United States Office of Planning December 1980
Environmental Protection and Evaluation Washington, DC 20460
Agency Economic Analysis EPA 440/2-81-009
Division
An Economic Analysis of
Proposed Effluent Limitations
Guidelines, New Source
Performance Standards, and
Pretreatment Standards for
the Iron and Steel
Manufacturing Point Source
Category
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This document is available in limited quantities through the U.S. Environmental Protection Agency,
Economic Analysis Staff (WH - 586), 401 M Street, S.W. Washington, D.C. sw 20460, (202) 755-2484
This document will subsequently be available through the National Technical Information Service,
Springfield, Virginia 22151.
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AN ECONOMIC ANALYSIS OF
PROPOSED EFFLUENT UMITATIONS GUIDELINES,
NEW SOURCE PERFORMANCE STANDARDS,
AND PRETREATMENT STANDARDS
FOR THE IRON AND STEEL
MANUFACTURING POINT SOURCE CATEGORY
Prepared for:
ENVIRONMENTAL PROTECTION AGENCY -
OFFICE OF PLANNING AND EVALUATION
DECEMBER 1980
U.S. Environmental Protection Agency
Region V, Library
230 South Dearborn Street
Chicago, Illinois 60604
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CONTENTS
Page
Preface iv
Acknowledgments v
List of Exhibits vi
EXECUTIVE SUMMARY 1
Report Coverage 2
Baseline Condition of the Steel Industry 2
Effects of Water Pollution Control 6
Other Effects 9
Alternative Scenario 11
I. INTRODUCTION 1-1
Background 1-2
Report Coverage 1-5
Research Methodology 1-6
II. BASELINE CONDITION II-l
Future Steel Shipments II-2
Future Operations and Maintenance Expenses II-3
Future Capital Expenditures for Capacity
Additions and Reworks II-5
Future Capacity Retirements and Additions II-8
Future Costs for In-Place and Committed
Water and Air Pollution Control Equipment II-9
III. AIR POLLUTION ABATEMENT REGULATIONS III-l
Costing Methodology III-4
Capital Expenditures for Air Pollution
Control Equipment III-5
Operations and Maintenance Expenses for
Air Pollution Control Equipment III-7
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CONTENTS
Continued
Page
III. AIR POLLUTION ABATEMENT REGULATIONS (continued)
Capital Expenditures and Operations and
Maintenance Expenses for Ancillary Boiler
Facilities III-8
Comparisons of Alternative Engineering
Cost Estimates for Air Pollution Control
Equipment III-9
IV. COST IMPACT OF THE CLEAN WATER ACT IV-1
Legislative Authority IV-1
Current Status of the Guidelines IV-2
Cost Impact Methodology IV-3
Cost Impact of the Guidelines IV-4
Sensitivity Analysis: Alternative
Compliance Schedules IV-10
V. REVENUE REQUIREMENTS AND PRICE EFFECTS V-l
Revenue Requirements V-2
Price Effects V-4
Shipments Sensitivity Analysis V-6
VI. FINANCIAL EFFECTS VI-1
Baseline External Financing Requirements
and Financial Condition VI-2
Financial Effects of Future Water Pollution
Control Expenditures VI-3
Sensitivity Analysis VI-7
VII. OTHER IMPACTS OF ENVIRONMENTAL REGULATIONS VII-1
Employment Effects VII-1
Market Share Effects VII-4
Energy Impact VII-5
ii
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CONTENTS
Continued
VIII. ALTERNATIVE SCENARIO VIII-1
Alternative Baseline Condition VIII-1
Baseline Financial Condition VIII-6
Financial Impact of Water Pollution
Control Regulations VIII-7
Other Effects VIII-10
EXHIBITS
APPENDIX: INTERMEDIATE SCENARIO
iii
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PREFACE
The attached document is a contractor's study prepared for
the Office of Planning and Evaluation of the Environmental Pro-
tection Agency (EPA). The purpose of the study is to analyze
the economic impact that could result from the implementation
of the proposed iron and steel effluent limitation guidelines.
The study is one of the regulatory documents being considered
by EPA in the formulation of effluent guidelines for the iron
and steel industry. The reader should note that the three
scenarios considered in this report—the main, the alternative,
and the intermediate—are referred to as the first scenario,
the second scenario, and the third scenario, respectively, in
other regulatory documents.
This study has been prepared with the supervision and re-
view of the Office of Planning and Evaluation. It has also
been reviewed by other offices within EPA.
IV
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ACKNOWLEDGMENTS
A study of this complexity cannot be undertaken without
the cooperation of many individuals. From the outset, Temple,
Barker & Sloane, Inc. (TBS) received valuable assistance from
a number of steel industry representatives. B. D. Smith and
L. Van der Veer of U.S. Steel, W. Lowe and T. Myers of Inland
Steel, and W. Williams, J. Briggs, and G. Millenbruch of Beth-
lehem Steel provided insightful comments as well as industry
perspective. Special appreciation is also given to J. Collins,
S. Fletcher, and D. Barnett of the American Iron and Steel
Institute (AISI) for their contribution.
The TBS study utilized detailed industry operating data
collected by Arthur D. Little for the AISI. Interpretation of
these data was provided by S. Margolin and K. Parameswaran.
Individuals from several organizations assisted in devel-
oping detailed cost and other technical data for pollution
control equipment. Among these were T. Centi and J. Boros of
NUS/Rice, and D. Henz and B. Kemner of PEDCo Environmental,
Inc.
The valuable contribution of the following individuals is
also acknowledged: S. Schatzow, G. Amendola, E. Dulaney,
E. Hall, L. DuPuis, and G. Coad of EPA's Office of Water and
Waste Management, D. Berry of EPA's Office of General Counsel,
and B. Bloom of EPA's Office of Enforcement.
EPA's Office of Planning and Management provided project
direction throughout the duration of the project. R. Greene
and J. Fitzgerald guided TBS's effort, providing perspective
and performing an important part of the information gathering
and coordination tasks associated with a project of this
scope. R. Gamse offered valuable comments and encouragement.
While pleased to acknowledge all the assistance it has
received during this study, TBS of course takes full respon-
sibility for the study's analysis and conclusions.
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LIST OF EXHIBITS
Exhibit
Number Title
1 Domestic Steel Shipments, 1960-1990
2 Projected Steel Shipments, 1976-1990
3 Shipments Sensitivity Analysis—Projected Steel
Shipments, 1980-1990
4 Steel Production Processes
5 Production Operations and Maintenance Expenses by
Cost Category, 1976-1990
6 Return on Equity, 1970-1990
7 Capital Expenditures for Productive Capacity
Additions, 1976-1990
8 Capital Expenditures for Reworks, 1976-1990
9 Productive Capacity Retirements, 1976-1990
10 Productive Capacity Additions, 1976-1990
11 Air Pollution Control Compliance Schedule,
1976-1990
12 Capital Expenditures for Air Pollution Control
Equipment by Time Period
13 Capital Expenditures for Air Pollution Control
Equipment by Type of Emission, 1976-1990
14 Capital Expenditures for Air Pollution Control
Equipment by Year and by Type of Emission,
1976-1990
15 Operations and Maintenance Expenses for Air
Pollution Control Equipment by Type of Emission,
1981-1990
vi
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LIST OF EXHIBITS
(continued)
Exhibit
Number Title
16 Operations and Maintenance Expenses for Air
Pollution Control Equipment by Time Period,
1981-1990
17 Operations and Maintenance Expenses for Air
Pollution Control Equipment by Year and by Type
of Emission, 1981-1990
18 Comparison of Capital Expenditures for Air
Pollution Control Equipment by Type of Emission
—PEDCo versus Arthur D. Little Engineering Cost
Estimates, 1976-1990
19 Comparison of Capital Expenditures for Air
Pollution Control Equipment by Stage of
Production—PEDCo- versus Arthur D. Little
Engineering Cost Estimates, 1976-1990
20 Capital Expenditures for Water Pollution Control
Equipment—Effluent Guideline: BPT
21 Capital Expenditures for Water Pollution Control
Equipment—Effluent Guideline: BAT
22 Capital Expenditures for Water Pollution Control
Equipment—Effluent Guideline: PTS
23 Capital Expenditures for Water Pollution Control
Equipment—Effluent Guideline: NSPS
24 Capital Expenditures for Water Pollution Control
Equipment—Total Water Pollution Control
Requirements
25 Capital Expenditures for Water Pollution Control
Equipment—Incremental Cost Category: Baseline
26 Capital Expenditures for Water Pollution Control
Equipment — Incremental Cost Category: BPT
Additions
VII
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LIST OF EXHIBITS
(continued)
Exhibit
Number
27
28
29
30
31
32
33
34
35
36
37
Title
Capital Expenditures for Water Pollution
Equipment — Incremental Cost Category:
Additions
Control
BAT/PTS
Capital Expenditures for Water Pollution Control
Equipment by Water Pollution Control
Subcategory--Effluent Guideline: BPT
Capital Expenditures for Water Pollution Control
Equipment by Water Pollution Control
Subcategory--Effluent Guideline: BAT
Capital Expenditures for Water Pollution Control
Equipment by Water Pollution Control
Subcategory--Effluent Guideline: PTS
Capital Expenditures for Water Pollution Control
Equipment by Water Pollution Control
Subcategory--Effluent Guideline: NSPS
Capital Expenditures for Water Pollution Control
Equipment by Water Pollution Control
Subcategory--Total Water Pollution Control
Requirements
Cash Outlays for Water Pollution Control
Equipment—Effluent Guideline: BPT, 1976-1990
Cash Outlays for Water Pollution
Equipment—Effluent Guideline:
Cash Outlays for Water Pollution
Equipment—Effluent Guideline:
Control
BAT, 1976-1990
Control
PTS, 1976-1990
Cash Outlays for Water Pollution Control Equipment
--Effluent Guideline: NSPS., 1976-1990
Cash Outlays for Water Pollution Control Equipment
--Total Water Pollution Control Requirements,
1976-1990
Vlll
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LIST OF EXHIBITS
(continued)
Exhibit
Number Title
38 Cash Outlays for Water Pollution Control Equipment
--Incremental Cost Category: Baseline, 1976-
1990
39 Cash Outlays for Water Pollution Control Equipment
--Incremental Cost Category: BPT Additions,
1976-1990
40 Cash Outlays for Water Pollution Control Equipment
--Incremental Cost Category: BAT/PTS Additions,
1976-1990
41 Operations and Maintenance Expenses for Water
Pollution Control Equipment--Effluent Guideline:
BPT, 1981-1990
42 Operations and Maintenance Expenses for Water
Pollution Control Equipment--Effluent Guideline:
BAT, 1981-1990
43 Operations and Maintenance Expenses for Water
Pollution Control Equipment--Effluent Guideline:
PTS, 1981-1990
44 Operations and Maintenance Expenses for Water
Pollution Control Equipment--Effluent Guideline:
NSPS, 1981-1990
45 Operations and Maintenance Expenses for Water
Pollution Control Equipment—Total Water
Pollution Control Requirements, 1981-1990
46 Operations and Maintenance Expenses for Water
Pollution Control Equipment — Incremental Cost
Category: Baseline, 1981-1990
47 Operations and Maintenance Expenses for Water
Pollution Control Equipment—Incremental Cost
Category: BPT Additions, 1981-1990
48 Operations and Maintenance Expenses for Water
Pollution Control Equipment — Incremental Cost
Category: BAT/PTS Additions, 1981-1990
IX
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LIST OF EXHIBITS
(continued)
Exhibit
Number
49
50
51
52
53
54
55
56
57
58
59
Title
Land Costs Associated with Water Pollution Control
Equipment—Effluent Guideline: BPT
Land Costs Associated with Water Pollution Control
Equipment—Effluent Guideline: BAT
Land Costs Associated with Water Pollution Control
Equipment--Effluent Guideline: PTS
Land Costs Associated with Water Pollution Control
Equipment—Effluent Guideline: NSPS
Land Costs Associated with Water Pollution Control
Equipment—Total Water Pollution Control
Requirements
Land Costs Associated with Water Pollution Control
Equipment—Incremental Cost Category: Baseline
Land Costs Associated with Water Pollution Control
Equipment—Incremental Cost Category: BPT
Additions
Land Costs Associated with Water Pollution Control
Equipment — Incremental Cost Category: BAT/PTS
Additions
Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Capital Expenditures for
Water Pollution Control Equipment—Effluent
Guideline: BPT
Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Capital Expenditures for
Water Pollution Control Equipment—Effluent
Guideline: BAT/PTS
Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Cash Outlays for Water
Pollution Control Equipment—Effluent Guideline:
BPT, 1976-1990
x
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LIST OF EXHIBITS
(continued)
Exhibit
Number Title
60 Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Cash Outlays for Water
Pollution Control Equipment—Effluent Guideline:
BAT/PTS, 1976-1990
61 Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Operations and Maintenance
Expenses for Water Pollution Control Equipment
--Effluent Guideline: BPT, 1981-1990
62 Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Operations and Maintenance
Expenses for Water Pollution Control Equipment—
Effluent Guideline: BAT/PTS, 1981-1990
63 Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Land Costs Associated with
Water Pollution Control Equipment—Effluent
Guideline: BPT
64 Sensitivity Analysis: Water Pollution Control
Compliance Schedules—Land Costs Associated with
Water Pollution Control Equipment—Effluent
Guideline: BAT/PTS
65 PTm(Steel) Financial Module
66 Revenue Requirements for the Baseline Condition,
1981-1990
67 Incremental Revenue Requirements for Water
Pollution Control Equipment, 1981-1990
68 Average Price Effects for Water Pollution Control
Equipment, 1981-1990
69 Effects of Additional Water Pollution Control
Costs on Net External Financing—Full Cost Pass-
Through, 1981-1990
70 Effects of Additional Water Pollution Control
Costs on Net External Financing—Zero Cost Pass-
Through, 1981-1990
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LIST OF EXHIBITS
(continued)
Exhibit
Number Title
71 Effects of Additional Water Pollution Control
Costs on Long-Term Debt to Capitalization
Ratios—Full Cost Pass-Through, 1981-1990
72 Effects of Additional Water Pollution Control
Costs on Interest Coverage Ratios--Full Cost
Pass-Through, 1981-1990
73 Effects of Additional Water Pollution Control
Costs on Cash Flow to Long-Term Debt Ratios —
Full Cost Pass-Through, 1981-1990
74 Effects of Additional Water Pollution Control
Costs on Long-Term Debt to Capitalization
Ratios—Zero Cost Pass-Through, 1981-1990
75 Effects of Additional Water Pollution Control
Costs on Interest Coverage Ratios—Zero Cost
Pass-Through, 1981-1990
76 Effects of Additional Water Pollution Control
Costs on Cash Flow to Long-Term Debt Ratios--
Zero Cost Pass-Through, 1981-1990
77 Employment for Industry Baseline and Additions to
Water Pollution Control Equipment for Selected
Years
7B Energy Consumption for Industry Baseline and
Additions to Water Pollution Control Equipment,
1981-1990
79 Alternative Scenario—Projected Steel Shipments,
1976-1990
80 Alternative Scenario—Return on Equity, 1981-
1990
81 Alternative Scenario—Productive Capacity
Additions, 1976-1990
82 Alternative Scenario—Capital Expenditures for
Productive Capacity Additions, 1976-1990
xn
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LIST OF EXHIBITS
(continued)
Exhibit
Number Title
83 Alternative Scenario—Capital Expenditures for
Reworks, 1976-1990
84 Alternative Scenario—Average Price Effects for
Water Pollution Control Equipment, 1981-1990
85 Alternative Scenario—Effects of Additional Water
Pollution Control Costs on Long-Term Debt to
Capitalization Ratios, 1981-1990
86 Alternative Scenario--Effects of Additional Water
Pollution Control Costs on Interest Coverage
Ratios, 1981-1990
87 Alternative Scenario—Effects of Additional Water
Pollution Control Costs on Cash Flow to Long-
Term Debt Ratios, 1981-1990
88 Alternative Scenario—Effects of Additional Water
Pollution Control Costs on Net External
Financing, 1981-1990
89 Alternative Scenario—Energy Consumption for
Alternative Industry Baseline and Additions to
Water Pollution Control Equipment, 1981-1990
Xlll
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EXECUTIVE SUMMARY
This report examines the economic effects of the proposed
water pollution control regulations on the iron and steel indus-
try. It focuses on the regulations' potential impacts on the
industry's prices, financial condition, and production capacity.
The report forms part of the Environmental Protection Agency's
(EPA's) overall review of water pollution control in the iron
and steel industry necessitated by the remand of the previous
iron and steel effluent guidelines in 1977 by the U.S. Court
of Appeals, Third Circuit.
This report is the culmination of a 24-month study con-
ducted by Temple, Barker & Sloane, Inc. (TBS) and sponsored by
EPA's Office of Planning and Evaluation. It analyzes the pro-
duction, pollution control, and financial characteristics of
the iron and steel industry. To analyze these industry char-
acteristics, TBS employed its policy testing model of the steel
industry, PTm(Steel). PTm(Steel) combines a methodology for
calculating economic effects with the cost impact methodology
employed by the American Iron and Steel Institute (AISI) in
its investigation of pollution control costs. This combina-
tion permits an integrated analysis of the costs and economic
effects of environmental regulations.
The TBS analysis of the economic effects of the proposed
effluent guidelines focuses on the steel industry's probable
future outlook assuming continuation of current government poli-
cies toward the industry through the 1980s. The policies under-
lying this main scenario include the current tax policies con-
cerning corporate income tax rates, allowable depreciation life-
times, and investment tax credits; the current pricing policies
of the "Anti-Inflation Program"; and the transitionary import
policies in effect during the suspension of the trigger price
mechanism. In addition, the analysis considers an alternative
scenario consistent with specific changes in government tax,
pricing, and import policies that would lead to a more optimis-
tic outlook for the steel industry during the second half of
the decade. The likelihood of the optimistic projections of the
alternative scenario will depend on whether the government imple-
ments these specific policy changes in the near future. Because
there is uncertainty regarding which policy changes, if any, will
actually be implemented, TBS has also analyzed an intermediate
scenario. This scenario considers the effects on the steel in-
dustry's operating and financial condition of the common elements
in the economic recovery policies currently being considered by
various groups within the government. The results of the inter-
mediate scenario analysis are presented in the Appendix.
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REPORT COVERAGE
In this study, the steel industry is defined as those pro-
duction process units normally associated with steel production
and finishing. On-site facilities from raw material storage
yards for coke ovens and blast furnaces through finishing mills
were thus considered part of the steel industry. Also included
in the industry definition were facilities used by the steel
industry to produce pig iron for foundries and other uses.
Facilities for the mining, beneficiation, and transportation
of raw materials and fabrication facilities were excluded from
the definition. All other nonsteel operations performed by
steel firms were excluded from the analysis.
In order to utilize detailed operating data compiled by
AISI members, TBS limited its analysis to steel industry opera-
tions that accounted for approximately 88 percent of U.S. raw
steel production capability in 1978. Extension of the analysis
to iron ore and coal mining, beneficiation, transportation, fab-
rication, and other nonsteel operations performed by steel com-
panies would not be appropriate.
The air and water pollution control regulations considered
in this report are limited to those promulgated, proposed, or
anticipated by EPA as of August 1980. Government regulations
initiated by other federal agencies, such as OSHA requirements,
are not included.
The engineering cost estimates and compliance schedules
associated with environmental control efforts were based on
compliance by the steel firms at the plant sites. They do not
include control efforts by municipal wastewater treatment
facilities.
The following sections of the Executive Summary review
TBS's main scenario analysis of the steel industry's probable
future outlook in the absence of water pollution control regu-
lations, and the potential changes in this outlook due to the
proposed water regulations. The final section summarizes the
potential effects of the proposed water pollution control reg-
ulations on the steel industry's projected condition under the
alternative scenario.
BASELINE CONDITION OF
THE STEEL INDUSTRY
To determine the economic effects of the proposed efflu-
ent guidelines on the iron and steel industry, it was neces-
sary to establish a baseline (reference point) against which
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comparisons could be made. The baseline was designed t'o reflect
the probable future operating and financial conditions of the
industry in the absence of the proposed water pollution control
regulations. In creating the set of baseline conditions, TBS
segmented the uncertainties inherent in forecasting steel indus-
try conditions unrelated to anticipated water regulations from
the uncertainties associated with these regulations. The uncer-
tainties inherent in both the baseline forecast and the incre-
mental water cost projections were investigated through sensi-
tivity analyses.
Major Assumptions
TBS has assumed that domestic steel shipments will slowly
rebound from the recession level of 1980, attaining by 1982 a
shipments volume comparable to the 1978 shipments volume of
about 98 million tons. During the 1983-1990 period, shipments
have been assumed to increase by approximately 1 percent per
year, with year-by-year fluctuations tied to domestic economic
activity. This baseline forecast results in domestic steel
shipments of 106 million tons by 1990. The forecast presumes
that the industry will maintain its present share of total U.S.
steel consumption.
The slow growth rate in domestic steel shipments projected
by TBS for the 1980s suggests that the industry's production
will not exceed sustainable levels of capacity utilization
(levels that include a reserve for maintenance downtime) through
about 1987, despite significant capacity retirements and only
a modest program for production capacity modernization and re-
placement. The balance between the industry's capacity and
demand projected by TBS implies a continuation of weak earnings
performance by the steel industry throughout most of the 1980s.
The industry's projected return on equity for the 1980-1990
period is approximately 8.9 percent, or a real return of only
about 0.8 percent.
The continuation of historically low profitability levels
projected for the industry throughout the 1980s by TBS and many
stock market analysts implies a weak financing capability for
the industry. A weak financing capability is partly a function
of the continuation of market prices that are markedly below
the book values of equity. Since market prices for steel com-
panies' common stock are currently at about 50 percent of their
book values, the issuance of a significant amount of new common
stock would result in substantial dilution of shareholders'
equity interest. This adverse potential effect on current stock-
holders is likely to deter the industry from common stock financ-
ing and, consequently, to encourage it to rely on debt to meet
external financing needs.
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The degree to which steel company managements are actually
willing to utilize debt to finance capital expenditures depends
on many factors, the most important being the implications of
additional debt financing for bond ratings. The increased use
of debt tends to decrease key measures of credit quality such
as interest coverage and cash flow to long-term debt ratios,
ultimately resulting in higher borrowing costs and lower bond
ratings. Of particular concern is the possibility that bond
ratings may decline from the current ratings of A by Standard &
Poor's and Moody's to the lowest investment grade (Standard &
Poor's BBB or Moody's Baa) or, worse yet, below investment grade
Under normal credit market conditions, a BBB/Baa rated company
is relatively assured of having access to debt capital on
reasonable terms. However, during tight credit market condi-
tions, these companies may not be able to raise their capital
requirements on reasonable terms. The additional costs and po-
tential financing difficulties associated with a BBB/Baa rating
(or lower) are likely to lead managements to constrain their
capital expenditures and debt financing to levels consistent
with the preservation of an A bond quality rating, one notch
above the BBB/Baa category.
The baseline created by TBS reflects the foregoing finan-
cial considerations in two important ways. First, it has been
assumed that common stock financing will not be undertaken by
the industry. Second, the industry's debt to capitalization
ratio has been limited to approximately 35 percent during the
1980s in order to preserve the industry's current credit rating.
This limit on debt financing in turn implies limits on the cap-
ital expenditures that the industry would be likely to under-
take in the absence of a financing constraint.1 The industry
is likely to limit capital expenditures by reducing expendi-
tures for reworks to levels below those that knowledgeable in-
dustry sources consider desirable. The implications of the
constraints on reworks expenditures for industry capacity, mar-
ket share, and employment levels are discussed in subsequent
sections of the Executive Summary.
Baseline Financial Condition
The financial implications of the baseline assumptions de-
scribed above can be assessed by focusing on five key indicators:
capital expenditures, external financing needs, operations and
The implications of a higher level of investment are detailed
in the body of the report.
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maintenance (O&M) expenses, revenue requirements, and average
price per ton of steel. Table 1 shows these indicators for the
short run (1981-1984) and the long run (1981-1990). (Exhibits
A, B, and C, included at the end of the Executive Summary, pro-
vide a more detailed breakdown of the baseline condition.)
In order to maintain the industry's current financial con-
dition throughout the 1980s, baseline capital expenditures for
reworks of production capacity have been reduced relative to
desired reworks levels by about $217.0 million per year over
the decade. This sustained reduction in reworks will lead to
a decline in production capacity of about 12.8 percent during
the latter part of the 1980s and the beginning of the 1990s
relative to capacity levels that would prevail with a full re-
works program. This decline is in addition to the sizable
capacity retirement projections included in the baseline fore-
cast. As discussed in the "other effects" section of the Exec-
utive Summary, the 12.8 percent decline in production capacity
will have important implications for the domestic industry's
future market share and employment levels.
" Table 1
SUMMARY OF BASELINE CONDITION
(mi 11 ions of 1978 do I lars)
Capital Expenditures
Net External Financing Needs
O&M Expenses
Revenue Requirements
Average Prica
(1978 dollars per ton)
aO&M and revenue levels for 1984.
bO&M and revenue levels for 1990.
Source: PTm(Steel).
Short Run
(1981-1984)
S 8,519.5
620.4
31,362.33
37,744.2*
427.5
Long Run
(1981-1990)
$19,576.9
2,109.4
34,648.5&
39,558.3b
426.3
As shown in Exhibits A, B, and C, the baseline projections
reflect the costs of in-place and committed water pollution
control equipment and in-place and additions to air pollution
2Revenue requirements are the changes in overall revenues neces-
sary to cover the cost of operations, including a projected
cost of capital.
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control equipment in addition to expenditures for production
capacity. Capital expenditures for production equipment account
for 94.1 percent of total baseline capital expenditures during
the 1981-1990 period. Air pollution control equipment expendi-
tures comprise 5.6 percent of the total baseline outlays. la-
place water equipment expenditures account for the remaining
0.3 percent. Production-related charges also dominate total
baseline operations and maintenance costs, accounting for 97.7
percent of total baseline costs. Air equipment operations and
maintenance costs (including miscellaneous pollution control
equipment charges) amount to 1.9 percent of total baseline
charges; about three-quarters of these costs are associated
with in-place air equipment as of 1980. Finally, costs arising
from the operation of in-place and committed water pollution
control equipment account for the remaining 0.4 percent of total
baseline operations and maintenance costs.
Table 1 shows that the steel industry will need to raise
$620.4 million in external funds over the 1981-1984 period,
even after it has reduced investments in reworks to levels con-
sistent with maintaining an A bond rating. An additional
$1,489.0 million will need to be raised during the 1985-1990
period. Total net external financing will be $2,109.4 million
for the 1981-1990 period. This amounts to less than half that
raised by the industry during the five-year period from 1975
to 1979. During the 1970s, the steel industry's net external
financing averaged $504.0 million per year; during the 1981-
1990 period, external financing amounts are projected to average
$210.9 million per year. The major factor underlying the pro-
jection of lower external financing amounts relative to histori-
cal levels is the current and projected weak financial condition
of the steel industry.
EFFECTS OF WATER POLLUTION CONTROL
TBS has estimated that capital expenditures for water pol-
lution control equipment needed to comply with EPA's proposed
effluent guidelines for the various water pollution control sub-
categories of the iron and steel industry will total $1,021.3
million during the 1981-1990 period.3 The capital-related
3
It should be noted that the TBS estimates are based on the
assumption that all existing steel facilities will achieve
Best Available Control Technology Economically Achievable (BAT)
requirements by July 1, 1984.
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charges associated with these expenditures, combined with the
costs of operating the additions to water pollution control
equipment, will create an annual revenue requirement of $227.0
million by 1990 (Table 2).
Table 2 shows that most of the capital expenditures as-
sociated with water pollution control equipment will occur
in the 1981-1984 period. These investments will necessitate a
further reduction in the industry's productive investment pro-
gram beyond the reduction in reworks expenditures inherent in
the baseline projections. The extent of the reduction in the
industry's productive investment program due to water pollution
control requirements will depend on the potential financial
effects of the water costs.
Table I
SUMMARY OF IMPACT OF ADDITIONS TO
WATER POLLUTION CONTROL EQUIPMENT
(mill ions or" 1978 do I lars)
Capital Exoenditures
External Financing Needs
O&M Expenses
Revenue Requirements
Short Run
(1981-1934)
5923.7
573.6
133.S*
301.1*
Long Run
(1981-1990)
51,021.3
473.5
102.9°
227.0"
Assumes full pass-through of annual *ater pollution control
costs.
aO&M and revenue levels for 1984.
b04M and revenue levels for 1990.
Source: ?Tm(Steel).
If water pollution control costs were passed through to
steel consumers and if the industry maintained its baseline
investment program, almost 75 percent of the capital expendi-
tures for additional water pollution control equipment would
require external financing during 1981-1984. External financ-
ing requirements in 1981-1984 ($673.6 million) would represent
a 56 percent increase over the external capital ($1,210.4 mil-
lion) that would need to be raised by the steel industry under
baseline conditions during this period. The heavy concentra-
tion of expenditures for water pollution control during the
first half of the 1980s would result in a net decline of $200.1
million in external financing from the baseline level during
the second half of the 1980s. The decline during the 1985-1990
period is primarily a function of the higher depreciation
charges associated with the investment in water pollution equip-
ment during the first half of the 1980s and of the presumption
that revenues would increase to the extent necessary to recover
these depreciation charges.
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8
If the steel industry maintained its baseline reworks pro-
gram, its external financing needs for water pollution control
would require additional reliance on debt financing since man-
agement would probably be unwilling to issue common stock at
currently depressed common stock price levels. A reliance on
debt to finance BPT and BAT water pollution control expendi-
tures would increase the industry's debt to capitalization
ratio to about 37.3 percent during the 1981-1984 period, as-
suming full pass-through of incremental costs. The increased
use of debt associated with maintaining both the baseline and
water-related investment programs would jeopardize the industry's
current bond ratings. It is unlikely that the costs of proposed
BPT control requirements alone would precipitate a lowering of
the industry's overall low A credit rating, but the additional
costs of proposed BAT control requirements would significantly
raise the likelihood of the steel industry's overall bond rat-
ing dropping to BBB.
If water pollution control costs were not passed through
to customers (the more likely case) and if the steel industry
maintained its baseline investment program, net external fi-
nancing requirements would increase by $864.0 million over the
1981-1984 baseline level. This contrasts with a $673.6 million
requirement with full cost pass-through. Net external financ-
ing requirements would increase by $211.9 million (instead of
declining by $200.1 million with full cost pass-through) over
the 1985-1990 period. With zero cost pass-through, the indus-
try's overall credit rating might decline to BBB with just BPT
control. The addition of BAT control would probably put the
indus.try at the low end of the BBB rating category.
Because steel companies would be subject to potential fi-
nancing difficulties with BBB ratings, they are unlikely to
maintain their baseline productive investment programs when
faced with additional water pollution control costs. Instead,
they are likely to reduce reworks expenditures to the extent
necessary to preserve the baseline debt to capitalization ratio
of 35 percent and thereby the industry's A credit rating.
Reductions in the modest baseline reworks program (which
already reflects significant reductions from desirable reworks
levels) resulting from water pollution control requirements
will adversely affect industry production and capacity levels.
This in turn will lead to reductions in domestic market share
and employment levels. The key to forestalling bond downgradings
and avoiding cutback of needed investment in steel facilities
is for the steel industry to earn a more competitive rate of
return on equity and to be able to pass through the added costs
of pollution control.
-------
OTHER EFFECTS
In addition to the potential financial effects described
above, the anticipated water effluent guidelines will have other
impacts on the steel industry's baseline condition. The most
significant of these effects will concern changes in the level
of steel industry employment and in the share of apparent con-
sumption held by domestic producers.4 Minor effects will be
expected in the steel industry's consumption of energy.
Employment
\
The operation of pollution control facilities will create
new jobs.- Compliance with air pollution control regulations,
considered part of the industry's baseline condition, is esti-
mated to require 5,675 new steel industry employees. Total
water pollution control efforts are estimated to create 4,050
new jobs. In total, about 9,725 new employees will be required
by 1990 to operate pollution control equipment within the steel
industry.
However, these employment increases will be more than off-
set by the reduction in production labor that will result from
total air and water pollution control costs. The steel indus-
try, when faced with pollution control requirements, will need
to forego substantial amounts of reworks expenditures during
the 1980s in order to preserve its credit quality. The sus-
tained reduction in reworks will result in capacity declines
during the latter part of the 1980s and the beginning of the
1990s. The decrease in industry production capacity will lead
to a corresponding decline in production and employment because
the industry will already be utilizing capacity at maximum sus-
tainable rates during the late 1980s.
The effects of environmental control costs on steel industry
employment are reflected in both the industry's baseline charac-
teristics and its condition after the addition of anticipated
water pollution control costs. As mentioned before, in order
to maintain its current financial condition throughout the
1980s—even before the incidence of water pollution control
requirements—the steel industry will need to forego reworks
to the point where it experiences a 12.8 percent decline in
capacity and production at the turn of the decade relative to
levels that would prevail with a full reworks program. About
one-third, or 4.6 percent, of the decline in capacity and pro-
duction in the baseline condition is attributable to air pol-
lution control additions. This implies that the air pollution
4
Apparent consumption of steel is defined as domestic steel
consumption plus the change in user inventories.
-------
10
control requirements included in the baseline will result in a
decrease in production labor of about 13,850 employees.
Anticipated water pollution control requirements will neces-
sitate a further decline in industry reworks, production capac-
ity, and production labor if the steel industry is to preserve
its current financial condition. If costs are passed through
to consumers, the incremental water pollution control require-
ments will create a further reduction in steel production labor
of about 9,600 jobs. If there is zero pass-through of these
costs, production employment is estimated to decline by approx-
imately 17,925 jobs.
The net effect of environmental control requirements on
steel industry employment is a potential reduction of 22,050
jobs. The net effect of water pollution control requirements
alone is a potential decline in employment of about 13,875 jobs.
Market Share
The domestic steel industry's share of-apparent steel con-
sumption will probably decline significantly due to environ-
mental control requirements. The industry's baseline market
share is projected to decrease from approximately 82 percent
in 1977 and 1978 to about 71.5 percent around the end of the
decade. This is a result of the projected 12.8 percent decline
in domestic capacity and production noted in the preceding sec-
tion on employment. Future air pollution control costs account
for about one-third, or approximately 3.8 percent, of the 10.5
percent decline in baseline market share.
Anticipated water pollution control requirements, with
full pass-through of annual costs, will result in a further
decline in domestic market share to about 68.9 percent. This
decline in market share is a result of declines in industry
capacity and production due to the further decrease in reworks
expenditures necessitated by water pollution control costs.
Under the more likely zero cost pass-through condition, water
pollution control costs will lead to a domestic market share
of about 66.6 percent.
Energy
The energy requirements of the environmental regulations
are small when compared to the energy requirements of steel
production. Pollution control regulations will account for
less than 4 percent of the industry's net energy consumption
in the 1980s. This amounts to approximately 38,000 barrels
of residual fuel oil, or the equivalent, per day—approximately
evenly divided between air and water regulations.
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11
Water pollution control equipment will require 0.370 quad-
rillion Btu in the 1981-1990 period. Of this, 0.124 quadrillion
Btu will be consumed by water equipment installed after 1980.
This energy use by new water pollution control equipment amounts
to 0.6 percent of the industry's net energy consumption, or
about 5,800 barrels of residual fuel oil, or the equivalent, per
day.
ALTERNATIVE SCENARIO
The main scenario analyzed in this study is consistent
with continuation of current government policies toward industry
in general and the steel industry in particular during the next
decade. These policies include the current tax policies con-
cerning allowable depreciation lifetimes, the current pricing
policies of the "Anti-Inflation Program," and the transitionary
steel import policies that have been in effect since the trigger
price mechanism was suspended.
The alternative scenario, described in this section, pro-
jects a more optimistic outlook for the steel industry that is
consistent with specific changes in government tax, pricing,
and import policies. These changes include a U.S. industrial
policy with provisions for accelerated capital recovery and
other investment incentives, a pricing policy that allows more
latitude in steel price increases, and a steel import policy
directed toward ensuring "full value" import prices in the
domestic market. The likelihood of the optimistic projections
of the alternative scenario will depend on whether the govern-
ment implements these specific policy changes in the near future,
Alternative Baseline Condition
If implemented, these new policies would probably have a
significant effect on the steel industry's condition during
the next decade. A more rapid capital recovery policy for the
industrial sector of the economy would create a higher growth
rate in steel demand than that projected in the main scenario.
If the import share of apparent consumption were to remain
constant, domestic steel shipments would be projected to grow
at about 3 percent per year. This more rapid growth in ship-
ments would cause capacity utilizations to rise to maximum sus-
tainable levels (levels including a reserve for maintenance
downtime) by the mid-1980s. The resulting balance between
steel demand and supply levels would cause a transfer in pric-
ing leverage from consumers to producers of steel during this
-------
12
period. The increase in the steel industry's pricing flexibil-
ity, if higher prices were allowed, would lead to increases in
profitability, culminating in an all-manufacturing return on-
equity by the 1985-1986 period.
The projected increase in steel industry profitability
during the mid-1980s would have important implications for the
industry's financing capability during the rest of the decade.
Once the industry's ability to compete for equity funds has been
demonstrated by returns at the all-manufacturing level for about
two years, the industry should be in a position to issue signi-
ficant amounts of common stock. Its increased profitability
would result in market-to-book ratios of common equity much
closer to 100 percent than the current 50 percent levels, and
steel shareholders consequently would not be exposed to signi-
ficant dilution of their equity interest through major common
stock issues. Increased profitability and issues of common
stock would also improve the steel industry's access to long-
term debt.
The industry's ability to obtain substantial amounts of
external financing would significantly reduce the investment
program restrictions that the industry would experience in the
main baseline scenario. The industry would be able to under-
take a full program of reworks expenditures to maintain its
production capacity. It would also be able to replace sizable
amounts of its obsolete raw material preparation, raw stee-1-
making, and semifinishing facilities with more efficient tech-
nologies. Finally, it would probably be able to increase ca-
pacity sufficiently to maintain its current market share of
domestic steel consumption throughout the 1980s.
The result would be a revitalization of the steelmaking
side of the industry. The efficiency gained in the 1980s from
new coke ovens, blast furnaces, and continuous casters should
lead to an improved ability to compete with foreign producers.
This would probably allow the steel industry to maintain accept-
able profit levels and to continue its modernization program
for finishing mills into the 1990s.
Effects of Water Pollution
Control Regulations
The effects of the pending water pollution control regula-
tions under the alternative scenario would be relatively small
compared to the impacts under the main scenario over the 1981-
1990 period. However, the effects of the water pollution con-
trol costs in the short run—the 1981-1984 period—would be
significant. During the 1981-1984 period, the industry would
-------
13
probably not be able to fully pass through incremental annual
water costs to steel consumers in the form of higher prices be-
cause of excess capacity and import price pressures. This in-
ability to completely pass through water pollution control costs
would increase the external financing effects associated with
the water regulations. Total net external financing needs (with
less than full pass-through of annual costs) would increase by
$837.9 million relative to the alternative baseline needs over
the 1981-1984 period.
These external financing needs would require additional
reliance on debt financing since management would be unlikely
to issue common stock at the depressed market price levels ex-
pected to prevail in the near term. Reliance on debt to finance
BPT and BAT expenditures would increase the industry's debt to
capitalization ratio to about 38.8 percent during the 1981-1984
period, compared to the alternative baseline level of 36.5 per-
cent. The increased use of debt would also result in a decline
in the interest coverage ratio from 3.86 times to 3.28 times
and a decrease in the cash flow to long-term debt ratio from
43.4 percent to 38.8 percent.
During the 1981-1984 period, the greatest financial im-
pact due to water pollution control requirements would occur
in 1983 and 1984. During these years, the industry would face
debt to capitalization ratios of about 39.8 percent and 41.0
percent, respectively. The industry may find it desirable to
prevent possible deterioration in its bond ratings during these
years by deferring reworks expenditures to periods of less fi-
nancial strain.
As already mentioned, the effects of the water pollution
control regulations on the steel industry over the entire decade
would be less significant. This is primarily due to the indus-
try's increased pricing flexibility and profitability under the
alternative scenario during the middle and latter part of the
1980s. By 1985-1986, the industry's pricing flexibility would
probably enable it to fully pass through annual water pollution
control costs in the form of steel price increases. This pass-
through capability, together with the higher internal sources
of funds generated through increased profitability, would reduce
the external financing effects associated with the pending water
pollution control regulations. Net external financing require-
ments for the decade as a whole would increase by only $953.7
million due to the water pollution control costs. This leads
to a reduction in the percentage of the industry's external
financing needs accounted for by water requirements for the
decade as a whole (6.0 percent) relative to the 1981-1984 period
(27.2 percent). This reduction in relative external financing
effects, coupled with the industry's increased common stock
-------
14
financing capability during the middle and latter part of the
decade, would tend to reduce the effects of the water costs on
the industry's financial condition. BPT and BAT costs would
cause an increase in the industry's average debt to capitali-
zation ratio for the 1981-1990 period of 0.9 percentage points,
from 36.3 percent to 37.2 percent. Total water pollution control
costs would also lead to a slight decline in the interest cover-
age ratio (from 4.55 times to 4.21 times) and in the cash flow
to long-term debt ratio (from 46.2 percent to 44.5 percent).
The industry's financial condition for the entire decade,
both before and after the incidence of water pollution control
requirements, under the alternative scenario would be consistent
with an A rating by Moody's and Standard & Poor's. The minor
deterioration in its financial condition due to the impact of
water costs would allow the industry to maintain a full produc-
tive investment program for the 1981-1990 period even when faced
with water pollution control requirements. The industry may,
however, find it necessary to defer reworks expenditures during
the first part of the 1980s when the water pollution control
cost effects would be significant. These expenditures would
be undertaken in the latter part of the decade when the indus-
try's financial condition would be improved. The maintenance
of a full productive investment program during the entire de-
cade would probably allow the industry to preserve its market
share of domestic steel consumption throughout the 1980s. It
also implies that total remaining air and water pollution con-
trol requirements would be unlikely to have a significant ad-
verse effect on production labor levels in the industry. As a
result, compliance with the water pollution control regulations
under this scenario would result in about 4,600 additional em-
ployees needed for the operation of water pollution control
equipment. Some minor reductions in employment would occur
due to slightly reduced shipments volumes resulting from price
increases to recover pollution control costs.
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Exhibit A
SHORT-RUN EONOMIC IMPACT OF B4VIROW4ENTAL REGULATIONS1
1981-1984
(•I II Ions of 1978 dollars)
Industry Basal Ine Condition
Iron and Staal Production
Mlscal lanaous Pollution
Control Equipment
Air Pollution Control
Equ 1 pmant
— In-Place
—Additions
Water Pollution Control
Equipment4
— 6PT In-Place
—BAT In-Place5
— fl AT Commitments"
Total Basal In* Conditions
Water Pollution Control
Additions
— 9PT Additions
—BAT Additions'
— NSPS Additions
Total Water Pollution
Control Equipment
Additions
Grand Total
Capital
Expenditures
Amount
S7.472.2
9.7
0.0
988.1
0.0
0.0
49.5
$8,519.3
417.7
444.1
61.9
923.7
$9,443.2
Percent of
Basel Ine
87.7*
O.I
0.03
11.6
O.O3
O.O3
0.6
100.0*
4.9
5.2
0.7
10.8
110.8*
Gross External
f 1 nanc 1 ng Needr
Amount
$1, 767.3
(48.1)
(541.3)
309.5
(255.3)
(14.1)
(7.6)
$1,210.4
143.5
467.4
62.7
673.6
$1,864.0
Percent of
Baseline
146.0*
(4.0)
(44.7)
25.6
(21.1)
(1.2)
(0.6)
100.0*
11.9
38.6
5.2
55.7
155.7*
1984 Operations i
Maintenance Expenses
. Amount
$31,125.9
88.0
379.1
163.0
90.5
9.9
6.4
$31,862.8
37.8
87.86
8.0«
133. 66
J31.996.46
Percent of
Basel Ine
97.7*
0.3
1.2
0.5
0.3
0.0?
0.03
100.0*
0.1
0.3T
0.0*
0.4
100.4*
1964 Revenue
Requirements
Amount
$36,476.6
120.9
613.4
360.6
142.7
11.3
18.5
$37,744.2
120.7
158.3
22.1
301.)
$38,045.3
Percent of
Baseline
96.6*
0.3
1.6
t.o
0.4
0.03
0.1
100.0*
0.3
0.4
0.1
0.8
UX0.8*
ASS
full pass-through of annual water pollution control costs.
'In some cases, the external financing requirements are more than offset by cash flow from pollution control equipment
Investments made In prior years.
Less than 0.05 percent.
*Total water pollution control equipment prior 1o 1981:
—BPT In-Place » $1,826.0
—«AT In-Place " $139.1
Total air pollution control equipment prior to 1981: $3,153.8
'The term BAT Is used herein as a surrogate for BAT and PTS equipment.
6ln 1984 OaM expenses Include land costs of $50.3 for BAT and $1.4 for NSPS.
Source: TBS projections.
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Exhibit B
LONG-RUN eCONQMIC IMP/CT OF ENVIRONMENTAL REGULATIONS1
1985-1990
(•I 11 Ions of 1978 dollars)
Industry Basel Ine Condition
Iron end Steel Production
Miscellaneous Pollution
Control Equipment
Air Pollution Control
Equipment
— tn-Place
—Additions
Miter Pol lutlon Control
Equipment4
— 6PT In-Place
—BAT In-Place5
—BAT Commitments3
Total Baseline Conditions
Water Pollution Control
Additions
— BPT Additions
—BAT Additions'
— NSPS Additions
Total Hater Pollution
Control Equipment
Additions
Orand Total
Capital
Expenditures
Amount
$10,952.8
0.0
0.0
104.6
0.0
0.0
0.0
$11,057.4
0.0
0.0
97.6
97.6
$11,155.0
Percent of
Baseline
99.1f
O.O5
O.O3
0.9
o.£
0.03
O.O3
100.0*
o.oj
O.O3
0.9
0.9
100.9*
Gross External
Financing Heeds2
Amount
$2,844.0
(41.9)
(371.8)
(187.6)
(131.1)
(6.4)
(15.0)
$2,090.2
(111.4)
(141.7)
53.0
(200.1)
$1,890.2
Percent of
Baseline
136.1*
(2.0)
(17.8)
(9.0)
(6.3)
(0.3)
(0.7)
100.0*
(5.3)
(6.8)
2.3
(9.6)
90.4*
1990 Operations &
Maintenance Expenses
Amount
$33,851.5
105.3
382.6
184.1
107.6
10.6
6.8
$34,648.5
42.3
40.0
20.6
102.9
$34,731.4
Percent of
Baseline
97.7*
0.3
1.1
0.3
0.3
o.i
O.O3
100.0*
0.1
0.1
0.1
0.3
100.3*
1990 Revenue
Requirements
Amount
$38,621.9
123.3
477.7
304.1
109.3
9.7
12.8
$39,658.8
83.2
96.4
43.4
227.0
$39,885.8
Percent of
Basel Ine
97.4*
0.3
1.2
0.8
°-33
O.O3.
0.0*
100.0*
0.2
0.3
0.1
0.6
100.6*
'Assumes full pass-through of annual •ater pollution control costs.
2!n some cases, the external financing requirements are more than offset by cash flow from pollution control equipment
Investments made In prior years.
Less than 0.05 percent.
*Total water pollution control equipment prior to 1981:
—flPT In-P lace - $1,826.0
—BAT In-Place » $139.1
Total air pollution control equipment prior to 1981: $3,153.8
'The term BAT Is used herein as a surrogate for BAT and PTS equipment.
Source: TBS projections.
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Exhibit C
LONG-RUN ECONOMIC IMPACT OF ENVIRONMENTAL REGULATIONS
1981-1990
(millions of 1978 dollars)
Industry Basel In* Condition
Iron and Steel Production
Mlscel laneous Pol lutlon
Control Equipment
Air Pollution Control
Equipment
— In-Place
—Additions
Water Pollution Control
Equipment
— 6PT In-Place
— flAT In-Place5
—BAT Commitments5
Total Basel Ine Conditions
Mater Pol lutlon Control
Additions
— 8PT Additions
—BAT Additions5
— NSPS Additions
Total Water Pollution
Control Equipment
Additions
Grand Total
Capital
Expenditures
Amount
$18, 425.0
- 9.7
0.0
1,092.7
0.0
0.0
49.3
$19,576.9
417.7
444.1
159,5
1.021.3
$20,598.2
Percent of
Basel Ine
94. It
O.O3
O.O3
5.6
O.OJ
O.O3
0.3
100.0«
2.1
2.3
0.8
5.2
105.2*
Gross External
Financing Needs2
Amount
J4, 611.3
(90.0)
(913.1)
121.9
(386.4)
(20.5)
(22.6)
$3,300.6
32.1
325.7
115.7
473.5
$3,774.2
Percent of
Baseline
139.7*
(2.7)
(27.7)
3.7
(11.7)
(0.6)
(0.7)
100.0*
0.9
9.9
3.5
14.3
114.3*
1990 Operations 4
Maintenance Expenses
Amount
$33,851.3
105.3
382.6
184.1
107.6
10.6
6.8
$34,648.5
42.3
40.0
20.6
102.9
$34,751.4
Percent of
Basel Ine
97.7*
0.3
1.1
0.5
0.3
o.'
O.O3
100.0*
0.1
0.1
0.1
0.3
100.3*
1990 Revenue
Requirements
Amount
$38,621.9
123.3
477.7
304.1
109.3
9.7
12.8
$39,658.8
83.2
98.4
45.4
227.0
$39,885.8
Percent of
Basel Ine
97.4*
0.3
1.2
0.8
0.3.
O.O3
0.03
100.0*
0.2
0.3
0.1
0.6
100.6*
'Assumes full pass-through of annual vater pollution control costs.
2ln some cases, the external financing requirements are more than offset by cash flc* from pollution control equipment
Investments made In prior years.
3Less than 0.05 percent.
*Total nater pollution control equipment prior to 1981:
—BPT In-Place" $1,826.0
—BAT In-Place » $139.1
Total air pollution control equipment prior to 1981: $3,153.8
*The term BAT Is used herein as a surrogate for BAT and PTS equipment.
Source: TBS projections.
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I. INTRODUCTION
This report is the culmination of a 24-month study con-
ducted by Temple, Barker & Sloane, Inc. (TBS) to evaluate the
economic effects of the pending effluent guidelines on the
iron and steel industry. The study effort was sponsored by
the Office of Planning and Evaluation of the U.S. Environ-
mental Protection Agency (EPA). It is part of the overall EPA
review of water pollution control for the iron and steel in-
dustry necessitated by the remand of the previous iron and
steel effluent guidelines in 1977 by the U.S. Court of Ap-
peals, Third Circuit.
In support of the previous effluent guidelines, TBS pro-
duced a report in March 1976 entitled Economic Analysis of
Proposed and Interim Final Effluent Guidelines. The current
study, which builds on the analytical approach of this prev-
ious effort, contains an improved evaluation of steel industry
production, pollution control, and financial characteristics.
The study is intended to provide both public policy makers and
industry representatives with an in-depth evaluation of the
total economic impact of the pending effluent guidelines and
other EPA regulations within the context of the uncertainties
facing the steel industry during the next decade.
The TBS analysis of the economic effects of the proposed
effluent guidelines focuses on the steel industry's probable
future outlook assuming continuation of current government
policies toward the industry throughout the 1980s. The pol-
icies underlying this main scenario include the current tax
policies concerning corporate income tax rates, allowable
depreciation lifetimes, and investment tax credits; the cur-
rent pricing policies of the "Anti-Inflation Program"; and the
transitionary import policies in effect during the suspension
of the trigger price mechanism. The analysis also considers
an alternative scenario consistent with specific changes in
government tax, pricing, and import policies that would lead
to a more optimistic outlook for the steel industry during the
second half of the decade. In addition, TBS has analyzed an
intermediate scenario that considers the effects on the steel
industry's operating and financial condition of the common
elements in the economic recovery policies currently being
considered by various groups within the government. The re-
sults of the intermediate scenario analysis are presented in
the Appendix.
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1-2
The following section describes the steel industry's per-
formance during the middle and latter part of the 1970s and
thus provides a perspective for the economic analysis. Sub-
sequent sections describe the report's coverage in terms of
the types of steel-related production and pollution control
operations included in the analysis and the research methodol-
ogy utilized in the economic impact analysis.
BACKGROUND
The economic recession of 1979-1980 has had a severe
effect on the steel industry. Shipments are anticipated to be
approximately 85 million tons in 1980, a 15-million-ton de-
cline from the 1979 level. As a result, steel industry prof-
itability is expected to exhibit a significant decline.
The steel industry's current weak performance is indica-
tive of a long-term financial debility and capital formation
problem. This problem-is best illustrated by a discussion of
the considerable changes in the industry's economic and finan-
cial performance during the middle and latter part of the
1970s. In order to depict the impact of government regula-
tions on the industry's financial performance, a discussion of
the effects of specific public policies on the steel industry
has been included.
In 1974, the steel industry achieved record profits. The
relaxation of steel price controls during 1974 was a major
factor in the industry's record performance. Perhaps just as
important was the anticipation of shortages in basic raw ma-
terials, which led to a significant increase in the steel
product inventories of steel customers and in domestic ship-
ments. By the end of 1974, the steel industry was looking
forward to continued strong performance over the next few
years. On the basis of this optimistic outlook, steel com-
panies planned substantial capital spending programs for mod-
ernization, replacement, and expansion of their production
capacity.
The economic recession of 1975, however, had a devastat-
ing effect on the steel industry. Shipments declined by more
than 25 percent during this year. Moreover, the year was
marked by direct confrontation between the Council on Wage and
Price Stability and the steel industry over prices. By year-
end, however, the industry was once again looking forward with
optimism—tempered by the economic realities of an uncertain
economy, foreign competition, and continued government regu-
lation.
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1-3
During 1976, steel shipments increased 11.9 percent as
the effect on shipments of the 1974 steel product inventory
buildup dissipated. Despite the increase in shipments, the
steel industry's profitability continued to erode, with net
income as a percentage of sales falling from 6.6 percent in
1974 to 3.7 percent in 1976. Return on equity during the same
period decreased from 17.1 percent to 7.8 percent. The de-
cline in the industry's profitability reflected in large part
a decrease in its pricing flexibility. Steel industry prices
rose by only 6.4 percent in 1976, while total industry produc-
tion costs increased by a significantly higher percent.
The steel industry's performance continued to deteriorate
in 1977. Shipments increased by only 1.9 percent, and profits
were minimal. Price increases were held to 9.6 percent on a
list basis by domestic producers, with significant discounting
relative to published prices prevailing. In spite of price
increases that failed to recover the rising costs of steel
production, domestic producers experienced a market share
decline as the import share of apparent steel supply rose from
14.1 percent in 1976 to 17.8 percent in 1977. Faced with a
weak financial condition and strong import penetration in the
domestic market, steel producers began to seriously curtail
their capital spending programs for production capacity and to
shut down unprofitable facilities.
The steel industry's profitability recovered somewhat in
1978. Net income as a percentage of sales was 2.6 percent,
and return on equity reached 7.3 percent. This improved per-
formance reflected a 7.5 percent increase in shipments and a
10.7 percent rise in steel prices. However, even with this
improvement over the poor performance of 1977, the steel in-
dustry's earnings remained weak.
The partial recovery experienced by the steel industry in
1978 occurred within the context of two new government pol-
icies: the trigger price mechanism and the "Anti-Inflation
Program." Trigger prices, instituted in February 1978 by the
Carter Administration, were designed to preclude foreign steel
products from being sold in the domestic market at price lev-
els below those of the most efficient producers of a partic-
ular foreign country. .Trigger prices helped to minimize fur-
ther import penetration during 1978. The import share of
apparent steel supply for the year rose only slightly from
the 1977 level of 17.8 percent to 18.1 percent. The second
new government policy was a set of anti-inflation guidelines,
instituted during the last quarter of 1978, which suggested
that steel price increases be restricted to the average of
steel company price increases during the two years preceding
October 1978 (approximately 10.1 percent per year).
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1-4
The two new government policies continued to have an ef-
fect on the steel industry in 1979. In this year, the steel
industry experienced a decrease in the import share of appar-
ent steel supply, in part due to increases in trigger prices
of 9.1 percent during the latter part of 1978 and 7.0 percent
during the first quarter of 1979. The 1979 import share of
15.2 percent represented a 3.2 percent decrease from the 1978
level. A more significant factor in the decline in imports,
however, was the deterioration in total demand for steel prod-
ucts during 1979.
The decline in total steel demand in 1979 occurred de-
spite strong demand conditions during the first part of the
year, which led to a 2.4 percent increase in domestic ship-
ments for the year as a whole. The strong demand during the
first part of the year also created significant pricing lever-
age for the industry, which resulted in steel prices increas-
ing by about 10.2 percent for the year as a whole. The in-
crease in prices reflected the approximate 10.1 percent ceil-
ing imposed by the Anti-Inflation Program. However, this
price increase, together with the 2.4 percent rise in ship-
ments volume, was insufficient to overcome the even larger
cost increases during 1979. As a result, steel industry prof-
itability levels in 1979 were slightly less than 1978 earnings
figures. Net income as a percentage of sales was 2.1 percent
in 1979 versus 2.6 percent in 1978, and return on equity was
6.8 percent compared with 7.3 percent in 1978. These fairly
weak levels of profitability exacerbated the industry's capi-
tal formation problems and caused it to maintain a reserved
attitude in its capital spending projections for the next few
years. -*•
As mentioned previously, the current economic recession
has had a severe effect on the steel industry in 1980, with
both shipments and profitability exhibiting marked declines.
The year 1980 has also witnessed a change in government pro-
grams affecting the steel industry. On March 21, the Carter
Administration suspended the trigger price mechanism. The
suspension occurred in response to the filing of a complaint
by the U.S. Steel Corporation that imports from Europe were
being priced at below "fair value." The suspension resulted
in uncertainty regarding the government's future plans in the
area of steel import policy.
^•American Iron and Steel Institute, Steel at the Crossroads;
The American Steel Industry in the 1980s, January 1980, pp.
39-40.
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1-5
Faced with an uncertain import policy, substantial weak-
ness in current and projected earnings and corresponding capi-
tal formation problems, as well as a government policy that
will tend to restrict future steel price increases during
periods of higher steel demand, the steel industry has adopted
a pessimistic outlook. This pessimistic outlook is depicted
in the steel industry's "Orange Book," which describes the
following circumstances as likely to result from a continua-
tion of current trends: "older facilities stemming from con-
tinued inadequate capital expenditures, capacity declines if
financial conditions do not improve, domestic shipment de-
clines and probable increases in imports, and declines in
steel industry employment."2
Recognizing the serious implications of recent trends,
the government helped to form the Steel Tripartite Committee.
The Committee was convened at the beginning of 1980 to initi-
ate discussions among public policy makers, industry spokes-
men, and labor representatives concerning major government
policy issues related to the steel industry.
REPORT COVERAGE
Before undertaking an analysis of the steel industry, EPA
had to define the boundaries of its analysis. EPA chose to
define the steel industry as those production process units
normally associated with steel production and finishing—on-
site production facilities, from raw materials storage yards
for coke ovens and blast furnaces through finishing mills.d
Thus, facilities for the mining, beneficiation, and trans-
portation of raw materials to the site of coking and/or iron-
making together with fabrication facilities were excluded from
the definition of the steel industry. However, facilities
2American Iron and Steel Institute, Steel at the Crossroads;
The American Steel Industry in the 1980s, January 1980,
pp. 39-40.
3Utilizing data provi-ded by the American Iron and Steel Insti-
tute, TBS estimated that steel operations so defined repre-
sented about 68 percent of the net fixed assets of the major
integrated steel companies during the 1972-1978 period. If
iron ore, metallurgical coal, and scrap were transferred at
market values, sales revenues from steel operations approxi-
mated 79 percent of the total revenues of these firms during
this period.
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1-6
used by the steel industry to produce pig iron for foundries
and other uses were included. In addition, all other nonsteel
operations performed by steel firms were excluded from the
impact analysis reported herein.
The American Iron and Steel Institute (AISI) provided TBS
with detailed operating data on 100 steel plants. The data
had been developed for AISI's cost impact study conducted by
Arthur D. Little (ADL).4 In order to utilize the data most
effectively, TBS limited its analysis to steelmaking and fin-
ishing facilities that produced approximately 88 percent of
domestic steel shipments. While extrapolation to total steel
operations could be made, extension of the analysis to iron
ore and coal mining, beneficiation, transportation, fabrica-
tion, and other nonsteel operations performed by steel com-
panies would not be appropriate.
RESEARCH METHODOLOGY
To our knowledge, the current and the previous TBS
studies of the steel industry are unique in their approach:
they combine the cost impact methodology employed by ADL in
its study for the AISI with a computer-based revenue require-
ment and external financing methodology, which permits an
integrated analysis of the economic impacts of environmental
regulations within the context of uncertain operating condi-
tions.5
TBS has utilized, as the basis of its study, a policy
testing model of the steel industry, hereinafter referred to
as PTm(Steel). This computer-based model combines the plan-
ning assumptions of industry and technical experts with the
structural relationships utilized by engineers and account-
ants. Underlying PTm(Steel) are three independent modules
that correspond to (1) the planning and operations functions
4Arthur D. Little, Steel and the Environment; A Cost Impact
Analysis, prepared for the American Iron and Steel Institute,
1978.
5In its report Steel and the Environment; A Cost Impact Anal-
ysis (p.11), ADL concluded, "While it was not within the
scope of our cost impact assignment to assess the ability of
the U.S. iron and steel industry to finance the replacement,
expansion, and environmental control capital requirements
projected in this report, it is clear that consideration of
the potential economic impact, based on the results of this
cost impact analysis, deserves national attention."
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1-7
associated with production facilities, (2) pollution control
equipment planning and operations, and (3) determination of
steel industry revenue requirements and financing needs. The
first two modules provide the cost impacts that, together with
the financial results from the revenue and financing module,
permit an integrated statement of the economic impact of en-
vironmental regulations.
All PTm(Steel) financial transactions have been computed
in current dollars. During periods of inflation, these finan-
cial transactions have included cost escalation where relevant
(e.g., operations and maintenance expenses). The financial
flows calculations have also recognized historical cost basis
where applicable (e.g., depreciation). However, for purposes
of comparability, all financial data have been reported in
1978 dollars. In translating data to a constant dollar basis,
transactions have been inflated at sectoral rates of inflation
and deflated by the rate of overall inflation (i.e., GNP de-
flator).6
In comparing the ADL methodology with PTm(Steel), the
reader should note that the ADL computer-based model computes
cost impacts on a process, plant, and company basis. Although
TBS utilized a methodology that is consistent with these lev-
els of analysis, it could not perform analyses at either the
plant or company level because the data provided to TBS by
ADL, with the concurrence of the AISI, do not permit these
analyses.7 However, more detailed data were not required to
perform the economic impact analysis reported herein.
The economic impact analysis reported herein focuses on
the 1981-1990 time period. In order to capture the cumulative
effect of environmental regulations in the recent past as well
as during this period, most exhibits (included at the end of
the report) provide detailed information for the periods 1976-
1980, 1981-1984, and 1985-1990 in addition to the 1981-1990
period. The text and the in-text tables in the report usually
summarize these data into short-run (1981-1984) and long-run
(1981-1990) time periods.
6For example, assume that a rolling mill completed in 1978
cost $100.0 million. A comparable facility scheduled for
initial operation in 1983 would cost $161.1 million in cur-
rent dollars and $126.2 million in 1978 dollars if the sec-
toral rate of inflation in the construction industry were 10
percent and if overall GNP inflation were 5 percent during
the 1978-1983 period.
7The AISI data were aggregated prior to their dissemination to
TBS and others in order to avoid divulging proprietary opera-
ting information.
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II. BASELINE CONDITION
In order to evaluate the economic impact of proposed
water pollution control regulations on the iron and steel
industry, it was first necessary to establish a reference
point or baseline condition consisting of the industry's fu-
ture operating and financial characteristics. To establish
this baseline condition, the capital and expenses needed to
produce a projected amount of finished steel products under
current pollution control regulations were determined with the
aid of PTm(Steel).
To -estimate future conditions in the iron and steel in-
dustry, TBS collected information from a number of industry,
government, academic, and financial sources. These sources,
specifically noted in the sections that follow, include EPA
and its technical consultants in the iron and steel industry
area (PEDCo and NUS/Rice), and the AISI and its consultant
(Arthur D. Little). Where a significant degree of uncertainty
on important issues remained, sensitivity analyses were per-
formed to evaluate the impact of the uncertainty on the con-
clusions of the study.
The following specific tasks were performed to establish
the baseline description of the iron and steel industry:
• Future steel shipments were projected.
• Future operations and maintenance expenses for
iron and steel production were determined
utilizing PTm(Steel).
• Future capital outlays for new production ca-
pacity and reworks expenditures for existing
capacity were estimated, taking into account
financing constraints.
• Future capacity retirements and additions
were projected.
• Future capital expenditures and operations and
maintenance expenses for currently installed
and committed pollution control equipment were
estimated using engineering data in conjunction
with PTm(Steel).
The remainder of this chapter describes each of these tasks.
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II-2
FUTURE STEEL SHIPMENTS
TBS's projection of future domestic steel shipments plays
an important role in PTm(Steel). The shipments estimate de-
termines required levels of production for each production
process in the model, thereby establishing process operations
and maintenance expenses and capacity utilization rates.
For a number of reasons, estimates of future domestic steel
shipments are subject to uncertainty. Variations in the business
cycle can cause wide fluctuations in the short-term consumption
of steel, often masking the underlying level of demand. This is
especially true today with the economy in a recession. For ex-
ample, the recession has obscured the impact of oil price in-
creases on steel demand, which is beginning to be reflected in
lower steel consumption by the automobile and capital goods in-
dustries. There is also great uncertainty with respect to the
long-term growth rate of domestic consumption. As recently as
1975, the industry projected a growth rate of 2.5 percent per
year through 1985.l This has been recently reduced by the AISI
to approximately 1.5 percent per year for the period 1978-1988.
In contrast, the post-World War II growth rate in domestic ship-
ments obtained from a time-series regression analysis has been
about 1.2 percent per year. This trend, along with decreasing
steel consumption caused by higher oil prices, has led TBS to
project a growth rate of about 1.0 percent per year.
In preparing the baseline shipments forecast for the steel
industry, TBS assumed a base domestic apparent consumption of
steel products of approximately 117 million tons in 1980. This
represents the consumption that would be expected if the economy
were neither in a recession nor a boom and is directly comparable
to the level of domestic demand in 1978. The share of imports
used in the baseline was fixed at a constant 18.0 percent of ap-
parent consumption. This compares with an actual import share of
17.8 percent in 1977, 18.1 percent in 1978, and 15.2 percent in
1979 and resulted in a base domestic shipments level of 95.9
million tons for 1980.
From 1980 to 1990, an overall 1.0 percent growth rate per
year was maintained in the domestic shipments forecast. Yearly
projections reflect cyclical fluctuations in steel demand based
on Data Resources, Inc.'s economic forecasts for steel produc-
tion over the 1980s.2 Exhibits 1 and 2 show the baseline
domestic shipments forecast, which projects actual shipments
1AISI, Steel Industry Economics and Federal Tax Policy, 1975.
2DRI's TRENDLONG0680 projection of June 1980.
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II-3
of 85.0 million tons in the recessionary environment of 1980,
a recovery to 97.8 million tons in 1982, and an increase to
108.1 million tons in the cyclical peak year of 1989.3
The shipments forecast developed for the baseline delays
to the end of the 1980s the pressure of demand on capacity
that has led in the past to more adequate rates of return for
the industry. Thus, the steel industry can expect little
economic relief in this decade if past relationships between
capacity utilization and profitability remain the same. Be-
cause of the importance of the baseline shipments forecast to
the conclusions of the study, two additional shipments fore-
casts were developed. In one forecast, developed in a similar
manner to the baseline forecast, the shipments growth rate was
increased to a more optimistic 1.5 percent. This matches the
current AISI projection of the steel shipments growth rate.
The second forecast was developed using a mixed growth rate:
a 1.0 percent growth rate for the 1981-1984 period, reflecting
the current pessimistic outlook for the short term, and a 2.0
percent growth rate for the 1985-1990 period, reflecting a
more optimistic outlook for the long term. Summaries of these
two additional shipments forecasts are presented in Exhibit 3.
FUTURE OPERATIONS AND
MAINTENANCE EXPENSES
PTm(Steel) calculates operations and maintenance (O&M)
expenses by first determining levels of production for each
production process that are consistent with the baseline steel
shipments forecast. TBS has segmented the iron and steel
industry into 29 production processes (see Exhibit 4), which
have been grouped into five stages of steel production: on-
site raw materials preparation, ironmaking, raw steelmaking,
casting and forming, and finishing.4 When these production
3These projections assume that steel industry production will
not be constrained by available supply or production capa-
city. Later in the report it is shown that restrictions on
available production capacity are likely to limit steel pro-
duction during the latter part of the 1980s and the beginning
of the 1990s to levels below those resulting from the 1 per-
cent shipments growth rate assumption.
4The 29 processes have also been grouped into two phases, with
the processes preceding and including ingot and continuous
casting in Phase I and the remaining processes in Phase II.
Processes ancillary to steel production such as on-site gen-
erators of steam and electricity have been grouped into a
30th process.
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II-4
levels were combined with the resources utilized per unit of
production in each process and the prices of those resources,
the baseline O&M expenses shown in Table II-l were obtained.5
Details of these O&M expenses are found in Exhibit 5.
Table II-l
OPERATIONS AND MAINTENANCE EXPENSES
FOR IRON AND STEEL PRODUCTION
(millions of 1973 dollars)
1981-1984
1985-1990 1931-1990
Basic Raw Materials
Direct Labor
and Overhead
Other Q&M Costs
Total
Source: PTm(Steel).
$ 33,703.7 S 64,349.1 S103.552.8
45,021.9 73,781.8 113,303.7
36,596.0 61,098.5 97,694.5
$120,321.6 5199,729.4 $320,051.0
Operations and maintenance expenses form the largest com-
ponent of steel industry costs. These expenses, which are ex-
pected to average $30,080.4 million per year from 1981 to 1984
and $32,005.1 million per year from 1981 to 1990, are dominated
by basic raw materials costs and labor-related costs. The re-
mainder of the O&M expenses include other raw materials (e.g.,
fluxes and alloying elements), energy costs, and miscellaneous
supplies and utilities.
Basic raw materials, which include iron ore, metallur-
gical coal, and steel scrap, form a major component of O&M
expenses--31.8 percent in 1981 and 32.3 percent in 1990. In
projecting iron ore and metallurgical coal prices, TBS has
assumed that increases will be closely tied to increases in
labor costs. However, since productivity in ore mines is ex-
pected to improve more rapidly than productivity in coal mines,
coal prices are expected to rise 0.5 percent faster per year
than iron ore prices.
TBS has assumed that the other principal component of O&M
expenses, direct labor and labor-related overhead charges, will
escalate in proportion to the per capita GNP. The labor cost
share of O&M expenses will decline slightly during the next
decade (from 37.9 percent in 1981 to 37.5 percent in 1990)
primarily because raw materials prices are likely to increase
at a somewhat faster fate.
5A description of the resources utilized per unit of produc-
tion in each process was obtained from Arthur D. Little, Inc.
via the AISI.
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II-5
FUTURE CAPITAL EXPENDITURES FOR
CAPACITY ADDITIONS AND REWORKS
The future capital expenditures program to be undertaken
by the steel industry will be influenced by both historically
low levels of profitability and projections of continued low
profitability. Exhibit 6 details return on equity by year for
the 1970-1990 period. As evidenced by the recent bond rating
declines of several large steel producers, low historical
returns have resulted in a deterioration of the steel indus-
try's financial condition.
Low profitability levels in the past have also led to
depressed market prices for steel companies' common stock.
With common stock valued at about 50 percent of the book value
of equity, issuance of new common stock would result in the
dilution of book value of existing shareholders. This adverse
effect on current stockholders is likely to deter management
from engaging in common stock financing and, consequently,
encourage it to rely on debt to meet external financing
needs.
The degree to which steel company managements are ac-
tually willing to utilize debt depends on many factors, the
most important being the effect of additional debt financing
on their bond ratings. Increased use of debt tends to de-
crease key measures of credit quality such as interest cov-
erage and cash flow to long-term debt ratios, ultimately re-
sulting in lower bond ratings. Of particular concern is the
possibility that bond ratings may decline to the lowest in-
vestment grade (Standard & Poor's BBB or Moody's Baa) or,
worse yet, below investment grade. Under normal credit market
conditions, a BBB-rated company is ordinarily assured of hav-
ing access to capital on reasonable terms. However, during
tight credit market conditions these companies may not be able
to raise necessary capital on reasonable terms. The addi-
tional costs and potential financing difficulties associated
with a BBB rating (or lower) are likely to lead managements to
avoid bond rating deterioration by reducing investment pro-
grams, thereby limiting reliance on debt.
The baseline created by TBS reflects these financial
considerations in certain important ways. First, it is as-
sumed that common stock financing is not likely to be under-
taken by the industry. Second, in order to preserve the in-
dustry's current credit rating, its debt to capitalization
ratio has been limited to approximately 35 percent during the
1980s. Finally, placing a limit on debt financing in turn
limits capital outlays for reworks that the industry would
be likely to undertake in the absence of a financing con-
straint .
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II-6
Capacity Replacement and
Expansion Expenditures
Low historical levels of profitability have significantly
reduced the number of attractive investments in production
capacity available to the steel industry. As a result, expen-
ditures in the past for new capacity have been inadequate to
maintain the industry at the peak levels of efficiency neces-
sary for effective competition with foreign producers. Expen-
ditures in the future are expected to be even lower due to the
financial constraints described above.
Estimates of capital expenditures for new capacity during
the 1976-1981 period were obtained by combining capacity ad-
dition information from two major steel industry studies® with
construction cost data developed by the AISI.
Beyond 1981, the level of capital expenditures for*new
capacity reflects the limit on the steel industry's investment
program for production equipment imposed by its weak financial
condition and its desire to maintain current financial rat-
ings. Thus, expenditures for capacity additions are expected
to be held to a minimum, with most outlays directed toward a
reduction of production bottlenecks. Since these debottle-
necking additions facilitate the balanced flow of materials
throughout the various stages of steel production, they offer
particularly high returns on investment.
Most of the capital expenditures for new capacity are
directed toward replacing obsolete facilities for the Phase I
processes. Of the $4,567.9 million to be spent for new capac-
ity in the 1981-1990 period, $767.2 million is allocated to
new blast furnaces, $457.6 million to new steelmaking fur-
naces, and $2,132.6 million to new casting and forming pro-
cesses. Exhibit 7 provides the allocation of baseline capital
expenditures by process and by time period.
Capital expenditures, as the term is used above, include
all cash outlays necessary to bring new production capacity
into service. New capacity normally requires several years to
construct, with cash outlays associated with the construction
process occurring in each of the years. PTm(Steel) keeps
track of funds spent in the past through a construction work
in progress (CWIP) account. In the 1981-1990 period, CWIP
averages $2,140 million. Because it is a sizable application
of funds, CWIP significantly influences external financing
requirements and interest expenses.
6Peter F. Marcus, World Steel Supply Dynamics; 1979-1981,
Mitchell, Hutchins, Inc., 1976; and William E. Peitrucha and
Richard L. Deily, Steel Industry in Brief; Data Book, U.S.A.
1979-1980, The Institute for Iron and Steel Studies, 1979.
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II-7
Reworks Expenditures
Reworks, the overhauling or replacement of worn equipment,
are necessary to maintain steel production at an acceptable level
of efficiency and quality. The major components of reworks ex-
penditures in the steel industry include the relining of iron and
steelmaking furnaces, the overhauling of individual ovens within
a coke battery, the replacement of rolls and stools in the fin-
ishing processes, and replacement of the various types of mobile
equipment. Reworks can be deferred over brief periods, but a
sustained reduction in these expenditures leads to a correspon-
ding decline in production capacity.
Initial estimates of capital expenditures for reworks were
established using reinvestment rates based on the replacement
value of capital equipment in each steel production process. The
reinvestment rates were provided by the AISI and a committee of
top level industry executives and are considered by the industry
to be adequate to prevent deterioration of baseline production
capability levels.
The initial estimates of reworks expenditures were subse-
quently revised downward to eliminate reworking production capa-
city projected to be shut down in the near future. This was done
by developing a "target" level of production capacity for the
latter part of the 1980s and then determining the reworks expen-
ditures necessary to maintain that capacity level. This reduc-
tion resulted in a total reworks program of $17,783.8 million
(1978 dollars) during the next decade, or average reworks of
$1,616.7 million per year.
However, even these revised reworks outlays in conjunction
with initial estimates of expenditures for capacity replacement
and expansion would cause a severe financial strain on the indus-
try throughout the 1980s. This was most importantly reflected in
unacceptable levels of the key financial parameters used in as-
sessing company bond ratings (e.g., debt to total capitalization,
cash flow to long-term debt, and interest coverage ratios). The
levels for these financial indicators implied that bond ratings
would probably decline unless the investment program were cut
back.
Presuming that steel companies would choose to avoid further
bond downgradings, TBS reduced the baseline productive investment
program so that the industry's current financial condition could
be maintained throughout the 1980s. TBS believes that industry
management will choose to cut back on reworks to reduce total
investments rather than to forego selected capacity additions
that have high projected returns on investment.
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II-8
The baseline investment program reflects this further
reduction in reworks expenditures. It amounts to a reduction
of about $2,365.8 million during the 1980s, relative to the
"target" reworks program of $17,783.8 million for the period.
Exhibit 8 details the final baseline levels of past and future
reworks. Approximately $1,400.0 million per year is expected
to be spent in this category in the next decade. This yearly
reworks level represents a reduction in reworks during the
1980s of slightly less than $217.0 million per year, relative
to the "target" reworks program. This sustained reduction
will lead to significant retirements of production capacity
during the latter part of the 1980s and the beginning of the
1990s. In total, the cutback in baseline reworks will cause
an approximate 12.8 percent decline in baseline capacity.
FUTURE CAPACITY RETIREMENTS
AND ADDITIONS
In addition to including the decline in capacity due to a
sustained reduction in reworks during the latter part of the
1980s and the beginning of the 1990s in its baseline descrip-
tion, TBS has included projections of specific production
process shutdowns. Also incorporated are additions to capac-
ity that will be undertaken within the constraints of the
capital expenditure program.
Capacity Retirements
The industry is likely to undertake production capacity
retirements in response to a variety of economic factors.
First, the obsolescence of many facilities has reduced their
competitiveness and potential for future productivity gains.
Second, low profitability in the industry has sent a clear
signal to the steel companies that a significant contraction
is in order. Finally, pollution control regulations have
hastened retirements of some facilities so that capital expen-
ditures for pollution control equipment can be avoided.
Estimates of facility retirements through the year 1984
were obtained from the Effluent Guidelines Division and the
Division of Stationary Source Enforcement of EPA. Most of
these facility retirements have been formalized as court or-
ders and consent decrees stemming from EPA enforcement ac-
tions. These estimates of retirements were augmented with
announced capacity shutdown figures from various articles and
studies on the steel industry. Beyond 1984, a retirement rate
of 5 percent per year of the capacity associated with Phase I
facilities that are between 20 and 40 years old has been as-
sumed. This results in significant retirements of sinter
strands, coke ovens, blast furnaces, open hearth furnaces, and
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II-9
ingot casting and primary breaking facilities. Exhibit 9
indicates past and projected facility retirements by process
from 1976 to 1990.
Capacity Additions
As described previously, capacity is added to reduce
production bottlenecks within the constraints of available
capital. Allocations of capital expenditures within a stage
of steel production are further influenced by recent changes
in technology and resource availability.
Debottlenecking will require the addition of 9 million
tons of blast furnace capacity. Because modern blast furnaces
have greatly improved coking rates, only small additions to
coke oven capacity will be necessary. Debottlenecking will
also require 7 million tons of raw steelmaking capacity by
1984 and an additional 3.7 million tons by 1990. These re-
quirements reflect in part sizable shutdowns of open hearth
steelmaking furnaces during the 1976-1990 period. In this
stage of steel production, additions to basic oxygen furnace
capacity will be significantly higher than additions to elec-
tric arc furnace capacity. This reflects the significant
expansion in electric arc furnace capacity during the 1977-
1981 period and the rising cost of steel scrap supplies (used
as the primary raw material in these furnaces) caused by this
expansion. After 1984, only about one-third of the additions
to raw steelmaking capacity will be electric arc furnaces; the
remaining two-thirds will be basic oxygen furnaces. Continu-
ing a trend toward higher yields in the casting and forming
stage, the steel industry will install approximately 23 mil-
lion tons of continuous casting capacity to replace ingot
casting and primary breaking capacity retired during the
period. Exhibit 10 summarizes past and future capacity addi-
tions by process and time period.
FUTURE COSTS FOR IN-PLACE AND COMMITTED
WATER AND AIR POLLUTION CONTROL EQUIPMENT
In addition to iron and steel production-related costs,
the baseline also includes certain costs for water and air
pollution control. Including these costs in the baseline
influences the evaluation of the effects of proposed regula-
tions in three important ways. First, if more equipment asso-
ciated with a given regulation is in place, then future capi-
tal expenditures necessary to reach compliance with the regu-
lation are reduced. Second, capital expenditures made in the
past increase depreciation charges, which become a source of
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11-10
funds for future expenditures. Third, equipment installed in
the past must be supported by increased operating and main-
tenance expenses and increased debt and interest payments.
The capital and operating costs of water and air pollution
control equipment included in the baseline are summarized
below.
Water Pollution Control Costs
The costs associated with water pollution control equip-
ment in-place as of 1980 or legally committed by 1980 to be
installed at some future date are included in the baseline.
These costs have been incorporated into the baseline because
EPA, in formulating effluent guidelines for the iron and steel
industry, does not have discretion over the incurrence of
costs associated with this equipment.
Capital expenditures for water pollution control com-
mitments are $49.5 million for the 1981-1990 period, or 0.3
percent of total baseline expenditures. Total operations and
maintenance costs associated with in-place and committed water
equipment for 1990 ($131.8 million) comprise about 0.3 percent
of total baseline operations and maintenance costs for the
year.
Air Pollution Control Costs
Also included in the baseline are costs associated with
air pollution control equipment. This equipment is necessary
to meet air emission standards that cover the steel production
processes, as well as on-site boilers used in generating elec-
tricity.7 Inclusion of air pollution control costs in the
baseline, against which the effects of proposed effluent
guidelines are measured, reflects the fact that these expendi-
tures have already been made or have in large part been com-
mitted to in response to air regulatory requirements that have
been in effect for a number of years.
Air pollution control equipment associated with ancillary
facilities or on-site boilers is described herein as
miscellaneous pollution control equipment.
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11-11
Capital expenditures for additions to air pollution con-
trol equipment (including miscellaneous pollution control
equipment) during the 1981-1990 period amount to $1,102.4 mil-
lion, or 5.6 percent of baseline expenditures. Total air
pollution control equipment O&M expenses for 1990 of $672.0
million constitute about 1.9 percent of the year's total base-
line O&M expenses. Of the total $672.0 million in O&M ex-
penses, equipment in-place as of 1980 accounts for $484.5
million. The remaining $187.5 million represents the costs of
operating equipment installed after 1980.
Chapter III provides more detail on the costs associated
with air pollution control regulations incorporated in the
baseline.
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III. AIR POLLUTION ABATEMENT REGULATIONS
The Clean Air Act amendments of 1970 and 1977 (herein-
after referred to as the Air Act) mandated a series of steps
to be taken by states and EPA that would achieve air quality
levels protective of public health and welfare. To this end,
the Air Act directed EPA to establish National Ambient Air
Quality Standards (NAAQS) for specific criteria pollutants
(emitted from diverse sources) that could endanger public
health or welfare.
Attainment and maintenance of the national ambient stan-
dards for specific criteria pollutants are primarily the re-
sponsibilities of the states. Under Section 110 of the Air
Act, each state is required to submit a State Implementation
Plan (SIP) to EPA for approval. The plan sets forth a state's
strategy for attaining and maintaining the standards within
the deadlines established by the Air Act. The strategy must
satisfy all the requirements of the Air Act including the
establishment of programs to prevent significant deterioration
of certain areas and to ensure the timely cleanup of polluted
areas.
Under the 1970 Clean Air Act amendments (the foundation
of the current statute), all states were to have attained the
primary (health-related) standards by May 31, 1975; however,
several regions were granted extensions to mid-1977. Second-
ary standards were to be attained within a "reasonable time,"
defined by most state plans to coincide with the primary stan-
dard attainment date.
The Air Act empowers EPA to approve or disapprove state
plans and to promulgate its own requirements for states whose
plans are found to be substantially inadequate. Regardless of
who promulgates the SIP, both the state and EPA are authorized
to enforce it. However, primary enforcement authority rests
with the states.
The 1970 Air Act did not specify the consequences of a
state's failure to attain the primary standards by the 1975
statutory deadline. As the deadline approached, at least 160
of the nation's 247 air quality control regions (AQCRs) evi-
denced violations, including most industrialized areas con-
taining steel mills. Existing EPA regulations for nonattain-
ment areas prohibited construction or modification of any
facility that would interfere with attainment or maintenance
of a national ambient standard. Strict enforcement of this
regulation would have prohibited growth in an AQCR that had
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III-2
not attained the prescribed ambient standards. EPA's "offset
policy" evolved out of this situation. The essence of the
policy is that growth will be allowed in nonattainment areas
if further progress toward attainment is achieved as a result
of this growth. The improvement in air quality is to be de-
rived from simultaneous reductions in emissions from existing
sources. The reductions must more than "offset" the emissions
added by the proposed new source.
The above air regulatory policies are inherent in the
general technology requirements described below:
• New Source Performance Standards (NSPS). The
Air Act requires EPA to establish New Source
Performance Standards for those sources whose
construction is begun after the 1979 NSPS dead-
line and whose emissions may be expected to
endanger human health or welfare. These stand-
ards must reflect the degree of emission reduc-
tion achievable through the application of the
best system of continuous emission reduction
determined by the EPA administrator to have
been adequately demonstrated for a particular
category of sources. Economic, environmental,
and energy factors must also be considered.
Although new source standards have already been
specified for some processes, standards for
other processes may not be proposed for several
years. In the meantime, new facilities must
meet the applicable requirements under the
State Implementation Plans. Currently, NSPS
have been promulgated for only electric arc
furnaces and basic oxygen furnaces; standards
are being developed for coke ovens.
• National Emission Standards for Hazardous Air
Pollutants (NESHAP).These regulations limit
emissions of specified hazardous pollutants
from designated new and existing source cate-
gories. As of 1979, only asbestos, mercury,
beryllium, and vinyl chloride had been listed
under NESHAP; none of these compounds bear
directly on the iron and steel industry.
• Best Available Control Technology (BACT).
Under the original Prevention of Significant
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III-3
Deterioration of Air Quality (PSD) regulations,
Best Available Control Technology (BACT) for
new and existing sources could not be more
restrictive than the New Source Performance
Standards. Where NSPS had not yet been es-
tablished, BACT was a case-by-case determin-
ation that weighed economic, technological,
energy, and geographic factors. Under the
revised law, BACT is always a case-by-case
determination. BACT now applies to all pol-
lutants regulated under the Act, not just to
sulfur dioxide and particulates.
• Reasonably Available Control Technology (RACT).
RACT is fundamentally different from the other
emission limitations in that it applies only to
existing sources. The 1979 SIP revisions re-
quire RACT for existing sources of air pollu-
tion in nonattainment areas. RACT is deter-
mined on a case-by-case basis using the EPA
guidelines. These guidelines define RACT for
traditional stationary sources as the lowest
emission limit that a particular source is
capable of meeting by the application of con-
trol technology that is reasonably available
considering technological and economic feasi-
bility.
The above definitions reveal that the air quality objec-
tives of the Air Act are implemented using emission limita-
tions associated with general technology definitions. Inter-
pretation of the Air Act is complicated by the Air Act's
complex language and its attempt to reflect certain non-air
considerations such as energy demands and economic effects.
The steel industry has begun to develop a program for
compliance with the Air Act's provisions. Large capital ex-
penditures have been made, and future funds have been allo-
cated to bring the industry into full compliance by 1984.-1
The definitive nature of these expenditures and their impacts
necessitate that they be included in TBS's baseline analysis.
statutory deadline for compliance with the Air Act is
December 31, 1982. However, on the basis of information from
EPA's Office of Enforcement, it is not anticipated that com-
pliance will actually be achieved until 1984.
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III-4
Thus, the industry's baseline condition, as depicted in Chap-
ter II, includes the total costs associated with air pollution
control efforts. The following sections discuss the sources
and methods used in interpreting and quantifying the effects
of the Air Act on the iron and steel industry for inclusion in
the TBS baseline analysis.
COSTING METHODOLOGY
The procedure for deriving total air pollution control
costs involves the estimation of three basic parameters:
• Unit treatment costs,
• The number of facilities in existence as of a
particular date, and
• The percent of facilities in compliance with
the applicable SIPs as of a particular date.
In addition, the methodology must accommodate differences in
SIPs, processes, emission type (stack, fugitive, or NSPS),
size of facilities, utilization rates, and implementation
schedules.
Determination of unit treatment costs is complicated by
the fact that neither federal law nor EPA regulation specifies
particular treatment facilities that would satisfy the Air
Act's requirements. Individual steel firms must make their
own judgments based on SIP requirements (which vary by state),
costs, and availability. Even in the area of New Source Per-
formance Standards where a uniform federal regulation does
exist, states may supersede EPA standards with more stringent
emission limitations. The 1979 report by PEDCo Environmental,
Inc. entitled The Impact of New Source Review Policy on Capac-
ity Expansion In the Integrated Iron and Steel Industry (EPA~
Contract Number 68-01-5135 PN 3417), plus additional updated
cost estimates from PEDCo, have been used by TBS as the basis
for projecting air-related cost impacts.
PEDCo formulated control technologies to treat the fol-
lowing pollutants: particulate matter, sulfur and nitrous
oxides, and hydrocarbons. The uncontrolled emission levels
emanating from each source were based on published emission
factors, engineering judgment, and information gathered by
EPA. The emissions resulting after the application of various
control technologies were defined as specified percentages of
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III-5
the uncontrolled emissions. PEDCo related these emission
rates to emission limitations associated with each general
technology requirement (i.e., RACT, BACT, and LAER); input to
this process was also obtained from EPA's Division of Station-
ary Source Enforcement (DSSE). The result of this analysis
was a specification of the control technologies that would
satisfy existing SIPs in all the major steel producing regions
of the country.
Legal delays and permit interpretation have caused delays
in the deadlines for the installation of these control techno-
logies. Therefore, a schedule of compliance (Exhibit 11) with
the Air Act's requirements for each steelmaking process was
generated by TBS in conjunction with DSSE. This compliance
schedule, and the unit treatment costs discussed earlier, were
combined with PTm(Steel) capacity forecasts to determine total
air pollution control costs associated with the Air Act.
These costs have been analyzed within the context of the pre-
viously described steel industry baseline conditions to deter-
mine their economic effect. Data pertaining to air pollution
control costs at the individual process unit level are pro-
vided in Exhibits 11 through 19.
CAPITAL EXPENDITURES FOR AIR
POLLUTION CONTROL EQUIPMENT
TBS estimates that $4,246.5 million in capital expendi-
tures will be required for air pollution control equipment,
the funds to be allocated as shown in Table III-l.
Table HI-1
CAPITAL EXPENDITURES FOR
AIR POLLUTION CONTROL EQUIPMENT
(mi 11 ions of 1973 dollars)
Prior to
1981
Stack
Emissions $2,688.7
Fugitive
Emissions 384.7
NSPS 80.4
1981-
1984
S472.3
1985-
1990
373.1 0
142.7 S104.5
Total
0 S3,161.0
757.3
327.7
Total 53,153.8 S988.1 S104.5 S4.246.5
Source: PTm(Stael).
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III-6
These capital expenditures are detailed for each stage of
production by time period and type of emission in Exhibits 12
and 13, respectively. The majority of funds', over 60 percent,
are spent to control emissions from coke ovens and blast fur-
naces. Over 97 percent of all air pollution control costs are
associated with the raw materials preparation, iron and steel-
making, and casting processes; few emissions and corresponding
control costs result from the forming and finishing opera-
tions.
The industry is expected to spend three-quarters of the
estimated $4,246.5 million in total air-related expenditures
prior to 1981. A large portion of the remaining capital ex-
penditures for the 1981-1984 period is expected to be devoted
to coking compliance efforts (about 40 percent).
It is expected that by 1984 over 97 percent of total
capital expenditures for air pollution control will have been
spent; these expenditures represent capital outlays necessary
to achieve 100 percent compliance across existing facilities.
The remaining $104.6 million to be spent during the 1985-1990
period will apply solely to NSPS sources.
The Air Act requires control of both stack- and fugitive-
related emissions. Nearly three-quarters of all capital ex-
penditures ($3,161.0 million) are demoted to stack emission
controls. Previous compliance efforts have resulted in 85
percent ($2,688.7 million) of the funds for stack emission
controls being spent prior to 1981. Fugitive control costs
($757.8 million) represent approximately one-fifth of total
capital expenditures and are allocated evenly between the
periods 1976-1980 and 1981-1984. These expenditures generally
occur after expenditures for stack controls, reflecting the
more expeditious compliance schedule associated with stack
controls. However, the distinction between stack and fugitive
control costs is somewhat vague and therefore open to alterna-
tive interpretations. Refer to Exhibit 14 for a yearly break-
down of expenditures by type of emission (stack, fugitive, and
NSPS) .
The final category of capital outlays, NSPS expenditures,
is associated with capacity additions after 1979. Any new
source after that date must install the most stringent control
technology (LAER). The NSPS expenditures, although they ac-
count for less than 10 percent of total capital outlays, rep-
resent the highest per unit treatment cost.
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III-7
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT
Operations and maintenance expenses required to operate
air pollution control equipment through 1990 are summarized in
Table III-2:
Table III-2
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT
(millions of 1978 dollars)
1981-
1984
1985-
1990
Total
Stack
Emissions
Fugitive
Emissions
NSPS
Total
$1,407.0 52,259.1 53,566.1
133.6
120.7
800.1
337.3
1,283.7
458.5
32,011.3 53,397.0 55,408.3
Source: PTm(Steel).
Total operations and maintenance expenses are tabulated
for each production process by type of emission and time peri-
od in Exhibits 15 and 16, respectively. These exhibits in-
clude O&M expenses for all air pollution control equipment in
operation during the 1981-1990 time period. A yearly schedule
of O&M charges (Exhibit 17) shows the 1980 cost level to be
$341.2 million. A 60 percent increase in these charges occurs
by 1984 when the industry achieves full compliance.
During the 1981-1990 period, total O&M expenses are
$5,408.3 million. This consists of stack and fugitive equip-
ment operations and maintenance expenses of $4,949.8 million
and NSPS-related expenses of $458.5 million. In 1990, with
all air pollution control equipment in operation, the yearly
O&M expense equals $566.7 million, an increase of 66 percent
from the 1980 figure of $341.2 million.
The individual processes requiring the greatest level of
capital expenditures—coke ovens and blast furnaces—also
necessitate the largest portion of O&M charges, 42 percent and
12 percent respectively. The steelmaking processes require
$1,820.1 million for total O&M expenses during the period
analyzed, or more than one-third of all operations and main-
tenance expenses. The size of air-related O&M charges in the
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III-8
steelmaking area reflects the increased capacity of basic
oxygen and electric arc furnaces; this additional steelmaking
capacity, requiring the most stringent control technologies,
is partly due to replacement of significant amounts of open
hearth capacity.
CAPITAL EXPENDITURES AND OPERATIONS
AND MAINTENANCE EXPENSES FOR ANCILLARY
BOILER FACILITIES ~~
The costs associated with the control of air pollution
from ancillary boiler facilities were determined by PTm(Steel)
using PEDCo unit cost data in conjunction with boiler capacity
projections. Separate calculations for existing and NSPS fa-
cilities were made to reflect their different control costs.
Costs were estimated on a per boiler basis with only the coal-
fired units requiring emission control equipment.
TBS estimates that $342.4 million in capital expenditures
and a total of $1,190.0 million in operations and maintenance
expenses will be required for air pollution control equipment
associated with ancillary boilers. The funds will be allo-
cated as detailed in Table III-3.
Table III-3
CAPITAL EXPENDITURES AND O&M COSTS FOR
ANCILLARY BOILER FACILITIES
(millions of 1978 dollars)
Capital
Expenditures
Prior to 1981
1981-1984
1985-1990
Total S342.4
Source: PTm(Steel).
O&M Expenses
S
269.8
339.4
580.3
SI,190.0
The pattern of capital expenditures reflects the com-
pliance schedule associated with ancillary boiler facilities.
In 1976, only 40 percent of all boiler units were in compli-
ance with existing air standards. By the end of 1980, how-
ever, all boiler facilities will have rapidly achieved full
compliance. Subsequent to 1980, a total of $9.7 million will
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III-9
be spent on LAER control equipment to bring new boiler capac-
ity into full compliance. After the addition of new boiler
capacity, increased utilization rates will offset any need for
further capacity expansion. The increased rates of utiliza-
tion are reflected in the larger air-related O&M expenses
during the latter portion of the study period.
COMPARISONS OF ALTERNATIVE ENGINEERING
COST ESTIMATES FOR AIR POLLUTION
CONTROL EQUIPMENT
In order to provide a basis of comparison for the EPA air
pollution control cost estimates used in this study, unit con-
trol cost estimates derived by Arthur D. Little were utilized
to estimate total air pollution control costs. The ADL study
represents the most recent and complete analysis of air pollu-
tion control costs performed outside EPA.2 In order to facil-
itate comparisons between the ADL and EPA/PEDCo air cost esti-
mates, TBS designed PTm(Steel) to accept the engineering cost
estimates presented in the ADL study.
For purposes of methodological verification, TBS used
PTm(Steel) in conjunction with ADL's assumptions regarding air
pollution control to compute total costs. The $4,450.2 mil-
lion level of total air-related capital expenditures calculat-
ed in this manner compares favorably with the 1978 ADL air
expenditure estimate of $4,313.5 million. This implies that
the TBS procedure accurately replicates the ADL procedure^for
estimating total costs. The small differences that do exist
between the ADL and TBS results are due to different assump-
tions regarding retirements of production capacity, utiliza-
tion rates, and amount of new capacity added, and slight vari-
ations in the definitions of stack and fugitive emissions.
Once the verification process had been completed, PTm
(Steel) was used to compare the PEDCo and ADL cost estimates.
Using ADL's unit cost data and TBS's slightly different input
assumptions, PTm(Steel) estimated total air-related expendi-
tures to be $4,551.8 million. PEDCo unit cost data used in
conjunction with TBS assumptions resulted in an estimate of
$4,246.5 million needed for air-related capital expenditures.
2Arthur D. Little, Steel and the Environment; A Cost Impact
Analysis, prepared for the American Iron and Steel Institute,
1978.
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111-10
The variance in expenditures based on these different engi-
neering unit cost estimates is less than 8 percent; the simi-
larity of these expenditures is support for the estimates used
in the TBS analysis. Exhibits 18 and 19 provide additional
detail regarding comparisons of the ADL and PEDCo cost esti-
mates.
As mentioned before, the air pollution control cost esti-
mates described in this chapter have been included in the TBS
baseline condition. This reflects the incremental nature of
all anticipated water pollution control requirements relative
to the air regulations that have been legally mandated for
three years. Subsequent chapters discuss the anticipated
water costs and their implications relative to this baseline
condition.
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IV. COST IMPACT OF THE CLEAN WATER ACT
This chapter presents the cost to the steel industry of
compliance with water effluent limitation guidelines. The
first sections provide background information concerning the
legal basis for the guidelines and the recent history of their
development. TBS's cost calculation methodology is then brief-
ly described and is followed by a presentation of the costs in
four parts: capital expenditures for water pollution control
equipment, cash outlays associated with these expenditures,
operations and maintenance expenses, and land costs. The last
section of the chapter analyzes the sensitivity of these costs
to alternative compliance schedule projections.
It should be noted at the outset that the purpose of this
chapter is to describe the costs associated with the pending ef-
fluent guidelines; the financial implications of these water pol-
lution control requirements are discussed in Chapters V and VI.
LEGISLATIVE AUTHORITY
The Clean Water Acts of 1972 and 1977, P.L. 92-500 and
P.L. 95-217 (hereinafter referenced as the Water Act), consti-
tute the current statutory basis for effluent standards. The
national objective declared by this environmental legislation
is to eliminate discharges of pollutants into navigable waters
by 1985. As an interim goal waters are to be suitable for
human recreation and the growth of fish, shellfish, and other
wildlife by July 1, 1983.
A major focus of the Water Act is regulation of industrial
dischargers. The Act prescribes, in general terms, levels of
technology to be employed by these dischargers in controlling
wastewater streams. EPA, in turn, assesses the effluent reduc-
tions achievable through application of control technologies
at the various levels and publishes effluent limitations for
each level. To comply with the Water Act, dischargers must
meet or exceed these limitations.
The least stringent level of control mandated by the Water
Act is a standard attainable through application of the Best
Practicable Control Technology Currently Available (BPT). This
standard was to have been met by all steel facilities by July 1,
1977.
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IV-2
By July 1, 1984, existing steel facilities discharging
directly into receiving waters are required to meet more strin-
gent standards for toxic pollutants through application of the
Best Available Technology Economically Achievable (BAT). For
conventional pollutants, generally characterized by lower tox-
icities, the Best Conventional Pollutant Control Technology
(BCT) will be required by the same date. All pollutants other
than toxics and conventionals are to be regulated at the level
of the Best Available Technology Economically Achievable, effec-
tive three years from the date that effluent limitations are
set by EPA, but not earlier than July 1, 1984, nor later than
July 1, 1987. In practice, for the steel industry, guidelines
for these pollutants will most likely be published on July 1,
1981, so that the effective date will be the same as for toxic
pollutants, July 1, 1984.
In addition to these regulations, the Water Act mandates
separate Pretreatment Standards (PTS) for facilities discharg-
ing to publicly owned treatment works. These standards apply
to all but conventional pollutants.
The Water Act further requires EPA to establish New Source
Performance Standards (NSPS) to regulate new facilities—those
on which construction is begun after proposal of the NSPS ef-
fluent guidelines. Performance standards for such new sources
are to reflect the degree of effluent reduction achievable
through the application of the Best Available Demonstrated
Control Technology which, where achievable, affords a standard
permitting no discharge of pollutants.
CURRENT STATUS OF
THE GUIDELINES
In order to develop effluent limitation guidelines, EPA
contracted with the Cyrus Rice Division of NUS Corporation
(NUS/Rice) to conduct an extensive engineering study of water
pollution control in the steel industry. As a result of this
study, effluent limitations for raw steelmaking operations were
published in the June 28, 1974, Federal Register. However,
these guidelines were contested by the AISI and several steel
companies and were subsequently remanded in November 1975 by
the U.S. Court of Appeals, Third Circuit.
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IV-3
Standards for the remaining industry operations—the cast-
ing, forming, and finishing of raw steel—were published in
the Federal Register of March 29, 1976. These, in turn, came
under judicial review and were remanded by the above-mentioned
court in September 1977 for further review by EPA. Since this
date, no effluent guidelines have been in effect for the steel
industry. Permits written by the Agency and the states have
been used to evaluate compliance efforts on a facility-by-
facility basis.
As a result of the court remand, a review of the effluent
guidelines, which includes the preparation of this document,
is currently under way. On the basis of a comprehensive, new
survey of industry practice, NUS/Rice has developed several
water pollution control options for compliance with each regu-
lation. EPA, in turn, has reviewed the engineering work, con-
sidered the alternatives presented, and compiled a revised set
of guidelines. An Advance Notice of Proposed Rulemaking pub-
lished in the May 30, 1980, Federal Register advised the industry
of ^PA's intention to propose these guidelines in December 1980.
Final guidelines, incorporating industry and public comments,
are expected to be promulgated in July 1981.
COST IMPACT METHODOLOGY
Water pollution control costs are determined by PTm(Steel)
in conjunction with engineering cost estimates from the NUS/Rice
study mentioned above.* NUS/Rice's effluent control costs, mod-
ified to account for economies of scale, are used by PTm(Steel)
in conjunction with projected capacity and production levels
to calculate the total costs of compliance. The incidence of
these costs is then determined by coverage schedules containing
the percent of steel facilities complying with each water regu-
lation in each year. Capital expenditures depend on the number
of incremental facilities achieving compliance in any year, and
operations and maintenance charges depend on the total number
of facilities in compliance.
In analyzing costs calculated in this fashion, TBS has di-
vided the aggregate cost impact of water pollution control into
components defined by both effluent guideline and time period.
EPA-440/l-79-024a, Development- Document for Proposed Effluent
Limitations Guidelines and Standards for the Iron and Steel
Manufacturing Point Source Category, draft, October 1979.In
many cases, TBS used revised costs that will be released pub-
licly in the final version of this document in December 1980.
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IV-4
As described in Chapter II, the point of departure for all
analysis is a baseline that includes water pollution control
equipment installed as of 1980 as well as equipment legally
committed by that date to be installed at some future time.
For purposes of analysis, additional BPT, BAT, PTS, and NSPS
facilities are considered as incremental to this baseline.
COST IMPACT OF THE GUIDELINES
The following sections describe estimated costs for water
pollution control included in the baseline and for each incre-
ment of additional control. Inherent in these costs are TBS's
"best, estimate" compliance schedule projections. The sensi-
tivity of the results to alternative compliance schedules is
analyzed in the last section of this chapter.
Capital Expenditures
Total estimated industry capital expenditures for baseline
water pollution control equipment, that is, for equipment in ser-
vice by 1980 or legally committed by 1980 to be installed at some
future date, are as follows:
Table IV-1
CAPITAL EXPENDITURES FOR WATER POLLUTION
CONTROL EQUIPMENT
BASELINE
(millions of 1978 dollars)
Prior to 1976
1976
1977
1978
1979
1980
1981
Total
$1,196.67
229.64
217.88
116.72
106.17
98.06
49.48
$2,014.62
Source: PTm(Steel) and Rice/EPA engi-
neering cost estimates.
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IV-5
It should be noted that all baseline capital expenditures for
water pollution control in 1981 are due to legal commitments
made by 1980 to install BAT treatment facilities in the steel
forming area.
By 1981, cumulative baseline capital expenditures for water
pollution control will result in an average industry compliance
with BPT standards of 81.4 percent and with BAT/PTS standards
of 29.8 percent. By far the greatest part of the baseline im-
pact is linked to capital expenditures for BPT compliance.
These capital expenditures total $713.4 million in the short
run (1976-1980), or 92.8 percent of all baseline water-related
capital expenditures for this period.
Remaining capital expenditures for BPT compliance will
occur in the years 1981-1983. These expenditures represent an
additional $417.8 million in aggregate capital requirements
and bring the total capital expenditures associated with BPT
effluent guidelines to $2,243.8 million.2 Capital expendi-
tures for additional BPT control are highest in 1981, amounting
to $181.6 million. Approximately two-thirds of this expendi-
ture and three-quarters of all capital expenditures for incre-
mental BPT control will be associated with compliance in the
forming and finishing processes.
Since most plants have not yet installed a level of treat-
ment consistent with proposed BAT and PTS requirements, most
of the capital expenditures for BAT and PTS control will be
incremental to the baseline. The sum of all incremental capital
expenditures required to bring the industry into full compli-
ance with BAT and PTS regulations is projected to be $444.1 mil-
lion, of which less than 6 percent is due to PTS requirements.
The expenditures for BAT and PTS regulations, which occur in
1983 and 1984, overshadow the cost of compliance with other
water pollution control regulations in these years: expendi-
tures for BPT and NSPS equipment in 1983 and 1984 total only
$120.8 million.
The schedule of industry capital expenditures for water
pollution control, including baseline and incremental BPT, BAT,
and PTS compliance efforts, is shown in Table IV-2.
2
Includes BPT-related capital expenditures prior to 1976.
-------
IV-6
Table IV-2
CAPITAL EXPENDITURES FOR WATER POLLUTION
CONTROL EQUIPMENT
3PT, SAT, and PTS
(millions of 1978 dollars)
Prior to 1976
1976
1977
1978
1979
1980
1981
1982
1983
1984
Total
SI,196.67
229.64
217.38
116.72
106.17
98.06
231.04
149.18
235.13
295.92
52,876.46
Source: PTm(Steel) and Rice/EPA engi-
neering cost estimates.
These figures include all capital expenditures for water pollu-
tion control except those related to NSPS regulations. Capital
expenditures are detailed by effluent guideline, including NSPS,
in Exhibits 20 to 24 and for the baseline and incremental cost
categories in Exhibits 25 to 27. Also, to facilitate comparison
between the TBS and NUS/Rice studies, investments associated
with each effluent guideline are detailed by NUS/Rice's water
pollution control subcategories in Exhibits 28 to 32.
Of the $2,876.5 million in total capital expenditures shown
in Table IV-2, 78.0 percent is associated with BPT, 20.8 percent
with BAT, and 1.2 percent with PTS. An alternative breakdown
shows 70.0 percent associated with the baseline, 14.5 percent
with additional BPT control, and 15.4 percent with additional
BAT and PTS control. In addition to these requirements for
existing capacity, capital expenditures associated wtih NSPS
will total $61.9 million during the 1981-1984 period.
After 1984, all capital expenditures for water pollution
control are associated with NSPS regulations. NSPS capital
expenditures average $16.3 million annually for the years 1985-
1990. It is useful to note that this figure amounts to 3.7 per-
cent of the cost associated with installation of new capacity
during the period.
-------
IV-7
Cash Outlays
The above discussion of capital expenditures tends to
underemphasize the concurrent incidence of the impacts of BPT
and BAT/PTS regulations. In practice, because construction
spans a number of years, approximately 80 percent of the cash
outlays associated with a capital expenditure for pollution
control equipment are made in the years preceding the year in
which the equipment is placed into service. For this reason,
nearly three-quarters of the $444.1 million of capital expendi-
tures for incremental BAT/PTS control consist of cash payments
in 1981 and 1982. This has a considerable effect on the inci-
dence of the impacts. As shown above in Table IV-2, the high-
est capital expenditure in any year is $295.9 million in 1984,
due entirely to BAT/PTS regulations. The highest cash outlay,
however, is $273.8 million in 1982, resulting from the joint
impact of BPT and BAT/PTS regulations. This is shown in
Table IV-3, which depicts total cash outlays for compliance
with water pollution control regulations other than NSPS.
Table IV-3
CASH OUTLAYS FOR WATER POLLUTION
CONTROL EQUIPMENT
8PT, SAT, and PTS
1976-1984
(millions of 1978 dollars)
1976
1977
1978
1979
1980
1981
1982
1983
1984
Total
S
191.39
143.29
116.61
174.96
190.91
222.31
273.85
177.49
59.18
51,549.99
Source: PTm(Steel).
Cash outlays are detailed by effluent guideline in Exhibits
33 to 37 and for the baseline and incremental cost categories
in Exhibits 38 to 40.
-------
IV-8
Operations and Maintenance
Operations and maintenance expenses projected for the base-
line level of control are shown in Table IV-4.
Table IV-4
OPERATIONS AND MAINTENANCE EXPENSES
FOR WATER POLLUTION CONTROL EQUIPMENT
BASELINE
1976-1990
(millions of 1978 dollars)
1976
1977
1978
1979
1980
1981
1982
1983
Source:
S 53.27
65.94
76.84
86.36
84.41
94.39
102.25
105.63
?Tm( Steel)
engineering
1984
1985
1986
1987
1988
1989
1990
S106.91
109.37
114.85
117.91
123.63
125.41
125.06
and Rica/EPA
cost estimates.
These figures include charges associated with equipment in
service prior to 1976. Note also that, since the baseline
consists entirely of equipment installed prior to 1981, all
O&M charges in subsequent years are due only to that equip-
ment and not to incremental control. Variations in the
charges from year to year are caused by retirements of pro-
duction capacity and changes in capacity utilization rates.
Of the $106.9 million in baseline O&M charges for 1984
shown in Table IV-4, $90.5 million is associated with BPT con-
trol and the remaining $16.4 million is associated with BAT/
PTS control. In addition to charges associated with the base-
line, BPT equipment installed after 1980 will incur O&M costs
of $37.8 million in 1984 and incremental BAT/PTS equipment
will incur costs of $37.4 million in this year. In total,
O&M charges for water pollution control in 1984, excluding
NSPS control, will be $182.1 million, 41.3 percent of which
will be due to incremental control.
-------
IV-9
O&M expenses related to NSPS regulations depend directly
on the level of capacity additions and therefore are expected
to be small for TBS's minimal capacity expansion forecast.
Maximum NSPS O&M costs, incurred in 1990, will be only $19.0
million and will amount to less than 9 percent of the total
O&M expense for water pollution control in that year.
A detailed tabulation of O&M expenses is provided for each
effluent guideline in Exhibits 41 to 45 and for the baseline
and incremental cost categories in Exhibits 46 to 48..
Land Costs
The total cost of land requirements associated with water
pollution control equipment is shown in Table IV-5.
Table IV-5
LAND COSTS ASSOCIATED WITH
WATER POLLUTION CONTROL EQUIPMENT
SPT, SAT, and PTS
(millions of 1978 dollars)
Prior to 1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
Total
S543.67
Source: NUS/Rice land requirement
and cost estimates.
Of the $543.7 million total, 67.9 percent is associated with
the baseline, 18.1 percent with incremental BPT control, and
14.0 percent with incremental BAT and PTS control. Less than
$25.5 million will be spent for land associated with NSPS regu-
lations over the ten years 1981-1990.
-------
IV-10
Land costs are detailed by effluent guideline in Exhibits
49 to 53 and for the baseline and incremental cost categories
in Exhibits 54 to 56.
SENSITIVITY ANALYSIS:
ALTERNATIVE COMPLIANCE SCHEDULES
As noted earlier, the above analysis is based on a pro-
jected schedule of compliance with the various water regula-
tions. To measure the sensitivity of the results to these pro-
jections, TBS developed a number of alternative schedules that,
while not intended as projections per se, serve to bracket the
likely compliance strategy possibilities. TBS's "best esti-
mate" BPT compliance schedule, which depicts a gradual progres-
sion from actual compliance in 1980 to full compliance in 1983,
served as a standard against which the impacts of the following
schedules could be measured:3
• Full compliance in 1981 (early BPT)
• Full compliance in 1983; no incremental
control in 1981 or 1982 (late BPT)
The standard schedule for BAT/PTS compliance, that is, the
schedule described earlier as TBS's "best estimate," assumes
that incremental control efforts will occur only in 1983 and
1984. In this schedule, the greater part of BAT equipment is
placed into service in the latter year. The alternative sched-
ules studied were as follows:
• Full compliance by 1985, with some compliance
efforts in 1984 (one-year delay BAT)
• Incremental compliance efforts evenly distributed
over the three years 1982-1984 (uniform BAT)
Figure IV-1, a plot of cumulative capital expenditures
for each scenario against time, depicts these schedules graph-
ically. Note that total capital expenditures in the figure
differ minimally after full compliance is reached due to the
interaction of capacity and compliance projections.
3
It should be noted that for the historical years 1976-1980
all compliance schedules are equivalent.
-------
IV-11
Figure IV-1
CUMULATIVE CAPITAL EXPENDITURES FOB ALTERNATIVE COMPLIANCE SCHEDULES
1976-1985
S.SOO
$2,000
SI 400
SJ.OOO
$500
MILLIONS OF 1978 DOLLARS
COMPLIANCE SCHSDULE
—— TBS Projection
Strty
Un
$300
5200
S100
COMPLIANCE SCHEDULE
— TBS Pronction /•'
— Uniform
On».Y««r
BAT
1978
1976
1985
Sourev: TBS
• Of the possible combinations of these schedules, three
were selected that bound the range of water cost impacts, while
remaining reasonably realistic. The first is late compliance
with BPT regulations coupled with the standard schedule for
BAT and PTS. This would imply a shorter period of more con-
centrated cash outlays, while at the same time easing the bur-
den of BPT O&M costs for the years 1981 and 1982. The second
combination studied, early compliance with BPT regulations in
conjunction with uniform incremental BAT/PTS compliance, would
provide a more constant level of cash outlays. It would also
maintain higher levels of compliance in early years than would
the standard schedule. Finally, combining the standard BPT
schedule with a one-year delay of BAT/PTS compliance would lead
to a reduction in the level of maximum cash outlays and would
decrease BAT/PTS O&M charges during 1983 and 1984. Cash outlays
associated with each of these scenarios are shown in Table IV-6.
-------
IV-12
Table IV-6
COMPLIANCE SCHEDULE SENSITIVITY
CASH OUTLAYS
BPT, BAT, and PTS
1979-1985
(millions of 1978 dollars)
1979
1980
1981
1982
1983
1984
1985
Source:
Standard BPT and
Standard BAT/PTS
$174.96
190.90
222.31
273.85
177.49
59.18
0
PTm(Steel).
Late BPT and
Standard BAT/PTS
$ 88.04
41.16
299.64
408.17
253.01
59.18
0
Early BPT and
Uniform BAT/PTS
$314.46
316.80
238.17
163.77
94.14
29.33
0
Standard BPT and
One- Year Delay BAT/PTS
$174.96
190.90
152.25
138.59
211.49
146.49
54.28
Detailed capital expenditure, cash outlay, operations and
maintenance, and land cost figures associated with the standard
and alternative compliance schedules are provided in Exhibits
57 to 64.
-------
V. REVENUE REQUIREMENTS AND PRICE EFFECTS
This chapter describes the steel industry's revenue re-
quirements and product prices, which result from the effects
of the capital expenditures and annual costs described in the
previous chapters. The determination of revenues facilitates
the calculation of the sources of funds from income, deprecia-
tion, deferred taxes, and external financing, and the applica-
tion of funds to capital expenditures. Changes in these flows
of funds, along with associated changes in the industry-wide
balance sheet items, allow an examination of the important fi-
nancial constraints the industry may face as a result of en-
vironmental regulations.
The PTm(Steel) methodology uses the concept of revenue re-
quirements to infer impacts on revenue from impacts on cost.
Revenue requirements are defined as those revenues that recover
all costs, including a return on common equity.1 These costs
include operating expenses, depreciation, sales and property
taxes, interest income and expenses, federal and state income
taxes, and net income requirements. Computation of revenue
requirements is complicated by the tax effects of the numerous
forms of capital investment considered in PTm(Steel). These
effects include investment tax credits and tax deferrals caused
by timing differences in tax and book depreciation expenses.
A schematic diagram of the financial module of PTm(Steel),
which develops revenue requirements as well as industry-wide
annual financial statements, is provided in Exhibit 65.
TBS has evaluated the financial implications of proposed
environmental regulations in the context of two scenarios for
the pass-through of annual pollution control costs—a full cost
pass-through condition and a zero cost pass-through condition.
Although both conditions focus on the baseline description de-
veloped in Chapter II, they differ in their treatment of revenue
A profitability model was developed for the steel industry
based on historical rates of return on common equity (adjusted
for inflation) and utilization rates of raw steelmaking capacity,
both of which were obtained from the AISI. The model, along
with future utilization rates for raw steelmaking capacity ob-
tained from PTm(Steel), was used to predict returns on common
equity. Exhibit 6 provides the rates of return on common
equity obtained from this analysis.
-------
V-2
increases above baseline revenue requirements to cover the added
operating and capital costs of additional pollution control equip-
ment. The full cost pass-through condition allows an increase
in revenues to recover fully all the operating and capital costs
associated with additional equipment required by pollution con-
trol regulations. The zero cost pass-through condition allows
no increases in revenues to recover added costs and thus results
in lower earnings available for common equity. The full cost
pass-through scenario places the entire burden of increased
costs on the consumer of steel products, whereas....the zero cost
pass-through scenario places this burden on the steel industry
and its shareholders.
The ability of the steel industry to pass through incre-
mental costs to its customers is influenced by a number of
factors. In the past, the steel industry, faced with price
competition from foreign producers, high visibility of price
increases, and formal and informal government price controls,
has found it difficult to increase prices adequately, except
in years of exceptionally high demand. This is demonstrated
by the overall poor profit performance of the industry during
the last five years. Currently, import competition and the
government's "Anti-Inflation Program" continue to' limit the
steel industry's ability to raise prices. To the extent that
such competitive conditions and government policies continue
in the future, TBS believes that, of the two pass-through
scenarios considered here, the -zero cost pass-through scenario
is the more likely.
Because the zero cost pass-through scenario does not
involve changes in revenues or shipments due to incremental
pollution control costs, no revenue or price impacts result.
Therefore, the remainder of this chapter discusses only the
revenues and price effects of the full cost pass-through sce-
nario.
REVENUE REQUIREMENTS
Projected baseline revenue requirements for the 1981-1990
period are shown in Table V-l. Exhibit 66 provides a year-by-
year breakdown of these requirements.
-------
V-3
Table V-l
REVENUE REQUIREMENTS FOR THE BASELINE CONDITION
(millions of 1978 dollars)
Sales Tax
Operations and Maintenance
Expenses
Capita I-Related Charges
Total
1981-1984
$ 5,800.1
123,084.7
17.212.6
$146,097.4
1985-1990 1981-1990
S 9,398.9 $ 15,199.0
204,423.5
22,926.9
327,508.3
40,139.5
S236,749.4 S382.846.8
Source: PTm(Steel).
Required revenues for the baseline condition, which exclude
consideration of costs for additional water pollution control
equipment, will total $146,097.4 million from 1981 to 1984 and
$382,846.8 million from 1981 to 1990. These baseline revenue
requirements average $36,524.4 million per year through 1984
and $38,284.7 million per year through 1990. More than 84 per-
cent of these revenue requirements represent operating costs,
about 4 percent represent sales taxes, and most of the remain-
der is associated with capital-related charges.
Incremental revenue requirements related to the full pass-
through of costs associated with BPT, BAT, and NSPS water ef-
fluent guidelines are shown in Table V-2. Exhibit 67 provides
a year-by-year breakdown of these revenue requirements.
Table V-2
INCREMENTAL REVENUE REQUIREMENTS FOR
WATER POLLUTION CONTROL EQUIPMENT
(millions of 1978 dollars)
BPT Additions
BAT Additions'
NSPS Additions
Total
Source: PTm(Steel).
1981-1984 1985-1990 1981-1990
$495.6 S 580.4 $1,076.0
280.5 713.6 994.2
70.8 216.3 287.1
$847.0 $1.510.3 $2,357.3
-------
V-4
Revenues required to recover fully the cost of water pol-
lution control equipment will be $847.0 million through 1984
and $2,357.3 million through 1990. These increases amount to
0.58 percent of the baseline revenues through 1984 and 0.62
percent through 1990.
In 1984, after most of the proposed water pollution con-
trol equipment is installed, approximately $301.1 million in
additional revenues will be required to recover added annual
costs. By 1990, the added revenue requirements should decrease
to $227.0 million, as interest expenses and other capital charges
associated with the additional equipment decline.
Over the 1981-1990 period, more than half the additional
revenue requirements associated with water pollution equipment
will stem from capital-related charges, and about 40 percent
will result from increased operations and maintenance expenses.
PRICE EFFECTS
Average steel prices were determined by dividing revenue
levels by the appropriate levels of steel shipments. During
the next ten years, the baseline average steel price is not
expected to deviate significantly from the 1984 estimate of
$429.09 per ton (in 1978 dollars). The only exception occurs
during a cyclical downturn in the demand for steel products
forecast in the mid-1980s, which will lead to increased price
competition in the industry. Baseline price levels in both
nominal and real terms are displayed in Figure V-l.
-------
V-5
$1,000
$800
$600
$400
$200
Figure V-1
DOMESTIC STEEL PRICES
1976-1990
DOLLARS PER TON
1978 REAL DOLLARS
1976 1978 1980
Sourea: PTm(SteaJ).
1982
1984
1988
1990
Water pollution control equipment placed in service during
the 1981-1984 period is expected to increase the 1984 price
per ton of steel from $429.09 to $432.51—an increase of 0.80
percent (Table V-3).
Table
V-3
AVERAGE PRICE EFFECTS FOR
WATER POLLUTION CONTROL EQUIPMENT
(1978 dollars
8PT Additions
BAT Additions
NSPS Additions
Total
Source:
PTm( Steel).
per ton)
1984
SI. 37
1.80
0.25
S3. 42
1990
SO. 89
1.06
0.49
S2.44
-------
V-6
The effects of additions to water pollution control equip-
ment on average steel prices in the years 1981 to 1990 are shown
in Exhibit 68. In 1990, additional water pollution control
requirements account for 0.57 percent of the price of steel.
SHIPMENTS SENSITIVITY ANALYSIS
As explained in Chapter II, TBS developed two alternative
shipments forecasts based on more optimistic projections of
future growth rates for shipments. Instead of utilizing the
1.0 percent growth rate of the TBS baseline shipments forecast,
one alternative forecast used a 1.5 percent growth rate, and
the other used a mixed growth rate—a 1.0 percent growth rate
for the 1981-1984 period and a 2.0 percent growth rate for the
1985-1990 period. The effects of the alternative shipments
forecasts on steel product prices were examined with the aid
of PTm(Steel). Projected price increases necessary to recover
all the costs of additional water pollution control equipment
under the two shipments forecasts are shown in Table V-4.
Table V-4
SHIPMENTS SENSITIVITY ANALYSIS
AVERAGE PRICE EFFECTS FOR WATER POLLUTION
Jasellne Price
BAT Additions
BAT Additions
(including NSPS)
Total Additions
Total Price
Source: PTm( Steel)
(1978 dollars per ton)
1.5 Percent Growth
1984 1990
S429.4S $428.06
1.31 0.86
2.22 1.67
3.53 2.53
$432.98 J430.59
CONTROL EQUIPMENT
Mixed
1984
$429.20
1.36
2.04
3.40
$432.80
Growth
1990
$428.74
0.36
1.48
2.34
$431.08
In the 1.5 percent forecast, the additional water pollu-
tion control requirements will increase prices by 0.82 percent
in 1984 and by 0.59 percent in 1990. Corresponding figures
for the mixed growth forecast are 0.79 percent in 1984 and
0.55 percent in 1990. These percentage increases are essen-
tially the same as those in the baseline forecast—0.80 percent
in 1984 and 0.57 percent in 1990. Thus, the price effects of
proposed water pollution control regulations are relatively
insensitive to variations in the forecast for shipments of steel
products that are reasonable given the underlying assumptions
of the analysis.
-------
VI. FINANCIAL EFFECTS
The steel industry's need for external sources of capital
stems primarily from its investment in new facilities, in the
modernization and reworking of existing facilities, and in
pollution control equipment. Steel industry managers deter-
mine levels of capital expenditures on the basis of their
expectations of future profitability and access to the capital
markets. The terms on which capital is available to a steel
company, in turn, depend importantly on investor perceptions
of the steel company's future profitability and the relative
risks associated with other investment opportunities.
The investment program undertaken by the steel industry—
even before consideration of additional water pollution con-
trol costs — is likely to be constrained by financing consider-
ations. Issuing new common stock is likely to be unattractive
because it would result in a severe dilution of the book value
of existing shareholders' stock. The market prices for steel
companies' stock are currently at about 50 percent of their
book values and will probably remain at this level. The cur-
rent low value placed by investors on most steel company com-
mon stocks reflects both a history of low profitability and,
perhaps more importantly, the expected continuation of low
profitability. Over the past ten years, return on equity for
the steel industry has averaged about half the all-manufac-
turing average. If there are no significant changes in gov-
ernment policy, it is likely that import competition and pro-
jected supply-demand conditions will lead to returns on equity
for the steel industry over the^ 1981-1990 period that continue
to average approximately half the average return for all non-
financial corporations. This projected low profitability
implies a continuation of the current situation in which com-
mon stock prices are low relative to the book value of equity.
Issuing debt in the amounts needed to meet the steel in-
dustry's potential external financing requirements is also
likely to be unattractive to industry management. The amount
of debt steel companies decide to employ depends importantly
on their bond rating objectives. With current bond ratings
for most major steel companies at a single A, several of which
have recently been downgraded from an AA, most steel company
managements are likely to be unwilling to take actions that
would result in further bond rating declines.1
Chapter II for a discussion of the implications of low
investment grade bond ratings.
-------
VI-2
Steel companies can attempt to prevent further bond rat-
ing declines by limiting the proportion of debt in their capi-
tal structures. Imposing a ceiling on the'use of debt implies
a limit on the magnitude of the investment program that can be
undertaken. As discussed in Chapter II, TBS's baseline pro-
jection reflects limits on the steel industry's investment
program that are consistent with the preservation of current
bond ratings. An unwillingness to take actions that would
jeopardize bond ratings means, in effect, that the industry
would have a fixed pool of capital available to allocate among
new capacity, reworks, and pollution control. Thus, addi-
tional outlays for water pollution control would necessitate
cutting back other investments, rather than significantly
altering baseline external financing requirements or financial
conditions.
The next section presents the steel industry's baseline
external financing requirements and financial condition. This
is followed by a discussion of the effects of future BPT and
BAT control requirements.2 The chapter concludes with analy-
ses of the sensitivity of the financial results to the base-
line investment program, alternative shipments forecasts, and
water-related compliance schedules.
BASELINE EXTERNAL FINANCING
REQUIREMENTS AND FINANCIAL CONDITION
Baseline external financing requirements, all of which
are assumed to be met by issuing debt, total $3,300.6 million
over the 1981-1990 period. Of the $3,300.6 million, $1,191.2
million is required for refunding maturing debt, which results
in net external financing requirements of $2,109.4 million.
The projected net external financing requirements are signifi-
cantly lower than the levels that have prevailed over the past
decade. For example, over the 1970-1979 period the steel
industry raised over $5,000.0 million. Almost 90 percent of
this amount was raised in the 1975-1979 period. The lower
projected external financing requirements relative to histori-
cal levels result directly from the assumed constraint on
capital outlays required to maintain the industry's current
financial condition.
term "BAT control requirements" is used herein as a
surrogate for the requirements asssociated with BAT, PTS,
and NSPS effluent limitations and standards.
-------
VI-3
The financial condition of the steel industry projected
in the baseline represents a continuation of recent financial
performance levels. This condition is dominated by the major
steel companies, most of which currently have single A bond
ratings. Although smaller steel companies typically have much
lower bond ratings, as a group they are not large enough to
materially change the overall credit quality of the industry.
FINANCIAL EFFECTS OF FUTURE WATER
POLLUTION CONTROL EXPENDITURES
Financial effects of future expenditures for water pol-
lution control equipment depend importantly on the magnitude
of capital outlays required, the manner in which such outlays
are financed, and the extent to which these costs can be
passed through to consumers. This section discusses the capi-
tal requirements and associated external financing needed to
achieve proposed BPT and BAT standards over the 1981-1990
period. The implications for the industry's financial condi-
tion and the industry's ability to access capital markets are
also discussed.
The following analysis assumes that baseline capital
expenditures would be augmented by water pollution control
costs. In practice, however, baseline capital expenditures
are likely to be reduced by an amount approximating the level
of capital requirements for water pollution control in order
to prevent deterioration in the industry's financial condition
and bond ratings. Consequently, the following discussion
should be viewed as an illustration of the potential financial
effects of water costs if baseline expenditures were
maintained.
Capital outlays for BPT and BAT water pollution control
equipment in the first four years would account for about
90 percent of total outlays for water pollution control during
the 1981-1990 period. During the 1981-1984 period, capital
expenditures for water pollution control total $923.7 million,
representing a 10.8 percent increase over baseline capital
expenditures. Of the $923.7 million, about 45 percent is
associated with BPT regulations and about 55 percent is
related to expenditures for BAT control.
If it is assumed that the steel industry can raise prices
so that baseline profitability is maintained, the additional
outlays for water pollution control would increase the steel
industry's external financing requirements over the 1981-1984
period by $673.6 million, $143.5 million for BPT and the bal-
ance for compliance with BAT standards. Cash flow from
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VI-4
pollution control outlays in the early 1980s provides a reduc-
tion in net external financing requirements in the 1985-1990
period, resulting in total incremental external financing of
$473.7 million over the 1981-1990 period (see Table VI-1).
Table VI-1
CHANCES IN NET EXTERNAL FINANCING REQUIREMENTS1
FROM WATER POLLUTION CONTROL
(millions of 1978 dollars)
Full Cost Pass-Through
BPT Additions
BPT and SAT Additions
Zero Cost Pass-Through
BPT Additions
8PT and BAT Additions
1981-1984 1985-1990
S143.5
573.5
257.1
864.0
(199.9)
53.5
211.8
1-Changes are measured relative to the baseline.
Source: PTm(Steel).
If the industry is unable to raise prices above baseline
levels, then external financing requirements would be higher
than in the full cost pass-through case. For example, exter-
nal financing over the 1981-1984 period associated with pro-
posed BPT and BAT requirements would be $864.0 million rather
than $673.6 million under the full cost pass-through assump-
tion. Over the 1981-1990 period, zero cost pass-through of
additional water costs to steel consumers would lead to
incremental external financing for BPT and BAT control of
$1,075.8 million, instead of the $473.7 million associated
with full cost pass-through. As discussed previously, if
faced with additional capital outlays for controlling water
pollution, the steel industry is likely to reduce reworks
expenditures rather than increase its external financing to
avoid deterioration in its financial condition.3
The degree to which the industry can pass additional
costs through to consumers affects not only external financing
requirements but also the general implications of water pollu-
tion control requirements for the cost and availability of
capital. If costs for BPT compliance can be entirely passed
along to consumers, the industry should be able to maintain
^Exhibits 69 and 70 provide external financing requirements
for each year of the study period for both the full and zero
cost pass-through conditions.
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VI-5
its current overall low A bond rating. However, even with
full pass-through of costs, BAT requirements are so large that
the industry's current bond rating would be jeopardized.
If additional costs can be passed through to consumers,
then, as shown in Table VI-2, the addition of BPT and BAT
control requirements would raise the industry's 1981-1990
average debt to capitalization ratio to 36.6 percent, or 1.8
percentage points higher than this ratio in the baseline. The
average interest coverage ratio during this period would de-
cline to 2.93 times from 3.17 times, and the average cash flow
to long-term debt ratio would decline to 39.5 percent from
42.0 percent in the baseline.'* Although these changes are not
large, they represent a deterioration in financial condition
from baseline levels that could threaten the industry's over-
all low single A bond rating.
Table VI-2
SUMMARY FINANCIAL STATISTICS
Saseline
Full Cost Pass-Through
BPT Additions
BPT and SAT Additions
Zero Cost 3ass-Through
BPT Additions
BPT and SAT Additions
Source: PTm( Steel ).
ROE
(percent)
9.2
9.2
9.2
3.8
3.3
(1981-1990 averages)
long-Term Debt *
Total Capitalization
(percent)
34.3
35.5
36.6
36.3
38.2
Cash Flow ••
long-Term Debt
(percent)
42.0
41.0
39.5
39.2
36.0
Pretax
Interest
Coverage
(times)
3.17
3.07
2.93
2.86
2.54
The effects of water pollution control expenditures on
the industry's financial condition are more severe in the more
likely case in which the industry is unable to increase prices
to reflect the added costs. In such circumstances, BPT re-
quirements alone would jeopardize the industry's current bond
rating, and the addition of BAT requirements would most likely
result in a drop in the industry's overall credit quality to a
BBB/Baa rating. This predicted decline in credit quality with
the addition of BAT requirements is reflected in the following
^Exhibits 71 through 73 provide these financial statistics for
each year of the study period.
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VI-6
changes in financial indicators for the 1981-1990 period: a
3.4 percentage point increase in the average debt to capi-
talization ratio to 38.2 percent, a decline in the interest
coverage ratio to 2.54 times from 3.17 times, and a decline in
the ratio of cash flow to long-term debt to 36.0 percent from
42.0 percent in the baseline.^
If the steel industry chooses to maintain the baseline
investment program in the face of added BAT pollution control
costs, then it must be willing to accept lower bond ratings.
Companies with resulting BBB ratings should be able to finance
their capital programs under normal credit market conditions.
However, during tight credit market conditions they may not be
able to obtain capital on reasonable terms and may therefore
be forced to reduce their capital expenditure programs. For
those companies with bond ratings below investment grade
(i.e., below BBB), financing will be more costly. For such
companies, capital may be limited and, in extreme cases, not
available at any cost.
The potential financing difficulties that can be encoun-
tered by a company with a low investment grade bond rating
(i.e., BBB) will provide steel industry management with a
strong incentive to take actions to avoid bond downgradings.
One strategy to avoid credit quality deterioration would be to
reduce reliance on debt financing by limiting capital expendi-
tures. In the absence of future profitability higher than
that currently projected, the steel industry is likely to
follow such a strategy. Thus, faced with additional water
pollution control requirements, the industry will probably cut
back investment in steel production related assets.
The amount that reworks will need to be reduced to main-
tain current bond ratings cannot be determined precisely be-
cause bond ratings depend on many factors. A good approxima-
tion can be obtained, however, by reducing reworks expendi-
tures by an amount approximating the magnitude of added water
pollution control costs. This leads to an average industry
debt to capitalization ratio similar to that maintained in the
baseline (i.e., approximately 35 percent). Other indicators
of financial condition such as interest coverage ratios will
vary somewhat even if baseline debt to capitalization ratios
are maintained. However, changes in the industry's overall
credit quality would be minimal. External financing require-
ments would also depart somewhat from baseline levels if pol-
lution control expenditures were substituted for reworks
Exhibits 74 through 76 for year-by-year results.
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VI-7
expenditures because of differences in such factors as book
and tax depreciation rates. But, over the study period, total
external financing requirements would be approximately the
same as in the baseline.
Following a strategy of reducing reworks expenditures to
maintain current financial condition means that the key ef-
fect of additional water pollution control requirements will
be to accelerate retirement of some production facilities.
The associated effects of such retirements on steel industry
capacity, employment, and market share are discussed in Chap-
ter VII.
SENSITIVITY ANALYSIS
In order to test the sensitivity of the previous results
to certain assumptions concerning future steel shipments,
reworks expenditures, and water-related compliance schedules,
three sensitivity analyses were undertaken. The first analy-
sis evaluated the financial effects of larger outlays for
reworks than those incorporated in the baseline. The second
analysis evaluated the financial effects of the alternative
steel shipments forecasts. The third analysis focused on the
financial impacts of the alternative BPT and BAT compliance
schedules discussed in Chapter IV.
Sensitivity Analysis:
Full Reworks
This sensitivity analysis examined the financial effects
of a higher level of reworks expenditures than that included
in the baseline, a level that knowledgeable industry sources
consider necessary to adequately support desired production
levels. The lower capital outlays for reworks and moderniza-
tion expenditures incorporated in the baseline reflect poten-
tial financing constraints.
If the industry chose to maintain desirable levels of
reworks and modernization, this would increase external finan-
cing by $1,125.5 million over the 1981-1984 period and by
$519.3 million over the 1985-1990 period, relative to the
baseline. The added financing would increase the 1981-1990
average debt to capitalization ratio to 38.4 percent from the
baseline level of 34.8 percent. Additionally, the average
cash flow to debt ratio would drop from 42.0 percent to 37.6
percent, and the pretax interest coverage ratio would decrease
from 3.17 times to 2.85 times (see Table VI-3). These changes
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VI-8
in financial condition would probably result in a decline of
the industry's overall current low A bond rating to a strong
BBB.
The effects of BPT control requirements on the industry's
financial condition if a full reworks expenditure program were
implemented and if water treatment costs were passed through
to consumers would not be large enough to jeopardize the
strong BBB rating. Key indicators of financial condition in
these circumstances are summarized in Table VI-3. The average
debt to capitalization ratio over the 1981-1990 period would
increase 0.6 of a percentage point to 39.0 percent, the cash
flow to debt ratio would decline 0.7 of a percentage point to
36.9 percent, and the pretax interest coverage ratio would
decrease by 0.10 times to 2.75 times.
Tabla VI-3
SUMMARY FINANCIAL STATISTICS FOR FULL REWORKS ALTERNATIVE INVESTMENT PROGRAM
(1981-1990 averages)
Saseline
"Full Reworks" Before
BPT and BAT Additions
Full Cost Pass-Through
3PT Additions
8PT and BAT Additions
Zero Cost Pass-Through
BPT Additions
8PT and BAT Additions
Source: PTm(Stesl).
ROE
(percent)
9.2
9.2
9.2
9.2
3.7
3.2
Long-Term debt i
Total Capitalization
Ipercent)
34.3
38.4
39.0
40.0
39.9
41.6
Casn Flow •!
Long-Term Debt
(percent)
42.0
37.5
36.9
35.7
35.3
32.7
Pretax
Interest "
Coverage
_[times)
3.17
2.85
2.75
2.65
2.53
2.31
The addition of BAT requirements, still assuming full
pass-through of costs, would lower the industry's overall bond
rating to an average BBB. As can be seen in Table VI-3, the
average debt to capitalization ratio would increase by 1.6
percentage points to 40.0 percent, the average cash flow to
debt ratio would decline by 1.9 percentage points to 35.7 per-
cent, and the average pretax interest coverage ratio would
decline by 0.20 times to 2.65 times.
If costs cannot be passed through to consumers (the more
likely case), the addition of BPT control requirements probab-
ly would result in bond downgradings to the mid-range of the
BBB category. With BAT water pollution control costs added
-------
VI-9
to BPT requirements (assuming no pass-through of costs) the
industry's overall credit quality is likely to drop to at
least the lower end of the BBB range and possibly below in-
vestment grade. With zero p^ass-through of costs, BPT and BAT
control requirements would i'ncrease the 1981-1990 average debt
to capitalization ratio by 3.2 percentage points over the
ratio in the "full reworks" baseline scenario to 41.6 percent.
The average cash flow to debt ratio would decline 4.9 percent-
age points to 32.7 percent, and the average pretax interest
coverage would decrease by 0.54 times to 2.31 times (see Table
VI-3).
The potential bond downgradings associated with a full
reworks investment program, even before consideration of addi-
tional water pollution control costs, imply that the steel
industry is unlikely to undertake such a capital expenditure
program. As discussed earlier, most of the major steel com-
panies have experienced bond downgradings from AA to A ratings
over the last few years. Further declines in bond ratings
would tend to restrict these companies' access to capital
during periods of tight credit market conditions. Faced with
this potential financing difficulty, steel companies are like-
ly to pare back their investment programs to preserve current
credit quality. It was largely this consideration that led
TBS to incorporate the reduced reworks investment program in
the baseline. Moreover, the industry's desire to maintain
current credit quality and the corresponding limit on the
amount of debt financing the industry is willing to undertake
imply that the impacts of additional capital outlays for water
pollution control are primarily evidenced by reductions in
investment for steel-producing assets.
Sensitivity Analysis;
Alternative Shipments Scenarios
Future steel shipments can be an important determinant of
the steel industry's profitability. This profitability in
turn influences the industry's need for external capital and
the terms on which capital can be raised. Since the future
demand for domestic steel is uncertain, two alternative ship-
ments scenarios were analyzed. In the first scenario, steel
shipments matched those in the baseline through 1982 and then
followed a cyclically adjusted growth rate of 1.5 percent per
year thereafter. The second scenario used a mixed growth
rate: a 1.0 percent growth rate per year through 1985 and a
constant 2.0 percent annual growth rate for 1986-1990. This
second scenario combines the relatively pessimistic short-run
outlook for the industry inherent in the baseline and a more
optimistic outlook for the long run.
-------
VI-10
These higher shipments forecasts lead to higher capacity
utilization rates which, as discussed in Chapter V, should
lead to higher profitability levels than in the baseline. The
improved profitability under both scenarios, however, is small
and doesn't significantly alter the industry's financial con-
dition from baseline levels. As shown in Table VI-4 the
average return on equity before consideration of additional
BPT and BAT requirements over the 1981-1990 period would be
9.9 percent in the 1.5 percent shipments case and 9.7 percent
in the mixed growth case. These average returns on equity
compare to 9.2 percent in the baseline. A comparison of
Table VI-4 and Table VI-2 reveals that changes relative to the
main scenario baseline in average debt to total capitaliza-
tion, cash flow to long-term debt, and interest coverages for
both alternative shipments growth rate cases are small.
FOR
Table VI-4
SUMMARY FINANCIAL STATISTICS
ALTERNATIVE SHIPMENTS FORECASTS
(1981-1990 averages)
long-Term Debt *
ROE Total Capitalization
(percent) (percent)
1.5% Growth Rate Before
BPT or BAT Additions
8PT
BPT and BAT
Mixed Growth Rate Before
3PT or SAT Additions
8PT
3PT and SAT
1.5% Growth Rate Before
BPT or SAT Additions
SPT
BPT and SAT
Mixed Growth Rate Before
BPT or SAT Additions
BPT
BPT and SAT
Source: PTm(Steel ) .
9.9
9.9
9.9
9.7
9.7
9.7
9.9
9.4
8.3
9.7
9.2
8.7
Full Cost Pass-Throuah
34.6
35.3
36.4
34.7
35. 4
36.5
Zero Cost Pass-Throuah
34.6
36.2
38.4
34.7
36.3
38.3
Cash Flow *
Long-Term Debt
(percent)
43.3
42.3
40.7
42.9
41.9
40.4
43.3
40.4
36.7
42.9
39.9
36.7
Pretax
Interest
Coverage
(times)
3.41
3.30
3.09
3.34
3.23
3.08
3.41
3.03
2.70
3.34
3.01
2.68
-------
VI-11
Results of the shipments sensitivity analysis, which take
into account additional BPT and BAT requirements for both the
full and zero cost pass-through cases, are presented in Table
VI-4. The similarity between the baseline financial condi-
tions associated with the two shipments growth cases and the
baseline financial condition of the main scenario leads to
changes in financial condition due to BPT and BAT requirements
that are similar to those discussed in the main analysis.
Thus, the alternative shipments growth rates do not alter the
earlier conclusions regarding the effects of the proposed
water pollution control requirements on the iron and steel
industry.
Net external financing requirements over the 1981-1990
period, before consideration of additional water pollution
costs, are slightly higher for both alternative shipments
growth rates. For example, in the 1.5 percent shipments
growth case, net external financing is $1.0 million higher
than in the baseline over the 1981-1990 period. In the mixed
growth rate case, net external financing is $28.7 million
higher. Although one might expect that higher profitability
levels would lead to an overall decline in external financing,
increased working capital requirements at higher sales volumes
results in larger overall external financing requirements in
both cases.
In the mixed growth rate case, the changes in external
financing due to BPT and BAT requirements over the 1981-1990
period are almost the same as those obtained using baseline
growth rates under both full and zero cost pass-through as-
sumptions (see Table VI-5). In the 1.5 percent growth case,
the changes in external financing requirements over the 1981-
1990 period due to the addition of BPT and BAT control equip-
ment are about $42.0 million higher than those obtained using
baseline shipments growth rates, whether or not costs are
passed through to consumers.
If the industry tries to maintain its current financial
condition both before and after the incidence of water pollu-
tion control requirements, the relatively small changes in
external financing due to changes in the shipments forecast
assumptions imply that the magnitude of productive capital
expenditure cutbacks would be about the same as with the base-
line shipments scenario.
-------
VI-12
Basaline
Growth
Sate
Total Before 3PT
or BAT Additions 520.3
8PT Additions 143.5
8PT and SAT
Additions 573.5
SPT Additions 257.1
3PT and SAT
Additions 364.0
Source: PTm( Steel).
Table VI-5
NET EXTERNAL FINANCING FOR
ALTERNATIVE SHIPMENTS FORECASTS
(millions of 1978 dollars)
-1981-1984 1985-1990
1.5% Mixed Baseline 1.555 Mixed
Growth Growth Growth Growth Growth
Rate Rate Rate Rate Rate
511.5 522.0 1,489.0
Full Cost Pass-Throuah
143.6 143.6 (111.4)
679.5 573. 6 (199.9)
Zero Cost Pass-Through
257.2 257.2 63.5
369.4 364.0 211.8
1,498.3 1,516.0
(94.6) (111.1)
(164.0) (199.5)
80.3 53.3
247.9 212.4
Sensitivity Analysis: Alternative
BPT and BAT Compliance Schedules
Three alternative compliance schedules were examined to
test the sensitivity of the steel industry's external financ-
ing requirements and financial condition to the water-related
compliance schedules implicit in the results presented
earlier:
• Delaying BAT compliance by one year (corres-
ponding to the standard BPT, one-year delay BAT
schedule in Chapter IV)
• Accelerating BPT expenditures (early BPT, uni-
form BAT)
Delaying BPT expenditures (late BPT, standard
BAT)
-------
VI-13
The shifts in the incidence of external financing re-
quirements in each of these three scenarios would result in
small changes in the industry summary financial statistics.
Delaying BAT compliance by one year would reduce the 1982 net
external financing requirements by $200.9 million, relative to
the results presented in the main analysis with full cost
pass-through.6 However, net external financing requirements
would increase by $215.0 million over the 1983-1986 period.
Accelerating BPT expenditures would reduce 1981-1984 net
external financing by $267.6 million and increase 1985-1990
external financing by only $10.0 million. The reduction in
1981-1984 external financing requirements is the result of a
shift in external financing needs associated with water
pollution control costs from this period to the period prior
to 1981.
Delaying the BPT compliance schedule would raise 1981-
1984 external financing requirements by $326.2 million. This
increase results from a shifting of BPT cash outlays into the
1981-1984 period from earlier years. Under this scenario, a
reduction in external financing requirements of $38.9 million
would occur during the latter part of the 1980s because of
increased depreciation cash flow in this period resulting from
the delayed installation of BPT equipment.
As indicated in the above discussion, the primary effect
of the alternative compliance schedules would be to cause
short-term variations in the incidence of cash outlays and
corresponding financial requirements associated with the pro-
posed effluent guidelines. Because these alternative compli-
ance schedules could indicate a potential reduction in the
financial burden of water pollution control requirements
during years of particular financial weakness in the near
future, they are of potential importance. However, the
changes in industry summary financial statistics under these
scenarios would be short-term; for example, in 1990 the debt
to capitalization ratios for the three scenarios would lie
within 0.2 percentage points of this ratio in the main scena-
rio after the incidence of water pollution control costs.
Because the financial constraints faced by the steel industry
are based on long-term, permanent shifts in financial condi-
tion, the industry's financial condition and credit ratings
discussed earlier in this chapter would not be sensitive to
the three alternative compliance schedules.
6A11 external financing changes in this section are relative
to the BPT and BAT full cost pass-through results presented
in the main analysis.
-------
VII. OTHER IMPACTS OF ENVIRONMENTAL REGULATIONS
This chapter discusses the other impacts that the antici-
pated water effluent guidelines and the air pollution control
regulations will have on the steel industry's baseline condi-
tion. The most significant effects concern changes in the level
of steel industry employment and in the share of apparent con-
sumption, supplied by domestic producers. Minor effects are
also expected in the steel industry's consumption of energy.
As already discussed in Chapter VI, when steel companies
are faced with water pollution control requirements, they are
likely to attempt to preserve their financial condition by cut-
ting investment in productive assets. Therefore, the primary
effects on the steel industry of the pending effluent guidelines
relate to the consequences of reduced investment.
The industry is likely to cut its modest baseline reworks
program (which already reflects significant reductions from
reworks levels considered desirable by knowledgeable industry
sources) in response to water pollution control requirements
to the extent necessary to obtain levels of key financial in-
dicators consistent with an A bond rating. The potential de-
clines in reworks of production capacity due to water pollu-
tion control costs amount to approximately $100.0 million per
year over the decade. The sustained reduction in reworks is
likely to lead to a decline .in production capacity of about
6.0 percent during the latter part of the 1980s and the begin-
ning of the 1990s. The approximate 6.0 percent decline in in-
dustry production capacity due to water pollution control re-
quirements will have important implications for the domestic
industry's future market share and employment levels.
EMPLOYMENT EFFECTS
The gross employment effects associated with the operation
of pollution control facilities in conjunction with production
equipment are illustrated in Table VII-1 on the following page.
Two factors contribute to the decline in production employment
depicted in the table. The first is the underlying assumption
that labor productivity will continue to increase at the his-
torical rate of 1.8 percent per year. The negative employment
effects associated with this increase in labor productivity
-------
VII-2
Table VII-1
SUMMARY OF STEEL INDUSTRY 3ASEUNE EMPLOYMENT1
(thousands of jobs)
Production Labor
Air Pollution Control Labor?
[n-Place Water Pollution Control Labor
Total Employment
Short Run
1984
326.3
5.5
2.7
334.5
Long Run
1990
262.7
5.7
2.7
271.1
Includes process-related direct and indirect employees only.
Includes only the gross employment effects of the operation
of pollution control equipment.
will more than offset the positive employment impacts of in-
creasing domestic shipments during the middle and latter part
of the 1980s. The second factor leading to a decline in pro-
duction employment is the sustained reduction in reworks ex-
penditures the industry will need to make in the baseline
scenario (i.e., before the incidence of water treatment costs)
in order to preserve its current financial status throughout
the 1980s. This reduction, amounting to approximately $217.0
million per year during the 1980s, will lead to a production
capacity decline of approximately 12.8 percent. An estimated
8.2 percent of this decline is unrelated to pollution control
requirements. The remaining 4.6 percent of the baseline capac-
ity decline is due to additional air pollution control require-
ments during the decade.
It is anticipated that approximately 9,725 steel industry
jobs will be required by 1990 to operate all pollution control
equipment. Compliance with air pollution control regulations,
incorporated into the industry's baseline condition, is esti-
mated to require 5,675 steel industry employees. About 25.7 per-
cent of these employees, or approximately 1,460, will be needed
to operate air pollution control equipment placed into service
after 1980. Total water pollution control efforts are estimated
to create 4,050 steel industry jobs. About 2,690 of these jobs
are linked to the operation of water pollution control equipment
placed into service or committed to prior to 1981. Additional
BPT compliance efforts after 1980 will account for about 560
new employees, and additions to BAT and NSPS equipment will
provide the remaining 800 jobs associated with water pollution
control efforts. (See Exhibit 77 for additional detail on the
employment effects of pollution control equipment.)
-------
VII-3
However, these employment increases due to the operation
of pollution control equipment will be more than offset by the
reduction in production labor that will result from additional
air and water pollution control costs. The adverse effects of
environmental control costs on steel production labor are re-
flected in both the industry's baseline characteristics and
its condition after the addition of anticipated water pollution
control requirements. As mentioned before, the steel industry
will incur a 12.8 percent decline in production capacity at
the turn of the decade due to a reduction in reworks expendi-
tures that will be necessary even before the incidence of water
requirements. About one-third, or 4.6 percent, of this decline
in baseline capacity is attributable to air pollution control
equipment additions. The decrease in industry production ca-
pacity will result in a corresponding decline in production
levels because the steel industry will already be utilizing
capacity at maximum sustainable rates during the late 1980s.
The corresponding 4.6 percent decline in yearly production
levels implies that the air requirements included in the base-
line will result in a decrease in production labor of about
13,850 employees.
Proposed water pollution control requirements will ne- ,
cessitate a further decline in industry reworks, production
capacity, and production levels if the steel industry is to
preserve its current financial condition. The additional water
costs after 1980 (with full pass-through of annual charges to
consumers) will create a reduction of about 9,600 production-
related jobs. If water costs are not passed along to steel
consumers, as is more likely, the anticipated water pollution
control requirements are likely to cause a loss of about 17,925
jobs.
In summary, the net effect of environmental control re-
quirements on employment within the steel industry is a poten-
tial reduction of about 22,050 jobs. The net effect of water
pollution control requirements alone is a potential decline in
employment of 13,875 jobs.
In addition to the direct employment effects within the
steel industry, environmental control efforts will have indirect
employment impacts in other sectors of the economy. Employment
will be created in the sectors associated with the manufacture
and installation of pollution control equipment. This employment
will, in turn, create additional jobs in unrelated industries.
However, these positive indirect employment effects will be
more than offset by infrastructure-related job losses in other
sectors of the economy due to the reduction in steel production
and employment caused by environmental control requirements.
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VII-4
MARKET SHARE EFFECTS
The domestic steel industry's share of apparent steel con-
sumption will probably decline significantly due to environmen-
tal control requirements. The industry's market share in the
baseline scenario is projected to decrease from approximately
82 percent in 1977 and 1978 to about 71.5 percent around the
end of the next decade. This is a result of the 12.8 percent
decline in domestic capacity and production noted previously.1
Future air pollution control costs account for a signifi-
cant portion of the 10.5 percent decline in baseline market
share. Capital expenditures associated with additional air
pollution control compliance efforts will necessitate an ap-
proximate dollar-for-dollar tradeoff with reworks expenditures
in the baseline condition. The resulting reduction in reworks
expenditures will lead to capacity and production declines of
about 4.6 percent. These declines imply that air pollution
control equipment additions will be responsible for about
3.8 percentage points of the 10.5 percent decline in baseline
market share.
Under full cost pass-through conditions, proposed water
pollution control requirements will result in a further decline
in domestic market share of about 2.6 percentage points (to
68.9 percent). This decline in market share is a result of a
further decrease in reworks expenditures due to water pollution
control requirements, which in turn leads to a corresponding
decline in industry production capability. The approximate
2.6 percentage point market share decline caused by water pollu-
tion control efforts incremental to the baseline consists of
a 1.0 percentage point decrease due to BPT costs and a 1.6 per-
centage point decline associated with BAT requirements. Full
pass-through of annual water costs may also lead to further
minor reductions in market share due to the increases in im-
port demand that would result from domestic price increases.
Under zero cost pass-through conditions, BPT water pol-
lution control costs will probably lead to a domestic market
It should be noted that significant increases in the real
prices associated with domestically produced steel products
could lead to a further decline in market share through con-
sumer substitution of imports for domestic products. However,
restrictions on baseline steel price increases to levels ap-
proximating the rate of inflation for the economy as a whole
will probably preclude this kind of decline.
-------
VII-5
share decline of about 2.2 percentage points relative to the
baseline level of 71.5 percent. BAT requirements are likely
to cause a further market share reduction of approximately
2.7 percentage points. Hence, total water pollution control
requirements under zero cost pass-through conditions will lead
to a domestic market share of about 66.6 percent, or almost a
5.0 percentage point decline relative to the baseline market
share level.
ENERGY IMPACT
The manufacture of iron and steel products requires large
amounts.of energy. In recent years, the steel industry ac-
counted for nearly 9 percent of the net energy consumed in the
industrial sector. More than 40 percent of this amount has
been consumed in the coke oven and blast furnace process units.
In calculating the energy requirements for the steel in-
dustry, TBS relied on estimates of fuel and electric power con-
sumption per ton of output for each process. Arthur D. Little
provided the energy estimates for the production processes,
and EPA technical contractors supplied the estimates for water
and air pollution control equipment. In order to compare energy
requirements for fuel and electricity on a common basis, esti-
mates for electricity consumption in kilowatt-hours were con-
verted to Btu. The conversion was based on the total energy
required to produce electricity rather than just the energy
content of electricity alone.2
In addition to considering fuel and electricity, TBS con-
sidered two other important sources of energy: coke oven and
blast furnace by-product gases. By-product gases produced in
the cokemaking and ironmaking stages of production are high
enough in energy content to be used as energy sources in down-
stream processes. Therefore, these gases were treated as an
energy credit; the amount of energy needed to be purchased
by the steel industry was reduced accordingly.
Metallurgical coal used in coke ovens was also included
in the energy calculations because of its large energy content.3
The total energy required to produce electricity—10,500 Btu
per kilowatt-hour—was used instead of the energy content in
a kilowatt-hour of electricity—3,412 Btu.
3TBS assumed an energy content of 26 million Btu per ton of
metallurgical coal.
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VII-6
Since other raw materials do not include important amounts of
energy, they were not included in the energy computations. En-
ergy requirements for steel-related activities outside the
steel industry as defined in this study (e.g., the mining and/
or preparation of iron ore, limestone, coal, steel scrap, oxy-
gen, fluxes, and alloying materials) were also excluded from
the analysis.
A summary of net energy consumption by the steel industry
for 1981-1990 is provided in Table VII-2. Exhibit 78 presents
these energy requirements in more detail.
Table VII-2
NET ENERGY CONSUMPTION
(quadri11 ions of Btu)
Production
Air Pollution Control Equipment
Water Pollution Control Equipment
In-Place
Additions
Total
Grand Total
1981-1984
7.951
0.162
0.093
0.028
1981-1990
20.582
0.428
0.241
0.124
0.365
21.375
The energy impact of environmental regulations is minor
when compared to the large energy requirements of steel produc-
tion. Pollution control regulations will account for less than
4 percent of the industry's net energy consumption in the 1980s.
This will amount to about 38,000 barrels of oil, or the equiva-
lent, per day—approximately evenly divided between air and water
pollution control equipment.
Water pollution control equipment to be installed in the
1981-1990 period will require 0.124 quadrillion Btu. This
amounts to 0.6 percent of the industry's net energy consump-
tion, or about 5,800 barrels of oil or the equivalent per day.
BPT requirements will account for about 35 percent of this
energy requirement, and BAT and NSPS regulations will comprise
the remaining 65 percent.
The magnitude of the energy impact of the anticipated
water pollution control regulations on the steel industry's
baseline condition is small relative to the other impacts of
water pollution control requirements noted in this chapter; it
-------
VII-7
is smaller still relative to the scale of national energy con-
sumption. Additional pollution control equipment will consume
energy at a rate of about 0.09 percent of the 6.4 million bar-
rels of crude oil imported per day in 1979. Thus, the energy
impacts of additional pollution control equipment are not of
major significance when considered in the context of national
energy consumption.
-------
VIM. ALTERNATIVE SCENARIO
The main scenario analyzed in the preceding chapters is
consistent with the continuation of current government poli-
cies toward industry in general and the steel industry in
particular during the next decade. These policies include the
current tax policies concerning allowable depreciation life-
times, the current pricing policies of the "Anti-Inflation
Program," and the transitionary steel import policies that
have been in effect since the trigger price mechanism was
suspended.
Specific changes in these government tax, pricing, and
import policies would probably lead to a more optimistic out-
look for the steel industry during the middle and latter part
of the 1980s. These changes include a U.S. industrial policy
with provisions for accelerated capital recovery and other
investment incentives, a pricing policy that allows more lati-
tude in steel price increases, and a steel import policy en-
suring "full value" import prices in the domestic market. The
likelihood of the alternative scenario's more optimistic out-
look will depend on whether these specific changes in govern-
ment policies toward industry in general and the steel indus-
try in particular are implemented in the near future.
The following section describes the industry conditions
that are. likely to result from the specific changes in govern-
ment policies. This is followed by analyses of the baseline
financial condition of the industry and the financial impact
of water pollution control regulations on this condition with-
in the more favorable government policy environment. The
chapter concludes with an assessment of the impacts of the
policy changes on the market share, employment, and energy use
effects associated with the anticipated water regulations.
ALTERNATIVE BASELINE CONDITION
If the above changes in government policies were imple-
mented, they would probably have a significant effect on the
steel industry's condition during the next decade. A policy
of more rapid capital recovery for the industrial sector of
the economy would create a higher growth rate in steel demand
than that projected in the main scenario. If the import share
of apparent consumption were to remain constant, domestic
-------
VIII-2
steel shipments would be projected to grow at about 3 percent
per year (Exhibit 79).1 This more rapid growth in shipments
would cause capacity utilizations to rise to maximum sustain-
able levels by the mid-1980s. The resulting balance between
steel demand and supply levels would cause a transfer in pric-
ing leverage from consumers to producers of steel. An in-
crease in the steel industry's pricing flexibility, if higher
prices were allowed, would lead to increases in profitability,
culminating in a return on equity comparable to the all-manu-
facturing average by 1985 or 1986. Exhibit 80 details the
returns on equity for the alternative scenario by year.
This projected increase in steel industry profitability
would have important implications for the industry's financing
capabilities in the second half of the 1980s. If the steel
industry were to achieve returns on equity comparable to the
all-manufacturing average for about two years, market-to-book
ratios of common equity would be significantly higher than the
current 50 percent levels. With a significant increase in
market-to-book ratios, industry management would be in a posi-
tion to issue significant amounts of new common stock without
substantially diluting shareholders' equity interest. The
issuance of new common stock and the industry's increased
profitability would improve the steel industry's access to
long-term debt.
The industry's ability to obtain substantial amounts of
external financing would eliminate many of the investment
program restrictions that the industry would experience in the
main baseline scenario. The industry would be able to under-
take a full program of reworks expenditures to maintain its
production capacity. It would also be able to replace sizable
amounts of the obsolete portion of its raw material prepara-
tion, raw steelmaking, and semifinishing facilities with more
efficient technologies. Moreover, it would probably be able
to increase production capacity sufficiently to maintain its
current market share of domestic steel consumption throughout
the 1980s.
The result would be a revitalization of the steelmaking
sector of the industry. The efficiency gains in the 1980s
from new coke ovens, blast furnaces, and continuous casters
should lead to an improved ability to compete with foreign
annual 3 percent shipments growth rate was derived by TBS
from Data Resources, Inc.'s analysis of the effects on steel
demand of more favorable tax policies for the industrial
sector as a whole.
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VIII-3
producers. This would probably allow the steel industry to
maintain acceptable profit levels and to continue its modern-
ization program by revitalizing and replacing finishing mills
in the 1990s.
The following discussion provides a detailed description
of baseline capital expenditures—expenditures for new produc-
tion capacity and reworks expenditures—under the alternative
scenario.
Expenditures for New
Production Capacity
The industry's increased financial flexibility under the
alternative scenario would allow it to undertake a sizable
investment program for capacity modernization, replacement,
and expansion during the middle and latter part of the 1980s.
The capacity additions associated with this productive in-
vestment program are detailed in Exhibit 81. As in the main
scenario, these additions would be primarily in the area of
the raw material preparation, raw steelmaking, and semifin-
ishing process units. They would include 9.6 million tons of
new coke oven capacity, 34.6 million tons of new blast furnace
capacity, 37.1 million tons of new raw steelmaking capacity,
and 60.1 million tons of continuous casting capacity. Total
capital expenditures associated with capacity additions in
these areas would be $13,742.3 million, or about 76.4 percent
of the total capital expenditure program for capacity addi-
tions in 1981-1990 of $17,975.6 million. Capital expenditures
for production capacity additions in all areas are provided in
Exhibit 82.
The substantial capital expenditure program for capacity
additions under the alternative scenario would significantly
reduce the average age of the industry's production processes.
Table VIII-1 illustrates the percentage of capacity in 1990
that would be less than 15 years old under both the alter-
native and the main scenarios. The figures for both scenarios
reflect similar estimates of production capacity retirements.2
Under the alternative scenario, at least one-quarter of the
capacity retirement estimates for the main baseline sce-
nario do not reflect the additional declines in production
capacity that occur in the latter part of the 1980s and the
beginning of the 1990s as a result of the main scenario's
reduced reworks program.
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VIII-4
process capacity of cokemaking, ironmaking, raw steelmaking,
and semifinishing facilities would consist of new units by
1990. The reduction in the average age of these production
processes relative to their average age in the main scenario
would lead to a significant increase in the industry's pro-
duction efficiency by the end of the decade.
Table VIII-1
PERCENTAGE OF INDUSTRY PRODUCTION
CAPACITY IN 1990 ACCOUNTED FOR BY
FACILITIES LESS THAN 15 YEARS OLO
Stage of Production
Raw Materials Preparation
Cokemaking
Ironmaking
Raw Steelmaking
Casting and Forming
Finishing
Percentage of Facilities
Less than 15 Years Old
Main
Scenario
6.3
17.7
23.7
21.4
14.5
1.5
Alternative
Scenario
12.4
26.9
43.1
33.9
26.9
8.6
Source: PTm(Steel).
Reworks Expenditures
As mentioned previously, in the alternative scenario the
industry would probably be able to undertake a full reworks
program. Its financial condition in the early 1980s might
lead the industry to temporarily defer some reworks expendi-
tures, but these deferred expenditures would be small. Be-
cause of the small magnitude of the reduction in reworks out-
lays, the industry would probably be able to spread these.
declines over a sufficient number of facilities to avoid ma-
terially affecting production capabilities at specific
facilities.
The full reworks program, projected to be affordable
under the alternative scenario over the decade as a whole,
would comprise reworks expenditures averaging $1,693.1 million
per year during 1981-1990. Industry sources agree that these
expenditures would be sufficient to maintain capacity at de-
sirable levels. Capital expenditures for reworks in the al-
ternative scenario are provided in Exhibit 83.
-------
VIII-5
The implications of the full reworks program of the al-
ternative scenario for industry employment and market share
levels are discussed in the last section of this chapter.
Air and Water Pollution
Control Costs
Under the alternative scenario, capital expenditures
associated with air pollution control requirements other than
NSPS regulations would be comparable to these expenditures in
the main scenario. However, capital expenditures related to
NSPS regulations would be significantly higher in the alterna-
tive scenario, primarily in the 1985-1990 period. During this
period, substantial production capacity additions would lead
to an increase of $580.5 million in capital expenditures for
NSPS air equipment over the main scenario figure.
Operations and maintenance expenses for air pollution
control equipment under the alternative scenario would be
significantly higher than these expenses in the main scenario
during the entire decade. In 1984, total air-related O&M
expenses under the alternative scenario would be $579.1 mil-
lion, 6.8 percent above the corresponding main scenario fig-
ure. O&M expenses under the alternative scenario would reach
$653.3 million by 1990, representing an increase of 15.3 per-
cent over the main scenario figure.
As with air pollution control, the principal impact of
the alternative scenario assumptions on capital expenditures
for 'water pollution control would occur in the latter half of
the 1980s. Capital expenditures in the 1985-1990 period for
water pollution control equipment associated with new produc-
tion capacity would total $541.9 million for the alternative
scenario, compared with only $97.6 million in the main scen-
ario. The purchase cost of'the land requirements associated
with NSPS water pollution control equipment would also in-
crease, from $8.3 million in the main scenario to $80.9 mil-
lion under the alternative scenario.
Water-related operations and maintenance expenses would
be higher for the alternative scenario than the main scenario
throughout the 1980s. In 1984, O&M expenses associated with
water pollution control equipment would be $199.7 million, a
5.8 percent increase relative to the main scenario figure.
O&M expenses in the alternative scenario would increase to
$280.8 million in 1990, 24.0 percent above the main scenario
figure.
-------
VII1-6
BASELINE FINANCIAL CONDITION
In the baseline projections of the alternative scenario,
the future financial condition of the steel industry would
change markedly over the 1981-1990 period as a whole relative
to the main baseline scenario. However, most of the change
would occur during the second half of the 1980s. During the
1981-1984 period, the industry's financial condition would be
similar to the weak financial state of the industry depicted
in the main baseline scenario: returns on equity would aver-
age 11.3 percent, debt to capitalization ratios would average
36.5 percent, interest coverage ratios would average 3.86
times, and cash flow to long-term debt ratios would average
43.4 percent. Net external financing of $2,240.8 million
would be necessary to support a minimal capital expenditure
program.
In contrast to its weak condition during the 1981-1984
period, the steel industry would be likely to experience sig-
nificant increases in pricing leverage under the alternative
baseline scenario during the middle and latter part of the
1980s. This would lead to somewhat higher average prices for
steel products beginning in about 1984-1985. By 1990, the
average steel price in real terms would be about $461.70.
This represents an 8.2 percent real price increase relative to
the average price level in the main baseline scenario.
The price increases the industry would be likely to real-
ize under the alternative scenario during the middle and lat-
ter part of the 1980s would lead to significantly higher prof-
its during the period. During the 1985-1990 period, the av-
erage return on equity under the alternative baseline scenario
would be 17.0 percent—the average nominal all-manufacturing
return on equity for the period. This amounts to an increase
of 7.4 percentage points for the period over the main baseline
scenario.
The significant increases in profitability the industry
would experience beginning in 1984-1985 would probably allow
the industry to issue significant amounts of common stock
starting in 1986. The common stock issues would be needed to
finance an extensive capital expenditure program for the mod-
ernization, replacement, and expansion of industry production
capacity. Common stock issues would reach a peak of about
$2,200.0 million per year by 1987-1988.
-------
VIII-7
The increased profitability and common stock financing
capability of the industry would greatly improve the indus-
try's financial condition during the latter part of the 1980s.
This is reflected in an average interest coverage ratio for
the 1985-1990 period of 5.02 times, which represents an in-
crease of 1.80 times relative to the main baseline scenario
figure. The cash flow to long-term debt ratio would be 48.2
percent, 5.4 percentage points above the main scenario figure.
The improvements in these indicators of financial condition
would allow an increase of 1.7 percentage points (to 36.1
percent) in the industry's average debt to capitalization
ratio relative to the main baseline scenario figure without
jeopardizing the industry's A bond rating.
FINANCIAL IMPACT OF WATER POLLUTION
CONTROL REGULATIONS
The financial effects of the proposed water pollution
control regulations under the alternative scenario would be
significant during the first half of the decade. However,
they would diminish during the second half of the decade be-
cause of improvements in the industry's baseline financial
condition.
During the 1981-1984 period, the industry would probably
not be able to fully pass through incremental annual water
costs to steel consumers in the form of higher prices because
of excess capacity and import price pressures. This inability
to completely pass through water pollution control costs would
increase the external financing effects associated with the
water regulations. Water pollution control requirements (with
less than full pass-through of annual costs) would lead to an
increase in total net external financing needs in 1981-1984 of
$837.9 million relative to the alternative baseline needs over
the same period. Of this $837.9 million, $246.1 million would
be due to incremental BPT control, and $591.8 million would be
due to additional BAT compliance efforts. The additional
$837.9 million in external financing needs represents 27.2
percent of the industry's total net external financing needs
in 1981-1984.
The significant increase in net external financing needs
in 1981-1984 due to water pollution control costs would re-
quire additional reliance on debt financing since management
would be unlikely to issue common stock at the depressed mar-
ket price levels expected to prevail in the near term. Reli-
ance on debt to finance BDT expenditures would increase the
industry's debt to capitalization ratio to about 37.7 percent
during the 1981-1984 period, compared to the alternative
-------
VIII-8
scenario baseline level of 36.5 percent; BAT expenditures
would add another 1.1 percentage points. The increased use of
debt would also result in a decline in the interest coverage
ratio from 3.86 times to 3.54 times after incremental BPT
costs. Additional BAT costs would reduce the interest cover-
age ratio further to 3.28 times. Finally, reliance on debt
would decrease the cash flow to long-term debt ratio: to 40.9
percent from 43.4 percent after incremental BPT costs, and to
38.8 percent after incremental BAT costs.
During the 1981-1984 period, the greatest potential fi-
nancial impact due to water pollution control requirements
would occur in 1983 and 1984. In these years, the industry
would face debt to capitalization ratios of about 39.8 percent
and 41.0 percent, respectively. The industry might find it
desirable to prevent possible deterioration in its bond rating
during these years by deferring reworks expenditures to per-
iods of less financial strain.
As previously indicated, the effects of the water pollu-
tion control regulations on the steel industry would be less
significant over the 1985-1990 period than during the 1981-
1984 period. This is primarily due to the industry's in-
creased pricing flexibility and profitability in the alter-
native baseline scenario during the middle and latter part of
the 1980s. By 1985-1986, the industry's pricing flexibility
would probably enable it to pass through total annual water
pollution control costs in the form of steel price increases.
This pass-through capability, together with the higher in-
ternal sources of funds generated through increased profita-
bility, would reduce the external financing effects'associated
with the proposed water pollution control regulations relative
to these effects in the 1981-1984 period.
Net external financing requirements for the 1985-1990
period due to incremental water costs would increase by only
$115.8 million relative to the alternative baseline needs.
This represents 0.9 percent of the industry's total net ex-
ternal financing requirements in 1985-1990. Incremental BPT
control alone would lead to a decline in external financing
needs of $120.3 million, due in part to the cash flow from
depreciation of previously installed BPT equipment. Addi-
tional BAT and NSPS requirements would lead to increases in
external financing requirements of $236.1 million.
Overall, additional external financing for water pollu-
tion control equipment in the latter half of the decade would
be significantly less than the $837.9 million required in the
1981-1984 period. This reduction in external financing re-
quirements results in effects of water pollution control costs
-------
VIII-9
on the industry's financial condition during the 1985-1990
period that are small. Additional water pollution control
requirements would not lead to material changes in the indus-
try's average debt to capitalization ratio in the 1985-1990
period. Similarly, average interest coverage for the period
would decline only slightly: to 4.97 times from 5.02 times
due to incremental BPT costs, and to 4.82 times due to incre-
mental BAT costs. Furthermore, incremental water costs would
reduce the cash flow to long-term debt ratio by less than 0.2
percentage points.
During the 1981-1990 period as a whole, the financial
effects of the pending water pollution control regulations
under the alternative scenario would be relatively small com-
pared to these financial effects under the main scenario.
These relatively small effects would stem from the positive
financial effects of changes in government policies toward
industry in general and the steel industry in particular.
The effects of additional water pollution control costs on the
steel industry's financial condition under both scenarios are
presented in Table VIII-2. (Additional detail is provided in
Exhibits 84-88.)
Under the alternative scenario, the industry's financial
condition during the entire decade—both before and after the
incidence of water pollution control requirements—would re-
main consistent with an A rating by Moody's and Standard &
Poor's. The small change in its financial condition due to
water costs would allow the industry to maintain a full pro-
ductive investment program throughout the 1981-1990 period.
Table VIII-2
SUMMARY FINANCIAL STATISTICS
(1981-1990 averages)
Main Scenario*
Baseline
8PT
BAT
Alternative Scenario
Baseline
BPT
BAT
^Zero cost pass-through
Source: TBS projections
Nominal
ROE
(percent)
.9.2
8.8
8.3
14.7
14.6
"14.5
condition
•
Debt to
Capitalization
Ratio
(percent)
34.8
36.3
38.2
36.3
36.7
37.2
is assumed.
Cash Flow
to Long -Term
Debt Ratio
(percent)
42.0
39.2
36.0
46.2
45.3
44.5
Pretax
Interest
Coverage
{times!
3.17
2.86
2.54
4.55
4.40
4.21
-------
VIII-10
OTHER EFFECTS
The steel industry's likely ability to maintain a full
productive investment program over the 1981-1990 period after
the incidence of water pollution control requirements would
have important implications for the effects of water costs on
industry market share and employment. The maintenance of a
full productive investment program in the alternative scenario
would probably allow the industry to preserve its current mar-
ket share of domestic steel consumption throughout the 1980s.
It also implies that total remaining air and water pollution
control requirements would be unlikely to have a significant
adverse effect on production labor levels in the industry. As
a result, compliance with the water regulations under this
scenario would lead to about 4,600 employees needed for the
operation of water pollution control equipment. About 42.0
percent of these employees, or approximately 1,915 jobs, would
be linked to the operation of water pollution control equip-
ment placed into service after 1980. Some minor reductions in
employment would occur due to slightly reduced shipments vol-
umes resulting from price increases to recover water pollution
control costs.
Energy consumption under the alternative scenario would
increase only slightly due to environmental control require-
ments. Pollution control equipment would consume approxi-
mately 41,570 barrels of residual fuel oil, or the equivalent,
per day during the 1981-1990 period. This represents slightly
less than 4.0 percent of the industry's daily energy consump-
tion during the period. Water pollution control equipment
alone would require about 19,200 barrels per day, or 0.402
quadrillion Btu for the 1981-1990 period as a whole. Of this,
0.148 quadrillion Btu would be consumed by water equipment in-
stalled after 1980. This energy use by new water pollution
control equipment amounts to only 0.6 percent of the steel in-
dustry's net energy consumption during the period. (Exhibit
89 details the energy consumption of the steel industry during
the 1981-1990 period.)
-------
EXHIBITS
-------
ISO
Exhibit 1
DOMESTIC STEEL SHIPMENTS
1960-1990
MILLIONS OF TONS
100
Baseline Shipments Scenario
\
SO
ACTUAL
FORECAST
1960
1965
1970
1975
1980
1985
1990
Source: AISI Annual Statistical Reports and TBS projections.
-------
Exhibit 2
PROJECTED STEEL SHIPMENTS
1976-1990
(mill Ions of tons)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Sh I pments
89.4
91.1
97.9
100.3
85.0
91.4
97.8
100.1
101.3
104.3
103.6
104.2
108.0
108.1
106.0
Source: TBS projections.
-------
Exhibit 3
SHIPMENTS SENSITIVITY ANALYSIS
PROJECTED STEEL SHIPMENTS
1980-1990
(ml 11 Ions of tons)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1.5 Percent
Growth Rate
85.0
91.4
97.8
100.6
102.3
105.8
105.6
106.8
111.3
111.9
110.3
Mixed
Growth Rate
85.0
91.4
97.8
100.1
101.3
104.3
106.4
108.5
110.7
112.9
115.2
Source: TBS projections.
-------
Exhibit 4
STEEL PRODUCTION PROCESSES
RAW MATERIALS
IRON-
MAK-
ING
DIRECT SHIPMENTS
Bars& Lighl
Slructurals
& Wire Products
Cold Finished Bart
Cominuouf
Casting
Billeis&
Blooms
STEELMAKING
CASTING AND FORMING . Q|Q FINISHING MILLS1
Welded Pipe
Cold Rolled
Sheet &
Strip
Galvaniied Pcoducis
Tin and Other
Plated Products.
PHASE I
PHASE II
Source: TBS.
-------
Exhibit 5
PRODUCTION OPERATIONS AND MAINTENANCE EXPENSES BY COST CATEGORY
1976-1990
(millions of 1978 dollars)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1981-1984
1985
1986
1987
1988
1989
1990
1985-1990
1981-1990
Raw
Materials
$ 8,245.7
7,843.1
9,102.3
9,820.1
8,119.8
8,905.2
9,647.4
9,998.1
10,153.0
$ 38,703.7
10,518.8
10,514.4
10,677.2
11,127.7
11,082.9
10,928.1
$ 64,849.1
$103,552.8
Labor
$ 4,819.2
5,052.6
5,435.0
5,417.5
4,478.8
4,763.5
5,057.5
5,173.6
5,116.9
$20,111.5
4,934.7
5,389.6
5,529.4
5,637.0
5,686.5
5,633.9
$32,811.1
$52,922.6
Overhead
$ 5,895.9
6,172.2
6,633.5
6,629.8
5,493.0
5,870.7
6,254.8
6,423.5
6,361.4
$24,910.4
6,153.2
6,715.8
6,894.9
7,038.2
7,109.9
7,058.7
$40,970.7
$65,881.1
Power
$ 960.9
1,058.7
1,153.1
1 ,203.2
1,100.4
1,248.9
1,343.2
1,396.7
1,405.9
$ 5,394.7
1,437.1
1,413.3
1,407.1
1,477.4
1,462.4
1,426.0
$ 8,623.3
$14,018.0
Fuel
$ 90.3
134.4
185.0
243.6
252.0
343.7
404.0
446.3
457.3
$1,651.3
590.3
683.8
739.4
800.2
823.5
834.7
$4,471.9
$6,123.2
Water
$ 291.7
293.3
312.5
318.2
267.0
282.1
301.1
305.4
306.0
$1,194.6
317.9
313.9
314.5
324.5
323.6
315.8
$1,910.2
$3,104.8
Other
$ 6,183.7
6,350.8
6,673.7
7,368.3
6,155.8
6,632.4
7,111.5
7,286.2
7,325.3
$28,355.4
7,603.1
7,554.7
7,589.8
7,850.6
7,840.6
7,654.3
$46,093.1
$74,448.5
Total
$ 26,487.4
26,905.1
29,495.1
31,000.6
25,866.8
28,046.5
30,119.5
31 ,029.8
31,125.8
$120,321.6
31,555.1
32,585.5
33,152.3
34,255.6
34,329.4
33,851.5
$199,729.4
$320,051.0
Source: PTm(Steel) and Arthur D. Little engineering cost estimates.
-------
Exhibit 6
RETURN ON EQUITY
1970-1990
(percent)
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1970-1980
1976-1980
1981-1984
1985-1990
1981-1990
Real
Return on Equity
(1.3)
(0.8)
1.7
3.5
7.4
0.3
2.6
(5.9)
0.0
(2.2)
(3.3)
(1.8)
(0.4)
(0.1)
(0.3)
1.0
1.4
1.7
2.5
3.6
2.7
0.2
(1.8)
(0.7)
2.1
1.0
1 nf 1 at ion Rate
5.4
5.1
4.1
5.8
9.7
9.5
5.2
6.0
73
9.0
9.9
8.9
8.8
8.7
10.2
7.7
6.8
7.5
9.4
6.9
6.5
7.0
7.5
9.2
7.5
8.2
Nominal
Return on Equity
4.1
4.3
5.8
9.3
17.1
9.8
7.8
0.1
7.3
6.8
6.6
7.1
8.4
8.6
9.9
8.7
8.2
9.2
11.9
10.5
9.2
7.2
5.7
8.5
9.6
9.2
Source: AISI Annual Statistical Reports; Data Resources, Inc.; and
TBS projections.
-------
Exhibit 7
CAPITAL EXPENDITURES FOR PRODUCTION CAPACITY ADDITIONS
1976-1990
(ml 11 Ions of 1978 do Ilars)
Process
Ore Yard
Coal Yard
Scrap Yard
S I nter I ng
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting — BI 1 lets
Continuous Casting — Slabs
Primary Breakdown—Blooms
Primary Breakdown— -BI 1 lets
Primary Breakdown — Slabs
Heavy Structure Is
Bar MI 1 1
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mil 1
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
Ancillary Facilities
Vacuum Degassing
Total
1976-1980
$ 106.1
-
-
-
592.6
-
625.6
-
144.4
711.7
-
60.0
616.4
67.2
-
-
-
-
-
-
173.8
-
-
192.3
32.2
-
-
171.6
-
—
$3,493.9
1981-1984
-
-
$ 25.2
-
728.4
-
116.8
-
265.8
9.3
-
444.3
267.5
-
-
-
-
—
-
72.3
-
-
-
-
-
-
-
-
-
—
$1,929.6
1985-1990
-
-
$ 33.2
88.2
-
-
650.4
—
118.1
64.4
-
764.2
656.6
-
—
—
—
—
-
57.0
-
206.2
—
-
-
-
—
-
-
—
$2,638.3
Subtotal
$ 106.1
~
58.4
88.2
1,321.0
—
1 ,392.8
"•
528.3
785.4
-
1,268.5
1,540.5
67.2
~
"
~
™
—
129.3
173.8
206.2
—
192.3
32.2
"•
~
171.6
—
—
$8,061.8
Source: TBS projections and AISI engineering estimates.
-------
Exhibit 8
CAPITAL EXPENDITURES
FOR REWORKS
1976-1990
(millions of 1978 dollars)
Year
1976
1977
1978
1979
1980
1981
1982
J983
1984
1985
1986
1987
1988
1989
1990
1976-1980 •
1981-1984
1985-1990
Reworks
$1,321.4
1,718.4
1,740.0
1,764.5
1,559.7
1,385.7
1,385.4
1,385.6
1,385.9
1,385.9
1,385.9
1,385.4
1,385.9
1,385.9
1,385.5
$8,104.0
$5,542.6
$8,315.5
Source: TBS projections.
-------
Exhibit 9
PRODUCTION CAPACITY RETIREMENTS
1976-1990
(mi 11 Ions of tons)
Process
Ore Yard
Coal Yard
Scrap Yard
Sintering
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting—Si 1 lets
Continuous Casting — Slabs
Primary Breakdown — Blooms
Primary Breakdown — Billets
Primary Breakdown — Slabs
Heavy Structure Is
Bar Ml 1 1
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickl Ing
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Ml II
Ancl 1 lary Facl 1 itles
Vacuum Degassing
1976
Capacity
171.84
88.22
73.61
46.19
60.17
-
106.51
27.96
86.57
24.33
121.93
5.75
11.25
27.02
25.98
74.92
14.97
26.76
3.87
1.41
3.69
73.15
59.29
5.07
48.08
8.01
9.61
13.25
-
—
Ret t rements
1976-1980
_
-
-
4.43
1.16
-
8.19
3.66
-
-
-
0.30
-
1.60
0.56
3.27
0.49
1.30
0.05
-
-
3.12
1.52
-
0.75
0.05
-
0.52
-
"•
1981-1984
-
-
-
-
11.93
-
11.84
6.50
2.02
-
-
-
-
-
-
4.42
-
-
-
-
-
-
-
-
-
-
-
-
-
—
1985-1990
-
-
-
11.11
11.52
—
29.44
11.06
2.55
3.31
31.09
-
-
10.83
9.20
20.35
0.63
1.04
-
-
-
2.52
1.55
-
1.68
0.21
-
0.50
-
™
Subtota 1
-
-
-
15.54
24.61
—
49.47
21.22
4.57
3.31
31.09
0.30
-
12.43
9.76
26.04
1.12
2.34
0.05
-
-
5.64
3.07
-
2.43
0.26
-
1.02
-
"*
Source: TBS projections.
-------
Exhibit 10
PRODUCTION CfPfCtTf ADOtlIONS
1976-1990
(mill tons of tons)
Process
Ore Yard
Coal Yard
Scrap Yard
S 1 nter 1 ng
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting — Billets
Continuous Casting— Slabs
Primary Breakdown— Blooms
Primary Breakdown — Bi 1 lets
P r I mary Breakdown — S 1 abs
Heavy Structure Is
Bar Mill
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
And llary Facilities
Vacuum Degassing
1976
Capacity
171.84
88.22
73.61
46.19
60.17
_
106.51
27.96
86.57
24.33
121.93
5.75
11.25
27.02
25.98
74.92
14.97
26.76
3.87
1.41
3.69
73.15
59.29
5.07
48.08
8.01
9.61
13.25
-
-
Capacity Additions
1976-1980
9.59
_
-
-
3.44
_
8.64
_
3.69
15.58
«
0.75
7.35
0.70
_
_
M
—
_
_
0.28
-
_
0.67
0.12
_
_
0.90
_
-
1981-1984
—
—
3.55
4.20
—
1.59
_
6.72
0.20
—
5.48
3.14
—
—
—
—
—
0.27
-
_
w
_
_
_
w
_
M
-
1985-1990
_
—
3.93
2.35
^
7.48
2.51
1.16
7.91
6.46
—
—
-B
^
^
0.18
1.51
—
—
—
—
—
.»
-
Subtotal
9.59
7.48
2.35
7.64
17.71
12.92
16.94
14.14
16.95
0.70
.
_
_
.45
0.28
1.51
0.67
0.12
Im
0.90
-
Source: TBS projections.
-------
Exhibit II
AIR POLLUTION CONTROL OWfUANCE SCHEDULE
1976-1990
(percent)
Process
1. Ore Yard
Stack
Fugitive
2. Coal Yard
Stack
Fugitive
3. Scrap Yard
Stack
Fugitive
Stack
Fugitive
Fugitive
6. Direct Reduction
Stack
Fugitive
7. Blast Furnace
Stack
Fugitive
8. Open Hearth Furnace
Stack
Fugitive
9. Basic Oxygen Furnace
Stack
Fugitive
10. Electric Furnace
Stack
Fugitive
1 1. Ingot Casting
Stack
Fugitive
12. Continuous Casting— Bll lets
Stack
Fugitive
13. Continuous Casting — Slabs
Stack
Fugitive
14. Primary Breakdown— Sloans
Stack
Fugitive
15. Primary Breakdown— 611 lets
Stack
Fugitive
16. Primary Breakdown — Slabs
Stack
Fugitive
17. Heavy Structurals
Stack
Fugitive
18. Bar HI 1 1
Stack
Fugitive
19. wire Ml II
Stack
Fugitive
20. Cold Finished Bars
Stack
Fugitive
21. Seamless Pipes
Stack
Fugitive
22. Hot Strip Mill
Stack
Fugitive
23. Pickling
Stack
Fugitive
24, Melded Pl_pe
Stack
Fugitive
23. Cold Reduction
Stack
Fugitive
26. Galvanizing
Stack
Fugitive
27. Tin Plating
Stack
Fugitive
28. Plate Mill
Stack
Fugitive
29. Ancillary Facilities1
Stack
1976
0
0
0
0
0
0
20
20
3
0
0
90
0
23
0
30
0
30
40
0
0
80
80
80
80
40
40
40
40
40
40
80
80
80
80
0
0
0
0
0
0
80
80
60
60
0
0
0
0
60
60
0
0
80
80
0
0
1977
35
33
30
30
0
0
27
27
10
0
0
90
0
33
0
57
0
45
45
0
0
90
90
90
90
65
65
65
65
65
65
80
80
80
80
0
0
0
0
0
0
80
80
60
60
0
0
0
0
60
60
0
0
80
80
0
0
'Air pollution control efforts associated with
1978
55
55
50
50
0
0
40
40
33
0
0
90
0
50
0
66
20
55
45
0
0
97
97
97
97
75
75
75
75
75
75
80
80
80
80
0
0
0
0
0
0
80
80
60
60
0
0
0
0
60
60
0
0
80
80
0
0
1979
80
80
75
75
0
0
60
50
50
0
0
90
5
50
0
75
35
70
45
0
0
too
too
100
too
80
80
80
80
80
80
80
80
80
80
0
0
0
0
0
0
80
80
90
90
0
0
0
0
90
90
0
0
80
80
0
0
ancillary fee
1980
95
95
90
90
0
0
80
60
65
0
0
95
10
75
25
85
40
85
53
0
0
too
100
100
100
90
90
90
90
90
90
80
80
80
80
0
0
0
0
0
0
80
80
100
100
0
0
0
0
too
100
0
0
80
80
0
0
Illtles
1981
100
too
95
95
0
0
90
70
85
0
0
too
20
too
50
95
70
90
65
0
0
100
100
100
100
95
95
95
95
95
95
87
87
87
87
0
0
0
0
0
0
87
87
100
100
0
0
0
0
100
100
0
0
87
87
0
0
1982
too
100
100
100
0
0
93
85
95
0
0
too
80
too
75
95
90
95
85
0
0
100
100
too
too
95
95
95
95
93
95
94
94
94
94
0
0
0
0
0
0
94
94
too
too
0
0
0
0
100
100
0
0
94
94
0
0
1983
100
100
100
100
0
0
100
93
too
0
0
100
93
100
100
100
95
100
95
0
0
100
100
100
too
too
100
100
too
100
100
97
97
97
97
0
0
0
0
0
0
97
97
100
100
0
0
0
0
too
100
0
0
97
97
0
0
1984
100
too
100
100
0
0
too
100
too
0
0
100
too
too
100
too
too
too
too
0
0
100
100
100
100
100
too
100
too
100
too
100
100
100
100
0
0
0
0
0
0
too
100
100
too
0
0
0
0
100
100
0
0
too
too
0
0
1985
100
100
100
100
0
0
too
100
too
0
0
100
100
100
100
too
too
100
100
0
0
100
too
too
100
100
100
too
too
100
100
too
100
too
100
0
0
0
0
0
0
100
too
100
100
0
0
0
0
100
too
0
0
too
too
0
0
1986
too
100
100
too
0
0
100
100
100
0
0
100
100
100
100
too
100
100
100
0
0
100
100
100
too
too
100
100
100
100
100
100
100
100
100
0
0
0
0
0
0
100
100
100
100
0
0
0
0
100
100
0
0
too
too
0
0
1987
too
too
100
too
0
0
100
100
100
0
0
too
100
100
100
100
100
100
100
a
0
100
too
100
too
100
too
100
100
100
100
100
100
too
100
0
0
0
0
0
0
too
100
100
too
0
0
Q
0
too
100
0
0
100
100
0
0
1988
100
100
100
too
0
0
too
too
100
0
100
100
100
100
100
too
100
100
0
0
too
100
100
100
too
100
too
too
too
100
100
too
100
100
0
0
0
0
0
0
100
100
100
100
0
0
Q
0
100
too
0
0
100
100
0
0
1989
100
too
100
100
0
0
too
too
100
Q
0
100
100
too
100
too
100
too
100
0
0
too
100
too
100
100
100
100
too
100
too
100
too
100
100
0
0
0
0
0
0
100
too
too
100
0
0
Q
0
100
too
0
0
too
100
0
0
1990
100
too
100
100
0
0
too
too
too
ft
0
100
too
100
100
too
100
too
100
0
0
too
too
100
100
100
100
too
100
too
100
too
too
100
too
0
0
0
0
0
0
100
100
100
100
0
0
o
0
100
100
0
0
too
100
0
0
nave been determined ndependently and ere Included In the
miscellaneous pollution control costs.
Source: TBS In conjunction .Itti the Division of Stationary Source Enforcement of EPA.
-------
Exhibit 12
CAPITAL EXPENDITURES FOR AIR POLLUTION
CONTROL EQUIPMENT BY TIME PERIOD
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak 1 ng
Steel making
Casting
Forming and Finishing
Tofal
Prior to
1981
$1,591.8
541.9
893.4
27.3
99.4
$3,153.8
1981-1984
$475.4
159.9
322.3
19.4
11.1
$988.1
1985-1990
$8.7
40.5
24.8
30.6
0
$104.6
Subtotal
$2,075.9
742.3
1 ,240.5
77.3
110.5
$4,246.5
Source: PTm
-------
Exhibit 13
CAPITAL EXPENDITURES FOR AIR POLLUTION
CONTROL EQUIPMENT BY TYPE OF EMISSION
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
Stack
$1,759.7
496.7
904.6
0
0
$3,161.0
Fugitive
$196.4
158.2
270.3
22.4
110.5
$757.8
NSPS
$119.8
87.4
65.6
54.9
0
$327.7
Subtotal
$2,075.9
742.3
1,240.5
77.3
110.5
$4,246.5
Source: PTm(Steel) and PEDCo/EPA engineering cost estimates.
-------
Exhibit 14
CAPITAL EXPENDITURES FOR AIR POLLUTION
CONTROL EQUIPMENT BY YEAR
AND BY TYPE OF EMISSION
1976-1990
(mil lions of 1978 dol lars)
1976
1977
1978
1979
1980
Subtotal
1981
1982
1983
1984
Subtotal
1985
1986
1987
1988
1989
1990
Subtotal
Total
Stack
$1,149.2
459.5
375.9
288.0
416.1
2,688.7
333.3
76.3
62.7
0
472.3
0
0
0
0
0
0
0
$3,161.0
Fugitive
$ 85.5
51.3
83.5
58.0
106.4
384.7
137.1
166.9
58.5
10.6
373.1
0
0
0
0
0
0
0
$757.8
NSPS
$ 0
0
0
64.8
15.6
80.4
51.3
41.6
31.8
18.0
142.7
19.1
14.2
15.5
17.4
18.6
19.8
104.6
$327.7
Total
$1,234.7
510.8
459.4
410.8
538.1
3,153.8
521.7
284.8
153.0
28.6
988.1
19.1
14.2
15.5
17.4
18.6
19.8
104.6
$4,246.5
Source: PTm(Steel) and PEDCo/EPA engineering cost
estimates.
-------
Exhibit 15
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT BY TYPE OF EMISSION
1981-1990
(mil lions of 1978 dot lars)
Stage of Production
Raw Materials Preparation
1 ronmaking
Steel making
Casting
Forming and Finishing
Total
Stack
1 ,886.0
361.0
1,419.1
0
0
3,666.1
Fugitive
663.2
194.0
330.0
30.0
66.5
1,283.7
NSPS
241.6
97.4
71.0
48.5
0
458.5
Subtotal
2,790.8
652.4
1,820.1
78.5
66.5
5,408.3
Source: PTm(Steel) and PEDCo/EPA engineering cost estimates.
-------
Exhibit 16
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT BY TIME PERIOD
1981-1990
(ml I I Ions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmaking
Steel making
Casting
Forming and Finishing
Total
1981-19841
1,041.0
230.8
692.7
19.9
26.9
2,011.3
1985-19901
1,749.8
421.6
1,127.4
58.6
39.6
3,397.0
Subtotal
2,790.8
652.4
1,820.1
78.5
66.5
5,408.3
Includes all 03M expenses related to previously installed equipment.
Source: PTm(Steel) and PEDCo/EPA engineering cost estimates.
-------
Exhibit 17
OPERATIONS AND MAINTENANCE EXPENSES FOR
AIR POLLUTION CONTROL EQUIPMENT BY YEAR
AND BY TYPE OF EMISSION1
1981-1990
(mil lions of 1978 dollars)
1981
1982
1983
1984
Subtotal
1985
1986
1987
1988
1989
1990
Subtotal
Total
Stack
315.9
352.1
370.4
368.6
1,407.0
371.9
375.3
375.9
385.3
381.2
369.5
2,259.1
3,666.1
Fugitive
91.3
123.0
133.9
135.4
483,6
135.0
134.9
134.3
135.6
132.9
127.4
800.1
1 ,283,7
NSPS
19.6
28.7
34.3
38.1
120.7
43.2
47.8
52.6
59.4
65.0
69.8
337.8
458.5
Total
426.8
503.8
538.6
542.1
2,011.3
550.1
558.0
562.8
580.3
579.1
566.7
3,397.0
5,408.3
1 Total Operating and Maintenance Expenses in 1980 were
$341.2 million.
Source: PTm(Steel) and PEDCo/EPA engineering cost estimates.
-------
Exhibit 18
COMPARISON OF CAPITAL EXPENDITURES
FOR AIR POLLUTION CONTROL EQUIPMENT
BY TYPE OF EMISSION
PEDCo VERSUS ARTHUR 0. LITTLE
ENGINEERING COST ESTIMATES
1976-1990
(mil lions of 1978 dol lars)
Stack
— In-Place
—Additions
Fugitive
— 1 n-P 1 ace
—Additions
M iscel laneous
NSPS
Total
PEDCo
$2,688.7
472.3
384.7
373.1
0
327.7
$4,246.5
AOL
$1,255.4
235.9
838.8
1,007.9
956.3
257.5
$4,551.8
Source: PEDCo/EPA and AOL engineering
cost estimates.
-------
Exhibit 19
COMPARISON OF CAPITAL EXPENDITURES FOR
AIR POLLUTION CONTROL EQUIPMENT BY STAGE OF PRODUCTION
PEDCo VERSUS ARHTUR D. LITTLE
ENGINEERING COST ESTIMATES
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
• 1 ronmaklng
Steel making
Casting
Forming and Finishing
Total
PEDCo
2,075.9
742.3
1,240.5
77.3
110.5
4,246.5
AOL1
1 ,804.6
506.4
2,114.3
23.2
103.3
4,551.8
'Includes miscellaneous.
Source: PEDCo/EPA and ADL engineering cost estimates.
-------
Exhibit 20
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BPT
(millions of 1978 do I tars)
Stage of Production
Raw Materials Preparation
Ironmaking
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$ 219.29
445.32
104.73
84.63
972.08
$1,826.04
1981-1984
$ 50.17
21.76
8.11
31.47
306.24
$417.75
1985-1990
0
0
0
0
0
0
Subtotal
$ 269.46
467.08
112.84
116.09
1 ,278.32
$2,243.80
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 21
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak 1 ng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$ 7.14
4.46
0
.02
120.08
$131.70
1981-1984
$ 23.59
17.20
7.28
4.19
413.16
$465 .4 11
1985-1990
0
0
0
0
0
0
Subtotal
$ 30.73
21.66
7.28
4.21
533.24
$597.11
Includes SAT commitments (made prior to 1981) of $49.48 million.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 22
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: PTS
(mil I tons of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaking
Steel making
Casting
Form 1 ng and F i n 1 sh I ng
Total
Prior to
1981
$2.36
.06
0
0
4.97
$7.39
1981-1984
$ 6.96
.21
3.27
.15
17.56
$28.15
1985-1990
0
0
0
0
0
0
Subtotal
$ 9.32
.27
3.27
.15
22.53
$35.54
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 23
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: NSPS
(mil I Ions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmaking
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$15.74
5.19
6.61
34.35
0
$61 .88
1985-1990
$ 2.91
24.57
2.78
58.31
9.03
$97.60
Subtotal
$ 18.65
29.75
9.39
92.65
9.03
$159.48
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 24
COITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
TOTAL WATER POLLUTION CONTROL REQUIREMENTS
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
S 228.80
449.83
104.73
84.65
1,097.13
$1,965.13
1981-1984
$ 96.45
44.35
25.28
70.16
736.96
$973. 191
1985-1990
$ 2.91
24.57
2.78
58.31
9.03
$97.60
Subtota 1
$ 328.16
518.75
132.79
213.12
1,843.11
$3,035.92
Includes BAT commitments of $49.48 million.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 25
CAPITAL EXPENDITURES FCR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BASELINE1
(mil I Ions of 1978 dollars)
Stage of Production
Raw Materials Preparatfon
1 ronmaklng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$ 228 .80
449 .83
104.73
84.65
1,097.13
$1,965.13
1981-1984
$ 0
0
0
0
49.48
$49.48
1985-1990
0
0
0
0
0
0
Subtotal
$ 228.80
449 .83
104.73
84.65
1,146.61
$2,014.61
'Equipment in-place or legally committed prior to 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 26
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BPT ADDITIONS
(mil lions of 1978 dol lars)
Stage of Production
Raw Materials Preparation
1 ronmak i ng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$ 50.17
21.76
8.11
31.47
306.24
$417.75
1985-1990
0
0
0
0
0
0
Subtotal
$ 50.17
21.76
8.11
31.47
306.24
$417.75
Source: PTmCSteel) and Rica/EPA engineering cost estimates.
-------
Exhibit 27
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BAT/PTS ADDITIONS
(mi I I ions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmaking
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$ 30.55
17.41
10.55
4.35
381.24
$444.09
1985-1990
0
0
0
0
0
0
Subtotal
$ 30.55
17.41
10.55
4.35
381.24
$444.09
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 28
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
BY WATER POLLUTION CONTROL SUBCATEGORY
EFFLUENT GUIDELINE: BPT
(mil lions of 1978 dollars)
Water Po 1 1 ut Ion
Control Subcategory
Sintering
Gokemaklng
Blast Furnace
Open Hearth Furnace
Basic Oxygen Furnace
Electric Arc Furnace
Vacuum Degassing
Continuous Casting
Hot Forming
Cold Formed Pipe and Tube
Cold Rol ling
HCI Acid Pickling
H2S04 Acid Pickling
Combination Acid Pickling
Hot Coating
Scale Removal
Al kal ine Cleaning
Total
Prior to
1981
$ 47.26
172.03
445.32
10.76
82.61
11.35
7.63
77.00
615.25
9.95
46.23
110.21
106.86
28.65
37.31
4.88
12.74
$1,826.05
1981-1984
$ 9.67
40.50
21.76
1.07
6.24
.80
5.10
26.36
104.97
2.68
19.21
49.00
92.86
13.66
14.72
4.46
4.68
$417.75
1985-1990
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Subtotal
$ 56.93
212.53
467.08
11.83
88.85
12.15
12.73
103.36
720.22
12.63
65.44
159.21
199.72
42.31
52.03
9.34
17.42
$2,243.80
Source: PTm(SteeI) and Rice/EPA engineering cost estimates.
-------
Exhibit 29
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
BY WATER POLLUTION CONTROL SUBCATEGORY
EFFLUENT GUIDELINE: BAT
(mil lions of 1978 dot tars)
Water Pollution
Control Subcategory
S 1 nter 1 ng
Cokemaklng
Blast Furnace
Open Hearth Furnace
Basic Oxygen Furnace
Electric Arc Furnace
Vacuum Degassing
Continuous Casting
Hot Forming
Cold Formed Pipe and Tube
Cold Rolling
HCI Acid Pickling
H2S04 Acid Pickling
Combination Acid Pickling
Hot Coating
Scale Removal
Alkal tne Cleaning
Total
Prior to
1981
$ 1.37
5.79
4.46
0
0
0
.02
0
110.57
0
0
1.62
4.99
0
2.80
.08
0
$131.70
1981-1984
$ 6.80
16.79
17.20
.83
5.44
1.00
.38
3.82
355.92
0
15.30
15.27
14.99
4.53
5.45
1.70
0
$465.41 '
1985-1990
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Subtotal
$ 8.17
22.58
21.66
.83
5.44
1.00
.40
3.82
466.49
0
15.30
16.89
19.98
4.53
8.25
1.78
0
$597.11
Includes BAT commitments of $49.48 million.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 30
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
BY WATER POLLUTION CONTROL SUBCATEGORY
EFFLUENT GUIDELINE: PTS
(millions of 1978 dollars)
Water Po 1 1 ut Ion
Control Subcategory
Sintering
Cokemaklng
Blast Furnace
Open Hearth Furnace
8 as Ic Oxygen Furnace
Electric Arc Furnace
Vacuum Degassing
Continuous Casting
Hot Forming
Cold Formed Pipe and Tube
Cold Rolling
HCI Acid Pickling
H2S04 Acid Pickling
Combination Acid Pickling
Hot Coating
Scale Removal
Alkal Ine Cleaning
Total
Prior to
1981
$ .05
2.31
.06
0
0
0
0
0
4.36
0
0
.11
.21
0
.26
.03
0
$7.39
1981-1984
$ .26
6.69
.21
0
3.27
0
0
.15
14.02
0
.43
.99
.65
.44
.42
.60
0
$28.15
1985-1990
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Subtotal
$ .31
9.00
.27
0
3.27
0
0
.15
18.38
0
.43
1.10
.86
.44
.68
.63
0
$35.54
Source: PTmCSteel) and Rice/EPA engineering cost estimates.
-------
Exhibit 31
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
BY WATER POLLUTION CONTROL SUBCATEGORY
EFFLUENT GUIDELINE: NSPS
(millions of 1978 dollars)
Water Po 1 1 ut Ion
Control Subcategory
Sintering
Cokemaklng
Blast Furnace
Open Hearth Furnace
Basic Oxygen Furnace
Electric Arc Furnace
Vacuum Degassing
Continuous Casting
Hot Forming
Cold Formed Pipe and Tube
Cold Rolling
HCI Acid Pickling
H2S04 Acid Pickling
Combination Acid Pickling
Hot Coating
Scale Removal
Alkal ine Cleaning
Total
Prior to
1981
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1981-1984
S 0
15.74
5.19
0
6.56
.05
0
34.35
0
0
0
0
0
0
0
0
0
$61 .88
1985-1990
$ 2.91
0
24.57
0
2.48
.30
0
58.31
8.31
0
0
0
0
.35
0
.13
.23
S97.60
Subtotal
$ 2.91
15.74
29.75
0
9.04
.35
0
92.65
8.31
0
0
0
0
.35
0
.13
.23
S159.48
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 32
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
BY WATER POLLUTION CONTROL SUBCATEGORY
TOTAL WATER POLLUTION CONTROL REQUIREMENTS
(millions of 1978 dollars)
Water Pol lutlon
Control Subcategory
Sintering
Cokemaklng
Blast Furnace
Open Hearth Furnace
Basic Oxygen Furnace
Electric Arc Furnace
Vacuum Degassing
Continuous Casting
Hot Forming
Cold Formed Pipe and Tube
Cold Rol 1 Ing
HCL Acid Pickling
H2S04 Acid Pickling
Combination Acid Pickling
Hot Coating
Scale Removal
Alkal Ine Cleaning
Total
Prior to
1981
$ 48.68
180.13
449.83
10.76
82.61
11.35
7.65
77.00
730.18
9.95
46.23
111.94
112.07
28.65
40.37
5.00
12.74
$1,965.13
1981-1984
$ 16.73
79.72
44.35
1.90
21.52
1.86
5.48
64.68
474.91
2.68
34.94
65.26
108.50
18.62
20.59
6.76
4.68
$973.19'
1985-1990
$ 2.91
0
24.57
0
2.48
.30
0
58.31
8.31
0
0
0
0
.35
0
.13
.23
$97.60
Subtota 1
$ 68.32
259.85
518.75
12.66
106.61
13.51
13.13
199.99
1,213.40
12.63
81.17
177.20
220.57
47.62
60.96
11.89
17.65
$3,035.92
1
Includes BAT commitments of $49.48 ml 11 ton.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 33
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BPT
1976-1990
(mil lions of 1978 do Ilars)
Stage of Production
Raw Materials Preparation
1 ronmaklng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$ 88.71
153.15
32.93
65.57
392.14
J732.51
1981-1984
$ 24.80
6.83
1.70
20.41
173.68
$227.42
1985-1990
0
0
0
0
0
0
Subtotal
$113.51
159.98
34.63
85.98
565.82
$959.93
Source: PTmCSteel).
-------
Exhibit 34
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak I ng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$ 1.01
.81
0
0
79.32
$81.15
1981-1984
$ 26.32
19.18
8.12
4.68
417.42
$475.72
1985-1990
0
0
0
0
0
0
Subtotal
$ 27.33
19.99
8.12
4.68
496.74
$556.87
Source: PTm(Steel).
-------
Exhibit 35
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: PTS
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$ .35
.01
0
0
3.13
$3.50
1981-1984
$ 7.76
.23
3.65
.17
17.87
$29.69
1985-1990
0
0
0
0
0
0
Subtotal
$ 8.1)
.24
3.45
.17
21.00
$33.19
Source: PTm(Steel).
-------
Exhibit 36
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: NSPS
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$11.12
0
.86
5.58
0
$17.56
1981-1984
$ 6.61
12.30
7.08
44.76
.71
$71 .46
1985-1990*
$ 2.95
20.41
2.43
51.65
9.14
$86.59
Subtotal
$ 20.68
32.71
10.37
101.99
9.85
$175.61
*Does not Include outlays for equipment to be Installed after 1990.
Source: PTm(Steel).
-------
Exhibit 37
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
TOTAL WATER POLLUTION CONTROL REQUIREMENTS
1976-1990
(mil lions of 1978 do Ilars)
Stage of Production
Raw Materials Preparation
Ironmaking
Steel making
Casting
Forming and Finishing
Total
1976-1980
$101.19
153.97
33.79
71.16
474.60
$834.72
1981-1984
$ 65.49
38.55
20.55
70.02
609.68
$804.30
1985-1990*
$ 2.95
20.41
2.43
51.65
9.14
$86.59
Subtota 1
$ 169.63
212.93
56.77
192.83
1,093.42
$1,725.61
•Does not Include outlays for equipment to be Installed after 1990.
Source: PTm(Steel).
-------
Exhibit 38
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BASELINE1
1976-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak i ng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$ 59.11
136.60
25.59
51.06
308.14
$580.49
1981-1984
$ 0
0
0
0
9.90
$9.90
1985-1990
0
0
0
0
0
0
Subtotal
$ 59.11
136.60
25.59
51.06
318.04
$590.39
'Equipment in-place or legally committed prior to 1981
Source: PTm(Steel).
-------
Exhibit 39
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: 8PT ADDITIONS
1976-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1976-1980
$ 30.97
17.38
7.34
14.52
166.46
$236.67
1981-1984
$ 24.80
6.83
1.70
20.41
173.68
$227.42
1985- 1990
0
0
0
0
0
0
Subtota 1
$ 55.77
24.21
9.04
34.93
340.14
$464.09
Source: PTm(Steel).
-------
Exhibit 40
CASH OUTLAYS FCR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BAT/PTS ADDITIONS
1976-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak i ng
Steel making
Casting
Forming and Finishing
Total
1976-1980
0
0
0
0
0
0
1981-1984
$ 34.08
19.42
11.77
4.85
425.39
$495.52
1985-1990
0
0
0
0
0
0
Subtotal
$ 34.08
19.42
11.77
4.85
425.39
$495.52
Source: PTm(Steel).
-------
Exhibit 41
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT1
EFFLUENT GUIDELINE: BPT
1981-1990
(mill Ions of 1978 dollars)
Stage of Production
Raw Materials Preparation
ironmaklng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$133.86
109.52
45.75
34.04
134.48
$457.64
1985-1990
$226.93
181.57
74.92
66.26
310.25
$859.93
Subtotal
$ 360.79
291.09
120.66
100.30
444.73
$1,317.57
'includes charges due to equipment installed prior 1o 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 42
OPERATIONS MO MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPICNT1
EFFLUENT GUIDELINE: BAT
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaktng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$ 2.32
2.20
.78
.17
101.84
$107.32
1985-1990
$ 8.27
7.79
3.32
.98
302.62
$322.99
Subtota 1
$ 10.59
9.99
4.11
1.16
404.47
$430.30
'includes charges due to equipment Installed prior -to 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 43
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT1
EFFLUENT GUIDELINE: PTS
1981-1990
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$ .66
.03
.24
.01
4.52
$5.45
1985-1990
$ 2.33
.09
1.22
.04
13.60
$17.28
Subtota 1
$ 2.99
.12
1.46
.04
18.12
$22.74
'includes charges due to equipment installed prior to 1981.
Source: PTm(Stee)) and Rice/EPA engineering cost estimates.
-------
Exhibit 44
OPERATIONS AM) MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: NSPS
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$ 8.00
.39
1.45
6.70
0
S16.54
1985-1990
$19.68
11.82
5.86
40.79
2.43
$80.58
Subtotal
$27.68
12.21
7.31
47.49
2.43
$97.13
Source: PTmCSteel) and Rice/EPA engineering cost estimates.
-------
Exhibit 45
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT1
TOTAL WATER POLLUTION CONTROL REQUIREMENTS
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$144.83
112.14
48.22
40.92
240.84
$586.96
1985-1990
$ 257.21
201 .27
85.32
108.07
628.91
$1,280.78
Subtotal
$ 402.04
313.41
133.55
148.99
869.75
$1,867.74
'includes charges due to equipment Installed prior "to 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 46
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT1
INCREMENTAL COST CATEGORY: BASELINE2
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
IronmaKIng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$104.10
100.31
41.68
26.74
136.34
$409.18
1985-1990
$165.48
164.34
68.29
48.84
269.28
$716.23
Subtota 1
$ 269.58
264.65
109.97
75.58
405.63
$1,125.41
'includes charges due to equipment Installed prior 1o 1981.
Equipment In-place or legally committed prior to 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 47
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BPT ADDITIONS
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaking
Steel making
Casting
Forming and Finishing
Total
1981-1984
$ 30.99
10.10
4.07
7.30
59.03
5111. 48
1985-1990
$ 63.52
18.70
6.63
17.42
140.92
$247.20
Subtotal
$ 94.52
28.80
10.69
24.72
199.95
$358.68
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 48
OPERATIONS AND MAINTENANCE EXPENSES FOR WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BAT/PTS ADDITIONS
1981-1990
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak I ng
Steel making
Casting
Forming and Finishing
Total
1981-1984
$ 1.74
1.34
1.02
.18
45.47
$49.75
1985-1990
$ 8.52
6.41
4.55
1.02
216.27
$236.77
Subtotal
$ 10.27
7.75
5.57
1.19
261 .74
$286.52
Source: PTmCSteel ) and Rice/EPA engineering cost estimates.
-------
Exhibit 49
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BPT
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$117.68
83.07
.34
1.90
138.49
$341.49
1981-1984
$30.31
4.42
.03
.70
63.13
$98.58
1985-1990
0
0
0
0
0
0
Subtotal
$147.99
87.49
.37
2.60
201 .62
$440.07
Source: MJS/RIce land requirement and cost estimates.
-------
Exhibit 50
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPNENT
EFFLUENT GUIDELINE: BAT
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak i ng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$10.60
.01
0
.01
9.08
$19.70
1981-1984
$31.88
.04
.01
.72
32.77
$65.42
1985-1990
0
0
0
0
0
0
Subtotal
$42.48
.05
.01
.73
41.85
$85.12
Source: NUS/Rice land requirement and cost estimates.
-------
Exhibit 51
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: PTS
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmak 1 ng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$4.14
0
0
0
.43
$4.58
1981-1984
$12.33
0
0
.02
1.53
$13.88
1985-1990
0
0
0
0
0
0
Subtotal
$16.47
0
0
.02
1.96
$18.46
Source: NUS/Rlce land requirement and cost estimates.
-------
Exhibit 52
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: NSPS
(millions of 1978 do)lars)
Stage of Production
Raw Materials Preparation
1 ronmak 1 ng
Steel making
Casting
Form Ing .and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$15.08
1.09
.02
1.00
0
$17.19
1985-1990
$1.03
5.13
.01
1.67
.45
$8.29
Subtotal
$16.12
6.22
.03
2.67
.45
$25.48
Source: NUS/RIce land requirement and cost estimates,
-------
Exhibit 53
LAND COSTS ASSOCIATE WITH WATER POLLUTION CONTROL EQUIPMENT
TOTAL WATER POLLUTION CONTROL REQUIREMENTS
(mill Ions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
$135.42
83.08
.34
1.91
148.01
$365.77
1981-1984
$ 89.61
5.55
.06
2.44
97.42
$195.07
1985-1990
$1.03
5.13
.01
1.67
.45
$8.29
Subtotal
$223.06
93.76
.41
6.02
245.88
$569.13
Source: NUS/Rlce land requirement and cost estimates,
-------
Exhibit 54
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BASELINE1
(millions of 1978 dollars)
Stage of Production
Raw Materials Preparation
Ironmaklng
Steel making
Casting
Form 1 ng and F I n 1 sh I ng
Total
Prior to
1981
$132.42
83.08
.34
1.91
148.01
$365.77
1981-1984
0
0
0
0
$3.25
$3.25
1985-1990
0
0
0
0
0
0
Subtotal
$132.42
83.08
.34
1.91
151 .26
$369.02
'Equipment in-place or committed prior to 1981.
Source: NUS/Rice land requirement and cost estimates.
-------
Exhibit 55
LAND COSTS ASSXIATED WITH WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BPT ADDITIONS
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmakfng
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$30.31
4.42
.03
.70
63.13
$98.58
1985-1990
0
0
0
0
0
0
Subtotal
$30.31
4.42
.03
.70
63.13
$98.58
Source: NUS/Rice land requirement and cost estimates.
-------
Exhibit 56
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
INCREMENTAL COST CATEGORY: BAT/PTS ADDITIONS
(mil lions of 1978 dollars)
Stage of Production
Raw Materials Preparation
1 ronmaking
Steel making
Casting
Forming and Finishing
Total
Prior to
1981
0
0
0
0
0
0
1981-1984
$44.22
.04
.01
.74
31.04
J76.05
1985-1990
0
0
0
0
0
0
Subtotal
$44.22
.04
.01
.74
31.04
$76.05
Source: NUS/Rlce land requirement and cost estimates.
-------
Exhibit 57
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BPT
(mil lions of 1978 dollars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Un 1 form BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
Prior to
1981
$1,826.05
1,826.05
1,826.05
1,826.05
1981-1984
$417.75
464.62
472.92
417.75
1985-1990
0
0
0
0
Total
$2,243.80
2,290.67
2,298.97
2,243.80
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 58
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
CAPITAL EXPENDITURES FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT/PTS
(millions of 1978 dollars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
Prior to
1981
$139.09
139.09
139.09
139.09
1981-1984
$493.57
493.57
490.62
197.52
1985-1990
$ 0
0
0
271 .42
Total
$632.66
632.66
629.71
608.03
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 59
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: 8PT
1976-1990
(mil I Ions of 1978 do I lars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
1976-1980
$732.51
495.84
928.24
732.51
1981-1984
$227.42
514.59
94.58
227.42
1985-1990
0
0
0
0
Total
$ 959,93
1,010.43
1 ,022.82
959.93
Source: PTm(Steel).
-------
Exhibit 60
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
CASH OUTLAYS FOR WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT/PTS
1976-1990
(mil lions of 1978 dollars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
1976-1980
$ 34.65
84.65
154.31
84.65
1981-1984
$505.42
505.42
430.82
421.40
1985-1990
$ 0
0
0
54.28
Total
$590.07
590.07
585.13
560.33
Source: PTm(Steel).
-------
Exhlblf61
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
OPERATIONS AND MAINTENANCE EXPENSES FOR
WATER POLLUTION CONTROL EQUIPMENT1
EFFLUENT GUIDELINE: 8PT
1981-1990
(millions of 1978 dollars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
1981-1984
$457.64
421.56
492.27
457.64
1985-1990
$859.93
859.93
859.93
859.93
Total
$1,317.57
1 ,281 .49
1 ,352.20
1,317.57
' Includes charges due to equipment Installed prior 1t> 1981.
Source: PTm(Steel) and Rice/EPA engineering cost estimates.
-------
Exhibit 62
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
OPERATIONS AND MAINTENANCE EXPENSES FOR
WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT/PTS
1981-1990
(millions of 1978 do Ilars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One- Year Delay BAT/PTS
1981-1984
$112.77
112.77
137.16
75.48
1985-1990
$340.27
340.27
340.27
340.27
Total
$453.04
453.04
477.44
415.75
11ncludes charges due to equipment Installed prior to 1981.
Source: PTm(Steel) and Rtce/EPA engineering cost estimates.
-------
Exhibit 63
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BPT
(mil I tons of 1978 dollars)
Compliance Schedule
Standard BPT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Un 1 form BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
Prior to
1981
$341.49
341.49
341.49
341 .49
1981-1984
$ 98.58
110.47
118.75
98.58
1985-1990
0
0
0
0
Total
$440.07
451 .96
460.24
440.07
Source: MJS/RIce land requirement and cost estimates,
-------
Exhibit 64
SENSITIVITY ANALYSIS: WATER POLLUTION CONTROL COMPLIANCE SCHEDULES
LAND COSTS ASSOCIATED WITH WATER POLLUTION CONTROL EQUIPMENT
EFFLUENT GUIDELINE: BAT/PTS
(mil lions of 1978 dollars)
Compliance Schedule
Standard 8PT
and
Standard BAT/PTS
Late BPT
and
Standard BAT/PTS
Early BPT
and
Uniform BAT/PTS
Standard BPT
and
One-Year Delay BAT/PTS
Prior to
1981
$24.28
24.28
24.28
24.28
1981-1984
$79.30
79.30
78.27
28.50
1985-1990
$ 0
0
0
47.47
Total
$103.58
103.58
102.55
100.25
Source: NUS/Rice land requirement and cost estimates.
-------
Exhibit 65
PTm(Steel) FINANCIAL MODULE
i
Working Capital
Operating Expenses
Refinancing of Debt
Long-Term Debt
Deferred Income Taxes
I
Required Revenues
Operating and
Maintenance Costs
Capital Expenditures
'
^
_^^.
Gross Plant Value
A
Retirements
V
Accumulated
Depreciation
t
Net Plant Value
^
^
•»—
1 I I
Depreciation
•
Taxes Other
Earnings Before Interest
And Income Taxes
Interest
1
Earnings Before Income
Taxes .
Tax Policy
Retained Earnings
Actual Income Taxes
1
Net Income
Dividends
Return
on Equity
Sourc*: PTmlStwO.
-------
Exhibit 66
REVENUE REQUIREMENTS FDR THE BASELINE CONDITION
1981-1990
(•III Ions ot 1978 dollars)
Sal as Tax
Operations and Malntananc* Expanses
Capltal-Ralatad Charges
Depreciation
Property Taxas
Nat Interest Expenses
Incoaa Taxas
Actual
Dal erred
Nat Income Requirements
Subtotal
Total
1981
1.357.4
28.652.5
1,555.8
392.3
818.5
156.0
276.9
982. 2
4.181.9
34,191.8
1982
I.4S4.8
30.808.2
1.515.4
378.4
794.4
298.6
268.6
1,125.2
4.380.6
36.643.6
1983
1,469.5
31,761.2
1.470.3
362.9
79S.I
267.5
257.7
1,113.6
4,267.1
37,517.8
1984
1,498.4
31,862.8
1,396.3
338.4
753.8
422.8
234.7
1,237.0
4.383.0
37.744.2
1981-1984
5.800.1
123.084.7
5.937.8
1.472.2
3.161.8
1,144.9
1,037.9
4,458.0
17,212.6
146.097.4
1985
1.496.4
32,297.9
1.353.4
326.3
740.4
216.3
217.7
1.044.5
3.898.6
37,692.9
1986
1, S3 1.0
33.352.2
1,325.9
315.5
724.8
141.5
202.2
970.2
3.680.1
38,563.3
1987
1.559.8
33.931.1
1.290.5
305.1
716.6
238.7
184.1
1.065.4
3.800.4
39,291.3
1988
1.625.7
35,058.3
1 .243.8
293.7
683.2
524.1
166.1
1.352.9
4.265.8
40.949.8
1989
1.61 1.5
35.135.6
1.230.3
290.5
682.6
311.9
161.3
1,169.6
3.846.2
40.593.3
1990
1.574.5
34,648.5
1.216.3
289.7
635.3
118.9
159.2
1 .016.4
3.435.8
39.658.8
1985-1990
9.398.9
204.423.6
7.660.2
1.820.8
4,182.9
1.551.4
1.092.6
6.619.0
22.926.9
236,749.4
1981-1990
15,199.0
327.508.3
13.598.0
3.293.0
7,344.7
2.696.3
2.130.5
11,077.0
40.139.5
382.846.8
Sourcei PTn(Steal).
-------
Exhibit 67
INCREMENTAL REVENUE REQUIREMENTS TOR WATER POLLUTION CONTROL EQUIPMENT
1981-1990
(millions of 1978 dollars)
8PT Additions
BAT Additions
Without NSPS
NSPS Only
Subtotal
Total
1981
$101.2
7.7
15.1
22.8
$124.0
1982
$124.8
26.3
16.4
42.7
$167.5
1983
$148.8
88.3
17.2
105.5
$254.3
1984
$120.8
158.3
22.1
180.4
$301.2
1985
$112.1
142.3
26.5
168.8
$280.9
1986
$105.5
132.3
30.1
162.4
$267.9
1987
$ 98.9
122.4
33.6
156.0
$254.9
1988
$ 92.9
112.8
38.1
150.9
$243.8
1989
$ 88.0
105.3
42.5
147.8
$235.8
1990
$ 83.2
98.4
45.5
143.9
$227.1
Source: PTm(Steel).
-------
Exhibit 68
AVERAGE PRICE EFFECTS FOR WATER POLLUTION CONTROL EQUIPMENT
1981-1990
(1978 dollars per ton)
BPT Additions
BAT Additions
Without NSPS
NSPS Only
Subtotal
Total
1981
$1.26
0.10
0.19
0.29
$1.55
1982
$1.46
0.31
0.19
0.50
$1.96
1983
$1.70
1.01
0.20
1.21
$2.91
1984
$1.37
1.80
0.25
2.05
$3.42
1985
$1.23
1.56
0.29
1.85
$3.08
1986
$1.16
1.46
0.33
1.79
$2.95
1987
$1.08
1.34
0.37
1.71
$2.79
1988
$0.98
1.19
0.40
1.59
2.57
1989
$0.93
1.11
0.45
1.56
$2.49
1990
$0.89
1.06
0.49
1.55
$2.44
Source: PTm(Steel).
-------
Exhibit 69
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
NET EXTERNAL FINANCING
FULL COST PASS-THROUGH
1981-1990
(millions of 1978 dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Totals
1981-1984
1985-1990
1981-1990
Basel Ine
-167.0
212.3
417.1
158.0
327.9
286.1
369.5
180.8
408.0
-83.3
620.4
1,489.0
2,109.4
BPT Additions1
-167.0 (0.0)
392.6 (180.3)
406.8 (-10.3)
131.5 (-26.5)
297.6 (-30.3)
261.2 (-24.9)
347.8 (-21.7)
162.2 (-18.6)
392.1 (-15.9)
-83.3 (0.0)
763.9 (143.5)
1,377.6 (-111.4)
2,141.5 (32.1)
BAT Additions1
-167.0 (0.0)
700.9 (488.6)
577.0 (159.9)
183.1 (25.1)
281.5 (-46.4)
237.3 (-48.8)
330.2 (-39.3)
149.5 (-31.3)
373.9 (-34.1)
-83.3 (0.0)
1,294.0 (673.6)
1,289.1 (-199.9)
2,583.1 (473.7)
'Numbers In parentheses are differences relative to the baseline.
Source: PTm(Steel).
------- OCR error (C:\Conversion\JobRoot\000005ZA\tiff\2000LZZC.tif): Cannot open ZyIMAGE Global Professional OCR OCR engine
-------
Exhibit 71
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
LONG-TERM DEBT TO CAPITALIZATION RATIOS
FULL COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
35.7
35.3
35.6
34.8
34.9
34.9
35.1
34.2
34.5
33.0
35.4
34.4
34.8
BPT
Additions1
36.3 (0.6)
36.5 (1.2)
36.6 (1.0)
35.8 (1.0)
35.7 (0.8)
35.6 (0.7)
35.6 (0.5)
34.7 (0.5)
34.9 (0.4)
33.4 (0.4)
36.3 (0.9)
35.0 (0.6)
35.5 (0.7)
BAT
Additions1
36.4 (0.7)
37.4 (2.1)
38.1 (2.5)
37.3 (2.5)
37.1 (2.2)
36.9 (2.0)
36.8 O.7)
35.8 (1.6)
35.8 (1.3)
34.3 (1.3)
37.3 (1.9)
36.1 (1.7)
36.6 (1.8)
^Numbers In parentheses are differences relative to the
base!tne.
Source: PTm(Steel).
-------
Exhibit 72
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
INTEREST COVERAGE RATIOS
FULL COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
2.68
3.13
3.06
3.51
3.00
2.81
3.08
3.99
3.41
3.03
3.10
3.22
3.17
BPT
Additions1
2.60 (-.08)
2.98 (-.15)
2.92 (-.14)
3.37 (-.14)
2.89 (-.11)
2.73 (-.08)
2.99 (-.09)
3.88 (-.11)
3.33 (-.08)
2.96 (-.07)
2.97 (-.13)
3.13 (-.09)
3.07 (-.10)
BAT
Additions'
2.61 (-.07)
2.90 (-.23)
2.77 (-.29)
3.13 (-.38)
2.73 (-.27)
2.59 (-.22)
2.84 (-.24)
3.68 (-.31 )
3.17 (-.24)
2.82 (-.21)
2.85 (-.25)
2.97 (-.25)
2.93 (-.24)
^Numbers In parentheses are differences relative to the
base! Ine.
Source: PTm(Steel).
-------
Exhibit 73
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
CASH FLOW TO LONG-TERM DEBT RATIOS
FULL COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
37.3
40.7
40.6
44.1
41.0
39.9
41.0
47.3
43.6
44.0
40.7
42.8
42.0
BPT
Additions'
36.4 (-0.9)
39.0 (-1.7)
39.2 (-1.4)
42.7 (-1.3)
40.0 (-1.0)
39.1 (-0.8)
40.4 (-0.6)
46.7 (-0.6)
43.2 (-0.4)
43.6 (-0.4)
39.3 (-1.4)
42.2 (-0.6)
41.0 (-1.0)
BAT
Additions1
36.3 (-1.0)
37.4 (-3.3)
37.0 (-3.6)
40.4 (-3.7)
38.3 (-2.7)
37.6 (-2.3)
38.9 (-2.1)
45.1 (-2.2)
41.9 (-1.7)
42.3 (-1.7)
37.8 (-2.9)
40.7 (-2.1)
39.5 (-2.5)
'Numbers In parentheses are differences relative to the
base! Ine.
Source: PTm(Steel).
-------
Exhibit 74
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
LOUS-TERM DEBT TO CAPITALIZATION RATIOS
ZERO COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
35.7
35.3
35.6
34.8
34.9
34.9
35.1
34.2
34.5
33.0
35.4
34.4
34.8
BPT
Additions1
36.4 (0.7)
36.7 (1.4)
37.1 (1.5)
36.4 (1.6)
36.5 (1.6)
36.5 (1.6)
36.7 (1.6)
36.0 (1.8)
36.3 (1.8)
34.8 (1.8)
36.7 (1.3)
36.1 (1.7)
36.3 (1.5)
BAT
Additions1
36.5 (0.8)
37.8 (2.5)
38.7 (3.1)
38.3 (3.5)
38.5 (3.6)
38.6 (3.7)
38.9 (3.8)
38.3 (4.1)
38.7 (4.2)
37.3 (4.3)
37.8 (2.5)
38.4 (4.0)
38.2 (3.4)
'Numbers In parentheses are differences relative 1o the
base!Ine.
Source: PTm(Steel).
-------
Exhibit 75
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
INTEREST COVERAGE RATIOS
ZERO COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
2.68
3.13
3.06
3.51
3.00
2.81
3.08
3.99
3.41
3.03
3.10
3.22
3.17
BPT
Additions1
2.49 (-.19)
2.82 (-.31)
2.72 (-.34)
3.16 (-.35)
2.70 (-.30)
2.53 (-.28)
2.77 (-.31 )
3.61 (-.38)
3.07 (-.34)
2.72 (-.31)
2.80 (-.30)
2.90 (-.32)
2.86 (-.31)
BAT
Additions1
2.47 (-.21)
2.70 (-.43)
2.47 (-.59)
2.73 (-.78)
2.34 (-.66)
2.18 (-.63)
2.40 (-.68)
3.12 (-.87)
2.64 (-.77)
2.31 (-.72)
2.59 (-.51 )
2.50 (-.72)
2.54 (-.63)
'Numbers In parentheses are differences relative to the
base! Ine.
Source: PTm(Steel).
-------
Exhibit 76
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
CASH FLOW TO LONS-TERM DEBT RATIOS
ZERO COST PASS-THROUGH
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
37.3
40.7
40.6
44.1
41.0
39.9
41.0
47.3
43.6
44.0
40.7
42.8
42.0
BPT
Additions1
35.7 (-1.6)
37.9 (-2.8)
37.7 (-2.9)
41.1 (-3.0)
38.3 (-2.7)
37.2 (-2.7)
38.3 (-2.7)
44.0 (-3.3)
40.6 (-3.0)
40.9 (-3.1)
38.1 (-2.6)
39.9 (-2.9)
39.2 (-2.8)
BAT
Additions1
35.5 (-1.8)
36.0 (-4.7)
34.8 (-5.8)
37.3 (-6.8)
34.9 (-6.1)
33.9 (-6.0)
34.8 (-6.2)
39.8 (-7.5)
36.6 (-7.0)
36.8 (-7.2)
35.9 (-4.8)
36.1 (-6.7)
36.0 (-6.0)
'Numbers In parentheses are differences relative to the
baseline.
Source: PTm(Steel).
-------
Exhibit 77
EWLOYMENT FOR INDUSTRY BASELINE
AND ADDITIONS TO WATER POLLUTION CONTROL
FOR SELECTED YEARS
rt
EQUIPMENT1
(thousands of jobs)
Source of Employment
Iron and Steel Production
Air Pollution Control Equipment
In-Place
Additions
Water Pollution Control Equipment
BPT In-Place
BAT In-Place
BAT Commitments
Total
Water Pollution Control Additions
BPT Additions
BAT Additions
NSPS Additions
Total Water Pollution Control
Equipment Additions
Total Employment
1980
300.2
4.2
0
2.4
0.2
0.1
307.1
0
0
0
—
0
307.1
1984
326.3
4.2
1.3
2.4
0.2
0.1
334.5
0.6
0.6
0.1
1.3
335.8
1990
244.S2
4.2
1.5
2.4
0.2
0.1
253.2
0.6
0.6
0.2
1.4
254.6
'includes process-related direct and Indirect employees only.
^Reflects employment decline associated with additional water pollution
control costs under zero cost pass-through conditions.
Source: PTm(Steel) and Arthur 0. Little man-hour estimates.
-------
Exhibit 78
ENERGY CONSUMPTION FOR INDUSTRY
BASELINE AND ADDITIONS TO WATER
POLLUTION CONTROL EQUIPMENT
1981-1990
(quadrlllion BTu)
Iron and Steel Production
Coal
Other Fuel
Electricity
Total Consumption
Self-Generated Process Gas
Net Consumption
Air Pollution Control Equipment
Water Pollution Control Equipment
BPT In-Place
BAT In-Place
BAT Commitments
Total Basel Ine Net Consumption
Water Pollution Control Additions
BPT Additions
BAT Additions
NSPS Additions
Total Water Pollution Control
Equipment Additions
Total Net Energy Consumption
1981-1984
5.476
2.781
1.986
10.243
2.292
7.951
0.162
0.077
0.009
0.007
8.206
0.015
0.011
0.002
0.028
8.234
1985-1990
8.648
4.260
3.180
16.088
3.457
12.631
0.266
0.122
0.014
0.011
13.044
0.030
0.051
0.015
0.096
13.140
1981-1990
14.124
7.041
5.166
26.331
5.749
20.582
0.428
0.200
0.023
0.018
21.251
0.044
0.062
0.018
0.124
21 .375
Source: PTm(Steel) and Arthur D. Little estimates,
-------
Exhibit 79
ALTERNATIVE SCENARIO
PROJECTED STEEL SHIPMENTS
1976-1990
(mil lions of tons)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Sh I patents
89.4
91.1
97.9
100.9
85.0
91.4
98.8
103.3
106.7
112.0
113.6
116.6
123.4
126.1
126.0
Source: TBS projections.
-------
Exhibit 80
ALTERNATIVE SCENARIO
RETURN ON EQUITY
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1981-1984
1985-1990
1981-1990
Return on Equity
7.1
9.9
12.0
16.2
16.5
15.1
16. 1
19.2
17.5
17.6
11.3
17.0
14.7
Source: TBS projections.
-------
Exhibit 81
ALTERNATIVE SCENARIO:
PRODUCTION CAPACITY ADDITIONS
1976-1990
(ml I I Ions of tons)
Process
Ore Yard
Coal Yard
Scrap Yard
Sintering
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting— 81 1 lets
Continuous Casting— Slabs
Primary Breakdown— Blooms
Primary Breakdown—Billets
Primary Breakdown— Slabs
Heavy Structure Is
Bar Ml 1 1
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
Ancillary Facilities
Vacuum Degassing
1976
Capacity
171.84
88.23
73.61
46.19
60.17
-
106.51
27.96
86.57
24.33
121.93
5.75
11.26
27.02
25.98
74.93
14.97
26.76
3.87
1.41
3.69
73.15
59.29
5.07
48.08
8.01
9.61
13.25
-
—
Capacity Additions
1976-1980
9.59
-
-
-
3.44
-
8.64
-
3.69
15.58
-
0.75
7.35
0.70
-
-
-
-
-
-
0.28
-
-
0.67
0.12
-
-
0.90
-
—
1981-1984
.
-
11.59
-
2.44
-
-
-
1.62
-
-
5.48
-
-
-
-
-
-
-
.56
-
-
-
-
-
-
-
-
-
-
1985-1990
^
-
8.08
14.46
7.17
-
34.56
-
29.51
5.94
-
20.60
34.02
-
-
-
-
2.88
-
0.36
-
12.02
-
-
0.85
-
-
-
-
-
Subtotal
9.59
-
19.60
14.46
13.05
—
43.20
-
34.82
21.52
-
26.83
41.37
0.70
-
-
-
2.88
-
0.92
0.28
12.02
0.67
0.12
0.85
-
-
0.90
—
-
Source: TBS projections.
-------
Exhibit 82
ALTERNATIVE SCENARIO:
CAPITAL EXPENDITURES FOR PRODUCTION CAPACITY ADDITIONS
1976-1990
(millions of 1978 dollars)
Process
Ore Yard
Coal Yard
Scrap Yard
Sintering
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting — Billets
Continuous Casting—Slabs
Primary Breakdown — Blooms
Primary Breakdown—Billets
Primary Breakdown — Slabs
Heavy Structure Is
Bar Mi 1 1
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mil 1
Ancillary Facilities
Vacuum Degassing
Total
1976-1980
$ 106.1
-
-
-
592.6
-
625.6
-
144.4
711.7
-
60.0
616.4
67.2
-
-
-
-
-
-
173.8
-
-
192.3
32.2
-
-
171.6
-
—
$3,493.9
1981-1984
_
$ 89.0
-
422.3
-
-
_
71.6
-
-
477.9
-
-
-
_
-
-
_
155.1
-
-
-
-
-
-
-
-
-
-
$1,215.9
1985-1990
.
$ 72.2
594.1
1,675.5
_
3,306.9
_
1,489.9
348.3
_
2,164.3
3,785.6
-
-
_
-
707.6
_
121.1
—
1,761.0
323.1
-
-
410.1
-
-
-
-
$16,759.7
Subtotal
$ 106.1
—
161.2
594.1
2,690.4
.
3,932.5
.
1,705.9
1,060.0
_ _
2,702.2
4,402.0
67.2
_
_
_
707.6
—
276.2
173.8
1,761.0
323.1
192.3
32.2
410.1
-
171.6
-
-
$21,469.5
Source: TBS projections and AISI engineering cost estimates.
-------
Exhibit 83
ALTERNATIVE SCENARIO
CAPITAL EXPENDITURES
FOR REWORKS
1976-1990
(mil lions of 1978 dollars)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1976-1980
1981-1984
1985-1990
Reworks
$1,321.4
1,718.4
1,740.0
,764.5
,751.6
,754.1
,740.7
,740.4
,729.7
,672.0
,652.6
,634.2
,626.3
,654.0
1,727.2
$8,295.9
$6,964.9
$9,966.3
Source: TBS" projections.
-------
Exhibit 84
ALTERNATIVE SCENARIO
AVERAGE PRICE EFFECTS FOR WATER POLLUTION CONTROL EQUIPMENT
1981-1990
(1978 doI tars per ton)
BPT Additions
BAT Additions
Total
1981
1.27
0.07
1.34
1982
1.45
0.72
2.17
1983
1.73
1.32
3.05
1984
1.32
2.14
3.46
1985
1.27
2.13
3.40
1986
1.37
2.53
3.90
1987
1.27
2.73
4.00
1988
1.16
3.25
4.41
1989
1.02
3.59
4.61
1990
0.96
3.86
4.82
Source = PTm(Steel).
-------
Exhibit 85
ALTERNATIVE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
LONG-TERM DEBT TO CAPITALIZATION RATIOS
1981-1990
(percent)
Year
1981
1982
1983
1984
1983
1986
1987
1988
1989
1990
Aver aces
1981-1984
1985-1990
1981-1990
Basel fne
35.4
35.6
36.9
38.0
40.0
38.0
36.0
35.0
35.0
32.6
36.5
36.1
36.3
BPT
Additions1
36.1 (0.7)
37.0 (1.4)
38.3 (1.4)
39.3 (1.3)
40.0 (0.0)
38.0 (0.0)
36.0 (0.0)
35.0 (0.0)
35.0 (0.0)
32.6 (0.0)
37.7 (1.2)
36.1 (0.0)
36.7 (0.4)
BAT
Additions1
36.4 (1.0)
38.0 (2.4)
39.8 (2.9)
41.0 (3.0)
40.0 (0.0)
38.0 (0.0)
36.0 (0.0)
35.0 (0.0)
35.0 (0.0)
32.6 (0.0)
38.8 (2.3)
36.1 (0.0)
37.2 (0.9)
Numbers In parentheses are differences relative to the
baseIIne.
Source: PTm(Steel).
-------
Exhibit 86
ALTERNATIVE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
INTEREST COVERAGE RATIOS
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel Ine
2.72
3.62
4.07
5.03
4.66
4.46
5.04
5.99
5.07
4.88
3.86
5.02
4.55
BPT
Additions1
2.53 (-.19)
3.27 (-.35)
3.68 (-.39)
4.70 (-.33)
4.57 (-.09)
4.42 (-.04)
4.99 (-.05)
5.95 (-.04)
5.04 (-.03)
4.85 (-.03)
3.54 (-.32)
4.97 (-.05)
4.40 (-.15)
BAT
Additions1
2.53 (-.19)
3.06 (-.56)
3.31 (-.76)
4.22 (-.81)
4.39 (-.27)
4.30 (-.16)
4.86 (-.18)
5.79 (-.20)
4.90 (-.17)
4.71 (-.17)
3.28 (-.58)
4.82 (-.20)
4.21 (-.34)
Numbers In parentheses are differences relative to the
base!Ine.
Source: PTm(Steel).
-------
Exhibit 87
ALTERNATIVE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
CASH FLOW TO LONG-TERM DEBT RATIOS
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1984
1985-1990
1981-1990
Basel ine
38.3
43.4
44.1
47.6
42.3
40.1
43.1
50.9
51.5
61.0
43.4
48.2
46.2
BPT
Additions1
36.7 (-1.6)
40.5 (-2.9)
41.2 (-2.9)
45.3 (-2.3)
42.2 (-0.1)
40.2 (0.1)
43.2 (0.1)
51.0 (0.1)
51.6 (0.1)
61.1 (0.1)
40.9 (-2.5)
48.2 (0.0)
45.3 (-0.9)
BAT
Additions1
36.3 (-2.0)
38.5 (-4.9)
38.2 (-5.9)
42.3 (-5.3)
42.1 (-0.2)
40.3 (0.2)
43.3 (0.2)
51.0 (0.1)
51.7 (0.2)
61.1 (0.1)
38.8 (-4.6)
48.3 (0.1)
44.5 (-1.7)
Numbers in parentheses are differences relative to the
base Iine.
Source: PTm(Steel).
-------
Exhibit 88
ALTERNATIVE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
NET EXTERNAL FINANCING
1981-1990
(mil lions of 1978 dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Totals
1981-1984
1985-1990
1981-1990
Basel tne
-167.1
445.1
894,2
1,068.6
2,156.1
3,163.9
3,643.4
2,682.7
1 ,094.9
-83.4
2,240.8
12,657.6
14,898.4
8PT Additions1
-167.1 (0.0)
670.1 (225.0)
922.4 (28.2)
1,061.5 (-7.1)
2,134.6 (-21.5)
3,140.3 (-23.6)
3,618.5 (-24.9)
2,655.0 (-27.7)
1,072.3 (-22.6)
-83.4 (0.0)
2,486.9 (246.1)
12,537.3 (-120.3)
15,024.2 (125.8)
BAT Additions1
-96.0 (71.1)
907.2 (462.1)
1,121.8 (227.6)
1,145.7 (77.1)
2,140.4 (-15.7)
3,173.1 (9.2)
3,696.0 (52.6)
2,746.9 (64.2)
1,100.4 (5.5)
-83.4 (0.0)
3,078.7 (837.9)
12,773.4 (115.8)
15,852.1 (953.7)
Numbers In parentheses are differences relative to the baseline.
Source: PTm(Steel).
-------
Exhibit 89
ALTERNATIVE SCENARIO
ENERGY CONSUMPTION FOR ALTERNATIVE INDUSTRY BASELINE AND
ADDITIONS TO WATER POLLUTION CONTROL EQUIPMENT
1981-1990
(quadrillion Btu)
Iron and Steel Production
Coal
Other Fuel
Electricity
Total Consumption
Self-Generated Process Gas
Net Consumption
Air Pollution Control Equipment
In-Place Water Pollution Control Equipment
Total Baseline Net Consumption
Water Pollution Control Additions
8PT Additions
BAT and NSPS Additions
Total Water Pollution Control
Equipment Additions
Total Net Energy Consumption
1981-1984
5.633
2.883
2.029
10.545
2.359
8.186
0.167
0.097
8.450
0.015
0.013
0.028
8.478
1985-1990
9.570
4.748
3.565
17.883
3.863
14.020
0.302
0.157
14.479
0.031
0.089
0.120
14.599
1981-1990
15.203
7.631
5.594
28.428
6.222
22.206
0.469
0.254
22.929
0.046
0.102
0.148
23.077
Source: PTm(Steel) and Arthur D. Little estimates.
-------
APPENDIX
INTERMEDIATE SCENARIO
-------
Appendix
INTERMEDIATE SCENARIO
The "intermediate scenario" is an alternative to the two
steel industry scenarios (the "main scenario" and the "alter-
native scenario") detailed in the body of the report. As its
name indicates, the intermediate scenario describes a possible
outlook for the steel industry over the next decade that falls
in between the relatively pessimistic outlook projected in the
main scenario and the relatively optimistic outlook projected
in the alternative scenario. In the intermediate scenario,
the operating and financial characteristics of the steel indus-
try would be comparable to those in the main scenario during
the 1981-1985 period. A gradual improvement in the industry's
weak condition during the 1986-1990 period would result in an
improved outlook that approaches the optimistic outlook of the
alternative scenario by 1989-1990.
Each of the three scenarios incorporates a different set
of assumptions regarding government policies toward the steel
industry during the next decade. The intermediate scenario
examines the effects on the demand for steel and on the steel
industry's financial condition of the economic recovery policies
currently being considered by various groups within the govern-
ment. The specific changes in government policies considered
in the intermediate scenario reflect a "common denominator"
approach to the major elements of the various economic recovery
programs. They include the recent reinstitution of the trigger
price mechanism by the Carter Administration and a revised
U.S. industrial policy that includes provisions for increases
in capital recovery rates1 and other investment incentives.
The intermediate scenario also assumes continuation until at
least the mid-1980s of current government pricing policies
toward the steel industry, as embodied in the limits on steel
price increases set by the "Anti-Inflation Program."
As described in the body of the report, the main scenario
assumes that the government policies toward industry in general
and the steel industry in particular that were in effect in
September 1980 would continue to be in effect throughout the
The term "increases in capital recovery rates" suggests a re-
duction in tax depreciation lifetimes or the use of other depre-
ciation mechanisms that allow for an increased present value of
depreciation cash flow. In the intermediate scenario, a reduc-
tion in depreciation lifetimes for production and pollution con-
trol investments to nine years has been assumed.
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A-2
1980s. These policies include the current tax policies concern-
ing corporate income tax rates, allowable depreciation life-
times, and investment tax credits; the current pricing policies
of the "Anti-Inflation Program"; and the transitionary steel
import policies that were in effect in September 1980 during
the nine-month suspension of the trigger price mechanism.
The alternative scenario, detailed in Chapter VIII, is
consistent with the implementation of specific changes in gov-
ernment policies toward the steel industry that would be in
effect throughout the 1980s. These changes include a liberal
capital recovery plan for U.S. industry that would substantial-
ly increase the demand for steel products, a pricing policy
that would allow more latitude in steel price increases, and a
steel import policy that would ensure "full value" import
prices in the domestic market.
As outlined above, the intermediate scenario differs from
the main scenario in its assumptions regarding government tax-
ation and import policies, and from the alternative scenario
in its assumption regarding government pricing policy. More-
over, the intermediate and alternative scenarios differ in their
assumptions regarding the level of increases in capital recovery
rates and other investment incentives; the capital recovery
and other tax policies of the intermediate scenario would pro-
vide less stimulus to steel demand. Although the intermediate
and alternative scenarios assume different import policies,
the effects of these policies would probably be comparable over
the decade.
The following section describes the operating and finan-
cial characteristics of the steel industry that are likely to
result from the changes in government policies assumed in the
intermediate scenario. Subsequent sections detail the industry's
baseline financial condition and the financial impact of water
pollution control regulations on this condition. The appendix
concludes with a description of the effects of the anticipated
water regulations on steel industry market share, employment,
and energy use.
INTERMEDIATE SCENARIO;
BASELINE CONDITION
If the changes in government policies underlying the in-
termediate scenario were implemented, they would probably have
a significant impact on the operating and financial character-
istics of the steel industry during the next decade. A U.S.
industrial policy that included provisions for a reduction in
the depreciation lifetime associated with new equipment to nine
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A-3
years together with other tax incentives would probably affect
the industry in two important ways. First, it would provide
the industry with additional cash flow by'increasing deferred
income taxes approximately 40 percent. Second, the accelerated
rate of capital recovery for the industrial sector as a whole
would increase industrial expenditures for capital equipment.
This, in turn, would lead to an increase in the demand for steel.
TBS analyzed the impact of increased capital recovery rates
and other tax incentives on capital equipment expenditures to
determine the impact of the possible revisions to U.S. industrial
policy on steel shipments. For the most part, TBS's projections
were predicated on a DRI analysis2 of the effects of accelerated
capital recovery rates on business investment in fixed assets,
and on-DRI's estimate of 0.43 as the elasticity between demand
for capital equipment and steel production. On the basis of
its analysis, TBS estimated that the $18.0 billion reduction in
business taxes currently being proposed by several groups within
the government would increase the average growth rate of the
demand for steel products by 0.9 percent per year. Other reduc-
tions in business taxes (inferred by TBS through a "least common
denominator" approach to the various tax policy proposals being
considered) would probably increase this average growth rate of
steel demand by an additional 0.1 percent. This amounts to an
average 1.0 percent increase per year in the growth rate of de-
mand for steel products over the next decade.3
If the import share of apparent steel consumption were to
remain constant, the projected growth in steel demand would lead
to a domestic shipments growth rate of about 2 percent per year
after domestic shipments had recovered from current recession-
induced levels. TBS has assumed that during periods when the
industry would possess the necessary production capacity the
industry would probably be able to maintain a shipments level
consistent with a constant import share of apparent consumption
of about 15 percent. Imports would tend to be limited to about
15 percent by certain provisions of the recently reinstituted
trigger price mechanism. Specifically, the surge provisions of
the trigger price mechanism should limit imports by providing
for an investigation of the enforcement of trigger prices when
imports exceed 13.7 percent of apparent consumption and for the
possible initiation of product-specific anti-dumping or counter-
vailing duty proceedings when import penetration is above 15.2
percent.
2
Data Resources, Inc.
3
This growth rate is incremental to the 1.0 percent growth
rate of steel demand projected in the main scenario.
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A-4
The 2 percent domestic shipments growth rate per year stem-
ming from the constant import share assumption of 15 percent
would result in 117.8 million tons of steel being shipped in
1990, 11.8 million tons more than in the main scenario. However,
the projection of growth in steel shipments assumes that the
domestic steel industry would possess the necessary capacity to
supply its portion of steel demand. This potential growth rate
of shipments, higher than that of the main scenario, would ac-
tually cause capacity utilizations to rise to or exceed maximum
sustainable levels (levels including a reserve for maintenance
downtime) by the middle to latter part of the 1980s, resulting
in a reduction in the market share of steel products supplied
by the domestic industry.4
The supply-demand pressure experienced by the industry in
the latter part of the 1980s would cause a transfer in pricing
leverage from consumers to producers of steel. The ability of
the industry to raise prices, and therefore to increase its prof-
itability, would depend on the extent to which the government
would exert pressure to limit steel price increases. The inter-
mediate scenario assumes that the current price control policies
of the "Anti-Inflation Program" would remain in effect until at
least the mid-1980s. This program limits increases in the nomi-
nal price of steel products to about 10.1 percent.
The industry's ability to raise prices during the first part
of the 1980s would also be affected by the 12.0 percent increase
in trigger prices in November 1980 over the March 1980 price
levels. TBS has assumed that this trigger price increase would
provide the industry with the pricing flexibility necessary to
raise 1981 prices by the full 10.1 percent allowed under the
"Anti-Inflation Program."
During the latter part of the 1980s, the pricing policies
of the government's "Anti-Inflation Program" were assumed by
TBS to remain in effect. TBS has further assumed that the gov-
ernment would not adhere strictly to the 10.1 percent price ceil-
ing of the program if the balance between steel supply and de-
mand warranted steel price increases of a larger magnitude.
This flexibility in setting the ceiling on steel price increases
during the second half of the 1980s together with the pressure
of demand on domestic steel supply during the period would prob-
ably lead to significant increases in profitability. It would
Capacity constraints facing the steel industry during the
second half of the 1980s would probably limit domestic shipments
to levels significantly below those consistent with an average
annual growth rate of 2 percent. The resulting baseline shipments
levels (levels before the incidence of additional water pollution
control costs) are detailed in Exhibit A-l.
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A-5
result in an average return on equity for 1986-1990 of about
14.1 percent (a real return of about 7.5 percent).
This projected level of steel industry profitability would
probably lead to an improvement in the steel industry's financ-
ing capability in the latter part of the 1980s. If the steel
industry were to achieve returns on equity at the levels de-
scribed above for about two years, market-to-book ratios of com-
mon equity would be significantly higher than the current 50
percent levels—probably around 80 percent to 90 percent. As a
result, industry management would be able to issue new common
stock without substantially diluting shareholders' equity inter-
est. The industry's ability to issue common stock and its im-
proved internally generated sources of funds (through higher
profitability) should also allow the industry to increase its
usage of long-term debt.
The industry's improved access to external financing in
the intermediate scenario in the second half of the 1980s would
reduce the investment program restrictions the industry would
find necessary in the main scenario. However, during the first
half of the 1980s> the industry would have to reduce reworks
expenditures significantly from desirable levels. As in the
main scenario, reduced reworks would cause premature shutdowns
of capacity.5 These shutdowns of capacity, together with a
limited capacity additions program, would lead to declines in
total production capacity and in market share beginning in the
mid-1980s. During the second half of the decade, the industry
would be able to reinstate a full reworks program. It would
also be able gradually to offset the contraction in production
capacity by making significant capacity additions beginning in
1988. By 1990-1991, the industry's expenditures in these areas
would probably increase capacity sufficiently to allow the indus-
try to regain the 85 percent market share position6 that would
be lost during the latter part of the 1980s due to constraints
on industry capacity.
By the end of the 1980s, the steel industry would experi-
ence the beginning of a revitalization of its operating condi-
tion and a significantly improved financial condition relative
to its weak financial position during the first half of the
1980s. The industry would not achieve the operating efficiencies
in the steelmaking sector that would be present in the alterna-
tive scenario in 1990 because it would still need to replace
These capacity shutdowns would be primarily due to obsolescence
as well as reworks reductions.
£*
This assumes that an import policy ensuring "fair value" import
prices in the domestic market would be in effect.
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A-6
the remaining obsolete portion of its raw materials preparation,
raw steelmaking, and semifinishing facilities with more produc-
tion facilities. However, the efficiency gains from the indus-
try's new production capacity would probably allow the industry
to maintain minimally acceptable profitability levels and con-
tinue its modernization program into the 1990s.
The following discussion provides a detailed description
of baseline capital expenditures for reworks and new production
capacity under the intermediate scenario. Air and water pollu-
tion control costs are also discussed.
Reworks Expenditures
The duration and intensity of the financial constraints
facing the steel industry during the first half of the 1980s
would result in a significant reduction in the industry's pro-
ductive capital expenditures program. On the basis of conversa-
tions with industry executives, TBS believes that the steel
industry would choose to reduce expenditures for reworks, even
to the point of reducing production capacity, rather than, forego
selected capacity additions that promise high returns on invest-
ment. Three steps were required to determine the reduction in
reworks expenditures needed to preserve the industry's current
financial condition. First, the full reworks program was revised
downward to eliminate reworking production capacity projected to
be shut down in the near future. Second, a determination was
made of the effect on the industry's financial condition of the
revised reworks program together with other baseline capital ex-
penditures programs. Third, further reductions in reworks ex-
penditures were made to relieve the financial strain the indus-
try would experience even with the revised reworks program.
The first step required determining a target level of pro-
duction capacity that would be in operation after 1987. The
target level was established from the existing capacity profile
in 1986 and 1987, the years of minimum capacity for the steel
industry in the next decade under the intermediate scenario.
This would include about 137.6 million tons of raw steelmaking
capacity. Reworks expenditures necessary to maintain this capac-
ity at its full productive capability would amount to $8,100
million (1978 dollars) over 1981-1985, or average reworks out-
lays per year of $1,620 million. This represents a reduction
in the full reworks program of $580 million.
Despite this initial reduction in reworks expenditures,
the estimated capital expenditures program for reworks and capac-
ity replacement and expansion would still lead to a severe strain
on the industry's financial condition and its current "A" bond
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A-7
rating during the first part of the 1980s. The strain would be
reflected in changes in the levels of the key financial para-
meters used to assess bond ratings and would probably lead to a
downgrading of the industry's current bond rating unless further
cutbacks in capital expenditures occurred. Because the industry
would want to maintain its current bond rating in order to preserve
access to credit markets, it was necessary to make a further
reduction in its reworks program.
The final baseline investment program thus incorporates an
additional reduction of $857.5 million in reworks expenditures
for 1981-1985. As a result, approximately $1,448.5 million per
year for reworks is expected to be spent during the 1981-1985
period. The final reworks expenditures under the intermediate
scenario are detailed in Exhibit A-2.
The reduction in reworks expenditures relative to the re-
works level consistent with target production levels is expected
to result in a decline in production capacity of approximately
5.1 percent in the mid-1980s. This decline in capacity would
occur during a period when the industry would have little flexi-
bility for production capacity replacement and expansion. Hence
the reduction in capacity would have significant implications
for industry market share and employment during the middle and
late 1980s. These market share and employment effects are dis-
cussed in the final section of this appendix.
Expenditures for New
Production Capacity
Capital expenditures for new production capacity during
the first half of the 1980s would reflect the effective ceiling
on the industry's productive investment program imposed by the
industry's weak financial condition and desire to maintain its
current bond rating. The similarity in industry financial char-
acteristics between the intermediate and main scenarios during
the 1981-1985 period would result in comparable capacity addi-
tion programs under these two scenarios. Therefore, as in the
main scenario, expenditures for capacity additions in the in-
termediate scenario are expected to be held to a minimum dur-
ing this period, with most outlays designed to reduce production
bottlenecks. Because these debottlenecking additions offer par-
ticularly high returns on investment, they would be undertaken
despite a coincident reduction in reworks expenditures.
The steel industry's increased financial flexibility in
the latter part of the 1980s would allow it to expand capacity.
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A-8
As a result, the increased demand for steel products would prob-
ably be met by the domestic industry by 1990 or 1991. The capac-
ity additions associated with this expansion are detailed in
Exhibit A-3. As in the two other scenarios, additions would be
concentrated in the process areas associated with coke, pig iron,
and raw and semifinished steel production. They would include
5.2 million tons of new coke oven capacity, 23.3 million tons of
new blast furnace capacity, 27.9 million tons of new raw steel-
making capacity, and 38.9 million tons of new continuous casting
capacity for semifinished steel. Total capital expenditures for
these capacity additions over the next decade would be $8,795.3
million, or about 74.1 percent of the total $11,865.9 million
capital expenditures program for capacity additions. Because
improvements in the financial condition of the industry would
not begin to occur until the latter part of the 1980s, the bulk—
58.7 percent—of these capital expenditures would be deferred
until 1989-1990. Capital expenditures for capacity additions
in all steel production processes are detailed in Exhibit A-4.
The modernization and replacement of old or obsolete capac-
ity in the intermediate scenario would proceed at a moderate
pace. This is illustrated in Table A-l, which indicates the
percentages of 1990 production process capacities that would be
less than 15 years old. For the most part, these percentages
lie roughly halfway between those of the main and alternative
scenarios. The reduction in the average age of the industry's
production facilities would lead to a discernible increase in
the industry's production efficiency by the end of the decade.
Table A-l
PERCENTAGE OF INDUSTRY PRODUCTION
CAPACITY IN 1990 ACCOUNTED FOR 8Y
FACILITIES LESS THAN 15 YEARS OLD
Stage of Production
Raw Materials Preparation
Cokemaking
Ironmaking
Raw Steelmaking
Casting and Forming
Finishing
Source: Pfm( Steel).
Percentage
Less
of Production
than 15 Years
Main Intermediate
Scenario Scenario
6.3
17.7
23.7
21.4
14.5
1.5
10.3
17.9
33.2
30.3
18.9
6.5
Capacity
Old
Alternative-
Scenario
12.4
26.9
43.1
33.9
26.9
3.6
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A-9
The trend toward increased production efficiency would
probably continue into the 1990s. The improved financial condi-
tion of the steel industry during the late 1980s would permit
the major programs for the replacement of old, relatively inef-
ficient facilities implemented in 1988-1989 to be continued
into the next decade. The efficient production technologies
that would result from these capital expenditure programs would
improve the industry's cost competitiveness in world steel
markets.
Air and Water Pollution
Control Costs
Since capacity and production levels for the steel indus-
try in the 1981-1985 period would be substantially the same
under the main and intermediate scenarios, air and water pol-
lution control costs for the two scenarios would also be com-
parable during this period. However, during the 1986-1990
period, cost differences would result from different NSPS re-
quirements associated with significantly different programs for
production capacity additions. In the intermediate scenario,
capital expenditures necessary to meet air-related NSPS require-
ments would require an increase of $266.0 million, or 311.2 per-
cent, over the main scenario figure. Operations and maintenance
expenses for air pollution control equipment would also be higher
than in the main scenario. In 1986, total air-related O&M ex-
penses in the intermediate scenario would be $571.6 million,
2.4 percent above the corresponding main scenario figure. By
1990, total air-related 0£M costs would be $624.0 million, or
10.1 percent over the main scenario figure.
The principal impact of the intermediate scenario assump-
tions on current and-proposed water pollution control require-
ments would also take place in the second half of the 1980s. ..
Capital expenditures for water pollution control equipment asso-
ciated with new capacity in the 1985-1990 period would amount
to $313.4 million, compared to only $97.6 million in the main
scenario. In 1986, operations and maintenance costs for water
pollution control equipment would be $206.9 million, an increase
of only 3.6 percent over these costs in the main scenario. In
1990, O&M expenses would amount to $259.5 million, 14.6 percent
higher than in the main scenario.
INTERMEDIATE SCENARIO;
BASELINE FINANCIAL CONDITION
The assumptions underlying the intermediate scenario would
lead to a projected financial condition for the steel industry
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A-10
for the decade that would fall in between the projections of
the main and alternative scenarios. However, because of the
financial constraints facing the steel industry during the 1981-
1985 period, the intermediate scenario would project a financial
condition similar to that prevailing in the main baseline sce-
nario during this period: returns on equity would average 9.6
percent, debt to capitalization ratios would average 36.1 per-
cent, interest coverage ratios would average 3.32 times, and
cash flow to long-term debt ratios would average 42.8 percent.
These financial ratios are consistent with the industry's cur-
rent A bond rating. Capital expenditure reductions needed in
the reworks program to maintain this financial condition would
be substantial relative to the reworks levels considered neces-
sary to maintain facilities at full production capacity. Exter-
nal financing of $2,237.1 million would be required to support
the minimal baseline capital expenditures program consisting
mainly of outlays for capacity additions and reworks during
this period.
A gradual improvement in the industry's weak financial
condition would occur in the 1986-1990 period. In 1986, when
the increased demand for steel products would lead to capacity
utilization rates approaching maximum sustainable levels, pric-
ing leverage would begin to shift from consumers to producers
of steel. By 1986 and 1987, steel prices under the intermediate
scenario would reach $433.45 and $447.55 per ton, respectively,
or 1.4 percent and 3.4 percent above these prices in the main
scenario. By 1990, the average price per ton of steel in real
terms would be about $443.08. This represents a 3.3 percent
increase relative to the 1990 price level in the main baseline
scenario.
The increases in prices the industry would probably realize
during the second half of the 1980s would lead to improvements
in the industry's profit performance. The industry would earn
an average return on equity in the 1986-1990 period of 14.1 per-
cent. This amounts to an increase of 4.3 percentage points for
this period relative to the average return in the main baseline
scenario. The baseline returns on equity for the intermediate
scenario are detailed in Exhibit A-5.
By 1987, the improvement in industry profitability would
probably increase common stock prices to the level where indus-
try management would be willing to issue common stock. In 1988-
1989, the industry's common stock financing capability would
enable the industry to begin a significant capital expenditures
program for replacement and expansion of production capacity
to meet the growing demand for steel products. The improvement
in the cost efficiency of the industry that would result from
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A-ll
this program would aid the industry in its attempts to maintain
adequate profitability into the 1990s.
The improved baseline financial condition the steel indus-
try would experience in the 1986-1990 period would be reflected
in an average interest coverage ratio of 4.31 times and an aver-
age cash flow to long-term debt ratio of 48.8 percent. The
levels of these indicators of financial condition together with
an average industry debt to capitalization ratio of 35.2 percent
should allow the industry to maintain its A bond rating and at
the same time undertake the significant production capital ex-
penditures program described above.
INTERMEDIATE SCENARIO;
FINANCIAL IMPACT OF WATER
POLLUTION CONTROL REGULATIONS
During the early 1980s, the magnitude of the incremental
financial impacts of the proposed water pollution control regu-
lations on the steel industry would be similar under the inter-
mediate and main scenarios. In both scenarios, financial con-
straints imposed on the industry by capital markets would require
the industry to divert financial resources from productive capi-
tal expenditure programs to the installation and operation of
pollution control equipment. Because of the necessary tradeoff
between pollution control and productive expenditures, the steel
industry would probably further reduce the baseline reworks ex-
penditure program (which already reflects significant reductions
from desirable reworks levels) when faced with additional water
pollution control requirements. Expenditures for reworks would
be reduced to the extent needed to permit the industry's finan-
cial indicators to be consistent with an A bond rating. The
final section of this appendix explains how this further reduc-
tion in reworks expenditures due to water treatment costs would
lead to capacity declines in addition to those projected in the
baseline of the intermediate scenario.
To describe the potential financial impacts of anticipated
water pollution control requirements on the steel industry under
the intermediate scenario, the following discussion identifies
possible changes in financial parameters due to water costs.
The indicated changes in financial variables would occur if
expenditures for both water pollution control equipment and
baseline reworks? were undertaken.
*r
The baseline reworks program is the reworks program that
would be undertaken if there were no additional water treat-
ment costs.
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A-12
The potential effects of water pollution control costs on
the industry would be more significant in the first half of the
1980s than in the second half because of the inability of the
industry to pass through annual water treatment costs to steel
consumers due to excess capacity, import competition, and the
government's "Anti-Inflation Program." In the 1981-1985 period,
a total capital expenditures program that included expenditures
for baseline reworks and for BPT and BAT water pollution con-
trol equipment would require an additional $822.3 million in
external financing to provide for the added water costs. Of
this amount, $227.9 million would be due to BPT requirements;
the remaining $594.4 million would be due to BAT requirements.8
The additional $822.3 million in incremental external financing
needs relative to baseline requirements would represent a 36.8
percent increase in the industry's total external financing needs
for 1981-1985.
The significant increase in external financing needs in the
early 1980s due to water pollution control requirements would be
met almost entirely through issues of new debt. Management would
probably choose to rely on debt rather than issue common stock
at the depressed market price levels expected to prevail in the
near term. Reliance on debt to finance BPT expenditures would
increase the industry's average debt to capitalization ratio
over baseline levels in the 1981-1985 period to about 37.3 per-
cent; BAT requirements would add another 1.3 percentage points.
The increased use of debt would result in a decline in the aver-
age interest coverage ratio to 3.03 times after incremental BPT
costs and to 2.80 times after incremental BAT costs. Finally,
reliance on debt would decrease the average cash flow to long-
term debt ratio to 40.4 percent after incremental BPT costs and
to 38.1 percent after incremental BAT costs.
The effects of the anticipated water pollution control reg-
ulations on the steel industry would be less significant over
the 1986-1990 period. This would be primarily due to the in-
dustry's high capacity utilization during the 1986-1990 period,
which would lead to increased pricing flexibility, higher profits,
and ultimately to improved financial flexibility through the
issuance of common stock. Also, the steel industry's improved
pricing flexibility during this period would probably permit a
full pass-through of annual water pollution control costs.
The term "BAT requirements" is used herein as a surrogate
for the requirements associated with BAT, PTS, and NSPS efflu-
ent limitations.
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A-13
External financing requirements in 1986-1990 due to incre-
mental BPT costs would decline by $62.0 million. This decline
is due to the added depreciation cash flows generated by BPT
equipment installed in the early 1980s. BAT and NSPS require-
ments would increase external financing needs by $106.3 million
in the 1986-1990 period. The significant reduction in total
external financing needs in the 1986-1990 period relative to
the total external financing needs of the 1981-1985 period, as
well as the industry's improved financial flexibility, would
reduce the financial impacts of added water pollution equipment
to insignificant levels in the 1986-1990 period. The effects
of additional water pollution control costs on the steel indus-
try's financial condition are detailed in Exhibits A-6 through
A-9.
INTERMEDIATE SCENARIO;
OTHER EFFECTS
As discussed in previous sections of this appendix, the
financial constraints facing the steel industry in the interme-
diate scenario during the 1980s would probably lead to signifi-
cant reductions in the industry's productive capital expenditures
program both before and after the incidence of incremental water
pollution control requirements. Therefore, in the intermediate
scenario the primary effects on the steel industry of the pro-
posed effluent guidelines relate to the consequences of reduced
investment.
The main impact of further reductions in capital expendi-
tures, due to the necessary tradeoff between incremental water
pollution control costs and productive expenditures, would be a
significant additional decline in reworks expenditures and there-
fore in production capacity. A decline in production capacity
in turn would have important implications for the industry's
market share of apparent consumption and level of employment.
This section of the appendix discusses the industry's market
share and employment characteristics both before and after the
incidence of water costs. It also discusses the energy consump-
tion associated with the operation of pollution control equipment,
The reduction in reworks expenditures that would occur
in the intermediate baseline, i.e., prior to the incidence of
incremental water pollution control regulations, would probably
lead to a 5.1 percent decline in capacity in 1985-1987, signifi-
cantly less than the 12.8 percent capacity decline likely to
occur in the main scenario baseline.^ When faced with additional
9
See Chapter II for a detailed discussion of the probable
capacity declines in the main scenario.
-------
A-14
water pollution control requirements, the steel industry would
experience an additional 5.1 percent capacity decline in about
1985-1987. This is slightly less than the 6.0 percent capacity
decline the industry would experience in the main scenario.
The improved financial condition of the steel industry in the
late 1980s should permit sufficient capacity replacement and
expansion to allow the industry to recover from these capacity
declines by 1990-1991.
The decrease in industry production capacity, both in the
baseline and after the incidence of water pollution control
costs, would lead to a corresponding decline in steel production
levels. This would occur because the industry would already be
utilizing capacity at maximum sustainable rates during the second
half of the 1980s. The effect of the capacity constraints on
steel production and thus shipments would be reflected in actual
shipments levels below those associated with the average annual
2 percent shipments growth rate potentially available to the
industry during the period.
The decline in the domestic steel industry's production
capability during the second half of the 1980s would have im-
portant implications for the industry's market share of appar-
ent consumption. As shown in Table A-2, the industry would
probably experience baseline market share declines in the 1986-
1989 period, with the peak market share loss of 7.2 percentage
points occurring in 1988. Additional market share declines due
to water pollution control requirements would occur primarily
in the late 1980s, averaging about 3.3 percentage points in 1985-
1990. The incidence of market share declines due to water cost
requirements would be greatest in 1987 and 1988, when the market
share losses in each year would be about 4.3 percentage points.
As a result of the decreases in the domestic market share of
apparent consumption both in the baseline and after the incidence
of water pollution control costs, industry market share would
fall to about 73.4 percent in 1988 before returning to an 85 per-
cent level in the first part of the 1990s. This recovery in
market share would result from the substantial additions to ca-
pacity the steel industry probably would achieve in 1988-1990.
As a practical matter, regaining 11.6 percentage points in market
share may require extensive marketing or promotional efforts.
The decline in steel production in the second half of the
1980s would also lead to significant reductions in .industry
employment during the period. The maximum impact on employment,
both before and after the incidence of additional water treat-
ment costs, would occur in 1987 and 1988. In these years, addi-
tional water pollution control requirements would lead to a de-
cline in production labor of about 16,190 jobs. This decrease
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A-15
LOSS
Table A-2
IN MARKET SHARE
(percent)
Market Share Declines
Year
1985
1986
1987
1988
1989
1990
Average
Source:
Baseline
and Additional
Baseline Water Costs
0.0
2.6
6.1
7.2
3.7
0.0
1985-1990 3.3
T3S projections.
0.6
5.4
10.5
11.6
8.0
1.8
6.3
Resulting
Market Share
84.4
79.6
74.5
73.4
77.0
33.2
78.7
in employment would be only partially offset by the 4,270 jobs
needed to operate the water treatment equipment. The net effect
of water pollution control requirements on steel industry employ-
ment would be a. temporary reduction of 11,920 jobs during the
second half of the 1980s.1° Some minor reductions in employ-
ment would also occur as a result of slight reductions in ship-
ments volumes arising from price increases to recover water
pollution control costs.
Energy consumption under the intermediate scenario would
increase only slightly due to environmental control regulations.
Pollution control equipment would consume approximately 39,180
barrels of residual fuel, or the equivalent, per day during the
1981-1990 period. This represents 3.7 percent of the total
energy consumption of the steel industry during the period.
Water pollution control equipment alone would require about
18,200 barrels per day, or about 0.381 quadrillion BTU, for the
1981-1990 period as a whole. Of this, 0.135 quadrillion BTU
would be consumed by water treatment equipment installed after
1980. This energy use amounts to 0.6 percent of the steel in-
dustry's net energy consumption during the period. Exhibit A-10
details the energy consumption of the steel industry during the
1981-1990 period.
10
A description of the general indirect employment effects of
water pollution control requirements is provided in Chapter VII
-------
Exhibit A-1
INTERMEDIATE SCENARIO
PROJECTED STEEL SHIPMENTS
1976-1990
(mill Ions of tons)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1983
1986
1987
1988
1989
1990
Shipments
89.4
91,1
97.9
101.0
85.0
91.4
100.3
104.4
106.6
110.4
107.0
104.3
107.6
113.9
J17.8
'includes decline In ship-
ments In 1986-1989 due to
capacity constraints.
Source: TBS projections.
-------
Exhibit A-2
INTERMEDIATE SCENARIO
CAPITAL EXPENDITURES
FOR REWORKS
1976-1990
(millions of 1978 dollars)
Year
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Reworks
1,321.4
1,718.4
1 ,740.0
1,764.5
1,751.6
1,468.2
1,457.0
1,462.8
1,461.0
1,393.4
1,608.0
1,547.9
1,535.7
1,561.8
1,618.9
Source: TBS projections.
-------
Exhibit A-3
INTERMEDIATE SCENARIO
PRODUCTION CAPACITY ADDITIONS
1976-1990
(mi 11 ions of tons)
Process
Ore Yard
Coal Yard
Scrap Yard
S 1 nter I ng
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Cont I n uous Cast ! ng — B 1 1 1 ets
Continuous Casting — Slabs
Primary Breakdown — Blooms
Primary Breakdown — Bi 1 lets
Primary Breakdown — Slabs
Heavy Structure Is
Bar Mill
Wire Mil 1
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
Ancll lary Faci 1 ities
Vacuum Degassing
1976
Capacity
171.84
88.23
73.61
46.19
60.17
-
106.51
27.96
86.57
24.33
121.93
5.75
11.26
27.02
25.98
74.93
14.97
26.76
3.87
1.41
3.69
73.15
59.29
5,07
48.08
8.01
9.61
13.25
-
—
Capacity Additions
1976-1980
9.59
-
-
-
3.44
-
8.64
-
3.69
15.58
-
0.75
7.35
0.70
-
-
-
-
-
-
0.28
-
-
0.67
0.12
-
-
0.90
-
w
1981-1985
-
4.73
-
4.20
-
3.28
-
7.17
0.41
-
7.05
4.03
-
-
-
-
-
-
0.35
-
-
-
-
-
-
-
-
-
™
1986-1990
-
14.58
9.65
1.00
-
20.03
-
14.21
6.10
-
10.91
16.87
-
-
-
-
1.81
-
0.30
-
8.75
2.78
-
-
0.54
-
-
-
"*
Subtotal
9.59
-
19.31
9.65
8.64
-
31.95
-
25.07
22.09
-
18.71
28.25
0.70
-
-
-
1.81
-
0.65
0.28
8.75
2.78
0.67
0.12
0.54
-
0.90
-
~*
Source: TBS projections.
-------
Exhibit A-4
INTERMEDIATE SCENARIO
CAPITAL EXPENDITURES FOR PRODUCTION CAPACITY ADDITIONS
1976-1990
(millions of 1978 dollars)
Process
Ore Yard
Coal Yard
Scrap Yard
Sintering
Coke Oven
Direct Reduction
Blast Furnace
Open Hearth
Basic Oxygen Furnace
Electric Furnace
Ingot Casting
Continuous Casting— 8 i 1 lets
Continuous Casting— Slabs
Primary Breakdown—Blooms
Primary Breakdown— 8 i I lets
Primary Breakdown— Slabs
Heavy Structure Is
Bar Mill
Wire Mill
Cold Finished Bars
Seamless Pipe
Hot Strip Mill
Pickling
Welded Pipe
Cold Reduction
Galvanizing
Tin Plating
Plate Mill
Anci 1 lary Faci 1 ities
Vacuum Degassing
Total
1976-1980
$ 106.1
-
-
-
592.6
-
625.6
-
144.4
711.7
-
60.0
616.4
67.2
-
-
-
-
-
-
173.8
-
-
192.3
32.2
-
-
171.6
-
-
$3,493.9
1981-1985
-
$ 39.5
-
782.0
-
282.9
-
329.3
22.4
-
673.2
403.9
-
-
-
-
-
.
109.6
-
-
-
-
-
-
-
-
-
-
$2,642.8
1986-1990
_
$ 134.9
396.2
239.9
-
1,930.6
-
747.3
376.7
.
1,137.0
1,870.1
-
-
-
-
467.1
_
104.9
-
1,368.1
182.2
-
-
268.1
-
~
-
-
$9,223.1
Subtotal
$ 106.1
—
174.4
396.2
',614.5
-
2,839.1
-
1,221.0
1,110.8
_
1,870.2
2,890.4
67.2
-
-
-
467.1
_
214.5
173.8
1,368.1
182.2
192.3
32.2
268.1
-
171.6
-
-
$15,359.8
Source: TBS projections and AISI engineering cost estimates.
-------
Exhibit A-5
INTERMEDIATE SCENARIO
RETURN ON EQUITY
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1966
1987
1988
1989
1990
Return on
Equity
8.8
9.0
9.5
10.4
10.3
11.2
13.6
16.0
14.8
14.9
Source: TBS projections.
-------
Exhibit A-6
INTERMEDIATE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
DEBT TO CAPITALIZATION RATIOS
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1985
1986-1990
1981-1990
Basel Ine
36.3
35.9
35.9
35.4
36.8
37.0
36.0
35.0
35.0
32.9
36.1
35.2
35.6
BPT
Additions'
37.0 (0.7)
37.2 (1.3)
37.3 (1.4)
36.9 (1.5)
38.2 (1.4)
37.0 (0.0)
36.0 (0.0)
35.0 (0.0)
35.0 (0.0)
32.9 (0.0)
37.3 (1.2)
35.2 (0.0)
36.3 (0.7)
BAT
Additions'
37.0 (0.7)
38.3 (2.4)
38.9 (3.0)
38.7 (3.3)
40.0 (3.2)
37.0 (0.0)
36.0 (0.0)
35.0 (0.0)
35.0 (0.0)
32.9 (0.0)
38.6 (2.5)
35.2 (0.0)
36.9 (1.3)
1Numbers in parentheses are differences relative to the
base!ine.
Source: PTm(Steel).
-------
Exhibit A-7
INTERMEDIATE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
INTEREST COVERAGE RATIOS
1981-1990
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1985
1986-1990
1981-1990
Basel Ine
3.18
3.24
3.30
3.56
3.32
3.53
4.35
5.14
4.39
4.15
3.32
4.31
3.82
BPT
Additions1
2.98 (-0.20)
2.94 (-0.30)
2.96 (-0.34)
3.24 (-0.32)
3.03 (-0.29)
3.39 (-0.14)
4.30 (-0.05)
5.08 (-0.06)
4.34 (-0.05)
4.10 (-0.05)
3.03 (-0.29)
4.24 (-0.07)
3.64 (-0.18)
SAT
Additions1
2.96 (-0.22)
2.82 (-0.42)
2.70 (-0.60)
2.82 (-0.74)
2.68 (-0.64)
3.20 (-0.33)
4.21 (-0.14)
4.97 (-0.17)
4.25 (-0.14)
4.01 (-0.14)
2.80 (-0.52)
4.13 (-0.18)
3.46 (-0.36)
Numbers In parentheses are differences relative to the
base!Ine.
Source: PTm(Steel).
-------
Exhibit A-8
INTERMEDIATE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
CASH FLOW TO LONG-TERM DEBT RATIOS
1981-1990
(percent)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Averages
1981-1985
1986-1990
1981-1990
Basel tne
40.0
42.0
43.6
45.9
42.5
41.1
44.0
49.6
50.0
59.1
42.8
48.8
45.8
8PT
Additions'
38.4 (-1.6)
39.5 (-2.5)
40.9 (-2.7)
43.2 (-2.7)
40.1 (-2.4)
40.8 (-0.3)
44.2 (0.2)
49.7 (0.1)
50.1 (0.1)
59.0 (0.0)
40.4 (-2.4)
48.8 (0.0)
44.6 (-1.2)
BAT
Additions'
38.2 (-1.8)
37.6 (-4.4)
37.9 (-5.7)
39.7 (-6.2)
37.3 (-5.2)
40.3 (-0.8)
44.4 (0.4)
49.9 (0.3)
50.2 (0.2)
59.3 (0.2)
38.1 (-4.7)
48.8 (0.0)
43.5 (-2.3)
'Numbers in parentheses are differences relative to the
base Iine.
Source: PTm(Steel).
-------
Exhibit A-9
INTERMEDIATE SCENARIO
EFFECTS OF ADDITIONAL WATER POLLUTION CONTROL COSTS ON
NET EXTERNAL FINANCING
1981-1990
(millions of 1978 dollars)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Totals
1981-1985
1986-1990
1981-1990
Basel Ine
$ -167.01
253.50
378.34
278.24
784.89
1,655.13
2,036.85
1,638.56
895.30
-83.34
$1,527.96
6,142.50
7,670.46
8PT
Additions'
$ -167.01 (0.00)
463.97 (210.47)
395.02 (16.68)
276.08 (-2.16)
787.82 (2.93)
1,643.27 (-11.86)
2,015.83 (-21.02)
1,627.45 (-11.11)
877.24 (-18.06)
-83.34 (0.00)
$1,755.88 (227.92)
6,080.45 (-62.05)
7,836.33 (165.87)
BAT
Additions1
$ -167.01 (0.00)
784.94 (531.44)
585.52 (207.18)
353.90 (75.66)
792.92 (8.03)
1,646.68 (-8.45)
2,041.61 (4.76)
1,694.08 (55.52)
887.76 (-7.54)
-83.34 (0.00)
$2,350.27 (822.31)
6,186.79 (44.29)
8,537.06 (866.60)
Numbers In parentheses are differences relative to the
base!Ine.
Source: PTnKSteel).
-------
Exhibit A-10
INTERMEDIATE SCENARIO
ENERGY CONSUMPTION FOR BASELINE AND
ADDITIONS TO WATER POLLUTION CONTROL EQUIPMENT
1981-1990
(quadrillion BTU)
Iron and Steel Production
Coal
Other Fuel
Electricity
Total Consumption
Self-Generated Process Gas
Net Consumption
Air Pollution Control Equipment
In-Place Water Pollution Control Equipment
Total Basel I ne Net Consumption
Water Pollution Control Additions
BPT Additions
BAT and NSPS Additions
Total Water Pollution Control Additions
Total Net Energy Consumption
1981-1985
7.189
3.636
2.610
13.435
2.994
10.441
0.215
0.125
10.779
0.021
0.024
0.045
10.824
1986-1990
7.379
3.559
2.791
13.729
2.935
10.794
0.225
0.123
11.142
0.025
0.065
0.090
1 1 .232
1981-1990
14.568
7.195
5.401
27.164
5.929
21.235
0.440
0.246
21.921
0.046
0.089
0.135
22.056
Source: PTm(Steel) and Arthur 0. Little estimates.
-------
««eUOGRAPHIC DATA
SHEET
1. Report No.
3. Recipient's Accession No.
and subtle An Economic Analysis of Proposed Effluent
Limitations Guidelines, New Source Performance
Standards, and Pretreatment Standards for the Iron
and St^el Manufacturire: Point Source Cateeorv
5. Report Date
December,
6.
7. Auchor(s)
Roderick M.
Sherwood, III. Darrell A. Smith et al
8- Performing Organization Repc.
No.
9. Performing Organization Name and Address
Temple, Barker & Sloane, Inc.
33 Eayden Avenue
Lexington, Massachusetts 02173
10. Project/Task/Work Una No.
11. Contract/Grant No.
68-01-4340, 60-01-
4878. 68-01-61^."
12. Sponsoring Organization Name aod Address
Office of Planning and Evaluation
Environmental Protection Agency
Washington, B.C. 20460
13. Type of Report & Period
Covered
Final
14.
15. Supplementary Notes
le. Abstracts TBS performed an analysis of the economic and financial effects
of the proposed water effluent guidelines on the iron and steel industry.
Additional capital expenditure requirements for water pollution control
equipment will be $923.7 million in 1981-1984. An additional $97.6 mil-
lion will be required for NSPS additions in 1985-1990. These capital re-
quirements, together with the corresponding annual operating costs, will
probably cause the steel industry to significantly reduce reworks expend^
tiires for production capacity. This in turn will probably result in an
vpproximate 6.0 percent decline in industry production capacity, a 4.9
ercent decrease in domestic market share, and a potential decline in
teel industry employment of about 13,875 .jobs during the latter Dart of
\e 1980s and the beginning of the 1990s.
;y words sad Document Analysis. I/a. Descriptors
Economic Analysis
ffluent Guidelines
teel Industry
>licy-Testing model: PTm (Steel)
rs/Opea-Ended Terras
i/Group
•.eacat
19.. Security Class (This
Report )
UNCl 4
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