   This figure includes some double counting, e.g.,  both SIC 2865 and
SIC 2869 produce inorganic pigments (SIC 2816) as a secondary output.

    Other industries—i.e.,  outside a designated 4-digit SIC group—also
manufacture primary products of the designated group.  For the five SIC
groups considered individually, these other  industries total 55 (again,  this
total includes some double counting).  Of the 55, twelve are accounted for in
one (or more)  of the four other SIC groups in the study scope and 43 are
industries outside the study scope.
                                   3A-5-8

-------
                                                                 Table  5-6
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                                                             3A-5-9

-------

-------
                                   Section  6
                            Description of Companies
     There  are  about 1/500 firms that  produce chemicals and allied products.*
 These  include  producers of chemicals, both organic and inorganic, and manu-
 facturers  of products—such as paints,  synthetic rubber,  plastic pipe—in
 which  the  chemicals are constituent ingredients.  The companies represent a
 diverse group  of  participants.   Some  firms are engaged solely in the produc-
 tion of chemicals which are sold to the outside, or merchant market.  Some
 manufacture  chemicals only for  their  own consumption (captive use)  in pro-
 ducts  they market or for use in their manufacturing processes.   Other firms
 produce important chemicals,  but as by-products of their  main manufacturing
 activity (e.g.  steel producers)  and some multi-product line firms make chem-
 icals  in relatively large plants dedicated to chemicals,  but the chemical
 product is not  the dominant business  of the corporation (e.g.  General
 Electric).  Firms also vary in  the  degree of vertical integration,  for
 example some large oil companies have organizational divisions  or subsidiary
 companies  that  make and market  chemicals utilizing their  refinery products
 as feedstocks.  In these oil  firms, sales of chemical products  may  be very
 large  compared  to large chemical firms  but a minor part of total corporate
 sales.

     These  are the main reasons  why  it is difficult to describe  the  chemical
 industry by  a simple,  unambiguous classification method.   One useful descrip-
 tion of firms is  presented in Table 6-1.   The classification of sixteen
 company groups  was adapted from  the classification scheme  developed  by
 Chemical Week** to describe 300  major firms.   In Table 6-1,  the last three
 firm groups—Plastics  and  Resins, Colors  and Dyestuffs, and  firms Not  Else-
 where  Classified—were added  for the  purposes of this project.

     We  developed  a sample  of  firms  to describe  the wide variety of businesses
 engaged in chemical  manufacturing.  The  sample  was developed from the  EIS
 (Economic  Information  Systems,  Inc.)  file  which  includes private  and publicly
 owned  firms.  This file  is an establishment  oriented  data  base  and includes
 all  those  establishments with 20 employees or more, and/or with  sales of $0.5
 million or more.   Each establishment  is assigned to one SIC group.  All
 establishments  in  the  EIS  file that were  identified with one of  the five SIC
 groups  discussed  earlier were selected.  The parent companies for each
 establishment were noted and in all,  600 firms were identified.   These firms
 are  listed by company group in Table  6-2.  Sales and employment information
 for the firms were obtained from Dun and Bradstreet*** listings which include
private and public companies.  However, where available, sales data from 10-K
 reports made by publicly owned firms for 1980 were used in preference to the
Dun and Bradstreet information.
    * SRI International,  1979 Directory of Chemical Producers.
   ** Chemical Week,  April 22, 1981.
      Dun and Bradstreet  Million Dollar Directory,  1980 edition.

-------
                                Table 6-1

                    Classification of. Company Groups*
 1.  Industrial Chemicals and Synthetic Materials
 2.  Pulp, Paper, Packaging
 3.  Specialty Chemicals
 4.  Petroleum, Natural Gas, Chemicals
 5.  Steel, Coke, Chemicals
 6.  Food and Dairy Companies with Chemical-Process Operations
 7.  Multi-Industry Companies with Chemical-Process Operations
 8.  Glass, Cement, Gypsum, Abrasives, Refractories
 9.  Fertilizers and Pesticides
10.  Pharmaceuticals, Other Medical and Hospital Supplies
11.  Detergents, Other Sanitation Products, Toiletries and Cosmetics
12.  Paints,  Printing Inks, Adhesives and Sealants
13.  Tires, Other Rubber and Plastic Products
14.  Plastics and Resins
15.  Colors and Dyestuffs
16.  Firms Not Elsewhere Classified
 *Company and Firm are synonymous.
                                 3A-6-2

-------




















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                                        3A-6-6

-------
     Of  the  600  firms  selected  from  the  EIS file,  sales data  were  not avail-
 able for  205  firms.   Employment  data  were  not  available for  219 firms.
 Therefore the statistical  tabulations used to  present  a profile of  the
 industry  are  based on a  reduced  sample;  395 firms are  used for sales inform-
 ation and 381 for employment information.

     Table 6-3 shows the  number of companies by firm  group for six cate-
 gories  of company sales.   Considering the  size distribution  of the  total
 sample, the greatest  number 142  (35.95 percent*)  have  less than $25 million
 in annual sales.  The fewest number of  firms,  20  firms,  are  in the  highest
 sales category  of $10 billion and over.

     The firm group designated as Industrial Chemicals  and Synthetic Materials
 accounts  for the greatest  number of firms  and  there  are  72 in this  group
 (18.23 percent  of the 395).  The fewest  number, three  firms, are in the
 Fertilizers and Pesticides group.

     Forty-three of the 395 firms could not  be  classified by  firm group based
 on the information available and 26 of these are  relatively  small with sales
 of $25 million  or less; an additional 91 firms  whose sales category could
 not  be ascertained are also in this unclassified  firm group.

     Table 6-4 displays the total firm sales by  company group and indicates
 how  sales are distributed among six different  sizes of firm.  Combined sales
 of the 395 firms total $847 billion.  The  20 firms identified earlier as
 very  large with sales exceeding $10 billion, account for $524 billion or
 61.82 percent of total sales.
   *In this discussion percentages are shown to the same degree of accuracy
as in the tables only to assist the reader in using the tables in conjunc-
tion with the text.
                                   3A-6-7


-------
                                                            Table 0-4
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                                                           3A-6-9

-------
    The firm group with greatest share of total sales is Petroleum, Natural
Gas and Chemicals.  This group  (which includes less than 10 percent of all
firms) has sales of $450 billion, accounting for 53.16 percent of total
sales.  This group includes some of the nation's largest oil companies with
major sales stemming from refining and other oil related businesses that are
not classified as part of the chemicals industry in the SIC system.  How-
ever, the sales of chemicals by some of these firms are very large even
though they are a relatively minor part of a corporation's total sales.

    Table 6-5 shows the number o£ firms in each firm group by six categories
of employment.  The greatest number of firms, 94 (24.67 percent)  fall into
the category of 10,000 employees or more.  This category is followed closely
by firms with 50 to 250 employees; there are 89 (or 23.36 percent) in this
employment group.
                                  3A-6-10

-------
                                                      Table 6-5
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                                                     3A-6-11

-------
                                    Section 7

                                Financial Profile
     This section presents 1980 financial information for publicly owned
 firms.   The  financial profile is based on 10-K reports which publicly-owned
 companies are  required to file with the SEC.  Similar data are not available
 for  privately  held  firms.  The 10-K reports include information on sales,
 profits,  assets,  net worth,  debt-equity ratio and capital expenditures.

     The  financial profile describes 178 U.S. firms compared to 395 firms in
 the  industry sample  discussed earlier.  The group of 178 firms is not a
 representative  industry  sample because small firms and privately owned firms
 are  not  included; there  is no source of financial data comparable to the 10-K
 report for these  companies.   The financial profile is based on a subset of
 the  industry representing large companies; for example average sales of the
 178  firms is $4.7 billion compared to a $2.1 billion average for the 395
 firms.  Also,  the number  of  firms; in the financial profile with sales less
 than $25 million  per  year is four* while in the industry sample this category
 of sales  accounted for the greatest proportion, 36 percent, of the 395
 firms.  Table 7-1 lists  the  178 ifirras by the sixteen company groups.

     The financial information is presented by the sixteen firm groups and by
 four categories of annual sales:   $1 to $250 million,  $250 to $1000 million,
 $1 to $10 billion and over $10 billion.   The specific financial data
 presented in this firm group and  sales category format  are sales,  profits,
 profit/net worth  ratio,  assets,  average debt/equity ratio,  capital
 expenditures and average  capital  expenditure sales ratio.

    Table 7-2 shows  the  number of firms in each firm group and sales
 category.  The sales  category $1  to 10 billion accounts  for  82 firms,  or
 nearly half of the total.  The largest category of sales—over $10 billion—
 has the fewest number of  firms,  .20 (11.24  percent, of  the total).

    The company group with the greatest  number of firms  is  the Multi-Industry
group, with 33 firms  (18.54  percent).   This  firm  group  is  followed by  the
 Industrial Chemicals  and  Synthetics group  which accounts for  32 firms  (17.98
percent).  The fewest number  of  firms  is  in  the Color and Dyestuffs group,
which shows only one  firm  (.56 percent).   It  is interesting  to note that
eleven of the sixteen firm groups  have no  firms in the; largest sales group.

    Tables 7-2 and 7-3 reveals the  same pattern that was  seen  using the
larger industry sample.  Very  large  firms  (sales  over $10 billion) account
for 62.27 percent of  the  total  $841  billion  sales but only  11.24 percent of
the firms.  Twelve of the 20 firms  in  the very  large category  are  in the
Petroleum, Natural Gas and Chemicals group and  account for  48.65 percent of
the $841  billion total sales.
   *  Not revealed in the tables presented in this section.

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     The firm group with greatest sales volume (considering all categories of
 sales) is Petroleum, Natural Gas and Chemicals with $464 billion; thus 55.18
 percent of total sales are attributed to one firm group which accounts for
 12.92 percent of the 178 companies.   The Multi-Industry group shows the
 second greatest amount of sales with $144 billion (17.15 percent).  The firm
 group/ Colors and Dyestuffs/ accounts for the least sales with $341 million
 (.04 percent).

     High profits generally correlate with a high volume of sales.  Table 7-4
 shows that firms in the sales category over $10 billion account for the
 greatest profit, almost $30 billion  of the $47 billion total.  As noted
 earlier,  there are 20 firms in this  sales category,  thus 11.24 percent of all
 the firms account for 62.83 percent  of total profits and, as noted above,
 62.27 percent of total sales.  Table 7-4 also shows profits for the firm
 group Petroleum and Natural Gas and  Chemicals of $28 billion or 59.35 per-
 cent, of  the $47 billion for the total sample.   This one firm group with
 12.92 percent of the firms accounts  for 59.35 percent of total profits.  The
 Multi-Industry group ranks second with $7.9 billion (16.90 percent)  of total
 profits.   The Colors and Dyestuff firm group shows the least profits,  with
 $11 million (.02 percent).

     Table 7-5 shows the average ratio of profit to net worth.  It would be
 misleading  in calculating  an average profit to  net worth ratio to treat a
 firm with low sales volume the same  as one with a large sales volume.   There-
 fore,  the average ratio shown in each cell represents the sales weighted
 average  of  the ratios for  each firm  in that cell.  While no general  pattern
 is  observed  with respect to firm groups or size,  the following observations
 are noted.   Firm groups showing a relatively high ratio are Fertilizers and
 Pesticides,  Pharmaceuticals,  and Paints,  Inks,  Adhesives and Sealants.   Firm
 groups  showing  a low ratio are Steel and Coke,  Glass,  Cement,  Gypsum,  etc.,
 Tires and Other  Rubber,  and Colors and  Dyestuffs.  The lowest ratio  is  -13
 and appears  in the  Multi-Industry firm  group (sales  from $250 million  to  $1
 billion).   This  value  is due  to negative  total profits reported in 1980 for
 the four  firms  in this  firm/sales group.

     Total assets, shown  in  Table  7-6,  in  general correlates  with  sales  and
 profits.  The  largest category of  sales—over $10  billion—shows  the greatest
 assets amounting  to  $358.5  billion;  the  20  firms in  this  sales  category
 account for  59.23 percent of  the  total  assets of the  178  firms.   Table  7-6
 also shows the firm  group Petroleum  and Natural Gas  and  Chemicals firms has
 the  greatest share of assets,  with $299.2 billion  (49.42 percent) of the
 total $605.3 billion in  assets.   The Multi-Industry  group ranks second  and
 has $124.0 billion  (20.49 percent) in assets.  Colors  and Dyestuffs has the
 least assets with $170 million  (.03 percent).

    A firm's debt to equity ratio is often  used to gauge its riskiness or
financial soundness.  Table 7-7 shows average debt/equity ratio and the ratio
 in each cell is a sales weighted average.  The data presented was reviewed to
see if there is a pattern between size of firms (in terms of sales) and debt/
equity ratio.  We see that more firm groups have their highest debt/equity
                                   3A-7-6

-------
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ratio in the $250-$!,000 million category than in any other sales category
(eight out of 16 firm groups).

    Table 7-8 shows capital expenditures, which totaled $73.3 billion.  The
sales category $1 to $10 billion has more firms than any other (82 or 46
percent of the total number of firms), and accounted for 31.47 percent ($23.1
billion) of the total capital expenditures.  Capital expenditures are
greatest in the largest sales category where 20 firms (11.24 percent of the
178) account for 65.54 percent of the total.  The Petroleum, Natural Gas and
Chemicals Industry invested the most with $45.6 billion (62.17 percent) of
the total.  The Multi-Industry group ranks second with investments of $10.3
billion (14.05 percent), and the Colors and Dyestuffs group ranked lowest
with $11 million (.02 percent).

    Table 7-9 shows the sales-weighted average ratio of capital expenditures
to sales.  A high ratio suggests high growth and/or capital intensiveness of
the firm.  More firm groups show their highest capital expenditure/sales
ratio in two sales categories; $250-$!,000 million and $1  billion to $10
billion (five firm groups in each).
                                  3A-7-11

-------
                                                                  Table  7-8
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-------
                                    Section 8

                                  Establishments
     In this section,  1167 chemical manufacturing establishments are described
 by several important  characteristics including type of manufacturing estab-
 lishment, size of employment,  sales, geographical location, discharger
 status,  product type  and parent company ownership.

     Establishments are classified by important manufacturing characteristics
 to facilitate evaluation of  pollution control measures.   Three major
 establishment groups—basic, intermediate,  end-use  or finished chemicals—are
 defined.   Establishments producing end-use  chemicals are,  in turn,  divided
 into three groups based on the production (or lack  of produc- tion) of
 plastics  and  resins.   In total,  five groups are used to  classify individual
 establishments and these are defined in Table 8-1.   The  five are mutually
 exclusive and thus a  single  establishment can be classified in only one  group
 as noted  in the table.

     Three employment  categories are used to describe size  of the establish-
 ments.  Small plants  are defined as having  fewer than 50 employees.  Medium
 establishments have 50  to 500  and large establishments have 500 or  more  em-
 ployees.   The combination of three employment categories and five establish-
 ment groups define 15 segments of the organic chemical industry.  (Employment
 is also treated in a  more detailed breakdown in one  of the later data dis-
 plays) .

     Eight  categories  are  used  to describe establishment  sales.   These
 categories are  expressed  in  millions  of  dollars,  which are distinguished  at
 the  following  intervals:   0, 5,  10,  25,  50,  100,  250,  500  and  over.

                                    Table 8-1

                      Definition of Establishments Groups

    1.  Basic  Chemicals:   establishments  with some production of  basic-
       chemicals.

    2.  Intermediate Chemicals:   establishments  with  some production of
       intermediate chemicals  but  no production  of basic chemicals.

    3.  End-use Chemicals, Plastics:  establishments producing only plastics
       and resins.

   4.  End-use, Chemicals, Other:  establishments producing only end-use
       chemicals other than plastics and  resins.

   5.  End-use, Chemicals, Both:   establishments producing both plastics and
       resins  and other end-use chemicals but no basic or intermediate
       chemicals.
   Note:  With these definitions, each establishment falls into only one
group.  For example, an establishment producing some basic, some
intermediate,  and some end-use chemicals falls into 41.

-------
Number of Establishments, Sales and Employment

    Tables 8-2 and 8-3 show the distribution of the 1167 establishments with
respect to establishment groups, sales categories and employment.  The
primary source of information is the EIS file, which primarily consists of
1979 data.  Those establishments in the EIS file identified by one of the
five SIC codes defining the scope of study yielded a sample of 1175 estab-
lishments.  However, for eight of these, employment data were missing.  (The
1167 establishments based on 1979 data is about 5 percent less than the 1233
establishment count obtained from the Census of Manufactures for 1977 that
was discussed in Section 6).
    Total sales of the 1167 establishments is $50.6 billion.  Of the total
number of establishments, about 84 percent (984 establishments) are in the
three End-Use Chemical groups with 55 percent ($28 billion) of total sales.
Approximately 11 percent (126 establishments) of the establishments are in
the Intermediate Chemicals group and account for 30 percent ($15.2 billion)
of total sales.  The Basic Chemicals establishment group has about 5 percent
of the establishments and accounts for 15 percent ($7.4 billion) of total
sales.

    Average annual sales per establishment are $130 million in the Basic
Chemical group and $120 million in the Intermediate Chemicals group.  The
average is $30 million for the three End-Use Chemical groups combined.

    Tables 8-2 and 8-3 demonstrate several important characteristics of the
industry.  Considering first a comparison of the sales categories (for  all
establishment groups and employment sizes),  we observe that eleven percent of
the establishments have annual sales in excess of $100 million and account
for 60 percent of total sales.  Sixty seven percent of the establishments
have annual sales less than $25 million and account for 14 percent of total
sales.
                                   3A-8-2

-------
                                                                     Table  8-2
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-------
     Considering  next a comparison of establishment groups and employment
 categories (for  all sales categories) we observe that establishment sales are
 greatest for  the Intermediate Chemicals with large employment; this one
 group,  with about 4 percent of the establishments, has $12.5 billion in
 annual  sales  (24.58 percent of total sales).  If the small/  medium large
 employment categories are aggregated within an establishment group,  the End-
 Use Chemicals, Other group, with 46 percent of the establishments, has the
 greatest share of total sales, about 36 percent.

     Sales of  two establishment groups—Basic Chemicals and Intermediate
 Chemicals—are predominated by establishments with relatively large  sales
 volume.   For  each of these, about 83 percent of the group's  sales  (aggregated
 for small, medium and large employment categories)  are by establishments in
 the $100 million or more category.   In contrast, aggregate establishment
 sales for the three End-Use Chemical groups are less concentrated  in the
 higher  sales categories; establishments over $100 million in  sales account
 for 43 percent of  the aggregate sales of the three End-Use Chemical  group.

     Establishment  employment in both the Basic  and  the  Intermediate  Chemicals
 groups  is predominantly made up of  establishments in the  large and medium
 size employment  categories.   For the Basic  Chemicals group, only seven  of  57
 establishments (12 percent)  have small employment;  none of the seven shows
 annual  sales over  $50 million.   For the Intermediate Chemicals group, 26  of
 the 126  establishments (21  percent)  are in  the  small employment category;
 none of  the 26 exceeds $25  million  in annual sales.

     In contrast  to the Basic and Intermediate establishment groups,  a sub-
 stantial share of  the  establishments in the  three End-Use Chemical groups are
 in  the small employment category.   Considering  the  aggregate of 984  establish-
 ments in the three  End-Use  groups,  404 small employment establishments account
 for  41 percent of  the  total.

     The  single largest  establishment group/employment combination  is the
 End-Use,  Other establishment group  with medium  size  employment which accounts
 for  265  (or 22.71 percent) of all establishments.  Sales for this segment are
 16.39 percent of total  sales.

     Table 8-4 shows  the  distribution of  number  of establishments—again
 broken down into the five establishment groups—with respect to a more
detailed  breakdown of employment.   The  three  (small, medium,  large) cate-
gories of employment are subdivided  into nine and the boundaries defining
 those categories are 0,  20,  50,  100,  250, 500,  1,000, 2,500 and 10,000
employees.  The  greatest number of establishments, 435, have  20 to 50
 employees and account for 37.28 percent of all establishments.  There are 144
establishments with employment of 500 or more; the 144 represents 12 percent
of the total number of establishments.
                                   3A-8-5

-------
Table  8-4
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-------
 Establishment Locations

     Establishment locations are identified by five geographical regions and
 these are the northeast, the north central states, the southeast, the western
 states of the south central region and the western states.  Table 8-5 lists
 the states in each region.

     Table 8-6 and 8-7 show the number and sales of establishments by region,
 broken down by the five establishment groups and three employment cate-
 gories.   The region with the greatest number of establishments is the north-
 east with 393 (33.68 percent of the total) followed by the north central
 region with 260 establishments (22.28 percent).  However,  sales are greatest
 in  the southeast with 33.68 percent of the total $50.6 billion in establish-
 ment sales.   The northeast  has 24.62 percent and the north central region has
 17.07 percent of total sales.

     For  reasons of economic efficiency,  production of end-use  chemicals and
 manufacture of final products  tend to be located near major consumer markets.
 By  contrast,  the earlier stages of manufacture tend to locate  near raw
 material  sources.   The establishments in the  northeast are predominantly
 producers of  finished chemicals and the  374 establishments in  the  three End-
 Use Chemical  groups  account for 95 percent of the 393 establishments in that
 region.   The  374 establishments in the End-Use Chemical groups located in  the
 northeast  account  for 38 percent of all  984 of the End-Use Chemical  establish-
 ments and 35  percent of the $28 billion  aggregate sales (all regions)  for  the
 three End-Use Chemical establishment groups.   The southeast region has almost
 the same  volume  of sales (33 percent of  the End-Use Chemical sales)  but has
 only  20 percent  of  the establishments in that establishment group; the average
 size  is greater  for  establishments in the southeast than in the  northeast.

    Establishments  in the Intermediate Chemical  group are  concentrated in  the
 southeast  and west  south central region  which together have  80 establish-
 ments, or  63 percent  of  the total  126 in that establishment  group.   Combined
 sales  by southeast  and west south  central establishments in  the  Intermediate
 Chemical group account  for  72 percent of  the  $15.2  billion sales for that
 establishment group.   Considering  all regions, the  large employment
 establishments have over  80 percent of the  Intermediate Chemical group's
 $15.2  billion in sales.

    Establishments that make some  basic  chemicals are  relatively few in total
 number (five percent of  the  total)  , and concentrated  in the west south cen-
 tral  region, which includes  states  that  both  produce  and import hydrocarbon
 feedstocks.  Thirty seven of 57 establishments  (65 percent) in the Basic
Chemical group are in  this  region  and  account  for 68 percent of the $7.4
billion sales for the establishment group.  The large employment establish-
ments are the major producers and  have 74 percent of  the $7.4 billion sales
for  the Basic Chemical establishment group, considering all regions.
                                   3A-8-7

-------
                     Table 8-5.

                Definition of Regions



                    Northeast

 Maine                                      Vermont
 New Hampshire                   .           Massachusetts
 Rhode Island                               Connecticut
 New York                                    Pennsylvania
 New Jersey

                  Korth Central

 Ohio                                       Indiana
 Illinois                                    Michigan
 Wisconsin                                   Minnesota
 Iowa                                       Missouri
 North Dakota                               South Dakota
 Nebraska                                    Kansas

                    Southeast

 Delaware                                   Maryland
 Virginia                                   West Virginia
 North  Carolina                             South Carolina
 Georgia                                     Florida
 Kentucky                                   Tennessee
 Alabama                                    Mississippi
 Puerto Rico

               West South Central

 Oklahoma                                   Arkansas
 Texas                                      Louisiana

                      West

Montana                                    Idaho
 Colorado                                   Wyoming
 Utah                                       New Mexico
Arizona                                    California
 Nevada                                     Oregon
Washington                                 Alaska
Hawaii
                     3A-8-8

-------
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                                                                   3A-8-10

-------
 Discharger Status

     Considering  only those establishments that are direct dischargers of
 wastewater reduces the number of establishments from 1167 to 405* and total
 establishment sales from $50.6 billion to $33.7 billion.  Thus, direct dis-
 chargers constitute 35 percent of all establishments but account for 67 per-
 cent of total sales.  Of the 405 direct dischargers, 256 are in the three
 End-Use Chemicals establishment group and account for 41.8 percent of all
 direct discharger sales, 102 are in the Intermediate Chemicals group with
 39.6 percent  of  the sales and 47 are in the Basic Chemicals group with 18.6
 percent of sales.

     Tables 8-8 and 8-9 display number of direct discharging establishments
 and  sales for the five geographical regions by establishment group and
 employment size  category.  The greatest number, 130, or 32.10 percent of all
 direct dischargers,  is in the southeast and they account for 41.09 percent of
 the  $33.7 billion total sales.   The next greatest number, of direct dis-
 chargers,  107, is in the west south central region followed by 90 in the
 northeast with approximately 27 percent and 19 percent  of direct  discharger
 establishment sales  respectively.   The fewest number of direct dischargers
 are  in the  west  which has 25 (6.17  percent)  establishments and only 1.22
 percent of  total  sales.

     The geographical distribution of direct dischargers for the different
 establishment groups shows  the  following  pattern.   Direct discharger
 establishments in the three End-Use Chemicals groups are concentrated  in the
 southeast  (with  87)  and  northeast  (with 79);  together these two regions  have
 65 percent  of all 256 establishments in the  End-Use groups.   Direct dis-
 chargers  in the  Intermediate Chemicals group  are  concentrated in  the south-
 east (with  39) and west  south central region  (with 33);  together  these two
 regions have  71 percent  of  all  102  establishments  in the Intermediate
 Chemicals establishment  groups.  For the  Basic Chemical group,  direct
 dischargers are primarily located in the  west south central  region  with  34 of
 the  47 establishments (72 percent)  in that  establishment group.

     Comparison of the economic  importance of  direct  dischargers and indirect
 dischargers in different regions is  relevant  to the  potential impacts of
 pollution control measures  on the different establishments.  As stated
 earlier, direct dischargers account  for about one  third  of the  total number
 of establishments and two thirds of  the total sales.  Within each region, the
 same general pattern  is  observed; i.e., direct dischargers account for a
 greater share of   regional sales than is indicated  by  the number of such
 establishments.  For  example, in the  northeast, of all 393 establishments
 (direct and indirect dischargers), 23 percent  are direct dischargers but they
 account for 50 percent of regional sales.  In  the west south central
   * Identification of direct discharges was made from the National Pollutant
Discharge Elimination System (NPDES) permit rating file maintained by the
Denver regional office of the EPA.
                                   3A-8-11

-------
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                                                          3A-8-13

-------
 region,  69 percent of the  establishments are direct dischargers and have 86
 percent  of sales;  this is  the  highest  proportion of regional sales by direct
 dischargers in any of the  five regions.   Table 8-10 shows the comparison for
 all  the  regions.

     A more detailed comparison of  direct and indirect dischargers can be con-
 structed with relative ease  from the existing data base,  i.e.,  number and sales
 of direct and indirect discharger:; can be compared for the different establish-
 ment groups and size categories on a regional basis.   This level of description
 may  be desirable to facilitate the economic  impact analysis of  pollution controls
 for  the  two types  of dischargers,  but  it is  not  presented here.
                                     Table 8-10

                Relative  Importance of Direct  Dischargers  by Region
                                (Numbers  are  rounded)
                           Total
                                 West
        North   North    South   South
        East    Central   East   Central  West
Number of  Establishments

Number of  Direct
  Dischargers

% of Establishments that
  are Direct Dischargers
1167    393      260

 405     90       53


  35     23       20
         246     154

         130     107
  chargers (Billion $)

% of sales that are
  Direct Dischargers
          53
  67      50
45
81
        69
86
        114

         25


         22
Total Sales (Billion $)
Sales of Direct Dis-
50.6
33.7
12.5
6.3
8.6
3.9
17.0
13.8
10.7
9.2
1.7
0.4
24
Type of Products

    A single establishment usually manufactures a number of chemical products.
(This was explained in the discussion of SIC groups in. Section 6).  To
describe the wide variety of outputs from the 1167 establishments in the
industry sample a comprehensive List of fourteen product types, shown in
Table 8-11, is employed.
                                  3A-8-14

-------
                                    Table 8-11

                         Identification  of  Product  Types

                    1.   Basic Aliphatics

                    2.   Basic Aroraatics

                    3.   Intermediate Large Volume  Aliphatics

                    4.   Intermediate Large Volume  Aromatics

                    5.   Dyes and Organic Pigments

                    6.   Flavors and Fragrances

                    7.   Plastics and Resins

                    8.  Rubber Processing Chemicals

                    9.  Elastomers

                   10.  Plasticizers

                   11.  Surface Active Agents

                   12.  Synthetic Fibers

                   13.  Miscellaneous End-Use Chemicals

                   14.  Generalized Compounds/Inorganics
 This  list  was  selected because information about individual establishments
 is  presented by  these  product types in the SRI Directory*.   Also,  the
 classification is  quite similar to that used by the ITC.**   These
 documents  are  primary  data sources for the study.   The list of product
 types bears some resemblance to the five establishment groups defined
 earlier  in this  section.   However, there are important differences.  The
 establishment  groups are  used to classify each of  the  1167  establishments
 on  a  mutually  exclusive basis.   For example,  if an establishment produces
 any amount of  an intermediate chemical,  but no basic chemicals, the
 Intermediate Chemicals establishment group is appropriate even though the.
 establishment  also produces  finished chemicals.  In contrast to the
 establishment  group classification,  the  list  of  product types is used to
 identify outputs of an establishment.  As discussed in Section 6, an
 establishment produces primary  products  associated with its  SIC
 classification and other  secondary products.   An overview of the
 relationship of the product  types  listed  in Table  8-11 to the five major
 SIC groups addressed in this  study is  shown  in Table 8-12.

    Some of the fourteen  product groups are closely  identified with func-
 tional end-uses,  or markets,  for finished  chemicals, e.g., Flavors and Fra-
grances, Synthetic Fibers, Rubber  Processing chemicals.  Also note the list
   *SRI International 1979 Directory of Chemical Producers.

  **Synthetic Organic Chemicals, U.S. Production and Sales, 1979, U.S. Inter-
national Trade Commission, Publication 1099.
                                   3A-8-15

-------
                                  Table  8-12.
               Relationship of Product Types to Major  SIC  Groups
SIC  Product    *|
No.  I Type Number  I                Product Type

2821      7       Plastics materials and synthetic  resins
          9       Elastomers, nonvulcanizable
2823     12       Cellulosic manmade fibers
2824     12       Organic fibers, noncellulosic
2865      2       Basic aromatic chemicals (from coal tar)
          4       Intermediate aromatic chemicals (from coal tar)
          5       Synthetic dyes and pigments
         13       Other chemicals (e.g., light oils, creosote oil)
2869      1       Basic aliphatic chemicals
          3       Intermediate aliphatic chemicals
          6       Flavor and fracranee materials
          8       Rubber processing chemicals
         10       Plasticizers
         13       Miscellaneous (e.g.,  tanning agents, enzymes, paint
                  driers,  lube oj.ls)

Secondary products of establishments classified as one of the above SIC
groups

          9       Elastomers,  vuLcanizable
         11       Surface  active agents
         13       Pesticides
          2       Basic aromatics (Benzene,  toluene, xylene from
                  petroleum)
         13       Medicinals
         14       Others (including  inorganics)

   *Number  refers  to the listing in  Table  8-11.
                                  3A-8-16

-------
 distinguishes two major types of basic and intermediate chemicals; these two
 are aromatics and aliphatics.  The intermediates identified in Table 8-11 are
 those produced in large volume; the small volume intermediates are classified
 under Miscellaneous End-Use Chemicals because they are used both as end-use
 and intermediate chemicals.

     Table 8-13 shows the number of establishments by product type and
 establishment group.  In total, there are 1932 outputs from the 1167
 establishments; an average of 1.7 product types per establishment.  The two
 most frequently manufactured product types are Miscellaneous End-Use
 Chemicals (produced by 530 establishments) and Plastics and Resins (produced
 by 521).   There are six product types which are manufactured by fewer than 50
 establishments; these six are numbered in Table 8-11 as Product Types 1,  2,
 6,  8,  9 and  10.  Establishments in the several End-Use Chemicals establish-
 ment groups  do not manufacture any Basic Chemicals or Large Volume Inter-
 mediate Chemical product types.

     Establishments in the Intermediate Chemicals establishment  group  make
 none of the  Basic Chemical product types.   However,  some  establishments in
 the  Intermediate Chemicals group (particularly those in the medium and  large
 employment size category)  make product types  other  than Basics  and Inter-
 mediates;  four  product types with  a significant number of establishments
 participating  are Plastics and Resins (made by 54 establishments),  Synthetic
 Fibers  (made by 16), Miscellaneous End-Use Chemicals (made by 53)  and
 Generalized  Compounds/Inorganics (made by  52).

     Few establishments in the Basic Chemicals group  make  end-use  product
 types except for  the Plastics and  Resins (made by 25 establishments),
 Miscellaneous  End-Use Chemicals (made by 27) / and Generalized Compounds/
 Inorganics product types (made by  36).
Ownership of Establishments

    Table 8-14 shows  the  number  of  establishments  by  establishment group and
ownership by firm group.   (Firm  groups  are  those defined in Section 7.)  The
Industrial Chemicals  and  Synthetic  Materials  firm  group has the highest
number of establishments  (considering the aggregate of three employment cate-
gories) with 361 (30.9 percent of the 1167  total).  The firm group with
fewest establishments is  the Fertilizer and Pesticides group which has only
eight establishments  (.69 percent).

    Ownership of establishments  is  concentrated in different firm groups.
Ownership of establishments in the  Basic Chemicals group is concentrated in
the Petroleum, Natural Gas and Chemicals firm group with 25 establishments
(43.8 percent of all  the  Basic Chemical establishments) and in the Industrial
Chemicals and Synthetic Materials firm group with  18 establishments (31.6
percent) .
                                   3A-8-17

-------
                                                             Table  B-l
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                                                     3A-8-19

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                                                             Table  n-]4

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                                                                     3A-8-21

-------
    Ownership of establishments in the Intermediate Chemicals group is con-
centrated in the Industrial Chemicals and Synthetic Materials firm group
which owns 72 establishments (57 percent of the 126 in the Intermediate
Chemicals establishment group).

    Ownership of two of the three End-Use Chemical groups is also concen-
trated in the Industrial Chemicals and Synthetic Materials firm group; these
two are End-Use Chemicals, Other and End-Use Chemicals, Both.  Ownership of
the End-Use Chemicals, Plastics and Resins establishments is less concen-
trated; of the 325 establishments in this group, 17.2 percent is in the
Industrial Chemicals and Synthetic Materials firm group and about 14 percent
is in each of three other firm groups (i.e., Tires and Rubber,  Plastics and
Resins and Not Elsewhere Classified).
                                  3A-8-22

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                                Appendix  3A
                   Bibliography for Industry Profile of
                         Organic Chemicals Industry
 Curry,  Susan  and  Rich,  Susan,  eds.   The Kline Guide to the Chemical Industry,
 4th  edition.   Fairfield,  N.J.:   Charles H.  Kline and Co.  Inc.,  1980.

 Data Resources, Inc.  Chemical  Review.   Vol.  6,  No. 1.  Lexington,  MA:
 Data Resources/ Inc., 1981.

 Data Resources, Inc.  Chemical  Review.   Vol.  6,  No. 3.  Lexington,  MA:
 Data Resources, Inc., 1981.

 Data Resources, Inc.  Chemical  Review.   Vol.  7,  No. 1.  Lexington,  MA:
 Data Resources, Inc., 1982.

 Dun  and Bradstreet.  Million Dollar  Directory,  1980 edition.

 Economic  Information Systems,  Inc.;  301 Madison  Avenue, New York, New
 York 10017.

 Lowenheim, Frederick A.,  and Moran,  Marguerite K.   Faith,  Keyes, and
 Clark's Industrial Chemicals/ 4th edition.  New  York:  John Wiley and
 Sons, 1975.

 SRI  International.  1979  Directory of Chemical Producers,  United States
 of America.  Menlo Park,  CA:  SRI International, 1979.

 U.S.  Department of Commerce.  Bureau of the Census.  1977  Census of
 Manufactures:  Industrial Organic Chemicals.  Washington,  D.C.:
 Government Printing Office, 1980.

 U.S.  Executive Office of  the President.  Office  of  Management and Budget.
 Statistical Policy Division.  Standard  Industrial Classification Manual,
 1972.  Washington, D.C.:  Government Printing Office,  1972.

 U.S.  International Trade Commission.  Synthetic Organic Chemicals.
Washington, D.C.:   Government Printing Office, 1970-1980.

Financial data for individual firms obtained from 10-K reports filed with
the U.S. Securities and  Exchange Commission.

Periodicals used:

Chemical Week.  Several  issues.

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                                   Appendix 4A

                       Modification of Original GPC  Costs
     This Appendix describes the procedures used to develop BAT and PSES
 costs consistent with the long-term average effluent limitations.
     Modification of Original Effluent Targets

     Each GPC was compared with the new BAT and PSES targets to determine if
 additional  treatment would be required.   Treatment  was required whenever the
 GPC exceeded one or more  of the new targets.   The targets used in the
 evaluation  were:

        Pollutant  Group                     Effluent  Target

          Acids                                .025 mg/1

          Base/Neutrals                        .060 mg/1

          Metals                               .075 mg/1

          Volatiles                            .050 mg/1
    For the BAT regulation  (which is applicable to direct dischargers),
concentrations found in the wastestream emerging from the BPT system* were
compared to the BAT targets to determine if further treatment would be
required before discharge to receiving waters.  For the PSES regulation, the
raw waste load of each GPC was compared with the target concentrations for a
subset of the 129 priority pollutants to be controlled by the PSES
regulation.
    Modification of Treatment Systems

    If additional treatment was required, the original treatment systems
were modified.  Since the lists of pollutants controlled by BAT and PSES
were different, the selected systems might not be the same.  The following
are the guidelines by which the original treatment trains were adjusted:

    o    Treatment units treating only pollutants meeting the
         proposed targets could be removed from the train.

    o    Treatment units treating pollutants in a segregated stream
         could be removed if/ when that stream was combined with
         others before discharge, its final concentration would be
         below target by virtue of dilution.
   * In situations where no reduction in concentration was reported for the
BPT system although it was expected,  these concentrations were adjusted by an
average POTW removal efficiency.  This frequently occurred with metals.

-------
          Except  in  situations where several metals were present in
          excessive  concentrations,  ion exchange units following
          coagulation/flocculation units were removed since the
          targets would  be  reached with the coagulation/flocculation
          unit.

          Final filters/  second stage activated  sludge,  or  other
          "polishing* units were removed if it was  judged that the
          remaining  units alone would meet  the targets.

          Where intermediate concentrations were given between various
          treatment  units, it  was  sometimes possible  to  remove the
          latter units when intermediate concentrations  met  the  new
          targets.

         When treatment  units were  shown to be ineffective  in
          removing pollutants  in excess  of  the new  targets,  as
         demonstrated by influent and effluent concentrations of the
         unit, they were removed.

         Many of the units in the treatment  trains, such as
         clarifiers, dual media filters, et cetera, served only to
         protect subsequent units.  When the main unit was removed,
         the corresponding pretreatment units were also removed.
    After the new treatment trains were defined, an adjustment was made to
•miscellaneous direct costs".  Originally, these costs were based on the
number of treatment units in the train and the power requirements of each
unit.  For the modified trains, this was approximated by 23.7 percent of
total capital cost plus $85,000 (third quarter, 1977).  This formula is based
on a regression of miscellaneous direct costs on total capital cost for the
original BAT treatment systems.
                                     -4A-

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