&EFA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-83-006
July 1983
Water
Economic Impact Analysis
of Effluent Limitations
and Standards for the
Copper Forming Industry
QUANTITY
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
This document Is an economic Impact assessment of the recently-Issued
effluent guidelines. The report Is being distributed to EPA Regional
Offices and state pollution control agencies and 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 1s 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, and copies
are available from National Technical Information Service (NTIS), 5282 Port
Royal Road, Springfield, Virginia 22161, (703)-487-4650.
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 1n 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 Ann Watkins (202/382-5397).
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ECONOMIC IMPACT ANALYSIS OF
EFFLUENT LIMITATIONS AND STANDARDS
FOR THE COPPER FORMING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulations and Standards
401 M Street, S.W.
Washington, D.C. 20460
July 1983
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent standards and limitations issued under Sections
301, 304, 306, and 307 of the Clean Water Act to the Copper Forming industry.
The study supplements the technical study (EPA Development Document)
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 document supplements
this analysis by estimating the broader economic effects which might result
from the application of various control methods and technologies. This study
investigates the impact on product price increases, employment and the con-
tinued viability of affected plants, and foreign trade.
This 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 EPA Contract No. 68-01-6348 by JRB Associates. This analysis
was completed in July 1983.
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY S-l
INTRODUCTION
1.1
1.2
1.3
1.4
BACKGROUND
PURPOSE
SCOPE
1.3.1 Industry Coverage
1.3.2 Regulatory Options Considered
ORGANIZATION OF THE STUDY
METHODOLOGY
2.1
2.2
2.3
OVERVIEW
SPECIFIC APPROACH
2.2.1 Description of the Industry
2.2.2 Industry Structure and Performance Analysis
2.2.3 Demand and Supply Analysis
2.2.4 Cost of Compliance
2.2.5 Price and Production Changes Analysis
2.2.6 Capital Availability Analysis
2.2.7 Plant Closure Methodology
2.2.8 Employment and Community Impacts
2.2.9 Balance-of-Trade Impacts
2.2.10 Small Entity Analysis
DATA
MARKET DESCRIPTION
3.1
3.2
3.3
3.4
3.5
3.6
INDUSTRY OVERVIEW
3.1.1 Industry Segmentation
3.1.2 Production Processes
3.1.3 Production Trends
END-USE MARKETS
3.2.1 Building and Construction
3.2.2 F.lectrical and Electronic Products
3.2.3 Industrial Machinery and Equipment
3.2.4 Consumer and General Products
3.2.5 Transportation
TECHNOLOGICAL CHANGE AND SUBSTITUTION
3.3.1 Direct Material Substitution
3.3.2 Technological Change in End-Use Markets
3.3.3 More Efficient Uses of Copper
IMPORTS AND EXPORTS
PRICES
3.5.1 Industry Price Determination
3.5.2 Recent Copper Price Trends
SUMMARY OF MARKET DESCRIPTION
1-1
1-1
1-1
1-2
1-2
1-3
1-4
2-1
2-1
2-2
2-2
2-3
2-4
2-5
2-5
2-7
2-9
2-11
2-12
2-12
2-12
3-1
3-1
3-1
3-3
3-4
3-4
3-6
3-6
3-6
3-8
3-8
3-8
3-9
3-10
3-11
3-11
3-15
3-15
3-16
3-17
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TABLE OF CONTENTS (Continued)
INDUSTRY STRUCTURE AND PERFORMANCE
4.1
4.2
4.3
4.4
4.5
OVERVIEW
TYPES OF MARKET STRUCTURES
MARKET STRUCTURE OF THE COPPER FORMING INDUSTRY
4.3.1 Conceptual Problems in Determining
Market Structure
4.3.2 Industry Concentration
4.3.3 Integration
4.3.4 Product Differentiation
4.3.5 Barriers to Entry
4.3.6 Summary of Industry Structure
Characteristics
FINANCIAL PERFORMANCE OF THE COPPER FORMING
INDUSTRY
4.4.1 Financial Status of Copper Forming
Companies
4.4.1.1 Profitability at Corporation Level
4.4.1.2 Capital Structure Analysis at the
Corporation Level
4.4.2 Financial Status of Reporting Entities
4.4.3 Plant-Level Assessment
CONCLUSIONS
BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
5.1
5.2
5.3
COST
6.1
6.2
6.3
DEMAND- RELATED FACTORS
5.1.1 Theoretical Considerations
5.1.2 Econometric Analysis and Considerations
5.1.2.1 Long-Run Dynamic Adjustment Process
5.1.2.2 Data Availability
5.1.3 Empirical Results
5.1.4 Demand Forecasts
SUPPLY FACTORS
5.2.1 Theoretical and Empirical Considerations
5.2.1.1 Long-Run Dynamic Adjustment
Process
5.2.1.2 Data Availability
5.2.2 Empirical Results
5.2.3 Supply Forecasts
ANTICIPATED GROWTH AMONG TYPES OF PLANTS
OF COMPLIANCE
INTRODUCTION
CONTROL TREATMENT OPTIONS
ESTIMATED COMPLIANCE COSTS
6.3.1 Existing Sources
6.3.2 New Sources
4-1
4-1
4-1
4-4
4-4
4-6
4-8
4-10
4-11
4-12
4-12
4-13
4-13
4-15
4-18
4-22
4-25
5-1
5-2
5-2
5-3
5-3
5-6
5-7
5-10
5-10
5-12
5-12
5-13
5-14
5-17
5-17
6-1
6-1
6-2
6-3
6-3
6-4
ii
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TABLE OF CONTENTS (Continued)
ECONOMIC IMPACTS
7.1 INTRODUCTION
7.2 PRICE AND PRODUCTION IMPACTS
7.3 CAPITAL AVAILABILITY ANALYSIS
7.4 PLANT CLOSURE ANALYSIS
7.5 OTHER IMPACTS
7.5.1 Employment and Community Impacts
7.5.2 Balance-of-Trade Impacts
7.6 SMALL ENTITY ANALYSIS
7.6.1 Defining Small Entities
7.6.2 Baseline Conditions
7.6.3 Economic Impacts (Small Entities)
LIMITATIONS OF THE ANALYSIS
8.1 DATA LIMITATIONS
8.1.1 Economic Survey Data
8.1.2 Compliance Cost Data
8.2 METHODOLOGY LIMITATIONS
8.2.1 Methodology
8.2.2 Sensitivity Analysis on Key Assumptions
8.3 MONITORING COST SENSITIVITY ANALYSIS
iii
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LIST OF TABLES
Page
S-l SUMMARY OF ESTIMATED ECONOMIC IMPACTS OF EFFLUENT S-ll
LIMITATIONSCOPPER FORMING INDUSTRY
3-1 CONSUMPTION OF COPPER IN THE UNITED STATES, 1982 3-2
3-2 PRODUCTION LEVELS FOR THE DOMESTIC COPPER FORMING INDUSTRY 3-5
3-3 CONSUMPTION OF COPPER PRODUCTS BY MAJOR END-USE MARKETS 3-7
3-4 IMPORTS AND EXPORTS OF COPPER FORMING PRODUCTS, 1970-1980 3-12
4-1 INDUSTRY CONCENTRATION RATIOS 4-7
4-2 KEY PROFITABILITY RATIOS FOR CORPORATIONS PERFORMING COPPER 4-14
FORMING
4-3 KEY FINANCIAL RATIOS FOR CORPORATIONS BY SIZE CATEGORIES, 4-16
1976-1979
4-4 KEY CAPITAL STRUCTURE FINANCIAL RATIOS OF CORPORATIONS 4-17
INVOLVED IN COPPER FORMING
4-5 CAPITAL STRUCTURE BY SIZE OF CORPORATION INVOLVED IN COPPER 4-19
FORMING
4-6 KEY FINANCIAL RATIOS FOR THE COPPER FORMING REPORTING ENTITIES 4-21
4-7 PROFITABILITY ASSESSMENT BY SIZE OF THE REPORTING ENTITY, 4-23
1976-1979
4-8 SAMPLE OF COPPER FORMING PLANTS, 1979 4-24
5-1 EMPIRICAL RESULTS OF ANALYSIS OF DEMAND FOR COPPER FORMING 5-8
PRODUCTS
5-2 PRICE ELASTICITY ESTIMATES FOR THE DEMAND FOR COPPER FORMING 5-9
PRODUCTS
5-3 COPPER FORMING PRODUCTS DEMAND FORECASTS 5-11
5-4 EMPIRICAL RESULTS OF ANALYSIS OF SUPPLY FOR COPPER FORMING 5-15
PRODUCTS
5-5 SUPPLY PRICE ELASTICITY ESTIMATES FOR THE COPPER FORMING 5-16
INDUSTRY
iv
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LIST OF TABLES
Page
5-6 COPPER FOBMING PRODUCTS SUPPLY FORECASTS 5-18
6-1 COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY DIRECT 6-5
DISCHARGERS
6-2 COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY INDIRECT 6-6
DISCHARGERS
6-3 COMPLIANCE COSTS FOR NEW SOURCES 6-8
7-1 DEMAND/SUPPLY ASSESSMENT OF EACH PRODUCT GROUP IN THE 7-3
COPPER FORMING INDUSTRY
7-2 EXPECTED PRICE INCREASES BY COPPER FORMING PRODUCT GROUP 7-3
7-3 ANALYSIS OF COPPER FORMING SAMPLE PLANTS BY EMPLOYMENT 7-10
CLASSIFICATION
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LIST OF FIGURES
Page
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-3
3-1 U.S. EXPORTS AND IMPORTS OF COPPER FORMING PRODUCTS 3-13
vi
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EXECUTIVE SUMMARY
This report presents an analysis of the economic impacts of EPA effluent
regulations on the copper forming industry. This analysis was prepared under
the supervision of the Office of Analysis and Evaluation, U.S. Environmental
Protection Agency.
PURPOSE
The purpose of this study is to analyze the economic impacts that are
likely to result from the promulgation of effluent regulations on the copper
forming industry. These regulations are being promulgated under the authority
of the Clean Water Act. The analysis considers:
Effluent limitations based on the Best Available Tech-
nology Economically Achievable (BAT) to be met by
industrial dischargers by July 1984;
New Source Performance Standards (NSPS) to be met by
new source industrial dischargers;
Pretreatment Standards for Existing Sources (PSES) to
be met by existing dischargers to publicly owned treat-
ment works (POTWs); and
Pretreatment Standards for New Sources (PSNS) to be met
by new dischargers to publicly owned treatment works
(POTWs).
The economic impacts of the effluent regulations include changes in prices
and the quantities produced, changes in profitability, and changes in capital
requirements and availability. In addition, the number of plant closures,
employee layoffs, and community and balance-of-trade impacts resulting from
the regulation are assessed.
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METHODOLOGY
In general, effluent regulations impose added costs on plants in the
industry. These costs include capital expenditures on pollution control equip-
ment (fixed costs) and operating and maintenance expenses (variable costs),
both of which cause the average production costs of a plant to increase. Under
such conditions plant owners have the following options:
Raise the price of their products and pass through some or
all of the increased costs to purchasers;
Absorb the increase in costs;
Shut down the operation and go out of business.
The approach to this study begins with a determination of which option(s)
producers in the copper forming industry are most likely to follow and what
the resulting price and output levels are likely to be. Then, capital budget-
ing techniques are used to evaluate the financial status of copper forming
plants before and after compliance with the effluent regulations. Other
impacts such as employment, community, and foreign-trade effects are evaluated
based on effluent regulation impacts on the industry.
The following several pages describe the information sources used in the
analysis and the analytical techniques used in specific steps in the analysis.
Information Sources
This study is based on data from several sources. They include govern-
ment reports, text books, trade association data, the trade press, discussions
with individuals associated with the industry, and, of particular importance,
a plant- and firm-level survey conducted by EPA under authority of Section 308
of the Clean Water Act (the 308 Economic Survey).
S-2
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The 308 Economic Survey was designed to provide accurate and current
information on the economic and financial characteristics of the industry's
plants and firms. Data collected included information on market structure,
profitability, depreciation, salvage value, investment in new capital, and
value added. The survey questionnaire was mailed to every known plant in
the copper forming industry. A total of 105 plants (i.e., approximately 60
percent of all copper forming plants) responded to the 308 Economic Survey.
All the survey questionnaires were returned directly to EPA by the
respondents, and procedures were employed to protect the confidentiality of
the data. These procedures included EPA removing the identification section
from each questionnaire and assigning a code number to each before forwarding
to the contractor for processing. The data from the survey, together with
estimates of the costs of alternate water pollution control options, served
as the most critical information inputs to the economic impact analysis.
Description of the Industry
The first step in the analysis describes the basic industry characteris-
tics that relate to the impacts of the regulation. This analysis focuses on
the end-use markets for copper products, substitution, foreign competition,
number and types of firms and plants, and price trends. These factors deter-
mine the future growth and competitiveness of the industry and are important
in assessing the copper forming producer's ability to afford additional
capital outlays for pollution control equipment.
Industry Structure and Performance
The next step in the analysis focuses on the industry structure and per-
formance. Industrial organization theory states that the performance of a
firm in an industry is determined by the conduct of the firms in the market.
The firm's market conduct is, in turn, dependent on the structure of the
industry and market conditions prevailing in the economy at the time. Certain
S-3
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market structures (e.g., monopoly) imply that the participants may have higher
profit margins and may be able to absorb or pass through added costs with less
financial difficulty than other types of firms (e.g., firms in competitive
markets). This analysis, therefore, provides information on the copper forming
industry structure and performance, in order to provide insights into the indus-
try' s ability to absorb or pass through the added costs of compliance with EPA's
effluent regulations.
Base-Case Analysis
This step of the analysis involves the development of economic projec-
tions under the assumption that no water pollution control requirements
mandated by the Clean Water Act are imposed on the copper forming industry
over the 1981-1990 period. The basic approach followed in developing the'
projections begins with the development of explicit demand and supply func-
tions that explain the behavior of the copper forming domestic market over
the 1960-1979 period. The forecasts of future levels of demand and supply
for each of the major product groups are calculated from the established
historical relationships and on projections of the explanatory variables of
the demand and supply functions. Forecasts of the number of new plants are
also given.
Compliance Cost Estimates
The water treatment control systems, costs, and effluent limitations and
pretreatment standards recommended for the copper forming industry were derived
in a separate analysis. A comprehensive description of the methodology and
the recommended technologies and costs are provided in the Development Docu-
ment for Effluent Limitations Guidelines and Standards for the Copper Forming
Point Source Category (Development Document). Several treatment and control
options based on BPT, BAT, NSPS, PSES, and PSNS for facilities within the
copper forming category are considered. They consist of:
S-4
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Option 1: Option 1 is end-of-pipe treatment consisting
of lime precipitation and settling, and preliminary treat-
ment, where necessary, consisting of chemical emulsion
breaking, oil skimming, and chromium reduction. For
forged parts, this option also consists of spray rinsing
and recirculation for pickling rinse and flow normaliza-
tion for alkaline cleaning rinse. This combination of
technology reduces toxic metals, conventional pollutants,
and also toxic organics through oil skimming.
Option 2: Option 2 is equal to Option 1 plus flow reduc-
tion for three waste streams: annealing water, solution
heat treatment, and pickling rinse. Flow reduction of
the annealing water and solution heat treatment streams
is based on recycle, and flow reduction of the pickling
rinse stream is based on spray rinsing and recirculation.
The Option 1 flows for these streams are reduced and this
reduction will decrease toxic metals and conventional pol-
lutants.
Option 3: Option 3 is equal to Option 2 plus filtration
for further reduction of toxic metals and TSS.
Option 4: Option 4 consists of lime precipitation,
settling, and filtration, and, where necessary, prelimi-
nary treatment consisting of chemical emulsion breaking,
oil skimming, and chromium reduction, with counter-
current rinsing and other methods of flow reduction.
Option 5: Option 5 is equal to Option 1 plus filtra-
tion for further reduction of toxic metals and TSS.
A detailed description of these technologies and the development of their
costs is in the Development Document. The costs of the pollution control
options were developed by EPA's engineering staff and provided to the economic
analysis study team for use in the economic impact analysis.
Price Impact Analysis
The extent to which the proposed pollution control costs can be passed
through to the customers is analyzed separately. This analysis is important
because it establishes (1) who is likely to bear the costs of the regulations
S-5
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(i.e., the consumers, producers, or both) and (2) the degree of impacts on
the markets for copper forming products (i.e., impacts on demand, supply,
and imports). The increase in the prices of copper forming products that is
likely to occur if pollution controls are required is estimated via a micro-
economic demand/supply analysis of all the product markets in the copper
forming industry.
In general, compliance with effluent limitations increases the production
costs of firms. This cost increase can be translated as an upward shift in
the supply curve of the firms in the industry. The interaction of the new
supply and the demand curves determines the new price. In this analysis, the
movements of the supply and demand curves are simulated by the information
provided in the demand and supply price elasticities of the copper forming
products, under the assumption that competitive market conditions exist.
The impact of an increase in costs on price in a single-product market is
shown to depend on the elasticities of supply and demand in that market.
Demand and supply curves are constructed to provide these elasticity
estimates. The percent price increases are used in conjunction with the
additional per-unit pollution control costs to calculate the likely price
increases for each product market.
Capital Availability Analysis
The capital availability analysis examines the ability of participants
in the industry to finance investments in new capacity, both with and without
pollution control. The approach focuses on the ability of participants to
finance capital investments from their current cash flow, without relying on
outside sources of capital. An implicit assumption in this approach is that
if a plant can invest in pollution control and still remain profitable, given
the current cost of capital, the capital market would also be willing to
provide the money for the pollution control investment. A capital budgeting
approach that considers the profitability of the plant, assuming that it decides
S-6
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to install the pollution control equipment, is used. If the net present value
of the plant's cash flow is positive after the investment is made, the plant
could afford to purchase the equipment. If the net present value of the cash
flow is negative, the plant could not afford to install the pollution control
equipment.
Plant Closure Analysis
In general, the proposed pollution control requirement will force a
rational plant owner to decide (a) whether to make an additional investment
and incur additional fixed and operating costs or (b) to sell the plant. The
alternatives available to the owner are to:
Sell the planteither as an operating entity or as
scrap, or
Make the investment and realize the value of the cash
flows expected from remaining open.
Because a plant will remain open for several years if the owner invests
to meet the pollution control limitations, the analysis takes into account the
expected cash flow over the life of the plant plus the salvage value of the
plant at the end of the last period. The future cash flow of the plant is
discounted back to the present year, using a discount rate equal to the firm's
cost of capital. The plant will be kept open if the expected discounted cash
flow less investment costs (net cash flow) exceeds the expected salvage value
of the plant. If the discounted net cash flow is less than the salvage value,
a rational owner would sell the plant because he would receive a larger
return from liquidating it than from continuing its operation.
*
Other Impacts
The compliance with EPA effluent regulations can have both direct and in-
direct impacts on employment, balance of trade, and earnings in the community.
Direct employment and earnings impacts would result from plant closures, and
S-7
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indirect impacts would result from price Increases and the subsequent produc-
tion, employment, and earnings decreases. Given the changes that may result
from the regulation these additional impacts are estimated.
Small Entity Analysis
The Regulatory Flexibility Act (RFA) requires Federal regulatory agencies
to consider small entities throughout the regulatory process. A small entity
analysis of the copper forming industry is performed to determine if small
entities will be significantly impacted by the regulation and to ascertain if
a Regulatory Flexibility Analysis is needed. The definition of small entity
is not precise or universal and several criteria (e.g., plant production,
employment, wastewater flows) are examined for identifying small plants in
*
the copper forming industry. In this section the small plants in our data
base are examined to determine whether these plants would be more significantly-
affected by the water regulations than larger plants.
SUMMARY OF ECONOMIC IMPACTS
Market Description
The copper forming industry consists of approximately 176 plants that
form copper and copper alloys into intermediate and finished products .JL'
These plants are generally divided into two categories: brass mills and wire
mills. Together they consumed approximately 4.46 billion pounds of copper
in 1982. This industry employs approximately 43,000 employees. The output
of the industry dropped from a high of 6.1 billion pounds of copper in 1979
to 4.5 billion pounds in 1982. The industry s poor performance in this year
was a result of the prolonged period of h^gh interest rates and the recession
which depressed sales in the end-use markets. Prices during this period also
JL' In this report the term "copper" is generally used to refer to both
copper and its alloys.
S-8
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fell significantly. U.S. producer prices in 1982 averaged $0.74 per pound,
down from a record high of $1.45 per pound in February 1980. In recent times,
there has been some improvement in the price of copper and this trend is
expected to continue over the 1983-1984 period. These improved conditions are
mainly due to the improvement in the economy and to reductions in inventories
of copper products.
Industry Structure and Performance
Although a large segment of the market is vertically integrated, the
structure of the copper forming segment is relatively competitive. This type
of market structure suggests that individual firms in the copper forming
industry are unlikely to be in a position to control or influence the market
or prices in a perceptible manner. Market concentration is low and entrance
into the industry is relatively easy. An analysis of the firm's key financial
ratios suggests that the industry is earning profits slightly below those of
comparable industries. The data also indicate that the industry may be in
a position to finance moderate levels of additional debt in the future.
Baseline Projections of Industry Conditions
The results of the baseline projections show that the growth in demand
and supply for the various types of copper forming products is likely to be
strong among the product groups. The highest growth in the demand segment
of the market is for the sheet, plate, and strip products which is expected
to Increase by 86 percent over the 1982-1990 period. The smallest increase
in demand is projected for plumbing tube and pipe products. This market
segment is expected to increase by 37 percent over the 1982-1990 period.
The demand increases for the other products range between 74 and 78 percent.
Overall, the growth in the domestic supply of copper forming products
is estimated to be slower than the estimated growth in demand over the period
examined. The supply of the rod, bar, and mechanical and the sheet, strip,
S-9
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and plate segments are projected to increase by 82 and 81 percent above their
1982 level of output by 1990, respectively. The growth in the output of the
other copper forming products ranges between 57 and 60 percent.
The severity of the 1981-1982 recession has depressed sales of copper
forming products which has forced the industry to cut back its production
in 1982. However, recent economic indicators suggest that the industry will
recover to previously attained output and demand levels during the 1984-1990
period.
There has been very little growth in new plant capacity over the last
decade. Additionally, there is excess capacity in the industry at the current
time. This is a result of the 1981-1982 recession which forced plants to cut
back their production levels. A review of the annual reports of copper
forming plants indicates that four new plants and two major plant expansions
are planned for the future. The existing plants plus these new plants would
provide the capacity necessary to attain the increases in the output that
are predicted in 1990.
Results of the Plant-Specific Analysis
Table S-l summarizes the economic impacts that would result from the
promulgation of the effluent limitations. Of the 176 plants in the copper
forming industry, 94 plants do not discharge wastewater. The remaining 82
plants consist of 37 direct dischargers and 45 indirect dischargers. These
represent the plants in the copper forming industry that would incur costs
to install, operate, and maintain the pollution control treatment systems.
For the selected options the BAT and PSES regulatory costs these plants
would incur are estimated at $15.7 million for investment and $10.5 million
for operating and maintenance. The total annual compliance costs for the
industry would be $14.0 million. These costs are estimated to have an
S-10
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insignificant impact (less than one percent) on the price of copper forming
products. Because of the insignificant price changes, no production or
balance-of-payment impacts are expected from this regulation.
The results also indicate that the impacted plants would experience
some profit reductions, but these would not be significant enough to cause
plant closures or employee layoffs. Additionally, the results of the capital
availability analysis indicate that the plants would be able to finance
installation of the required pollution abatement technologies.
The initial capital investment and operating and maintenance costs asso-
ciated with NSPS and PSNS are estimated at $1.23 million and $0.8 million per
plant, respectively.U Relative to revenues and plant assets, these costs
are similar to the costs for BAT and PSES and, therefore, are not likely to
present a barrier to new plants entering the industry.
The small entities analysis provides no evidence that the profitability
of small plants is different from that of larger plants. The regulation is
not expected to cause any of the small plants to close or layoff employees.
For these reasons, the Agency has determined this regulation is economically
achievable.
The NSPS and PSNS costs are for a "normal" plant as defined in Section
VIII of the Development Document. It is a theoretical plant which has
each of the manufacturing operations covered by this regulation and
production that is average for the industry as a whole.
S-12
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1. INTRODUCTION
1.1 BACKGROUND
The Environmental Protection Agency is charged with the responsibility
to restore and maintain the chemical, physical, and biological integrity of
the nation's waterways. This authority is granted under the Clean Water Act
(the Federal Water Pollution Control Act Amendments of 1972 as amended by the
Clean Water Act of 1977). Section 301(b)(l)(A) of the Act requires that all
industries discharging into navigable waterways achieve the "best practicable
control technology" (BPT). These same dischargers are required to meet efflu-
ent limitations achievable by the application of "best available technology
economically achievable" (BAT) and best conventional pollutant control tech-
nology pursuant to Sections 301(b)(2)(A), (b)(2)(C), and (b)(2)(E). Addition-
ally, new industrial dischargers are required to comply with the New Sources
Performance Standards (NSPS) under Section 306 of the Act, and new and exist-
ing industrial dischargers to publicly owned treatment works (POTWs) are
subject to Pretreatment Standards under Sections 307(b) and 307(c) of the
Act. The Agency is now promulgating these effluent limitations and standards
for the copper forming industry. In developing these standards the Agency
has extensively examined the technical and economic characteristics of the
copper forming industry and the technical and economic characteristics of
several alternative pollution control technologies. This report describes
the economic impact analysis. The technical analyses are presented by EPA
in a separate document.
1.2 PURPOSE
The purpose of this study is to analyze the economic impacts that are
likely to result from the promulgation of EPA's effluent regulations on the
copper forming industry. This analysis considers:
1-1
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Effluent limitations based on the Best Available Tech-
nology . Economically Achievable (BAT) to be met by
industrial dischargers by July 1984;
New Source Performance Standards (NSPS) to be met by
new source industrial dischargers;
Pretreatment Standards for Existing Sources (PSES) to
be met by existing dischargers to publicly owned treat-
ment works (POTWs); and
Pretreatment Standards for New Sources (PSNS) to be met by
new dischargers to publicly owned treatment works (POTWs).
This study analyzes the impacts of the costs for alternative pollution
control regulatory options on plant profitability, capacity expansion and
replacement, and the potential for plant closures in the U.S. copper forming
industry. In addition, the impacts of the regulation on employment, communi-
ties, foreign trade, and small businesses are considered.
1.3 SCOPE
1.3.1 Industry Coverage
For purposes of this study, the copper forming industry includes 176
plants that form copper and copper alloys into intermediate and finished
copper and copper alloy products. The industry is classified under the fol-
lowing Standard Industrial Classification (SIC) groupslU
SIC 3351 - Rolling, drawing, and extruding of copper,
brass, bronze, and other copper-base alloys
into shapes such as plate, sheet, bar, and
tubing.
SIC 3357 - Drawing copper and copper-base alloy wire, and
other copper wire products within the nonfer-
rous wire drawing and insulating industry group.
I/ Included in this analysis of the copper forming industry is most of SIC 3351
and some, but not all, of SIC 3357.
1-2
-------
The plants covered under this regulation produce the following:
Brass Mill Products
Sheet, Strip, and Plate
- Rod, Bar, and Mechanical Wire
- Plumbing Tube and Pipe
Wire Mill Products (Wire and Cable).
1.3.2 Regulatory Options Considered
EPA considered five treatment and control options for the BPT, BAT,
NSPS, PSES, and PSNS regulations. These are:
Option 1: Option 1 is end-of-pipe treatment consisting
of lime precipitation and settling, and preliminary treat-
ment, where necessary, consisting of chemical emulsion
breaking, oil skimming, and chromium reduction. For
forged parts, this option also consists of spray rinsing
and recirculation for pickling rinse and flow normaliza-
tion for alkaline cleaning rinse. This combination of
technology reduces toxic metals, conventional pollutants,
and also toxic organics through oil skimming.
Option 2: Option 2 is equal to Option 1 plus flow reduc-
tion for three waste streams: annealing water, solution
heat treatment, and pickling rinse. Flow reduction of
the annealing water and solution heat treatment streams
is based on recycle, and flow reduction of the pickling
rinse stream is based on spray rinsing and recirculation.
The Option 1 flows for these streams are reduced and this
reduction will decrease toxic metals and conventional pol-
lutants.
Option 3: Option 3 is equal to Option 2 plus filtration
for further reduction of toxic metals and TSS.
Option 4: Option A consists of lime precipitation,
settling, and filtration, where necessary, preliminary
treatment consisting of chemical emulsion breaking,
oil skimming, and chromium reduction, with counter-
current rinsing and other methods of flow reduction.
1-3
-------
Option 5: Option 5 is equal to Option 1 plus filtra-
tion for further reduction of toxic metals and TSS.
A description of these technologies and associated compliance costs is
contained in chapter 5.~.'
1.4 ORGANIZATION OF THE STUDY
The remainder of the study is organized into six chapters. The complete
methodology of the study is outlined in chapter 2. Chapter 3 provides a
description of the copper forming industry and the key factors that influence
the market. Chapter 4 evaluates the structure of the industry as well as the
economic and financial performance of copper forming firms over their recent
history. Chapter 5 provides the baseline conditions of the industry market
assuming no further water pollution control requirements over the regulatory
impact period. Chapter 6 details the costs of the alternative treatment tech-
nologies being considered. Chapter 7 presents the findings of the economic
impact analysis, and chapter 8 summarizes the limitations.
2J The fifth option was rejected based on engineering judgment.
1-4
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2. METHODOLOGY
This chapter summarizes the methodology, assumptions, and Information
sources used to analyze the economic impacts of the BAT effluent regulations
on the copper forming industry. It describes the ways in which Information
on industry characteristics (from the 308 Economic Survey and from other
sources) are used together with estimated compliance costs (from a separate
study).!/ to identify plants that may not be in a position to afford the
installation of pollution control equipment. This chapter also summarizes
the approaches used to identify potential plant closures, employment, price,
and other impacts on plants in the industry.
2.1 OVERVIEW
Effluent regulations generally impose added costs on plants in the indus-
try. These costs include capital expenditures on pollution control equipment
(fixed costs) and operating and maintenance expenses (variable costs). When
the average production costs of a plant increase, plant owners will act accord-
ing to one of the following options:
Raise the price of their products and pass through
some or all of the increased costs to purchasers;
Absorb the increase in costs;
Shut down the operation and go out of business.
The industry is analyzed in depth to determine which of these options copper
formers are most likely to implement and, subsequently, an analysis of the
JL' U.S. Environmental Protection Agency, Development Document for Effluent
Limitations Guidelines and Standards for the Copper Forming Point Source
Category, July 1983.
2-1
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impacts of the various pollution control technologies is carried out. Figure
2-1 shows the major elements and information flows of the analysis. The main
elements of the analysis include the following eleven steps:
Description of the Industry
Industry Structure and Performance Analysis
Demand and Supply Analysis
Cost of Compliance
Price and Production Impacts
Capital Availability Analysis
Plant Closure Analysis
Employment Impacts
Community Impacts
Balance-of-Trade Impacts
Small Entity Analysis.
The specific approach used in analyzing each of these elements is discussed in
detail below.
2.2 SPECIFIC APPROACH
2.2.1 Description of the Industry
The first step in the analysis is to describe the basic characteristics
of the copper forming industry, such as the nature of the products and markets,
the historical trends of sales, end-use markets, prices, foreign trade, and
the number, type, and location of firms and plants in the industry. This
analysis establishes the growth rates of these key variables and the factors
that influence the market for copper forming products. This information is
useful in assessing the future competitiveness and the ability of the copper
forming industry to afford additional capital outlays for pollution control
equipment.
2-2
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w
w
g
en
W5
o
H-l
O
z
8
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2.2.2 Industry-Structure and Performance Analysis
The structure of an industry is an important determinant of how a regu-
lation will affect the participants in an industry. Certain industry struc-
tures (e.g., monopoly) imply that the participants have some control over
their markets and can set prices or the quantity produced to maximize profits.
Other forms of industry structures (e.g., perfect competition) imply that the
participants have no control over their markets and must accept the prices of
the products as given. This section analyzes the copper forming industry
structure and its performance to establish whether the participants have con-
trol over their markets and are likely to pass the costs of pollution control
through to their customers. This analysis also establishes the financial
status of the firms in the copper forming industry and their ability to afford
the added costs of the regulation if they cannot pass along all of the costs
to their customers.
2.2.3 Demand and Supply Analysis
The demand and supply analysis quantitatively estimates changes in market
prices and industry production likely to result from the regulation. The
analysis produces a base-case forecast (i.e., a forecast in the absence of
the BAT regulations) of sales and output of the domestic producers of copper
forming products. The approach assumes that the markets for copper forming
products are competitive. The demand for the copper forming products is
determined by the prices of copper and the behavior of their end-use markets.
The supply of copper forming products is determined by the prices of copper
and the level of capacity utilization or level of inputs used by the industry
in a given period. Explicit demand and supply curves are established for each
of the copper forming product groups. Demand and supply forecasts by product
group are established from the curves that are developed and on projections of
the explanatory variables that are taken from various other sources. In addi-
tion, the supply forecasts are used to determine whether the industry would
require significant capital expansions and/or new plants to attain the projected
output levels.
2-4
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2.2.4 Cost of Compliance
The costs of the treatment systems and their associated effluent limita-
tion and standards were developed in a separate study?/. The costs of com-
pliance are estimated for individual plants in the copper forming industry.
These costs include both capital and total annual costs.
A comprehensive description of the technical cost analysis methodology,
recommended treatment systems, and costs is provided in EPA's Development
Document JL' EPA considered treatment and control options as the basis for
BPT, BAT, NSPS, PSES, and PSNS for facilities within the copper forming
industry.
The costs associated with the treatment options are used for predicting
the impacts on prices, output, profitability, capital availability, and plant
closures.
2.2.5 Price and Production Changes Analysis
The copper forming plants will attempt to adjust their price and output
decisions so that their financial performance after compliance is as good as
it was prior to regulation. This implies that a plant will attempt to recover
the costs of compliance by raising the product prices if it can do so. The
success of this attempt will be governed by the market resistance to price
increases (i.e., price elasticity of demand) and intraindustry competition.
If all or a significant amount of the added costs can be passed through
to the customers without affecting the volume of sales of the plants in the
industry, then the impacts of the proposed effluent regulation on the plants
would be small. On the other hand, if the pollution control costs cannot be
I/ Ibid, p. 2-1,
I/ Ibid, p. 2-1,
2-5
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passed along to.the customers in the form of higher prices or if significant
reductions in quantity demanded result from the price increases, then the
plants in the industry would experience revenue and profit margin decreases
due to the proposed effluent regulation. Consequently, it is important to
estimate the likely extent of the price increase that may occur as a result
of the regulations and to compare the price increases to expected cost
increases at the various plants.
The effects of an increase in production cost on price depends on both
demand and supply conditions in the industry. In markets where the demand
for the product is growing and the price is inelastic (i.e., the demand is
insensitive to price changes), producers can usually pass cost increases
through to their customers without losing sales. Under other market condi-
/
tions (e.g., a stagnant product market and elastic product price), a smaller
amount of the increased costs is likely to be passed through since the firms
would lose significant amounts of revenues if they raised their prices signifi-
cantly. Under the latter circumstances, firms have to absorb some or all of
the increased costs, which may result in reduced output and profit levels
and, possibly, plant closures.
To summarize the outcome of these forces, the impact of additional costs
on a firm can be interpreted as a shift in the supply curve (i.e., an increase
in the costs) of the firm. The increase in price is determined in the market
by the interaction of the supply curve with a new position on the demand
curve. As long as the cost increase is not too large, the assumption about
the change in the supply curve due to the change in costs can be measured from
information provided by the supply and demand price elasticities. That is, it
can be shown that, in a competitive marke' , ^.ne change in price (AP) due to a
change in cost (AMC) is equal to:
(2.1) AP , n
AMC n - e
2-6
-------
where n represents the supply price elasticity and e the demand price elasti-
city for the specific copper forming product .A.' Using equation (2.1) the price
increase due to a change in pollution control costs can be estimated as
follows:
(2.2) AP
The change in cost (AMC) is defined as the additional pollution control costs
per pound of output.
The elasticity estimates are provided by the demand and supply equations
constructed in the supply/demand analysis described in section 2.2.3. Based
on these estimates, the change in the price of the copper forming produces
due to the increase in costs of pollution control can be calculated.
The next step is to calculate the reductions in industry sales that are
associated with the price increases. These reductions are calculated using
the demand/supply model. Postcompliance price increases determined above are
inserted in the demand equations to provide changes in the demand forecasts.
The difference between the baseline and the postcompliance simulations pro-
vides estimates of the changes in sales due to added costs of compliance with
the effluent regulations.
2.2.6 Capital Availability Analysis
The capital availability analysis examines the ability of the copper
forming plants to finance investments in new capacity and pollution control.
The approach focuses on the ability of individual plants to finance pollution
A more detailed discussion of the derivation of the price impact formula
is provided in Albert M. Levenson and B.S. Solon, Outline of Price Theory
(New York: Holt, Rinehart and Winston, 1964), pp. 56-59.
2-7
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control and capacity expansion from current cash flow without relying on
outside sources of capital. This assessment is based on the assumptions
that the capital markets would provide the funds and the plant manager would
invest in pollution abatement if the plant would still remain profitable after
the investment. The capital availability analysis uses data on the cash flow,
the investment, and the annual pollution control costs of individual plants to
determine whether the plants can continue to be profitable after the required
investment in pollution control.
Information on the cash flow for individual plants was estimated from
data provided in the 308 Economic Survey. The cash flow for each plant was
estimated as:
(2.3) Cash flow = net profits + depreciation
Next, a capital budgeting approach is used to determine whether the plant
can afford to install the required pollution control equipment. For each
plant, the present value of the future stream of net income (cash flow) is
calculated assuming that the plant invests in pollution control. The expected
future cash flows of the plant are discounted back to the present year using an
interest rate that reflects the plant's current cost of capital. The analysis
takes into account the cash returns expected over the life of the plant and
equipment, because the plant will remain open for many years if the operator
invests to meet pollution control standards.
The plant will make the investment in pollution control if the expected
future revenues are greater than the future annual expenditures, plus the
capital investment in pollution control. The capital availability analysis is
summarized in the following formula:
(2.4) NPV
n CASHn n Cn
n-1 (l+i)n n-1
2-8
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where
NPV » net present value
CASH n - cash flow over n periods
i - average cost of capital
C annual pollution costs
I - capital investment in pollution control.
The decision rule is if the NPV is positive the plant would invest; if
the NPV is negative or zero the plant could not afford to invest in pollution
control. Furthermore, it can be assumed that if the firm could invest in pollu-
tion control and still remain profitable, then the financial markets would also
be willing to finance the installation of the pollution control equipment.
The capital impact analysis uses the information provided by the copper
forming industry 308 Economic Survey to calculate the expected cash flows for
the individual plants. This analysis assumes that the cash flow of the plant
will remain constant in real terms over the expected life of the plant (ten
years). The estimated cost of capital over this period is 13 percent.
2.2.7 Plant Closure Methodology
A. decision to close a plant is extremely complex, involving an array of
factors, many of these subjective. Some of the more important factors to
consider are:
Present and expected profitability of the plant;
Current market or salvage value of the plant, i.e.,
the opportunity costs of keeping the plant open;
Required pollution control investment;
Expected increase in annual costs due to pollution
control requirements;
Expected product price, production costs, and pro-
fitability of the plant after pollution control
equipment is installed and operating; and
2-9
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Other major economic developments expected for the
plant (i.e., change in the competitive position,
increase/decrease in market growth) .
Each of these factors is addressed to some extent in this plant closure analy-
sis. Our efforts at this stage are aimed at identifying the plants that may
close under the regulatory options.
In general a plant owner faced with pollution control requirements must
decide whether to make the additional investment in pollution control or to
sell the plant. A rational owner would decide to keep the plant if the
before-and-after pollution control cash flows are greater than the salvage
value of the plant. If the expected cash flows are less than the salvage
value of the plant, the owner would be better off selling the plant. Sinte
the plant will remain open for many years if the investment is made in pollu-
tion control, the analysis takes into account the cash flow expected over the
life of the plant and equipment plus the salvage value at the end of the last
period. The present value of future cash flows is calculated by discounting
the expected income stream by the current cost of capital. The plant will
remain open if the present value of the expected cash flows less the costs of
investing in pollution control exceeds the expected salvage value. If the
expected cash flows are less, the owner will sell the plant. Thus, the owner
will close the plant if:
n C Sp
(2.5) S0 > Z - -S - + - -I
where S0 is the current salvage value of the plant, Sn is the salvage value
in year n, and the other variables are the same as defined in equation 2.4.
Plant specific financial data (i.e., profits, depreciation, and salvage
value) were provided by the copper forming industry 308 Economic Survey. The
annual cash flow of the plants is predicted to remain constant in real terms
2-10
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(i.e., increase at the level of the inflation rate) over the life of the plant
and the cost of capital is estimated at 13 percent .A' The investment and
annual operating and maintenance costs for each of the pollution control
options were determined in a separate study, which is described in the
Development Document.
2.2.8 Employment and Community Impacts
The BAT effluent regulations may have both direct and indirect impacts
on employment and the community. Direct employment impacts would result from
plant closures; indirect employment impacts would result from price increases
and the subsequent production decreases. Given the changes that may result
from the regulation, these additional impacts can be estimated.
The estimate of employment effects flows directly from the outputs of
the industry-level analysis and the plant closure analysis. The algorithms
used are:
total » employment at + (Q )/(Q/employee)
employment closed facilities r
impact
Qr = change in output which is due to the price increase associ-
ated with the compliance costs
Q/employee - baseline output produced per employee.
Community impacts result primarily from employment and earning losses.
The critical parameters are the ratios of these variables to total employment
and earnings in the community. Once these are established the multiplier
effects on the community can be assessed. Data on community employment and
earnings are available through the Bureau of the Census and the Bureau of
Labor Statistics.
This cost of capital is based on an analysis of the capital markets and
interest rate on treasury bonds.
2-11
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2.2.9 Balance-pf-Trade Impacts
The regulation would impact the balance of trade depending on (1) the
extent that copper forming product prices in the domestic market rise faster
than prices in the rest-of-world market and (2) the extent to which the domes-
tic production losses are replaced by imports from foreign countries.
Information on both the price increases and output losses are determined
in previous analyses. The effects from the effluent regulations on the trade
balance are analyzed by evaluating the magnitude of changes in these variables.
If the changes in these variables are negligible, then there would be no sub-
stitution of domestic products for imports (i.e., there would be no balance-
of-trade impacts).
2.2.10 Small Entity Analysis
The Regulatory Flexibility Act (RFA) requires Federal regulatory agencies
to consider small entities throughout the regulatory process. A small entity
analysis of the copper forming industry is performed to determine if small
entities would be significantly impacted by the effluent guideline and to
ascertain if a regulatory flexibility analysis is needed for this industry.
The definition of "small entity" is not precise or universal and several
criteria (e.g., plant production, employment, wastewater flows) are examined
for defining small plants in the copper forming industry. Since our analyses
examine individual plants in the industry, some of which are small and some
of which are large, a separate analysis for small business was unnecessary.
The analysis of the impact on small businesses focused on a comparison between
the impacts on small versus large plants to determine whether the small plants
would be more significantly affected by the regulation than larger plants.
2.3 DATA
The economic analysis of the effluent regulation is based on information
from several different sources. These include government reports, textbooks,
2-12
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trade association data, the trade press, discussions with individuals associ-
ated with the industry, and, of particular importance, a plant- and firm-level
survey conducted by EPA under authority of Section 308 of the Clean Water Act
(the 308 Economic Survey).
x-
The 308 Economic Survey questionnaire was designed with consultation from
representatives of the copper forming industry. The data collected in the
survey provide accurate and current information on the economic and financial
characteristics of the industry's plants and firms. Data collected included
information on market structure, profitability, investment in new capital,
value added, depreciation, and salvage value. These data, together with esti-
mates of the costs of alternate pollution control options, served as the basis
of the economic impact analysis of the proposed regulation for this industry.
The survey questionnaire was mailed to every known copper former .A'
A total of 105 plants (i.e., approximately 60 percent of all copper forming
plants) responded to the 308 Economic Survey. The types of copper forming
plants that filled out and returned the questionnaire included:
Brass Mills
- Sheet and Plate 19
- Rod, Bar, and Mechanical Wire 14
- Tube and Pipe 16
- Combination Brass MillaZ/ 5
Wire and Cable Mills 30
Other!/ 21
105
^J Using a mailing list developed in cooperation with trade associations, 119
surveys were mailed out, many to corporate headquarters, with the instructions
that the plant survey be forwarded to the corporation's applicable plants.
U Plants that produce two or more different types of products (e.g., sheet
and plate and tube and pipe).
JL' The plants produced products other than brass and wire.
2-13
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All questionnaires were returned directly to EPA by the respondents, and
procedures were employed to protect the confidentiality of the data. These
procedures included EPA1s removing the identification section from each ques-
tionnaire and assigning a code number to each questionnaire before it was sent
to the contractor for processing.
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3. MARKET DESCRIPTION
This chapter provides an overview of the copper forming industry. It
describes the main characteristics of the industry and the factors that may
affect the growth of the industry's markets over the 1983-1985 period. Parti-
cular attention is given to end-use markets for copper products, substitution,
foreign competition and price trends, because these factors determine the
outlook, future competitiveness of the industry, and producers' ability to
afford additional capital outlays for pollution control equipment.
3.1 INDUSTRY OVERVIEW
3.1.1 Industry Segmentation
The copper forming industry which employs approximately 43,000 employees
consists of approximately 176 plants that form copper and copper-base alloys
into intermediate and finished articles. This industry consists of two major
groupsbrass mills and wire mills. Table 3-1 provides information on the
consumption of copper by the major copper using industries. In 1982 these
two groups consumed about 86 percent of the approximately 2.6 million tons
of copperJL' Wire mills, which produce wire and cable products, accounted
for approximately 52 percent of the total consumption of copper. Brass
mills, which fabricate shapes such as sheet, strip, foil, plate, tube, pipe,
and mechanical wire consumed approximately 34 percent of the total. Other
industry segments include ingot makers and foundries. They accounted for
approximately 7 and 3 percent, respectively, of the total copper consumed.
The remaining 4 percent of U.S. copper consumption was accounted for by
powder mills and a variety of other industries»"L!
' Copper Development Association, Inc., Annual Data 1983.
2J For purposes of this economic analysis, the copper forming industry
includes only wire and brass mills. Other industries consuming copper
may be covered by other regulations, e.g., the regulation on foundries
covers copper foundries and copper ingot makers.
3-1
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TABLE 3-1. CONSUMPTION OF COPPER IN THE UNITED STATES, 1982*
MARKET SEGMENT
Copper Formers
Brass Mills
Wire Mills
Subtotal
Other Consumers
Foundries
Powder Plants
Ingot Makers
Other Industries**
TOTAL
COPPER CONTENT
(In Thousands
of Short Tons)
880.8
1,356.4
2,237.2
87.2
16.6
177.6
78.8
2,597.4
% TOTAL
33.9
52.2
86.1
3.4
0.6
6.9
3.0
100.0
*Preliminary.
**Include chemical, steel, and aluminum industries.
SOURCE: Compiled by JRB Associates from the Copper Development Association,
Annual Data 1983.
3-2
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3.1.2 Production Processes
The copper forming Industry is comprised of plants engaged in forming
basic shapes (plate, sheet, strip, rod, tube, and wire) from cast forms, such
as slabs, billets, and cakes. These plants employ a number of basic processes
to form the copper or copper alloy, alter its mechanical properties, and change
the condition of its surface. The basic forming operations are hot rolling,
cold rolling, extrusion, drawing, and forging.
The wire mill segment is involved in drawing bare wire and the production
of manufactured copper wire. Refined copper is heated, broken down by rolling
or extrusion, and rolled into rods. The rods are then put through dies to make
wire and cable of various sizes, ranging from thick electric power cables to
hairlike wires for electronics equipment. Other wire mill products include
high-voltage overhead electricity transmission cables, which are usually bare,
and manufactured copper wire products, which are typically insulated with a
variety of materials.
The brass mills segment of the copper forming industry consumes large
amounts of copper scrap and refined copper. Brass mill products are made
of both alloyed and unalloyed copper and can be grouped into three basic
shapes: sheet, rod, and tube. The primary alloyed items, brass and bronze,
are formed by melting scrap copper with primary copper and one of several
possible alloying meta.1s, such as zinc for brass and tin for bronze. Depend-
ing on the thickness to which they are rolled, brass sheets are classified
as either plates or strips. Brass rods are produced by drawing and those
that are subjected to additional drawing become mechanical wire (which is
different from electrical wire). Brass tubes are produced by extruding
copper in a variety of diameters, wall thicknesses, and configurations,
including square and rectangular.
3-3
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3.1.3 Production Trends
Table 3-2 provides information on various brass and wire copper forming
products over the 1979-1982 period. This table shows that the production of
brass and wire mill products dropped from a high of 6.1 billion pounds in 1979
to a low of 4.5 billion pounds in 1982. The record production in 1979 reflects
the high price for copper products that resulted from speculative pressures and
a strong demand for copper products in that year. These conditions, however,
did not prevail over the next three years, although the market did show some
slight improvement in 1981. The copper forming industry's output in 1982 was
the lowest since the recession of 1974-1975, when the industry only produced
4.6 billion pounds of copper products.
The industry's poor performance in 1982 was a result of the prolonged
period of high interest rates, the recession which depressed sales in the
end-use markets (especially in the automobile and construction industries),
and the excess world supply of copper. Production of copper forming products
is expected to grow over the 1983-1990 period as the economy recovers and as
sales in the end-use markets expand..£/
3.2 END-USE MARKETS
The demand for copper forming products is a derived demand. Copper
forming products are generally used in the production of final products and
are not the final products themselves. For example, the housing, automobile,
and electrical appliance industries use copper fabricated products to produce
a variety of items such as radiators, heaters, and utensils. As a result,
the demand for specific copper forming products depends on, and is influenced
by, the behavior of key industrial sectors or end-use markets in the economy.
There are five major end-use markets for copper forming products. In
order of importance the major market segments are:
A' See chapter 5 on the base-case projections.
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TABLE 3-2. PRODUCTION LEVELS FOR THE DOMESTIC COPPER FORMING INDUSTRY
(In Millions of Pounds)
Brass Mill Products
Sheet, Strip, and Plate
Mechanical Wire
Rod and Bar
Plumbing Tube and Pipe
Commercial Tube and Pipe
Total Brass Mill Products
Wire Mill Products
Bare Wire
Communication Wire and Cable
Other Wire Products
Total Wire Mill Products
Total Industry
1979
1,067
111
970
483
399
3,030
236
971
1,867
3,074
6,104
1980
873
79
816
414
340
2,522
240
850
1.708
2,798
5,320
1981
969
81
818
401
351
2,620
250
854
1,768
2,872
5,492
1982*
736
59
621
369
247
2,032
195
755
1.475
2,425
4,457
*Preliminary.
SOURCE: Copper Development Association, Inc., Annual Data 1983.
3-5
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Building and construction
Electrical and electronic products
Industrial machinery and equipment
Consumer and general products
Transportation equipment.
Table 3-3 shows copper consumption by major end-use markets in the United States
from 1978 to 1982. A brief description of each of these end-use markets is
given in the following paragraphs.
3.2.1 Building and Construction
The building and construction industry was the leading end-user of copper
products in 1982. This segment consumed approximately 31 percent of the pro-
ducts manufactured by the copper forming industry. Most of the products used
by this market are in the form of wire mill products. Copper has also been
widely used for plumbing, roofing, and decorative items in public buildings
and homes, largely because of its corrosion resistant properties.
3.2.2 Electrical and Electronic Products
The electrical and electronic products market segment was the second
largest end-user of copper forming products in 1982, representing about 29 per-
cent of domestic copper products consumption. Copper is a preferred material
for applications such as electrical lighting, wiring, and cable because of its
superior electrical conductivity and energy efficiency. Other applications
include telecommunications equipment, electric motors, generators, and numerous
miscellaneous electrical parts.
3.2.3 Industrial Machinery and Equipment
The industrial machinery and equipment end-use segment accounted for
approximately 18 percent of the 1982 U.S. copper consumption. This market
3-6
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TABLE 3-3. CONSUMPTION OF COPPER PRODUCTS BY MAJOR END-USE MARKETS*
DOMESTIC MARKETS
Building Construction
Electrical and Electronic
Products
Industrial Machinery and
Equipment
Consumer and General Products
Transportation Equipment
Total
(In Millions of Pounds
by Metal Weight)
1978
2,095
1,711
1,215
930
882
6,833
1979
2,107
1,820
1,229
994
846
6,996
1980
1,792
1,632
1,056
823
599
5,902
1981
1,884
1,750
1,148
806
635
6,223
1982**
1,571
1,461
912
653
486
5,083
% 1982
30.9
28.7
17.9
12.9
9.6
100.0
*Products from wire mills and brass mills account for most of these totals,
but products from foundries, etc., are also included.
**Preliminary.
SOURCE: Copper Development Association, Inc., Annual Data 1983.
3-7
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segment uses brass and wire mill products in fittings, valves, bearings, screws,
and pumps. Many of these parts are machined from extruded rod. Copper tubings
in this market segment are used for heat exchangers in refrigerators, air condi-
tioners, freezers, and water coolers.
3.2.4 Consumer and General Products
Consumer and general products accounted for approximately 13 percent of
domestic copper use in 1982. This market segment consumes copper to manufac-
ture durables such as washing machines, radios, televisions, phonographs, tape
recorders, cutlery, watches, clocks, microscopes, projectors, and many types
of gauges. Solid copper, brass, and bronze are also popular materials in
utensils, furnishings, jewelry, and other decorative items.
Miscellaneous uses of copper forming products include shell castings,
projectile fuses, and rotating bands for ordnance. Copper also has important
applications in coinage in the United States.
3.2.5 Transportation
In 1982 the transportation equipment sector accounted for 10 percent of
U.S. copper consumption. This industry segment uses copper in automobile,
truck, airplane, railroad, and marine components. For example, the automobile
industry alone uses approximately 25 pounds of copper per vehicle. Most of
this goes into radiators, air conditioners, power windows, seats, and brakes.
Copper is also used in producing heaters, defrosters, bushings, carburetors,
oil lines, and wiring in cars and other vehicles. Large quantities of copper
are used in diesel locomotives, railroad passenger cars, and switching and
signal devices.
3.3 TECHNOLOGICAL CHANGE AND SUBSTITUTION
The growth in the demand for copper forming products is influenced by
factors other than price and the end-use markets. These factors include:
3-8
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Direct substitution of one material for another
Technical change in end-use markets
More efficient use of copper.
Each of these activities affect the demand for copper and is considered here
to establish factors other than the regulation which may affect the industry
over the regulatory impact period.
3.3.1 Direct Material Substitution
Direct substitution of copper forming products from materials such as
aluminum, plastic, and steel is widespread. Aluminum has made great inroads
into traditional copper markets because of its similar properties, its lighter
weight, and its lower cost. The greatest replacement of copper by aluminum
has been in the transmission of electricity at high voltages. Some 40 percent
of the insulated power cable and over 90 percent of bare conductor applica-
tions are now provided by aluminum.A' Because of its weight advantage over
copper, aluminum-conductor, steel-reinforced cable has been used for most
long-distance power transmission lines for more than a decade. Aluminum
alloys are also being used as conductors on overhead transmission lines.
In the building industry, substitution of aluminum for copper has also
been increasing. The degree of substitution is directly related to the size
of the wire, i.e., the larger the wire, the greater the percentage of aluminum
building wire used. Substitution of aluminum for copper in small building
wire has been hampered because of safety problems in residential applications.
At current prices copper still remains the first choice for automotive wiring.
In areas where space in an existing design is not a problem, the use of the
larger sizes of aluminum wire will increase. Examples of such applications
Bureau of Mines, Mineral Commodity Profiles, Copper, September 1979,
3-9
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are battery cables, air conditioners, clutch coils, alternators, anti-skid
devices, horn coils, and some accessory motors.2.'
In addition, copper and aluminum are mutually interchangeable in some
heat exchanger applications. Copper has been used predominately in this area
because of its heat-transfer properties, corrosion resistance, ease of fabri-
cation, and ease of joining the various components by conventional soldering
techniques. The largest use of copper in this area, automobile radiators, is
vulnerable to aluminum. However, the inability to repair aluminum radiators
is inhibiting widespread application. Copper tubing is still the predominant
primary surface in heat exchangers for commercial refrigerators and freezers,
and for room, central residential, and commercial air conditioners. Aluminum
tubing is used in less than 10 percent of these products. Aluminum alloy
tubing in air conditioners may have twice the wall thickness of copper, but
still maintains a weight and cost advantage. However, extensive manufacturing
development would be necessary before aluminum could completely replace copper
in these applications. Other substitutes include plastics which have replaced
copper in many plumbing applications.
3.3.2 Technological Change in End-Use Markets
Technological substitution has also significantly impacted the demand
for copper. The most obvious development is that of microwave technology
and communication satellites, which have substantially reduced the demand for
undersea and long-distance copper cables. Current developments in fiber-optic
transmission technology for intracity communication transmission lines may
reduce or eliminate much of the market for copper wire products over the long
run. Recent uses of this new technology include a 633-mile fiber-optic system
connecting Sacramento and San Diego by Pa .ific Telephone and Telegraph. The
JL' Raymond F. Mikesell, The World Copper Industry (Baltimore: Johns Hopkins
University Press, 1979), pp. 160-163.
3-10
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Bell System has begun to install various fiber-optic systems. AT&T has
announced its plans to install 1,000 miles of fiber-optic cable within the
next three years, replacing the equivalent of 2,000 tons of copper.
3.3.3 More Efficient Uses of Copper
The demand for copper forming products has also been affected by the more
efficient uses of copper. For example, improved copper alloys have made it
possible to make thinner walled copper tubing, with the result that it requires
substantially less copper to produce a foot of copper tubing of the same inside
diameter today than it did ten years ago. Automobile radiator walls today are
made thinner, thus reducing the amount of copper used in radiators.
3.4 IMPORTS AND EXPORTS
Historically, the balance of trade in copper forming products has been
unfavorable to the United States. Domestic producers have little incentive
to develop an export market for their fabricated products primarily because
of subsidized production, tariff and nontariff barriers, and low costs of
labor and copper in foreign countries. As a result, the U.S. copper formers
have concentrated their marketing efforts on domestic customers.
In 1980 the competitive trade position of U.S. domestic suppliers in the
world changed drastically indicating the possibility of substantial improve-
ments in the trade balance. As shown in table 3-4, imports of copper mill
products dropped by 44 percent over the 1978-1980 period, from 492.6 million
pounds in 1978 to 294 million pounds of copper mill products In 1980. Mean-
while exports increased by approximately 50 percent, from 209.4 to 312 million
pounds over the same period. Thus, the trade deficits of 283.2 and 187 mil-
lion pounds in 1978 and 1979 changed to a surplus of 18 million pounds of
copper in 1980. Brass mill products accounted for the largest relative share
of imports and the lowest relative share of exports (see figure 3-1). On the
average, imports of brass mill products have been three times as great as
3-11
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TABLE 3-4. IMPORTS AND EXPORTS OF COPPER FORMING PRODUCTS, 1970-1980
(In Millions of Pounds)
YEAR
IMPORTS
EXPORTS
TRADE BALANCE*
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982**
202.4
249.2
297.7
308.7
257.6
195.3
353.5
359.4
492.6
436.0
294.0
492.8
391.9
69.9
77.9
84.3
127.8
161.4
137.1
130.1
165.5
209.4
249.0
312.0
284.4
206.3
-132.5
-171.3
-213.4
-180.9
-96.2
-58.2
-223.4
-193.9
-283.2
-187.0
18.0
-208.4
-185.6
*Calculated by JRB Associates from import and export data in the Copper
Development Association, Inc., Annual Data 1983.
**Preliminary.
SOURCE: Copper Development Association, Inc., Annual Data 1983.
3-12
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3-13
-------
exports, and exports of wire mill copper products were four times greater
than imports in 1980.
The changes that occurred in 1980 appear to be only momentary. Imports
of copper mill products in 1981 went up by almost 67 percent over the 1980
level, moving from 294 million pounds in 1980 to 490.1 million pounds in 1981.
Simultaneously, exports decreased by approximately 7.5 percent, from 312 mil-
lion pounds in 1980 to 288.5 million pounds in 1981. As a result, the trade
surplus of 1980 turned into a deficit of 201.6 million pounds in 1981. Brass
mill products still accounted for the largest relative share of imports and
the lowest relative share of exports. In 1981 exports of wire mill products
were three and a half times as large as imports. Significant changes worth
noting in the 1980-1981 period are: (1) the imports of brass mill products
almost doubled, moving from 248.1 to 442.6 million pounds and (2) exports of
brass mill products fell almost 15 percent, moving from 139.1 to 120.6 million
pounds. The key factors that led to the recent balance-of-trade deficits
include:
The worldwide recession which reduced the demand for
copper products in the developed and developing
countries and led to a fall in the world market price
of copper;
Market strategies of government-owned and -operated
copper producing operations in developing countries
that focus on maximizing foreign exchange earnings
and employment rather than profits. These countries
continue to produce and export their copper products
even in depressed markets; and
The rise in the value of the U.S. dollar which has
encouraged imports and discouraged exports of copper
forming products.
The adverse trade balance is likely to continue for several years, especially
if the U.S. dollar continues to remain strong. Furthermore, as additional
low-cost copper capacity comes on stream in the developing countries, U.S.
copper producers may find it harder to compete effectively in the domestic
and overseas markets.
3-14
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3.5 PRICES
3.5.1 Industry Price Determination
Historically, copper forming products were marketed at prices based on two
major price systems. One system consisted of producer prices set independently
by major primary producers in the United States and Canada. The second price
system consisted of prices related to quotations on a metal/commodity exchange.
The London Metal and the New York Commodity Exchanges (LME and COMEX) are two
organized metal exchanges (markets) where most international copper trading
occurs.
U.S. producers have traditionally sold their products at their published
prices. These producer prices were influenced by the COMEX and LME copper
prices, but they remained relatively stable over long periods of time. Gener-
ally, producer prices moved slowly and at times were above or below the
exchange or "outside market" price. During periods of strong demand, U.S.
producers tended to change their prices slowly and not by the magnitude often
experienced by the COMEX/LME prices. As a result, the producers' prices
have generally remained well below those set by the "outside market." This
practice gave their customers an advantage on raw material costs and retarded
substitution of copper by other materials. During periods of weak demand,
domestic U.S. producer prices were usually higher than the metal exchange
market prices as producers attempted to recover their costs of production.
This pricing behavior resulted in the existence of a two-tier price
system for copper products which was characterized by a wide divergence
between the "outside market" price for copper (i.e., the LME price) and the
domestic producer price. This system seemed to work as long as the market
did not weaken. However, since 1975, a combination of factors appears to have
had substantial restraining influence on the pricing decision of the domestic
primary producers. Between 1975 and 1978, the world copper market weakened,
and "outside market" prices, or imported prices, fell substantially below
3-15
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those of the U.S. producers. An increasing number of U.S. copper consumers
switched their purchases to the lower priced copper fabricated product imports.
This situation climaxed in the new producers' price policies of mid-1978 when
key U.S. producers decided to base their prices on the daily quotes of COMEX.
Since 1978 Kennecott Copper and Anaconda Co. have based their spot prices on
the daily quotes of the nearest copper futures contracts on COMEX, plus a fixed
premium. Other producers have maintained a fixed-price system, but competitive
forces have compelled them to change their quotes very frequently. In effect,
most companies' prices have become very responsive to changes on the commodity
exchange.
3.5.2 Recent Copper Price Trends
In February 1980 copper prices reached a high of $1.45 per pound. This
high price resulted from (1) the significant decline in copper stockpiles in
1979 and (2) speculation in a. number of metals markets in early 1980. How-
ever, by early April 1980 major producers were charging $0.91 to $0.95 a
pound for refined copper, down from February's (1980) domestic high of $1.45.
This downward trend continued during the 1981-1982 recession. U.S. producer
prices during 1982 averaged $0.74, down 12 percent from the average 1981
price. The major factors influencing this price drop in 1982 included:
The worldwide recession;
The tight money policy of the Federal Reserve which
kept interest rates high; and
Increase in overseas copper producing capacity.
We can expect increases in the price of copper products as the interest
rates fall and the economy recovers. Both of these factors will increase the
demand for copper products and as the large inventories of copper products
decline the price should begin to rise.
3-16
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3.6 SUMMARY OF MARKET DESCRIPTION
The analysis suggests that the copper forming industry is involved in
producing products that are very sensitive to the behavior of the overall
economy. In periods of expansion, the industry's end-use markets expand and
the supply, demand, and prices for copper forming products increase. On the
other hand, during periods of recession and high interest rates, the end-use
markets contract and the output, demand, and prices of copper products fall.
Substitution from other products and new technologies do exist, but they are
not significant enough to reduce the growth of the copper industry market.
In 1980 the export of wire mill products increased while imports of some
copper forming products stabilized or decreased slightly. However, this trade
surplus reversed back to a trade deficit in 1981 and 1982, as the U.S. dollar
strengthened and world prices fell. There are indications that the economy
is experiencing a recovery from the 1981-1982 recession. This would stimulate
the production of domestic copper products in the future, as the demand and
price situation improves.
3-17
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4. INDUSTRY STRUCTURE AND PERFORMANCE
4.1 OVERVIEW
The impact of the effluent limitations and standards on the copper
forming industry will be influenced by the industry (market) structure and
prevailing market conditions. In general, the performance of a firm (parti-
cipant) in an industry is determined by the conduct (i.e., the pricing and
production strategies) of the firms in the market. The firm's market conduct
is, in turn, dependent upon the market structure and business conditions pre-
vailing at the time. Certain market structures (e.g., monopoly) imply that
the participants have control over the market and can set prices and quantity
in such a way that profits are maximized. Consequently, the monopolist would
be expected to have higher profit margins and would be able to absorb added
costs with less financial difficulty than other firms (i.e., firms in compe-
titive markets).
This chapter examines the market structure, conduct, and financial per-
formance of the copper forming industry. The results of this examination
are used in chapters 5 and 7 to estimate how the industry would behave when
faced with the decision to invest in the recommended pollution control equip-
ment. The various types of industry structure and their role in determining
economic impacts are discussed. The observed market structure of the copper
forming industry is described and key financial ratios are analyzed to estab-
lish the profitability and capital structure of the industry.
4.2 TYPES OF MARKET STRUCTURES
The range of market structures is bound by perfect competition and
monopoly. The perfectly competitive industry is characterized by:
4-1
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A very large number of participants (buyers and
sellers) where each participant accounts for an
imperceptible share of the market
A homogeneous or standardized product
Participants that are well informed about product
quality and each other's prices
Relatively easy exit and entry into the industry.
In a perfectly competitive market no individual firm has influence over the
market price. The price is given to the firm and the firm decides only how
much to produce and sell at the prevailing price. Because each firm's output
is an imperceptible part of the total output of the industry, output decisions
have no influence on the market price. Also, since the products of the fi,rms
are perfect substitutes for one another, the price elasticity of demand facing
the firm is infinite. For these reasons, the price that the firm observes is
determined by the interactions of supply and demand forces in the entire market
where all firms participate.
The market structure at the other end of the spectrum is monopoly, which
is characterized by:
One firm in the industry
No close substitutes for the product
Substantial barriers to entry.
The latter characteristic is important for the maintenance of monopoly power
in the long run. Barriers to entry must exist if the monopolist can remain
the sole producer of goods in the long run, while at the same time earning
large profits which induce entry. Barriers to entry may exist because of
(1) weak demand conditions, (2) control of raw materials by one firm, (3)
legal and institutional factors imposed by governments, (4) scale economies
that satisfy the entire market, (5) large capital requirements, and (6) the
lack of technological expertise by outsiders.
4-2
-------
In general, the monopolist can fix price and let demand conditions deter-
mine output or he can fix output and let demand conditions determine price.
He maximizes his profits at the output at which his marginal revenues equal
marginal costs. For any given quantity of output sold, the marginal revenues
and costs will be less than price, because the demand curve of the industry
slopes downward. By way of contrast with the perfectly competitive firm,
the monopolist may (1) charge a higher price, (2) produce fewer units, and
(3) operate a less than optimal scale plant.
Between these two extremes are other forms of market structures. Closely
related to the perfectly competitive market is monopolistic competition.
This market structure is associated with industries in which there are a great
number of firms, but the product is somewhat differentiated (e.g., the toqth-
paste industry). As a result, the demand facing the individual firm is not
perfectly elastic, but its price elasticity is high due to the existence of
close substitutes produced by other firms in the industry. Firms in this
market attempt to create separate markets for their products through advertis-
ing and product design, in order to have some control over their price and
output decisions. To the extent that they can create a separate market for
their products, their price will be higher and their output lower than under
a perfectly competitive market structure. Unlike monopoly, which has signifi-
cant barriers to entry, monopolistic competition has insignificant barriers
to entry.
Another market structure within this spectrum is the oligopolistic market,
which is characterized by a few sellers. There are at least five different
types of oligopoly models that are recognized in the economic literature. How-
ever, the characteristic that is common to them all is their small numbers
which force them to recognize the interdependence of their activities. One
seller recognizes that his actions affect other sellers and the other sellers
are likely to react in some fashion to his activities. Since there is no
way to determine, a priori, the interactions that may result because of a
decision, the market solutions to this type of market structure are indeterminate.
4-3
-------
The pricing behavior of this market structure is sometimes characterized by
price leadership and followership, by long periods of stable prices, or by
periods of price wars to capture market share. The airline industry provides
a good example of this type of market structure.
Market structure influences pricing policy in an industry and, hence, the
financial condition and performance of individual firms in the industry. In a
perfectly competitive market, firms realize normal profit, i.e., profits approach
the market rate of interest plus a premium for the risk associated with that
business. In a monopoly market, the firm has market power and can earn a
greater profit than under perfect competition. The profits of the firms in
the other market structures are somewhere between these two market extremes.
4.3 MARKET STRUCTURE OF THE COPPER FORMING INDUSTRY
Market structure can be assessed by evaluating the following four factors:
(1) buyers and sellers concentration, (2) vertical integration, (3) product
differentiation, and (4) ease of entry into the industry.i/ Each of these
factors in turn affect the individual firms' performances and price/output
decisions.
4.3.1 Conceptual Problems in Determining Market Structure
It is difficult to analyze the financial condition and performance of
participants in the copper forming industry in a precise manner because of
the heterogeneity of the units (i.e., diverse nature and size) and because of
the ownership relationships. The problems arise because some of the partici-
pants are subsidiaries of large corporations that are involved in producing
and selling products unrelated to copper forming (e.g., oil companies). Others
are involved in earlier stages of copper manufacture such as mining, smelting,
i/ James V. Koch, Industrial Organization and Prices (Englewood Cliffs, N.J.:
Prentice-Hall, Inc., 1974).
4-4
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and refining. To overcome these problems and alleviate some of the biases
that these conditions create in analyzing the performance of the participants
in the copper forming industry, the analysis was disaggregated into three
broad categoriescorporate, reporting entity, and plant. This grouping pro-
vides a more precise definition of the participants in the industry and allows
foe a meaningful analysis of the financial condition of the industry.
The financial condition at the corporate level provides information on
the overall economic and financial viability of all the entities that make
up the corporation and its ability to incur debt or finance new investment
in plant, machinery, and equipment. At this level, the analysis is not con-
cerned with the copper forming manufacturing facility, per se. It is mainly
concerned with the overall financial picture of the entire company, whether
it be a copper producing company or an oil conglomerate that owns a copper
forming plant.
The analysis at the reporting entity level provides information on the
financial condition of the unit to which individual copper forming plants
report directly. The unit is defined as the management structure that most
clearly reflects copper forming operations and only copper forming operations.
This unit may be a subset of the parent corporation which may also be involved
in other businesses (e.g., an oil conglomerate may own several copper forming
plants which are managed by a separate unitthe reporting entity). At this
level of analysis the unit or reporting entity that is most closely related
to the copper forming plants is identified and analyzed.
Finally, the analysis at the plant level examines the profitability of
individual copper forming plants. The disaggregation at this level is important
because it is doubtful whether a corporation (whether a copper company or an oil
company) would continue to subsidize and/or invest further in a sector of its
organization that was not making profits over the long run, even though the
parent company was making large profits or had the cash flow to invest in pol-
lution control capital equipment.
4-5
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4.3.2 Industry Concentration
A measure of the industry concentration provides information on the number
and size distribution of sellers in the market. It indicates how much of the
market sales (or some other unit of output measurement) is held by a portion
of firms in that market. For example, it provides the percentage of sales
accounted for by the 4, 8, 20, and 50 largest firms in that market. Generally,
when concentration is low, there is a large number of firms, and each individ-
ual firm's share of the market will be so small that no individual firm would
be able to influence prices significantly (i.e., firms are price takers, not
price setters). On the other hand, in markets where concentration is high,
the pricing and production decisions of any one firm will have some effect
on the pricing and output of other firms in the relevant market. Consequently,
price and output determination by the firms will be interdependent.
Table 4-1 summarizes concentration ratios for the copper forming reporting
entities and corporations (including single-plant firms) responding to the 308
Economic Survey..?/ Based on this survey, the largest four reporting entities
in 1979 accounted for approximately 52 percent, and the largest eight reporting
entities accounted for 74 percent of sales in the industry.
Although the concentration ratios at the reporting entity level are higher
than those of some manufacturing industries such as apparel and electronics,
they are low compared to other manufacturing industries, such as automobile,
steel, and even other stages of copper manufacture. For example, six companies
in the copper refining segment controlled over 90 percent of the U.S. refining
capacity in 1973..1' Considering that the concentration ratios for the entire
U The concentration ratios shown in the table are greater than those for the
entire copper forming industry because they are calculated from the survey
responses which do not include the entire industry.
.1' Raymond F. Mikesell, The World Copper Industry (Baltimore: Johns Hopkins
University Press, 1979), pp. 31-33.
4-6
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TABLE 4-1. INDUSTRY CONCENTRATION RATIOS
NUMBER OF
PARTICIPANTS
Top 4
Top 8
Top 16
Total**
REPORTING ENTITY***
CONCENTRATION
RATIO (Z)
51.7
73.9
93.3
100.0
CUMULATIVE
1979 SALES*
($000)
2,965,620
4,237,793
5,352,251
5,737,039
CORPORATION INVOLVED
IN COPPER FORMING
CONCENTRATION
RATIO (%)
69.4
82.1
96.0
100.0
CUMULATIVE
1979 SALES*
($000)
32,709,911
38,706,266
45,267,312
47,161,297
*Not all of the sales of these reporting entities and corporations are
due to copper sales.
**A total of 41 reporting entities and 43 corporations.
***"Reporting entity" for purposes of this analysis is defined as the manage-
ment structure that most clearly reflects copper forming operations and
only copper forming operations. Some plants report directly to a corpora-
tion and the data from that corporation may not properly be considered
data from a "reporting entity" because the corporation may include nort-
copper forming operations.
SOURCE: Compiled from data provided in the 308 Economic Survey.
4-7
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industry (including nonrespondents to EPA's industry survey) would be lower,
the industry's concentration ratios do not strongly support the hypothesis
that noncompetitive market conditions exist.
4.3.3 Integration
The degree of integration is an important determinant of the industry's
conduct and performance. For example, in a firm that is highly vertically
integrated, material costs may be somewhat insulated from the market demand
forces at intermediate stages of production. This does not mean that producers,
in making price and output decisions, can ignore market forces. Rather, it
means that producers have control over some, but not all, of the relevant
demand forces emanating from downstream markets.A'
In addition, the existence of a high degree of integration in a particular
market can constitute an effective barrier to entry into the industry. For
example, a potential entrant to the copper forming stage could face a dilemma
if most of the existing firms are highly integrated. Suppose that a firm
enters the copper forming industry when 90 percent of the production of both
copper ingots and copper forming products are controlled by vertically inte-
grated firms. If the firm buys from a nonintegrated ingot producer, the
copper forming firm can depend on only 10 percent of the industry's ingot
capacity and might find itself dealing in a thin market. The entrant avoids
this problem, of course, if the firm enters as an integrated producer. But
that strategy may not be possible if one or more of the production stages is
large-scale and capital intensive. The entrant must choose between the costs
of integrated entry (high capital investments in fixed assets) and the risks
of unintegrated entry so as to minimize his disadvantage. The existence of
such barriers to entry into the industry is important as it affords opportu-
nities for firms in the industry to indulge in the noncompetitive pricing
behavior and production behavior of the existing producers.
' Buyer concentration is important because copper fabricated products are
intermediate goods rather than goods going to final consumers. In times
of recession, strong buyers can force prices below average costs.
4-8
-------
Several of .the domestic primary producers participate either directly or
through subsidiaries in all five stages of production: mining, milling, smelt-
ing, refining, and fabrication (i.e., copper forming). The principal domestic
producers such as Anaconda (ARCO), Inspiration, Kennecott (Standard Oil of
Ohio), ASARCO, Magma, Phelps Dodge, and White Pine are all integrated. Of
these, Phelps Dodge, ASARCO, Kennecott, and Anaconda control copper forming
facilities that account for 50 percent of domestic copper consumption. This
is a high level of integration but may not be an overriding influence on price
and output decisions because of the existence of significant capacity at other
domestic and foreign independent producers and because of other market factors
discussed below.
Kennecott, the largest U.S. copper producer, is vertically integrated
downstream into copper forming through its wholly owned subsidiary, Chase
Brass and Copper. Atlantic Richfield Co. (ARCO) participates through Anaconda
Minerals, which mines copper, and Anaconda Industries, which fabricates brass
sheet, strip, and tube. These subsidiaries consume more copper than is pro-
duced by Anaconda. Phelps Dodge produces wire, wire rod, and copper tubes at
facilities that consume about 30 percent more copper than the primary produc-
tion at Phelps Dodge. Similarly, Cities Service owns New Haven Copper and
Chester Cable; Cyprus mines (AMACO) owns Cyprus Wire and Cable; and El Paso
Natural Gas owns Narragansett Wire. While ASARCO does not own copper forming
capacity directly, it owns 33 percent of RevereJL'
The copper forming divisions, subsidiaries, and affiliates of the major
copper producers are believed to account for roughly 35 to 55 percent of the
total copper forming capacity. Of the three major producers, Anaconda appears
to consume the highest percentage of its own copper, Phelps Dodge the next
highest, and Kennecott the least. However, the vagaries of the market from
A' Economic Impact of Environmental Regulations on the United States Copper
Industry (prepared for the U.S. Environmental Protection Agency, Washington,
D.C., by Arthur D. Little, Inc., January 1978), p. 111-24 and Copper,
Supplement to American Metal Market, September 28, 1981, p. 8A.
4-9
-------
year to year and the fact that companies buy and sell to and from each other
complicate the picture.J§/
The degree of integration in this industry influences the price-output
decisions of the companies in several ways. For example, integrated companies
consider the copper forming stage an outlet for the primary copper produced.
For this reason, companies have typically endeavored to maintain low prices
on copper forming products, relying on the sale of the primary metal for the
bulk of their profits. The largest expense for most independent copper
formers is the cost of copper; thus, profitability depends substantially on
the copper former's markup or spread. As a result, there is often a struggle
in the market. The integrated producers seek to keep product prices on their
copper forming products low enough to boost demand and provide an expanding
market for the more profitable primary and refined output, while the indepen-
dent copper formers strive to raise their prices and margins. Both groups
prosper in a high demand-high price market such as in 1974, but independents
suffer less in recessionary period-low price markets such as in 1975, because
they can benefit from the lower raw materials costs. During recessions the
integrated producers can have substantial sale and earning losses because of
their high fixed costs and reduced operating rates, as well as reduced prices.
4.3.4 Product Differentiation
Product differentiation is an important determinant of market share and
price/output decisions in some industries. Some firms may significantly
influence their profit margins by differentiating their products (i.e., by
creating separate markets) which enhances their market share or provides them
with the market power to raise prices. However, product differentiation does
not play an important role in the copper forming industry. Copper forming
products are relatively homogeneous, in that they have well-defined physical
jj/ Economic Impact of Environmental Regulations on the United States Copper
Industry, op. cit., p. IV-13.
4-10
-------
and performance properties that conform to generally accepted standards in
the industry. For this reason, copper formers' efforts in advertising and
product differentiation are small.
4.3.5 Barriers to Entry
A barrier to entry is simply any advantage held by existing firms over
those firms that might potentially produce in a given market. Examples of
barriers to entry include the control of sources of key raw materials by
existing companies, large capital and technological requirements, the cost
and source of financing investment, and vertical and horizontal integration
of existing companies.U For example, the size of the investment that is
necessary to construct a nuclear power plant and the technology that is
required by individuals entering that area may be significant deterrents to
entry.
As described in section 4.3.3, vertical integration and access to captive
sources of raw materials represent only minor potential barriers for copper
formers. Moreover, this industry is not as capital intensive as other manu-
facturing industries or other stages of copper manufacturing, such as smelting
and refining. For these reasons, barriers to entry into the industry are not
a significant factor in price determination for copper forming products.
Another factor that has affected the copper forming market structure is
the increasing number of new firms and the growing level of production in
foreign countries. In recent years foreign countries have been moving into
the downstream stages of copper manufacturing and building copper forming and
processing plants near the source of the raw material. However, because of
the growing demand for copper products abroad and the change in pricing
policies of U.S. copper formers over the past four years, the impacts of
these overseas developments have been mitigated to some degree.
U J. S. Bain, Industrial Organization (New York; John Wiley and Sons, 1968),
pp. 251-301.
4-11
-------
4.3.6 Summary of Industry Structure Characteristics
After reviewing the four basic industry structure measures, it can be
inferred that this industry is characterized by (1) relatively moderate four-
firm and eight-firm concentration ratios; (2) a moderate degree of vertical
integration which has some, but not overriding, effects on market price for-
mations; (3) a low degree of product differentiation; and (4) moderate entry
requirements. For these reasons a relatively high degree of competition
exists among the participants of this industry.
As discussed in section 4.2, competitive industries are expected to earn
"normal" rates of profit. Thus, review of industry financial ratios serves
a useful function of checking the conclusions regarding market behavior. In
s
the next section, the financial performance of the industry is examined and
found to support the conclusion that a fairly competitive market structure
operates in the industry.
4.4 FINANCIAL PERFORMANCE OF THE COPPER FORMING INDUSTRY
This section describes the financial condition and performance of parti-
cipants in the copper forming industry. The financial analysis focuses on
measures of profitability, capital structure, and productivity. Measures of
these variables provide information on the financial status of the partici-
pants in the copper forming industry and whether they can raise the required
capital for expenditures in pollution abatement equipment, from retained
earnings (internally), or from stock or bond markets (externally). Further-
more, they provide indicators of the financial viability (including plant
closure potential) of participants under present circumstances, and in the
event of the EPA effluent regulation being imposed.
4-12
-------
The analysis examines the actual performance of 43 copper forming corpo-
rations^' and 41 reporting entities?.' that operate 105 copper forming plants.
Key financial ratios for the participants in this industry are evaluated over
time by entity and firm size. Evaluating the data over a period of time is
important because it mitigates the potential for distortions caused by unusual
years when losses or gains may have been large. Reviewing the data by entity
size provides information on whether size plays an important part in deter-
mining performance, i.e., whether economies or diseconomies of scale exist.
The information in this section also provides useful benchmarks for comparing
the performance of individual participants later in the analysis of high
impact plants.
4.4.1 Financial Status of Copper Forming Companies
4.4.1.1 Profitability at Corporation Level
Table 4-2 provides a summary of profitability measures for the corpora-
tions involved in copper forming. The data suggest that the performance of
the corporations as a whole has been poorer than that of related industries.
Over the period of analysis, the profit margins after taxes increased slightly
from about 2 percent in 1976 to 2.5 percent in 1979. The returns on net worth
(equity) and assets after taxes were low but showed steady improvements over
the 1976-1979 period. The industry averages for these two financial measures
increased from approximately 8.5 and 7.4 percent in 1976 to 11 and 10.3 per-
cent in 1979, respectively. Despite the recovery during this period, the
2.1 For purposes of this analysis, copper forming corporations include not only
oil corporations and other conglomerates whose subsidiaries include copper
formers but also smaller corporations whose only operation is copper forming.
I/ "Reporting entity" for purposes of this analysis is defined as the manage-
ment structure that most clearly reflects copper forming operations and
only copper forming operations. Some plants report directly to a corpora-
tion and the data from that corporation may not properly be considered
data from a "reporting entity" because the corporation may include non-
copper forming operations.
4-13
-------
TABLE 4-2. KEY PROFITABILITY RATIOS FOR CORPORATIONS
PERFORMING COPPER FORMING
(Percentage)
CORPORATE-LEVEL FINANCIAL RATIOS
Profit margin before taxes (returns on sales)
Profit margin after taxes (returns on sales)
Return on equity before taxes
Return on equity after taxes
Return on assets before taxes*
Return on assets after taxes*
1976
4.12
1.96
17.17
8.46
14.86
7.41
1977
4.54
2.33
16.30
9.30
14.01
7.09
1978
4.64
2.70
20.06
13.37
15.24
8.82
1979
5.74
2.49
23.62
11.01
24.13
10.31
* Fixed assets.
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
4-14
-------
profitability of the corporations involved in copper forming is still below
the average of the total fabricated metal products industry. The profit
margin and return on equity after taxes for the fabricated metal products
industry as a whole in 1978 were 4.7 and 16 percent, respectively.12/
Table 4-3 shows the four-year average profitability ratios for these cor-
porations disaggregated by size. The data reveal that the the profit margin
after taxes for the large corporations is 4.5, compared to 2.5 for all corpo-
rations involved in copper forming. The return on equity and return on assets,
however, show mixed results. Return on assets for large corporations is sig-
nificantly greater than for small ones, but the reverse is true for return on
equity. Larger firms appear to have higher profit margins but lower asset-
turnover rates. Other than these observations, there does not appear to be a
direct relationship between profitability and size. The superior performance
of the larger corporations may not necessarily reflect the performance of large
firms in the copper forming segment, per se, because the larger firms are gene-
rally conglomerates including such businesses as petroleum and coal, and copper
forming is only a subsidiary. The analysis at the reporting entity level
(section 4.4.2) provides further insights into profitability and whether size
plays a part in the performance of the copper forming segment of these companies.
4.4.1.2 Capital Structure Analysis at the Corporation Level
The capital structure is examined to provide information on the ability
of the corporations involved in copper forming to finance initial capital
outlays. Six key ratios that provide a profile of the industry debt structure,
leverage, and ability to finance current debt are summarized in table 4-4.
The first measure, the debt coverage ratio, is the ratio of net profits before
interest and taxes to interest expense. Based on the 308 Economic Survey data,
this ratio is high for the industry as a whole. A high ratio suggests that
the corporations are able to service their debts in the near term.
Federal Trade Commission, Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations, First Quarter 1979.
4-15
-------
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4-16
-------
TABLE 4-4. KEY CAPITAL STRUCTURE FINANCIAL RATIOS OF
CORPORATIONS INVOLVED IN COPPER FORMING
(Percentage)
CORPORATE LEVEL FINANCIAL RATIOS
Debt coverage ratio
Long-term debt/ total capitalization
Debt/equity
Capital expenditures/ sales
Pollution capital expenditures/ sales
Assets/sales
1976
697.88
31.39
51.78
3.90
0.93
40.28
1977
680.33
33.90
54.62
5.35
0.66
41.39
1978
850.28
36.60
67.33
4.99
0.41
37.22
1979
931.36
33.68
64.49
4.79
*
0.37
32.80
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
4-17
-------
The debt/equity and the long-term debt/total capitalization ratios provide
measures of credit-worthiness and financial risk involved in the manufacture of
copper forming products (see table 4-4). The debt/equity ratio provides a
measure of debt to net worth of the corporation, while the long-term debt/total
capitalization provides a measure of the long-term capital structure of the
corporations. These ratios indicate that the industry debt structure has been
deteriorating since 1976. In 1979 the debt/equity ratio of the corporations
reached 64.5 percent.
The fourth parameter, the capital expenditures to sales ratio, is rela-
tively low for the industry. This is expected because of the slow growth of
this industry and the longevity of the capital equipment. Investment in other
pollution abatement equipment, the fifth parameter, is also low for the indus-
try as a whole. Since 1976 there has been a decline from 0.9 percent of sales
for these types of expenditures to 0.4 percent of sales in 1979. The assets
to sales ratio, the sixth parameter, is high, but there are indications that
the industry as a whole has been utilizing its assets in a more efficient
manner over the four-year period. The assets/sales ratio dropped from 40.3
percent in 1976 to 32.8 percent in 1979.
Table 4-5 provides a profile of the capital structure of corporations by
size classification. The debt coverage ratio of the medium-sized corporations
appears to be in a better position than the rest of the corporations in the
industry. The other data show no clear pattern in financial health related
to corporate size.
4.4.2 Financial Status of Reporting Entities
The financial profile of the reporting entities is provided in this sec-
tion. The analysis at this level is important because it examines the unit or
corporate structure that is most closely related to the copper forming opera-
tions. As stated earlier, copper forming is carried out by many different types
of companies. Some copper forming operations are segments of large vertically
4-18
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integrated metal products companies; some are subsidiaries of other types of
large corporations (e.g., subsidiaries of oil companies). By identifying the
reporting entity and analyzing this segment, a better understanding of the
financial condition of the copper forming industry segment is realized.
Two important groups of profitability ratios are analyzed. The first
group shows profitability in relation to the long-term investments of the
copper forming reporting entities: return on gross and net assets. These
ratios provide information on the earning power of the reporting entities'
assets. The second group of ratios shows profitability in relation to sales
profit margins before taxes and profit margins before taxes and metal input
expense (gross profit margin). Examination of these two ratios at the report-
ing entity level provides greater insights into the efficiency of the copger
forming operations than by examining a single ratio. For example, if the
gross profit margin (i.e., profit margin before taxes and the cost of metal
inputs) is unchanged over a period of years, but the profit margin before
taxes has declined over the same period, then this change can be attributed
to the higher costs of the metal inputs. On the other hand, if the gross
profit margin falls, then the cost of the metal inputs in relation to sales
is declining. This type of analysis is especially important when vertically
integrated plants are involved, since integrated plants can benefit or suffer
depending on the price of the metal input, especially during periods of high
or low demand for copper forming products.
Table 4-6 provides a summary of the average profitability ratios for 43
copper forming reporting entities over the 1976-1979 period.JL!/ The data
suggest that the profitability of the reporting entities has been improving,
although they suffered slight profit losses in 1977. For example, the return
on gross assets dropped from 19.2 percent in 1976 to 18.6 percent in 1977
but recovered to 21.8 percent in 1978, and by 1979 the return on gross
A copper forming reporting entity may include one or more copper forming
plants.
4-20
-------
TABLE 4-6. KEY FINANCIAL RATIOS FOR THE COPPER FORMING REPORTING ENTITIES
(Percentage)
FINANCIAL RATIOS
Return on Gross Assets
Return on Net Assets
Profit Margin Before Taxes (Net)
Profit Margin Before Taxes and Cost of Metal
Input (Gross)
1976
19.17
36.41
6.01
13.01
1977
18.56
36.92
5.19
11.95
1978
21.82
45.17
6.06
13.06
1979
23.67
49.37
6.11
13.60
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
4-21
-------
assets reached 23.7 percent. The profit margins for the reporting entities
also shared a similar trend. The reporting entities experienced a small
decrease in profit margins in 1977, but their profitability improved from
5.2 percent for that year to 6.1 percent in 1979. The spread between the
profit margin before taxes and the profit margin after taxes plus the cost
of metal inputs remains relatively constant, suggesting that the metal input
price did not fluctuate significantly over the period of analysis.
Table 4-7 summarizes the data that are available on the profitability of
the copper forming reporting entities by size classifications. Four-year
averages are analyzed to mitigate the effects of annual variances in perform-
ance. The data indicate no reason to expect variances in financial performance
because of entity size. Moreover, they indicate that there are differences in
the operating characteristics among the entities that cannot be explained by
the given data. These differences include such items as asset turnover rates,
metal costs, depreciation schedules used, and product mix.
4.4.3 Plant-Level Assessment
Although a more comprehensive analysis at the plant level is presented
in chapter 7, this section briefly reviews some important characteristics of
the copper forming plants. It is estimated that there are about 176 plants
in the copper forming industry, which employ approximately 43,000 people.
These plants can be divided into two basic categories: "brass mills" that
are involved in producing brass and bronze products (sheet, plate, rod and
bar, etc.) and "wire mills" involved in producing only copper wire. A sample
of 99 of these plants (see table 4-8) indicates that there are many small-
to medium-sized plants in the industry. Only 7 of the 99 copper forming
plants responding to the 308 Economic Survey had over 1,000 employees, whereas
78 of the plants had less than 500 employees. The average annual production
of the plants was approximately 60 million pounds of copper.
4-22
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TABLE 4-7. PROFITABILITY ASSESSMENT BY SIZE OF THE REPORTING ENTITY, 1976-1979*
(Percent)
TOTAL 1979
SALES**
($ Millions)
Very Large
$2,000 - $500
Large
$499 - $100
Medium
$99 - $25
Medium- Small
$24 - $5
Small
under $5
All Entities
RETURN ON
GROSS ASSETS
22.29
15.68
25.38
21.35
22.23
20.79
RETURN ON
NET ASSETS
43.05
31.53
44.40
47.99
45.90
41.88
PROFIT MARGIN
BEFORE TAXES
6.40
4.32
7.00
7.05
4.85
5.85
PROFIT MARGIN
BEFORE TAXES
AND METAL INPUT
8.68
10.73
16.55
12.24
10.72
12.96
*Average financial ratios for the 1976-1979 period.
**Not all of these sales are due to copper forming. 1979 dollars.
SOURCE: Compiled by JRB from data provided in the 308 Economic Survey.
4-23
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TABLE 4-8. SIZE DISTRIBUTION OF SAMPLE OF COPPER FORMING PLANTS, 1979
NUMBER OF EMPLOYEES
1-24
25 - 49
50 - 99
100 - 199
200 - 299
300 - 399
400 - 499
500 - 999
> 1,000
TOTAL IN SAMPLE
NUMBER OF
PLANTS
6
4
13
25
15
8
7
14
7
99**
AVERAGE
PRODUCTION
(000 Ibs)*
2,303
7,868
14,888
23,085
30,563
60,849
151,994
153,791
164 ,404
60,406
*Average per plant production for employment-size classification.
**176 plants in total but only 99 of the copper forming plants responding
to the Section 308 Economic Survey provided enough data to be included
in this table. Four additional copper forming plants which responded to
the 308 Economic Survey did not provide the data needed for this table.
SOURCE: Compiled by JRB Associates from data provided in the 308 Economic
Survey.
4-24
-------
4.5 CONCLUSIONS
The analysis of the copper forming industry structure and performance
reveals that the industry is relatively competitive. Although a large seg-
ment of the market is vertically integrated, the structure of the industry
is such that individual firms are not in a position to control or influence
market forces or prices in a perceptible manner. Market concentration is
moderate and entrance into the industry is relatively easy. The empirical
data on the industry's performance confirm this finding. The financial
data reveal that the industry as a whole is earning profits below that of
comparable industries, although not alarmingly low. Moreover, the industry
appears to be in a position to finance moderate levels of additional debt.
The results also suggest that economies of scale are not an important factor
in this industry.
4-25
-------
5. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of economic conditions that are likely
to exist in the copper forming industry markets through 1990. The baseline
projections assume compliance with all existing environmental regulations.
These baseline projections assume that no new water pollution control require-
ments mandated by the Clean Water Act, including the recommended effluent
guidelines, are imposed on the copper forming industry during this period.
The demand and supply projections and parameter estimates of the equations
developed in this section will be used together with other information,
including estimated compliance costs, to assess the effects of the effluent
control requirements on future industry conditions.
The baseline projections in this report provide a general point of ref-
erence from which the relative and absolute magnitudes of the impacts from
EPA's copper forming regulation can be measured. These projections provide
a plausible picture of future developments and are to be used as a benchmark
for comparison, and not as a comprehensive, authoritative forecast of future
industry conditions. However, even though minor changes to the baseline
projections may result from more recent data and sophisticated forecasting
techniques, they are not likely to significantly alter the overall conclusions.
Our basic approach began with the development of explicit demand and
supply functions that explain the behavior of the copper forming market over
the 1960-1979 historical period. The forecasts of future levels of demand
and supply for the major product groups are then calculated based on the
established historical relationships and on projections of the explanatory
variables in the demand and supply functions. Supply factors were also
assessed to determine if there would be any significant changes in the level
of capital requirements or growth in the number of plants over the regulatory
impact period.
5-1
-------
5.1 DEMAND-RELATED FACTORS
The demand for copper forming products refers to the quantity buyers are
willing to purchase at different prices, everything else being equal. However,
an analysis of demand requires a distinction between the uses and the demand
for copper forming products. These variables are not definitionally identical.
Uses of copper refer to the disposition of copper on hand (e.g., copper is
used in the transportation, building, and communication industries). On the
other hand, demand for copper forming products refers to specific types of
copper products (e.g., copper sheets, plates, tubes). Moreover, since data
on copper forming product flows are usually collected in terms of production,
consumption by end-use, inventories, imports, and exports, it is necessary to
determine the annual demand for copper forming products.- The copper forming
products' demand is estimated by adding imports to, and subtracting exports
and changes in inventories from, the annual production figures. Using this
approach, the quantity demanded is estimated (i.e., point estimates of demand
over time) for four copper forming product categories: sheet, strip, and
plate; rod, bar, and mechanical wire; tube and pipe; and wire mill products.
5.1.1 Theoretical Considerations
There are a number of factors that must be considered when analyzing the
demand for copper forming products. First, the demand for copper forming
products is inversely related to its price [i.e.., as the relative price rises
(falls), the demand for copper products decreases (increases)]. Second, the
demand for copper is a derived demand which arises from the final demand for
the goods for which it is an input. Consequently, there is a direct relation-
ship between the general utilization of copper forming products and the indus-
trial production of durable manufactured goods. As industrial production of
durable manufactured goods increases, the demand for copper forming products
increases. For greater specificity, the demand for each of the copper forming
products can be analyzed by relating it to its specific end-use. The demand
5-2
-------
for wire mill products, for example, can be associated with the demand for com-
munication and building materials. Finally, the demand for copper is directly
related to the price of substitute goods. In the manufacturing process of
various end-users of copper forming products, there exist other materials that
could be used instead of copper, even though they are not "perfect" substitutes.
The most important substitutes for copper include aluminum, stainless steel,
fiber optics, and plastics. Each substitute is a competitor to copper in
limited situations. For example, aluminum is a substitute for copper mainly
in wire products, and plastics are more important substitutes in the case of
consumer products. Each of these factors are considered in the estimation
of explicit demand functions for the copper forming industry segments.
5.1.2 Econometric Analysis and Considerations
Econometric analysis is a statistical technique which is used within an
economic framework to analyze the relationship of key explanatory variables
to the movement of select variables under study. It is an empirical approach
that is extensively used in economic and business analysis to quantify rela-
tionships among variables and to predict market phenomena. In demand analy-
sis it is used to quantify and empirically test the influence of the product's
price, the prices of substitutes and complements, and general income levels
(I.e., economic activity) on the demand for a product. Once a relationship is
made explicit, a forecast of future demand conditions can be based on predic-
tions of the explanatory variables and the estimated behavioral coefficients.
5.1.2.1 Long-Run Dynamic Adjustment Process
In this analysis the demand for copper forming products is specified as
a function of its relative price and the level of economic activity related
to the specific copper forming product. However, since the purchasers of
copper forming products do not generally change their consumption patterns
in. response to short-term movements in the price or changes in price within
a given time period, a dynamic model specification is used to capture this
long-run adjustment process.
5-3
-------
In general, purchasers of copper forming products would not change their
consumption of copper, due to short-run movements in the price or activity
variables, because of technological and institutional constraints. This is
so because, even though aluminum, steel, wood, and plastics are some of the
materials that can be substituted for copper products in some applications,
it is often not possible to make a direct substitution of one material for
another in an ongoing manufacturing process as the price of copper increases.
Substitution generally requires new types of manufacturing equipment or major
modifications to existing equipment, and the substitute material must offer
rather decisive advantages in cost and performance over the long term to
justify the cost of adopting a new manufacturing process or designing and
constructing a new manufacturing plant to use it. As a result, the substitu-
tion of one material for another usually takes place over a relatively long
period of time, and then only under overwhelming conditions such as when:
The substitute material maintains desirable properties
at low costs
The substitute is perceived to be available in suffi-
cient quantities
The substitute is adaptable to commercial manufacturing
processes.
In most cases, major consumption decisions are made on the basis of changes
that occur over an extended period of time and not changes in a single point
in time. In the short run, consumers of copper forming products may not
be able to switch to substitutes because of higher prices. If prices are
expected to remain high in the long run, consumers may switch to aluminum.
Hence, short- and long-run elasticities of demand may be different. Also,
in the copper forming industry, less copper per dollar of output may be used
in the long run as compared to the short run; i.e., there is induced techno-
logical change as the price of raw copper rises (or falls).
5-4
-------
To explain this type of demand behavior in the copper forming industry, a
distributed lag equation structure (Koyck model specification) is used to cap-
ture the long-run adjustment process that is observed as prices and the indus-
trial activity variables (income) change over time. An example of a demand
function of the Koyck type (i.e., assuming that the lag weights decline geo-
metrically) is given in equation (5.1) below.
n n
(5.1) ct - a0 + ax Z X1 yt-1 + a2 Z
i-0 i-0
where:
ct - consumption of copper forming products in period t
yt - industrial activity or income in period t
PC * price of copper in period t
and where X is defined as the reaction coefficient and takes on values from
0 £ X £ 1. Estimated values of X are normally obtained through the use of a
transformed equation. This requires multiplying the above equation lagged one
period by X,
n n
(5.2) Xct-l " Xao + a E xi ?t-l + a2 E X± pt-l
and subtracting it from the original equation to obtain
(5.3) ct - a0(l-X) + aiyt + a2Pt + *ct_!
Equation (5.3) can be stated in a set of composite coefficients and a stochastic
disturbance term that would result from estimation.
(5.4) ct » b0 + b]Pt
5-5
-------
Since the parameters X, ao, a^, and a.% can be determined uniquely from bo, b]_,
b2, and b$, equation (5.3) is approximately identified and can be estimated
using the ordinary least squares regression method. The estimated parameters
would correspond as follows:
X bj a^ = b^
a0 b0/(l-X) 32 - b2
A useful property of the Koyck lag function is that it permits a distinc-
tion to be drawn between short-run and long-run adjustments or elasticities.
The estimates of b^ and b2 represent the short-run income and price coeffi-
cients and the values of bi/(l-A) and b2/(l-A) represent the respective long-
run elasticities.i' A priori, the short-run adjustment (elasticity) must be
*
less than the long-run elasticity, since in the long run consumers have time
to switch over to substitutes.
5.1.2.2 Data Availability
The specification of the preceding model was developed and estimated
using annual time series data over the 1960-1979 period. The historical con-
sumption data were derived from information provided by the Copper Development
Association. Since actual consumption figures are not available, an estimate
of the apparent consumption for each year is calculated by subtracting exports
and inventory changes from, and adding imports to, production. The price of
copper wire bar is used as a proxy for the price of copper forming products.
This is appropriate since this price is used as the basis for changes in the
copper forming industry price. Generally, the price of copper forming pro-
ducts is determined by adding a fixed processing fee (toll) to the price of
wire bar. The annual average price quotations for wire bar products were
obtained from the American Metal Market, 1979 Metal Statistics. The price
Walter C. Labys, Dynamic Commodity Models; Specification, Estimation, and
Simulation (Chicago:Lexington Books, 1973).
5-6
-------
series was transformed into constant dollars or relative prices by dividing
the current price series by the copper mill price index. Since the demand
for copper forming products is highly related to changes in the total fabri-
cation metal industry, the Federal Reserve Board production index for fabri-
cated metal products was used as the activity variable.
5.1.3 Empirical Results
The ordinary least squares technique was used to estimate the demand
functions (equation 5.4) for each of the copper forming products. The results
of the analysis for each of the product groups, including the total brass
mill product group, are shown in table 5-1. The signs of all the coefficients
meet with a priori expectations (i.e., the signs of price coefficients are
g
all negative and the signs of the income coefficients are all positive for
each of the product groups). The coefficients are significant at the 90
percentile level for all segments, except those of the plumbing tube and
pipe subcategory. The relatively high R2s indicate that the explanatory
variables are explaining most of the movement in the dependent variables.
In addition to these statistical criteria, the price elasticities from
each of the structural equations were calculated and evaluated. The price
elasticities of demand (calculated at the means) for each product group are
shown in table 5-2. In each case the implied long-run elasticity is greater
than the short-run elasticity. Moreover, the short-run elasticity estimates
are consistent with other elasticity estimates calculated for the entire copper
industry..?/ The short-run elasticity estimate ranges from a high of -1.3
(fairly elastic) for the sheet, strip, and plate product group to -0.4
(inelastic) for the tube and pipe product group.
2J Estimates of elasticities are provided in the following publications:
Charles River Associates, Policy Implications of Producer Country Supply
Restrictions; The World Copper Market (Cambridge, Massachusetts: August
1976); and F. N. Fisher, P. H. Coutneau, and M. N. Baily, "An Econometric
Model of the World Copper Industry," Bell Journal of Economics and Manage-
ment Science, Vol. 2 (Autumn 1972), pp. 568-664.
5-7
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-------
TABLE 5-2. PRICE ELASTICITY ESTIMATES FOR
THE DEMAND FOR COPPER FORMING PRODUCTS*
DEMAND PRODUCT GROUPS
Sheet, Strip, and Plate
Plumbing Tube and Pipe
Rod, Bar, and Mechanical Wire
Wire Mill Products
SHORT-RUN PRICE
ELASTICITY
-1.3
-0.4
-0.9
-0.5
LONG-RUN PRICE
ELASTICITY
-1.4
-0.9
-1.0
-0.7
^Elasticity estimates are calculated at the means.
SOURCE: Compiled by JRB Associates based on the demand and supply model of
the copper forming industry that was developed for this study.
5-9
-------
5.1.4 Demand Forecasts
The demand forecasts were generated by fitting the estimated coefficients
with predictions of future values for the explanatory variables. In the base-
line projections it is assumed that the industry prices will increase in rela-
tion to the level of inflation in the economy over the forecast period. Since
relative prices and not current prices are considered in a demand function,
the real price of copper is not expected to change over the forecast period.
The forecast of the Federal Reserve Board (FRB) fabricated metal index is based
on the growth rate of the fabricated metal products index provided by Predicast,
Table 5-3 provides the results of the forecasting exercise for each of
the product groups. Overall, the results indicate that the demand for cop,per
forming products is not likely to increase uniformly over the 1982-1990 period.
Increases (in relative terms) are predicted to be the greatest for the sheet,
plate, and strip product group which is expected to expand to 1.7 billion
pounds or by 86 percent over its 1982 level. The smallest increase in demand
is projected for the plumbing tube and pipe subcategory which is expected to
increase to 928 million pounds by 1990. The quantity of products demanded
for the rod, bar, and mechanical wire is expected to increase to 1,320 million
pounds or approximately 74 percent. Finally, wire mill products are expected
to increase by 78 percent over the 1982-1990 period.
5.2 SUPPLY FACTORS
In this section baseline projections for future levels of supply are pro-
vided for each of the four groups. In addition to the projected production
levels, estimates are provided for capital expenditures in plant and equipment
and the growth in new 'plants necessary to satisfy the projected production
levels. These baseline estimates assume that no additional resources are
expended to meet effluent pollution control requirements that may result from
the Clean Water Act.
5-10
-------
TABLE 5-3. COPPER FORMING PRODUCTS DEMAND FORECASTS*
YEAR
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
PRODUCT GROUPS (Millions of Pounds)
SHEET, STRIP,
AND PLATE
985.4
1,148.7
909.3
1,392.0
1,459.2
1,526.4
1,561.2
1,593.9
1,626.5
1,659.0
1,691.5
PLUMBING
TUBE AND PIPE
720.0
786.6
673.0
871.4
888.4
900.8
909.3
915.4
920.1
924.1
927.6
ROD, BAR, AND
MECHANICAL WIRE
917.2
1,063.9
759.1
1,125.3
1,169.6
1,213.9
1,234.4
1,255.9
1,277.3
1,298.7
1,320.2
WIRE MILL
PRODUCTS
2,690.4
2,760.5
2,350.8
3,296.9
3,490.1
3,490.1
3,806.0
3,908.0
4,004.1
4,098.4
4,192.3
*1980, 1981, and 1982 are actual figures. Forecasts are given for the 1983-
1990 period.
SOURCE: Compiled by JRB Associates based on a forecast from the demand and
supply model of the copper forming industry that was developed for
this study.
5-11
-------
5.2.1 Theoretical and Empirical Considerations
5.2.1.1 Long-Run Dynamic Adjustment Process
The supply of copper forming products refers to the quantity of products
producers are willing to produce (supply to the market) at a given price,
assuming other factors remain constant. A priori, the supply of copper form-
ing products is positively related to the relative price of copper [i.e., as
relative prices increase (decrease), the supply of copper forming products
increases (decreases)].
Prices, however, are not the only variable that influences the supply of
copper forming products. The ability to expand output in this industry also
depends on variable costs and/or the ability to utilize the current stock of
machinery and labor more intensively. For example, it is doubtful whether a
plant could expand its production significantly if wages or other production
costs per unit of output increase precipitously as output expands or if the
machinery is being used at its full capacity. Therefore, information on the
level of capacity utilization of the copper forming industry would provide
some indication of this industry's ability to expand its productive forces
(i.e., labor and capital) and output over time. At low levels of capacity..
utilization, current production would be low and expansion of output possible.
On the other hand, at high levels of capacity utilization, the industry produc-
tive capacity would be constrained by labor and capital shortages and would be
producing close to its limit, at which point the industry would be unable
to significantly increase its output in the short run. Increased output can
be forthcoming only in the long run as new plants and machinery come on stream,
new workers are trained, and existing plant? are expanded.
Furthermore, the supply response to price changes is not immediate in
most cases, but is spread over a long period. It takes time to build up new
productive capacity (i.e., to train new workers and construct new plants).
To capture this long-run response, the supply function uses the Koyck lag
5-12
-------
structure, as previously explained. The supply curves are expressed in the
form:
(5.5) St » a0 + aiPt + O2CUt -I- a3St_i + et
where
S = supply of copper forming products
P = price of copper forming products
CU = level of capacity utilization in the copper forming industry
t = annual time period
and ao, oj_, 02, and 03 are the estimated coefficients of the explanatory vari-
ables, and et is the stochastic error, respectively. The distributive lag form
of this model (i.e., the Koyck model specification) is derived similarly to the
demand model above. It assumes that the supply response is dependent on price
and industry capacity changes spread over a long period of time.
5.2.1.2 Data Availability
Annual time series data over the 1960-1979 period are used for each of
the product groups. The annual production data for each of the four product
groups are obtained from the Copper Development Association's Annual Data
Reports. The price information is from the American Metal Market, 1979 Metal
Statistics. For brass mill products the price of copper scrap is used as a
proxy for the price of the brass products. Copper scrap prices are a good
proxy for the brass mill product sectors for the following reasons:
A significant amount of scrap is consumed by this
product group .ji/
Prior to 1978 producer list prices were relatively
stable, while scrap prices varied according to market
forces.
A typical brass mill does not smelt or refine scrap. Instead, primary
scrap is melted and reformed.
5-13
-------
One possible reason for relatively stable prices in the domestic market may be
because producers tend to provide discounts (which are not observable) to their
customers while maintaining their list prices on the books. Scrap prices, how-
ever, are competitive and do reflect changes in the market. On the other hand,
wire mills do not consume any scrap, therefore, the use of this variable would
be inappropriate for explaining copper wire supply. In the wire mill product
group equation the price of copper wire is used.
The data on capacity utilization for the copper forming industry are from
the Federal Reserve Board. The time series data from this source has missing
observations for years prior to 1966 (and had to be estimated). Since the level
of capacity utilization is highly related to the level of demand in the copper
forming industry, the 1960-1966 capacity utilization levels are estimated from
*
established relationships between these two variables over the period for which
data are available. Using the capacity utilization/demand relationship and data
on the industry demand over 1960-1966, estimates of the missing observations are
generated.
5.2.2 Empirical Results
The results of the empirical analysis for the supply of copper forming
products are provided in table 5-4. Overall, these results are reasonable.
All the price variable coefficients, except for the wire mill category, are
statistically significant at the 95 percentile level. Both the signs and
magnitudes of the price coefficients are consistent with our a priori expec-
tations. The signs on all the price coefficients are positive, and the respon-
siveness of supply in the short and long run are consistent, i.e., the long-run
coefficients are greater than the short-run coefficients (see table 5-5). The
short-run elasticity estimates (calculated at the means) range from a low of
0.1 for the wire mill product group to a high of 0.4 for the rod, bar, and
mechanical product group. The supply price elasticities are slightly more
responsive in the long run.
5-14
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5-15
-------
TABLE 5-5. SUPPLY PRICE ELASTICITY ESTIMATES FOR
THE COPPER FORMING INDUSTRY*
SUPPLY PRODUCT GROUPS
Sheet, Strip, and Plate
Plumbing Tube and Pipe
Rod, Bar, and Mechanical Wire
Total Brass Mill Products
Wire Mill Products
SHORT-RUN
ELASTICITY
0.3
0.4
0.1
0.3
0.1
LONG-RUN
ELASTICITY
0.3
0.4
0.2
0.3
0.2
^Elasticity estimates are calculated at the means.
SOURCE: Compiled by JRB Associates based on the demand and supply model of
the copper forming industry that was developed for this study.
5-16
-------
5.2.3 Supply Forecasts
Predictions of the explanatory variables are fitted to the estimated
coefficients to generate forecasts for each of the product groups over the
1983-1990 period. Since it is assumed that prices will increase at the same
rate as inflation, real prices are assumed to remain constant over the fore-
cast period. The forecast of capacity utilization for the copper forming
industry is based on future levels of copper consumption in the economy. The
relationship that is established to provide estimates of the missing data for
the capacity utilization levels (i.e., over the 1960-1966 period) is used to
predict values for the copper forming capacity utilization rates over the
1980-1990 period.
Using the supply functions developed above, forecasts of production levels
for each of the product groups are generated based on the estimated coefficients
and forecasts of the explanatory variables in each product group. Table 5-6
shows the results of the baseline supply forecasts for the copper forming
industry. Overall, the rate of growth in the future supply of copper forming
products is less than the rate of growth in the demand forecasts. The sheet,
strip, and plate product group is forecast to increase by about 81 percent over
its 1982 level of production by 1990. The supply of rod, bar, and mechanical
wire products is expected to increase by 82 percent over the 1982-1990 period.
The tube and pipe product group is expected to increase by 60 percent above its
1982 level. The supply forecast for wire mill products is expected to be about
57 percent over its 1982 production level.
5.3 ANTICIPATED GROWTH AMONG TYPES OF PLANTS
Growth in industry can come about in at least four different ways:
By expanding the current capacity utilization of the
plant (i.e., assuming that there is some excess capacity
or the plant is not working at 100 percent of its capa-
bilities, a plant can produce more by working its mach-
inery and labor more intensively);
5-17
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TABLE 5-6. COPPER FORMING PRODUCTS SUPPLY FORECASTS*
YEAR
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
PRODUCT GROUPS (Millions of Pounds)
SHEET, STRIP,
AND PLATE
873.0
969.0
736.0
1,154.5
1,195.5
1,235.9
1,259.4
1,279.7
1,299.3
1,318.9
1,338.4
PLUMBING
TUBE AND PIPE
764.0
752.0
616.0
901.1
920.4
939.6
949.7
959.1
968.4
977.7
987.0
ROD, BAR, AND
MECHANICAL WIRE
895.0
899.0
680.0
1,073.8
1,111.2
1,148.7
1,165.4
1,183.7
1,201.8
1,220.0
1,238.1
WIRE MILL
PRODUCTS
2,798.0
2,872.0
2,425.0
3,102.2
3,243.2
3,390.6
3,496.1
3,583.6
3,663.2
3,739.5
3,814.3
*1980-1982 are actual figures. Forecasts are given for 1983-1990.
SOURCE: Forecasts of the copper forming model that was developed by JRB
Associates.
5-18
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By addition of new facilities, equipment, and tech-
nology to the existing plant. Given the space and the
existence of scale economies, a plant may expand its
output by replacing old machinery with new or adding
to existing machinery;
By construction of new plants in order to expand; or
By new firms entering the industry, assuming the rate
of return is much higher than the market rate of
interest and the risk associated with copper forming.
In recent years the copper forming industry has been operating below
its production capacity. This has been especially true during periods of
recession when the producers' price deviates widely from the prices quoted
on the commodity markets. During periods of recession, producers in the
copper forming industry reduce their production significantly or carry
large inventories. Additionally, in periods when the domestic producers'
price is higher than the commodity market quotations, purchasers buy copper
forming products from abroad; consequently, producers are forced to cut back
production levels or increase inventories. Furthermore, the profitability
of the copper forming companies is not significantly above that of companies
with comparable risk. These factors tend to keep the copper forming industry
output below its potential capacity levels in most years and to discourage
ne:w entries into this segment of the industry.
The copper forming industry is also a very mature industry that has not
grown rapidly during the last decade. Generally, most of the new capacity
has come from existing plants and from new plants built overseas where low
cost inputs are available. This trend appears likely to continue when the
high costs of labor, copper, and environmental and other regulations for new
sites are considered. As a result, any significant new productive capacity
over the next decade is likely to come predominantly from investment in
improvements to machines in place, introduction of new machines, and the
construction of new plants abroad.
5-19
-------
Information from the most recent annual reports (1982) of companies with
copper forming plants indicates that four new plants will be built, plus two
plants will have major expansions:
Chase Brass and Copper plans to complete a new commer-
cial plant to produce narrow strip copper products by
mid-1983.
Handy Harmon recently constructed a fully automated
facility in La Grange, Georgia.
Phelps Dodge Industries, Inc. built a new plant in
Norwich, Connecticut, in 1981 that has a 180,000-ton
capacity.
Phelps Dodge Industries, Inc. also completed a new mill
in El Paso, Texas, within its $25 million budget during
the third quarter of 1982.
Chase Brass and Copper Co. expanded its rod plant in
William County, Ohio, by 50 percent during 1982.
ARCO Metals Company plans to spend $11 million on
its brass mill in Buffalo, New York, early in 1984.
According to ARCO's 1982 annual report, this expansion
will result in lower unit production costs and will
increase capacity by 40 percent to 31 million pounds
of metal each month, making this facility the nation's
largest brass mill.
Our forecast of new plants is restricted to the four new plants and the two
major plant expansions that have been identified, since there is no other infor-
mation to suggest that other new plants will be built over the next ten years.
5-20
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6. COST OF COMPLIANCE
6.1 INTRODUCTION
The water treatment control systems, costs, and effluent limitations and
pretreatment standards recommended for the copper forming industry are enumer-
ated in the Development Document for Effluent Limitation Guidelines and
Standards of Performance for the Copper Forming Point Source Category (Develop-
ment Document* This document identifies various characteristics of the
industry including manufacturing processes, products manufactured, volume
of output, raw waste characteristics, sources of waste and wastewaters, and
the constituents of wastewaters. This information serves as the basis for
reflecting the effluent limitations and pretreatment standards and estimating
the costs of the treatment control systems.
The EPA Development Document identifies and assesses the range of control
and treatment technologies that apply to copper forming wastes. This assess-
ment involved an evaluation of both in-plant and end-of-pipe pollution control
technologies that could be designed for this industry. This information is
them evaluated for existing direct industrial dischargers to determine the
effluent limitations achievable based on the "best practicable control techno-
logy currently available" (BPT) and the "best available technology economi-
cally achievable" (BAT). Similar evaluations were performed for new direct
dischargers to develop new source performance standards (NSPS). Finally,
pretreatment standards for existing sources (PSES) and pretreatment standards
for new sources (PSNS) are developed for dischargers to publicly owned treat-
ment works (POTWs). Each of the technologies identified is analyzed to calcu-
late cost and performance. Cost data are expressed in terms of investment,
operating and maintenance, and total annual costs.
6-1
-------
A further discussion of the cost methodology is provided in Section VIII
of EPA's Development Document.
6.2 CONTROL TREATMENT OPTIONS
EPA considered the following treatment and control options as the basis
for BPT, BAT, NSPS, PSES, and PSNS for facilities within the copper forming
industry.
Option 1: Option 1 is end-of-pipe treatment, consisting-
of lime precipitation and settling, and preliminary x
treatment, where necessary, consisting of chemical
emulsion breaking, oil skimming, and chromium reduction.
For forged parts, this option also consists of spray
rinsing and recirculation for pickling rinse and flow
normalization for alkaline cleaning rinse. This com- ,
bination of technology reduces toxic metals, conventional
pollutants, and also toxic organics through oil skimming.
Option 2: Option 2 is equal to Option 1 plus flow reduc-
tion for three waste streams: annealing water, solution
heat treatment, and pickling rinse. Flow reduction of
the annealing water and solution heat treatment streams
is based on recycle, and flow reduction of the pickling
rinse stream is based on spray rinsing and recirculation.
The Option 1 flows for these streams are reduced and this
reduction will decrease toxic metals and conventional
pollutants
Option 3: Option 3 is equal to Option 2 plus filtration
for further reduction of toxic metals and TSS.
Option 4: Option 4 consists of lime precipitation, settling,
and filtration, where necessary, preliminary treatment con-
sisting of chemical emulsion breaking, oil skimming, and
chromium reduction, with countercurrent rinsing and other
methods of flow reduction.
Option 5: Option 5 is equal to Option 1 plus filtration
for reduction of toxic metals and ITS.
6-2
-------
For existing sources, Options 4 and 5 were rejected for technical reasons
and their costs are not reported here. Option 4 is demonstrated at only a
few copper forming plants; most existing plants lack the space required by
countercurre'nt rinsing. Option 5, compared to Option 2, removes only one-
fourth the pollutants at approximately the same costs. (Option 4, however,
as a recommended technology for new sources, is costed.)
The pollutants selected for regulation are: chromium, copper, lead,
nickel, zinc, oil and grease, TSS, pH, and TTO. These are the same pollutants
that were selected for regulation in the proposed rule.
Each of these recommended control options is expected to generate more
solid wastes than are generated by the current treatment systems in use in
t
copper forming plants. The costs of the control options include estimates
for the cost of hauling and disposing of these additional'solid wastes. The
cost estimates reflect EPA* a view that the solid wastes generated by the pro-
posed, control options are not expected to be classified as hazardous under the
regulations of the Resource Conservation and Recovery Act (RCRA).
i
6.3 ESTIMATED COMPLIANCE COSTS
6.3.1 Existing Sources ' j , ,
The number of plants in the copper forming industry is estimated at 176.
Of this total, 37 plants are considered direct dischargers and 45 plants
indirect dischargers (i.e., they discharge their wastewater to POTWs). The
remaining 94 plants do not discharge any wastewater and therefore would not
incur treatment costs.
i ^
Actual compliance costs for Options 1, 2, and 3 were estimated for 14
direct and 17 indirect dischargersJL' The costs from these plants are used
' The compliance costs used in the economic analysis are those provided by
the Effluent Guidelines Division on July 31, 1983. Of the 31 plants for
which cost data are estimated, only 18 of these plants provided adequate
financial data.
b-3
-------
to project the compliance costs for the total industry. This is accomplished
by determining the average costs that are required to comply with each of the
BAT and PSES regulatory options and then multiplying the results by the total
number of direct and indirect dischargers in the industry.
Tables 6-1 and 6-2 provide the estimated total industry costs in 1982
dollars for the first three pollution control options considered for BAT and
PSES. The total industry investment costs for direct dischargers are approxi-
mately $5.8 million, $6.5 million, $7.9 million, and the anriual costs, which
include the operating and maintenance costs plus depreciation and interest,
are $6.1 million, $6.3 million, and $7.4 million for Options 1, 2, and 3,
respectively .A' For indirect dischargers the total industry investment
costs are $8.8 million, $9.2 million, $10.4 million, with annual costs of ,
$7.6 million, 7.1 million, and $8.3 million, respectively.
Option 2 often costs less than Option 1, because the reduced flow Option of
2 requires smaller and less expensive end-of-pipe treatment systems. There-
fore, many plants, when required to meet Option 1 limitations, will install
Option 2 technology. For discussion of these costs see the Development
Document (Section VIII).
6.3.2 New Sources
In order to estimate pollutant removals and costs for new sources, the
Agency developed a normal plant. A normal plant is a theoretical plant that
has each of the manufacturing operations covered by this regulation and
production that is at the average level of the industry as a whole. Section
VIII of the Development Document presents in detail the composition of the
copper forming normal plant.
2J Annual costs are calculated using a capital recovery factor of 0.22. For
a discussion of this capital recovery factor, see Economic Impact Analysis
of Proposed Effluent Limitations and Standards for the Organic Chemicals,
Plastics and Synthetic Fibers Industry, EPA, March 1983, Appendix 2A.
6-4
-------
TABLE 6-1. COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY DIRECT DISCHARGERS*
($ Millions)
POLLUTION CONTROL
TECHNOLOGY
1 Option 1
Option 2
Option 3
NUMBER OF
PLANTS
INCURRING
COSTS
37**
37
37
TOTAL COSTS ENTIRE INDUSTRY
INVESTMENT
$ 5.8
$ 6.5
$ 7.9
O&M
$ 4.8
$ 4.9
$ 5.6
ANNUAL
$ 6.1
$ 6.3
$ 7.4
*Costs are in 1982 dollars.
**11 of the 37 are expected to meet Option 1 limitations but these 11 share
in the total costs.
SOURCE: Compiled by JRB Associates from data provided by EPA, Effluent Guide-
lines Division, July 31, 1983.
6-5
-------
TABLE 6-2. COMPLIANCE COSTS FOR COPPER FORMING INDUSTRY INDIRECT DISCHARGERS*
($ Millions)
POLLUTION CONTROL
TECHNOLOGY
Option 1
Option 2
Option 3
NUMBER OF
PLANTS
INCURRING
COSTS
45
45
45
TOTAL COSTS ENTIRE INDUSTRY
INVESTMENT
$ 8.8
$ 9.2
$10.4
O&M
$ 5.7
$ 5.6
$ 6.0
ANNUAL
$ 7.6
$ 7.7
$ 8.3
*Costs are in 1982 dollars.
SOURCE: Compiled by JRB Associates from data provided by EPA, Effluent Guide-
lines Division, July 31, 1983.
6-6
-------
The regulation promulgated for new sources is the same for new direct
and new indirect dischargers. Both the NSPS and PSNS technologies are based
on end-of-pipe treatment and in-process controls (Option 4). Table 6-3
summarizes the compliance costs associated with new sources. The total
capital investment cost for a new normal plant to install NSPS or PSNS tech-
nology is estimated at $1.23 million, compared with investment costs of
$1.18 million to install technology equivalent to BAT and PSES costs (Option
2). The total annual cost for a new plant to install NSPS or PSNS technology
is $1.05 million, and $1.02 million for BAT..1/
The results of a cost-effective analysis of the recommended pollution
control technologies for existing and new sources are presented in a
separate document entitled Cost-Effectiveness Anlaysis of Effluent
Standards and Limitations for the Copper Forming Industry, JRB Asso-
ciates, July 29, 1983.
6-7
-------
TABLE 6-3. COMPLIANCE COSTS FOR NEW SOURCES*
($ Millions)
POLLUTION CONTROL
TECHNOLOGY
Option 2 (BAT - PSES)
Option 4 (NSPS - PSNS)
COST PER NEW SOURCE
INVESTMENT
$ 1.18
$ 1.23
O&M
$ 0.76
$ 0.78
ANNUAL
$ 1.02
$ 1.05
*Costs are in 1982 dollars.
SOURCE: EPA, Effluent Guidelines Division.
6-8
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7. ECONOMIC IMPACTS
7.1 INTRODUCTION
This chapter describes the economic impacts likely to occur as a result
of the costs of alternative pollution control regulatory options on the copper
forming industry. The results focus on:
Price and Output Impacts: An analysis of the impact
of the pollution abatement costs on price and output
in the U.S. domestic market;
New Capital Financing Impacts: An analysis of the
ability of plants in the copper forming industry to
invest in new capacity and pollution control equip-
ment out of current and future income;
Plant Closures: An analysis of (a) baseline plant
closures (i.e., plant closures that may result even
without the costs of the regulation), (b) plant closures
as a result of the regulation, and (c) impact of the
regulation on new plants;
Employment Effects: An analysis of the number of lay-
offs that may result due to the estimated plant closures
and the reduction in the output levels;
Commmunity Impacts: An analysis of indirect effects
on employment and earnings outside the copper forming
industry as a result of layoffs in the copper forming
industry within specific geographic areas;
Balance-of-Trade Impacts: An analysis of the effects
of price increases on the international competitiveness
of domestic copper formers;
Small Entity Impacts: An analysis of the impacts of the
recommended pollution control options on small copper
forming plants.
7-1
-------
The impact assessment procedure uses the estimated investment and annual
operating and maintenance costs for each option as the basis for the poten-
tial impacts. If these costs are small for individual plants in the industry,
there are likely to be no significant impacts. On the other hand, if the
costs are large, the industry and related plants may face serious problems
if the recommended pollution control systems are required.
7.2 PRICE AND PRODUCTION IMPACTS
Tables 7-1 and 7-2 summarize the estimated price changes for each of the
major product groups of the copper forming industry. Table 7-1 is derived
from equation 2.1 (see chapter 2) which estimates the price increase as total
annual production cost changes, and table 7-2 expresses the price increase in
cents per pound of copper formed product under the assumption of a competitive
market structure. The analysis presented here uses the long-run price elasti-
cities for the specific copper forming product groups presented in table 5-2.
This is necessary because short-run adjustments in the copper forming markets
are small, while in the long run, the quantity of a product demanded and
supplied may change significantly, since consumers and suppliers have suffi-
cient time to adjust, to price changes.
The results suggest that the price increases due to changes in costs are
predicted to be small. The price increase associated with each product group
increases by a much smaller proportion than the increase in the unit costs
of production. The price change ranges between 0.17 and 0.31 of cost change
from one copper forming product group to another.
In dollar terms, the regulation will cause price increases ranging from
0.4^ per pound to 0.8^ per pound. Based on an average price of $1.08 per
pound for copper forming products the average percentage increase in price is
less than 1 percent for the pollution control options. These empirical results
are consistent with the market structure analysis in previous chapters (which
indicate a competitive market for the copper forming products). In such
7-2
-------
TABLE 7-1. DEMAND/SUPPLY ASSESSMENT OF EACH PRODUCT GROUP
IN THE COPPER FORMING INDUSTRY
PRODUCT GROUPS
Sheet, Strip, and Plate (1)
Rod, Bar, and Mechanical
Wire (2)
Commercial and Plumbing
Tube and Pipe (3)
Wire Mill Products (4)
1
DEMAND OUTLOOK
(Predicted
Annual Growth
Rate 1981-1990)
3.3
2.6
1.4
4.0
DEMAND
ELASTICITY
(Long-Run)
-1.4
-1.0
-0.9
-0.7
SUPPLY
ELASTICITY
( Long-Run)
0.3
0.2
0.4
0.2
PREDICTED
RATIO OF PRICE
INCREASE TO
COST INCREASE
0.18
0.17
0.31
0.22
SOURCE: Compiled by JRB Associates from information provided in the demand/
supply model.
TABLE 7-2. EXPECTED PRICE INCREASES BY COPPER FORMING PRODUCT GROUP
POLLUTION CONTROL
TREATMENT OPTIONS
Option 1
Option 2
Option 3
PRODUCT GROUP
SHEET, STRIP,
AND PLATE
0.36
0.47
0.54
ROD, BAR, AND
MECHANICAL WIRE
0.34
0.44
0.51
TUBE AND PIPE
0.62
0.81
0.93
WIRE
0.42
0.57
0.66
SOURCE: Compiled by JRB Associates.
7-3
-------
markets, producers may be restricted by market forces from passing through all
but a small portion of the cost increases to their customers by raising prices.
A further observation is that a significant portion of the industry will not
incur any compliance cost at all, because either they do not discharge waste-
water or they are already in compliance. These firms will have no immediate
need to raise prices and would gain market share if the other firms increase
prices. For this reason, the above price increase estimates are overstated.
Because of this factor, the profit impact and plant closure analysis described
below uses the assumption of zero price increase.
The remainder of the economic impact analysis, therefore, focuses on the
extent to which plants in the copper forming industry can remain financially
viable and competitive domestically and abroad with added compliance costs
imposed on them.
7.3 CAPITAL AVAILABILITY ANALYSIS
The capital availability analysis examines the ability of the copper
forming plants to finance investments in new capacity and pollution control.
As described in section 2.2.6, a discounted cash flow capital budgeting
approach is used to determine whether a plant can afford to install the
required pollution control equipment. For each plant, the analysis takes
into account the cash returns expected over the life of the plant and equip-
ment and the costs of capital. The plant will make the investment in pollu-
tion control, if the expected future revenues are greater than the future
annual expenditures, plus the capital investment in pollution control.
The decision rule is if the NPV is positive the plant will invest; if
the NPV is negative or zero the plant cannot afford to invest in pollution
control. Furthermore, it can be assumed that if the firm can invest in pol-
lution control and still remain profitable at a given cost of capital, then
the financial markets would also be willing to finance the installation of
the pollution control equipment.
7-4
-------
The capital impact analysis uses the information provided by the copper
forming industry 308 Economic Survey to calculate the expected cash flows for
the individual plants. This analysis assumes that the expected cash flow of
the plant will be the same as the average cash flow over the 1978 and 1979
period. Additionally, the analysis assumes that the expected cash flow will
remain constant in real terms over the expected life of the plant (ten years).
The cost of capital over this period is set at 13 percent.
The capital availability analysis examines a sample of plants in the
copper forming industry to predict the number of plants that would be able
to afford to install the proposed pollution control systems. The use of
sample plants is necessary because adequate financial data (i.e., information
on profits and depreciation) and compliance cost information are not available
for all 82 plants that discharge wastewater. Of the 105 plants responding to
the 308 Economic Survey, only 39 that provided adequate financial data for
inclusion in this capital availability analysis are wastewater dischargers.
Of these, 20 are indirect dischargers and 19 direct dischargers. Additionally,
actual compliance cost estimates are not available for all 39 plants. In fact,
actual compliance data are estimated for only 18 plants. For the remaining 21
plants, the analysis uses the highest compliance costs of the plants for which
cost data are estimated. The results of the analysis indicate that all 39 of
these sample plants would have positive net present values, indicating that
aLI of the plants examined can afford any of the pollution control options.
Extrapolating these results (based on the sample of copper forming plants
examined) to all the copper formers leads to the conclusion that all firms
would be able to afford the installation of the pollution control treatment
systems needed to meet the effluent limitations.
Additionally, our previous analysis on the debt structure of corporations
arid reporting entities of the copper forming industry (see chapter 4) indicated
that the copper formers were in a position to manage additional debt and they
should be able to finance the required pollution control via outside sources,
if necessary.
7-5
-------
The analysis of capital availability for new sources is analagous to that
of existing sources. An analysis of the costs for the pollution control equip-
ment that new industrial dischargers are required to install to comply with
the new source performance standards (NSPS and PSNS) indicates that the costs
would not be different from those for existing direct and indirect dischargers.
As a result, we do not expect any of the new sources' pollution control require-
ments to impose significant barriers to entry for new sources, regardless of
whether these new sources are plants with major modifications or greenfield
sites.
7.4 PLANT CLOSURE ANALYSIS
As described in section 2.2.7, a rational plant owner would keep the
plant operating, if the before-and-after pollution control cash flows were
greater than the salvage value of the plant. If the expected cash flows were
less than the salvage value, the owner would be better off selling his plant.
Since the plant will remain open for many years if the investment is made in
pollution control, the analysis takes into account the cash flow expected over
the life of the plant and equipment plus the salvage value at the end of the
last period. The present value of future cash flows is calculated by discount-
ing the expected income stream by the current cost of capital. The plant will
remain open if the present value of the expected cash flows less the costs of
investing in pollution control exceeds the expected salvage value. If the
expected cash flows are less, the owner will sell the plant. Thus, the owner
will close the plant, if:
n CASHn n c sn
(7.5) S > I - -E
where S is the salvage value of the plant and the other variables are the
same as defined for equation 2.4 (see Chapter 2).
7-6
-------
Plant-specific financial data (i.e., profits, depreciation, and salvage
value) were provided by the copper forming industry 308 Economic Survey. The
expected cash flow is the average cash flow over the 1978-1979 period, and it
is predicted to remain constant in real terms (i.e., increase at the level of
the inflation rate) over the life of the plant. The cost of capital is esti-
mated at 13 percent. The investment and annual operating and maintenance
costs for each of the pollution control options were determined in a separate
study by EPA's Effluent Guidelines Division and are reported in Section VIII
of the Development Document. The analysis examines the same sample of 39
plants discussed in section 7.3 to predict the number of plant closures that
may result from the regulation.
The results of the plant closure analysis indicate that although the
*
profitability of the plants will be reduced, none of the plants are likely to
close if any of the pollution control options considered are imposed. Based
on this plant closure analysis, we do not expect any of the plants in the
copper forming industry to close as a result of the effluent guidelines.
An analysis using the 308 Economic Survey data was also conducted to
determine baseline closures and our results indicated no closures. However,
it should be noted that market conditions in a number of the product sectors
since the survey was conducted (i.e., the 1981-1982 recession) was conducive
to a number of baseline closures even in the absence of the regulation.
Generally, the smaller, older, nonintegrated plants appear to be more vulner-
able to a combination of increased competition from abroad and the economic
recession here and abroad. Poor baseline performance is likely to be indica-
tive of brass mills (especially tube and pipe plants) than the wire mills.
Moreover, the long-term outlook for the industry is positive, indicating that
most of the industry would experience increased revenues and profits during
the 1980s. The results of the market analysis and the closure analysis indi-
cate that, though neither brass nor wire mill closures are expected as a
result of the regulation, wire mills are in a better financial and market
position to afford the costs of pollution controls than brass mills.
7-7
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7.5 OTHER IMPACTS
7.5.1 Employment and Community Impacts
The increase in costs resulting from compliance may cause employee lay-
offs if the added costs cause prices to increase, production to decrease, and
plants to close. Our analysis, however, indicates that the compliance costs
are not significant enough to cause the price of copper forming products to
increase, production losses, or plant closures. For these reasons, this
regulation would cause no employees to lose their jobs.
Community impacts generally stem from employment losses and plant clo-
sures. Since no plant closures or unemployment is expected to result from
any of the pollution control options examined, the regulation will not create
any community impacts.
7.5.2 Balance-of-Trade Impacts
The regulation would impact on the balance of trade depending on (1) the
extent that copper forming product prices in the domestic market rise faster
than prices in the rest-of-world market and (2) the extent to which the domes-
tic production losses are replaced by imports from foreign countries. Since
the regulation would have only negligible price or domestic output capacity
effects, there would be no foreign trade impacts. Thus, domestic producers'
competitive position vis-a-vis foreign producers will not change.
7.6 SMALL ENTITY ANALYSIS
Public Law 96-354, known as the Regulatory Flexibility Act, requires EPA
to determine if a significant impact on a substantial number of small entities
occurs as a result of the regulation. If there is a significant impact, the
act requires that alternative regulatory approaches that mitigate or eliminate
economic impacts on small businesses must be examined. This section addresses
7-8
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these objectives by identifying whether or not small entities of the copper
forming industry are significantly Impacted by the proposed regulation.
7.6.1 Defining Small Entities
The definition of small business is not precise or universal. The Small
Business Administration (SBA) definition of "small business" generally means a
specific number of employees for each manufacturing industry by Standard Indus-
try Classification (SIC). For service, wholesale, retail, and other nonmanu-
facturing businesses, "small" is limited in SBA regulations by dollar amount
of gross sales. In our analysis the number of employees is the primary
variable used to distinguish size. Five employee size categories of copper
forming plants are selected for examination and the production and financial
characteristics of each were assessed. The five size categories are: 1-99,
LOO-299, 300-499, 500-999, and greater than 1,000 employees.
7.6.2 Baseline Conditions
Table 7-3 presents a disaggregation of the sample of 39 plants by employ-
ment size classification for key variables. It shows the discharge status
(i.e., direct and indirect dischargers), value added, output, and the average
profit margins of the copper forming plants in each employment category. The
information on profit margins indicates that medium-sized plants with 300-499
employees are in the worst financial position. Consequently, they would be
likely to be most affected by the regulation. It also indicates that the
smallest plants (those with less than 100 employees) and the largest plants
(those with more than 1,000 employees) are in the best financial position and
are likely to be be least impacted by the regulation.
In addition, statistical tests were performed to determine whether the
profitability of the plant differed by its size category. These tests revealed
that there were no statistical differences in the performance of the copper
forming plants that could be associated with their size.
7-9
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7-10
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7.6.3 Economic Impacts (Small Entities)
The discounted cash flow analyses presented in sections 7.3 and 7.4 are
based on a sample of 39 plants that consist of 21 plants which have less
than 500 employees. These analyses indicate that the plants examined can
afford to install the pollution control equipment and would not close as a
result of these added costs. Based on this analysis, the impact on small
entities does not appear to be more significant or different than that of
larger plants. Therefore, a formal regulatory flexibility analysis for the
copper forming industry is not required.
7-11
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8. LIMITATIONS OF THE ANALYSIS
This section discusses the major limitations of the economic impact
analysis. It focuses on the limitation of the data, methodology, assumptions,
and the implications for the results of this study. Methodology and limita-
tions pertaining to the estimation of the plant-specific compliance cost
estimates used in the analysis are outlined in the Development Document .A'
The economic impacts analyzed are the result of the aforementioned
eiffluent limitations and guidelines. The analysis assumes compliance with
existing environmental regulations and excludes the economic impacts result-
ing from other new regulations such as air pollution control, OSHA require-
ments, and solid waste requirements JL'
8.1 DATA LIMITATIONS
8.1.1 Economic Survey Data
The major assumptions and estimates that may have the greatest impact on
the accuracy of the conclusions of this study relate to the data used in the
plant-specific analysis. Even though the economic and financial data came
directly from copper forming plants, conditions in the industry may have
changed significantly enough that these data are no longer representative of
the industry. The economic survey collected data for the 1976-1979 period.
Since then the industry has experienced significant cutbacks in production and
employment and losses in profits, as demand and prices for its products fell
Development Document for Effluent Limitations Guidelines and Standards
for the Copper Forming Point Source Category, EPA, July 1983.
2J The impacts of the solid waste requirements caused by the technologies of
this regulation are, of course, included in the analysis.
8-1
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during the 1981-1982 recession. It is, therefore, possible that the financial
performance of the firms in the latter part of the 1970s may not continue into
the 1980s. However, the Agency has received no comments from industry on our
estimates or provided additional data for analysis, since the formal proposal
of this regulation in November 1982.
To evaluate whether the plant-specific information we currently have on
the industry is still relevant, a separate study was carried out to determine
the impacts of business cycles on the performance of the copper forming
industry..!' The information from this analysis was used to forecast the
profitability of the industry during the 1984-1990 period. This analysis
indicated that the industry* s financial performance would improve to levels
attained during the 1970s as the economy and the end-use markets for copper
f
forming products expand. Based on this analysis, we believe that economic
survey data are still appropriate for examining the impacts of this regula-
tion.
8.1.2 Compliance Cost Data
This study uses "actual" plant-specific compliance cost estimates pre-
pared for only 18 plants. However, compliance cost estimates are extrapolated
to 21 other plants for which economic and financial data are available. The
compliance costs for these plants are assumed to be equal to the highest
costs of the 18 plants for which actual compliance cost data are available.
It appears that these costs represent an upper bound estimate for the costs
of the remaining plants. The analyses using these compliance costs show
insignificant impacts.
Macroeconomic Conditions and Performance of Regulated Industries, JRB
Associates, June 1983.
8-2
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8.2 METHODOLOGY LIMITATIONS
8.2.1 Methodology
The methodology used to estimate the increase in prices due to the
regulation is very sensitive to the estimates of the demand and supply
elasticities. However, the price of copper is not determined by only the
U.S. domestic industry, but by market factors in other countries. As a
result, copper formers in the U.S. can not unilaterally increase the price
of copper to cover the costs of this regulation without losing a significant
market share and profits to foreigners. Therefore, the regulation would not
cause the price of copper forming products to increase.
The criteria used in the plant closure and capital availability analysis
are not all inclusive. They only examine the rational reasons for investing
in pollution control equipment or for keeping a plant open. For example,
they do not address behavior that may arise from personal reasons, or specific
marketing strategy. Furthermore, the results of these analyses are limited
by the assumptions used for calculating the key variables and parameters,
especially the expected cash flow data and interest rates. Significant
changes in these variables in the future could cause the results of the
analysis to change.
8.2.2 Sensitivity Analysis on Key Assumptions
Sensitivity analyses were conducted to determine how the results of the
study would change if the estimated cost of capital and cash flows changed.
The interest rate used in the discounted cash flow analyses was Increased
from 13 percent to 18 percent. The results of this analysis suggest that
none of the plants would close from the promulgation of this regulation.
It is extremely difficult to predict economic conditions that may affect
the financial performance of plants in the future. However, based on our
analysis of the performance of the industry during the 1984-1990 period, we
8-3
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believe the cash flow position of the plants would be similar to what they
experienced during the 1970s.A' We carried out separate sensitivity analyses
using the 1978 and 1979 cash flows as estimates of the expected cash flow of
the plants, and the results were similar to the final results of the study.
8.3 MONITORING COST SENSITIVITY ANALYSIS
EPA estimates that facilities covered under this regulation will monitor
their effluent for toxic organics. Large plants with large effluent flow
rates are expected to monitor their waste streams more frequently than small
plants. Our analysis reflects EPA's Effluent Guidelines Division estimates
of monitoring requirements. These estimates assume large plants would monitor
their wastewaters three times a week at a cost of $120 for each sample and
small plants would monitor their waste streams only once a month. The annual
monitoring costs are estimated to be $18,000 for large plants and $1,440 for
small plants.
Local authorities and permit writers have discretion in specifying moni-
toring frequencies. It is possible that the small plants would be required
to monitor their effluent more often, thus incurring higher costs than were
estimated in the study. A sensitivity analysis was conducted to determine
the impacts of higher monitoring costs on small plants. This analysis
assumed that the small plants would have to monitor their waste streams at
least ten times a month. This level of monitoring frequency would add $0.8
million, increasing industry's total annual cost for BAT and PSES from $14.0
million to $14.8 million. The results of our analysis of these higher moni-
toring costs indicate that the higher monitoring costs would not cause any
of the small plants to close at the selected option (Option 2). However,
one of the small plants would close if the regulation were to be promulgated
at the Option 3 level. Since Option 3 is not the selected option, these find-
ings do not alter the results of the study. Even with increased monitoring
frequency requirements, this regulation is economically achievable.
A/ Ibid.
8-4
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