EPA
-'4W2-80-082
vvEPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-80-082
January 1981
Water
Economic Impact Analysis
of Proposed Effluent
Standards and Limitations
for the Porcelain
Enameling Industry
QUANTITY
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This report has been reviewed by the Office of Water Regulations and
Standards, EPA, and approved for publication. Approval does not signify that
the contents necessarily reflect the views and policies of the Environmental
Protection Agency, nor does mention of trade names or commercial products
constitute endorsement or recommendation for use.
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ECONOMIC IMPACT ANALYSIS OF PROPOSED
EFFLUENT STANDARDS AND LIMITATIONS FOR
THE PORCELAIN ENAMELING INDUSTRY
Prepared for
U.S. Environmental Protection Agency
Office of Water Regulations and Standards
Washington, D.C. 20460
January 1981
SSx.
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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. 20460, (202) 426-2617.
This document will subsequently be available through the National
Technical Information Service, Springfield, Virginia 22151.
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent standards and limitations issued under Section
301, 304, 306, and 307 of the Clean Water Act to the porcelain enameling
industry.
The study supplements the technical study (EPA Development Document)
supporting the issuance of these regulations. The Development Document
surveys existing and potential waste treatment control methods and technology
within particular industrial source categories and supports certain standards
and limitations based upon an analysis of the feasibility of these standards
in accordance with the requirements of the Clean Water Act. Presented in the
Development Document are the investment and operating costs associated with
various control and treatment technologies. The attached document supplements
this analysis by estimating the broader economic effects which might result
from the application of various control methods and technologies. This study
investigates the effect in terms of product price increases, effects upon
production and the continued viability of affected plants, effects upon
foreign trade, and other competitive effects.
The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA. This report was submitted in
accordance with Contract No. 68-01-3892 by JRB Associates, Inc. and reflects
work completed as of January 1981.
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule-
making. The study is not an official EPA publication. It will be considered
along with the information contained in the Development Document and any
comments received by EPA on either document before or during the final rule
making proceedings necessary to establish final regulations. Prior to final
promulgation of regulations, the accompanying study shall have standing in any
EPA proceedings or court proceedings only to the extent that it represents the
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views of the contractor who studied the subject industry. It cannot be cited,
referenced, or represented in any respect in any such proceeding as a
statement of EPA's views regarding the porcelain enameling industry.
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ACKNOWLEDGEMENTS
This study was conducted by JRB Associates, Inc., under the direction of
Mr. Dick Monteith and Mr. Chris Morgan. The. industry analyst and task leader
for the study was Mr. Steve Sinclair. Major contributions to the study were
made by Mr. Thong Nguyen, and Mr. Nick Papadopoulos. Dr. Shymal Chowdhury
made important contributions in the development of the theoretical framework.
Mr. Paul Gruber, a porcelain enamel industry specialist,.rendered invaluable
assistance in the development of industry profiles and background data.
Ms. Carolyn Saxon was instrumental in providing computer programming and
analysis for the study.
JRB Associates, Inc. especially acknowledges the guidance provided by the
U.S. Environmental Protection Agency (EPA), Office of Analysis and Evaluation.
Project Officers for this study were as follows: Ms. Debra Maness, Mr. John
Attaman, Mr. Paul Weech, Ms. Susan Rosse, Mr. John Kukulka, and Mr. Dave Fege.
Valuable contributions to this study were also made by the following members
of the Effluent Guidelines Division, EPA: Mr. Ernst Hall, Ms. Catherine
Lowry, and Mr. John Whitescarver. The costs of implementing the various water
pollution regulations analyzed in this study were provided by Bob Blaser and
staff, of Hamilton-Standard, Inc.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY
CHAPTER 1 INDUSTRY DESCRIPTION
1.1 OVERVIEW
1.1.1 Scope of Study
1.1.2 Technical and Economic Subcategorization
1.1.3 Industry History
1.2 FIRM AND PLANT CHARACTERISTICS
1.2.1 Types of Plants
1.2.2 Company Organization
1.2.3 Financial Profile
1.2.4 Industry Competition
1.3 PRODUCTS AND PRODUCTION TRENDS
1.3.1 Trends in Porcelain Enamel Product
Shipments
1.3.2 End Product Prices
1.3.3 Trends in Production Capacity
1.4 MARKET STRUCTURE
CHAPTER 2 BASE CASE ANALYSIS
2.1 ANTICIPATED TRENDS AND CHANGES
2.1.1 Projected Growth of Porcelain Enamel
Usage
2.1.2 Projected Use of Porcelain Enamel by
Product
2.1.3 Anticipated Growth Among Types of Plants
2.1.4 Capital Requirements for Growth
2.1.5 Entry and Exit of Plants
2.2 PROJECTED INDUSTRY CONDITIONS
CHAPTER 3 WATER POLLUTION CONTROL OPTIONS AND COSTS
3.1 OVERVIEW
3.2 POLLUTANT PARAMETERS
3.3 CONTROL AND TREATMENT TECHNOLOGY
3.3.1 Best Practicable Control Technology
Currently Available (BPT)
3.3.2 Best Available Technology Economically
Achievable .(BAT)
3.3.3 Pretreatment
3.3.4 New Source Performance Standards (NSPS)
and Pretreatment Standards New Sources (PSNS)
Page
ES-1
1-1
1-1
1-1
1-3
1-4
1-6
1-6
1-9
1-10
1-16
1-22
1-23
1-30
1-32
1-37
2-1
2-1
2-3
2-5
2-9
2-9
2-9
2-11
3-1
3-1
3-1
3-2
3-2
3-5
3-5
3-5
VII
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CHAPTER 4
TABLE OF CONTENTS (CONTINUED)
Pas
3.4
TOTAL COMPLIANCE COSTS
3.4.1 Overview
3.4.2 Compliance Costs by Industry Segment
3.4.3 Assumptions Made in Estimating Compliance
Costs
ECONOMIC IMPACT ANALYSIS
4.1
4.2
4.3
4.4
4.5
METHODOLOGICAL APPROACH
4.1.1 Calculation of Product Group Price
Increases
4.1.2 Calculation of Product Group Quantity
Decreases
4.1.3 Plant-By-Plant Profit Margin Changes
4.1.4 Estimates of Plant Assets and Profit
Margins
4.1.5 Plant Closure Determinations
BASE LINE PLANT CLOSURES
FINANCIAL ANALYSIS OF SELECTED PLANTS
4.3.1 Profitability Analysis
4.3.2 Analysis of Capital Investment Requirements
4.3.3 Impact Potential of Four Miscellaneous
Product Groups
REGULATORY IMPACT CONCLUSIONS
4.4.1 Plant Closure Conclusions
4.4.2 Substitution Effects
4.4.3 Community and Employment Impacts
4.4.4 Economic Indications of Discharge Status
4.4.5 Compliance Cost Sensitivity Analysis
4.4.6 Projection of Impacts to Total Industry
OTHER ECONOMIC IMPACTS
4.5.1 New Source Performance Standards
4.5.2 Foreign Trade Impacts
4.5.3 Possible Long-Term Implications
3-11
3-11
3-14
3-14
4-1
4-1
4-3
4-6
4-7
4-10
4-12
4-14
4-14
4-16
4-18
4-18
4-21
4-22
4-24
4-25
4-31
4-34
4-44
4-50
4-50
4-52
4-52
4.6 LIMITATIONS TO THE ACCURACY OF THE ANALYSES 4-53
viii
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LIST OF TABLES
Table Page
ES-1 Economic Impact Assessment Summary, Porcelain ES-4
Enameling
ES-2 Economic Impact Assessment Summary for Plants ES-6
Discharging Directly to Surface Waters, Porcelain
Enamel
ES-3 Economic Impact Assessment Summary for Plants ES-8
Discharging to Publicly Owned Treatment Systems
(POTW's), Porcelain Enamel
1-1 Major End-Use Products Containing Porcelain 1-4
Enamel by Technical Subcategory
1-2 Plants Identified from EPA Data Sample 1-7
1-3 Summary of Plant Profiles 1-8
1-4 Selected Operating Ratios Product Group 1-12
Averages
1-5 Corporate Financial Data, 1976 1-14
1-6 Selected Measures of Financial Status of 1-15
Major Product Group Manufacturers, 1976
1-7 Profit Margins of Companies by Product Group, 1-17
1976
1-8 Concentration Ratios, SIC Codes Which Contain 1-18
Major Porcelain Enameled Products, 1958-1972
1-9 Market Shares, Major Home Appliance Manufacturers, 1-19
1976
1-10 Correlation of Porcelain Enameled Product Shipments 1-29
with Housing Starts
1-11 Housing Starts, and Projections 1-31
1-12 Estimated Value of Shipments, Major Porcelain 1-33
Enameled Products, 1976
1-13 Product Prices, Enameling Costs and Square Footage 1-34
Per Unit Major Porcelain Enameled Products
1-14 Square Footage Porcelain Enameled by Major Market 1-35
1-15 Elasticity Estimates for Porcelain Enameled 1-38
Products
2-1 Substitution Away from Porcelain Enamel Usage 2-2
(1960-1978)
ix
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LIST OF TABLES (CONTINUED)
Table Page
2-2 Average Annual Shipments (1968-1978) and 2-4
Projected Annual Shipments (1979-1983) for
Major Porcelain Enamel Products
2-3 Prospects for Porcelain Enamel Usage 2-6
2-4 Pre-1950 Plants Still in Production, Plant 2-10
Closures and New Plants Since 1965, Porcelain
Enameling
3-1 Porcelain Enameling Pollutant Parameter Selection 3-3
3-2 Total Annual Compliance Costs for 80 Plants in 3-12
Sample
3-3 Capital Investment Requirements of Compliance by 3-13
Option
3-4 Incremental Annual Compliance Costs, Porcelain 3-15
Enameling
4-1 Anticipated Industry Price and Production 4-8
Changes
4-2 Likely Baseline Plant Closures 4-15
4-3 Profitability Analysis 4-17
4-4 Analysis of Capital Investment Requirements 4-19
4-5 Summary of "Likely" Plant Closures and Market 4-23
Shares by Product Group
4-6 Annual Compliance Costs and Porcelain Enameling 4-26
Costs Per Production Unit, by Compliance Option
4-7 Substitution Potential Analysis 4-27
4-8 Porcelain Enamel Employment Impact by Product 4-28
Group
4-9 Porcelain Enamel Employment Impacts by State 4-30
4-10 Direct (Surface) vs. Indirect (Municipal 4-32
Dischargers) BAT/Pre-2 Compliance Cost, Porcelain
Enamel Sample Plants
4-11 Number of Plant Closures by Discharge Status 4-33
4-12 Summary of "Likely" Plant Closures by Product 4-35
Group
4-13 Porcelain Enamel Employment Impact by Product 4-36
Group
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LIST OF TABLES (CONTINUED)
Table Page
4-14 Porcelain Enamel Employment Impacts by State, 4-45
Plus 30 and 60 Percent, Given Compliance Costs
4-15 Compliance Cost Projections, Porcelain Enamel 4-46
4-16 Projections of Porcelain Enamel Plant Closure 4-47
Conclusions
4-17 Projected Employment Impact for 116 Plants, 4-48
Porcelain Enamel Industry
4-18 Sensitivity Analysis of Plant Closures, 4-49
Projections for 116 Plants
4-19 Sensitivity Analysis of Employment Impact, 4-51
Projections for 116 Plants
xi
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LIST OF FIGURES
Figure
1-1 Typical Porcelain Enameling Process Sequence 1-2
1-2 Unit Shipments of Ranges 1-24
1-3 Unit Shipments of Hot Water Heaters and 1-25
Dishwashers
1-4 Unit Shipments of Metal Sanitary Ware 1-26
1-5 Unit Shipments of Washers and Dryers 1-27
1-6 Unit Shipments of Refrigerators and 1-28
Freezers
3-1 BPT Treatment System for the Steel, Aluminum, 3-4
and Copper Subcategories
3-2 BPT Treatment System for the Cast Iron 3-6
Subcategory
3-3 BAT1/PRE2 Treatment System 3-7
3-4 BAT2/PRE3 Treatment System 3-8
3-5 BDT1 Treatment System 3-9
3-6 BDT2 Treatment System 3-10
4-1 Economic Analysis Study Overview 4-2
4-2 Price and Market Share Adjustments 4-4
4-3 Market Reaction to Price Increase Due to 4-5
Regulations
4-4 Potential Plant Closures, Profitability and 4-37
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Ranges
4-5 Potential Plant Closures, Profitability and 4-38
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Hot Water Heaters
4-6 Potential Plant Closures, Profitability and 4-39
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Cookware
xii
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LIST OF FIGURES (CONTINUED)
Figure Page
4-7 Potential Plant Closures, Profitability and 4-40
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Architectural Panels
4-8 Potential Plant Closures, Profitability and 4-41
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Job Shops
4-9 Potential Plant Closures, Profitability and 4-42
Capital Investment Requirement Analysis,
Original Compliance Costs, Plus Thirty Percent,
Plus Sixty Percent, for Steel Sanitary Ware
xiii
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EXECUTIVE SUMMARY
PURPOSE
The purpose of this report is to identify and analyze the economic
impacts which are likely to result from the promulgation of BPT, BAT,-pre-
treatment and NSPS/PSNS effluent regulations on the porcelain enameling point
source category. These impacts are measured in terms of price increases,
plant closures, substitution effects, decreases in employment, shifts in the
foreign trade balance, and changes in industry competition.
INDUSTRY COVERAGE
Porcelain enameling is a metal finishing process that consists of the
application of a glass coating called frit to steel, cast iron, aluminum,
strip steel and copper. The purpose of the coating is to improve resistance
to chemical abrasion and corrosion, and to improve thermal stability, electri-
cal insulation and appearance. The major end uses for porcelain enameling
products are the major home appliances (which account for approximately
80 percent of porcelain enamel usage); sanitary ware (which accounts for
approximately 10 percent of total usage); as well as other more minor products
such as cookware, architectural panels, silos, and barbecues.
Of the 116 plants identified by EPA, sufficient data to conduct economic
impact analyses were received from 80 plants. This 80-plant sample covers at
least 50 percent of the plants in each industry segment including 14 of the
26 job shops. In addition, this sample contains a wide range of both small
and large plants in each industry segment. The analyses and impact assess-
ments contained in this report have as their basis this 80-plant sample.
The type of metal enameled was chosen by EPA as the basis for the tech-
nical subcategorization, since the pollutants generated in the surface prep-
aration of the metal vary by type of metal enameled. Thus the industry is
easily divided into groups of plants with similar pollution profiles. Though
this scheme may be appropriate from a technical viewpoint, it is expected that
ES-1
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the economic and financial impacts of the regulations will vary by the type of
product being enameled. This is because product market strength, pricing
latitude, and the ability of manufacturers to substitute alternative materials
for porcelain enameling vary by end-product. The plants were divided into
eight product groups for purposes of measuring the potential economic impacts
of compliance with effluent regulations.
APPROACH
The costs of complying with effluent regulations were estimated for
individual plants by EPA and economic impact analyses were conducted on each
of the 80 sample plants, and projected for the 116 known plants in the
industry.
The methodology used in these analyses was based on the assumption that
plants will try to maintain their pre-compliance level of profitability by
attempting to raise prices. Since there appears to be a significant level of
price competition in the various product groups, it is evident that the inter-
action of firms in each product group would determine one price increase that
will apply to all plants in that product group.
Utilizing the compliance cost estimates, the projected product price
increases, and relevant financial ratios, the 80 sample plants were subjected
to a series of financial ratio analyses. These ratio analyses attempted to
measure the potential profitability impacts and the general magnitude of the
capital investment requirements expected to result from compliance with
effluent regulations. The results of these analyses were integrated into
overall .plant closure conclusions. In order to isolate the potential plant
closure impacts related directly to the regulations, baseline plant closures
plant closures which were likely to occur without the enforcement of effluent
regulationswere also considered.
Sensitivity analysis was conducted on the estimates of profit margin and
the value of plant assets. This procedure was undertaken by using statistical
techniques of random number generation from within appropriate intervals and
ES-2
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by calculating probabilities. This approach simulates the variation of the
estimated variables among plants in each product group, rather than relying on
a single average product group estimate. At the direction of EPA, additional
sensitivity analysis was performed on the effect of increasing compliance
investment costs (and the corresponding annual costs) by 30 and 60 percent.
FINDINGS AND CONCLUSIONS
Plant Closures
Total annual (operating and maintenance plus amortized investment costs)
and investment costs for each compliance option for the 80 sample plants and
projected for the 116 known plants in the industry are:
80 SAMPLE PLANTS PROJECTED FOR 116 PLANTS
MILLION DOLLARS
Investment Annual Investment Annual
26.2 10.2
30.0 11.9
45.2 14.9
Table ES-1 highlights the results of the baseline and plant closure
analyses for the industry. Of the 80 sample plants, five are projected as
potential baseline closures. Potential plant closures resulting from
compliance cost burdens were found to be distributed as follows:
POTENTIAL PLANT CLOSURES
80 Sample Plants Projected For 116 Plants
BPT/Prel 7 10
BATl/Pre2 8 11
BAT2/Pre3 18 26
BPT/Prel
BATl/Pre2
BAT2/Pre3
18.3
21.1
27.3
7.2
8.4
10.5
ES-3
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For the BAT2/Pre3 option, the job shops (with 6 potential plant
closures), the architectural panels (with 4), sanitary ware (with 3 potential
plant closures) and cookware (with 3 potential line closures) and the range
(with 2 potential plant closures) product groups were the most heavily
impacted.
Price Increases and Substitution Potential
The projected price increases per product group resulting from compliance
costs were found to range from .1 percent to 2.8 percent for BPT/Prel, to
.2 percent to 3.3 percent for BATl/Pre2, and .2 percent to 5.0 percent for
BAT2/Pre3. These price increases indicate that the possibility exists for
substitution away from porcelain enamel usage in the architectural panel,
.dishwasher, and refrigerator segments.
Impacts by Discharge Status
Direct Dischargers. Of the 80 sample plants, only 13 discharge directly
to surface waters. The compliance costs for these 13 plants plus the
projected costs for the 28 plants known to discharge to surface waters are
summarized below and presented by product group in Table ES-2.
13 SAMPLE PLANTS PROJECTED FOR 28 PLANTS
MILLION DOLLARS
Investment Annual Investment Annual
BPT 2.4 .9 5.1 2.0
BAT1 2.8 1.1 6.0 2.3
BAT2 4.5 1.4 10.7 3.6
The average annual compliance cost to revenue ratios calculated for the
13 direct dischargers and the 67 indirect dischargers are not significantly
different, therefore the direct dischargers could possibly derive a small, but
probably insignificant competitive advantage from the regulations since they
do not have the burden of municipal discharge fees.
ES-5
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In terms of plant closure conclusions for the 13 direct discharge plants
contained in the 80 plant data sample, there are two potential plant closures
for the BPT and BAT1 treatment level options and three closures at BAT level 2
option. For the 28 direct discharger plants, there are projected to be three
plant closures at the BPT and BAT1 options, and six plant closures at BAT2.
Indirect Dischargers. Sixty-seven of the 80 sample plants discharge
their effluent to POTWs and will be subject to EPA pretreatment regulations.
The compliance costs for the 67 plants in the sample and the 88 plants known
to discharge to POTWs are summarized below and presented by product group in
Table ES-3:
67 SAMPLE PLANTS PROJECTED FOR 88 PLANTS
Prel
Pre2
Pre3
16.0
18.3
27.9
6.3
7.3
9.1
MILLION DOLLARS
Investment Annual Investment Annual
21.1 8.2
24.0 9.6
34.5 11.3
As mentioned for the direct discharger plants, since the compliance cost
to revenue ratios for the direct and indirect dischargers are virtually
identical, the indirect discharger plants could possibly be more adversely
affected by the regulations than the direct dischargers. However, since the
magnitude of municipal sewage fees are unknown, the magnitude of a differen-
tial impact of compliance burden by discharge status is uncertain.
Employment Impact
In terms of employment impact, Table ES-1 shows that the potential
closures for the 80 sample plants resulting from pollution regulations will
affect 489 employees at BPT/Prel treatment level, 530 at BATl/Pre2 and
2,112 employees at BAT2/Pre3 level. For the BAT2/Pre3 option, Tennessee with
546 employees and Ohio with 497 total employment losses were the most heavily
impacted states.
ES-7
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The impact of compliance costs, may also result in a possible substitu-
tion away from porcelain enamel (where possible) to alternative materials or
finishes, affecting approximately 405 additional jobs.
New Source Performance Standards
The impact of NSPS/PSNS regulations appears to be insignificant, since no
added porcelain enamel production capacity by new facilities is expected to be
needed through 1985. Also, if new plants are built, it is quite likely that,
because of substantial production cost savings, they would utilize the dry
powder coating technique which is also specified by the proposed NSPS
standards.
Compliance Cost Sensitivity Analysis
No provisions for site specific costs were made in the costing procedure;
therefore, EPA has requested that a cost sensitivity analysis be performed on
the compliance costs. This analysis entails estimating the plant closure
effect of increasing each plant's investment cost and associated annual costs
by 30 and 60 percent. The results of this analysis, in comparison to the
given compliance cost plant closure impacts for the 80 sample plants and
projected for the 116 known plants are shown below:
Number of Potential Closures at
The Given
Compliance Cost
BPT/Prel
BATl/Pre2
BAT2/Pre3
80 Sample
Plants
7
8
18
Projected
for 116
Plants
10
11
26
130 Percent of
Compliance Cost
80 Sample
Plants
10
12
29
Projected
for 116
Plants
15
19
43
160 Percent of
Compliance Cost
80 Sample
Plants
13
16
31
Projected
for 116
Plants
20
23
46
ES-9
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In terms of an employment impact for the total industry in the sensi-
tivity analysis, plant closure projections at the two highest cost treatment
options affect approximately 3,295 employees at BATl/Pre2 and approximately
8,105 employees at BAT2/Pre3.
ES-10
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CHAPTER 1
INDUSTRY DESCRIPTION
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1. INDUSTRY DESCRIPTION
1.1 OVERVIEW
Porcelain enameling is a metal finishing process performed by appliance,
plumbing fixture, miscellaneous product manufacturers, and job shops. It
consists of the application of a glass coating called frit to steel, cast
iron, aluminum, strip steel, or copper. The purpose of the coating is to
improve resistance to chemical abrasion and corrosion, and to improve thermal
stability, electrical insulation, and appearance. The liquid enamel applied
to the metal workpiece is called a "slip" and is composed of one of many com-
binations of* frits, clays, coloring oxides, water, and special additives such
as suspending agents. This vitreous inorganic coating is applied to the metal
by a variety of methods such as spraying, dipping, electrostatic deposition,
and flow coating, and is bonded to the base metal at temperatures in excess of
500 degrees centigrade (about 1,000 degrees Fahrenheit). At these tempera-
tures, the finely ground enamel frit particles fuse and flow together to form
the permanently bonded hard porcelain coating.
1.1.1 Scope of Study
Regardless of the base metal being enameled, the porcelain enameling
process involves the preparation of the enamel slip (ball milling) , the sur-
face preparation of the base metal, application of the enamel, and the drying
and firing to permanently fuse the coating to the metal. There are a few
porcelain enameling facilities that also manufacture their own frit. The
focus of this study is on the ball milling, metal preparation, and process
application stages of porcelain enameling. Figure 1-1 depicts the porcelain
enamel manufacturing process.
The slip is a suspension of ceramic material in either water or oil. Ball
milling is the process for grinding enamels utilizing vitreous china balls in
a rotating cylindrical mill.
1-1
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1.1.2 Technical and Economic Subcategorization
The base metal in the porcelain enameling process was chosen by EPA as
the basis for the technical subcategorization of the porcelain enameling
industry. These subcategories are:
Porcelain enamel on steel
Porcelain enamel on iron
Porcelain enamel on aluminum
Porcelain enamel on copper
Porcelain enamel on strip steel.
Since the pollutants generated in the surface preparation of the metal vary by
type of metal enameled, this subcategorization scheme was chosen to subdivide
the industry into groups of plants with similar pollution profiles. While
this scheme may be appropriate from a technical viewpoint, it is expected that
the economic and financial impacts of the regulations will vary with the type
of product enameled. This is because product market strength, pricing lati-
tude, and the ability of manufacturers to substitute alternative materials for
porcelain enameling vary by end product. Therefore, subdividing these five
subcategories into end product groups is required to develop a basis for
assessing economic impacts.
The major end products which contain porcelain enamel are listed in
Table 1-1 on the following page for each technical subcategory.
1-3
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TABLE 1-1. MAJOR END-USE PRODUCTS CONTAINING PORCELAIN ENAMEL
BY TECHNICAL SUBCATEGORY
End-Use Products Technical Subcategory
Ranges SteeL
Home laundry
Hot water heaters
Bathtubs, sinks
Dishwashers
Architectural panels
Cookware
Refrigerators
Bathtubs Cast Iron
Range parts
Architectural panels Aluminum
Cookware
Architectural panels Strip Steel
Chalkboards
Jewelry, art pieces, and metal dials Copper
1.1.3 Industry History
The basic porcelain enameling process has been in existence for thousands
of years. The first use of the process was for coating jewelry and other
decorative and ornamental items. However, commercial enameling did not begin
until about 1830 in Czechoslovakia, when the Bartelmes family began porcelain
enameling cast iron for cooking utensils. In 1859, this same family started
to enamel sheet iron. From these activities grew the great enamel industry of
Central Europe.
Porcelain enameling began in the United States around 1867 when two
cooking utensil plants began to enamel. Shortly afterward, one of the first
plants to enamel cast iron tubs, the Kohler Company, began operation in
Kohler, Wisconsin. Next came the first'porcelain enameled stove (1890),
followed by refrigerators, washtubs, and many other products. The first
washing machine enameling plant was built by the A.B.C. Washer Company
in 1927.
1-4
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Probably one of the greatest early technical advances in enameling was
the discovery of the use of clay to keep the powdered enamel frit suspended in
water, making it adhere better to the metal before firing. The suspended
enamel and clay in water was called slip, and was painted or poured on the
metal, dried, and then fired in a furnace. At a much later date, the spray
gun was developed, greatly facilitating the uniform application of frit,
especially on large pieces.
The use of enamel slips became known as the wet process, and the powder-
ing-on as the dry process. Both are in use at the present timethe dry
process being used primarily for cast iron, while the wet process is used both
for cast iron and steel enameling.
By 1930, porcelain enamel was used for signs, table tops, restaurant
equipment, automobile manifolds, and wall tile. Following the depression, the
manufacture of porcelain enamel refrigerators, stoves, and washing machines,
as well as other household items, expanded many times. New products such as
automatic hot water heaters and architectural panels added to the growth.
In 1941, when war was declared, porcelain enameling production all but
stopped as the industry put its efforts into war production. After World
War II, application techniques changed greatly. Before the war and a short
time afterwards, porcelain enamel thicknesses were up to 40 mm. Today, with
improved application and coating technologies, the thickness of coatings has
been reduced to 8 mm. Despite the elimination of porcelain enamel use from
many products following World War II (i.e., table tops, restaurant and service
station equipment, automobile manifolds, hospital bed pans, etc.), overall
porcelain enamel use increased as the demand for housing grew, resulting in
increased demand for sanitary wares and home appliances. The demand for
porcelain enamel products and finishes remained at a peak until the early
1960's, when substitute finishes began to supplant many uses of the more
costly enamel surfaces.
1-5
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1.2 FIRM AND PLANT CHARACTERISTICS
There are an estimated 130 to 140 plants in the United States that per-
form porcelain enameling operations. EPA has identified 116 plants and was
able to collect annual production rate data on 101 of these plants. In 1976,
the annual production rates of these plants ranged from 25,000 square feet
(of exposed surface area enameled) for a small job shop to 62,190,000 square
feet (of exposed surface area) for an integrated appliance manufacturer. All
total, these 101 plants enameled 802,212,000 square feet of exposed metal
2
surface area in 1976.
Of these 116 plants, EPA was able to estimate the costs of complying with
effluent regulations for 97 plants. Both compliance cost and production rate
data were available for 83 plants. However, for three of these plants, there
was insufficient product and price data available to include them in the
economic impact analysis sample. Therefore, the remaining 80 plants form the
nucleus of the economic analyses presented in this report. Chapter 4 contains
the results of the plant-by-plant economic analyses performed in this report.
Table 1-2 lists the 80 sample plants and the 36 (116 minus 80) missing
plants by product group.
1.2.1 Types of Plants
Table 1-3 presents a summary of the plant profile characteristics by
product group for the 80 plants. In the analysis of discharger status, it was
found that approximately 84 percent of the plants are indirect dischargers.
Also, most of the plants (about 50 percent) are middle sized, with an employ-
ment of between 50 to 500 workers; and, while many plants were built before
1950, most plants have had recent modifications.
2
Even though both sides of the metal workpiece are enameled when the dip
process is used, only the exposed surface is important for end-product use.
This number is generally equal to one side of the metal that is enameled.
1-6
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TABLE 1-2. PLANTS IDENTIFIED FROM EPA DATA SAMPLE
Industry Segment
Ranges
Job Shops
Cookware
Home Laundry
Hot Water Heaters
Sanitary Ware
Architectural Panels
Dishwashers
Cast Iron
Refrigerators
Strip Steel
Barbecues
a/
Other Products-
Total
No. of Plants
Included in
Economic Impact
Analysis Sample
18
14
7
7
7
8
4
2
2
2
1
0
80
No. of Plants
Identified by EPA
but Having
Insufficient Data
for Economic Analysis
9
12
3
1
1
2
Total
Number of
Identified
Plants
27
26
1
8
8
36
4
2
2
2
1
8
116
a./ Includes heat exchangers, pipes, iron parts, copper enameling, etc., as
well as plants for which products were not known.
1-7
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The more critical plants in terms of impact potential could be older plants
that have not had recent modifications. There were found to be eight plants
that were built before 1950 which were not modified or modernized since 1965.
The distribution of these eight plants by product group is as follows:
Plants Below Average
Built Production/Employee
Before 1950 For Each Product Group
Job shops 2 1
Cookware 2 2
Architectural panels,
signs and reflectors 1 0
Ranges 1 1
Cast Iron 2 1
Five of these eight plants have a rate of production per employee which is
below the production group's mean, tending to increase the likelihood of the
impact potential of compliance costs. However, plant age, together with the
absence of a recent modification, were not found (in Chapter 4) to be statis-
tically significant factors for high impact.
1.2.2 Company Organization
Porcelain enameling plants can be subcategorized into two basic types
captive operations which are located within an integrated manufacturing facility
and independent job shops. Job shops are defined as plants that perform porce-
lain enamel operations on a contract basis and are not part of an integrated
appliance, sanitary ware, or other product manufacturing facility. Of the 130-
140 porcelain enamel plants, in the United States, approximately 25 to 30 are
porcelain enamel job shops. Job shops represent about 20 percent of the plants
but only about 5-8 percent of the production in the porcelain enamel industry.
A job shop may perform other operations such as metal stamping, welding, or
spray paint finishing. However, almost all job shops have at least limited
fabrication capabilities and many of them make direct purchases of metal from
1-9
-------
metal producers. Most do not market proprietary items, nor havt. a research
department to develop products. Practically all of the job shops are family
or privately owned and closely held. This factor hinders financial and
market data collection for this group.
The range of items which are enameled by job shops includes appliance
parts, sanitary ware, free-standing fireplaces, lanterns, hog feeders, shower
stalls, heat exchangers, architectural items, gauges, dials, pumps, cast iron
gates, and signs, as well as other miscellaneous items.
The vast majority of porcelain enamel plants are owned by large appli-
ance, plumbing fixture, and other miscellaneous product manufacturers. In
general, this group comprises about 92-95 percent of the industry production
and about 80 percent of the plants. The Porcelain Enamel Institute estimates
that the appliance market accounts for between 70-80 percent of all porcelain
enamel use, sanitary ware manufacturers comprise about 10 percent, and the
remaining 10-20 percent is distributed among other manufacturers. Generally,
the enameling facilities are situated in the same building as, or in close
proximity to, the assembly operations. Virtually none of the captive oper-
ation porcelain enameling facilities do jobs for outside customers.
1.2.3 Financial Profile
The indicators of the financial status of the plants and firms covered in
this study include:
Various financial ratios prepared from data contained in the Commerce
Department's Annual Survey of Manufacturers, 1976 for sanitary ware
(3431), cookware,architectural panels,and job shops (3469), ranges
(3631), home laundry equipment (3633), hot water heaters, and dish-
washers (3639)
Financial performance data from corporate reports of firms producing
porcelain enameled products
Average corporate profit margins calculated for each major product
group.
1-10
-------
Selected operating ratios from the Annual Survey of Manufacturers, 1976,
are presented in Table 1-4. Each ratio is described below.
Total assets to total employment represents the ratio of capital to labor
and measures the average capital intensity of the plants. SIC code 3469, the
cookware/architectural panels/job shop group, has the lowest ratio ($13,036 per
employee) while the home laundry group (SIC code 3633) has the highest ratio
($23,700 per employee).
Total assets to value of shipments provides a measure of the level of invest-
ment required to generate each dollar of revenue. A fairly large spread is shown
for this ratio. The lowest is .196 for SIC code 3639 (hot water heaters and dish-
washers), compared to .314 for SIC code 3431 (the sanitary ware group).
The ratio of cost of materials and labor to value of shipments measures
the relative cost structure of the plants, and varies only slightly from a
high of .798 for the cookware/architectural panels/job shop group to a low of
.721 for the laundry product group.
Last, the ratio of new capital expenditures to the value of shipments
provides an indication of the plants ability to attract capital to their oper-
ations. The industry groups vary on this measure from a low of .013 for hot
water heaters and dishwashers to a high of .033 for sanitary ware.
An examination of these ratios shows that the home laundry group is the
most capital intensive and has the lowest cost structure as a percent of value
of shipments while the cookware/architectural panels/job shop groups are the
least capital intensive and have the highest cost structure. However, the
absence of more definitive trends makes it difficult to draw further conclu-
sions about the financial status of these plants, and the use of average
ratios makes it difficult to draw conclusions about the degree of variation
among the plants within each product group. Furthermore, the applicability of
the five SIC-based ratios (which in many cases represent a heterogeneous mix
of products) to the eight homogeneous product groups used in this study limits
the usefulness of these ratios to estimate impacts on the product lines of
1-11
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TABLE 1-4. SELECTED OPERATING RATIOS -- PRODUCT GROUP AVERAGES
Product
Groups
by
SIC
Codes
SIC 3431
Sanitary Ware
SIC 3469
Cookware
Architectural Panels
Job Shops
SIC 3631
Ranges
SIC 3633
Home Laundry
SIC 3639
Hot Water Heaters
Dishwashers
Measures of
Capital
Intensity
Total
Assets
to
Total
Employment
$17,590
13,036
14,701
23,740
13,510
Total
Assets
to
Value of
Shipments
.314
.307
.232
.269
.196
Measure of
Costs per Dollar
of Shipments
Cost of
Materials
and Labor to
Value of
Shipments
.778
.798
.773
.721
.781
Measures of
New Capital
Investment
Rate
New
Capital
Expenditures
to Value of
Shipments
.0329
.0292
.0244
.0288
.0130
Source: Commerce Department, Annual Survey of Manufactures, 1976
1-12
-------
interest. Especially for groups such as SIC codes 3469 (Household Appliances,
not elsewhere classified) and 3639 (Metal Stamping, not elsewhere classified)
that contain a diverse mix of firms, extrapolation to product group variables
from the SIC industry average ratios could be misleading.
In view of these reservations, corporate data were collected to strengthen
the assessment of financial status. Twenty corporations which produce and
market porcelain enameled products have publicly available financial data.
Table 1-5 lists these firms by product group and shows the return on equity,
debt-equity, and profit margin ratios for the 20 firms.
This table also shows that these 20 firms control a major market share in
each product group. Therefore, even though the selected ratios for these
large corporations may not reflect the profitability of products that contain
porcelain enameling or of the smaller, privately-owned firms missing from the
sample, it appears that these firms provide a reasonable coverage of the
various product groups.
The return on equity and debt/equity ratios shown for each firm in
Table 1-5 were compared to similar ratios calculated by the Federal Trade
Commission (FTC) to reflect the average for all manufacturing firms. The
number of firms in each product group which had a return on equity or
debt/equity ratio worse than the FTC All Manufacturing Average was identified.
Table 1-6 displays a summary of this analysis.
Firms representing significant market shares in the ranges, cookware, and
hot water heater product groups were found to have return on equity ratios
worse than the All Manufacturing Average. The other product groups had either
no firms or firms with very small market shares falling within this category.
On the other hand, in all of the groups except dishwashers and hot water
heaters, the leading firms (on a market share basis) had debt/equity ratios
above those of the overall industry averages. In some instances, the
debt/equity ratios of the appliance manufacturers were almost twice as high as
the overall manufacturing averages.
1-13
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TABLE 1-5. CORPORATE FINANCIAL DATA, 1976
Firms By
Product Group
Return On ,
Equity
Debt to ,
Equity -
Profit ,
Margin -
Market Share ,
Represented
GAS RANGES
Magic Chef
Tappan
Roper
White Consolidated
ELECTRIC RANGES
.0936
.0870
.2780
.2787
.1211
.5562
.8079
.5913
.0311
.0199
.0608
.0771
60%
76%
General Electric
White Consolidated
Magic Chef
Roper
Tappan
Whirlpool
REFRIGERATORS
General Electric
Whirlpool
White Consolidated
FREEZERS
White Consolidated
Whirlpool
General Electric
WASHERS
Whirlpool
General Electric
Maytag
White Consolidated
GAS DRYERS
Whirlpool
General Electric
Maytag
White Consolidated
ELECTRIC DRYERS
Whirlpool
General Electric
Maytag
White Consolidated
DISHWASHERS
General Electric
Hobart
Maytag
Whirlpool
White Consolidated
Tappan
HOT WATER HEATERS
A.O. Smith
City Investing
SANITARY WARE
American Standard
Crane Company
Morris Industries
COOKWARE
Mirro Aluminum
Revere Copper
Sun Beam
Wear Ever Aluminum
General Housewares Corp.
.3098
.2787
.0936
.2780
.0870
.3395
.3098
.3395
.2787
.2787
.3395
.3098
.3395
.3098
.4825
.2787
.3395
.3098
.4825
.2787
.3395
.3098
.4825
.2787
.3098
.2604
.i825
.3395
.2787
.0870
.1780
.0866
.3037
.2679
.4295
.1117
.0174
.2177
.1295
.5261
.2517
.5913
.1211
.8079
.5562
.1852
.2517
.1852
.5913
.5913
.1852
.2517
.1852
.2517
.0000
.5913
.1852
.2517
.0000
.5913
.1852
.2517
.0000
.5913
.2517
.3852
.0000
.1852
.5913
.5562
.3320
.8837
.4704
.8771
.1414
.3495
.1339
.3941
.6856
1.6501
.1036
.0771
.0311
.0608
.0199
.1023
.1036
.1023
.0771
.0771
.1023
.1036
.1023
.1036
.2202
.0771
.1023
.1036
.2202
.0771
.1023
.1036
.2202
.0771
.1036
.0993
.2202
.1023
.0771
.0199
.0502
.0531
.0835
.0705
.1467
.0439
.0048
.0666
.0748
.0566
68%
59%
87%
86%
88%
45%
52%
40%
MA
a/ Profits before taxes and extraordinary items -: stockholders equity.
]j/ Notes, Bonds, and mortgages with over a 12 month amortization * stockeholders equity.
c/ Profits before taxes and extraordinary items ; net sales.
d/ Corporate aarket shares based upon estimates in Appliance Manufacturer, January 1977.
Source: Moodv's Industrial Manual
1-14
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Table 1-7 compares the profit margins and market shares of corporations
in each product group. An average value is calculated for each group,
weighted on the basis of market shares of each firm.
Even though these ratios are based on total corporate performance, which
does not necessarily reflect the condition for the specific product lines, the
predominant position of the sample firms in each product groups seems to
indicate that the profit margins calculated in Table 1-7 are somewhat representa-
tive of the six product groups shown.
1.2.4 Industry Competition
Competition among firms which produce products with porcelain enamel
finishes appears to be rather intense, even though the eight firm concentra-
tion ratios increased between 1958 and 1972 for most home appliance product
groups, as shown in Table 1-8. Manufacturers appear to be quite competitive
in attempts to maintain and improve their brand names' market share as well as
maintaining or improving their private-label production. Competition for
private-label business (which for some manufacturers accounts for the greatest
proportion of production) demands a continuous emphasis on high quality at a
reasonable price. Although many private-label contracts have been controlled
by the same firms for many years (e.g., Roper ranges, and Whirlpool refrig-
erators, freezers, washer and dryers for Sears), the firms are constantly
having to maintain high standards in order to keep that business.
Market Share Competition
Market shares, by company, for the major porcelain enameled products are
listed in Table 1-9. For the major appliance products, General Electric,
White, and Whirlpool maintain sizeable market shares for virtually all prod-
ucts. These companies, which produce a "full-line" of major appliance prod-
ucts, can offer retailers and construction development companies the oppor-
tunity to buy all appliances from a single company. One major retailer,
Montgomery Ward, has recently expressed an interest in switching the purchase
1-16
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TABLE 1-8. CONCENTRATION RATIOS, SIC CODES WHICH CONTAIN
MAJOR PORCELAIN ENAMELED PRODUCTS,
1958, 1963, 1967, 1972
3631- Household cooking equipment
3632- Household refrigerators and freezers
3633- Household laundry equipment
3639- Household appliances, n.e.c.
36391 Household water heaters, electric
36392
Household water heaters, except
electric ,
36394
34310
Dishwashing machines and food waste
disposers
Metal plumbing fixtures
1972
1967
1963
1958
1972
1967
1963
1958
1972
1967
1963
1958
1954
1972
1967
1963
1958
1972
1967
1963
1958
1954
1972
1967
1963
1958
1954
1972
1972
1967
1963
1958
1954
4 Largest
Companies
46
46
45
42
75
69
73
65
76
74
71
67
58
45
39
37
32
62
48
40
37
39
67
54
51
42
40
71
45
43
46
53
52
8 Largest
Companies
65
64
62
56
96
89
89
85
95
92
90
87
81
63
55
51
46
88
69
61
52
55
90
81
69
56
57
91
62
59
63
70
75
Source: "Concentration Ratios in Manufacturing",
U.S. Census of Manufacturers, 1972
1-18
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TABLE 1-9. MARKET SHARES, MAJOR HOME APPLIANCE MANUFACTURERS, 1976
Product
Company
Market Share
(percent)
Gas Ranges
Elec tr ic Rang e s.
Refrigerators
Freezers
Washers
Gas Dryers
Electric Dryers
Magic Chef
Tappan
Roper
Hardwick*
Caloric
Brown*
Sunray*
White
General Electric
White
Magic Chef
Roper
Tappan
Frigidaire*
Whirlpool
General Electric
Whirlpool
White
Frigidaire*
White
Whirlpool
Revco*
Admiral*
General Electric
Whirlpool
General Electric
Maytag
White
Fedders
Whirlpool
General Electric
Maytag
White
Fedders
Whirlpool
General Electric
Maytag
White
Fedders
19
16
13
10
9
4
4
3
33
12
10
10
9
6
3
28
22
18
10
27
26
13
10
6
40
18
13
9
7
39
18
13
10
6
40
20
11
11
6
1-19
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TABLE 1-9. MARKET SHARES, MAJOR HOME APPLIANCE MANUFACTURERS, 1976 (cont'd)
Product Company
Dishwashers
Hot Water Heaters
Steel Sanitary Ware
Market Share
(percent)
Design & Manufacturing* 55
General Electric 20
Hobart 18
Maytag 6
Whirlpool 5
White 3
Tappan 3
Rheem (City Mfg. Co.) 27
A. 0. Smith 25
State Industries* 17
Bradford-White Corporation* 15
Mor-Flo* 11
W. L. Jackson* 3
General Processing* 2
Briggs* 30
Norris 21
American Standard 10
Alliance Ware (Crane) 9
Verson* 6
Active Products* 5
Perless Pottery* 5
Lawndale* 4
Kilgore Ceramics 4
Cotton* 4
* Denotes firms not contained in JRB corporate sample
Source: Appliance Manufacturer, January 1977, and
Paul S. Gruber, Porcelain Enamel Consultant
1-20
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3
of its private labeled appliances to a single full-line appliance maker. The
prospect of increasing market shares for "full-line" firms has precipitated
another company, Magic Chef, through its purchases of Admiral (refrigerators/
freezers) and Fedders (washers/dryers) to move into the "full-line" market.
Magic Chef's acquisition of these two product lines, which will result in
higher concentration ratios in the appliance industry, could actually stim-
ulate competition within the industry, since there will be a new "full-line"
competitor in the new home builders market.
The leading market shares for each major appliance product are now con-
trolled by a "full-line" firm with one exceptionDesign and Manufacturing
(D&M), a private-label dishwasher manufacturing firm, maintains a 55 percent
market share. D&M's market strength is bolstered by its long standing rela-
tionship with Sears Roebuck & Company.
In other product groups, competition appears to be even more intense as
manufacturers of sanitary ware and other porcelain enamel products are not
only competing among themselves for business, but are also competing with
substitute products (i.e., fiberglass tubs, stainless steel sinks, cultured
marble sinks, stainless steel cookware, painted panels, plastic signs, etc.).
These porcelain enamel products have to remain price competitive with these
alternative products or risk further erosion of their share of these markets.
Industry Capacity and Competition
Although the production capacity for porcelain enameling has fallen
approximately 40 percent over the last 15-20 years, industry sources indicate
that there is still considerable excess porcelain enameling capacity available
4
within the industry. In order for a firm to maximize plant operating effi-
ciency, it is necessary to maintain high operating levels. With the excess
American Metal Market, May 7, 1979.
4
Paul S. Gruber, JRB Porcelain Enamel Consultant.
1-21
-------
capacity present, it appears likely that there would be strong competitive
pressures to set pricing strategies in a way that will keep operating levels
high. These pressures may force firms to absorb large portions of increased
costs in order to maintain stable prices and market shares.
In addition to price competition there is significant consumer brand name
loyalty within the appliance and, to a lesser extent, the sanitary ware
groups. In order to maintain a product's reputation among consumers, it is
necessary for a company to constantly strive for product quality and dura-
bility. Inferior product performance can easily damage a firm's well-
established reputation.
Import Competition
Except for cookware, where there is a considerable import problem, there
is virtually no competition from foreign producers. The lack of foreign
competition stems from the technological advantages of United States manufac-
turers of major home appliances. Additionally, the generally bulky nature of
most products which have porcelain enameled finishes (i.e., home appliances
and sanitary ware) results in their having prohibitively high transportation
costs and, thus, minimal import competition or export trade for these
products. The imports of porcelain enameled cookware have, however, been
steadily increasing. Imports, principally from developing countries, now
exceed United States production for porcelain enameled cookware.
1.3 PRODUCTS AND PRODUCTION TRENDS
Since, as stated in Section 1.1, porcelain enameling is a process which
is used as a finish in various products, the assessment of economic impacts
resulting from EPA regulations must involve an examination of the end products
which contain porcelain enameling and a review of the competitive conditions
present in the markets in which these products are used. This section will
examine the prices, growth rates, and trends in production capacity.
Paul EdsonMetal Cookware Manufacturers Association.
1-22
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1.3.1 Trends in Porcelain Enamel Product Shipments
In addition to trends in porcelain enamel usage, the growth of end prod-
uct shipments plays a major role in the overall usage of porcelain enamel and
in the assessment of the economic condition of the porcelain enamelers.
Figures 1-2 through 1-6 illustrate a 12-year period (1967-1978) in unit ship-
ments of major porcelain enameled products. This 12-year period is believed
to portray the most recent complete business cycle in that it includes both
the boom years of 1972 and 1973, and one very bad year (1975).
Even though accurate growth rates are difficult to calculate for a highly
cyclical industry (because the selection of the base year and ending year can
alter the results significantly), attempts were made to calculate compound
annual growth rates over the 12-year period so that relative comparisons could
be made among products., Products such as ranges, refrigerators, washers, and
dryers which are older and more highly market saturated, have shown minimal
growth in this period (2 percent or less). For products which have not yet
reached complete market saturation, such as dishwashers and freezers, unit
shipments grew at the fastest rate (6.8 and 5.1 percent respectively). Hot
water heater shipments also grew at a moderate rate (3.8 percent) due in part
to the large replacement market for this product. Bathtubs and kitchen sinks
showed a slow +2.5 percent compounded annual growth rate in unit shipments in
the 11-year, 1967-1977 period. Metal tubs are all porcelain enameled; how-
ever, kitchen sinks can be either porcelain enameled or stainless steel.
Therefore after accounting for the competition from stainless steel in kitchen
sinks and plastics in bathtubs, lavatories, and bathroom sinks, porcelain
enameled unit shipments fell at the compound annual rate of 2.6 percent in the
11-year period. (Unit shipment data on plastic tubs have only been compiled
for the last 5 years.)
The demand for most porcelain enameled products is closely related to new
home construction. Table 1-10 shows the correlation coefficients calculated
Paul S. Gruber, JRB Porcelain Enamel Consultant.
1-23
-------
Millions of
Units
3-
1-
Ranges
Housing
Starts
1 1 1 1 1 1 1 " 1 1 t
67 68 69 70 71 72 73 74 75 76 77 78
FIGURE 1-2. UNIT SHIPMENTS OF RANGES
Source: American Home Appliance Manufacturers and National Association
of Home Builders
1-24
-------
Millions of
Units
Water
Heater
Dishwashers
Housing
Starts
67 68 69 70 71 72 73 74 75 76 77 78
FIGURE 1-3. UNIT SHIPMENTS OF HOT WATER HEATERS AND DISHWASHERS
Source: American Gas Association, American Home Appliance Manufacturers,
and National Association of Home Builders
1-25
-------
Millions of
Units
12 -,
10 -
8 -
6 -
4 -
P.E. bathtubs
Housing Starts
67 68 69 70 71 72 73 74 75 76 77 78
Total
Lavatories
Tubs, & Sinks
(Excluding
plastic tubs)
P.E. lava-
tories amd
sinks
FIGURE 1-4. UNIT SHIPMENTS OF METAL SANITARY WARE
Source: Appliance Industry Shipments, U.S. Department of Commerce;
National Association of Home Builders
1-26
-------
Millions of
67 68 69 70 71 72 73 74 75 76 77 78
Washers
Dryers
Housing
Starts
1-
FIGURE 1-5. UNIT SHIPMENTS OF WASHERS AND DRYERS
Source: American Home Appliance Manufacturers, and National Association
of Home Builders
1-27
-------
Millions of
Units
7-,
6-
4-
3-
2-
Refrigerators
Housing
Starts
Freezers
67 68 69 70 71 72 73 74 75 76 77 78
FIGURE 1-6. UTTIT SHIPMENTS OF REFRIGERATORS AND FREEZERS
Source: American Home Appliance Manufacturers: and National Association
of Home Builders
1-28
-------
TABLE 1-10. CORRELATION OF PORCELAIN ENAMELED PRODUCT
SHIPMENTS WITH HOUSING STARTS
Correlation Coefficient
With With
1-Year No
Product Lag Lag
Ranges .7695 .8264
Washers .8557 .7138
Dryers .8709 .7098
Dishwashers .6413 .4908
Refrigerators .9094 .7342
Freezers .4432 -.2513
Refrigerators-Freezers .8739 .3031
Water Heaters .2457 .5650
Kitchen Sinks .7661 .7401
Bathtubs .6731 .8820
1-29
-------
and housing starts. The regressions were calculated with and without a 1-year
lag. Consideration of a lag was made because it appears that the demand for
some products may follow behind the actual housing starts. Since only annual
data on product shipments and housing starts were available, quarterly lags
(which would probably produce higher correlation) could not be calculated.
Except for freezers and hot water heaters, fairly high correlation coef-
ficients were recorded for the major porcelain enameled products. The demand
for freezers is highly influenced by the price of meats, as evidenced by the
strong countercyclical sales of freezers in 1974-1975 when high meat prices
motivated many consumers to purchase freezers. Hot water heaters apparently
have the largest replacement market of any home appliance. This factor ap-
pears to lower its correlation coefficient. Likewise, since dishwashers are
the newest porcelain enameled product and their shipments over the last 15
years represent considerable new market penetration, its correlation with
housing starts is weaker. In spite of these inconsistencies, it appears that
the future trend of housing starts will indicate the general direction of unit
shipments for all of the appliance and sanitary products.
The National Association of Home Builders projects a decrease of about
20 percent in housing starts between 1978 and 1980. While this decrease may
have some significant production and financial impacts on porcelain enamelers,
the overall impact should not be nearly as great as the sharp drop experienced
in 1975. Table 1-11 shows the 1968-1978 trend and 1979-1983 projections for
housing starts. Perhaps more important than the projected decrease in housing
starts in 1979-80 is the growth in housing starts projected for the 1981-1983
period, when porcelain enamelers will be required to comply with effluent
standards. Further discussion on this topic is contained in Chapter 2Base
Case Analysis.
1.3.2 End Product Prices
Using estimates of manufacturers' wholesale prices and average square
footage of enameling per unit, the value of shipments for each product group
1-30
-------
TABLE 1-11
HOUSING STARTS
Year Million
1968 1.5
1969 1.46
1970 1.43
1971 2.05
1972 2.35
1973 2.05
1974 1.34
1975 1.16
1976 1.54
1977 1.99
1978 2.02
PROJECTIONS
1979 1.62
1980 1.69
1981 1.8
1982 1.9
1983 2.1
Source: National Association of Home Builders
1-31
-------
is estimated and presented in Table 1-12. Manufacturers' prices are based upon
standard models (assuming a 100 percent retail markup) that were found in the
1979 Sears Catalogue, while the average square footage per square unit figures
are based on estimates prepared by Paul S. Gruber, JRB consultant, and Arnold
Consdorf, editor of Appliance Manufacturer. Value of shipments (plant revenues)
were then estimated by the following means:
Total porcelain enamel square footage/square footage per Unit =
Number of Units Produced
Number of Units Produced x Manufacturers Unit Price = Plant: Revenue
These calculated values of shipments per product group range from $68.6 million
for steel sanitary ware to $864 million for ranges. Table 1-12 also shows the
value of shipments recorded for.feach product group by the Commerce Department.
In each case, the JRB estimated value of shipments is less than the corresponding
Commerce Department figures. This is as expected, since the EPA data sample
missed some plants in each product group.
As illustrated in Table 1-13, the porcelain enameling costs as a per-
centage of manufacturers' product price are highest for bathtubs, cookware,
and architectural panels. Of the home appliances, washers and ranges had the
highest percentage, while refrigerators, hot water heaters, and dishwashers
had the lowest.
1.3.3 Trends in Production Capacity
The largest market for porcelain enamel materials is major home appli-
ances, which accounts for approximately 70 percent of square footage enameled
(see Table 1-14). Sanitary ware and cookware were the second and third
largest porcelain enamel markets, accounting for 10.5 and 7.4 percent, re-
spectively. Over the last 15-20 years, the square footage of enameling per
product unit has declined for most products, but the growth in unit shipments
has partially offset the loss in porcelain enameling production. Since 1960
(the peak year for porcelain enameling production), it is estimated that
porcelain enamel production capacity has decreased 40 percent. Examining
changes in the porcelain enameling production capacity for each product pro-
vides an insight into the net effect of these two counterbalancing trends.
Paul S. Gruber, JRB Porcelain Enamel Consultant
1-32
------- An error occurred while trying to OCR this image.
-------
TABLE 1-13. PRODUCT PRICES, ENAMELING COSTS AND SQUARE FOOTAGE
PER UNIT MAJOR PORCELAIN ENAMELED PRODUCTS
Product
Ranges
Washers
Dryers
Refrigerators
Hot Water Heaters
Steel Bathtubs, Sinks & Lavatories
Dishwashers
Architectural Panels, Signs
and Reflectors
Cast Iron Bathtubs
Aluminum Cookware
Aluminum Architectural Panels
Strip Steel Architectural Panels/
Chalkboards
Representative
Manufacturers
Product Price
$190.00
140.00
130.00
250.00
65.00
42.50
170.00
3.50
(sq. ft.)
100.00
5.00
3.50
(sq. ft.)
2.50
(sq. ft.)
Estimated
Enamel
Cost/Unit
$16.73
12.62
8.20
2.39
2.27
18.50
6.42
.5185
(sq. ft.)
17.30
.89
.93
(sq. ft.)
.170
(sq. ft.)
Porcelain
Enamel
Cost As A
Percentage
of Price
8.8
9.0
6.3
1.0
3.5
43.6
3.8
14.8
17.3
17.8
26.6
6.8
Source: JRB Associates
1-34
-------
TABLE 1-14. SQUARE FOOTAGE PORCELAIN ENAMELED BY
MAJOR MARKET a/
Million , ,
Square Feet Percent
Home Appliance 453.1 68.3
Sanitary Ware 69.7 10.5
(Steel and Iron)
Architectural Panels, Signs, and 9.9 1.5
Reflectors
Cookware 48.9 7.4
Other 81.7 12.3
(Includes Job shops and~
other misc. products)
Total 663.3 100.0
a/ Based upon 80 plants which had production and compliance cost data.
b/ Square footage of exposed surface area (one side of metal).
1-35
-------
The following maior porcelain enamel markets have experienced adjustments
in porcelain enamel production capability since 1960.
Appliances
refrigeratorsonce the largest user of porcelain enamel12 net plant
closures and a net loss in porcelain enamel production capacity of
90 percent
t rangespresently porcelain enamel's largest user20 net plant
closures and a net loss in porcelain enamel production capacity of
50 percent
washers and dryers4 net plant closures and a 10 percent loss in
porcelain enamel production capacity
dishwashersa big growth market that has not yet been completely
saturatedone new plant added and a 50 percent increase in production
capacity
hot water heaters13 net plant closures but a 25 percent increase in
production capacity.
Sanitary Ware
cast irononce the leader in sanitary ware; now shipments of cast
iron bathtubs are only about half as large as the shipments of pressed
steel tubsthree plant closures and a 50 percent loss in production
capacity
steelfive net plant closures but no net change in production
capacity.
Cookware
These products have suffered large losses to alternative finishes and
imports from developing countries. There has been a net increase of
four plants; however, steel cookware has suffered a 50 percent loss in
capacity. For aluminum, it is uncertain whether the change in capa-
city has been due to the shift of domestic production to U.S.-owned
plants in developing countries. A tariff suit has recently been file.d
to seek relief from imports which now account for about 50 percent of
domestic sales .
1-36
-------
Architectural Panels
a net loss of 11 plants
a 50 percent loss in production capacity for steel panels
a 25 percent loss in production capacity for aluminum, (which has
always been a smaller proportion of the architectural panel business).
Job Shops
a net loss of seven plants, and a loss in production capacity of
40 percent.
In summary, the porcelain enamel industry has experienced a net loss of approx-
imately 65 facilities over the last 15-20 years.
1.4 MARKET STRUCTURE
The demand for porcelain enameled products is dependent on two factors:
The market strength of the various end products which contain
porcelain enamel (i.e., ranges, bathtubs, dishwashers, etc.)
The availability of substitute materials for porcelain enameled
finishes (i.e., plastic in bathtubs, painted steel on appliances,
etc .).
In other words, substitutes for porcelain enameled products may be in the form
of competing products (i.e., use of a coin laundry vs. a washer and dryer,
hand washing vs. a dishwasher, brick and block vs. architectural panels, etc.)
or products with alternative surfaces (i.e., a porcelain enameled refrigerator
vs. a painted steel and plastic lined refrigerator with no porcelain enamel).
Generally, the competition from alternative finishes appears to affect the
demand for porcelain enameled products more than from end product competition.
Table 1-15 assimilates these factors and shows the elasticity coefficient
which has been estimated for each major porcelain enameled product.
1-37
-------
TABLE 1-15. ELASTICITY ESTIMATES FOR PORCELAIN ENAMELED PRODUCTS
Product
Ranges
Home Laundry
Dishwashers
Refrigerators
Hot Water Heaters
Sanitary Ware
Cookware
Architectural Panels, Signs
and Reflectors
Barbecues
Job Shop Services
Substitut- Estimated
Substitut- ability Elasticity
ability of the of the
of the Porcelain Porcelain
End Enameled Enameled
Product Finish Products
Low
Low-
Moderate
Moderate
Low
Low
Low
Low
High
Moderate
Moderate
Low
Moderate-
High
Moderate-
High
High
Low
High
High
High
Moderate
Moderate-
High
-.3
-.7
-.8
-.9
_ 2
-.9
-.9
-1.2
-.7
-.8
Source: JRB Associates, Inc.
1-38
-------
The responsiveness of demand factors to price changes is reflected in the
measure of elasticity. An elasticity coefficient of between -1.0 and 0 refers
to a generally inelastic (less responsive) market reaction to price increases,
while a coefficient less than negative one (-1) will portray an elastic (more
responsive) market reaction. These market reactions will take the form of
reductions in the quantity demanded in such a way that a price increase for a
product with an inelastic coefficient will yield an increase in revenue (price
x quantity) while a similar price increase for a product with an elastic
coefficient will result in a decrease in revenue. Therefore, manufacturers of
products with higher elasticity coefficients (<-1.0) may have difficulty
raising prices to pass through increased costs (i.e., effluent compliance
costs), and must consequently absorb a larger portion of the cost increase out
of profits than would the manufacturers of products with lower elasticity
coefficients. A discussion of the elasticity assessment for each major prod-
uct follows.
Ranges
The market strength of ranges is strong because there are few other
methods for home cooking. Microwave ovens, open fireplaces, wood stoves, and
barbecue grills are not viable substitutes. In addition, porcelain enamel
usage on ranges appears to be well established. Virtually all ranges contain
porcelain enameled oven interiors and over 90 percent have porcelain enameled
tops. Approximately 10 percent of oven tops are made of glass or stainless
steel. However, increased use of these alternatives appears limited since
glass range tops (which at one time were a popular new product) suffer from
energy efficiency problems and stainless steel is currently a more expensive
Q
alternative than porcelain enamel. Therefore, porcelain enamel substitut-
ability appears to be low. With both low end product and porcelain enamel
substitutability, a low elasticity coefficient of -.3 is assigned to porcelain
enameled ranges.
Q
"How To Identify Appliances Finishes." American Iron and Steel Institute.
1-39
-------
Home Laundry
As compared with ranges, home laundry products (washers and dryers) have
less market strength. Many persons use commercial, coin laundries, and/or
outdoor clotheslines instead of buying their own machines. Also, in some
apartment buildings, one laundry room is shared by several apartments while a
range and refrigerator are provided for each unit.
Virtually all washer tops are currently being porcelain enameled with a
small proportion of units containing plastic or painted tops and, while stain-
less steel and plastic can be substituted in washer drums, porcelain enamel is
9
currently being used for 80-90 percent of washer drums. Dryer tops and drums
are more susceptible to substitution of porcelain enameling because of the
lack of the requirement for acid and alkali protection necessary for washers
(no detergent or bleach spills are likely on dryers), and the lack of a
moisture problem for the drums. Therefore, since potentially viable sub-
stitutes exist for many of these porcelain enamel applications, a moderately
high elasticity coefficient of -.7 is assigned to the porcelain enamel usage
in this product group.
Dishwashers
The percent of the dishwasher interiors that are porcelain enameled has
decreased from close to 100 percent to about 80 percent. This slippage has
been due to the use of vinyl chloride interiors in some units. Currently, one
major manufacturer produces a line of dishwashers with no porcelain enamel.
In addition, it appears that the market strength of dishwashers is among the
weakest of all major appliance products. While shipments of dishwashers have
grown the fastest of all appliance products over the last 10 years, dish-
washers are still considered as somewhat of a luxury by many American families
and more families do without dishwashers than any other major appliance
9
Arnold Consdorf, Editor, Appliance Manufacturing.
1-40
-------
product (besides freezers). With this moderately high degree of end-product
substitutability (dishwashers vs. hand washing) and a moderately high availa-
bility of porcelain enamel alternatives, porcelain enameled dishwashers are
.assigned an elasticity coefficient of -.8.
Refrigerators/Freezers
The substitutability of porcelain enamel on refrigerators is among the
highest of all porcelain enameled products. In fact, only one manufacturer
is currently using any porcelain enamel on refrigerators; plastic is used
throughout the interior and either painted or coil coated steel is used on the
exteriors.
However, the end-product market strength of refrigerators is strong since
there are virtually no substitutes for storing refrigerated foods. In spite
of this high end-product market strength, the high availability of alternative
finishes leads to the assignment of an elasticity coefficient of -.9 for
porcelain enameled refrigerators.
Hot Water Heaters
A low elasticity coefficient of -.3 is assigned to porcelain enameled hot
water heaters, since there is a combination of high end-product market
strength and low substitutability for porcelain enamel. There is virtually no
practical substitute for hot water heaters and with over 90 percent of the
heater liners porcelain enameled (glass lined), alternative finishes, i.e.,
stainless steel, copper, and concrete covered steel, do not appear to be cost
effective substitutes.
Sanitary Ware
Sanitary ware is similar to refrigerators in that there are no practical
substitutes for sinks and bathtubs, but the market share of porcelain enameled
sanitary ware is being eroded by plastic and stainless steel substitutes.
1-41
-------
In the past 10-15 years, substitutes for porcelain enameled sanitary ware have
become more prevalent. For example, fiberglass one-piece tubs have made
significant inroads into the market. In 1977, these "one-piece" tubs had over
26 percent of the market. During this same time period, the market share of
cast iron tubs dropped from 45 to 28 percent (and from 55 to 46 percent for
steel tubs). Stainless steel has made a significant impact on kitchen sinks,
and, in 1977, stainless steel had a 67 percent market share. Cultured marble
has also become a strong new product in bathroon sinks.
This combination of low end-product substitutability and high porcelain
enamel substitutability results in the assignment of an elasticity coefficient
of -.9.
Cookware
Cookware also appears to fall into the same situation as refrigerators
and sanitary ware, in that few substitutes exist for cookware, but many sub-
stitutes exist for porcelain enamel cookware finishes. Also, a large quantity
of imported porcelain enamel cookware offers a significant amount of competi-
tion. Therefore, a relatively high elasticity coefficient of -.9 is assigned
to United States-made porcelain enameled cookware.
Architectural Panels, Signs, and Reflectors
In this broad category, both substitute products and alternative finishes
are widely available and highly utilized. In fact, porcelain enameled panels
have evolved in the last 10-15 years into a limited, more specialized product.
For example, brick, block, and aluminum and vinyl siding are most often used
in place of architectural panels, and lighted plastic signs are more fre-
quently used than painted signs. Therefore, because of the high degree of
substitutability and the weak demand, a high elasticity coefficient of -1.2 is
assigned to this porcelain enameled product group.
U.S. Department of Commerce
1-42
-------
Barbecues
First, even though a large number of American families own a barbecue
grill of some kind, they are generally considered to be non-necessity items.
Therefore, the market strength of these products is considered to be only
moderate. In addition, only a small percentage of barbecue grills are
currently procelain enameled, indicating a high degree of substitutability
between porcelain enamel and other finishes. However, the porcelain enameled
barbecues are considered prestige products and currently receive a premium
price. Therefore, the high elasticity coefficient which might have been
assigned based solely upon substitutability is revised downward to a
moderate -.7.
Job Shop Services
It is difficult to develop a single, average elasticity coefficient for
job shop services, since job shops enamel so many different products. How-
ever, some insight can be gained by examining the following three main reasons
that lead various manufacturers to contract for enameling services:
The volume of enameling is too small to make it economically feasible
for the end-product manufacturer to create an in-house enameling
capability.
In-house enameling capability is insufficient to meet peak demand
fluctuations.
The products' future is too uncertain to justify the investment
required for the product manufacturer to establish an in-house
enameling capability.
Porcelain enameling in these cases appears to serve necessary functional
purposes, since the product manufacterers would probably not botfher with
contracting for the enameling services unless it was necessary. This factor
tends to indicate a high level of market strength for job shops. On the other
hand, the dependability of these markets appears to be quite weak. For
example, the growth in product demand may reach a point whereby the porcelain
enameling could be more economically performed by the end-use product
1-43
-------
manufacturer creating his own in-house enameling capability, and the risk of
the product being displaced or phased out is very significant with small
volume products. These factors therefore tend to indicate a basic weakness in
the demand for job shop services. After considering these two
counterbalancing factors, a moderate-high elasticity coefficient of -.8 was
assigned to job shop services.
Finally, one additional factor which must be considered in assessing the
market strength of porcelain enameled products is the condition of the economy
and the rate of growth in new housing starts . Less highly-saturated markets
(i.e., dishwashers and freezers) are less dependent upon housing starts for
sales; general economic conditions will strongly affect consumer purchases of
these products. Therefore, if the economy were in the "boom" phase of the
business cycle (i.e., 1972-1973), the market strengh of porcelain enameled
products will be greater and the potential for economic impact from effluent
regulations would be less than during a recessionary period like 1975.
1-44
-------
CHAPTER 2
BASE CASE ANALYSIS
-------
2. BASE CASE ANALYSIS
The outlook for porcelain enameling use over the next 5 to 10 years is
uncertain. Trends of the last 10 to 20 years clearly point to a movement away
from the usage of porcelain enamel. Table 2-1 shows where the use of porcelain
enamel finishes has either been decreased or discontinued. During this same
time period, 90 porcelain enameling plants have been closed, representing a
net decrease of 65 plants.
2.1 ANTICIPATED TRENDS AND CHANGES
The future prospects for porcelain enameling depend on whether the sub-
stitutions shown in Table 2-1 represent substantially all of the technically
possible and economically viable substitutes. In some cases, i.e., oven
interiors and hot water heater liners, no viable substitutes are currently
being used. In other cases, porcelain enamel is being used because it offers
certain quality or cost advantages over available alternative materials. For
example, Sears (the largest U.S. appliance retailer) requires porcelain
enameling on many surface areas where substitute materials can be used. The
Sears catalogue and appliance advertisements emphasize the quality of the
porcelain enameling on their appliances. Nevertheless, it appears to be the
practice of appliance manufacturers today to use porcelain enameling only on
the surface areas where it has a clear functional or cost advantage. In
addition, new developments in plastics, fiberglass, paints, and coil coating
are all continually challenging porcelain enamel usage. Therefore, the key
question regarding the future of porcelain enamel use is whether all practical
substitutions have already been made. Even though a definitive and/or
quantitative answer is difficult to derive, and while trends appear to vary
among products, all available information seems to point toward a continued,
though decelerated, decline in the usage of porcelain enamel finishes.
2-1
-------
TABLE 2-1. SUBSTITUTION AWAY FROM PORCELAIN ENAMEL USAGE
(1960-1978)
Product Group
Sanitary Ware
Refrigerators
Washers
Dryers
Ranges
Surface Area Where
Porcelain Enamel
use has been
Discontinued or
Heavily Substituted
Bathtubs
Sinks
Exterior surface
Interior liners
Door interiors
Crisper trays
Exterior front and
side panels
Exterior fronts,
tops and sides
Exterior side
panels
Substituted
Product or
Finish Being Used
Fiberglass, cultured marble
Stainless steel, cultured
marble
Painted steel, coil coated
Plastic, painted steel
Plastic, painted steel
Plastic
Painted steel
Painted steel
Painted steel
DISCONTINUED OR DYING PORCELAIN ENAMEL PRODUCTS
Signs
Table tops
Steel and Aluminum Architectural Panels
Meter Dials
2-2
-------
2.1.1 Projected Growth of Porcelain Enamel Usage
The growth of porcelain enamel usage appears to depend on three factors:
The development of new products which have porcelain enameled finishes
or include porcelain enameled parts and components
The increased use of porcelain enameling on current products
The growth in demand for current products with porcelain enameled
finishes.
New Products
Increased agricultural applications and solar heating panels appear to be
the only new developing markets for porcelain enameling in the near future.
However, it does not appear likely that these areas will become high volume
markets and, at best, will only partially offset losses from substitution in
the appliance and sanitary ware markets.
Increased Porcelain Enamel Use in Existing Products
Recent trends have reduced porcelain enamel use in many product cate-
gories. No product with a trend toward increasing porcelain usage has been
found. The best case situation for the porcelain enameling industry appears
to be one in which no further decrease in usage occurs.
Growth in Demand for Porcelain Enameled Products
Using the 1979-1983 housing start projections and the corresponding
regression equations developed in Section 1.3, annual 1979-1983 shipments were
projected for each major porcelain enameled product. These projections and
the average annual shipments for the 1968-1978 time period are shown in
Table 2-2. Projected shipments are compared to the average shipments for
1968-1978 to determine which of the next 5 years are likely to be above aver-
age and which are likely to be below average for each major product. The
1968-1978 average can be considered as an appropriate measure for this
2-3
-------
TABLE 2-2. AVERAGE ANNUAL SHIPMENTS (1968-1978) and PROJECTED
ANNUAL SHIPMENTS (1979-1983) FOR MAJOR
PORCELAIN ENAMEL PRODUCTS
($ THOUSAND)
Average Projected Shipments
Shipments ,
i r\ f o i r\ T o *
Product 1968-1978- 1979 1980 1981 1982 1983
Ranges 4,906.8 (4,774) 4,870 5,020 5,156 (4,428)
Washers 4,714.9 5,058 (4,668) 4,736 4,843 4,941
Dryers 3,349.6 3,787 3,382 3,453 3,564 3,666
Dishwashers 2,877.1 3,285 2,905 2,972 3,076 3,171
Water Heaters 5,164.7 5,368 (5,008) (5,071) 5,170 5,260
Kitchen Sinks 4,222.3-' 4,825 4,282 4,377 4,526 4,662
Bathtubs 2,635.9-/ (2,579) 2,638 2,732 2,817 2,987
Refrigerators/ 7,357.1 8,226 (7,312) 7,472 7,723 7,952
Freezers
a/ American Home Appliance Manufacturers; American Gas Association; and
Appliance Shipments, U.S. Department of Commerce
W Data average for 1968-1977
Note: ( ) - Indicates shipments projected to be less than the average for
years 1968-1978.
2-4
-------
analysis since it appears to cover a complete business cycle in the housing
industry, including both the peak years of 1973 and 1978 and the down year of
1975. This analysis indicates that 1982 and 1983 will be above average years
for all products while several products will likely experience down years
during 1979-1981.
2.1.2 Projected Use of Porcelain Enamel by Product
Since the total use of porcelain enamel in each product group depends
both on availability, acceptance, and cost of substitute materials, the
product-by-product discussion in this section will focus on these three
aspects. Table 2-3 contains a summary of porcelain enamel usage for all
major porcelain enameled products. This table indicates that porcelain
enamel usage in architectural panels, chalkboards, and sanitary ware are
likely to decrease significantly over the next 5 years. Usage on ranges
and in hot water heaters is not expected to change significantly, while
use on washers/dryers and dishwashers could decrease, depending on cost
and marketing factors.
Ranges
Ranges currently account for more porcelain enamel usage than any other
individual product. For oven interiors, there are no alternative materials
being used, and over 90 percent of all range tops use porcelain enamel.
However, with the increased quantity of insulation currently being used in
ranges, fronts and side panels can now be painted steel. Much of this sub-
stitution has already been made and further decreases in porcelain enamel
usage on ranges appear unlikely.
Washers/Dryers
Potential substitutes exist for all current uses of porcelain enameling
on washers and dryers. Decisions on the utilization of substitute materials
involve product quality and consumer preference as well as cost considera-
tions. While, as shown in Table 2-3, stainless steel, galvanized steel,
2-5
-------
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plastic, and painted steel could be substituted, porcelain enameled steel
currently appears to have an advantage over these materials. Exposure to
water, detergents, bleaches, and various cleaners requires corrosive resistant
properties for washer and dryer drums and washer tops. This need is currently
being served by porcelain enameled steel. Some consideration is being given
to using plastic, stainless steel, or galvanized steel drums in washers and
galvanized or stainless steel drums in dryers.
Dishwashers
The interior of the door and the tub of dishwashers is generally por-
celain enameled. Potential substitutes exist for each of these uses. Plastic
tubs and interior door liners are presently being used by one dishwasher
manufacturer. In fact, this manufacturer is currently marketing one of its
dishwasher lines which has no porcelain enameling. Therefore, further substi-
tution is likely if cost pressures and market acceptance factors shift away
from porcelain enameling.
Hot Water Heaters
Virtually all hot water heaters made in the United States have porcelain
enameled tanks. Since the porcelain enameling performed on an interior part
does not require a quality appearance finish and since it is a single-coat
application, the cost per square foot of porcelain enameling on these liners
is the lowest of all major products. The total porcelain enameling cost is
reported to average between $2.25 and $2.50 per hot water heater. By
comparison, the cost of using copper or concrete over steel liners would be
greater. Therefore, cost factors appear to point toward a continued use of
porcelain enamel on hot water heaters.
Sanitary Ware
Plastic/fiberglass molded bathtubs, and stainless steel and cultured
marble sinks have been gaining market share increases at the expense of
2-7
-------
porcelain enameled products in the sanitary ware market. The molded plastic/
fiberglass tubs require lower installation costs to the home builder since no
ceramic tile setting is required. While quality differences between the
molded bathtubs and porcelain enameled bathtubs are unclear, there is some
consumer appeal to the one-piece bathtub in that there are no grout cracks
where mildew can grow. The trend toward stainless steel and cultured marble
sinks seems to be a reflection of changing consumer tastes. Therefore, given
the increased consumer acceptance of plastic products and the cost advantages
of molded bathtubs, it appears likely that substitution away from porcelain
enameling will continue in the sanitary ware market.
Architectural Panels/Signs/Reflectors
Porcelain enameled architectural panels have been steadily declining in
use. Coil coated (painted) aluminum and steel, as well as plastics, glass,
and prefabricated concrete panels offer substantial competition to porcelain
enameling in this market. All evidence seems to indicate that current trends
will not change and the use of porcelain enamel panels will continue to de-
crease. Porcelain enameled signs and reflectors have also experienced signif-
icant decreases in market shares. Painted metals and plastics have been the
principal beneficiaries of the decline of porcelain enameled signs and reflec-
tors. Due principally to the substantial cost economies of the substitute
"surfaces little prospect exists for a reversal in the declining trend for
these porcelain enameled products.
Cookware and Small Appliances
This product group can be divided into two sections steel and aluminum
cookware and small appliances. The demand for steel cookware has substan-
tially diminished over the last 30 years, and porcelain enameled steel cook-
ware has become a rather specialized commodity. On the other hand, porcelain
enameled aluminum cookware and small appliances have experienced a growth in
demand over this same time period. Even though the production volumes of both
of these sectors combined is very small compared to the volumes contained in
2-8
-------
the appliance and sanitary ware markets, the combined trend of these two
sectors probably reflects a slight positive movement. However, available
substitutes exist for porcelain enameled cookware and small appliances, and
relatively small shifts in cost factors or consumer preferences could lead to
a substantial reduction of porcelain enamel usage over the next 5 years.
2.1.3 Anticipated Growth Among Types of Plants
The demand for virtually all porcelain enameled products is cyclical and
has shown no consistent growth pattern over the last 10 years. For example,
the peak demand of 1973-1974 is higher than the projected demand for any year
between 1979-1983, and the drop in demand in 1975 was lower than the lowest
year's demand between 1968-1970 for every product except freezers. In addi-
tion, the assessment of porcelain enamel usage trends concludes that, at best,
there will be a stabilzation in the historical decline of porcelain enamel
usage. Therefore, no significant growth is expected in any product or market
sector during the next 5 years.
2.1.4 Capital Requirements for Growth
Since no significant growth is expected, there appears to be no need for
major capacity expansion over the next 5 years, and thus, no large-scale
capital requirements (besides equipment replacement) should be needed. In
fact, it appears that the historical decrease in production capacity described
in Section 1.3 may continue.
2.1.5 Entry and Exit of Plants
Since 1965, there have been 25 new plants built while about 90 plants
have closed for a net reduction of 65 plants. As shown in Table 2-4, the
largest number of plant closures has been in the manufacture of rangeswith a
total of 24. The remaining distribution of closures is as follows: hot water
heaters15, refrigerators and freezers15, architectural panels, signs, and
reflectors11, and job shops8. All major product groups except dishwashers
2-9
------- An error occurred while trying to OCR this image.
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and cookware have shown a net reduction in the number of plants after consid-
eration of both new plants and plant closures.
2.2 PROJECTED INDUSTRY CONDITIONS
The projections of industry shipments shown in Table 2-4 are highly
contingent on the general health of the United States economy. During the
1975 recession, the financial health of the porcelain enamelers dropped
significantly and several firms.sustained operating losses.
The prospects of energy shortages and/or escalating energy costs cause
considerable difficulty in forecasting the future performance of the general
economy. Thus certain contingencies must be attached to the projections
presented in Section 2.1. If the 1980 recession approaches the same magnitude
as the 1975 recession, or if the anticipated 1981-1985 recovery is delayed or
mitigated, the financial health of firms in this point source category could
be significantly weakened. In that case, there would likely be an increased
number of both baseline and regulatory impact plant closures.
A description of the methodology used in developing baseline plant closure
conclusions and the results of these findings are contained in Sections 4.1 and
4.2 and Table 4-2.
2-11
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CHAPTER 3
WATER POLLUTION CONTROL OPTIONS AND COSTS
-------
3. WATER POLLUTION CONTROL OPTIONS AND COSTS
3.1 OVERVIEW
The recommended water treatment control systems, costs, and effluent
limitations for the Porcelain Enameling Point Source Category were enumerated
in the Development Document for effluent limitation guidelines and standards
of performance. The Development Document identified various characteristics
of the industry, including manufacturing processes; products manufactured;
volume of output; raw waste characteristics; supply, volume, and discharge
destination of water used in the production processes; sources of waste and
wastewaters; and the constituents of wastewaters. Using this data, pollutant
parameters requiring limitations or standards of performance were selected by
EPA. The primary criteria for this selection were that both the nature of the
pollutant parameters and the volume of discharge must be significant.
The EPA Development Document also identified and assessed the range of
control and treatment technologies within each industry subcategory. This
involved an evaluation of both in-plant and end-of-pipe technologies which
could be designed for each subcategory. This information was then evaluated
to determine what levels of technology constituted the BPT, BAT, pretreatment,
and BDT control options. The identified technologies were analyzed to calcu-
late cost and performance. Cost data were expressed in terms of investment,
operating and maintenance costs plus depreciation, and interest expense.
Pollution characteristics were expressed in terms of median and mean concen-
tration levels (per liter of water as well as volume of production) for each
subcategory.
3.2 POLLUTANT PARAMETERS
The selection of pollutant parameters for the application of effluent
limitation guidelines was primarily based on a review of laboratory analyses
of wastewater samples from several porcelain enamel plants, and responses from
a mail survey submitted to all known porcelain enaraelers. This information
3-1
-------
was used to estimate the concentration of each of the 129 priority pollutants
as well as other conventional pollutants. The specific approach to selecting
pollutant parameters is presented in Sections V and VI of the Development
Document. Table 3-1 is a summary of the pollutant parameters selected.
3.3 CONTROL AND TREATMENT TECHNOLOGY
Recommended treatment technologies are presented in Chapters IX, X, XI,
and XII of the Development Document for BPT, BAT, BDT, and pretreatment,
respectively. BAT limitations and BDT standards were primarily based on the
estimated performance of recommended treatment systems. These performance
ievp.ls were estimated using raw wastewater characteristics for each subcate-
gory, while technology performance estimations were based on manufacturer's
data and performance in other industries. BPT and pretreatment performance
levels were based on a combination of actual discharge data from some existing
porcelain enamel plants. A brief description of the recommended technologies
follows.
3.3.1 Best Practicable Control Technology Currently Available (BPT)
There were two basic BPT systems recommended in the Development Document.
Several variations of each system were presented, depending on the specific
wastewater characteristics involved. The first system pertained to the steel,
strip steel, aluminum, and copper subcategories, and involved chromium reduc-
tion (where applicable), equalization, settling, clarification, and final pH
adjustment. A schematic of this system is shown in Figure 3-1. Chromium
reduction was required only if hexavalent chromium was present in significant
concentrations, as sometimes occured in the aluminum subcategory. Clarifica-
tion was required for all wastewater; it included pH adjustment, precipita-
tion, flocculation, and sedimentation. All ball milling and enamel
application wastewaters, regardless of the basic material subcategory, should
undergo settling.
3-2
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TABLE 3-1. PORCELAIN ENAMELING POLLUTANT PARAMETER SELECTION
PARAMETER
118
119
119
120
122
124
128
125
114
115
Cadmium
Chromium, Total
Chromium, Hexavalent
Copper
Lead
Nickel
Zinc
Phosphorus
Selenium
Antimony
Arsenic
TSS
Oil & Grease
Iron
Phenol, Total
PH
BASE MATERIAL APPLICABILITY
P.E. on
Steel
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
P.E. on
Aluminum
X
X
X
X
X
X
X
X
X
X
X
X
P.E. on
Iron
X
X
X
X
X
X
X
X
X
X
X
P.E. on
Copper
X
X
X
X
X
X
X
X
X
X
X
X
P.E. on
Strip Steel
X
X
X
A
X
X
X
X
X
X
X
X
X
Source: EPA Porcelain Enameling Development Document
3-3
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The second recommended BPT system pertained to porcelain enameling on
iron, (schematically depicted in Figure 3-2). It included settling, clari-
fication, and frit reclamation. Splitting of the coating wastewater and
enamel application raw waste streams and metal preparation waste streams was
unnecessary for the iron subcategory, since metal preparation in this sub-
category is accomplished by the grit blasting process which requires no water.
3.3.2 Best Available Technology Economically Achievable (BAT)
Two technology alternatives are presented in the Development Document for
BAT treatment, which apply to direct dischargers. BAT level 1 and BAT level 2
alternatives correspond to increasing levels of wastewater quality.
In general terms, the BAT1 option specifies an end of pipe treatment
system that uses settling sumps, clarification and multi-media filtration. By
contrast, BAT2 calls for separate treatment and recirculation of the coating
waste waters. Figures 3-3 and 3-4 depict these treatment options. A more
detailed discussion of these technologies can be found in the Development
Document.
3.3.3 Pretreatment
Pretreatment regulations will apply to plants which discharge to munici-
pal sewer systems. Figure 3-1 (Prel for steel, aluminum and copper) and
Figure 3-2 (Prel for cast iron) correspond to the BPT technology for direct
dischargers. Figure 3-3 (Pre2) and 3-4 (Pre3) correspond to the BAT1 and BAT2
technologies, respectively. A more detailed description of these technologies
is found in the Development Document.
3.3.4 New Source Performance Standards (NSPS) and Pretreatment Standards New
Sources (PSNS)
There are two basic treatment technologies presented in the Development
Document for new sources (NSPS and PSNS). These two systems, outlined in
Figures 3-5 and 3-6 which are the Best Demonstrated Technology (BDT) option 1
and BDT option 2 respectively, are applicable to both municipal and surface
water dischargers for new sources.
3-5
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The BDT 1 option permits the usage of the wet coating application tech-
nique, which is standard for most plants in the industry. BDT option 2
involves implementation of a dry powder coating technology, which results
in a zero discharge from the porcelain enamel application operation. More
specific details of this option have not been made available.
In the past five years there have been a few new porcelain enameling
plants built utilizing the dry powder technology. In terms of the potential
impact on new plants built in the industry, the dry powder method does involve
a higher capital investment outlay than does the wet spray process. However,
the advantages in energy savings (75 to 80 percent over the wet process), the
virtual 100 percent material utilization, the virtual elimination of air
pollution problems and wastewater from the ball milling operation, a 50 per-
cent saving in floor space and a smoother, brighter finish, tend to offset the
higher capital costs of construction for the dry process through the lower
operating and production costs. Although demand projections do not foresee
the need for significant capacity expansion in porcelain enameling, it is
unlikely that in lieu of its operating advantages, new, medium to large sized
plants would have significant problems raising the additional capital invest-
ment required for the dry process method. Given the industry projections
discussed in Chapter 2, it is very unlikely a new small plant would be built
in the near future with or without this requirement.
3.4 TOTAL COMPLIANCE COSTS
3.4.1 Overview
The estimated costs of installing and operating the recommended treatment
systems are presented in the Development Document, and form the basis of the
discussion below. Table 3-2 shows unit and total annual compliance cost
estimates for each economic subcategory and Table 3-3 shows the capital
investment requirements. These costs were tabulated from the plant-specific
cost estimates for the 80 sample plants. Based on the average compliance cost
estimates per plant for the 80 sample plants, and plant specific costs where
available, projections were also made for the total of 116 plants in the
3-11
------- An error occurred while trying to OCR this image.
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TABLE 3-3. CAPITAL INVESTMENT REQUIREMENTS OF COMPLIANCE Btf OPTION
Industry Segments
Ranges
Sanitary Ware
Home Laundry
Architectural Panels
Hot Water Heaters
Job Shops
Cookware
Dishwashers
Miscellaneous
Products
Total Number of Sample Plants
Direct Discharge
Indirect Discharge
Projected Total of Plants
in Industry
Projected Total of Plants, with
Direct Discharge
Number
of
Plants
18
7
7
8
7
14
8
4
7
80
13
67
116
28
Investment Costs
($ Thousand)
BPT/Prel
4,848
2,066
2,183
996
763
2,552
1,863
1,574
1,502
18,347
2,372
15,975
26,200
5,100
BATl/Pre2
5,679
2,409
2,437
1,125
833
2,883
2,170
1,827
1,723
21,086
2,778
18,308
30,000
6,000
BAT2/Pre3
8,398
3,474
4,264
1,939
1,500
4,485
3,187
2,544
2,622
32,413
4,496
27,917
45,200
10,700
Projected Total of Plants with 88 21,100
Indirect Discharge
24,000
34,500
3-13
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porcelain enamel industry. Total industry capital investment costs were
projected to range from $26.2 million for BPT/Prel, to $30.0 million for
BATl/Pre2, to $45.2 million for BAT2/Pre3.
3.4.2 Compliance Costs by Industry Segment
The distribution of compliance costs among the plants in each industry
segment is an important determinant of economic impacts. In addition, each
industry segment is perceived to operate, to a large extent, in separate
markets for purposes of the economic impact analysis. The groundwork for the
economic analysis lies in understanding the distribution of compliance costs
among plants within an industry segment.
The results of these analyses indicate that the architectural panel and
the job shop industry segments have the highest average compliance costs per
square foot of enameled surface for most compliance levels. In terms of total
annual compliance costs per industry segment, the range (18 plants), home
laundry (7 plants), job shops (14 plants) and sanitary ware (7 plants) seg-
ments bear the heaviest aggregate burden.
Table 3-4 also shows that the hot water heater, architectural panel, and
job shop groups have the highest proportionate increases in annual compliance
costs from BPT costs to each BAT level. However, two of these three industry
segments also have the lowest total BPT costs of the nine industry segments.
3.4.3 Assumptions Made in Estimating Compliance Costs
In developing these compliance cost estimates, a number of assumptions
were made by EPA. These assumptions are:
Depreciation was straight line at 10 percent per year
for 10 years.
All costs are expressed in January 1978 dollars.
3-14
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TABLE 3-4. INCREMENTAL ANNUAL COMPLIANCE COSTS, PORCELAIN ENAMELING
Industry Segments
Ranges
Job Shops
Cookware
Hot Water Heaters
Home Laundry
Sanitary Ware
Architectural Panels
Dishwashers
Miscellaneous Products
Average
Percentage Increase
From BPT/Prel
BATl/Pre2
16
16
17
20
16
16
19
15
^5_
16
BAT2/Pre3
43
75
53
101
30
43
88
26
11
47
Percentage Increase
Between Treatment Options
BPT/Prel-
BATl/Pre2
16
16
17
20
16
16
19
15
J^
16
BATl/Pre2-
BAT2/Pre3
23
50
30
67
12
23
58
26
11
26
3-15
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Where either a batch or continuous treatment system was
possible, the system with the lowest life-cycle costs (over
a 10-year period) was selected for presentation in the
system cost tables. The mode of treatment is noted in the
tables for each case.
Nonsupervisory labor costs assumed an average wage rate
reported by the Bureau of Labor Statistics of the U.S.
Department of Labor for January 1978 (as reported in BLS
periodical, Employment and Earnings).
An average rate of 3.3 cents per kilowatt hour was used for
all electric energy costs.
In addition to these basic assumptions, EPA also had to make some assumptions
in relation to the size of the treatment facility needed for each plant and
the cost of plant modifications and treatment system installation costs.
An assumption was made that a reasonable amount of water conservation
could be made through "good housekeeping" efforts to reduce the size of the
treatment facility needed for compliance. This "reasonable amount" of con-
servation was estimated for each plant by using the following procedure:
An average industry flow rate (gallons) per sq. ft. of
porcelain enamel application was calculated from data
collected from 10 of the 13 plant visits made by EPA/EGD.
(Data from three plants were not used because these plants
were assessed by EPA to have excessive water usage).
The average industry flow rate was multiplied by the hourly
production capacity rate reported to EPA by the individual
plants in the Sec. 308 survey conducted in 1976 as follows:
Ave. Industry Flow Rate (gallons) X Hourly Production Capacity of
per sq. ft. of Production Each Plant (sq. ft./hr.)
= Plant Flow Rate (gph) based on Industry Median Flow
An appropriate treatment facility was designed to accommodate the median flow
rate of each plant and used as a basis for estimating the compliance costs.
Some provisions were made to account for the subsidiary costs of treat-
ment system construction. These include administrative and legal expenses,
3-16
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interest during construction, segregation of water streams, yardwork, and
engineering. However, the provisions made for these costs do not account for
special site specific problems that may arise during the treatment system
construction. While these special site specific costs may in some cases
involve a significant added cost, the plant-by-plant variation in these costs
prevented EPA from being able to address these factors in its generic cost
estimation procedure. Therefore, because of this problem, sensitivity
analyses were conducted on the compliance cost estimates in Section 4.5.
Finally, in extrapolating from the 80 sample plants for which compliance
costs were estimated to the entire industry population of 116 plants, it was
assumed that, since the SO plant sample is generally representative of the
total industry, the 116 plant estimates will be reflective of the 80 plant
sample averages. The annual and investment costs of compliance were extra-
polated for both the direct and indirect discharger plants by utilizing
available data and the average compliance costs per plant.
3-17
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CHAPTER 4
ECONOMIC IMPACT ANALYSIS
-------
4. ECONOMIC IMPACT ANALYSIS
The purpose of this chapter is, first, tq quantify the economic impacts
which are likely to fall on the plants within the industry, and to estimate
the industry price, profit, and employment effects that these impacts are
expected to create; and, secondly, to identify secondary economic impacts,
i.e., community impacts, balance of trade changes, etc., which may occur. A
piant-by-plant examination of the 80 sample plants identified in Section 1.2
forms the basis for these analyses. This 80-plant sample represents about 70
percent of the plants in the industry. In addition, the sample contains a
wide range of both large and small plants within each industry segment and
appears to adequately represent all segments of the industry as shown in Table
1-2. Therefore, in extrapolating from the 80 sample plants to the entire 116
plant population, the total number of highly impacted plants was assumed to be
in general proportion to the number of impacts found in the sample plants.
4.1 METHODOLOGICAL APPROACH
In Chapter 1, the industry, market, and financial structure analyses were
developed to provide data input for a microeconomic price, production, and
profit model of the industry. A schematic overview of the economic analysis
to be conducted is contained in Figure 4-1. Relying on the elasticity coeffi-
cients developed in Section 1.3 and the compliance cost estimates discussed in
Chapter 3, the portion of the compliance costs which can be passed through in
terms of higher priced products was estimated. Then, an estimate was made of
the aggregate reduction in quantity demanded resulting from the compliance
induced price increases (i.e., the production effect). Finally, the calcu-
lated price increase and quantity reduction for the overall industry and the
plant specific compliance costs prepared by EPA were used to estimate the
impact of the regulations on a plant-by-plant basis. These impacts focused on
measuring capital availability and profitability.
4-1
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The calculations are based on the following three assumptions:
If possible, firms will attempt to maintain their current
financial status by passing through industry-wide cost
increases in the form of higher prices.
If the price increase does not result in a significant reduc-
tion in product demand, and companies are able to maintain
their current financial status, the potential for plant
closings will be minimal.
If price increases do not fully recover compliance costs
because of the potential for a significant decline in product
demand, the firms may attempt to maintain their financial
status by closing higher cost/less efficient plants.
With a competitive market, each plant must sell at a given industry-wide
market price determined by the interaction of competing firms. Therefore, the
price increase likely to follow compliance with effluent standards is con-
sidered to be a uniform product group price increase. For example, Figure 4-2
shows how the model assimilates the differential compliance costs of four
plants producing a similar product. Assume initially that each plant will
raise its price from p, to an amount equaling the compliance cost per unit of
its production. Demand would then tend to shift from plants C and D to plants
A and B because their prices are now substantially less. As a result of this
shift, plants C and D would be under pressure to lower their prices; at the
same time plants A and B would be able to raise their prices. An equilibrium
price, P-, will tend to be established, with plants C and D absorbing part of
their compliance costs. In this manner, the model serves as the basis for
estimating the price and production impacts for each product group as well as
the basis for identifying plants that may have to absorb a significant portion
of their cost of compliance.
4.1.1 Calculation of Product Group Price Increases
The first step in the analysis therefore is to estimate the portion of a
plant's compliance cost which can be passed through to customers in the form
of higher prices. Based on the framework illustrated in Figure 4-3, a cost-
plus-markup pricing strategy is used together with estimated elasticity
4-3
-------
Price/Unit
EQUILIBRIUM BEFORE COMPLIANCE
<
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INITIAL PRICE REACTIONS TO COMPLIANCE COSTS
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Compliance
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Market
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EQUILIBRIUM PRICE AFTER COMPLIANCE
Portion of
Compliance Costs
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absorbed by the
plants
Market
Shares
FIGURE 4-2. PRICE AND MARKET SHARE ADJUSTMENTS
4-4
-------
o
4-5
-------
coefficients. This determines the size of the product group price increase
expected to result from the compliance costs and the anticipated quantity
reduction in demand calculated to follow the .price increase.
The size of this product group price increase is estimated by using the
following equation:
N
P
where
P. = average product group price before compliance
Af - average product group price increase
cc. = annual compliance cost for each sample plant
N = number of plants in each product group
TC. » total cost of goods sold for each plant assumed to be equal to
TC. = PlQl. - PM1(P1Q1.)
where
PM. = base line profit margin before compliance
(see Section 4.3)
Q1. - quantity of production at each sample plant before
compliance.
4.1.2 Calculation of Product Group Quantity Decreases
Since the products that are porcelain enameled are expected to have
negatively sloped demand curves, a price increase will be followed by a
reduction in the quantity demanded (AQ). Using the basic elasticity equation
4-6
-------
and the ^j ratio calculated above the change in quantity demanded (AQ) can be
determined as follows:
Ql ' Pl
where £= the coefficient of elasticity for each porcelain
enamel product.
As illustrated in Figure 4-3, if the lost production from plant closures
in each segment counterbalances the quantity reduction for that segment, the
impact on the plants that remain in business will be limited to the impact of
their inability to cover all compliance costs by increasing prices. Likewise,
if the lost production from plant closures in a segment is less than the
quantity reduction for that segment, then the plants which remain in business
will have the added burden of a reduced level of production (equaling the
decrease in aggregate product group demand, less the lost production due to
plant closures).
Table 4-1 displays the product group price changes and the resulting
quantity changes, at each compliance level. The price and quantity changes
shown in this table are very small and indicate that, on the average, the
porcelain enameling plants will be able to pass through most of their
compliance costs.
After these industry-wide price and quantity adjustments are determined,
attention can be focused on the individual plant impacts. These impacts are
measured in terms of changes in profit margin.
4.1.3 PI ant-By-Plant Profit Margin Changes
Since data on the capacity utilization and marketing mixes of individual
plants were not available, the aggregate product group reductions in quantity
demanded (Aq) shown in Table 4-1, were distributed proportionately based on
the precompliance levels of production (Q .). This data (0,.) was collected
4-7
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4-8
-------
by EPA in an industry-wide survey and serves as the basis for the plant
specific analyses contained throughout the remainder of this chapter. There-
fore, using the following equations, the change in profit margin at each plant
(APM.) is estimated:
APM. - l
'i <
-------
Af ter APM. values were calculated, return on investment (ROI-) ratios and
assets to capital investment costs of compliance(A-/CCC-)ratios were calcu-
lated for each plant to measure profitability and capital requirement impacts
of compliance.
4.1.4 Estimates of Plant Assets and Profit Margins
To calculate the ROI. and the A./CCC. ratios to be used in the impact
analyses, the following data are needed for each plant:
PM_. - Profit margin after compliance
R- . - Plant revenue after product group price increases and
quantity decreases
A. - The value of assets at each plant.
The R . and PM . values can be obtained from the following equations:
R2i
where
P~ = Post compliance price
Q.. = Quantity produced in each plant before compliance
AQ- = The share of quantity reduction prorated to each plant
PM. . = The pre-cotnpliance profit margin
= The change in profit margin caused by compliance costs.
values of Q,. were collected in an industry survey by EPA, while P«,
Q. andAPM. were calculated using the equations previously presented. Values
for PM, and A. had to be estimated. Because of the uncertainty of these
estimates a sensitivity analysis based on the theories of random numbers and
statistical probability was used to lessen the significance of the uncertainty
of these estimates and to improve the accuracy of the resulting conclusions.
The
4-10
-------
Estimates of profit margin (return on sales, before tax) for individual
plants were derived based on data found in annual corporate reports, Moody"s
Industrial Index and SEC 10-K reports. However, these data reflect corporate
rather than specific plant profit margins and do not account for variability
that may exist among the plants of a given firm. Moreover, there were some
plants for which no corporate financial data were available. For those
plants, weighted (by market share) average product group profit margins were
used. In the case of the two product groups for which there were no corporate
financial data applicable for any of the firmsjob shops and architectural
panelsdata obtained from discussions with knowledgeable industry experts and
from the Federal Trade Commission's Quarterly Financial Report were used to
establish the sensitivity range.
In an effort to account for some of the uncertainty associated with
profit margin estimates, it was assumed that each plant's profit margin will
range between plus or minus 25 percent of the corporate profit margin, or if
corporate data was not available plus or minus 50 percent of the product group
average profit margin. Assuming a normal distribution, a set of 20 random
numbers were then drawn from this range of values. This process of selecting
random numbers was repeated for each individual plant, so that every plant
analyzed had a set (20) of PM. estimates. Further analysis was carried out
with these 20 PM. estimates.
The Commerce Department's assets per employee (A/E) and assets per value
of shipments (A/VS) ratios for respective SIC data were used to estimate the
value of plant assets using the following equations:
E. x A/E = A.; employment method of estimating plant assets
R.. x A/VS = A.; value of shipments method of estimating plant assets
where:
E. employees per plantcollected in the EPA industry survey
R.. » P. x Q,. (for porcelain enameled products only) defined
to equal VS
A. » asset value for each plant.
4-11
-------
Using these estimates, a range of asset values was established for each plant.
In most cases the range was defined as being the difference of the A- values
calculated by the employment and value of shipments methods. However, for
plants that also produced products that are not covered by this study, the A^
value calculated by the employment method was discarded and a 50 percent range
was established around the A. (value of shipments method) to provide an esti-
mate that is reflective of value of assets associated with the production of
porcelain enameled products only.
As in the case of the PM. estimates, 20 random numbers for assets were
selected from the specified interval for each plant. Then using the 20 PM^
and the 20 A. values for each plant, 20 ROI- and 20 A./CCC. ratios were
calculated for each plant. Based on the distribution of these 20 values of
ROI. and A./CCC. for each plant, the probabilities for these two ratios being
below selected threshold values were determined. These probabilities were
then used to make plant closure determinations.
4.1.5 Plant Closure Determinations
While plants which continually lose money or repeatedly fail to attract
needed capital will eventually cease to operate, the plant closure decision
ultimately involves managerial judgment. Therefore, the examination of ROI
and A/CCC ratios and the establishment of threshold levels for evaluating
these ratios can, in many cases, provide only an indicator of plant closure
potential and not a prediction of certainty. However, these ratios do provide
a means of quantifying impacts and measuring the likelihood of closure.
Potential plant closures were determined by using the following three
rules:
Plants whose ROI ratios after compliance have a probability
equal to or greater than 60 percent of falling below the
7 percent threshold level were identified as potential
closures
Plants having a probability equal to or greater than 60 per-
cent of compliance investment cost to gross assets ratio being
greater than 50 percent were identified as potential plant
closures regardless of the plants ROI value
4-12
-------
Plants with an expected ROI value of less than 25 percent and
a compliance investment cost to gross assets value of greater
than 10 percent were classified as potential closures.
The rationale for the first rule lies in 'the premise that the owners of
plants with very low ROI ratios (before taxes and corporate overhead) will not
feel that an insufficient return will be made to justify the continued opera-
tion of the facility. For the second rule, it is likely the owners of plants
with very large compliance investment requirements will be unwilling to commit
sums of capital equaling half or more of their gross investments in the plants
for pollution control equipment, which yields an essentially zero return on
expenditure. The third rule attempts to identify potential closures for
plants that have profitability and capital availability financial ratios that
do not exceed the threshold levels of the first two extremes, but nevertheless
indicate poor financial performance. Potential plant closures identified with
this rule are those plants which have both marginal profitability after
compliance and large, if not excessive, compliance investment requirements.
The owners of those plants are anticipated to weigh the combined impacts of
these two factors in deciding whether to make the required investments or to
cease operations.
The 7 percent ROI threshold level was based on the condition that plants
cannot continue to operate as viable entrepreneurial concerns if they are
unable to generate a return on investment (gross assets) that is roughly equal
to the opportunity cost of other investment alternatives, which in this case
is defined as the rate on U.S. Government Notes. A 25 percent ROI was con-
sidered to be a reasonable threshold level for "possible" impact because it
represents a below average return for the industry.
Available literature on financial ratios does not normally make use of
the ratio of assets to capital investment requirements. Therefore, to develop
an acceptable threshold, the 1976 Annual Survey of Manufacturers industry
profiles for the respective SIC groups represented in this study were used to
calculate "New Capital Expenditures to Assets" ratios for each product group.
4-13
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It was assumed that if the compliance capital investment requirement for a
plant is greater than the total average annual "New Capital Expenditure" for
building machinery and equipment, then an impact substantial enough to indi-
cate a likely plant closure will exist. The 5-year (1972-76) average of the
"New Capital Expenditures to Assets" was about 10 percent for each of the SIC
groups examined. The extreme capital investment threshold of 50 percent was
chosen because information gathered during plant visits and other discussions
with industry representatives and industry experts indicated that as a general
rule no plant would make a pollution control expenditure equaling more than
half of the value of total plant investment.
4.2 BASE LINE PLANT CLOSURES
As discussed in Chapter 2, the volume of porcelain enameling production
has been declining over the last 10 to 15 years, and a number of plants have
been forced to close because of this natural attrition. Furthermore, it
appears likely that between 1980 and 1984, when compliance is mandated, a
number of the current plants may be forced to close. These "base line"
closures need to be identified and discounted from the impact analyses
presented in Section 4.4 so that the bonafide impact of the proposed standards
can be measured.
For this purpose, plants that have an ROI of less than 7 percent before
consideration of compliance costs will be classified as "base line" closures.
The 60 percent probability threshold explained in Section 4.1.4 was also
applied to this analysis. Table 4-2 presents the results of this analysis.
4.3 FINANCIAL ANALYSIS OF SELECTED PLANTS
Each of the plants was subjected to financial ratio analyses to quantify
the level of anticipated impact and to assess the likelihood of plant
closures. To perform these analyses, a financial profile was derived for each
plant as discussed in Section 4.1.
4-14
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TABLE 4-2. LlkELY BASELINE PLANT CLOSURES
Number of
Product Groups Plants
Ranges
Sanitary Ware
Home Laundry
Architectural Panels
Signs & Reflectors
Hot Water Heaters
Dishwashers
Job Shops
Cookware
Total for the
80 Sample Plants
Total for 116 Plants
3
1
0
0
0
0
1
0
5
7
Percent of
Plants
16.7
14.3
0
0
0
0
7.1
0
6.0
6.0
Market1
Share (%)
8.1
1.0
0
0
0
0
2.6
0
2.4
2.4
Employees
Number
2187
404
0
0
0
0
478
0
3,069
4,280
Percent
14.3
21.5
0
0
0
0
20.0
0_
5.2
5.2
1
Market share of porcelain enameling production.
4-15
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Using the financial variables contained in these profiles, two financial
ratios were calculated to measure the impact of the compliance costs associ-
ated with the three treatment options. One of these ratiosreturn on
investment (gross assets)is used to assess plant profitability impact, while
the other ratioassets to compliance capital investmentwas used to assess
the magnitude of compliance capital investment requirements.
4.3.1 Profitability Analysis
The calculated return on investment (ROI) ratios for each plant were
compared with threshold values established for this ratio. The "likely" plant
closure threshold value was used to establish a point at which decreased
profitability would reach a significant level. However, a low ROI for a given
plant does not, by itself, necessarily imply that the plant will close. As
will be discussed in Section 4.4.1, actual plant closure decisions made by
individual companies are usually based on many factors.
The profitability ratio (ROI) relates profits to gross plant assets, and
provides a means of evaluating the attractiveness of the plant as an invest-
ment opportunity compared to other opportunities that may be available to
stockholders and potential lenders. Also, it provides a good indicator of the
relative financial status of a plant and thus, the likelihood of a potential
closure.
Therefore, by establishing a threshold value, decreases in the ROI can be
used to determine the point at which the level of impact reaches plant closure
significance. As explained in Section 4.1.5, plants with a post-compliance
ROI equal to or less than 7 percent were categorized as "likely" plant
closures.
Table 4-3 presents the results of the profitability analysis of high
impact plants from the eight product groups. Three of the product groups
ranges, hot water heaters, and job shopscontain all of the potentially
impacted plants based on the profitability criteria.
4-16
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4.3.2 Analysis of Capital Investment Requirements
Evaluation of a firm's ability to make investments is usually based on
an analysis of debt to equity, debt service coverage, profitability, and
liquidity ratios. For example, if the same investment requirements are placed
on a firm which is already highly leveraged (as indicated by a high debt to
equity ratio) and a firm which is not highly leveraged, the highly leveraged
firm is likely to experience the more significant impact, even if they have
the same ROI.
Since data on the extent of current precompliance financial leverage were
unavailable, an analysis could not be made directly addressing the porcelain
enamelers1 ability to raise the necessary capital. As an alternative approach,
the ratio of "assets to compliance cost capital investment requirements" was
used. This ratio provides a good indication of the relative magnitude of the
compliance capital investment requirements. Plants whose assets to capital
investment requirements ratio had a probability equal to or greater than
60 percent of being below 10 percent were classified as impacted plants. The
results of this analysis are contained in Table 4-4.
4.3.3 Impact Potential of Four Miscellaneous Product Groups
As noted in Section 4.2, seven plants, in four miscellaneous product
groups, required a different approach to impact assessment. The product
groups involved are cast iron bathtubs and sinks, porcelain enameled refrig-
erators, barbecue grills, and porcelain enameled strip steel. For the various
reasons discussed below, use of a microeconomic analysis to estimate price
increases and profit impacts was deemed inappropriate for these groups. In
lieu of this approach, the "annual compliance cost to price" ratio, and the
ratio of "annual compliance cost to the cost of porcelain enameling" were
calculated for each plant. A general qualitative assessment was then made of
the likelihood of compliance costs being passed through in higher prices
and/or the ability of the plants to absorb all of the costs without signi-
ficant adverse impacts.
4-18
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For the cast iron group, a large plant was known to be missing from the
EPA data base. The absent plant was considered to be of such significant
magnitude in relation to the two plants that were included in the EPA sample,
that use of a microeconomic analysis for the two sample plants could not be
considered reflective of the whole product group. Even though the inclusion
of the missing cast iron enameling plant in the analysis may alter the
relative impact conclusions with respect to the two cast iron enameling
plants, the "annual compliance cost to product price" and "annual compliance
cost to porcelain enameling cost" ratios for the two sample plants do not
appear to be large enough to cause immediate or intermediate plant closures.
However, these added costs are likely to contribute to the continuing decline
in shipments of cast iron bathtubs, which may have significant long term
implications.
While the EPA data base does contain both of the strip steel porcelain
enameling plants, the product line of these plants varies widely by the type
of order received. Their annual production mix can be of a highly diversified
nature (i.e., one plant may run a half year's production of "Top of the Line"
exterior panels priced at $5 a square foot, while the other plant may be
producing a more moderately priced product at $2.50 a square foot). There-
fore, a microeconomic price and production analysis was not considered to be
appropriate. Although "compliance cost to price" ratios for the strip steel
plants were not high, the increase in compliance cost to porcelain enamel cost
and the differential that exists between the two plants appears to put some
market pressure on one of the plants.
The porcelain enamel barbecue grill product group contains only one firm.
The competition for this product is nonporcelain enameled grills. Therefore,
the microeconomic industry screening analysis for porcelain enameled grills is
not applicable. For this plant, the compliance cost per square foot was over
one cent for the BAT2/Pre3 option. However, since data were not available on
the average square footage of porcelain enameling per unit, porcelain
enameling costs were not estimated for the "compliance cost per square foot to
porcelain enamel cost per square foot" ratio. However, since the "compliance
cost per square foot" ratio was not significantly high and since the prestige
4-20
-------
nature of the product appears to allow this firm significant opportunity to
differentiate the product, it appears that all of this cost could be passed on
through higher prices.
Porcelain enameled refrigerators are virtually in the same category as
barbecue grills. Only one company continues to use porcelain enamel for
refrigerators. The competitor of a porcelain enameled refrigerator is a
nonporcelain enameled refrigerator. Industry level analyses, therefore,
cannot be conducted for this product. The two refrigerator plants in the
sample both have relatively low ratios of compliance cost to product price,
indicating that even if all of the compliance costs had to be absorbed by the
plants, the impact would not be great. However, since the cost of enameling a
refrigerator is a relatively small portion of total manufacturing costs, the
percentage change in porcelain enamel cost due to compliance was relatively
high. The high "annual compliance cost per square foot to porcelain enamel
cost per square foot" ratio could exert added pressure on this company to
discontinue its porcelain enameling facilities. Plant closures, however, do
not appear likely for either of these plants.
4.4 REGULATORY IMPACT CONCLUSIONS
This section details the expected impacts resulting from compliance with
effluent regulations. These impacts include the plant closure conclusions for
the sample plants, the possible substitution effects away from porcelain
enamel associated with the higher costs due to compliance; employment and
community impacts; economic implications of discharge status; the results of
sensitivity analysis at plus 30 and plus 60 percent of the given compliance
costs, and projections of the impacts to all 116 plants in the industry for
the 3 treatment options; BPT/Prel, BATl/Pre2, and BAT2/Pre3.
4.4.1 Plant Closure Conclusions
Plant closure decisions are usually made on a broad basis. Taking into
consideration product line benefits (which may be derived by multi-plant firms
or on a firm basis for single-plant firms), these decisions generally encom-
4-21
-------
pass the overall industry growth potential, the ability and/or willingness of
the parent company to commit capital outlays for treatment facility construc-
tion, and the impact of treatment facility operating and amortization costs on
the financial viability of the plants.
In multi-plant firms, these questions heavily involve corporate and/or
division level decisionmaking. For example, decisions on the internal allo-
cation of funds between capital expenditure projects and on the sources to be
used to fund the expenditures are never delegated solely to the plant level.
Likewise, plant closure decisions are never made solely at the plant level.
If there is a decrease in product demand, the decisions to close individual
plants vis-a-vis a reduction of work hours in all plants are based on a
comparison of the unit production costs at each plant within the firm or
division and not entirely on a profitability measurement of an individual
plant. This management approach is logical since product marketing is a
corporate-wide or at least a division-wide endeavor. In these situations,
marketing and corporate strategy considerations will be evaluated along with
financial factors in plant closure decisions.
Since information on the interrelationship of plants within the same firm
is not available and the authors of this report are not privileged to corpor-
ate growth and marketing strategies, this report assumes that plant closure
decisions are made on an individual plant basis. While the implications of
this assumption may be toward the overstatement of plant closure conclusions,
the approach used in this report provides a reliable and representative
assessment of the burden of compliance on the individual plants. In other
words, the identification of plants as potential plant closures should be
interpreted more as an indication of the extent of plant impact than as a
prediction of certain closure.
Table 4-5 presents a summary of the likely plant closures by product
group and market share. The range, sanitary ware, architectural panels, job
shops, and cookware groups have the greatest potential plant closure inci-
dence. The range, and job shop groups have the largest number of likely plant
closures.
4-22
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A comparison of the likely plant closure market shares (as shown in
Table 4-5) and the industry-level production adjustments (as discussed earlier
in Section 4.1) reveals that the market share of likely plant closures is, for
each option, greater than the anticipated product group quantity adjustment
(AQ/Q percent, in Table 4-1). This would seem to indicate that the impacted
plants in the range, sanitary ware, architectural panel, job shop, and cook-
ware groups which remain in operation after compliance, may experience a
lesser decrease in the quantity of demand and a slightly reduced level of
impact.
The market shares of production accounted for by the likely closures
indicate that it is normally the smaller plants that are impacted. Further,
Table 4-5 shows that the number of likely plant closures increases from a
total of 7 for BPT/Prel level costs to a total of 18 for BAT2/Pre3 level
costs.
In summary, these impacts point to an acceleration of the trend toward
the closing of small plants, a decline in production capacity, and the
consolidation of market shares among the remaining large size manufacturing
plants.
4.4.2 Substitution Effects
While the burden of compliance may not force plants to cease operations,
it is clear that effluent guidelines will add to the cost of using porcelain
enamel finishes on all products. These added costs may exacerbate trends away
from porcelain enamel usage, as previously discussed in Chapter 2. For
example, substitution away from porcelain enameling may be used by some high
impact plants as a means of complying with effluent regulations. However,
since decisions on the use of porcelain enamel are frequently based on con-
sumer appeal and product quality, as well as cost considerations, it ia diffi-
cult to quantitatively estimate the degree of substitution that is likely to
follow the promulgation of effluent guidelines and to assess what impacts this
will have on porcelain enamelers.
4-24
-------
Notwithstanding, Table 4-6 compares the compliance costs per product unit
with respective costs of porcelain enameling that product to obtain a measure
of the relative compliance cost impacts on porcelain enameling costs. This
table shows that for most compliance options, architectural panels, dish-
washers, hot water heaters and refrigerators will bear the largest amount of
cost burden on a percentage basis. By combining these findings with the plant
impact conclusions from Section 4.3 and the porcelain enamel usage trends
examined in Chapter 2, some indicators of the pressure toward substitution can
be developed. Table 4-7 lists the product groups with the highest
substitution impact potential with respect to these three factors. From this
analysis, it appears that substitution pressures will be the highest for
plants manufacturing architectural panels, dishwashers, and refrigerators,
since these products are found to rank high for at least two of the three
factors. Therefore, it is possible that compliance costs may force the manu-
facturers of these products to discontinue their use of porcelain enamel.
Although not covered within the scope of this study, it should be noted
that the frit manufacturers (which supply porcelain enamelers with the raw
materials needed to make porcelain enamel) could be seriously impacted by a
substantial substitution away from porcelain enamel in these product groups.
4.4.3 Community and Employment Impacts
The findings on plant closure potential derived in Section 4.3 and the
conclusions concerning the possible impacts of compliance on substitution away
from porcelain enamel formed the basis for the assessment of employment
impacts.
Using the plant and porcelain enameling process employment data collected
by EPA in an industry survey, Table 4-8 (Porcelain Enamel Employment Impact by
Product Group) demonstrates the effects of effluent control levels on employ-
ment. Employment impacts vary from a total of 489 jobs lost for BPT to a
total of 2,112 jobs lost for BAT2/Pre3 level.
4-25
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TABLE 4-8. PORCELAIN ENAMEL EMPLOYMENT IMPACT BY PRODUCT GROUP
(HOURLY WAGE EMPLOYEES ONLY)
Product Groups
Ranges
Sanitary Ware
Home Laundry
Architectural Panels
Hot Water Heaters
Job Shops
Cookware
Dishwashers
TOTAL
Employment Lost From
"Likely" Plant Closures3
BPT/Prel BATl/Pre2
155 155
115 115
207 248
12 12
__
489 530
BAT2/Pre3
685
584
328
463
52
2,112
BPT and BAT employment reductions do not include baseline
employment reduction.
Porcelain enamel employees only.
4-28
-------
The range product group is expected to experience the largest employment
impact685 for BAT2/Pre3. This employment impact level accounts for over
30 percent of total industry employment impacts for BAT2/Pre3.
In addition to the range segment, the sanitary ware, and job shop
segments show significant employment losses. For BAT2/Pre3, these three
segments account for an employment loss of 1,732 jobs.
Table 4-9 lists, by state, the number of employees that could lose their
jobs as a result of each compliance cost level.
Tennessee will likely be the most affected (in terms of total employment
loss) by effluent regulations; 26 employees could be lost for BPT/Prel and
546 employees for BAT2/Pre3. These figures represent 5 percent of the total
industry employment loss from BPT/Prel regulations, and 26 percent of the
total employment loss for BAT2/Pre3. Other states with possible significant
compliance related employment loss are Indiana with 181 job losses for all 3
options; Ohio with 167 job losses for BPT/Prel and BATl/Pre2 options, and 497
job losses for BAT2/Pre3; and Illinois with 300 job losses for BAT2/Pre3.
Even though no potential plant closures are projected for the dishwasher
and refrigerator groups, the analysis of substitution effects in Section 4.4.1
indicates that the imposition of effluent regulations may cause substantial
substitution for porcelain enamel in these product applications. The analysis
also shows that substantial substitution should also take place in the porce-
lain enamel product applications of plants from the architectural panel group
that have not been identified as closures. If plants in these three product
groups discontinue their porcelain enameling operations, the employees
currently involved in porcelain enameling operations may be eliminated. This
could result in a net reduction of up to 405 jobs at BAT2/Pre3 in these
plants.
When the employment impact of these substitution effects is taken into
account, the total increase in potential unemployment may affect as many as
557 jobs within the state of Tennessee and up to 524 jobs in Ohio. Indiana
4-29
-------
TABLE 4-9. PORCELAIN ENAMEL EMPLOYMENT IMPACTS BY STATE
Reduced Employment From "Likely"
Plant Closures (No. of Workers)
State
Arkansas
California
Connecticut
Illinois
Indiana
Kent ucky
Michigan
Ohio
Pennsylvania
Tennessee
Virginia
Wisconsin
TOTAL
BPT/Prel
0
0
70
0
181
0
45
167
0
26
0
0
489
BATl/Pre2 Option
0
0
70
0
181
0
45
167
0
26
41
0
530
BAT2/Pre3 Option
0
0
275
300
181
0
120
497
140
546
41
12
2,112
Possible Porcelain
Enamel Substitution
Employment Effect
at BAT2/Pre3 Option
59
30
0
0
171
75
0
27
0
11
0
32
405
BPT and BAT/Pre employment reductions do not include baseline employment
reduction.
4-30
-------
has the largest substitution effect and faces the second largest unemployment
problem (352 » 181 for BAT2/Pre3 + 170 due to the substitution effect) of the
affected states. In addition, it should be noted that all of the affected
plants in Ohio are located in the northern half of the state, and one of the
potential plant closures, affecting about 155 employees, is located in a small
town (population 26,547 in 1970). The impact of this closure on the local
employment situation will probably be significant.
4.4.4 Economic Implications of Discharge Status
As stated in Chapter 3, the recommended pretreatment technologies for
existing indirect dischargers are identical to the recommended BAT technol-
ogies. Table 4-10 lists the aggregate compliance costs for BAT2/Pre3, annual
production, and the increase in the porcelain enamel cost per square foot due
to compliance, for direct and indirect discharger plants in the 80 sample
plants. The 13 direct discharger plants were found to have lower average
compliance costs, and compliance costs per square foot of production ($.012)
than those which discharged to municipal sewage plants ($.017). Average
production among direct discharger plants was found to be comparable to that
of the average for indirect dischargers.
The implication of these findings is that the direct discharger plants,
which have to pay no POTW user charges, could derive some degree of competi-
tive advantage from the promulgation of the regulations. However, since the
user charges vary between municipalities, it is difficult to establish a
definitive trend and make a quantitative assessment of the degree of this
competitive advantage. Table 4-11 provides an overview of potential plant
closures by discharge status. This table shows that at BATl/Pre2, 2 of 8
closures are direct dischargers, a higher closure rate than their propor-
tionate number in the sample. However, of 18 plant closures at BAT2/Pre3,
15 plants have indirect discharge status and although the indirect dischargers
have the highest proportionate cost burden, at BAT2/Pre3 the closures occur in
approximately the same proportion for both types of dischargers.
4-31
-------
TABLE 4-10
DIRECT (SURFACE) VS. INDIRECT (MUNICIPAL DISCHARGERS)
BAT2/Pre3 COMPLIANCE COST, PORCELAIN ENAMEL SAMPLE PLANTS
Direct Discharge Indirect Discharge
(13 Plants) (67 Plants)
Total Annual Compliance $ 1,444,000 $ 9,105,000
Average Compliance Cost 111,077 135,896
Total Production 119,828,167 543,445,833
Average Production 9,217,551 8,111,132
Compliance Cost/Square Foot .012 .017
4-32
-------
TABLE 4-11. NUMBER OF PLANT CLOSURES BY DISCHARGE STATUS
BPT/Prel BATl/Pre2 BAT2/Pre3
Indirect Discharge
(67 Plants)
Number of Plant Closures 56 15
Percent of Plant Closures
by Discharge Status 7.5 8.9 22.4
Percent of Plant Closures
Based on the 80 Sample Plants 6.3 7.5 18.8
Percent of Production Decline
by Discharge Status 0.4 1.0 5.5
Direct Discharge
(13 Plants)
Number of Plant Closures 22 3
Percent of Plant Closures
by Discharge Status 15.4 15.4 23.1
Percent of Plant Closures
Based on the 80 Sample Plants 2.5 2.5 3.8
Percent of Production Decline
by Discharge Status 4.1 4.1 4.4
Total Number of Plant Closures 78 18
(80 Sample Plants)
4-33
-------
From a qualitative perspective, it does not appear that- the impact of
this cost differential will be significant. First, since such a large per-
centage of the plants are indirect dischargers, the impact of the compliance
cost and user charge differential will not fall on a small or isolated group
of plants. Secondly, it is questionable whether the indirect dischargers,
many of which are located in urban areas, would be able to switch discharger
status, and therefore, the impacts on POTW revenues should be minimal.
Finally, since such a large proportion of the plants are indirect dischargers,
it is probable that market prices will adjust to cover part of the user charge
differential and lessen the cost pressure on the indirect dischargers.
4.4.5 Compliance Cost Sensitivity Analysis
Since several cost elements associated with compliance with effluent reg-
ulations could not be estimated for each plant as discussed in Section 3.5.3,
EPA directed that sensitivity analyses on the compliance costs be conducted.
Individual impacts for the 80 sample plants were calculated for both a 30 per-
cent and a 60 percent increase in compliance costs. To simplify the analysis,
EPA agreed that these impact assessments would assume that there would be no
additional price increase/compliance cost pass-through. Thus, using this
assumption, adjustments were made on the threshold levels to reflect 30 and
60 percent increases in investment compliance cost. The plant closures
resulting from these analyses are shown in Table 4-12. Table 4-13 shows the
employment impact by product group expected to occur at these increased levels
of compliance cost burden. By comparing Tables 4-12 and 4-13 with the plant
closure projections in Table 4-5 and the estimated employment loss shown in
Tables 4-8 and 4-9 (with and without substitution effects), it shows that the
increase in compliance cost will generate additional plant closures and
employment impacts.
Figures 4-4 through 4-9 display the integration of the plant closure
results from the profitability and capital cost investment analysis for the
original costs, and the plus 30 and 60 percent sensitivity analysis. The
vertical axis represents the ROI values and the horizontal axis represents the
assets to compliance investment ratios. The curve reflects the combined
4-34
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Original Compliance Cost
+30%
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PLANT CLOSURE ZONE
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CAPITAL REQUIREMENT FOR COMPLIANCE
C ASSETS TO COMPLIANCE CAPITAL INVESTMENT )
FIGURE 4-5. POTENTIAL PLANT CLOSURES, PROFITABILITY AND CAPITAL INVESTMENT
REQUIREMENT ANALYSIS, ORIGINAL COMPLIANCE COSTS, PLUS THIRTY
PERCENT, PLUS SIXTY PERCENT, FOR HOT WATER HEATERS
4-38
-------
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FIGURE 4-6. POTENTIAL PLANT CLOSURES, PROFITABILITY AND CAPITAL INVESTMENT
REQUIREMENT ANALYSIS, ORIGINAL COMPLIANCE COSTS, PLUS THIRTY
PERCENT, PLUS SIXTY PERCENT, FOR COOKWARE
4-39
-------
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FIGURE 4-7. POTENTIAL PLANT CLOSURES, PROFITABILITY AND CAPITAL INVESTMENT
REQUIREMENT ANALYSIS, ORIGINAL COMPLIANCE COSTS, PLUS THIRTY
PERCENT, PLUS SIXTY PERCENT, FOR ARCHITECTURAL PANELS
4-40
-------
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FIGURE 4-8. POTENTIAL PLANT CLOSURES, PROFITABILITY AND CAPITAL INVESTMENT
REQUIREMENT ANALYSIS, ORIGINAL COMPLIANCE COSTS, PLUS THIRTY
PERCENT, PLUS SIXTY PERCENT, FOR JOB SHOPS
4-41
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profitability and capital investment threshold levels for the sensitivity
ranges, and graphically portrays the plant closure effect of increasing
capital investment and corresponding annual costs 30 and 60 percent. This
effect is depicted by increasing the plant closure threshold levels of the
curve.
With a 30 percent increase in compliance costs, 3 additional plants are
shown as closures at BPT/Prel, 4 additional plants at BATl/Pre2, and
11 additional plants at BAT2/Pre3. Of the 12 additional plant closures at
BAT2/Pre3 level, 3 were from the range group and 2 each were from the job
shop, hot water heater, and architectural panel groups.
The additional industry employment losses (above the "given" compliance
cost employment losses) resulting from the 30 percent increase in compliance
costs are as follows:
For BPT/Prel option - 440 employees
For BATl/Pre2 option - 452 employees
For BAT2/Pre3 option - 3,031 employees,
Increase in compliance costs by 60 percent shows 6 additional plant
closures at BPT/Prel, 8 at BATl/Pre2, and 13 at BAT2/Pre3 levels. Of the
13 additional plant closures at BAT2/Pre3, the job shop, range, and
architectural panel groups were the most highly impacted.
The resulting additional employment losses (above the "given" compliance
cost employment losses) due to the 60 percent increase in compliance costs are
listed below:
For BPT/Prel option - 1,013 employees
For BATl/Pre2 option - 1,867 employees
For BAT2/Pre3 option - 3,154 employees.
In terms of total employment impacts at BAT2/Pre3 level, the range and
sanitary ware groups appear to be the most heavily affected. The range group,
4-43
-------
in particular, accounts for almost one-third of the total reduced employment
at a 60 percent increase in the given compliance costs (1,645 employees).
Table 4-14 lists, by state, the number of employment losses expected to occur
as a result of compliance cost increases, as well as resulting substitution
effects. Tennessee was found to have the largest employment impact at BAT2/
Pre3 at both a 30 and a 60 percent increase in compliance costs, with 1,938
and 2,015 affected employees. Other states with significant impacts are
Indiana with 592 impacted employees at both 30 and 60 percent increase in
costs at BAT2/Pre3, and Wisconsin with 472 employees at B:AT2/Pre3 plus 30 per-
cent and 518 employees at BAT2/Pre3 plus 60 percent.
4.4.6 Projections of Impacts to the Total Industry
Projections of compliance costs for the total 116 porcelain enamel plants
covered in this study are contained in Table 4-15. These estimations were
developed utilizing data given (when available) and industry averages (when
data was not available). Notwithstanding, the 80 plant sample is believed to
be representative of the entire industry and the projections developed on this
basis should closely reflect conditions in the total industry.
Table 4-16 lists the projected plant closures for the 116 known porcelain
enamel plants. These projections were derived on a proportionate basis from
the 80 sample plants, since the sample appears to be representative of the
whole industry. The results of the projections indicate that at BPT/Prel,
10 plants would close; at BATl/Pre2, 11 plants would close; and from
BAT2/Pre3, 26 plants would close.
Table 4-17 projects the employment impacts resulting from the plant
closures found in the previous table. These projections range in accordance
with the plant closures in Table 4-16. For the 116 plants, 700 employees at
BPT/Prel, 720 employees at BATl/Pre2, and 3,060 employees at BAT2/Pre3 could
be affected by plant closures.
Table 4-18 contains the plant closure projections for the plus 30 and
plus 60 percent sensitivity analysis. These plant closures were projected by
4-44
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product group and discharge status on a proportionate basis from the sensi-
tivity analysis conclusions for the 80 sample plants contained in Table 4-12.
The results of this analysis indicate that at the highest compliance cost
level (BAT2/Pre3 with a 60 percent increase in costs), 46 plant closures would
occur. The most heavily impacted product groups at this cost level are the
job shops (17 of 26 plants), ranges (9 closures of 27 plants), cookware
(7 of the 9 plants will discontinue porcelain enameling operations), the
architectural panel (6 closures of 8 plants) and sanitary ware (5 closures of
9 plants) segments.
Table 4-19 contains the employment losses resulting from the plant
closures found in Table 4-18. At the BAT2/Pre3 level with a 60 percent
increase in compliance costs, 8,105 employees are impacted. The range (with
2,960 employees), job shops (with 2,589 employees) and the sanitary ware (with
1,220 employees) segments are the most heavily impacted segments.
4.5 OTHER ECONOMIC IMPACTS
The proposed effluent regulations examined in this report may have
economic impacts other than the effects of the specific plant closure conclu-
sions. These impacts include the effect on new plant construction due to the
implementation of New Source Performance Standards; the possible foreign trade
impacts and the effect on the balance of payments abroad, as well as the
possible long term implications of the regulations. Each of these potential
impacts will be discussed in the following sections.
4.5.1 New Source Performance Standards
As stated in Section 2.1, the declining trend in the usage of porcelain
enamel is expected to continue. The slow growth rate for most end-products,
together with the expected continuation of substitution from porcelain enamel
suggests little need for additional porcelain enamel capacity. Since there is
already significant excess capacity in porcelain enameling, it is expected
that few if any new sources will emerge. Any new plants that might be built
are likely to be replacements of an older one. In that situation, it does not
4-50
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4-51
-------
appear likely that a new facility would be built unless there were sizable
cost savings to be realized from improved operating efficiencies or locational
factors (such as a more favorable labor and tax climate). These factors would
be expected to more than offset the costs associated with new source perfor-
mance standards. Thus, no significant impact is foreseen from new source
standards .
4.5.2 Foreign Trade Impacts
Besides the cookware group, where a significant level of import competi-
tion already exists, effluent regulations will have no foreign trade impacts.
Import and export of other porcelain enameled products are negligible. The
porcelain enamel cookware manufacturers, which already have lost half of the
United States market to imports, could be further impacted by compliance
requirements.
4.5.3 Possible Long-Term Implications
In light of the declining trends identified in the 1984 baseline projec-
tions and the significantly large added burden of effluent regulations, it
appears that porcelain enamel usage may be limited to a small number of func-
tionally advantageous applications in the future. The result of such a devel-
opment may further impact the household appliance manufacturers and lead to a
complete transformation of the sanitary ware industry.
In the appliance industry, consumer preference and product durability
considerations on the one hand, and increased porcelain enameling costs on the
other, may place considerable pressure on the manufacturers. In the sanitary
ware industry increased porcelain enameling costs are likely to increase the
competitive pressure currently being exerted by stainless steel, cultured
marble, and molded plastic. If these pressures continue, it is possible that
many home appliances may be redesigned to eliminate porcelain enamel use, and
the metal sanitary ware industry as it exists today may be replaced by a
plastic and stainless steel sanitary ware industry.
4-52
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In other product groups, it is likely that the demand for some architec-
tural panels and job shop services will continue to exist, and while the most
efficient plants in these sectors are likely to remain to meet this demand,
plant closures will continue as the quantity of demand drops. However, in the
case of cookware, it is likely that foreign imports may completely dominate
this business in the long run.
In summary, while the direction of the long-term trends in these industry
sectors will not be changed by the imposition of effluent regulations, it
appears that the rate of decline encompassed in these trends will be greatly
accelerated and may force industry adjustments sooner than would have
naturally occurred.
4.6 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
Various assumptions and estimates were made in the calculations of com-
pliance costs and in the analyses performed to assess their impacts. While
various statistical techniques were employed to lessen their significance,
these factors still unavoidably affect the level of accuracy which can be
assigned to the conclusions reached.
The assumptions relating to the estimation of plants' specific compliance
costs are outlined in Chapter 3 of this report and are discussed in detail in
the accompanying development document. These assumptions have a major bearing
on the accuracy of the economic impact conclusions, and accordingly a special
sensitivity analysis has been performed (see Section 4.6).
The major assumptions and estimates made in the economic impact analysis
are related to the data used for the analyses. A major data limitation in the
analysis lies in the fact that only a single year's production data (1976)
were collected. Multiple years production data would have enabled a more
in-depth analysis, encompassing the cyclical nature of the industry. Since no
industry survey was conducted to collect plant-specific financial data, much
of the data used in this report had to be estimated and/or extrapolated from
4-53
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public sources. The major assumptions made in the estimating and extra-
polating of these data are:
The production rates reported to EPA measured production in
terms of square feet enameled. These figures had to be
adjusted to reflect the square footage of metal coated on
one side so that the square footage figures of porcelain
enameling production could be converted to product units.
Estimates of average square feet of porcelain enameling per
unit and average manufacturers price per unit were used to
derive projected plant revenue estimates from the adjusted
porcelain enamel production volumes.
Corporate-level profit margins were applied to the plants in
each product group for which information was available. For
plants whose corporate profit margins were not available,
average product group profit margin was used.
Average industry operating ratios from the Commerce Depart-
ment's Annual Survey of Manufacturers were used to extra-
polate values for plant assets and average annual capital
expenditures for use in the financial analyses.
The limitations of the data used in the study also forced certain assump-
tions to be made in the methodology used for the impact analyses. In studies
where detailed, plant-specific data are available, potential plant closures
can be identified by using discounted cash flow analyses. Using this
approach, a judgment can be made about the ability of a plant to continue in
business, after compliance with effluent regulations, by comparing the dis-
counted value of the plant's cash flow with the plant's estimated salvage
value. The application of this approach requires plant-specific data on cash
flows and salvage values. Since data at this level of specificity were not
available for this study, this approach was not deemed to be practical or
appropriate. As an alternative method, profitability impacts were measured
through the use of return on investment (gross assets) and profit margin ratio
analyses.
Likewise, because data on the current debt-equity position of many of the
firms were not available, an analysis of impacts of compliance costs on debt
service coverage could not be performed. Therefore, the capital investment
requirements analysis was limited to a measure of the magnitude of impact
4-54
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burden and did not attempt to assess the ability of impacted firms to raise
the needed capital.
In summary, while these factors limit the quantitative accuracy of the
impact assessments, they do not appear to affect the general impact conclu-
sions with respect to most plants.
*U.S. GOVERNMENT PRINTING OFFICE: 1981 337-075/8002 1-3 4~55
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