•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).
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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Figure 2-2. Relationship of Establishments,
Plants and Processes
Plant/Establishment
Process
I Plant 1A
Establishment 1
Other
Establishments
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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
-------
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
-------
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
-------
Figure 2-5. Impact o'f Treatment Costs
Price,
Unit Costs
P'
Q1
Production
2-11
-------
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
-------
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
-------
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
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Figure 3-1. Derivatives of Benzene
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3-4
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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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4-3
-------
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
-------
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
-------
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
-------
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
-------
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.
-------
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
-------
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
-------
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
-------
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.
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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.
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
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
-------
-------
Appendix 3A
Industrial Profile
-------
-------
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.
-------
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
-------
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.
-------
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
-------
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
-------
-------
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
-------
Fjgurc 3-1 - Derivatives of Dunicno
c
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Fiyure 3-2 - Derivatives of Toluene
u
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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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3A-3-15
-------
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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3A-3-17
-------
-------
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
-------
continued on
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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
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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
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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
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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
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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
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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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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.
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Table 6-2
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-------
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
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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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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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Table 7-4
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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
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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
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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
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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
-------
Table 8-8
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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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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
-------
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.
-------
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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