United States
Environmental Protection
Agency
Office of Water
Regulations and Standards
Washington DC 20460
EPA 440/2-83-011
November 1983
Water
Economic Impact Analysis
of Effluent Limitations and
Standards for the Canmaking
Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS OF
EFFLUENT LIMITATIONS AND STANDARDS
FOR CANMAKING SUBCATEGORY
OF THE COIL COATING CATEGORY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulations and Standards
Washington, D.C. 20160
Submitted by:
Policy Planning & Evaluation, Inc.
8301 Greensboro Dr., Suite 460
McLean, VA 22102
November 1983
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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 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 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 in the Office of Water Regulations and Standards
at EPA Headquarters:
401 M Street, S.W. (WH-586)
Washington, D.C. 20460
(202) 382-5397
The staff economist for this project is Josette Bailey (202/382-5397).
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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 effl-uent standards and limitations
issued under Sections 301, 304, 306, and 307 of the Clean Water Act to
the Canmaking Subcategory of the Coil Coating Category.
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
continued 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. 68-01-6731 by Policy
Planning & Evaluation, Inc. This analysis was completed in November
1983.
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TABLE OF CONTENTS
Page No.
1. EXECUTIVE SUMMARY 1-1
1.1 Purpose 1-1
1.2 Industry Coverage 1-1
1.3 Methodology 1-2
1.4 Industry Characteristics 1-7
1.5 Baseline Projections 1-8
1.6 Effluent Guideline Control Options and Costs 1-9
1.7 Findings 1-10
1.8 Organization of Report 1-14
2. STUDY METHODOLOGY 2-1
2.1 Overview 2-1
2.2 Step 1: Description of Industry Characteristics 2-3
2.3 Step 2: Supply-Demand Analysis 2-3
2.4 Step 3: Cost of Compliance Estimates 2-5
2.5 Step 4: Plant-Level Profitability Analysis 2-5
2.6 Step 5: Capital Requirements Analysis 2-8
2.7 Step 6: Plant Closure Analysis 2-9
2.8 Step 7: Other Impacts 2-9
2.9 Step 8: New Source Impacts 2-10
2.10 Step 9: Small Business Analysis 2-11
3. INDUSTRY CHARACTERISTICS 3-1
3.1 Overview 3-1
3.1.1 Industry Coverage 3-1
3.1.2 Product Characteristics and Manufacturing Processes 3-1
3.2 Plant Characteristics 3-4
3.3 Company Characteristics 3-8
3.4 Market Characteristics 3-12
3.4.1 Product Characteristics and Substitution 3-12
3.4.2 Shipment Trends 3-15
3.4.3 Foreign Trade 3-18
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 4-1
4.1 Demand Forecasts 4-1
4.1.1 Competition Among Types of Beverage Containers 4-5
4.1.2 Competition for New Markets 4-6
4.1.3 Mandatory Deposit Legislation 4-8
4.2 Supply Forecasts 4-10
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TABLE OF CONTENTS
(Continued)
Page No.
5. EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS 5-1
5.1 Overview 5-1
5.2 Control and Treatment Technology 5-2
5.3 Compliance Cost Estimates 5-3
5.3.1 Critical Assumptions 5-3
5.3.2 Compliance Costs of Existing Sources 5-3
5.3.3 Compliance Costs of New Sources 5-5
6. ECONOMIC IMPACT ANALYSIS 6-1
6.1 Price and Quantity Changes 6-1
6.2 Profit Impact Analysis 6-1
6.3 Capital Requirements Analysis 6-3
6.4 Plant Closure Potential 6-6
6.5 Other Economic Impacts 6-6
6.5.1 Substitution Effects 6-6
6.5.2 Community and Employment Impacts 6-7
6.5.3 Foreign Trade Impacts 6-7
6.5.4 Industry Structure Effects 6-7
6.6 New Source Impacts 6-7
7. SMALL BUSINESS ANALYSIS 7-1
8. LIMITATIONS OF THE ANALYSIS 8-1
8.1 Data Limitations 8-1
8.2 Methodology Limitations 8-2
8.2.1 Price Increase Assumptions 8-2
8.2.2 Profit Impact Assumptions 8-2
8.2.3 Capital Availability Assumptions 8-3
8.3 Summary of Limitations 8-3
8.4 Sensitivity Analysis 8-4
BIBLIOGRAPHY 1
APPENDIX A CALCULATION OF PROFIT IMPACT THRESHOLD VALUE A-1
APPENDIX B ESTIMATION OF KEY FINANCIAL PARAMETERS OF
CANMAKING INDUSTRY B-1
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1. EXECUTIVE SUMMARY
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1. EXECUTIVE SUMMARY
1.1 PURPOSE
This report identifies and analyzes the economic impacts which are
likely to Result from the promulgation of effluent guidelines, limit-
ations, and standards applicable to the canmaking subcategory of the
coil coating category. These regulations include effluent limitations
and standards based on Best Practicable Control Technology Currently
Available (BPT), Best Available Technology Economically Achievable
(BAT), New Source Performance Standards (NSPS), and Pretreatment
Standards for New and Existing Sources (PSNS and PSES) which are being
promulgated under authority of Sections 301, 301*, 306, and 307 "of the
Federal Water Pollution Control Act, as amended by the Clean Water Act
of 1977 (Public Law 92-500). The primary economic impact variables
assessed in this study include the costs of the effluent regulations and
the potential for these regulations to cause plant closures, price
changes, job losses, changes in industry profitability, structure and
competition, shifts in the balance of foreign trade, new source impacts,
and impacts on small businesses.
1.2 INDUSTRY COVERAGE
The canmaking subcategory for purposes of this study includes
facilities that manufacture and wash two-piece seamless cans. Two
different manufacturing processes are used to fabricate two-piece cans:
the draw and iron (D&I) process which involves drawing a metal
disc into a cup and lengthening the sides through a series of
ironing rings; and
the draw/redraw (DRD) process where a metal disc is drawn one
or several times depending on the desired depth of the
container.
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The manufacture of can tops, ends, seamed three-piece cans (which
consist of a soldered-side-seam body), and seamless cans from coated
stock are not included in this study. These segments of the canmaking
industry employ dry manufacturing processes that do not require washing
of the can bodies after forming. Since these segments do not generate
process wastewater, they are not covered by this regulation.
1.3 METHODOLOGY
The approach used to assess the economic impacts likely to occur as
a result of the costs of each regulatory option is to (1) develop an
operational description of the price and output behavior of the industry
and (2) assess the likely plant-specific responses to the incurrence of
the compliance costs enumerated in the body of this report. Thus,
industry conditions before and after compliance with the effluent
regulations are compared. Supplemental analyses are used to assess
linkages of the canmaking industry's conditions to other effects such as
employment, community, and balance of trade impacts. These analyses
were performed for four regulatory options considered by EPA. The
methodology of the .study includes nine major steps. Although each step
is described independently, there is considerable interdependence among
them.
Step 1: Description of Industry Characteristics
The first step in the analysis is to develop a description of basic
industry characteristics such as the determinants of demand, market
structure, the degree of intra-industry competition, and financial
performance. The resulting observations indicated the type of analysis
needed for the industry. The sources for this information include
government reports, trade association data, discussions with various
trade associations and industry personnel, and a plant- and firm-level
survey conducted by EPA under authority of Section 308 of the Clean
Water Act (the 308 survey).
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For purposes of conducting the EIA, we have assumed that an average
can manufacturing plant operates two can production lines at an average
annual rate of 260 million cans per line (Church, 1982, p. 96). This
distinction was made in order to determine the likelihood of potential
closures which may occur in the baseline (closures in absence of this
regulation) or those likely to occur due to this regulation. In some
instances, a can manufacturing plant may produce other products on
separate production lines which wilL not be affected by this
regulation. However, because of a decline in revenues or annual
production, the two-piece production line may be projected to close.
Thus, the definition of a product line is necessary in order to estimate
potential product line closures in addition to closures of plants which
only manufacture two-piece cans.
Step 2; Supply-Demand Analysis
The supply-demand analysis provides an indication of the likely
changes in the industry absent additional effluent guidelines. In this
manner, potential baseline plant closures (closures that would have
occurred in the absence of this regulation) can be predicted and
compared to the plant closures estimated to result from each regulatory
option. This analysis shows that given the industry's current excess
capacity and moderate growth potential, by 1985 some eight commercial
can manufacturing plants may close for reasons unrelated to this
regulation.
Step 3; Cost of Compliance Estimates
The water treatment control systems, costs, and effluent
limitations and pretreatment standards recommended for the canraaking
industry were derived in a separate analysis. A comprehensive
description of the methodology and the recommended technologies and
costs are provided in the Development Document for Effluent Limitations
Guidelines and Standards for the Coil Coating Point Source Category
(Canmaking Subcategory). Several treatment and control options based on
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BPT, BAT, NSPS, PSES, and PSNS for facilities within the canraaking
subcategory are considered (refer to Section 1.7 of this chapter). 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 used to
form the basis for the economic impact analysis. For this analysis, it
was assumed that where the cost of complying with BAT was less than BPT,
dischargers would install BAT instead of BPT technology.
Step *t; Plant-Level Profitability Analysis
The basic measure of financial performance used to assess the
impact of the regulations on the profitability of individual plants is
return on investment (ROI) (pre-tax profits as a percent of assets).
The use of this technique involves a comparison of a canmaking
facility's return on investment after compliance with a minimum required
return on investment.
Plants with after-compliance ROI below a threshold value of 7% are
considered potential plant closures. The 1% FOI threshold value
corresponds to a 12% after-tax return on equity which is assumed to be
the minimum return for a business to continue operation (see Appendix A
for an explanation of how the 7% threshold was developed). Due to the
unavailability of plant-specific baseline financial characteristics for
the canmaking industry, average industry financial and operating ratios,
such as profit margins and assets to sales ratios, were applied to each
plant. Plant-specific information, however, was used to derive revenues
and compliance cost estimates. Commercial and captive operations were
treated the same in this analysis, on the assumption that captive
plants are treated as separate entities by their owners when making
decisions concerning capital expenditures and financing.
Captive operations refer to plants operated by brewers and food
processors that make cans for their own use, while commercial or
"jobber" plants sell their products to outside customers.
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Step 5: Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a
profitability perspective, the ability of firms to make the initial
capital investment needed to construct and install the required
treatment systems was also assessed. The analysis of capital
availability was based on the ratio of "compliance capital investment
requirements to plant annual revenues" (CCI/R). This ratio was
calculated for each plant and compared to a threshold value to help
determine the potential for significant plant-level impacts. This ratio
was used to determine the magnitude of capital costs as a percent of
revenues. For this analysis, the before-tax profit margin of a
canmaking plant is estimated to be 5% of revenues (see Appendix B), and
the corporate tax rate is assumed to be H0%; therefore 3% (60/£ of 5%) of
revenues was taken to be the capital availability threshold. Plants
with compliance capital investment costs greater than 3% of revenues are
considered potential plant closures. Commercial and captive operations
were treated the same in this analysis.
Step 6; Plant Closure Analysis
Plant closure estimates are based primarily on the quantitative
estimates of after-compliance profitability and ability to raise
capital, developed in Steps *J and 5, respectively. Failure to meet
either the profitability or capital requirements criteria specified in
the two steps mentioned above indicates a potential closure for an
individual plant.
The identification of potential closures in this step should be
interpreted as an indication of the extent of plant impact rather than
as a prediction of certain closure. The decision by a company to close
a plant also involves consideration of other factors, many of which are
highly uncertain and cannot be quantified. A summary of the results of
the plant closure analysis may be found in Section 1.7 of this chapter.
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Step 7: Other Economic Impacts
The substitution potential of other processes and materials, and
possible community, employment, foreign trade, and industry structure
implications, are addressed in this step.
Step 8; New Source Impacts
This step analyzes the effects of NSPS/PSNS guidelines upon new
plant construction and/or substantial modifications to existing
facilities in the canmaking industry. The analysis is based on model
plants representing the canmaking industry and their corresponding
compliance costs for the alternative treatment technologies.
Step 9: Small Business Analysis
The Regulatory Flexibility Act of 1980 requires Federal regulatory
agencies to evaluate small entities throughout the regulatory process.
This analysis identifies the economic impacts which are likely to result
from the promulgation of the effluent regulations on small businesses in
the canmaking industry. Most of the information and analytical
techniques in the small business analysis are drawn from the general
economic impact analysis. The specific conditions of small firms are
evaluated against the background of general conditions in the canmaking
markets.
For purposes of regulation development, the following alternative
approaches were considered to provide alternative definitions of small
canmaking operations:
the Small Business Administration (SBA) definition;
plant annual production;
plant number of can lines; and
plant wastewater flow rate.
1-6
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For this regulation, plant annual production was used to define a small
canmaking business. Plants producing 500 million cans or less per year
were considered small. Other size categories included 500-750 million
cans per year, 750-1,000 million cans per year, and greater than 1,000
million cans per year. The ratio of compliance capital investment to
revenues was used to determine the impact on each size category.
The EPA has determined that small entities will not be
disproportionately impacted by this regulation. This regulation is
expected to cause only one two-piece product line closure. This product
line is part of a three-piece canmaking plant.
1.1 INDUSTRY CHARACTERISTICS
EPA has identified 125 plants in the United States that manufacture
seamless two-piece metal cans, of which, 86 generate process waste-
water. The 86 include 80 indirect dischargers, 3 direct dischargers,
and 3 plants that discharge wastewater by land application. Only the 83
direct and indirect dischargers are covered by this regulation. Plants
which manufacture two-piece cans are dispersed throughout the country,
with some concentration in populated areas such as California, Texas,
and New York/New Jersey. Total employment by two-piece metal can plants
is estimated to be about 31,500 people.
Technical data from 71 of the 83 canmaking plants that will be
affected by this regulation were used to represent the industry for the
economic impact analysis. These data included information on volume of
production, discharge status, and treatment in place. Compliance costs
were also estimated for 71 of the 83 two-piece canmaking plants.
Approximately 80$, or 58, of these plants are aluminum two-piece
seamless can plants. The data from these 71 plants were extrapolated to
obtain estimated industry-wide impacts.
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Most metal cans are produced by commercial can manufacturers (i.e.,
Continental Can; American Can; National Can; Crown, Cork & Seal;
Reynolds Metals); however, in recent years, many breweries (i.e.,
Anheuser-Busch, Coors, Miller) and food processors (i.e., Carnation,
Campbell, Del Monte, Van Camp) have increased their production of cans
for their own use. Fourteen captive plants (canmaking operations owned
by breweries or food processors) are included in the 71-plant sample.
Beverage containers, the largest users of seamless two-piece metal
cans, accounted for 9^% of total two-piece metal can shipments in 1982,
and the food and general packaging markets represented the other 6%.
Competition is strong, however, in both markets. Glass and plastic
bottles are the primary substitutes in the beverage container market;
seamed three-piece cans, retort pouches, aseptic packaging, and
composite cans are the primary substitutes in the food and general
packaging markets.
Between 1976 and 1982 shipments of two-piece beverage cans
increased at an average annual rate of ]^%. However, despite the strong
growth in shipments of two-piece cans, the industry reported excess
capacity during 1982 of between 8-10 billion cans, as new, more
efficient facilities were added to improve productivity, and as more
captive plants were built by major beverage and food processing
companies. This excess capacity is expected to diminish over the next
several years.
Imports and exports of metal cans have been insignificant, since
transportation costs for empty cans are high.
1.5 BASELINE PROJECTIONS
Baseline conditions in the canmaking industry were projected to
1990 to assess the industry's status in the absence of additional
effluent regulations. These projections form the basic background for
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the economic impact conclusions. It was projected that shipments of
seamless cans would increase from 61.5 billion cans in 1982 to 80.9
billion cans by 1990. It was also estimated that by 1985, 8 older and
less efficient commercial plants would be shut down and 6 new captive
plants would be built.
Growth in two-piece can shipments through the 1980s will be
affected by several factors. Some of these factors are:
competition among types of beverage containers;
competition for new markets; and
mandatory deposit legislation.
Projections show that two-piece beverage cans will continue to
dominate the beverage packaging industry through 1990. New uses for
two-piece cans are being developed in the food packaging and non-
carbonated drink areas. Two-piece aluminum cans have also outperformed
three-piece cans and glass bottles in states with mandatory deposit
legislation. In New York, Massachusetts, and Delaware, cans are
expected to maintain or improve their market share due to "lower
handling costs, greater recycling value, and easy storage" (Bowe, 1983,
p. 30). In spite of these competitive strengths, two-piece can
shipments are expected to grow at an average annual rate of only 4.3/&
from 1982 to 1985 (Norton, 1982, p. 16) and at a rate of 3% from 1985 to
1990 (Predicasts, 1982, p. A-23). This contrasts sharply with an
average annual growth rate of 14? for the years 1976 to 1982. These
more moderate growth rates result from the fact that two-piece cans now
dominate the beverage can market and new markets for two-piece cans are
uncertain.
1.6 EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS
Based on the analysis of the potential pollutant parameters and
treatment in place in the canmaking industry, EPA identified six
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treatment technologies that are most applicable for the canmaking
industry:
Treatment Level 1: Flow normalization and model end of pipe
treatment technology consisting of oil removal by skimming,
chemical emulsion breaking, dissolved air flotation, or a
combination of these technologies; chromium reduction where
necessary, and removal of other pollutants by precipitation and
settle ("lime and settle");
Treatment Level 2:2 60% flow reduction below normalized BPT
flow, plus the Treatment Level 1 model end of pipe technology;
Treatment Level 3: Treatment Level 2 plus polishing
filtration;
Treatment Level ^: Similar to Treatment Level 3, but
substitutes ultrafiltration for polishing filtration;
Treatment Level 5:^ Flow reduction of about 30$ below
Treatment Level 2, in addition to the Treatment Level 1 model
end of pipe technology; and
Treatment Level 6: Similar to Treatment Level 5 plus polishing
filtration.
Treatment Levels 5 and 6 are limited to new sources only. In addition,
Treatment Levels 3 and U were rejected for reasons explained in the
preamble to the final regulation and are not included for discussion in
the Economic Impact Analysis.
Table 1-1 presents the estimated investment and annual compliance
costs for the existing sources, and Table 1-2 summarizes the compliance
cost estimates of the new source treatment alternatives.
2Selected technology for BAT/PSES.
3selected technology for NSPS/PSNS,
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TABLE 1-1
ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES
Total for 71 Sample Plants
Number of Plants
Compliance Capital Investment
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Annual Compliance Costs
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Projected Total for All Plants
in Industry
Number of Plants
Compliance Capital Investment
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Annual Compliance Costs
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
All Discharging
Plants
71
18,288
18,588
14,873
15,091
83
21 ,551
21,970
17,472
17,742
Indirect
Dischargers
69
17,909
18,209
14,493
14,711
80
20,907
21,324
16,881
17,148
Direct
Dischargers
2
379
379
380
380
3
644b
646
591b
594
SOURCE: Section VIII of the Development Document.
aFirst-quarter 1982 dollars.
These costs are lower than those estimates presented in Section VIII of the
Development Document. We believe facilities will choose the most
economical means of complying with BPT and, if going directly to BAT is
less expensive, will choose to install BAT technology with flow reduction
in order to meet the BPT limits.
Note: Sampling data for 74 plants was received which included 3 plants that
dispose wastewater by land application. Those three plants will
have no compliance costs as a result of this regulation and,
therefore, are not reflected in this table.
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TABLE 1-2
NEW SOURCE MODEL PLANT COMPLIANCE COSTS
Compliance Capital
Investment
(Thousand Dollars)3
Annual Compliance
Costs
(Thousand Dollars)3
Treatment Level 1b
Treatment Level 2
Treatment Level 3
Treatment Level 4°
Treatment Level 5
Treatment Level 6
382.1
399.1
382.1
396.1
266.6
277.6
266.6
275.6
SOURCE: Section VIII of the Development Document.
aFirst-quarter 1982 dollars.
^Treatment Level 1 costs are not provided since new source
requirements must be at least as stringent as existing source
requirements.
clnvestment and Annual costs were not provided for Treatment
Level U. This treatment level was rejected as a viable option
and will not be presented for discussion in the Economic Impact
Analysis.
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1.7 FINDINGS
Price and Quantity Changes
Because market competition is strong in the metal can industry, l,t
is assumed that metal can manufacturers will attempt to absorb their
compliance costs and will not adjust prices. Consequently, the price
changes due to the regulation would be zero and the quantities demanded
would not change from the baseline projections.
Plant Closure Potential
Treatment Levels 1 and 2 are expected to each cause a two-piece can
production line in one plant to close. This one line's after-oospliance
ROI is estimated to be below the threshold value of 1% and its ratio of
compliance capital investment to revenues exceeds 3%- This one line
closure is projected to cause 26 job losses.
Substitution Effects
Because the two-piece metal cans face strong competition from other
containers, price increases due to regulatory compliance costs probably
would cause a switch to other types of containers. For this reason, the
can manufacturers are expected to absorb their compliance costs, and no
substitution effects are expected to result from the regulations.
Community and Employment Impacts
The one two-piece production line expected to close employs 26
employees. Thus, the community and employment impacts are expected to
be small.
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Foreign Trade Impacts
Since it was assumed that there would be no price increases due to
the regulations, no foreign trade impacts are expected.
Industry Structure Effects
Treatment Levels 1 and 2 would have little effect on the structure
of the canmaking industry, since the one line expected to close produces
less than 50 million cans per year.
New Source Impacts
Costs of the new source treatment alternatives are low compared to
expected revenues and are not expected to deter new entry or prevent
major modifications to existing sources.
1.8 ORGANIZATION OF REPORT
The remainder- of this report consists of seven chapters. Chapter 2
describes the analytical methodology employed; Chapter 3 provides the
basic industry characteristics of interest; and Chapter 4 projects some
of these key characteristics to the 1985-1990 time period, when the
primary economic impacts of the effluent regulations will be felt.
Chapter 5 describes the pollution control technologies considered by EPA
and their associated costs; this information is derived primarily from
the technical Development Document prepared by EPA's Effluent Guidelines
Division. Chapter 6 describes the economic impacts projected to result
from the cost estimates presented in Chapter 5. Chapter 7 presents an
analysis of the effects of the effluent regulations on small businesses,
and Chapter 8 outlines the major limitations of the analysis and
discusses the possible effects of the limitations on the major study
conclusions.
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2. STUDY METHODOLOGY
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2. STUDY METHODOLOGY
2.1 OVERVIEW
Figure 2-1 presents an overview of the analytical approach used to
assess the economic impacts likely to occur as a result of the costs of
each regulatory option. For the canmaking industry, four regulatory
options (two for existing sources) are evaluated. The approach used in
this study is to (1) develop an operational description of the price and
output behavior of the industry and (2) assess the likely plant-specific
responses to incurring the compliance costs enumerated in Chapter 5.
The operational description of the price and output behavior, in
conjunction with compliance cost estimates supplied by EPA, is used to
determine new post-compliance industry price and production levels for
each regulatory option. Individual plants are then subjected to a
financial analysis that uses capital budgeting techniques to determine
potential plant closures. Effects on employment, community, foreign
trade, and industry structure are also determined. Specifically, the
study proceeded through the following steps:
Description of industry characteristics;
Industry supply and demand analysis;
Analysis of cost of compliance estimates;
Plant level profitability analysis;
Plant level capital requirements analysis;
Assessment of plant closure potential;
Assessment of other impacts;
New source impacts; and
Small business analysis.
Although each of these steps is described separately in this section, it
is important to realize that there are significant interactions between
them, as shown in Figure 2-1.
2-1
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2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis was to describe the basic industry
characteristics. These characteristics, which include the determinants
of demand and supply, market structure, the degree of intra-industry
competition, and financial performance, are presented in Chapter 3 of
this report.
The major sources of data used in this step are listed below:
U.S. Environmental Protection Agency: EPA industry surveys
conducted in 1978 and 1982 under Section 308 of the Clean Water
Act (of particular importance are data on plant production
volume);
U.S. Department of Commerce: Census of Manufactures,
U.S. Industrial Outlook, Quarterly Financial Report for
Manufacturing, Mining, and Trade Corporations;
Trade and business publications: Metal Can Shipments Report
(published by the Can Manufacturers Institute), American Metal
Market. Modern Metals, Packaging Engineering. Food Engineering.
Beverage World, Beverages, Robert Morris Associates' Statement
Studies, Standard and Poor's Industry Surveys, and Moody's
Industrial Manuals;
Corporate annual reports; and
Interviews with trade association and industry personnel.
2.3 STEP 2; SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis was to project the likely
changes in market prices and industry production levels resulting from
each regulatory option. The estimates of post-compliance price and
output levels are used in the plant-level analysis to determine post-
compliance revenue and profit levels for specific plants. If prices are
successfully raised without significantly reducing product demand and
companies are able to maintain their current financial status, the
potential for plant closings will be minimal. On the other hand, if
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prices cannot be raised to fully recover compliance costs because of the
potential for a significant decline in product demand or because of
significant intra-industry competition, the firms may attempt to main-
tain their financial status by closing higher cost, less efficient
plants. The supply-demand analysis is divided into four basic com-
ponents: description of industry structure, determination of industry
pricing mechanism, projection of possible changes in industry structure
to 1985, and determination of plant- and firm-specific operational
parameters (e.g., production levels, compliance costs).
As described in Chapter 3i the metal can industry appears to be
highly competitive. Competition is intense not only between can
manufacturers but also between metal cans and other types of containers
such as glass and plastic bottles. The highly competitive nature of the
container market suggests that metal can producers would have difficulty
raising the prices of their products. For this reason, it is assumed
that metal can producers would attempt to absorb their compliance costs
and would not raise their prices. This assumption represents a worst-
case situation and, to the extent can prices could be increased to
recover part of the compliance costs, tends to overestimate the
potential impacts of the regulations.
It is also necessary to determine if the key parameters in industry
structure would change significantly during the 1980s. Projections of
industry conditions began with a demand forecast which is described in
Chapter 4. The demand during the 1980s is estimated using trend
analysis and market research analysis.
For purposes of conducting the EIA, we have assumed that an average
can manufacturing plant operates two can product lines at an average
annual rate of 260 million cans per line (Church, 1982, p. 96). This
distinction was made in order to determine the likelihood of potential
closures which may occur in the baseline (closures in absence of this
regulation) or those likely to occur due to this regulation. In some
instances, a can manufacturing plant may produce other products on
2-4
-------
separate three-piece product lines which will not be affected by this
regulation. However, because of a decline in revenues or annual
production, the two-piece product line may be projected to close. Thus,
the definition of a product line is necessary in order to estimate
potential product line closures in addition to closures of plants which
only manufacture two-piece cans.
2.U STEP 3: COST OF COMPLIANCE ESTIMATES
The estimated investment and annual compliance costs for the treat-
ment options, summary descriptions of the control and treatment
technologies, and assumptions for the compliance cost estimates are
developed by EPA's Effluent Guidelines Division and may be found in
Section VIII of the Development Document. These compliance costs also
appear in Chapter 5. The costs are incremental costs above existing
treatment in place for canmaking facilities.
2.5 STEP 4: PLANT-LEVEL PROFITABILITY ANALYSIS
The basic measure used to assess the impact of the effluent
regulations on the profitability of individual plants is return on
investment (ROI) (pre-tax profits as a percent of assets). The use of
this technique involves a comparison of the return on investment after
compliance with a minimum required return on investment.
The return on investment is defined as the ratio of annual profits
before taxes to the total assets of a plant. This technique has the
virtues of simplicity and common usage in comparative analyses of the
profitability of financial entities. Plant-specific production
information was used to derive revenues. Compliance costs were also
calculated on a plant-by-plant basis. Average industry data were used
to derive profit margins and assets to sales ratios, because plant-
specific financial information was not available.
2-5
-------
The profit impact assessment is determined by calculating the
after-compliance ROI for each plant. The threshold value for ROI used
in the analysis is 1%. Plants with after-compliance ROI less than 7%
are considered potential closures. The 1% ROI threshold level is based
on the condition that plants could not continue to operate as viable
concerns if they are unable to generate for their owners/stockholders an
after-tax return on their investments (i.e., stockholder's equity) equal
to the opportunity cost of other lower-risk investment alternatives,
which in this case is defined as the U.S. Treasury bond yield expected
to be in effect when the regulation is implemented. In 1981, Data
Resources, Inc. forecast that interest rates on long-term U.S. Treasury
bonds will be about \2% in 1984-85, which is approximately the time when
the plants will have to make investment decisions on the treatment
facilities (DRI, 1981). More recent forecasts predict a bond yield of
about 9% by 1985 (DRI, 1983). A 9% yield would produce a threshold of
5% ROI. However, the results of the analysis would not be changed even
if the lower bond rate had been used. No potential closures are
expected. It is determined that a before-tax ROI of 1% would yield a
after-tax return on the liquidation value of the equity, assuming:
Stockholders' equity of canmaking firms represents about 50% of
total assets (as discussed in Appendix B);
The average corporate tax rate for the Fabricated Metal
Products Industry in 1982 was 40$ (U.S. Department of Commerce,
1983, p. 38);
The average liquidation value of the plants is Q5% of their
book value.
Appendix A describes the methodology that led to this ROI threshold
level.
The after-compliance ROI (ROI2i) is estimated for each plant using
the following equation:
Profit . - ACC.
ROI2i - Assets'. + CCI1. E«Uatl°n
2-6
-------
Profit ld = P1 x Qu x PM1 Equation (2)
Assets^ = P1 x Q^i x AS1 Equation (3)
where: ROIp< = after-compliance return on investment of plant i
Profit-^ = pre-compliance profit of plant i
Assets .ij = pre-corapliance assets value of plant i
= annual compliance cost for plant i
= compliance capital investment for plant i
PI = pre-compliance can body price
Q^ = pre-compliance production of plant i
PM-j = pre-compliance profit margin
AS.] = pre-compliance assets to sales ratio.
The values of Q..^ are obtained from industry 308 technical surveys
conducted by EPA in 1978 and 1982. In the absence of industry financial
surveys, plant-specific financial characteristics are not available,
therefore, P,, PM,, and AS- are estimated based on discussions with
industry representatives, analysis of industry-level data from Robert
Morris Associates Statement Studies, and review of corporate annual
reports. This analysis is somewhat conservative, for 1982 sales rather
than 1985 sales are used. Increases in shipments and capacity
utilization rates between now and 1985 will produce greater plant
revenues. A more detailed discussion of industry projections may be
found in Chapter M of this report.
Plants with after-compliance ROI below 7% are considered potential
closures. However, a low ROI for a given plant does not, by itself,
necessarily imply that the plant will certainly close. The profita-
bility ratio (ROI) relates profits to plant total assets and provides a
means of evaluating the attractiveness of the plant as an investment
opportunity compared to other opportunities that may be available to
stockholders and potential lenders. As discussed in Section 2.7, actual
plant closure decisions made by individual companies are usually based
on a variety of financial and non-financial factors.
2-7
-------
2.6 STEP 5: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing plant closure potential from a profitab-
ility perspective, it is also necessary to assess the firm's ability to
make the initial capital investment needed to construct and install the
required treatment systems. Some plants, which are not initially
identified as potential closures in the profitability analysis, may
encounter problems raising the amount of capital required to install the
necessary treatment equipment. The limit on a given firm's ability to
raise capital to finance investment expenditures is quite variable,
depending upon factors such as the firm's capital structure, profitab-
ility, and future business prospects, the industry's business climate,
the characteristics of the financial markets and the aggregate economy,
and the firm management's relationships with the financial community.
The precise limit, considering all these factors, is difficult to
determine.
For this study, the analysis of capital availability is based on
the ratio of "compliance capital investment requirements to plant annual
revenues" (CCI/R). This ratio provides an indication of the relative
magnitude of the compliance capital investment requirements.
The ratio CCI/R is calculated for each plant and compared to a
threshold value. Assuming that reinvestment in plant and equipment
equals depreciation, the plant's net after-tax profit margin is a
measure of the internally generated funds available for pollution
control investment. For this analysis, the before-tax profit margin of
a canmaking plant is estimated to be 5% of revenues, and the corporate
tax rate is assumed to be ^0%; therefore, 3% (60% of 5/t) of revenues was
taken to be the capital availability threshold. If a plant's CCI/R
ratio is less than the threshold value, the investment may be financed
out of a single year's internally generated funds without additional
debt. This is not to say that a plant would necessarily finance
pollution control equipment out of retained earnings. The ultimate
financing method is left to industry. A plant may elect to pay for the
2-8
-------
compliance equipment out of the current year's retained earnings,
perhaps reducing dividend payments for that year, or the compliance
equipment may be financed through the equity or debt markets. This test
merely demonstrates whether or not a firm has sufficient after-tax
profits to purchase the compliance equipment should it elect to do so.
Although the CCI/R ratio provides a good indication of the relative
burden created by the compliance requirement, it does not provide
precise or universal conclusions regarding a firm's ability to make the
investments. For purposes of this analysis, a plant whose estimated
compliance capital requirement exceeded 3% of its annual revenues is
identified as a potential closure.
2.7 STEP 6; PLANT CLOSURE ANALYSIS
For this analysis, plant closure estimates are based primarily on
the quantitative estimates of after-compliance profitability and the
ability to raise capital developed in Steps H and 5, respectively.
Failure to comply with either profitability or capital requirements
criteria specified in the two steps mentioned above indicates a
potential closure for an individual plant.
The identification of plants as potential closures in this step was
interpreted as an indication of the extent of plant impact rather than
as a prediction of certain closure. The decision by a company to close
a plant also involves consideration of other factors, such as market and
technological integration and the existence of specialty markets. Many
of these factors are highly uncertain and could not be estimated.
2.8 STEP 7; OTHER IMPACTS
"Other impacts" include economic impacts which result from basic
price, production, and plant-level profitability changes. These include
impacts on substitution potential, employment, communities, industry
structure, and balance of trade.
2-9
-------
As indicated in Step 2, the can manufacturers are expected to
absorb their compliance costs; thus, no substitution effects are
expected to result from the regulations.
The community and employment impacts are the direct results of the
plant closure analysis. Employment estimates for production facilities
projected to close are based on individual plant production data
obtained from the EPA 308 Surveys and an estimate of production per
employee. Community impacts are assessed by comparing the number of job
losses due to the regulations to total employment in the community.
The assessment of industry structure changes are based on examina-
tion of the following before and after compliance with the regulation:
Numbers of parent companies and plants;
Industry concentration ratios;
Effects of plant closures on specialty markets; and
Geographic areas likely to be impacted.
Impacts on imports and exports are primarily a function of the
change in the relative prices charged by domestic versus foreign
producers. In this study, it is estimated that there would be no price
increase due to the regulations. Therefore, the regulations are
expected to have no impact on the imports and exports of metal cans.
The role of imports and exports is qualitatively evaluated in Chapter 3
of this report.
2.9 STEP 8; NEW SOURCE IMPACTS
New facilities and existing facilities that undergo substantial
modifications will be subject to NSPS/PSNS guidelines. This step in the
study analyzes the economic impacts of these guidelines on new sources.
The analysis is based on a model plant developed for a greenfield
(new) site and the corresponding compliance costs of the treatment
2-10
-------
technologies. The treatment costs for major modifications to an
existing facility will not be different than those for an equally-sized
facility built on a greenfield (new) site. New source standards do not
necessitate the use of technologies that require greater space than the
technologies recommended for existing sources. For the purpose of
evaluating new source impacts, compliance costs of new source standards
are defined as incremental costs over the costs of selected standards
for existing sources. The impacts of new source regulations are then
determined by comparing compliance cost estimates to expected model
plant revenues.
2.10 STEP 9: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354) amends
the Administrative Procedures Act and requires Federal regulatory
agencies to consider "small entities" throughout the regulatory
process. The RFA requires that an initial screening analysis be per-
formed to determine if a substantial number of small entities will be
significantly affected. If so, regulatory alternatives that eliminate
or mitigate the impacts must be considered. This step in the study
addresses these objectives by identifying the economic impacts likely to
result from the promulgation of regulations on small businesses in the
canmaking industry. The primary economic variables covered are those
analyzed in the general economic impact analysis such as compliance
costs, plant financial performance, plant closures, and unemployment and
community impacts. Most of the information and analytical techniques in
the small business analysis are drawn from the general economic impact
analysis which is described above and in the remainder of this report.
The specific conditions of small firms are evaluated against the back-
ground of general conditions in the metal can markets and markets for
substitute containers.
For this regulation, plant annual production of 500 million cans
per year or less is used to define a small canmaking business.
Information on plant annual production is readily available; and since
2-11
-------
the manufacturing technology in the seamless two-piece canraaking
industry is very similar among the producers, plant annual production is
indicative of relative size.
The impacts on small plants are assessed by examining the
distribution by plant size of the number of canmaking plants and plant
annual production. The objective of this analysis is to estimate if
small plants would incur disproportional impacts. This was achieved by
calculating the ratio of compliance capital investment to revenues for
each size category. This analysis showed that all plants producing less
than 1,000 million cans per year would be impacted equally by this
regulation. Specifically, the compliance capital investment for these
plants represents no more than 1$ of plant revenues.
2-12
-------
3. INDUSTRY CHARACTERISTICS
-------
3. INDUSTRY CHARACTERISTICS
3.1 OVERVIEW
This chapter describes the characteristics of plants and companies
in the canmaking industry, the determinants of demand and supply for
metal cans, and the price determining behavior of the industry. The
primary operational characteristics include the number, size, and
location of plants and companies, trends in production technology,
degree of integration and industry concentration, and financial
performance. The primary determinants of demand are the nature of the
end-use markets, the nature of competitive products, and the magnitude
of imports and exports. The industry and market characteristics are
pertinent to determining industry behavior, when faced with additional
pollution control requirements. This information is used to estimate
the expected baseline characteristics of the industry during the 1980s,
which are described in Chapter *J, and to estimate the potential economic
impacts of the effluent regulations, which are described in Chapter 6.
3.1.1 Industry Coverage
The canmaking industry, for purposes of this study, includes
canmaking facilities which manufacture and wash seamless two-piece
cans. EPA has identified 83 plants that will be affected by this
regulation. These 83 plants include 3 direct dischargers and 80
indirect dischargers.
3.1.2 Product Characteristics and Manufacturing Processes
The seamless two-piece metal can was introduced in 1963 by Reynolds
Metals, Inc. In the beginning, virtually all two-piece seamless cans
were made from aluminum. However, due to fluctuations in aluminum
3-1
-------
prices in the late 1970s, manufacturers of seamless cans began looking
for alternative materials. Thus, the shipments of two-piece seamless
steel cans increased rapidly between 1977 and 1979. In recent years,
however, aluminum has regained its dominance in the two-piece seamless
can market. There are several reasons for this: aluminum chills
beverages faster than steel; aluminum weighs less than steel;
transportation costs are less for aluminum than for steel; recycling is
more cost-effective for aluminum cans than for steel cans steel cans
have aluminum tops which must be separated and because recycled steel
cans produce a lower grade of steel. Although aluminum can prices are
generally higher than seamless steel can prices, the net cost to
customers after rebate for recycled aluminum cans is comparable to that
for steel cans.
Two different processes are currently used to manufacture seamless
two-piece cans:
The "draw-iron" (D&I) process: In the D&I process, metal discs
are cut and cupped in a press and then the walls of the cup are
drawn or extruded to the desired height by forcing them through
two or three progressively smaller diameter ironing rings.
Cans made by this process are thinner and less rigid than
seamed three-piece cans and are primarily used for beer and
carbonated beverage cans. The carbonation pressure makes the
can stronger and more rigid when it has been filled and sealed.
The "draw-redraw" (DRD) process: In the DRD process, drawn
cans are punched from a metal disc. Shallow cans may require
one stamp, while deeper cans may require two or three. Beading
may be added to further strengthen the sidewalls. Meats,
spreads, snack foods, dog food, etc., are the major products
contained in these cans.
EPA has determined that virtually all plants that wash can bodies
use the D&I process. Figure 3-1 describes the D&I process employed by
canmaking plants.
3-2
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3-3
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3.2 PLANT CHARACTERISTICS
As indicated in Table 3-1, the U.S. Department of Commerce's 1977
Census of Manufactures reported that there were 153 metal can companies
operating 403 metal can plants (both seamless two-piece and seamed
three-piece can plants) in 1977. These plants employed about 50,200
metal can production workers (10,800 aluminum can workers) and 59,800
employees overall (13,600 at aluminum can plants). Table 3-2 presents
the distribution of the metal can plants by employment size. More than
half of the plants have less than 100 employees but only account for
16.8J of total value of shipments. This table also indicates that metal
can plants are highly specialized in the manufacture of cans (speciali-
zation ratio is 96$) and perform few other types of operations.
EPA has identified 125 plants in the United States which
manufacture two-piece seamless metal cans. Eighty-three of the plants
wash their cans and discharge process wastewater and are covered by this
regulation. Table 3-3 presents a geographic distribution of these 83
plants. The plants are dispersed throughout the country, with some
concentration in populated areas such as California, Texas, and New
York/New Jersey. Total employment by seamless two-piece metal can
plants is estimated to be about 31,500 people.1
Technical data obtained from EPA's 308 surveys for 71 of the 83
plants that will be affected by the final regulation are used to
represent the industry for the economic impact analysis. These data
include information on volume of annual production, discharge status,
and treatment in place.2 Fifty-eight of these plants are aluminum two-
piece seamless can plants.
Based on total shipments of seamless two-piece metal cans of 61.5
billion cans in 1982 (see Table 3-7), and assuming a productivity of
1.95 million cans per employee (productivity of aluminum can plants as
reported in the 1977 Census of Manufactures and shown in Table 3-D.
EPA found 86 plants that discharge wastewater. EPA estimated
compliance investment and annual costs for 83 of these discharging
plants. However, production quantities were not available for 12 of
these plants; thus, the 71-plant data set is used in the analysis.
3-4
-------
TABLE 3-1
METAL CAN INDUSTRY CHARACTERISTICS, 1977
Number of Companies
Number of Establishments
Value of Shipments
($ millions)
Number of Cans Shipped
(million cans)
Number of Employees
(thousands)
Number of Production Workers
(thousands)
Productivity
(thousand cans per employee)
SIC 3^11
Metal Cans3
153
403
8,142.8
88,311
59.8
50.2
1,477
SIC 34113
Steel Cans3
73C
253
5,576.9
61,761
42.3
36.1
1,460
SIC 34114
Aluminum Cans
25C
52
1,915.6
26,550
13.6
10.8
1,952
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
alncludes both seamless two-piece cans and seamed three-piece cans.
Only seamless cans are covered by the effluent regulations.
Our data indicate that SIC 34114 includes only seamless two-piece cans.
°Number of companies with shipments of $100,000 or more.
Note: In addition to "Steel Cans" and "Aluminum Cans," SIC 3411
includes the following 5-digit subgroupings:
34115 - metal can lids, ends, and parts for metal cans shipped
separately; and
34110 - metal cans, not specified by kind.
These subgroupings were excluded from this table because it was
intended to present data which will help characterize plants in
the seamless can industry only.
3-5
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TABLE 3-2
NUMBER OF METAL CAN PLANTS BY EMPLOYMENT SIZE, 1977a
(SIC 3411)
Plant Size
Establishments with:
1-19 employees
20 - 99 employees
100 - 199 employees
over 500 employees
Total
Coverage Ratio
Specialization Ratio0
No. of
Plants
103
117
165
18
403
% of
Total
Plants
25.6
29.0
40.9
4.5
100.0
Value of
Shipments
($ Millions)
117.8
1,255.2
5,345.1
1,424.8
8,142.8
% of Total
Value of
Shipments
1.4?
15.4$
65.6?
17.5?
100.0?
98?
96?
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
alncludes plants that manufacture steel cans (seamed and seamless),
aluminum cans, metal can lids, ends, and parts. Only seamless cans
are covered by the effluent regulations.
Coverage ratio is ratio of a given industry's primary product shipments
to total shipments of these products by all industries.
Specialization ratio is ratio of primary product shipments to product
shipments for primary plus secondary products.
Note: Detail may not add to totals because of rounding.
3-6
-------
TABLE 3-3
GEOGRAPHIC LOCATION OF 83 SEAMLESS CAN PLANTS
WITH PROCESS WASTEWATER
State
Arizona
California
Colorado
Connecticut
Florida
Georgia
Illinois
Indiana
Maine
Maryland
Minnesota
Missouri
New Jersey
New York
North Carolina
Ohio
Oklahoma
Pennsylvania
South Carolina
Texas
Virginia
Washington
Wisconsin
Wyoming
Puerto Rico
Total
Number of Plants
1
9
2
1
5
4
2
1
1
2
3
4
6
4
3
6
1
2
2
11
1
3
6
1
2
83
SOURCE: 1978 and 1982 EPA 308 Surveys.
3-7
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3.3 COMPANY CHARACTERISTICS
The Department of Commerce estimated that there were 153 companies
that produced metal cans (both two-piece and three-piece cans) in
1977. The major producers of metal cans are Continental Can; American
Can; National Can; Crown Cork and Seal; Reynolds Metals; Ball Container
Corp.; Kaiser Aluminum and Chemical; and Diamond International. Table
3-4 indicates that the metal can industry is moderately concentrated
with the four largest manufacturers accounting for over 50% of total
industry shipments.
Most metal cans are produced for sale by commercial (who sell their
products to outside customers) or jobber can manufacturers. However, in
recent years, many breweries (e.g., Anheuser-Busch, Coors, and Miller)
and food processors (e.g., Carnation, Campbell, Del Monte, and Van Camp)
have increased their production of cans for their own use. This self-
manufacture is known as captive production. Table 3-5 shows that
captive beverage can manufacturers increased their production from 20%
to 26% of total beverage can shipments between 1979 and 1982. Since
beverage cans accounted for 9^% of total two-piece can shipments in
1982, these figures are considered representative of total two-piece can
shipments.
Table 3-6 presents selected financial ratios of 18 canmaking com-
panies for which published financial data are available for the 1979-
1982 period. The financial information pertains to the entire company,
not just the segment engaged in manufacturing two-piece cans, because
information is generally not provided by segment. There are 11
commercial or jobber manufacturers and 7 companies with captive
canmaking operations in the group. These data show that the profit
performance (measured by the firm's before-tax profit margin and return
on equity) of most commercial can producers is, in general, below that
of both the companies with captive operations and the All Manufacturing
average. In terms of capital structure, the commercial can manu-
3-8
-------
TABLE 3-l|
CONCENTRATION RATIOS OF CANMAKING INDUSTRY. 1977
Class of Product
Metal Cans (SIC 3^1 1)a
Steel Cans (SIC 3^11 3 )a
Aluminum Cans (SIC 3miH)b
Percent of Value of Shipments Accounted for by
4 Largest
Companies
56
62
55
8 Largest
Companies
71
79
79
20 Largest
Companies
89
92
99+
SOURCE: U.S. Department of Commerce, 1977 Census of Manufactures.
alncludes both seamless and seamed cans. Only seamless cans are covered by
the effluent regulations.
Our data indicate that SIC
includes only seamless two-piece cans.
3-9
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TABLE 3-5
TOTAL SHIPMENTS OF BEVERAGE CANS BY MARKET
(Billions of Cans)
Year
1979
1980
1981
1982
Total Shipments
54.4
55.2
56.3
57.9
For Salea
43.5
(80.0$)
42.9
(77.7?)
42.2
(75.0?)
42.7
(73.7?)
Own Usea
11.0
(20.0?)
12.3
(22.3?)
14.1
(25.0?)
15.2
(26.3?)
SOURCE: Can Manufacturers Institute, Metal Can Shipments
Report, 1982.
aNumbers in parentheses represent percent of total
shipments.
Note: Detail may not add to totals because of rounding.
3-10
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Carnation
Coors Con
Metal Con
of Anhe
Miller Brewing C
Philip Morris,
Port Clyde Foods
Zapata Corp.
itz Brewing Co. -
ary of Strohs Brewing Co
oseph S
a subs
Number of Firms Below a
Manufacturing Average
Manufacturing Average
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3-11
-------
facturers are generally more leveraged and exhibit lower equity to asset
ratios than the captive producers and the All Manufacturing average.
"All Manufacturing" refers to those companies classified by the Bureau
of Census as manufacturing establishments.
3.1 MARKET CHARACTERISTICS
3.U.1 Product Characteristics and Substitution
Table 3-7 summarizes the shipments of all metal cans and seamless
two-piece cans by market in 1982. Beverage containers are the largest
users of seamless metal cans and accounted for 9^$ of total two-piece
seamless metal can shipments in 1982. Nearly 100$ of all beverage can
shipments in 1982 were two-piece seamless cans. The reasons for the
popularity of the two-piece seamless can are that it uses less metal,
can be made faster and cheaper, has high integrity (less prone to
leakage), and is lighter to transport than the three-piece seamed can.
For beverage packaging, metal cans have the advantages of lighter
weight and ease of shipping and handling over other containers such as
glass and plastic bottles. However, competition from glass and plastic
bottles is strong. Glass bottles enjoy advantages over metal cans such
as quality image and lower cost (the manufacturing cost of producing a
bottle is generally higher; however, unlike a metal can, a bottle can be
reused many times). In 1981, glass bottles accounted for 51$ of
packaged beer and 41$ of packaged soft drinks. Another advantage of
glass as well as plastic bottles (also called PET polyethylene
terephthalate) is that they are resealable. Plastic bottles are also
capturing the large family-size (2-liter) container market. Plastic
accounted for 17$ of soft drink packaging in 1981 from practically zero
in 1977 (Norton, 1982, p. 1). Although plastic's growth has been mainly
at the expense of glass bottles, PET manufacturers are now marketing a
J-liter bottle which will compete with both glass bottles and metal
cans.
3-12
-------
TABLE 3-7
METAL CAN SHIPMENTS. 1982
All Metal Cans Shipments
by Market:
Total
Beverage
Beer
Soft Drink
Food
General Packaging
Aluminum Cans Shipments
by Market:
Total
Beverage
Beer
Soft Drink
Food
General Packaging
Steel Cans Shipments
by Market:
Total
Beverage
Beer
Soft Drink
Food
General Packaging
All Cans
(Billion Cans)
89.3
57.9
31.7
26.2
27.6
3.8
52.9
51.7
31.1
20.6
1.2
»
36. 4
6.2
0.6
5.6
26. 4
3.7
Two-Piece Cans
Billion Cans
61.5
57.7
31.6
26.1
3.6
0.2
52.9
51.7
31.1
20.6
1.2
«
8.6
6.0
0.5
5.6
2.1
0.1
% of Total
Two-Piece Cans
100.0
93.8
51.4
42.4
5.9
0.3
86.0
84.1
50.6
33.5
2.0
0.1
14.0
9.8
1.0
9.1
3.9
0.2
SOURCE: Can Manufacturers Institute, Metal Can Shipments Report, 1982.
*Less than 0.05 billion cans.
Note: Detail may not add to totals because of rounding.
3-13
-------
Shipments of two-piece seamless cans in the food and general
packaging markets represent a relatively small portion of the market,
accounting for 6% of all two-piece seamless cans shipped in 1982 and for
12£ of 1982 total metal can shipments in these two markets. The reason
for this low demand is that two-piece seamless cans lack the rigidity
needed for food packaging and can only be made in small sizes; seamed
three-piece cans are stronger and are made in many different sizes to
meet the needs of food processors.
Competition for the food and general packaging markets also comes
from other types of containers, such as:
Retort pouch: a flexible, lightweight, sterile, laminated
plastic and aluminum foil food package that does not require
refrigeration or preservatives. Because it is easy to open,
heat, transport, and dispose of, this food package is very
attractive to a growing number of consumers. In addition, this
container has advantages of storage space savings of 99% and
weight savings of Q6% over metal cans of the same capacity when
empty and, therefore, is easier to ship and handle (Morris,
1981). The disadvantages of the retort pouch over metal cans
are slow filling speeds and high costs.
Aseptic package: a flexible, sterile, laminated container that
is used to package juices and other liquids so that they do not
need refrigeration.
Composite can: a container that consists of many layers of
paper or heavy paperboard wrapped around a mandrel to form a
tube; foil or plastics are laminated to the paper to add
strength and impermeability.
Until recently, two-piece seamless metal cans found only limited
use in packaging noncarbonated beverages. This is because the
carbonation, which is contained in beer and carbonated soft drinks,
helps pressurize and strengthen the can which otherwise may collapse due
to the thin sidewalls. A recent development by Reynolds Metals using
liquid nitrogen allows the use of two-piece seamless metal cans for
noncarbonated beverages such as wines, juices, and waters. In the new
process, a drop of liquid nitrogen is put in the filled can before
sealing; the nitrogen then expands and creates pressure against the
sidewall (Church, 1981, p. 28).
3-14
-------
Another recent technological development is the aluminum bottle
(i.e., resealable can) developed by Continental Can. This container has
a drawn and ironed body and a dome cap with a resealable plastic closure
(referred to as a "clicker top"). This aluminum bottle may improve the
two-piece can industry's competitive position as it combines the
advantages of both metal cans (i.e., lightweight, ease of shipping and
handling) and bottles (i.e., resealability) (Church, 1983, p. 76).
Finally, Alcoa Aluminum and Continental Can have announced a joint
venture to develop a one pound seamless can. Alcoa and Continental
believe they have a process to manufacture a can with strong side walls
at a competitive price. The successful development of a large-size
seamless can would open a new market for seamless two-piece cans
(Church, 1983, p. 13).
If any of the new technologies mentioned above gain wide consumer
acceptance, future demand for two-piece cans could be much greater than
expected. Forecasts of demand are presented in Chapter 4.'
3.4.2 Shipment Trends
As illustrated in Figure 3-2 and Table 3-8, shipments of seamless
two-piece beverage cans (which accounted for 9^% of all seamless cans
shipped in 1982) have experienced strong growth between 1976 and 1982,
averaging a 14.1$ increase per year. The increased demand for seamless
cans has been mainly at the expense of the seamed cans, as shipments of
total beverage cans grew at a more moderate average annual rate of 3.8$
during that same period.
Despite the strong growth in shipments of two-piece seamless cans,
the industry reported excess capacity of between 8 to 10 billion cans at
the start of 1983 (Church, 1983, p. 70). New, more efficient facilities
were added in recent years to improve productivity, and more captive
plants were built by major beverage and food processing companies. This
3-15
-------
FIGURE 3-2 METAL CAN SHIPMENTS. 1976-1982
to
c
o
H
H
PQ
100
90
80
70
60-
50
40
30-
20-
10-
9-
8-
7-
6-
b
c
d
e
f
g
[ i i i
1976 1977 1978 1979
Year
1980
1981
1982
SOURCE: Can Manufacturers Institute, Metal Can Shipments Report, 1977 and 1982.
aTotal Metal Cans.
Beverage Cans.
Q
Two-piece Beverage Cans.
Beer Cans.
Two-piece Beer Cans.
g
Soft Drink Cans.
Two-piece Soft Drink Cans.
3-16
-------
TABLE 3-8
METAL CAN SHIPMENTS. 1976-1982
Total Metal Cans
Billion Cans
% Change
Beverage Cans
Total
Billion Cans
% Change
Two-Pi ece Cans
Billion Cans
% of Total
% Change
Beer Cans
Total
Billion Cans
% Change
Two-Piece Cans
Billion Cans
% of Total
% Change
Soft Drink Cans
Total
Billion Cans
% Change
Two-Piece Cans
Billion Cans
% of Total
% Change
1976
82.6
16. 4
26. 4
56.9
26.9
20.3
75.5
19.5
6.1
31.3
1977
86.9
5.2
51.2
10.3
33.1
64.6
25.4
27.9
3.7
23.6
84.6
16.3
23.3
19.5
9.5
40.8
55.7
1978
89.8
3.3
54.4
6.3
39.9
73.3
20.5
28.9
3.6
26.4
91.3
11.9
25.5
9.4
13.5
52.9
42.1
1979
89.3
(0.6)
54.4
0
44.7
82.2
12.0
28.7
(0.7)
27.0
94.1
2.3
25.7
0.8
17.6
68.5
30.4
1980
87.9
(1.6)
55.2
1.5
50.8
92.0
13.6
29.5
2.8
28.9
99.0
7.0
25.7
0
21.9
85.2
24.4
1981
88.8
1.0
56.3
2.0
55.2
98.0
8.7
30.9
4.7
30.6
99.0
5.9
25.4
(1.2)
24.5
96.5
11.9
1982
89.3
0.6
57.9
2.8
57.7
99.6
4.6
31.7
2.6
31.6
99.7
3.3
26.2
3.1
26.1
99.6
6.5
1976-1982
Average Annual
Growth Rate (%)
1.3
3.8
14.1
2.8
7.8
5.3
28.5
SOURCE: Can Manufacturers Institute, Metal Can Shipments Report, 1977 and 1982.
Note: Detail may not add to totals because of rounding.
3-17
-------
excess capacity has put pressure on the industry's prices and profita-
bility and has also forced the shutdown of some older, less efficient
operations. The industry is expected to retire even more excess
capacity by 1985, thus bolstering prices and profitability. This is
explained more fully in Chapter 4.
3.^.3 Foreign Trade
Imports and exports of metal cans have been insignificant, since
transportation costs for empty cans are high. Table 3-9 shows that U.S.
exports of metal cans have always been less than 1$ of total industry
value of shipments. Statistics on imports of cans are not available;
however, industry sources indicate that they are also insignificant due
to high transportation costs.
3-18
-------
TABLE 3-9
U.S. EXPORTS OF METAL CANS. 1977-1982
Year
1977
1978
1979
1980
1981
1982
Value of
Shipments
($ Million)
8,2*12.8
8,972.3
9,892.3
10,087.0
10,560.0
10,900.0
Value of
Exports
($ Million)
45.0
36.7
52.1
85.9
84.7
89.3
Export/
Shipment
(*)
0.6
0.5
0.6
0.9
0.9
0.9
SOURCE: U.S. Department of Commerce, 1982 and 1983 U.S.
Industrial Outlook.
3-19
-------
H. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
-------
BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the canmaking
industry to 1990 in the absence of the effluent limitations and
standards that are being promulgated. These projections will be used
together with estimated compliance costs and other information to assess
the effects of the requirements of this regulation on future industry
conditions.
The basic approach followed in developing the projections began
with a demand forecast. Then, using the resulting initial volume
estimates, industry supply factors are assessed to determine if there
would be any significant changes in the level of capital requirements
and anticipated growth in terms of the number of plants and quantity of
production.
4.1 DEMAND FORECASTS
The primary reason for beginning the baseline projections with the
demand analysis is based on the hypothesis that the canmaking industry
supply factors will adjust to demand conditions. This results from two
factors: (1) the canmaking industry group is very small compared to the
total economic activity in the U.S. and is, therefore, more likely to
react to general trends rather than influence them and (2) the demand
for metal cans is a derived demand, depending on the demand for
beverage, food, and other consumer goods.
As indicated in Chapter 3, annual shipments of seamless two-piece
cans grew rapidly between 1976 and 1982, and by the end of 1982 nearly
70% of total shipments were seamless cans. This rapid growth can be
explained by the preference of seamless cans over the seamed three-piece
cans for beverage packaging. Beverage cans have always been, by far,
the largest market for seamless cans, accounting for 9^% of all seamless
4-1
-------
cans shipped in 1982 (see Table 3-7). Since there is no clear evidence
that the above demand patterns would change substantially during the
1980s, it is, therefore, assumed that further growth of seamless can
shipments between 1983 and 1990 would approximate that of beverage cans.
For this study, projections of seamless can shipments between 1982
and 1985 are based on industry forecasts of beverage can shipments
published in Beverage Industry Magazine (Norton, 1982, p. 16). These
projections are shown in Table 4-1 and indicate that beverage can
shipments are expected to grow at an average annual rate of 4.3$ to
reach almost 66 billion cans in 1985. It is therefore projected that
seamless two-piece cans will grow at the same 4.3$ rate and reach almost
70 billion cans by 1985. Between 1985 and 1990, it is again assumed
that shipments of seamless two-piece cans will grow at the same rate as
beverage shipments, which are projected to increase 3% a year during
that time period (Predicasts, 1982, p. A-23).
Table 3-8 shows that the average annual growth in two-piece can
shipments between 1976 and 1982 was 14$. This rate was achieved as two-
piece cans replaced three-piece cans in the beverage can market. Two-
piece cans now account for practically all beverage can shipments.
Therefore, it is reasonable to assume that future growth in two-piece
can shipments will be close to that of all beverage cans.
The 4.3$ average annual growth rate expected for all two-piece can
shipments is a combined rate for both captive and commercial
shipments. Captive shipments are expected to grow at 6.3$ per year from
1982 to 1985 and commercial shipments at 3.7$ during that period (see
Table 4-4). The rate for captive shipments reflects the continuing
trend toward self-manufacture by brewers and food processors. The more
modest rate for commercial shipments is in line with expected growth in
GNP (see below).
Figure 4-1 illustrates how the growth in shipments of all beverage
cans has generally outperformed the growth in the real GNP since 1972.
4-2
-------
TABLE 1-1
ACTUAL SHIPMENTS AND PROJECTED SHIPMENTS OF TWO-PIECE METAL CANS
(Billion Cans)
Year
1976
1977
1978
1979
1980
1981
1982
Projected
1983
1981
1985
1990
Annual Growth
Rate (*)
1976-1980
1979-1980
1980-1982
Projected Annual
Growth Rate (%)
1982-1985
1985-1990
Beverage Can Shipments3
Beer
26.9
27.9
28.9
28.7
29.5
30.9
31.7
32. 9b
33. 9b
35. Ob
2.3
2.8
3.7
3.1
NA
Soft Drink
19.5
23.3
25.5
25.7
25.7
25.1
26.2
27. 3b
29.0°
30. 7b
7.1
0
1.0
5.1
NA
Total
16.1
51.2
51.1
51.1
55.2
56.3
57.9
60.2
62.9
65.7
76.1
1.1
1.5
2.1
1.3
3.0°
Seamless
Two-Piece Can
Shipments
NA
NA
NA
16.5
52.6
58.1
61.5
63.9
66.8
69.8
80.9
NA
13.1
8.1
H.3*
3.0d
SOURCES: Can Manufacturers Institute, Metal Can Shipments Reports,
1979, 1980, 1981, and 1982, and Policy Planning & Evaluation,
Inc. estimates.
alncludes both seamed and seamless cans.
blndustry forecasts (Norton, 1982, p. 16).
cPredicast's forecast for beverage shipments (Predicasts, 1982,
p. A-23).
Projected growth rates for all seamless cans are assumed to be the same
as projected growth rates for beverage cans.
NA = not available.
4-3
-------
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4-4
-------
The average growth rate for all beverage cans was 4.5$ during the years
1972-1982 while the real GNP averaged a growth rate of only 2.2$. In
particular, beverage can shipments have grown more quickly than GNP
after recession years. Beverage can shipments exhibited rapid growth
after the 1975 recession and even sustained growth after the 1980
recession through the 1982 downturn in the economy. Given this
performance it seems reasonable to assume that beverage cans and
seamless two-piece cans will outgain the growth in GNP in the 1980s.
The growth in the GNP has been predicted to be 3-6$ between 1982 and
1985, and 2.4* from 1985 to 1990 (DRI, 1983, p. 1.3). Thus, the
beverage and two-piece can growth rates discussed above (1.3$ and 3.0$)
appear to be in line with previous years and are perhaps somewhat
conservative given the history of post-recession growth for beverage
cans.
Growth in beverage and two-piece can shipments through the 1980s
will be affected by several factors. Some of these factors are:
Competition among types of beverage containers;
Competition for new markets; and
Mandatory deposit legislation.
The degree to which two-piece cans maintain or increase their
market share in the face of these impacts will determine if the
projected growth rates for 1985 and 1990 can be met. The following
sections examine the outlook for two-piece cans in each of these
areas. The results tend to indicate that shipments of two-piece cans
will continue to grow. Thus the projected growth rates used in this
analysis appear to be accurate.
4.1.1 Competition Among Types of Beverage Containers
The beverage market has traditionally been the major end-use of
two-piece cans. Although competition remains high among the three most
popular types of beverage containers (metal cans, glass, and plastic),
4-5
-------
estimates are that metal cans will continue to dominate the field
through 1990. Table 4-2 shows the results of a study conducted by Chase
Econometrics and Sabre Associates. In spite of the inroads made by
plastic bottles, the market share held by cans is expected to remain
stable and the share for aluminum two-piece cans (which accounted for
almost 90$ of beverage can shipments in 1982) will grow from 63% to
73.2$ of all beverage packaging containers. This demonstrates the
preference for metal cans, particularly seamless aluminum cans, in the
beverage packaging industry.
The U.S. Brewers Association (USBA) has stated that packaged beer
sales declined by 0.6$ in 1982 while draught beer sales increased by
3.7$. The USBA suggests that the decline in packaged sales may lead to
a reversal of a long established trend favoring packaged beer over
draught beer. Although packaged beer sales may have dropped in 1982,
this was the first decline in recent years. Furthermore, the decline
coincided with a severe recession, with declines recorded by many major
industries and services. The can manufacturing industry, on the other
hand, realized a gain in sales over 1981. Shipments of all beverage
cans increased 2.8% and shipments of two-piece beer cans increased
3.3%. It appears unreasonable, therefore, to form the basis of a trend
on one year's data. The fact remains that two-piece can shipments have
increased steadily in recent years and this trend is expected to
continue. In addition to the Beverage Industry Magazine forecast, the
Agency obtained forecasts of beverage can market shares for 1990 from
Chase Econometrics/Sabre Associates. The results shown in Table 1-2
illustrate that the market share for two-piece aluminum cans is expected
to increase from 63$ of all beverage packaging in 1981 to 73$ in 1990.
U.1.2 Competition for New Markets
In Chapter 3, several innovations in packaging were discussed that
demonstrate how highly competitive the packaging industry is. For
example, although fruit juices and other non-carbonated drinks have
traditionally been packaged in three-piece cans, new aseptic containers
4-6
-------
TABLE 4-2
PROJECTED MARKET SHARES FOR SELECTED CONTAINERS
Cans
Aluminum
Steel
Glass
Beer bottles
Softdrink bottles
Plastic
0.5 Liter
2.0 Liter
Total
1981
% Share
74.4
63.0
11.4
22.6
16.5
6.1
3.0
0.3
2.7
100
1990
% Share
73.2
73.2
19.7
14.0
5.7
7.1
4.0
3.1
100
SOURCE: Chase Econometrics and Sabre
Associates, presented in Packaging
Engineering, December 1982.
4-7
-------
are quickly gaining consumer acceptance. Now two-piece can
manufacturers are attempting to enter this market with the development
of liquid nitrogen injection. One drop of liquid nitrogen injected
prior to sealing provides suitable pressure on the can's sidewalls,
thereby adding the strength necessary to withstand shipping and handling
stresses.
Another area in which competition is great is the 16 oz. or 1/2
liter beverage container market. This market has been dominated by
glass bottles, but plastic bottles and Continental Can's new resealable
aluminum two-piece can may soon compete successfully with glass.
Aluminum cans have definite advantages over plastic and glass. For
example, the 16 oz. metal bottle has a longer shelf life than its
plastic counterpart; cans have a shelf life of up to one year while the
shelf life of 1/2 liter plastic bottles is measured in weeks. Another
advantage over both glass and plastic is greater recyclability; the end
of the new aluminum bottle is made of the same material as the body
on a typical 12 oz. can the end is high magnesium alloy thus
enhancing the can's scrap value (Church, 1983, p. 70). In light of
these developments, if the new products are accepted by consumers, two-
piece can manufacturers may realize gains in new packaging markets, and
demand could exceed the projections used in this analysis.
4.1.3 Mandatory Deposit Legislation
Mandatory deposit legislation has been enacted by nine states. The
impact of deposit laws on cans and other one-way containers, such as
non-returnable glass bottles and plastic bottles, has been mixed. While
some studies show market shares for some containers drop immediately
after enactment and take several years to regain pre-law levels (Stupay,
1983, p. 11), aluminum two-piece cans have outperformed three-piece cans
and glass bottles in deposit law states. For example, in Connecticut
and Iowa, aluminum cans are replacing glass returnable bottles due to
"lower handling costs, greater recycling value, and easy storage" (Bowe,
1983, p. 30).
4-8
-------
Three states have enacted deposit legislation since Beverage
Industry Magazine made its forecast of beverage can shipments for
1985. They are: Massachusetts (effective 1982), Delaware (1982), and
New York (late 1983). Prospects are good that two-piece aluminum
beverage cans will maintain or improve their market share in each of
these states. Table 4-3 shows the beverage container mix between glass
and cans for New York in 1981. The New York legislation could have a
significant impact on this packaging mix because New York retailers have
indicated that they prefer not to handle glass after implementation of
the law (Bowe, 1983t p. 30). This may result in a positive impact for
two-piece cans because aluminum cans stand to gain a significant portion
of the 3 billion unit share held by glass bottles. Aluminum's light
weight and high scrap value have kept it in a good competitive position
in other deposit law states and should help cans maintain their market
share in New York.
In Massachusetts and Delaware, the effects of mandatory deposit
laws also favor two-piece cans. As a result of the deposit laws, four
grocery chains in Massachusetts have stopped selling bottles. In
Delaware, aluminum cans are exempt from the deposit laws until 1984 and
the exemption may continue pending a recommendation of a state
commission. Due to a clause in a contract with a waste recycling
company, the state would default if aluminum cans are eliminated from
municipal waste. The exemption gives cans a 300 savings over other
packages at the retail level (Bowe, 1983, p. 34).
In light of these events, mandatory deposit legislation is not
expected to adversely impact the forecasts of two-piece can shipments
used in this analysis. In addition, the drive for new deposit laws has
been slowed by the defeat last year of such laws in California,
Colorado, Arizona, and Washington (Bowe, 1983, p. 34).
4.2 SUPPLY FORECASTS
This section addresses the number of baseline closures and new
sources that might be expected during the 1980s. The increase in demand
4-9
-------
TABLE H-3
PACKAGING MIX IN NEW YORK STATE. 1981
(In Millions of Equivalent 12 oz. Units)
Product
Beer
Soft Drinks
Total
U.S. Total Shipments
New York as a % of U.S.
Container
One-Way Glass
2,080
936
3,016
29,117
10. M*
Cans
1,350
2,023
3,373
56,326
6.056
SOURCE: Stupay, Arthur, 1983; Containers and
Packaging Annual Review and Outlook Report,
Prescott Ball & Turben, Inc., April, 1983.
4-10
-------
through the 1980s forecast in Section 4.1 can be supplied by (a)
increasing capacity utilization at current plants, (b) modifying current
plants to increase their capacity, (c) constructing new plants, and (d)
increasing imports.
Production capacity in 1982 is calculated to be approximately 67
billion cans. This is based on actual 1982 production of 58 billion
cans, published by the Can Manufacturers Institute (CMI, 1982, p. 6),
and an estimate of unused capacity of 8-10 billion cans published in
Modern Metals Magazine (Church, 1983, p. 70). This is shown in Table
4-4. Total capacity shown in Table 4-4 for 1982 is assumed to be the
industry's optimal capacity utilization rate rather than maximum
capacity. Also, the additions and subtractions from capacity forecasted
for 1985 are assumed to be implemented to attain the industry's optimal
capacity utilization. It is assumed that plants run as captive
operations will operate at full capacity. This is based on the fact
that shipments from captive plants grew at an average annual rate of 11?
from 1979 to 1982 (see Table 3-5). Therefore, 1982 shipments for
captive plants of 15 billion cans (published by CMI) represents total
production capacity as well.
Production from captive plants is expected to continue to increase
by 1 billion cans per year or the same as the 1981-1982 rate (see Table
3-5). This is a conservative estimate, since increases in prior years
have been greater than 1 billion cans per year. Since total shipments
are projected to be 66 billion cans for 1985 (see Table 4-1), and
captive production will increase to 18 billion, commercial production is
estimated to be 48 billion cans.
The number of potential baseline closures is then calculated by
comparing production capacity to 1985 projected production. For
commercial manufacturers, the estimated capacity of 52 billion cans
exceeds 1985 production by 4 billion cans. Captive operations will
require an additional 3 billion cans of capacity by 1985 to meet the
4-11
-------
TABLE 4-4
SUMMARY OF FORECASTS FOR BEVERAGE CANS INDUSTRY
1982 (Actual)
Shipments (Billion Cans)
Excess Capacity (Billion Cans)
Production Capacity
(Billion Cans)
Number of Plantsc
1985 Forecasts
Shipments (Billion Cans)
Additional Capacity Needed Between
1981-1985 (Billion Cans)
Number of Potential Baseline
Plant Closures6
Number of Additional New Plantse
Capital Requirements for New Plants
($ Million )f
Total Number of Plants
All
Producers
58
ga
67
125
66
-1
8
6
120-
180
123
Commercial
Manu f ac tu r e rs
43
9
52
97
48
-4
8
-
89
Captive
Operations
15
15b
28
!8d
3
6
120-
180
34
SOURCE: Policy Planning & Evaluation, Inc. estimates.
aEstimate of beverage can oversupply (Church, 1983, p. 70).
bit is expected that the beverage companies will operate their captive
canmaking facilities at full capacity.
cAssume the number of plants identified as two-piece can plants (125) is
the same as that for beverage cans, and the number of commercial and
captive plants is proportional to capacity.
Assume shipments of beverage cans by captive plants will continue to grow
at the 1981-1982 rate of 1 billion cans a year (see Table 3-5).
eAssume average capacity per can line to be 260 million cans (Church,
1982, p. 96) and an average of 2 lines per plant:
67 billion capacity _ 25Q lineg 125 plants _ 2 lineg per plant
.260 billion per line
fAssume average investment cost of $10-$15 million per line (Gere, 1982).
4-12
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expected production levels. The 4 billion can excess for commercial
plants represents eight potential plant closures, while the 3 billion
can deficit for captives means six new captive plants will be needed by
1985 (assuming two can lines per plant and 260 cans per line). The
additional captive plants will cost between $120 and $180 million.
Because capacity for commercial producers far exceeded demand in
1982, companies are expected to close excess capacity in the near
future. This will enhance their ability to increase prices and,
therefore, strengthen their profitability.
As discussed in Section 3-1*, imports and exports of metal cans have
always been insignificant because transportation costs for empty cans
are high. This situation is not expected to change in the future.
4-13
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5. EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS
-------
5. EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS
5.1 OVERVIEW
The alternative water treatment control systems, costs, and
effluent limitations for the Canmaking subcategory of the Coil Coating
Point Source Category are enumerated in the Development Document. The
Development Document also identifies various characteristics of the
industry, including manufacturing processes; products manufactured;
volume of output; raw waste characteristics; supply, volume, and
discharge destination of water used in the production processes; sources
of waste and wastewaters; and the constituents of wastewaters. Using
these data, pollutant parameters requiring limitations or standards of
performance were selected by EPA.
The EPA Development Document also identifies and assesses the range
of control and treatment technologies for the industry. This involved
an evaluation of both in-plant and end-of-pipe technologies. This
information is then evaluated for existing surface water industrial
dischargers to determine the effluent limitations required for the Best
Practicable Control Technology Currently Available (BPT), and the Best
Available Technology Economically Achievable (BAT). Existing and new
dischargers to Publicly Owned Treatment Works (POTWs) are required to
comply with Pretreatment Standards for Existing Sources (PSES) and
Pretreatraent Standards for New Sources (PSNS), and new direct
dischargers are required to comply with New Source Performance Standards
(NSPS), which require Best Available Demonstrated Control Technology
(BDT). The identified technologies are analyzed to calculate cost above
treatment in place and performance. Cost data are expressed in terms of
investment, operating and maintenance costs plus depreciation, and
interest expense.
5-1
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5.2 CONTROL AND TREATMENT TECHNOLOGY
EPA identified six treatment technologies that are most applicable
for the canmaking industry:
Treatment Level 1: Flow normalization and model end of pipe
technology consisting of oil removal by skimming, chemical
emulsion breaking, dissolved air flotation, or a combination of
these technologies; chromium reduction where necessary, and
removal of other pollutants by precipitation and settle ("lime
and settle");
Treatment Level 2:1 60% flow reduction below BPT normalized flow
plus the Treatment Level 1 model end of pipe technology;
Treatment Level 3: Treatment Level 2 plus polishing filtration;
Treatment Level M: Similar to Treatment Level 3, but
substitutes ultrafiltration for polishing filtration;
o
Treatment Level 5: Flow reduction of about 3056 beyond
Treatment Level 2, in addition to the Treatment Level 1 model
end of pipe technology; and
Treatment Level 6: Similar to Treatment Level 5 plus polishing
filtration.
Treatment Levels 5 and 6 are limited to new sources only. In addition,
Treatment Levels 3 and 4 were rejected for reasons explained in the
preamble to the final regulation and are not included for discussion in
the Economic Impact Analysis.
1Selected technology for BAT/PSES.
2Selected technology for NSPS/PSNS.
5-2
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5.3 COMPLIANCE COST ESTIMATES
5.3.1 Critical Assumptions
The assumptions made to estimate compliance costs are outlined in
the Development Document. Some of the critical assumptions are
summarized below:
All costs are expressed in first-quarter 1982 dollars.
Plant compliance costs are functions of actual production
volume.
Provisions are made for equipment-in-place in estimating
compliance costs for existing sources.
Capital costs are amortized at 10 years and 12% interest. The
annual cost of depreciation was calculated on a straight line
basis over a 10-year period.
The compliance costs of Treatment Level 1 are in many cases greater
than those of Treatment Level 2 which includes substantial flow
reduction and allows for smaller-sized end-of-pipe treatment. In such
cases, in this report, it was assumed that dischargers would install
Treatment Level 2 instead of Level 1 in order to meet BPT and would
incur no incremental cost meeting BAT or PSES.
5.3.2 Compliance Costs of Existing Sources
Table 5-1 presents the total compliance capital investment and
total annual compliance cost estimates of Treatment Levels 1 and 2 for
existing sources in the canmaking industry. Costs were not developed
for Treatment Levels 3 and 4 for existing sources. Total annual
compliance costs for the 71 sample discharging plants for which
production and compliance cost data are available are $14.9 million for
Treatment Level 1 and $15.1 million for Treatment Level 2. Total annual
compliance costs projected for the 83 discharging plants in the industry
are $17.5 million for Treatment Level 1 and $17.7 million for Treatment
Level 2. Investment and annual costs for the 83 plants in the industry
5-3
-------
TABLE 5-1
ESTIMATED COMPLIANCE COSTS FOR CANMAKING EXISTING SOURCES
Total for 71 Sample Plants
Number of Plants
Compliance Capital Investment
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Annual Compliance Costs
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Projected Total for All Plants
in Industry
Number of Plants
Compliance Capital Investment
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
Annual Compliance Costs
(Thousand Dollars)3
Treatment Level 1
Treatment Level 2
All Discharging
Plants
71
18,288
18,588
14,873
15,091
83
21,551
21,970
17,472
17,742
Indirect
Dischargers
69
17,909
18,209
14,493
14,711
80
20,907
21,324
16,881
17,148
Direct
Dischargers
2
379
379
380
380
3
644b
646
591b
594
SOURCE: Section VIII of the Development Document.
3First-quarter 1982 dollars.
These costs are lower than those estimates presented in Section VIII of the
Development Document. We believe facilities will choose the most
economical means of complying with BPT and, if going directly to BAT is
less expensive, will choose to install BAT technology with flow reduction
in order to meet the BPT limits.
Note: Sampling data for 74 plants was received which included 3 plants that
dispose wastewater by land application. Those three plants will
have no compliance costs as a result of this regulation and,
therefore, are not reflected in this table.
5-4
-------
are estimated by (1) calculating costs for 71 plants based on their
individual production levels and treatment in place; and (2) determining
the average compliance costs for the 71 sample plants and assigning the
average costs to the remaining twelve plants. Aluminum and steel plants
are treated separately.
Table 5-2 shows the results of an analysis comparing the annual
compliance costs to total plant revenues. This table illustrates the
relative magnitude of the annual costs. Only 10 plants would experience
annual compliance costs between 156-2/6 of revenues for Treatment Levels 1
and 2. Only one two-piece product line within a plant would experience
annual costs in excess of 2% of revenues.
5.3-3 Compliance Costs of New Sources
As indicated in Section 5-2, two treatment technologies (Treatment
Levels 5 and 6) are considered for new sources. It is estimated that a
new source plant will have production equal to the industry average and
a water flow of 63.6 1/1,000 cans. Table 5-3 summarizes the compliance
cost estimates of these treatment technologies for model plants. These
costs apply to existing facilities that are substantially modified and
to greenfield (new) plants.
5-5
-------
TABLE 5-2
IMPACT OF ANNUAL COMPLIANCE COSTS ON REVENUES FOR EXISTING SOURCES
Number of Sample Plants
With Annual Compliance
Costs to Revenues between:
0 - 0.25 percent
0.25 - 0.50 percent
0.50 - 0.75 percent
0.75 - 1 .00 percent
1 .00 - 2.00 percent
Over 2.00 percent
Treatment
Level 1
6
24
22
8
10
1a
Treatment
Level 2
6
21
22
8
10
1a
SOURCE: Policy Planning & Evaluation, Inc. estimates.
Represents a single two-piece product line within a plant.
5-6
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TABLE 5-3
NEW SOURCE MODEL PLANT COMPLIANCE COSTS
Compliance Capital
Investment
(Thousand Dollars)3
Annual Compliance
Costs
(Thousand Dollars)3
Treatment Level 1D
Treatment Level 2
Treatment Level 3
Treatment Level 1C
Treatment Level 5
Treatment Level 6
382.1
399.1
382.1
396.1
266.6
277.6
266.6
275.6
SOURCE: Section VIII of the Development Document.
aFirst-quarter 1982 dollars.
Treatment Level 1 costs are not provided since new source
requirements must be at least as stringent as existing source
requirements.
clnvestment and Annual costs were not provided for Treatment
Level 4. This treatment level was rejected as a viable option
and will not be presented for discussion in the Economic Impact
Analysis.
5-7
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6. ECONOMIC IMPACT ANALYSIS
-------
6. ECONOMIC IMPACT ANALYSIS
This chapter provides an estimate of the economic impacts
associated with the costs of the effluent treatment technologies
described in Chapter 5. The analysis was based upon an examination of
the estimated compliance costs and other economic, technical, and
financial characteristics of the 71 canmaking plants for which
production and compliance costs data were available, and used the
methodology described in Chapter 2. The economic impacts examined
include changes in industry profitability, plant closures, substitution
effects, changes in employment, shifts in imports and exports, and
industry structure effects.
The 71-plant sample represents approximately 86% of the discharging
plants in the industry and contains a wide range of both large and small
plants. Therefore, the sample appears to represent adequately the
technical characterization of the industry for the purposes of this
study.
6.1 PRICE AND QUANTITY CHANGES
As described in Chapters 2 and 3, market competition is strong in
the metal can industry. For this reason, it was assumed that metal can
manufacturers would attempt to absorb their compliance costs and would
not adjust prices. Consequently, the price changes due to the
regulation would be zero. It follows, also, that quantities demanded
would not change because of the regulations.
6.2 PROFIT IMPACT ANALYSIS
As described in Section 2.5, the assessment of the impact of
compliance on plant profitability was based on the plants' after-
compliance return on investment (ROI) ratios, investment being defined
6-1
-------
as total plant assets (i.e., current assets plus net property, plant and
equipment). In addition to per plant production levels, compliance
costs, and capital investments (developed by EPA's Effluent Guidelines
Division), the methodology for the profit impact test requires the use
of average industry can prices, profit margins, and assets to sales
ratios. In order to arrive at values for the profit margin and assets
to sales ratio, a five-year average (1977-1981) of industry data from
Robert Morris Associates1 Statement Studies was used. The results are
shown in Appendix B. Since both good and bad business years are
included in the series, these averages represent the long-term
profitability for the industry. The average industry profit margin is
estimated to be 5% and the assets to sales ratio is 0.52. A 5% industry
profit margin appears obtainable by 1985 despite low capacity
utilization rates in 1982. It is expected that industry will close
unused capacity by 1985, thereby increasing utilization rates and
profitability.
The final data element required to perform the profitability test
is the price of the can. The price used in this analysis is $60 per
1,000 cans. This price represents the price of only the can body, as
the manufacture of lids does not generate process wastewater and is not
regulated. The $60 price is based on a consensus of can manufacturers
that are members of the Can Manufacturers Institute, a trade association
of metal can manufacturers. Chase Econometrics reported a target price
for 1982 of $68 per 1,000 cans in a 1982 study of the beverage packaging
industry (Chase, 1982, p. 2.23). However, due to severe price cutting
caused by high competition, $60 is used as an approximation of the
actual market price.
To perform the profitability test, the average before-tax ROI for
the industry must be estimated. This is calculated to be 10% by using
the following equation:
(Average PM) (Average TO) = Average BTROI
(.05) (2) = .10
6-2
-------
where: BTROI = before-tax ROI
PM = profit margin (from Appendix B)
TO - asset turnover ratio (from Appendix B)
The threshold for the profitability test is an after-compliance ROI
of 7% (see Appendix A). Therefore, plants with an ROI of less than 7%
after compliance would be potential closures. Table 6-1 presents the
distribution of ROIs for the 71 sample plants. This table indicates
that a two-piece product line in one of these plants was found to be a
potential closure at Treatment Levels 1 and 2. The same product line
closes at both treatment levels.
6.3 CAPITAL REQUIREMENTS ANALYSIS
As presented in Chapter 2, the ratio of "compliance capital
investment to revenues" (CCI/R) was used to evaluate a firm's ability to
raise the capital necessary to install the pollution control systems.
Although the CCI/R ratio does not precisely indicate whether or not
plants can afford to make the required investments, it provides a good
indication of the relative magnitude of the compliance capital
investment requirements. The ratio CCI/R was calculated for each of the
71 sample plants and compared to the plants' respective capital
availability threshold value. Assuming that reinvestment in plant and
equipment equals depreciation, the plant's net after-tax profit margin
is a measure of the internally generated funds available for pollution
control investment. For this analysis, the before-tax profit margin of
a canmaking plant is estimated to be 5% of revenues, and the corporate
tax rate is assumed to be 40/f; therefore, 3% (60% of 5%) of revenues was
taken to be the capital availability threshold.
Table 6-2 presents the results of the capital requirements
analysis. A two-piece product line in one of the plants was found to
have a CCI/R ratio greater than the threshold value for Treatment Levels
1 and 2. The same product line closes at both treatment levels.
6-3
-------
TABLE 6-1
SUMMARY OF PROFIT IMPACT ANALYSIS
Number of Sample Plants
With After-Compliance ROI
Between:
9.5 - 10.0 percent
9.0 - 9.5 percent
8.0 - 9.0 percent
7.0 - 8.0 percent
under 7.0 percent3
Treatment
Level 1
1»
19
37
10
1«>
Treatment
Level 2
3
20
35
12
1»>
SOURCE: Policy Planning & Evaluation, Inc.
estimates.
aPlants with ROI less than 7% are considered
potential closures.
Represents a single two-piece product line within
a plant.
6-4
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TABLE 6-2
SUMMARY OF CAPITAL REQUIREMENTS ANALYSIS
Number of Sample Plants
With Compliance Capital
Investment to Annual
Revenues Ratios between:
0-0.5 percent
0.5 - 1 .0 percent
1.0 - 2.0 percent
2.0 - 3.0 percent
over 3 percent3
Treatment
Level 1
19
38
13
0
ib
Treatment
Level 2
19
38
13
0
1b
SOURCE: Policy Planning & Evaluation, Inc.
estimates.
aPlants with ratios of compliance capital
investment to annual revenues greater than 3% are
considered potential closures.
^Represents the same single two-piece product line
that failed the ROI test.
6-5
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6.4 PLANT CLOSURE POTENTIAL
As indicated in the profit impact and capital requirements
analyses, Treatment Levels 1 and 2 are expected to cause one product
line closure. This product line produces less than 50 million cans per
year. Since the 71-plant sample represents a major portion of the
regulated industry, no additional plant closures are expected at the 83-
plant level.
It should be noted that the baseline projections developed in
Chapter U showed closures of 8 can plants by 1985 in the absence of
additional regulations. However, the identity of the plants that would
close in the baseline could not be determined because plant specific
financial data were not available. It is possible that one of these
plants contains the plant product line projected to close due to the
regulations.
6.5 OTHER ECONOMIC IMPACTS
The effluent regulations examined in this report may have economic
impacts other than the plant closure potentials discussed above. The
substitution potential of other processes and materials, and possible
community, employment, foreign trade, and industry structure
implications, will be addressed in the following sections.
6.5.1 Substitution Effects
As indicated in Chapter 3, seamless two-piece metal cans face
strong competition from other types of containers. Price increases due
to regulatory compliance costs would likely cause a switch to other
types of containers such as glass and plastic bottles. However, as
described in Chapter 2, compliance costs are expected to be absorbed by
the can manufacturers. For this reason, no substitution effects are
expected to result from the regulations.
6-6
-------
6.5.2 Community and Employment Impacts
The one two-piece can product line expected to close at Treatment
Levels 1 and 2 employs 26 employees. The plant is located in a
metropolitan area where the employees account for a very small portion
of the total labor force. Thus, the impact on local employment will not
be significant.
6.5.3 Foreign Trade Impacts
As stated in Chapter 3, foreign trade competition in the canraaking
industry is not significant. U.S. exports of metal cans have always
been less than 1? of total industry value of shipments. Although
statistics for imports are not available, industry sources indicate that
they are insignificant due to high transportation costs. In addition,
it is assumed that there will be no price increases resulting from the
regulations. Thus, no foreign trade impacts are expected.
6.5.4 Industry Structure Effects
The potential product line closure represents a small fraction of
the total industry capacity. The market share of the expected product
line closure is also quite small and will probably be captured by other
existing producers. Therefore, there will be no change in market
structure as a result of this regulation.
6.6 NEW SOURCE IMPACTS
As reported in Section 5.2, two treatment alternatives (Treatment
Level 5 and Level 6) are considered for canmaking new sources. Total
system compliance costs of these two alternatives for typical new
sources are summarized in Table 5-3.
For the purpose of evaluating the new source impacts, compliance
costs of new source standards were defined as incremental costs over the
6-7
-------
costs of selected standards for existing sources. Table 6-3 presents
the results of the new source impact analysis assuming the selected
treatment technology for existing sources is Treatment Level 2. This
table shows that there is no incremental capital or annual compliance
costs for new sources under the selected option (Treatment Level 5),
since the recommended technology for reducing flow beyond BAT/PSES flows
is the same as the technology for achieving BAT/PSES flows (counterflow
rinsing). Even if a sensitivity analysis had been conducted for Treat-
ment Level 6, the incremental investment and annual costs are less than
0.05% of revenues. New entry into the industry, therefore, should not
be deterred by these compliance costs.
6-8
-------
TABLE 6-3
SUMMARY OF NEW SOURCE IMPACT ANALYSIS
Annual Production of a New Model Can Plant (million cans)3
Plant Costs ($ million)
Plant Revenues ($ million)
Treatment Level 5 Costsb
Incremental investment cost - $000
Incremental annual cost - $000
Treatment Level 6 Costs
Incremental investment cost - $000
% of Annual Revenues
Incremental annual cost - $000
- % of Annual Revenues
600
30
36
0
0
0.01
9
0.03
SOURCE: Policy Planning & Evaluation, Inc. estimates.
aAssume average capacity of 300 million cans per line (Gere, 1982)
and 2 lines per plant.
Incremental from Treatment Level 2.
6-9
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7. SMALL BUSINESS ANALYSIS
-------
7. SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-351), which
amends the Administrative Procedures Act, requires Federal regulatory
agencies to consider "small entities" throughout the regulatory
process. The RFA requires an initial screening analysis to be performed
to determine if a substantial number of small entities will be
significantly affected. If so, regulatory alternatives that eliminate
or mitigate the impacts must be considered. This chapter addresses
these objectives by identifying and evaluating the economic impacts of
the aforementioned regulations on small metal can producers. As
described in Chapter 2, the small business analysis was developed as an
integral part of the general economic impact analysis and was based on
the examination of the distribution by plant size of the number of can
plants, plant production, and compliance costs from the regulations.
Based on this analysis, EPA has determined that small entities will not
be disproportionately impacted by this regulation.
For purposes of regulation development, the following alternative
approaches were considered to provide alternative definitions of small
canraaking operations:
the Small Business Administration (SBA) definition;
plant annual production;
plant number of can lines; and
plant wastewater flow rate.
Of these, plant annual production was chosen. This is because the
manufacturing technology in the seamless canmaking industry is very
similar among producers, so plant annual production is indicative of
relative size. For this regulation, plant annual production of 500
million cans or less was used as the definition of a small canmaking
business.
7-1
-------
Table 7-1 shows the distribution of production, sales, and
compliance capital investment costs, by size of annual production, for
the plants affected by this regulation. The size breakdown is as
follows:
500 million cans per year or less
500-750 million cans per year
750-1,000 million cans per year
More than 1,000 million cans per year.
A plant which manufactures 500 million cans per year or less is
considered to be a small producer for this analysis.
The table shows that small producers account for only 16% of the
industry's production and sales, while the largest producers (1,000
million cans and more per year) represent almost 35/6 . In spite of the
wide difference in the share of production and sales among the smallest
and largest plants, the impact of compliance costs for Treatment Level 2
is more closely distributed among the size categories. The comparison
of compliance capital investment to revenues was used in the small
business analysis because, as discussed elsewhere in this report, the
ratio provides a reasonable measure of the magnitude of the compliance
costs. An explanation of the methodology for this test is presented in
Chapter 2. The ratio of compliance capital investment to revenues is
the same for small producers as it is for the industry as a whole
(1$). Therefore this regulation will not disproportionately impact
small companies.
7-2
V*,
-------
TABLE 7-1
SMALL BUSINESS IMPACTS
Total Production
(millions of cans)
Total Sales ($ 000)
% of Total
Total Compliance Capital
Investment for
Treatment Level 2
($ 000)
% of Sales
Size of Plant (millions of cans per year)
< 500
7,681
460,860
16
5,277
1
500-750
15,969
958, 140
33
6,364
1
750-1,000
8,528
511,680
17
3,053
1
>1,000
17,036
1,022,160
35
3,895
0.4
Total
49,214
2,952,840
100
18,589
1
7-3
-------
8. LIMITATIONS OF THE ANALYSIS
-------
8. LIMITATIONS OF THE ANALYSIS
This section discusses the major limitations of the economic impact
analysis. It focuses on the limitations of the data, methodology,
assumptions, and estimations made in this report.
8.1 DATA LIMITATIONS
In the absence of complete plant-specific financial data for two-
piece canmaking plants, a financial profile of the canmaking industry
was developed based on extensive review of trade literature and
published financial reports. This financial profile is subject to the
following major assumptions and limitations:
The economic impact analysis was based on a sample of 71
discharging plants for which both annual production data
(obtained from EPA 308 industry surveys) and compliance cost
estimates were available. This 71-plant sample contains a wide
range of plants of all sizes and appears to be representative
of the two-piece canmaking subcategory. The sample was then
extrapolated to the industry total of 83 canmaking plants.
Production data for most plants were reported in terms of the
number of cans produced. For several plants production data
were reported in pounds and were converted to number of cans
assuming 3^ aluminum cans per pound and 13 steel cans per
pound.
An average industry price of $60 per thousand cans was used to
derive sales revenue estimates, from production data for each
sample plant.
Financial information is not available for the two-piece
canmaking segment of companies manufacturing metal cans.
Therefore, industry averages for operating ratios such as
profit margin and assets to sales were used. The methodology
for estimating these financial variables is explained in
Chapter 2 and Appendix B.
8-1
-------
8.2 METHODOLOGY LIMITATIONS
In addition to the data limitations described above, this study is
also subject to limitations of the methodology used. These limitations
are related to critical assumptions on price increase, profit impact,
and capital availability analyses.
8.2.1 Price Increase Assumptions
Because of strong competition within the canmaking industry and
with other types of packaging, it was assumed that the can manufacturers
would attempt to absorb their compliance costs and would not raise their
prices. If prices could be raised without significantly affecting
demand, the impacts on canmaking firms would be lower than those
estimated in Chapter 6.
8.2.2 Profit Impact Assumptions
In studies where detailed, plant-specific data are available,
potential plant closures can be identified by using discounted cash flow
analyses. Using this approach, a judgment can be made about the ability
of a plant to continue in business after compliance with effluent
regulations, by comparing the discounted value of the plant's cash flow
with the plant's estimated salvage value. The application of this
approach requires plant-specific data on cash flows and salvage values,
and since data at this level of specificity are not available for this
study, this approach was not deemed to be practical. As an alternative
method, profitability impacts were measured through the use of return on
investment (assets) analysis. Although this financial ratio analysis is
based upon accounting data and does not account for the time value of
money, it is widely used in comparative financial analyses and is simple
to apply. Moreover, in a situation such as the analysis conducted in
this study, both methods are likely to indicate the same impact (i.e.,
plant closure) conclusions.
8-2
-------
Industry-wide estimates of long-term profit margins and total
assets to sales ratios were applied to plant-specific sales figures to
arrive at estimates of profit and investment (for the return on
investment test). The long-term operating ratios represent the average
value over the past five years. Long-term profitability estimates were
used to project closures since major investment decisions are made
primarily on the basis of long-run expectations. Economic analysis
generally distinguishes between long-run and short-run outcomes.
Decisions regarding variable costs and relatively small amounts of
resources are generally made on short-run criteria. On the other hand,
decisions regarding large investment in fixed assets are made on the
basis of long-run expectations. This means that large capital
expenditures are generally made based on the expected return on the
investment over a period of years. Cyclical fluctuations in the general
economic conditions usually do not affect the outcome of these decisions
but do affect their timing.
8.2.3 Capital Availability Assumptions
The capital investment requirements analysis was assessed through
an evaluation of investment compliance costs in comparison to total
revenues. Although this technique does not provide a precise conclusion
on a firm's ability to make the investment, it does provide a good
indication of the relative magnitude of the capital requirement. In
performing this test, an assumption was made that reinvestment equals
depreciation. This assumption does not limit the usefulness of the test
and, in fact, is widely used in the financial analysis literature.
8.3 SUMMARY OF LIMITATIONS
Although the above factors may affect the quantitative accuracy of
the impact assessments on specific canmaking plants, it is believed that
the results of this study represent a valid industry-wide assessment of
the economic impacts likely to be associated with effluent guideline
control costs.
8-3
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8.4 SENSITIVITY ANALYSIS
8.4.1 Counterflow Rinsing vs. Countercurrent Cascade Rinsing
Table 8-1 shows the results of a sensitivity analysis performed for
a new source model plant with counterflow rinsing and three additional
stages of countercurrent cascade rinsing. The analysis was performed to
compare the investment and annual costs between the two technologies,
since some plants may elect to install countercurrent cascade rinsing to
achieve new source standards. The analysis shows that even with the
additional equipment needed for countercurrent cascade rinsing,
incremental investment and annual costs represent less than 0.5% of
annual plant revenues. Because both these technologies are only
slightly more stringent than Treatment Level 2, there will be no barrier
to entry caused by this regulation.
8.4.2 Monitoring
A sensitivity analysis was performed to estimate additional impacts
imposed by monitoring requirements. If all plants are required to
monitor ten days per month, total annual costs for the 71 sample plants
for Treatment Level 2 would increase from $15.1 million to $15.8
million. This increase would be expected to cause only one additional
closure over that shown in Chapter 6, or a total of two plant closures
(one of which is a two-piece can line within a three-piece canmaking
plant).
8-4
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TABLE 8-1
SENSITIVITY ANALYSIS OF NEW SOURCE IMPACTS
Annual Production of a New Model Plant (million cans)a
Plant Costs ($ million)
Plant Revenues ($ million)
Treatment Level 5 Costs (counterflow rinsing)b
Incremental investment cost - $000
Incremental annual cost - $000
Treatment Level 6 Costs (counterflow rinsing)
Incremental investment cost - $000
- % of Annual Revenues
Incremental annual cost - $000
- % of Annual Revenues
Treatment Level 5 Costs (3 additional stages of
countercurrent rinsing)
Incremental investment cost - $000
- % of Annual Revenues
Incremental annual cost - $000
- % of Annual Revenues
Treatment Level 6 Costs (3 additional stages of
countercurrent rinsing)
Incremental investment cost - $000
- % of Annual Revenues
Incremental annual cost - $000
- % of Annual Revenues
600
30
36
0
0
14
0.04
9
0.03
111
0.31
35
0.10
146
0.41
55
0.15
SOURCE: Policy Planning & Evaluation, Inc. estimates.
aAssume average capacity of 300 million cans per line (Gere, 1982)
and 2 lines per plant.
Incremental from Treatment Level 2.
8-5
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BIBLIOGRAPHY
-------
BIBLIOGRAPHY
1. Ball Metal Container Group. The Quality Beverage Container. 1978.
2. Bowe, James. "Aluminum Can Looks Like Winner in N.Y. Bottle
Bill." Modern Metals, April 1983, pp. 28-3^.
3. Can Manufacturers Institute (CMI). Metal Can Shipments Report.
1977, 1979, 1980, 1981, 1982.
4. Chase Econometrics and Sabre Associates (Chase). Materials
Competition in the Beverage Container Industry; The Outlook for
Aluminum, Glass, and Plastics to 1990* Presented in Packaging
Engineering, December 1982, p. 11.
5. Church, Fred L. "Next Aluminum Target: Cans for Wine, Water,
Juices." Modern Metals, January 1981, pp. 28-3^.
6. Church, Fred L. "Demand Dip Hits Can Makers; New Advances Promise
Cost Control." Modern Metals, January 1982, pp. 96-108.
7. Church, Fred L. "Canmakers Sing the Blues Despite Strengthened
Sales." Modern Metals, January 1983, pp. 70-76.
8. Church, Fred L. "Fruit, Vegetables, ,Other Foods Targeted for New
Aluminum Can." Modern Metals, January 1983, pp. 13-16.
9. Data Resources, Inc. (DRI). U.S. Long Term Review. Summer 1981 and
Winter 1982-1983.
10. Gere, Robert. American Can Company. Personal communication.
December 22, 1982.
11. Moody's. Industrial Manual. 1980-1982.
12. Moody's. Industrial New Reports. 1983-
13- Morris, Charles. "Institutional Retort Pouch Now in Pilot-Test."
Food Engineering, October 1981.
14. Norton, John. "Plastic Share Up; Beer Eyes PET For Family-Size
Bottle." Beverage Industry, February 19, 1982, pp. 1, 11, 16, 19.
15. Predicasts Inc. Predicasts Forecasts. June 1982, p. A-23-
16. Robert Morris Associates. Annual Statement Studies. 1982, p. 135.
17. Stupay, Arthur. 1983: Containers and Packaging Annual Review and
Outlook Report. Prescott, Ball, and Turben, Inc., April 1983.
18. U.S. Department of Commerce, Bureau of Census. 1977 Census of
Manufacturers, Metal Cans, Cutlery, Hand Tools, and General
Hardware. Issued June 1980.
-------
19. U.S. Department of Commerce, Bureau of Census. Quarterly Financial
Report for Manufacturing, Mining, and Trade Corporations; Fourth
Quarter 1982. Issued April 1983.
20. U.S. Department of Commerce. U.S. Industrial Outlook. 1982, 1983.
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
To assess the impact of compliance on plant profitability, the
plants' after-compliance returns on assets (ROI) ratios were calculated
and compared to a threshold value. The threshold value was set at a
level that would generate to the stockholders/owners a return on the
liquidation value of their investment (after taxes return on their
equity) equal to the opportunity cost of other investment alternatives,
which in this case is defined as the U.S. Treasury bond yield. It is
assumed that plants must generate an after-compliance return on assets
at least as great as, the threshold value or the plants would be closed.
The first step in relating the ROI threshold value and the
opportunity return is the following equation:
NPBT _ NPBT Equity
T 7 ~ rr x » ,
Assets Equity Assets
Assets
.
(1-t) Assets
where: BTROI = minimum acceptable before-taxes return on assets
NPBT = net profit before taxes
Assets = asset book value
Equity = equity book value
BTROE = minimum acceptable before-taxes return on equity
ATROE = minimum acceptable target after-taxes return on equity
t = average corporate tax rate.
A-l
-------
Using the above equation, a projected U.S. Treasury bond yield (or
minimum acceptable after- taxes ROE) of 12$ (DRI, 1981), corporate tax
rate of HQ% (U.S. Department of Commerce, 1983, p. 38), and equity-to-
assets ratio of 50% (see Appendix B), the bef ore-taxes ROI threshold
value would be
However, the gross cash value of a plant (liquidation value) is
generally a fraction of its book value. It is assumed that the gross
cash value is Q5% of the book value. Given a debt/equity share of
50-50, the net cash value of the plant after obligations would be:
Net Cash Value = (.85 Book Value) - (.50 Book Value)
= .35 Book Value
The "\2% U.S. T-bond rate represents the return on the net cash
value of plants assets that could be expected if the owners chose to
liquidate the plant. Therefore, the after tax return would be:
After Tax Return = (.12) ((.35) Book Value)
= .04 Book Value
Accounting for taxes produces a before tax return of:
.04 Book Value
Before Tax Return =
(1 - .4)
= .07 Book Value or a 1% return
The owners' expected before-tax return on the liquidated value of
equity (7/0 equals the opportunity cost of a comparable investment
alternative; namely the U.S. Treasury bond yield. Since the liquidation
value of equity represents the owners' retrievable investment:
Before Taivfte.turn on Equity = Before Tax Return on Investment
BTROE BTROI = 1%
Table A-1 presents estimatSlr^Qf profit impact threshold values
*ife
based on various assumptions on asset^Jiquidation value and equity-to-
assets ratio.
A-2
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TABLE A-1
ESTIMATED ROI THRESHOLD VALUES THAT GENERATE 12$ ROE
ASSUMING VARIOUS ASSETS LIQUIDATION VALUES AND EQUITY TO ASSETS RATIOS
Equity/Assets Ratio
0.30
0.35
0.40
0.15
0.50
0.55
0.60
0.65
0.70
Equity/Assets Ratio
0.60
0.65
0.70
Corporate Tax Rate: 10*
Assets Liquidation Value (% of Book Value)
60%
*
*
*
1.0
2.0
3.0
4.0
5.0
6.0
70%
*
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
75%
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
80*
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
85%
3.0
4.0
5.0
6.0
(Ml
8.0
9.0
10.0
11.0
90%
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
100*
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
Corporate Tax Rate: 35%
Assets Liquidation Value (% of Book Value)
60*
4.3
4.6
5.0
70%
6.0
6.5
7.0
75%
6.8
7.4
8.0
80%
7.7
8.3
8.9
85*
8.5
9.2
9.9
90*
9.4
10.2
10.9
100*
11.1
12.0
12.9
A-3
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APPENDIX B
ESTIMATION OF KEY FINANCIAL PARAMETERS
OF CANMAKING INDUSTRY
-------
APPENDIX B
ESTIMATION OF KEY FINANCIAL PARAMETERS
OF CANMAKING INDUSTRY
Table B-1 presents the methodology for estimating three key
financial ratios used in the economic impact analysis: plant baseline
return on sales (profit margin), total assets to sales, and stock-
holders' equity to sales ratios. Since plant-specific financial
characteristics are not available, data used to estimate these three
ratios are obtained from Robert Morris Associates' (RMA) Statement
Studies. 1982 edition.
In order to corroborate the results in Table B-1 and determine
whether adding 1982 data would significantly affect the industry
averages, an analysis of financial information for four of the largest
commercial manufacturers of cans was performed. The following companies
show business segment information on their annual reports for
predominantly can operations:
American Can Co. (Segment: Container and Packaging)
Continental Group (Segment: Cans)
Crown, Cork, and Seal Co., Inc. (Segment: Metal Products)
National Can Corp. (Segment: Metal Container)
These four companies account for almost 60% of the production of
all metal containers. Information on the before tax return on sales
(profit margin) for the years 1978 to 1982 was compiled for each
company's can segment. Table B-2 shows that the profit margin for these
companies averaged 5.1$ over the 1978-1982 time period. This tends to
indicate that the 5% profit margin represents the long-term
profitability of the can manufacturing industry.
B-1
-------
TABLE B-1
SELECTED FINANCIAL RATIOS FOR CANMAKING INDUSTRY
Profit Before Taxes
(% of Sales)
Assets to Sales
Stockholders' Equity
(% of Total Assets)
1977
5.2
0.57
47.3
1978 1979
4.8 6.9
0.58 0.45
49.1 44.7
1980
5.1
0.41
53.4
1981
4.6
0.53
51.2
Estimated
Industry8
Average
5.0
0.52b
49.2
SOURCE: Policy Planning & Evaluation, Inc. estimates based on published
financial data for Metal Cans industry (SIC 3411) from Robert
Morris Associates' Statement Studies, 1982 edition.
aAverage of 1977-1981 ratios, excluding the lowest and the highest years.
The inverse of the assets to sales ratio is the asset turnover ratio (sales
to assets). Therefore, the turnover ratio for this industry is estimated
to be 2.
B-2
-------
TABLE B-2
AVERAGE PROFIT MARGIN CALCULATED FROM
ANNUAL REPORTS. 1978-1982
(percents)
Year
1978
1979
1980
1981
1982
Company
Crown
8.7
8.0
8.2
7.0
5.7
National Continental American
2.9
7.6
6.8
4.2
5.0
5
5
3
2
J|
.9
.1
.2
.3
.0
5-year
5.5
5.2
3.1
3.7
-0.1
average
Average
5.8
6.5
5.3
4.3
3.7
5.1a
SOURCE: Corporate Annual Reports.
aAverage of 1978-1982 ratios, excluding the lowest and the
highest years.
B-3
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REPORT DOCUMENTATION
PAGE
1. REPORT NO.
EPA 440/2-83-011
3. Recipient's Accession No.
4. Title and Subtitle
Economic Impact Analysis of Effluent Limitations and Standards
for the Canmaking Subcategory of the Coil Coating Category
5. Report Date
November 1983
7. Author(s)
8. Performing Organization Rept. No.
9. Performing Organization Name and Address
10. Project/Tack/Work Unit No.
Work Order No. 2 '
Policy Planning and Evaluation, Inc.
8301 Greensboro Drive
Suite 460
McLean, VA 22102
11. Contract(C) or Grant(G) No.
(O 68-01-6731
(G)
12. Sponsoring Organization Name and Address
U. S. Environmental Protection Agency
401 M Street, SW (WH-586)
Washington. D.C. 20460
13. Type of Report & Period Covered
Final
14.
15. Supplementary Notes
16. Abstract (Limit: 200 words)
This report represents the results of the economic impact analysis for the Canmaking
subcategory of the Coil Coating industry which is noticed in the Federal Register
on November 17, 1983. The report presents an industry profile, cost estimates for
the options considered by the Agency, and the analyses of the projected plant or
product line closures, price changes, unemployment and other effects. Using revised
compliance costs for each plant, EPA performed a capital requirements analysis and
a profitability analysis to determine the likelihood of potential closures.
17. Document Analysis a. Descriptors
b. Identifiers/Open-Ended Terms
c. COSATI Field/Group
18. Availability Statement
Release unlimited
19. Security Class (This Report)
Unclassified
20. Security Class (This Page)
TTnol ^CJQI "Fi P*C{
21. No. of Pages
200
22. Price
(See ANSI-Z39.18)
GOVERNMENT PRINTING OFFICE:1984-«21-063 / 501
See Instructions on Reverse
OPTIONAL FORM 272 (4-77)
(Formerly NTIS-35)
Department of Commerce
-------
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Environmental Protection
Agency
Washington DC 20460
WE 586
Official Business Special
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