vvEPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
Water
EPA 440/2-82-010
November 1982
ENVIRONMENTAL
PROTECTION
Economic Analysis of
Effluent Limitations and
Standards for the Coil
Coating Industry
AGENCY
TEXAS
QUANTITY
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This document is available at EPA Regional offices. Copies may be obtained
from the National Technical Information Service, Springfield, Virginia 22161.
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ECONOMIC IMPACT ANALYSIS
OF PROPOSED
EFFLUENT STANDARDS AND LIMITATIONS
FOR THE COIL COATING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
401 M Street, Southwest
Washington, B.C. 20460
EPA 440-2-82-010
November, 1982
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DISCLAIMER
Mention of trade names or commercial products does not constitute
endorsement or recommendation for use.
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent standards and limitations issued under Sections 301,
304, 306, and 501 of the Clean Water Act to the coil coating industry.
The study supplements the technical study (EPA Development Document) sup-
porting 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 ac-
cordance 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 effects in terms of product price increases, effects upon em-
ployment 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 accor-
dance with Contract No. 68-01-6348, Work Assignment 14, by JRB Associates, and
was completed in November, 1982.
This report is being released and circulated at approximately the same
time as publication of a notice of proposed rulemaking in the Federal Register.
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
final rulemaking proceedings.
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TABLE OF CONTENTS
Chapter Page
SUMMARY S-l
1. INTRODUCTION 1-1
1.1 PURPOSE 1-1
1.2 INDUSTRY COVERAGE 1-1
1.3 INDUSTRY SEGMENTATION 1-1
1.4 ORGANIZATION OF REPORT 1-2
2. STUDY METHODOLOGY 2-1
2.1 OVERVIEW 2-1
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS .... 2-3
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS 2-3
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES 2-8
2.5 STEP 4: SCREENING ANALYSIS 2-8
2.6 STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS 2-11
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS 2-14
2.8 STEP 7: PLANT CLOSURE ANALYSIS 2-15
2:9 STEP 8: OTHER IMPACTS 2-16
2.10 STEP 9: NEW SOURCE IMPACTS 2-17
2.11 STEP 10: SOCIAL COST ANALYSIS 2-18
2.12 STEP 11: SMALL BUSINESS ANALYSIS 2-18
3. INDUSTRY CHARACTERIZATION 3-1
3.1 INDUSTRY PRODUCION PROCESSES 3-1
3.2 FIRM AND PLANT CHARACTERISTICS 3-3
3.2.1 Plant Characteristics 3-3
3.2.2 Firm Characteristics 3-9
3.2.3 Financial Status 3-13
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TABLE OF CONTENTS (Continued)
Chapter Page
3.3 DEMAND DETERMINANTS 3-15
3.3.1 Production Characteristics 3-15
3.3.2 Product Prices 3-18
3.3.3 Trends in Coil Coating Use 3-21
3.3.4 End Uses and Substitutes 3-24
3.4 PRICE DETERMINATION 3-31
3.4.1 Industry Competition 3-31
3.4.2 Demand Elasticity 3-33
3.4.3 Summary of Findings on Price Determination . . . 3-37
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 4-1
4.1 DEMAND FORECASTS 4-1
4.2 SUPPLY FORECASTS 4-3
4.2.1 Number of Facilities in 1985 4-3
4.2.2 Capital Requirements for New Sources 4-5
4.3 SUMMARY OF BASELINE CONDITIONS 4-7
5. WATER POLLUTION CONTROL OPTIONS AND COSTS 5-1
5.1 OVERVIEW 5-1
5.2 POLLUTANT PARAMETERS 5-1
5.3 CONTROL AND TREATMENT TECHNOLOGIES 5-2
5.4 COMPLIANCE COST ESTIMATES 5-4
5.4.1 Critical Assumptions 5-4
5.4.2 Compliance Costs of Existing Sources 5-5
5.4.3 Compliance Costs of New Sources 5-7
6. ECONOMIC IMPACT ANALYSIS 6-1
6.1 PRICE AND QUANTITY CHANGES 6-1
6.2 SCREENING ANALYSIS 6-2
6.3 PROFIT IMPACT ANALYSIS 6-2
11
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TABLE OF CONTENTS (Continued)
Chapter Page
6.4 CAPITAL REQUIREMENTS ANALYSIS 6-6
6.5 PLANT CLOSURE POTENTIAL 6-6
6.6 OTHER ECONOMIC IMPACTS 6-6
6.6.1 Substitution Effects 6-8
6.6.2 Community and Employment Impacts 6-8
6.6.3 Foreign Trade Impacts 6-8
6.6.4 Industry Structure Effects 6-8
6.7 NEW SOURCE IMPACTS 6-8
7. SMALL BUSINESS ANALYSIS 7-1
7.1 SMALL BUSINESS ANALYSIS BASED ON PLANT
ANNUAL PRODUCTION 7-1
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT
FLOW RATES 7-3
8. LIMITATIONS OF THE ANALYSIS 8-1
8.1 DATA LIMITATIONS 8-1
8.2 METHODOLOGY LIMITATIONS 8-2
8.3 SUMMARY OF LIMITATIONS 8-3
Appendices
A. CALCULATION OF PROFIT IMPACT THRESHOLD VALUE A-l
B. ELASTICITY ESTIMATES B-l
111
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LIST OF FIGURES
Figure Page
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
2-2 PRICE AND MARKET SHARE ADJUSTMENTS 2-7
2-3 SCREENING & PLANT CLOSURE ANALYSIS PROCEDURE 2-10
3-1 COIL COATING PROCESSES 3-2
3-2 PRODUCT SHIPMENTS OF COATED COIL, 1962-1981 3-22
B-l ILLUSTRATION OF SHIFTS OF DEMAND AND SUPPLY CURVES B-2
LIST OF TABLES
Table Page
S-l TOTAL ANNUAL AND CAPITAL INVESTMENT COMPLIANCE COSTS FOR COIL
COATING EXISTING SOURCES S-ll
S-2 NEW SOURCE COMPLIANCE COSTS FOR A PLANT WITH 78.1 MILLION
SQUARE METER PRODUCTION CAPACITY S-12
3-1 SQUARE FOOTAGE OF METALS COATED BY TECHNICAL
SUBCATEGORY MIX, 1976 3-4
3-2 PRODUCTION VOLUMES OF 62 SAMPLE PLANTS BY PLANT TYPE FOR THE
COIL COATING INDUSTRY IN 1976 3-6
3-3 SUMMARY OF CHARACTERISTICS OF 62 SAMPLE PLANTS WITH
PRODUCTION AND COST DATA 3-8
3-4 METALS COATED BY TYPE OF FIRM IN THE COIL COATING INDUSTRY. . 3-11
3-5 NUMBER OF PLANTS AND PRODUCTION VOLUME, BY TYPE OF COIL
COATING FIRM 3-12
3-6 FINANCIAL PROFILE OF TOLL COATING OPERATIONS 3-14
3-7 COATINGS AND METALS COATED 3-16
3-8 TYPES AND USES OF COATINGS 3-17
3-9 COATING MIX, FOUR COIL COATERS 3-19
IV
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LIST OF TABLES (continued)
3-10 FACTORS AFFECTING PRICES 3-20
3-11 ESTIMATED SHIPMENTS OF PRECOATED METAL COIL BY COATERS
LOCATED IN THE UNITED STATES, CANADA AND MEXICO 3-23
3-12 TYPICAL USES OF PRE-COATED METAL STRIP 3-25
3-13 CONSUMPTION OF COATED COIL BY MAJOR MARKET 3-28
3-14 FACTORS AFFECTING ELASTICITIES FOR FOUR MAJOR MARKETS OF THE
COIL COATING INDUSTRY 3-35
4-1 PROJECTION OF TOTAL SHIPMENTS OF COATED COILS 4-4
4-2 PROJECTED CAPACITY EXPANSION REQUIREMENTS FOR COIL
COATING, 1981-1985 4-6
5-1 TOTAL ANNUAL COMPLIANCE COSTS FOR COIL COATING
EXISTING SOURCES 5-5
5-2 INCREMENTAL ANNUAL COMPLIANCE COSTS FOR COIL COATING
EXISTING SOURCES 5-6
5-3 DISTRIBUTION OF SAMPLE PLANTS AND PRODUCTION BY UNIT
ANNUAL COMPLIANCE COST 5-8
5-4 CAPITAL INVESTMENT COMPLIANCE REQUIREMENTS FOR COIL COATING
EXISTING SOURCES 5-9
5-5 NEW SOURCE COMPLIANCE COSTS 5-10
5-6 NEW SOURCE COMPLIANCE COSTS FOR A PLANT WITH 78.1 MILLION
SQUARE METER PRODUTION CAPACITY 5-11
6-1 ANTICIPATED INDUSTRY PRICE AND PRODUCTION CHANGES 6-2
6-2 RESULTS OF SCREENING ANALYSIS 6-3
6-3 PROFIT IMPACT ANALYSIS OF HIGH IMPACT TOLL COATER AND ADJUNCT
PLANTS 6-4
6-4 PROFIT IMPACT ANALYSIS OF HIGH IMPACT CAPTIVE PLANTS 6-5
6-5 CAPITAL REQUIREMENTS ANALYSIS OF HIGH IMPACT PLANTS 6-7
6-6 COMPARISON OF COMPLIANCE COSTS FOR NEW AND EXISTING SOURCES. . 6-9
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LIST OF TABLES (continued)
Page
7-1 COIL COATING SMALL BUSINESS ANALYSIS BY PRODUCTION 7-2
7-2 COIL COATING SMALL BUSINESS ANALYSIS BY FLOW RATE 7-4
A-l ESTIMATED ROI THRESHOLD VALUES THAT GENERATE 12 PERCENT ROE
ASSUMING VARIOUS ASSETS LIQUIDATION VALUES AND EQUITY TO
ASSETS RATIOS A-3
VI
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EXECUTIVE SUMMARY
INTRODUCTION
Purpose
This report provides an identification and analysis of the economic
impacts which are likely to result from the promulgation of EPA's effluent
regulations on the Coil Coating Industry. These regulations include
effluent limitations and standards based on Best Practicable Control Tech-
nology Currently Available (BPT), Best Available Technology Economically
Achievable (BAT), Best Conventional Pollutant Control Technology (BCT), New
Source Performance Standards (NSPS), and Pretreatment Standards for New and
Existing Sources (PSNS and PSES) which are being proposed under authority of
Section 301, 304, 306, 307, and 501 of the Federal Water Pollution Control
Act,,as amended by the Clean Water Act of 1977 (Public Law 92-500). The
primary economic impact variables assessed in this study include the costs of
the proposed regulations and potential for these regulations to cause plant
closures, price changes, unemployment, changes in industry profitability,
structure and competition, shifts in the balance of foreign trade, new source
impacts, and impacts on small businesses.
Industry Coverage and Segmentation
The coil coating point source category, as defined in this study, includes
facilities which clean, chemically treat and paint continuous (long) strips
of metal called coils. The method of paint application reported and observed
in the coil coating industry is roll coating. The primary metals coated by
this process are cold-rolled steel, galvanized steel and aluminum.
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For regulatory purposes, EPA divided the coil coating industry into
three technical subcategories based on basis material coated. These sub-
categories are:
Coil coating of steel
Coil coating of galvanized steel
Coil coating of aluminum.
Since the pollutants generated in the surface preparation of the metal vary
by type of metal coated, this subcategorization scheme was chosen to sub-
divide the industry into groups of plants with similar wastewater profiles.
In terms of measuring economic impact, the technical subcategories were
found to be inappropriate. Therefore, for the purpose of assessing the
economic impacts of the regulations, the coil coating industry is divided
into the following three types of operational modes:
Toll coaters, which coat customer-owned metal on
a service basis; they generally do not perform
metal fabricating operations.
Captive operations, which are part of a proprietary
product manufacturing process (such as building
products, food container packaging, etc.).
Adjunct operations, which are performed in plants
with rolling mills on the plant site; the metal
is coated as part of the customers' orders.
METHODOLOGY
The approach used to assess the economic impacts likely to occur as a
result of the costs of each regulatory option is to (1) develop an operational
description of the price and output behavior of the industry and (2) assess
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the likely plant-specific responses to the incurrence of the compliance costs
enumerated in the body of this report. Thus, industry conditions before and
after compliance with the proposed regulations are compared. Supplemental
analyses are used to assess linkages of the coil coating industry's conditions
to other effects such as employment, community, and balance of trade impacts.
These analyses were performed for three regulatory options considered by EPA.
The methodology of the study includes eleven major steps. Although each
step is described independently, there is considerable interdependence among
them. Specifically, the study proceeded using the following eleven steps:
Step 1: Description of Industry Characteristics
The first step in the analysis is to develop a description of basic
industry characteristics such as the determinants of demand, market structure,
the degree of intra-industry competition, and financial performance. The
resulting observations indicated the type of analysis needed for the industry.
The sources for this information include government reports, trade association
data, discussions with various trade associations and industry personnel, and
an EPA survey of firms in the industry.
Step 2.: Supply - Demand Analysis
The second step in the analysis is a determination of the likely changes
in market prices and industry production levels resulting from each regulatory
option. The estimates of post-compliance price and output levels are used in
the plant-level analysis (Steps 5, 6, and 7) to determine post-compliance
revenue and profit levels for specific plants in each group.
A cost plus mark-up pricing strategy is assumed as an approximation of
industry-wide price increases. This strategy is applied to the average com-
pliance cost per dollar of revenue across all plants in the industry for
which data were available. The post-compliance market price levels are
used, in a later step, to assess the financial condition of individual coil
coating facilities.
S-3
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Step 3: Cost of Compliance Estimates
Investment and annual compliance costs of the three treatment options were
estimated for each coil coating operation. These cost estimates form
the basis for the economic impact analysis.
Step A: Screening Analysis
A screening analysis based on plant change in profit margin (dPM) after
compliance is performed to identify plants which require detailed financial
analysis to determine the likelihood of closure. Plants with dPM greater
than 2 percent are selected for further financial analysis.
Step 5: Plant-Level Profitability Analysis
The basic measure of financial performance used to assess the impact of
the proposed regulations on the profitability of individual plants is return
on investment (ROI). Plants with after-compliance ROI below a threshold
value of 8 percent are considered potential plant closures. The 8 percent
ROI threshold value corresponds to 12 percent after-tax return on equity which
is assumed to be the minimum return for a business to continue operation. Due
to the unavailability of plant-specific baseline financial characteristics
for the coil coating industry, average industry financial and operating ratios
were applied to each plant.
The above ROI analysis is used for toll coaters only. For captive and
adjunct plants, the profit impact analysis is based on the "profit to annual
compliance cost" ratio. Plants with a ratio of less than one are considered
potential plant closures.
S-4
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Step 6: Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a profita-
bility perspective, it is also of interest to assess the ability of firms to
make the initial capital investment needed to construct and install the required
treatment systems. The analysis of capital availability was based on the ratio
of "compliance capital investment requirements to plant revenues" (CCI/R). This
ratio was calculated for each plant and compared to a threshold value to help
determine the potential for significant plant-level impacts.
Step 7: Plant Closure Analysis
The decision to close a plant, like most major investment decisions, is
largely based on financial performance, but ultimately iudgmental. This is
because the decision involves a wide variety of considerations, many of which
cannot be quantified or even identified. Assessments of the degree of impacts
on individual plants were made by evaluating the above financial variables in
conjunction with non-financial and non-quantifiable factors, such as substitut-
ability of products, plant and firm integration, the existence of specialty
markets, and expected market growth rates.
Step 8: Other Impacts
"Other impacts" which result from the assessment of basic price, produc-
tion, and plant-level profitability changes, include impacts on employment,
communities, industry structure, and balance of trade.
Step 9: New Source Impacts
This step analyzes the effects of NSPS/PSNS guidelines upon new plant
construction and substantial modification to existing facilities in the
coil coating industry. The analysis is based on model plants developed
for each technical subcategory and the corresponding compliance costs of the
alternative treatment technologies.
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Step 10: Social Cost Analysis
Social costs measure the value of goods and services lost by society due
to regulatory action. These costs generally include the use of resources
needed to comply with a regulation, the use of resources needed to implement
or enforce a regulation, plus the value of the output that is forgone because
of the regulation. However, the total industry costs of the treatment alter-
natives are less than $100 million, therefore a social cost analysis is not
required.
Step 11; Small Business Analysis
The Regulatory Flexibility Act requires Federal regulatory agencies to
consider small entities throughout the regulatory process. This analysis
identifies the economic impacts which are likely to result from the promulga-
tion of the effluent regulations on small businesses in the coil coating
industry. Most of the information and analytical techniques in the small
business analysis are drawn from the general economic impact analysis. The
specific conditions of small firms are evaluated against the background of
general conditions in the coil coating markets.
For purposes of regulation development, the following two approaches
for defining small plants were considered:
1) Plant annual production, and
2) Plant wastewater flow rates.
The impacts on small plants under each definition were assessed by
examining the distribution by plant size of the number of coil coating plants,
plant revenues, wastewater volumes, compliance costs, and potential closures
from regulations.
S-6
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INDUSTRY CHARACTERISTICS
The EPA identified 77 coil coating facilities in operation in 1976. Seven
of these plants were zero dischargers and two were closed due to bankruptcy of
the parent corporation. Of the 68 known dischargers, 62 provided production
data through an EPA industry survey and formed the basis of the economic impact
analysis.
These 62 plants may be classified into the following three types of coil
coating plants:
Toll coaters - 17 plants
Captive operations - 24 plants
Adjunct operations - 21 plants.
Toll coaters and adjunct plants are generally larger than captive plants.
Other key characteristics of the 62 sample plants are:
34 plants (55 percent) discharge to POTWs
48 plants (77 percent) have been modified since 1970
The average coil coating employment is 50 persons per plant
Coil coating employment ranges from 5 to 600 persons with
65 percent of the plants employing between 5 and 40 persons
41 plants (59 percent) of the firms coat more than one
type of metal.
In the group of 62 plants with reported production volumes, only 41 firms
are represented. Based on an examination of their major line of business,
these 41 firms may be classified into the following three categories:
Integrated aluminum firms - 10 firms
Integrated steel firms - 6 firms
Other types of firms - 25 firms.
S-7
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The integrated aluminum and steel firms were found to operate primarily
adjunct facilities, while the other types of firms with coil coating facilities
were found to operate primarily captive and toll coating facilities. Forty-
three percent of the industry production is accounted for by the integrated
aluminum firms. Also, the average plant production rate for the aluminum firms
is 40 percent larger than that of the steel firms and almost 60 percent
larger than the average for the other firms with coil coating facilities.
Fifty-nine percent of the firms coat more than one type of metal.
The coatings used in the coil coating industry are complex blends of
organic polymers, pigments, solvents, and additives which are manufactured to
give the coatings different qualities. Studies found that acrylics, polyester
and silicone modified polyester along with zinc primers constitute a large
majority of the coatings used in the industry. Zinc coating is one of coated
coils fastest growing markets, and since 1975 there have been a number of new
lines built or modifications made to existing lines to accomodate this type
of coating.
Industry prices vary according to type of coating, and the width, gauge,
and area of the metal coated. Industry sources report that average prices
in 1977-1978 ranged from 1.8 cents to 35 cents per square foot of metal
coated. A weighted average selling price representative of the industry was
estimated to be 6 cents per square foot.
During the 1960s and 1970s, shipments of precoated metal grew by an
average annual compound growth rate of 10.6 percent while real GNP grew
about 3 percent annually. The two largest markets, building products and
transportation, accounted for 61 percent of the total shipments in 1981.
Two other major markets are the container and appliance markets. The strong
growth of coated coil shipments and recent construction of several new plants
seem to indicate that market conditions in the industry are good.
S-8
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The main advantages of coil coating are its high quality surface finishes
and its significant cost advantages over alternative finishing operations
(e.g., post painting) and materials. The major disadvantage is that pre-coated
coil requires careful handling, and special welding and joining techniques.
Potential for substitution of coated coil in most of its major applica-
tions is low. Because of this, low demand price elasticities between -0.2 and
-0.5 are estimated for the four largest markets of coated coil.
BASELINE PROJECTIONS
Conditions in the coil coating industry to 1990, under the assumption
that there would be no water pollution control requirements resulting from
the Clean Water Act, are projected and summarized below:
The industry output will grow at an average compounded
annual growth rate of 7.4 percent between 1981 and 1990,
about twice that expected for the general economy as
measured by GNP.
There will be no baseline closures.
Between 6 and 8 new coil coating lines will be needed by
1985 to meet the increase in demand for coated metal.
The capital requirements for the new lines are estimated
to be between $120 and $160 million (1978 dollars).
Technological change in the appliance industry may increase
the use of coated coils relative to other materials used
in appliances.
WATER POLLUTION CONTROL OPTIONS AND COSTS
Based on the analysis of the potential pollutant parameters and treatment
in place in the coil coating industry, EPA identified 4 treatment technologies
that are applicable for the existing sources in the industry:
S-9
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Treatment Level 1: lime and settle
Treatment Level 2: lime and settle, plus flow reduc-
tion by quench water recycling
Treatment Level 3: Treatment Level 2 plus filtration
Treatment Level 4: similar to Treatment Level 3 but
substitutes ultrafiltration for conventional filtration.
However, EPA determines that Treatment Level 4 may not be technically feasible
and, for this reason, excluded it from further consideration. As a result,
the economic impact analysis is limited to the first three alternatives.
For new sources, three alternative treatment technologies were examined:
Treatment Level 1: similar to existing source Treat-
ment Level 3 with the addition of multistage counter-
current cascade rinsing
Treatment Level 2: similar to new source Treatment
Level 1 but substitutes ultrafiltration for conven-
tional filtration
Treatment Level 3: similar to new source Treatment
Level 2 but substitutes sedimentation with membrane
filtration.
Because of potential technical difficulties with Treatment Level 2 and 3, only
Treatment Level 1 is considered for new sources.
Table S-l presents the estimated investment and annual compliance costs
for the existing sources, and Table S-2 summarizes the compliance cost esti-
mates of the new source treatment alternatives.
S-10
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TABLE S-2. NEW SOURCE COMPLIANCE COSTS FOR A PLANT WITH 78.1
MILLION SQUARE METER PRODUCTION CAPACITY
Steel Galvanized Aluminum
Subcategory Subcategory Subcategory
Plant Production ,
Capacity (10bxmZ)a/ 78.1 78.1 78.1
Plant Revenues
(Million of Dollars) 25.2 25.2 25.2
Plant Assets Value
(Million of Dollars) 20.0 20.0 20.0
Flow Rate , , , , , ,
0.316b/ 0.343b/ 0.475b/
1/hr 3,956C/ 4,294C/ 5,947C/
Compliance Costs
(Thousands of 1978 Dollars)
Investment 523.1 545.2 573.4
Annual 156.4 163.6 162.2
Compliance Costs of Revenues (%)
Investment 2.1 2.2 2.3
Annual 0.6 0.6 0.6
Investment to Assets Value (%) 2.6 2.7 2.9
a/
Represents area of both sides of metal.
Estimated by EPA.
Assume plant operation is 24 hours a day and 260 days a year.
Source: JRB Associates estimates.
S-12
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FINDINGS
Plant Closure Impact
As discussed previously, the primary economic impact variables examined
include changes in industry profitability, plant closures, and substitution
effects. Both the profit impact and capital requirements analyses indicate
that there would be no potential closures for the 68 known dischargers in
the industry.
New Source Impacts
Since the compliance costs are lower for new sources than for existing
sources, the regulations would not deter new entry.
Impacts on Small Entities
Two alternative approaches were selected to define small coil coating
plants for purposes of regulation development; (1) plant annual production
(2) plant wastewater flow rates. Since there are no projected plant closures,
the regulation would have a minimal effect on small plants.
Other Impacts
Since there are no projected plant closures and estimated quantity
changes were small for any of the treatment alternatives, the impacts of the
regulations on employment, communities, industry structure and foreign trade
would be small.
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1 INTRODUCTION
1.1 PURPOSE
This report identifies and analyzes the economic impacts which are likely
to result from the promulgation of EPA's effluent regulations on the coil
coating industry. These regulations include effluent limitations and stan-
dards based on Best Practicable Control Technology Currently Available (BPT),
Best Available Technology Economically Achievable (BAT), Best Conventional
Pollutant Control Technology (BCT), New Source Performance Standards (NSPS),
and P*vetreatment Standards for New and Existing Sources (PSNS and PSES) which
are being proposed under authority of Section 301, 304, 306, 307, and 501 of
the Federal Water Pollution Control Act as amended by the Clean Water Act of
1977 (Public Law 92-500). The primary economic impact variables assessed in
this study include the costs of the proposed regulations and potential for
these regulations to cause plant closures, price changes, unemployment,
changes in industry profitability, structure and competition, shifts in the
balance of foreign trade, new source impacts, and impacts on small businesses.
1.2 INDUSTRY COVERAGE
The coil coating point source category as defined in this study, includes
facilities which clean, chemically treat and paint continuous (long) strips of
metal called coils. The primary metals coated by this process are cold-rolled
steel, galvanized steel, and aluminum. The method of paint application
reported and observed in the coil coating industry is roll coating. The coil
coating process is also called "prior coating" or "pre-coating," since the
metal is coated before it is formed or fabricated.
1.3 INDUSTRY SEGMENTATION
For regulatory purposes EPA divided the coil coating industry into three
technical subcategories based on basis material coated. These subcategories
are:
Coil coating of steel
Coil coating of galvanized steel
Coil coating of aluminum.
1 1
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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 wastewater profiles.
In terms of measuring economic impact, the technical subcategories were
found not to be appropriate. This was due to the fact that most plants in the
industry have the capability to coat more than one type of metal, and thus
these three subcategories do not form an economic basis for segmenting the
industry.
In an attempt to segment the industry in a manner which would highlight
the economic impact, the types of products and markets served were considered
as a possible basis for industry segmentation. However, the potential
products produced by most plants in the industry were found to be too numerous
to serve as a basis for segmenting the industry. Also, most coil coating
plants were found to serve multiple markets.
After considering these factors, it was determined that the coil coating
industry consists of one economic segment. The financial impact of pollution
control costs, however, are likely to be most closely related to the plant
type of operations. Therefore, for the purpose of assessing the economic
impacts of the regulations, the coil coating industry is divided into the
following three types of operational modes:
Toll coaters, which coat customer-owned metal on a service basis; they
generally do not perform metal fabricating operations.
Captive operations, which are part of a proprietary product manufac-
turing process (such as building products, food container packaging,
etc.) .
Adjunct operations, which are performed in plants with rolling mills
on the plant site; the metal is coated as part of the customers'
orders .
1.4 ORGANIZATION OF REPORT
The remainder of this report consists of seven chapters. Chapter 2
describes the analytical methodology employed, Chapter 3 provides the basic
1-2
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industry characteristics and Chapter 4 projects some of the critical
parameters into the future to enable an understanding of the expected
characteristics of the industry during the 1985 to 1990 time period, when the
primary economic impacts of the proposed regulations will be felt. Chapter 5
describes the pollution control technologies considered by EPA and their
associated costs. The information in Chapter 5 is derived primarily from the
Development Document prepared by EPA's Effluent Guidelines Division
Chapter 6 describes the economic impacts estimated to result from the costs
that are estimated in Chapter 5. Chapter 7 presents an analysis of the
effects of the proposed regulations on small business and Chapter 8 outlines
the major limitations of the analysis and discusses the possible effects of
the limitations on the study's major conclusions.
Development Document for Effluent Limitations Guidelines and Standards for
the Coil Coating Point Source Category, January 1981.
1-3
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2. STUDY METHODOLOGY
2.1 OVERVIEW
Figure 2-1 shows an overview of the analytical approach used to assess
the economic impacts likely to occur as a result of the costs of each proposed
regulatory option. For the coil coating industry, four regulatory options are
evaluated; however, as explained in Section 5.3 one of the options may not be
technically feasible, and, for this reason, is excluded from further consider-
ation. The approach used in this study is to (1) develop an operational
description of the price and output behavior of the industry, and (2) assess
the likely piant-specific responses to the incurrence of the compliance costs
enumerated in Chapter 5.
The operational description of the price and output behavior, in conjunc-
tion with compliance cost estimates supplied by EPA, is used to determine new
post-compliance industry price and production levels for each regulatory
option. Individual plants are then subjected to a financial analysis that
uses capital budgeting techniques to determine potential plant closures. The
industry description is then revised, for each regulatory option, to incor-
porate the reduced industry capacity resulting from the plant closures into
the analysis. Finally, other effects which result from the basic price,
production, and industry structure changes are determined. These include
employment, community, and foreign trade impacts. Specifically, the study
proceeded in the following eleven steps:
1. Description of industry characteristics
2. Industry supply and demand analysis
3. Analysis of cost of compliance estimates
A. Plant level screening analysis
5. Plant level profitability analysis
6. Plant level capital requirements analysis
7. Assessment of plant closure potential
8. Assessment of other impacts
9. New source impacts
10. Social costs analysis
11. Small business analysis.
2-1
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Although each of these steps is described separately in this section, it is
important to realize that there are significant interactions between them, as
shown in Figure 2-1.
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis is to describe the basic industry charac-
teristics. These characteristics, which include the determinants of demand,
market structure, the degree of intra-industry competition, and financial
performance, are presented in Chapter 3 of this report.
The sources for this information include government reports, trade
association data, discussions with various trade association representatives
and individuals associated with the industry, and an EPA industry survey under
Section 308 of the Clean Water Act.
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis, step 2 of the study method-
ology, is to determine the likely changes in market prices and industry
production levels resulting from each regulatory option. The estimates of
post-compliance price and output levels are used in the plant-level analysis
to determine post-compliance revenue and profit levels for specific plants.
If prices are successfully raised without significantly reducing product
demand and companies are able to maintain their current financial status, the
potential for plant closings will be minimal. If prices cannot be raised to
fully recover compliance costs because of the potential for a significant
decline in product demand or because of significant intra-industry compe-
tition, the firms may attempt to maintain their financial status by closing
higher cost/less efficient plants. The supply-demand analysis was divided
into four basic components: determination of industry structure, projection
of possible changes in industry structure to 1984 (the expected effective date
for the proposed regulation), determination of plant- and firm-specific
operational parameters (e.g., production costs, profit rates), and development
of price-quantity algorithms.
2-3
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Short run pricing behavior depends upon the market structure of the
industry, which can range from competitive to monopolistic competition, and to
oligopoly and monopoly situations. Many economic impact studies begin by
assuming perfect competition. However, as described in Chapter 3, the coil
coating industry exhibits some characteristics that are indicative of not
perfectly competitive pricing mechanisms.
The perfectly competitive market structure is one in which there are many
buyers and sellers and the actions of any one of these do not significantly
affect the market. Firms in a competitive market generally earn a "normal"
rate of return on their assets and any industry-wide cost increase will
require the firms to raise prices to maintain profitability. The extent of
the price increases is determined by the interaction of the elasticities of
supply and demand, and usually, is less than the cost increases.
The oligopolistic pricing scheme is applicable for those industries which
exhibit the following market characteristics:
Few firms in the product group
High industry concentration
Low degree of foreign competition
Abnormally high profitability
Low demand elasticities
Highly capital intensive
Large degree of integration of production, marketing, and distribution
Large degree of specialized knowledge.
Industries which exhibit the first three of these characteristics are
those in which the pricing and output actions of one firm will directly affect
those of other firms in the industry. While these conditions do not obviate
oligopolistic behavior, they are necessary conditions and good indicators that
oligopolistic behavior exists. Abnormally high profits in an industry would,
in time, normally attract new entrants to the industry, thereby increasing
price competition (because there are more competitors) and industry marginal
cost (to the extent that new entrants have higher costs). However, very high
2-4
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profits over long periods of time which are not explained by such factors as
excess risk, unusual amounts of technological innovation, or firm size, may be
an indicator that an imperfect market structure exists. Such conditions may
occur when entry into an industry is difficult. The last three of the above
points are indicators of difficulty of entry into the market.
As described in Chapter 3, the domestic coil coating industry exhibits
some characteristics of non-competitive markets such as unusually high
profitability, low demand elasticity and high capital intensity. Firms
operating in non-competitive markets generally have more market power than
those in competitive markets, and for this reason are expected to be able to
raise prices to recover cost increases. Since the demand for coated coils is
generally price inelastic, it is assumed that the demand factors will not
deter manufacturers from raising prices. Instead, they will pass through cost
increases to their customers. The magnitude of the price increase is assumed
to be at a level which would maintain the industry-wide initial return on
sales (i.e., cost-plus-markup pricing st
incorporated in the following algorithm.
sales (i.e., cost-plus-markup pricing strategy) . This pricing strategy is
n
£ ACC.
dP = i=l Equation (1)
P n
I TC
and
TCi = PjQji (1-PMj) Equation (2)
where dP = industry-wide price increase
P~
ACC. = annual compliance cost of plant i
TC. = total cost of goods sold for plant i
Q,. = pre-compliance production of plant i
Because of variation of unit compliance costs among plants in the industry
some plants will be affected more than others by the regulations, as
described in Figure 2-2.
2-5
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PI = pre-compliance product price
PM = industry average pre-compliance profit margin
n = total number of plants in the industry
The values of Q . were obtained for the 1976-1977 period for 62 coil coating
plants in an industry survey by EPA, and P and PM1 (as explained in Section
3.2.3) were estimated based on discussions with industry representatives, and
review of corporate annual reports.
This price change algorithm implies some important dynamics in the inter-
action of competing firms when determining prices. Figure 2-2 illustrates how
the model assimilates the differential compliance costs of four plants pro-
ducing 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 while
plants A and B would be able to raise their prices. An equilibrium price, P_,
will 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 iden-
tifying plants that may have to absorb a significant portion of their cost of
compliance.
Using the basic price elasticity equation and the dP/P ratios calculated
above, the rate of change in quantity demanded dQ/Q for each product group was
determined as follows:
dQ ._ dP Equation (3)
E = - ' -
dQ_ = ^L p Equation (4)
Q P
where E = Coefficient of price elasticity of demand (estimated in
Section 3.4)
2-6
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Price/
Unit
EQUILIBRIUM BEFORE COMPLIANCE
<
4-1
C
CO
f-H
PU
«
4J
c
CO
tH
P*
U
4-J
C
cfl
it
(X
o
4J
C
CO
I 1
CU
Market
Shares
Price/
Unit
P2C
P2B
P2A
INITIAL PRICE REACTIONS TO COMPLIANCE COSTS
Demand Shift
from Plants
C & D
to Plants A & B
Compliance
Costs
Market
Shares
Price/
Unit
EQUILIBRIUM PRICE AFTER COMPLIANCE
Portion of
Compliance Costs
which must be
absorbed by the
plants
Market
Shares
FIGURE 2-2. PRICE AND MARKET SHARE ADJUSTMENTS
2-7
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Since all plants in the industry would raise their prices by the
industry-wide price increase dP/P, it was initially assumed that each plant
would experience the same proportionate reduction in quantity dQ/Q.
It was also necessary to determine if the key parameters in industry
structure would change significantly during the 1980's. Projections of
industry conditions begin with a demand forecast. The demand during the
1980's is estimated via trend analysis, and market research analysis. It was
concluded from the projections of industry conditions that only minor changes
in market structure would occur in the base case. For this reason, the
pricing mechanism previously described (i.e., equation 1) is considered a
valid approximation for estimating price changes due to the regulation.
The post-compliance market price levels are used, in a later step, to
assess the financial condition of individual coil coating facilities.
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
Investment and annual compliance costs were estimated for three of the
four identified treatment options. A summary description of the control and
treatment technologies and assumptions for these compliance cost estimates
appear in Chapter 5.
2.5. STEP 4: SCREENING ANALYSIS
The purpose of the screening analysis is to identify plants which may
experience a significant degree of regulatory impact. These plants are then
subjected to a detailed financial analysis to determine the likelihood of
closure. If potential plant closures are projected, the screening analysis
procedure will be repeated until all "high" impact potential plants are
identified.
The decrease in profit margin (dPM) is used as the basic variable in the
screening analysis in Section 6.2. As shown in Figure 2-3, an initial dPM
value is selected. Plants with a projected dPM greater than the dPM screening
value are identified as "high impact potential" plants and are subjected to
2-8
------- An error occurred while trying to OCR this image.
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profitability and capital investment impact analyses. If potential plant
closures are projected for any of these plants, a smaller dPM is selected and
the screening analysis process repeated until no additional potential plant
closures are identified.
The change in profit margin at each plant (dPM.) was estimated using the
following equation:
dPM.
i
Equation (5)
where PM = average baseline profit margin for the industry before
compliance (estimated to be 17 percent as explained in
Section 3.2.3)
PM . = after compliance profit margin of plant i
The variables in Equation (5) were further defined as follows:
PM_. = Profitli
dProfiti
Equation (6)
Profit,. = R, x
li li
dProfit. = (R2- -
. - FC. - ACC.) -
= (R2i - R^) - (ai x E x jiP_ x R^) - AC^
\ /I T Ur _ x
"^ / v '^ t /
Equation (7)
Equation (8)
Equation (9)
where
Profitu
Profit.
i
li
R
R,
P,
a.
i
FC.
baseline profit of plant i before compliance
change in profit of plant i after compliance
baseline revenue of plant i before compliance
after-compliance revenue of plant i
pre-compliance product price
pre-compliance production of plant i
after-compliance production of plant i
variable cost to pre-compliance price ratio of plant i
fixed cost of production of plant i
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ACC. = annual compliance cost of plant i
dP = industry-wide price increase
P~
E = price elasticity coefficient of demand
The values of Q, . were collected in the EPA industry survey, while
dP/P was calculated by equation (1) presented in Section 2.3. As explained in
Section 3.2.3, in the absence of plant-specific data, industry average for P^,
PM_ and a. were estimated based on inputs from various industry sources and
corporate annual reports. Finally, the demand price elasticity E was
developed in Step 2.
2.6 STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS
The basic measure of financial performance used to assess the impact
of the proposed regulations on the profitability of individual plants is
return on investment (ROI). The use of this technique involves a comparison
of the return on investment after compliance with a minimum required return on
investment.
The return on investment is defined as the ratio of annual profits
before taxes to the total assets of a plant. It is based on accounting income
rather than cash flows and it fails to account for the timing of cash flows,
thereby ignoring the time value of money. However, this technique has the
virtues of simplicity and common usage in comparative analyses of the profit-
abilities of financial entities.
The profit impact assessment is determined by calculating the after-
compliance ROI for each plant. Plants with after-compliance ROI below the
threshold value are considered potential plant closures. The underlying
assumption is that plants cannot continue to operate as viable concerns if
they are unable to generate a return on investment that is at least equal to
the opportunity cost of other lower risk investment alternatives.
The critical value for ROI used in the analysis is 8 percent. Plants
with after-compliance ROI less than 8 percent are considered potential
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closures. The 8 percent ROI threshold level is based on the condition that
plants cannot continue to operate as viable concerns if they are unable to
generate for their owners/stockholders an after tax return on their invest-
ments (i.e., stockholder's equity) eaual to the opportunity cost of other
investment alternatives, which in this case is defined as the U.S. Treasury
bond yield expected to be in effect when the regulation is implemented. Data
Resources, Inc. forecasts that interest rates on long-term U.S. Treasury bonds
2/
will be about 12 percent in 1983-1984 , which is approximately the time when
the plants will have to make investment decisions on the treatment facilities.
It was determined that a before tax ROI of 8 percent would yield a 12 percent
after-tax return on the liquidation value of the equity assuming:
stockholders' equity of coil coating firms represents about
60 percent of total assets (as discussed in Section 3)
the average corporate tax rate is 40 percent (fourth quarter of 1980
average for Fabricated Metal Products Industry)
the average liquidation value of the plants is 80 percent of their
book values.
Appendix A describes the methodology that led to this ROI threshold level.
The after compliance ROI (ROI2.) was estimated for each plant using the
following equation:
Profit,. + dProfit.
ROI . = * * Equation (10)
1 A. + CCI.
i i
where Profit.. = pre-compliance profit of plant i
dProfit. = change in profit of plant i
A. = pre-compliance assets value of plant i
CCI. = compliance capital investment for plant i
2/
Data Resources, Inc., U.S. Long Term Review, Summer 1981.
Federal Trade Commission, Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations, Second Quarter 1981.
2-12
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The values of Profit,, and dProfit. were calculated in Step 4. To
li i
estimate A. , the pre-compliance sales revenues of all plants were summed and
then divided by the average industry assets turnover ratio (estimated in
Section 3.2.3) to develop an estimate of the total assets for the 62 plant
sample. The estimated total assets were then pro-rated among the 62 sample
plants on the basis of production capacity.
A low ROI for a given plant does not, by itself, necessarily imply that
the plant will close. As discussed in Section 2.8, actual plant closure
decisions made by individual companies are usually based on many factors.
However, the profitability ratio (ROI) relates profits to plant total assets,
and provides a means of evaluating the attractiveness of the plant as an
investment opportunity compared to other opportunities that may be available
to stockholders and potential lenders.
The above approach only applies to toll coaters and adjunct plants.
Captive plants, due to the nature of their operations (part of a proprietary
product manufacturing process), were not subjected to the same analysis.
Instead, the ratio of "profits to annual compliance costs" was calculated for
the captive plants identified in the screening analysis as having "high impact
potential." This ratio was used to reflect the "make or buy" decision whether
or not to discontinue coil coating operations at a captive plant.
Plants with a pre-compliance "profits to annual compliance costs" ratio
of less than 1.0 were categorized as "potential" plant closures. A ratio
equaling 1.0 denotes a break-even point at which a captive plant is neither
making money or losing money on its coil coating operations. Therefore, it
should be less costly for plants with ratios equal to or greater than 1.0 to
continue to perform their own coil coating. Plants with ratios below 1.0
would be faced with the trade-off of continuing to perform their own coil
coating at a loss or purchasing pre-coated coil from an outside source, i.e.,
a toll coater or adjunct plant.
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2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing plant closure potential from a profitability
perspective, it is also necessary to assess the firm's ability to make the
initial capital investment needed to construct and install the required
treatment systems. Some plants which are not initially identified as
potential closures in the profitability analysis may encounter problems
raising the amount of capital required to install the necessary treatment
equipment. The limit on a given firm's ability to raise capital to finance
investment expenditures is quite variable, depending upon factors such as the
firm's capital structure, profitability, future business prospects, the
industry's business climate, the characteristics of the financial markets and
the aggregate economy, and the firm management's relationships with the
financial community. The precise limit, considering all these factors, is
ultimately judgmental. Even given firm-specific data, a limit on a firm's
ability (or willingness) to raise funds for capital investment would be
difficult to estimate.
Because firm-specific data for this study is scarce, the analysis of
capital availability was based on the ratio of "compliance capital investment
requirements to plant revenues" (CCI/R). This ratio provides an indication of
the relative magnitude of the compliance capital investment requirements.
The ratio CCI/R was calculated for each plant and compared to a threshold
value. Assuming that re-investment in plant and equipment equals depreciation,
the plant's net after tax profit margin is a measure of the internally
generated funds available for pollution control investment. For example, the
before-tax profit margin is 17 percent of revenues and the corporate tax rate
is 40 percent for toll coaters, therefore 10.2 percent (60 percent of 17
percent) of revenues is taken to be the capital availability threshold. If a
plant's CCI/R ratio is less than the threshold value, the investment may be
financed out of a single year's cash flow, without additional debt.
The 10 percent threshold value was established for toll coater plants
only. For the adjunct and captive segments, a higher threshold value was
used.
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The difference in threshold level for the latter two groups is due to
differences in the operating modes of the plants. Adjunct plants, for
instance, may also perform cold and/or hot rolling and other operations in
addition to coil coating. Likewise, the revenues of coil coating operations
are usually only a fraction of total plant revenues for captive plants. The
ratio of total plant revenues to coil coating revenues will vary depending on
the particular product line of the plants. However, for these plants it is
estimated that the metal value of the coated metal is about three times the
plant coil coating revenues. Therefore, the 10 percent threshold value is
multiplied by a factor of 3 to derive the 30 percent threshold value used for
adjunct and captive plants.
The CCI/R ratio does not provide precise or universal conclusions
regarding a firm's ability to make the required investments. However, this
ratio provides a good indication of the relative burden created by the
compliance requirement and is used in combination with other factors discussed
in Step 7 to determine the potential for significant plant-level impacts.
2.8 STEP 7: PLANT CLOSURE ANALYSIS
The plant-level analysis examines the individual production units in each
product group to determine the potential for plant closures and profitability
changes. The decision to close a plant, like most major investment decisions,
is ultimately judgmental. This is because the decision involves a wide
variety of considerations, many of which cannot be quantified or even
identified. Some of the most important factors are:
Profitability before and after compliance
Ability to raise capital
Market and technological integration
Market growth rate
Other pending Federal, state, and local regulations
Ease of entry into market
Market share
Foreign competition
2-15
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Substitutability of the product
Existence of specialty markets.
Many of these factors are highly uncertain, even for the owners of the
plants. However, this analysis was structured to make quantitative estimates
of the first two factors, as described above, and to qualitatively consider
the importance of the others. In this analysis, the first two factors are
given the greatest amount of weight and the importance of the other factors
varies from plant to plant.
Plant closure estimates are based primarily on plant-specific variables.
The limited consideration of firm-level data implies a bias toward the over-
statement of potential closures. Sometimes, a plant that is unprofitable on a
cash flow basis may be valuable to its owners (usually a corporation) for
other reasons, such as marketing and corporate growth strategies. Since
information on corporate strategies and the interrelationship of plants within
the same firm is not available, these situations could not be rigorously
addressed. It is believed, however, that such situations would only occur for
plants that are not too far below the closure threshold. That is, if a
plant's post-compliance profit and capital deterioration was extreme, it was
considered to be a closure regardless of its corporate interrelationships.
Thus, 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.
2.9 STEP 8: OTHER IMPACTS
"Other impacts" include economic impacts which result from basic price,
production, and plant level profitability changes. These impacts include
impacts on substitution potential, employment, communities, industry
structure, and balance of trade.
The estimate of employment effects is the direct result of the outputs of
the industry level analysis and the plant closure analysis. Employment
estimates for production facilities that are projected to close are available
from the EPA 308 survey responses.
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Community impacts result primarily from employment impacts. The critical
variable is the ratio of coil coating industry unemployment to total employ-
ment in the community. Data on community employment are available through the
Bureau of the Census and the Bureau of Labor Statistics.
The assessment of industry structure changes is based on examination of
the following before and after compliance with the regulation:
Numbers of firms and plants
Industry concentration ratios
Variance of average total- production cost per unit among plants
Effects of plant closures on specialty markets.
As presented in Chapter 6, compliance costs are small and no plant
closures are projected for the coil coating industry. Therefore, the
regulations would have very little effect on the structure of this industry.
Foreign competition is not an important factor in the coil coating
industry. The role of imports and exports is qualitatively evaluated in
Chapter 3 of this report. Basically, impacts on imports and exports are a
function of the change in the relative prices charged by domestic versus
foreign producers. In this study, the price changes due to the regulations
are estimated to be small as discussed in Section 6.1. Therefore the
resulting changes in imports and exports of coated coils are estimated to be
small.
2.10 STEP 9: NEW SOURCE IMPACTS
Existing facilities that undergo substantial modifications and new
facilities will be subject to NSPS/PSNS guidelines. This step in the study
analyzes the economic impacts of these guidelines.
The analysis is based on model plants developed for each technical
subcategory and the corresponding compliance costs of the treatment tech-
nologies. The analysis assumes that the treatment technologies and costs for
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major modifications to an existing facility are the same as for a greenfield
(new) site of the same size. For the purpose of evaluating new source
impacts, compliance costs of new source standards are defined as incremental
costs over the costs of selected standards for existing sources. The impacts
of new source regulations are then determined by comparing compliance costs to
plant assets, revenues, and profit.
2.11 STEP 10: SOCIAL COST ANALYSIS
This analysis assesses the total social costs that can be associated with
the EPA effluent regulations. The social costs measure the value of goods and
services lost by society due to a given regulatory action. These costs
generally include the use of resources needed to comply with a regulation, the
use of resources to implement and enforce a regulation, plus the value of the
output that is forgone because of a regulation. As indicated in Chapter 5,
the total industry costs of the treatment alternatives are less than $100 mil-
lion therefore a social cost analysis is not required.
2.12 STEP 11: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. The RFA requires
an initial screening analysis be performed to determine if a substantial
number of small entities will be significantly affected. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
step in the study addresses these objectives by identifying the economic
impacts which are likely to result from the promulgation of BPT, BAT, NSPS,
PSES, and PSNS regulations on small businesses in the coil coating industry.
The primary economic variables covered are those analyzed in the general
economic impact analysis such as compliance costs, plant financial perfor-
mance, plant closures, and unemployment and community impacts. Most of the
information and analytical techniques in the small business analysis are drawn
from the general economic impact analysis which is described above and in the
remainder of this report. The specific conditions of small firms are
evaluated against the background of general conditions in the coil coating
markets.
2-18
-------
Three alternative approaches were examined to define small coil coating
plants for purposes of regulation development. These approaches are based on
the following factors:
the Small Business Administration (SBA) definitions of small
businesses based on total firm employment
plant annual production
plant wastewater flow rates.
The SBA definition of small business was found to be inappropriate as a
basis for defining small entities in the coil coating industry for purposes of
developing water pollution control regulations. It is based on firm size
rather than plant size. Because firm size often does not correspond to plant
size in this industry, the use of SBA definition would fail to recognize
economies of scale in the pollution control technologies. For this reason, an
alternative definition based on plant annual production was evaluated to
account for unit compliance cost differentials due to plant size. Similarly,
another alternative size definition based on plant wastewater flow rates was
also examined since flow rates often vary with plant size and is a major
factor in the development of effluent guidelines.
The impacts on small plants under each definition were assessed by
examining the distribution by plant size of the number of coil coating plants,
plant revenues, wastewater volumes, compliance costs and potential closures
from regulations.
2-19
-------
3. INDUSTRY CHARACTERIZATION
3.1 INDUSTRY PRODUCTION PROCESSES
Coil coating consists of the coating of large rolls or "coils" of flat
metal with various types of organic polymer coatings and laminates to give the
metal decorative or protective qualities. After the coils are unrolled, the
coatings are applied with rollers to one or both sides of the metal as the
flat metal moves through the coil coating operation.
Figure 3-1 contains a diagram of a typical process sequence for coil
coating.
The primary metals coated by this process are cold-rolled steel, galva-
nized steel, and aluminum, although small quantities of brass, copper, stain-
less steel, titanium black plate, tin plate, and zinc are also coated. The
coil coating process is frequently called "prior coating" or "pre-coating,"
since the metal is coated before it is formed or fabricated. With the
development of coatings which can better withstand the stress of forming
operations, the pre-coating of coiled metal offers significant cost advantages
over operations which spray paint products after fabrication. These cost
advantages include both time and labor savings.
While the capabilities of coil coaters vary slightly, a complete coil
coating operation could contain all of the following steps:
Cleaning the metala light pickling with a mild acid
solution.
Chemical preparation of the metal (conversion coating)a
chromium-based coating for aluminum and a phosphate-based
coating for steel to prepare the metal for coating.
Application of the organic coatings .
Multiple coatsprimers, top coats, over paints, clear top coats, and
strippable protective shipping coatscan be applied either by multiple
passes through the line or on "tandem" lines with successive paint rollers
and ovens.
3-1
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Oven drying and/or baking of the coatings.
Slitting, cutting and/or shearing of the coated metal into
narrow coils, sheets, or strips.
Printing and/or embossing of the coated metal.
Different metals may be coated and different coatings may be applied at
the same coil coating facilities; but each of the lines varies in terms of the
width and thickness of the metal coils which may be accommodated and the speed
with which the coils may be coated.
3.2. FIRM AND PLANT CHARACTERISTICS
The National Coil Coaters Association (NCCA) estimates that there are
between 70 and 80 plants in the United States. The Department of Commerce
reports that in 1977 the total value of shipments for all coated coil was
$296.1 million.
Based on an EPA industry survey under Section 308, EPA identified 77 coil
coating facilities in 1976. However, nine of these plants were not included
in the analysis because of the following reasons: seven were found to be zero
dischargers, and two were closed due to bankruptcy of the parent corporation.
Thus, a total of 68 plants form the basis of this study.
Of these 68 plants, 62 provided production data through the EPA industry
survey and will form the basis of the economic impact assessment. Table 3-1
2/
presents the square footage of metal coated for the different metal
substrates for these 62 plants.
3.2.1 Plant Characteristics
As discussed in Chapter 1, coil coating plants were found to function
primarily under three types of operational modes:
21
It is a generally accepted industry practice to count one side of the metal
coated.
3-3
-------
TABLE 3-1. SQUARE FOOTAGE OF METALS COATED BY TECHNICAL SUBCATEGORY MIX, 1976
METALS
Aluminum Only
Cold-Rolled Steel Only
Galvanized Steel Only
Aluminum & Galvanized Steel
Cold-Rolled Steel & Galvanized Steel
Aluminum & Cold-Rolled Steel
Cold-Rolled Steel, Galvanized Steel
& Aluminum
TOTAL
SQUARE FEET3/
(Million)
5,138.6
1,022.4
362.7
267.4
980.4
712.0
2,068.0
10,551.5
PERCENT
49
10
3
2
9
7
20
100
NUMBER OF
PLANTS '
24
9
1
3
8
8
9
62
Square footage metal coated measures the area on one side of the metal.
Plants which reported production data in the EPA 308 Survey.
Source: EPA 308 Survey.
3-4
-------
Toll coaters, which coat customer-owned metal on a service basis;
they generally do not perform metal fabricating operations.
Captive operations, which are part of a proprietary product
manufacturing process (such as building products, food container
packaging, etc.).
Adjunct operations, which are performed in plants with rolling
mills on the plant site; the metal is coated as part of the
customers' orders.
Table 3-2 presents a summary of the distribution of the 62 sample plants
by plant type. The corresponding total annual production, average plant size,
and production ranges for 1976 as reported in the survey responses are also
presented.
While the number of captive operations was found to be slightly larger
than the number of adjunct operations (24 versus 21), the annual production
volume of the captive operations was less than half that of the adjunct
operations. On an average plant size basis, the square footage of production
for adjunct operations is almost three times greater than that of captive
operations. Toll coaters, on the other hand, account for 27 percent of the
number of plants, but comprise a third of the overall coil coating production.
In terms of range in production volume, over 70 percent of the captive plants
had annual production volumes of less than 100 million sauare feet, whereas
over 70 percent of the adjunct plants and the toll coater plants had annual
production volumes greater than 100 million square feet.
Captive operations could be expected to have smaller production volumes
because their coil coating lines operate as a part of a total product manu-
facturing process, and thus are limited by the end-product production require-
ments. Also, captive facilities do not generally operate as individual profit
centers, but their function contributes greater internal control, flexibility,
and convenience to the plants' total manufacturing process.
On the other hand, toll coaters sole line of business is coil coating.
Thus, it is more imperative for a toll coater to operate at high capacity
3-5
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rates and achieve the resulting economies of scale than for either a captive
or adjunct operator.
Adjunct operations, which had the highest average plant production
volume, primarily coat the metal processed through their rolling mill opera-
tions. Discussions with industry officials have indicated that oftentimes
this service is provided on a customer service basis to help move more metal
through their rolling mill operations.
Industry sources have also indicated that the categorization of plant
functions is not always a rigid one. That is, many captive or adjunct
operations will, during slack times, perform limited volumes of toll coating.
However, their primary function would still be considered as a captive or
adiunct operation. In addition, some firms own several coil coating plants,
each of which may function as a different plant type (captive, toll coater, or
adiunct). Therefore, in segmenting the industry by plant type, a judgment as
to the primary function of a plant must be made.
Other factors which could have a bearing on economic impacts are
summarized in Table 3-3. This summary data includes only those 62 plants for
which the plant specific economic impact assessment was made. The following
are some key characteristics of these plants:
34 plants (55 percent) discharge to POTWs
48 plants (77 percent) have been modified since 1970
The average coil coating employment is 50 persons per plant
Coil coating employment ranges from 5 to 600 employees with 63
percent of the plants employing between 5 and 40 persons.
3/
Coil coating employment data were used for captive and adiunct operations
since only those employees are affected by coil coating operations. Total
employment data for toll coaters were used because generally the whole plant
is dependent upon coil coating operations. Employment data were obtained
from industry responses to EPA 308 survey.
3-7
-------
TABLE 3-3. SUMMARY OF CHARACTERISTICS
OF 62 SAMPLE PLANTS WITH
PRODUCTION AND COST DATA
NUMBER OF PLANTS BY DISCHARGE STATUS
Indirect 34
Direct 22
Both 6
COIL COATING EMPLOYMENT
Total 3'043a/
Average Per Plant 503
NUMBER OF PLANTS WITH;3'
5- 40 Employees 39
41-100 Employees 17
101-600 Employees 5
NUMBER OF LINES 95b//
NUMBER OF MULTI-LINE PLANTS 19
NUMBER OF PLANTS WITH MODIFICATIONS BETWEEN
1970-1977 48
1960-1969 14
pre-1960 0
Based on 61 of the 62 plants for which data was available. Includes coil
coating employment for adjunct and captive plants and total employment for
toll coating plants.
Eight of the 62 plants which did not respond to that question were assumed
to have one line.
Source: EPA 308 Survey.
3-8
-------
Coil coating in recent years has experienced significant technological
advancements in paint formulations as well as equipment design, which have
increased line speed capability and production volume. Since price competi-
tion within the industry is deemed to be significant (see Section 3.4), it
would seem necessary for plants to continually update and improve their lines
to remain competitive. Of the 62 sample plants with compliance cost and
production data, only 14 reported having not been modified since 1969. Other
factors being equal, these 14 plants are likely to be less efficient producers
and thus may be less able to absorb compliance costs without suffering serious
adverse impacts. Nine of these 14 plants have a rate of production per
employee below the industry average, which could indicate a less efficient
operation and could thus tend to increase the likelihood of their impact
potential.
3.2.2 Firm Characteristics
EPA and National Coil Coaters Association (NCCA) data sources have indi-
cated that the estimated 70 to 80 plants in the coil coating industry are
affiliated with approximately 45 to 50 firms. The 62 plants with reported
production volumes are owned by 41 firms. Thirteen of the 41 firms operate
two or more plants, and only one firm has more than three plants. The 41
firms may be classified into three categories, based on examination of their
major line of business. The three categories are:
Integrated aluminum firms. The 10 firms in this group engage
mostly in adjunct plant operations with occasional captive and
toll coating activity.
Integrated steel firms. The 6 firms of this group are gener-
ally involved in adjunct plant operations with occasional
captive and toll coating activity.
Other types of firms. The 25 firms in this category are
engaged primarily in captive and toll coating operations with
some adjunct activity.
These three groups were found not to correspond to the three types of
plants presented in the previous section. The integrated aluminum and steel
companies which were found to operate primarily adjunct facilities, also own
3-9
-------
captive and toll coating facilities. The other types of companies with coil
coating facilities were found to operate primarily captive and toll coating
facilities. The latter group was not more specifically classified because of
the heterogeneous nature of the types of business in which the firms engage.
Most of the firms were found to be parts of larger diversified companies for
which no single line of business pattern was evident. Examples of this group
include building products, mobile home and recreational vehicle, and specialty
metal companies.
Table 3-4 lists the number and type of firms by the type of metal coated.
The table shows that 59 percent of the firms coat more than one type of metal.
Only among the integrated aluminum companies, where 8 of the 10 firms coat
aluminum solely, is there a significant degree of metal specialization.
The differences in plant size for the three types of firms, as shown in
Table 3-5, highlight the significant role played by the aluminum companies in
the coil coating industry. Almost half (43 percent) of the industry produc-
tion is accounted for by these firms. In addition, the average plant produc-
tion rate for the aluminum firms is 40 percent larger than that of the steel
firms, and almost 60 percent larger than the average for the other firms with
coil coating facilities.
It appears that virtually all of the maior integrated aluminum-producing
companies have entered the coil coating business and the integrated aluminum
companies account for 40 percent of the total metal coated. As shown in Table
3-5, the integrated steel-producing companies own proportionately fewer coil
coating plants, since it was found that only six of the large steel firms have
coil coating facilities and only one steel producer reported owning more than
one coil coating plant. This situation has resulted from the more aggressive
marketing strategy of the aluminum companies during the 1950's and 1960's when
there was excess capacity in aluminum smelting facilities and attempts were
made to stimulate demand for aluminum. In contrast, the steel industry has
not entered the coil coating market to as great an extent as the aluminum
3-10
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industry, in part due to the need to commit available capital to update and
modernize their smelting facilities so that they can become more competitive
v c A W
with foreign producers.
3.2.3 Financial Status
The strong growth of coated coil shipments and recent construction of
several new plants seem to indicate that market conditions in the coil coating
industry are good. As discussed in Chapter 4, the industry is expected to
continue to perform well as demand for coated coils continue to grow.
The Department of Commerce's Census of Manufactures provides data on SIC
3479, Metal Coating Services, N.E.C. (of which coil coating represents about
20 percent of total value of shipments). Further, corporate-level financial
data are available for many of the firms which own coil coating facilities.
However, in both the Department of Commerce and the corporate level data, for
most firms coil coating represented a small fraction of the total company
operations, thus the aggregate data cannot be considered an accurate reflec-
tion of coil coating operations.
Published financial data were available for several coil coating
companies. However, coil coating is generally a small and/or integrated part
of the total firm operations, therefore, these companies are not required to
report financial data of the coil coating line of business separately.
Financial data on coil coating operations for one firm was found. Table 3-6
presents the profit margin and return on investment ratios for the coil
coating operations of this firm. This firm's financial data reveal a rather
healthy and profitable condition of its coil coating operations. By averaging
the recession years of 1974 and 1975 with the growth years of 1976 to 1978, an
average gross profit margin of approximately 20 percent and an average net
profit before taxes of 17 percent are derived.
However, these data represent the status of only one company. To
determine the representativeness of these data in terms of industry-wide
4/
Wolverine Aluminum Corp., Annual Report, 1978.
3-13
-------
TABLE 3-6. FINANCIAL PROFILE OF TOLL COATING OPERATIONS9/
5-Year
1978 1977 1976 1975 1974 Average
- Percent of Sales -
Gross Profit Margin 29.4 20.0 19.5 16.3 17.0 20.4
Corporate Overhead and
Interest Expenses 3.0 3.8 2.7 3.3 2.9 3.1
Net Profit Before Taxes 26.4 16.2 16.8 13.0 14.1 17.3
Assets to Sales 63.5 65.5b/ 68.6 63.2 61.8 64.5
a/
Obtained from the Line of Business report of a firm with both toll coating
and captive coil coating operationsapproximately the fifth largest coil
coater in the U.S. in 1978.
Does not include a new $6.7 million coil coating line completed in December
1977.
Source: JRB Associates estimates.
3-14
-------
conditions, this profit margin rate as well as several other key financial
ratios calculated from the same company's annual report, were included in a
data fact sheet which was submitted to the NCCA for review and comment.
Officers of the NCCA noted that there was some variation in these values
between firms, but in general terms, the 20 percent gross profit margin, as
well as estimates for the other ratios presented, were deemed to be repre-
sentative and reasonably reflective of what they perceived to be averages for
the industry.
3.3 DEMAND DETERMINANTS
This section outlines the product characteristics, end-use markets, the
development of representative selling prices, and the trends in coil coating
shipments.
3.3.1 Product Characteristics
The coatings used in the coil coating industry are complex blends of
organic polymers, pigments, solvents, and additives which are manufactured to
give the coatings different qualities. For example, some coatings are
designed to be flexible, while other coatings are designed to have hard, high
luster finishes for decorative purposes. Table 3-7 lists the major coatings
and the different metals on which the coatings are used, and Table 3-8 lists
the major qualities and end-uses of the coatings.
As shown in Table 3~7, most coatings can be applied to any of the three
metals. Industry sources have said that the major factor involved in deter-
mining coating mix at a plant is the changing pattern of demand for the final
products which are fabricated from the pre-coated metal. A plant's coating
mix, therefore, may vary by year, or by time of the year, depending on the
nature of this product demand. Four different firms were asked to rank, in
Variable plant production costs/total plant production costs = 67%
(Corporate) Debt/equity = 70%
(Corporate) Interest expense/profits before taxes = 4.0%.
Meeting with members of the Executive Committee of the National Coil Coaters
Association in Columbus, Ohio on June 20, 1979.
3-15
-------
TABLE 3-7. COATINGS AND METALS COATED
Coating Metal Coated
We Idable primer S
Zincrometal (zinc-rich primer) S
Epoxy A,S,G
Epoxy-ester A,S,G
Acrylic A,S,G
Siliconized acrylic A,G
Alkyd A,S,G
Fluororocarbon (pvf and pvf_) A,G
Fluorocarbon (ptfe) A,P,G
Phenolic A,S,G
Polyester (oil free) A,S,G
Silicone Polyester A,G
Solution Vinyl A,S,G
Urethane A,S,G
Organosol A,S,G
Plastisol A,S,G
Acrylic Film A,S,G
Polyvinylchloride Film A,S,G
Polyvinylfluoride A,S,G
Polyester Film A,S,G
Polyolefin Film A,S,G
Prints of two or more colors A,S,G
Polyphenylene Sulfide A,G
Water and Alkali Soluble A,S
A = Aluminum
S = Cold-rolled Steel
G = Galvanized Steel
Source: JRB Associates estimates.
3-16
-------
TABLE 3-8. TYPES AND USES OF COATINGS
COATINGS
Amina Alkyds
Thermoset Acrylics
Vinyl Alkyds
Polyesters
Solution Vinyls
Silicone Modified
Epoxies
Phenolics
Plastisols & Organosols
Fluorocarbon Film
Vinyl Film
Laminates
Acrylic Film, Laminates
Metal to Metal Laminates
Vinyl Foams
Strippable Coatings
CHARACTERISTICS & QUALITIES
tough; highly decorative; most highly
used
excellent stain and abrasion resistance;
durable qualities
economical; ability to withstand fabri-
cating stress
oil free alkyd with wide range of
flexibility and durability
highly flexible and durable
superior nonchalk and gloss retention
facilities, but has limited flexibility
varies from hard and brittle to flexible
and elastic; excellent primer coating
good stain and acid resistance; primer
coat is necessary to promote normal
adhesion of phenolic coat and increase
phenolic ability to withstand bending
operations
excellent scuff, mar and decorative
qualities; ability to withstand
fabrication stress
long life; durable; consists of an
organic film which is bonded to one or
both sides of the base metal
largest color, pattern and third dimen-
sion selection; stain resistant; ability
to withstand fabricating stress
tough; weather and mar resistant
normally consists of a structural com-
ponent and a lighter more precious or
functional component bonded on one or
both sides together
uniform foam coatings
temporary protective coatings for
shipping
MARKET USES
Venetian blinds, furniture, awnings
exterior building products; cabinets
oven finishes for polished metals
roof decking and where more than
normal fabrication is involved
variety of interior and exterior uses
building products; tubing, cabinets;
furniture; auto dashboard panels
industrial building sheet and siding
sanitary coatings and metal listings
metal container linings; closures;
sanitary coating
television cabinets; appliance housings;
shelving; cabinets; building panels;
furniture
exterior siding; building produts
television cabinets; store fixtures;
instrument panels; humidifiers,
shelving
building applications
decorative trim; noise abatement;
chemical resistance; furniture
safety padding; packaging; noise
reduction; thermal insulation
exterior building panels; siding, auto
trim; appliance products
Source: National Coil Coaters Association, 1977 Product Capability Directory.
3-17
-------
order, their most widely used coatings. The results of this inquiry are shown
in Table 3-9. Three of the firms are toll coaters with two firms coating
primarily galvanized steel, and the other firm coating primarily cold-rolled
steel. The fourth firm is an aluminum producer that coats aluminum primarily.
The National Coil Coaters Association has estimated the rankings of the
various coatings (excluding zinc coatings). These results confirmed discus-
sions held with industry officials that acrylics and the two polyester coat-
ings (polyester and silicone modified polyester) along with zinc primers con-
stitute a large majority of the coatings used in the industry.
Virtually the only type of coating specialization found in the industry
is the rustproofing of cold-rolled steel with coatings of zinc-rich primers
(known as "Zincrometal"). Many coil coaters have designed lines with the
special purpose of utilizing the facility almost exclusively for the zinc
coatings. This coating is characterized by high speed, high volume, and lower
production costs (no chemical preparationconversion coatingof the metal is
needed prior to coating). Zinc coating is one of coated coil's fastest
growing markets (as more and more of this material is used in automobile and
trucks) and since 1975 there have been a number of new lines built or
modifications made to existing lines to accommodate this type of coating.
3.3.2 Product Prices
Average coil coating prices on an individual plant basis were not
available directly and, therefore, an "average industry selling price" per
square foot was used. Since no comprehensive industry price list exists, the
average price had to be estimated. The estimation involved a review of
pricing practices in the industry and a calculation of a weighted average
price for the most popular coatings.
Pricing in the industry is done on a per job basis, and industry sources
revealed that prices vary according to type of coating, and the width, gauge,
and area of the metal coated. For example, Table 3-10 lists the factors
7/NCCA letter dated March 7, 1978.
3-18
-------
TABLE 3-9. COATING MIX, FOUR COIL COATERS
Rank
1
2
3
4
5
6
Firm #1
Polyesters
Zinc-rich
Plastisols
Phenolic
Fluorocarbon
Acrylics
Firm #2 Firm #3
Polyesters Zinc-rich
Silicon Polyester
Polyesters
Acrylics Silicon
Polyesters
Vinyls
Epoxies
Fluorocarbon
Firm #4
Acrylics
Vinyls
Primer
Fluorocarbon
Source: JRB Associates estimates based on data from site units and interviews
with industry representatives during 1978-1979.
3-19
-------
TABLE 3-10. FACTORS AFFECTING PRICES
1. Coating Information:
percent coverage
wet film/dry film thickness test
cost per gallon & gallons required (paint cost)
cost per gallon & gallons required (solvent cost)
cleansing and rinsing cost
area to be coated
cost per hundred weight (CWT)
2. Metal Information:
type
gauge
width
3. Scrap Percent
A. Coating Line Information
type job - single or double coat
one or two sides
degree of difficulty
5. Slit and Upcut Information
width - cuts - pass
slit weight, rate, cost/CWT
6. Warehousing and Packaging
average coil weight
type of finish
coil movements
warehouse cost
packaging rate, packaging extent and cost
7. General and Administrative
5 percent charge
order charge
line charge
8. Markup
slit
t> upcut
metal
run t ime
CWT prices
Source: Pre-Finish Metals, Inc.
3-20
-------
considered by one toll coater in his pricing. This particular firm has
integrated these factors into a computer program which is used to establish
the prices to be charged. The most important factors are the cost of the
paint, the gauge, width and weight of the coil to be coated, the degree of
difficulty, and size of the order. Because of economies of scale in
production, unit prices of coating decrease as the size of a job increases.
For this reason most coil coaters will accept only jobs above a minimum size.
Industry sources report that average prices in 1977-1978 ranged between
1.8 cents and 35 cents per square foot of metal coated. Although 14 of the 25
coatings shown in Table 3-7 are estimated to be above 10 cents per square
foot, the most widely used coatings are in the lower price range. Industry
sources also indicate that acrylic coatings account for approximately 80
percent of the paint used on aluminum. Selling prices for acrylic coatings
generally average about 6 cents a square foot in 1977-1978. Also, on an
industry average, polyester accounts for about 80 percent of all the coatings
applied to galvanized steel and the cold-rolled steel which is not coated with
zinc primers. Selling prices for polyester coatings generally average between
7 and 14 cents per square foot. Zinc coatings, which are applied to cold-
rolled steel exclusively, generally average a fraction less than 2 cents per
square foot.
A weighted average selling price representative of the industry was
estimated to be 6 cents per square foot. This figure is a weighted price
based upon square footage coated by type of metal and a representative selling
price for the most widely used coating for each metal type. Each of these
most highly utilized coatings per metal type account for approximately 80
percent of the coating applied to each metal. Therefore, the 6 cents a square
foot price appears to be a close approximation of the average industry-wide
price in 1977-1978 for coil coating.
3.3.3 Trends in Coil Coating Use
Coil coating began in 1927 with a process used to coat Venetian blinds.
During the 1960s and 1970s, the coil coating industry has experienced strong
growth, as illustrated in Figure 3-2 and Table 3-11. During this period,
3-21
-------
c
o
H
u-i
O
tJ
c
nj
CO
o
f.
7000
6000
5000
4000
3000 H
2000
C
0)
a
H
1000
900
800
700
600
500
400
300 -f
200
Aluminum
100 i
i i i i i i i i i tI I I I I I i r
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 «1
- YEAR -
FIGURE 3-2. PRODUCT SHIPMENTS OF COATED COIL, 1962 - 1981
3-22
-------
TABLE 3-11. ESTIMATED SHIPMENTS OF PRECOATED
METAL COIL BY COATERS LOCATED IN
THE UNITED STATES, CANADA AND MEXICO
(In Thousands of Tons)
YEAR
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Annual
Compound
Growth
Rate (%)
Source :
ALUMINUM
172
202
232
277
297
364
453
580
550
661
730
829
707
580
720
782
841
800
702
668
7.9
National Coil Coaters
STEEL
292
435
567
782
825
860
1,013
1,182
1,137
1,263
1,439
1,863
2,087
1,434
2,407
2,944
3,215
3,141
2,535
2,701
11.6
Association,
TOTAL
464
637
799
1,059
1,122
1,224
1,466
1,762
1,687
1,924
2,169
2,692
2,794
2,014
3,217
3,726
4,056
3,941
3,237
3,369
10.6
News Release
May 1982
3-23
-------
shipments of pre-coated metal grew by an average annual compound growth rate
of 10.6 percent while the real GNP grew about 3 percent annually.
Traditionally, steel has accounted for more than 75 percent of total
tonnage coated coil. In terms of square footage, however, aluminum shipments
of coated coil represented about 40 percent of industry total shipments in
1981 (assuming the general industry rule of 1 square foot per pound of steel,
and 3 square feet per pound of aluminum).
Much of coil coating's strength in the marketplace lies both in its high
quality surface finishes and in its significant cost advantages over alterna-
tive finishing operations and materials. Coil coating's cost advantages
derive from its minimal paint loss during the application stages, low energy
costs and labor requirements, and high production capacity (up to
90 ft/minute), and the lowering of the overall assembly cost of end products.
Because of these factors, coated coils have replaced spray painting and other
materials in many applications. The increase in market share of the total
"materials market" has been responsible for most of the growth of coated coil
use.
The growth of coil coating is constrained, somewhat, by limitations in
fortnability and weldability of pre-coated metal. However, as new technologi-
cal advances in paint versatility and coating application are developed and as
industries become more accustomed to handling pre-coated metal, coil coating's
growth potential may increase.
3.3.4 End Uses and Substitutes
Coated coil are used in an extremely wide range of end-products. Table
3-12 contains a list of current and suggested end-uses of coated coil prepared
by the National Coil Coaters Association. Table 3-13 presents data on coated
coil shipments by major market reported by members of the National Coil
Coaters Association. The two largest markets (building products and trans-
portation) accounted for 61 percent of total shipments in 1981. The following
paragraphs describe each of the four largest markets:
3-24
-------
TABLE 3-12
TYPICAL USES OF
PRE-COATED METAL STRIP
AppliancesLarge
1. Air conditioners
2. Clothes dryers
3. Dish washers
4. Furnaces
5. Gas or electric ranges
6. Radio and phonograph cabinets
7. Refrigerator and freezer liners
8. Refrigerator and freezerdoors and shells
9. Space Heaters
10. Vending machines
11. V,"ashing machines
12. Water coolers
13. Water heater jackets
AppliancesSmall
1. Beauty shop equipment
2. Business machine housings
3. Can openers
4. Clock faces and housings
5. Coin-op equipment
6. Dehurmdifiers
7. Electric fan blades
S. Floor waxers
9. Hair Dryers
10. Homogenizers
11. Household cooking appliances
12. Humidifiers
13. Knife sharpeners
14. Nfiscellancous parts for appliances
(braces, brackets, etc.)
15. Radio &: TV cabinets
16. Sewing machines
17. Sound recording equipment
18. Vacuum cleaners
19. \\atchesandclocks
Construction
1. Accessories for siding, facia, trim, corners, etc.
Awnings and canopies
Baseboard hearing covers
Bathroom cabinets
Building soffit systems
2.
9
»*.
4.
5.
6. Bus stop shelters
7. Carports, boat shelters
8. Car wash booths
9. Ceiling tile
10. Commercial building marquees
11. Construction machinery
12. Curtain wall and building sheet (Supermarkets,
aircraft hangers, factories, schools, etc.)
13. Decorative chimnies
14. Decorative shutters
15. Doors
16. Door and window frames
17. Ductwork
18. Electrical swkch and outlet plates
19. Elevator and escalator paneling
20. Fabricated sections for brdges and buildings
21. Fencing
22. Fireplaces
23. Garage doors
24. Gutters and downspouts
25. Interior partitions and trim
26. Kitchen cabinet
27. Lighting reflectors and housings
28. I.ouveied <. ents
29. Partitions and fixtures
30. Patio covers and supports
31. Radiator fin stock
32. Refreshment booths (to house vending machines)
33. Residential siding
34. Roof decking
35. Roof flashing
36, Roof shingles and sheet
37. Sanitary \*are (metal)
38. Screen frames
39. Shower stalls
40. Signs and advertising displays
41. Silo roofs
42. Stadium seats
43. Staircases, railings, scaffolds
44. Storage sheds, tool sheds
45. "T" Bar hangers for tile
46. Telephone boothpaneling
47. Walkway covers and suppoits
48. Wall tile
3-25
-------
TABLE 3-12
TYPICAL USES OF
PRE-COATED METAL STRIP (cont.)
Machinery, Farm and Garden Equipment
1. Animal shelters
2. Farm storage bins
3. Feed troughs
4. Garden Equipment
5. Grain dryers
6. Large farm machinery
7. Blowers and fans
8. Food products machinery
9. Industrial controls
10. Machine tool accessories
11. Paper industry- machinery
12. Printing industry machinery
13. Stampers, roll formers
14. Switchgear
15. Textile machinery
16. Mowers
17. Snowblowers
18. Spreaders
19. Tools
Furniture
(Residential and Commercial)
1. Cabinets (storage, beverage, functional)
2. Card tables
3. Chairs
4. Clothes hampers
5. Coat racks
6. Desks
7. Display cases
8. Filing cabinets
9. Fiieplace accessories
10. Institutional furniture
11. Ironing boards
12. Juvenile furniture
13. Ladders and ironing boards
14. Lamps and shades
15. Lawn furniture
16. Library shelving
17. Lockers
18. Metal draper dMeiers
19. Radiator coders
20. Shelving
21. Store fixtures
22. Switchboards
23. Tubular products, legs, stands, etc.
24. T.V. travs
25. Waste baskets
Packaging
1. Bulk containers
2. Cans and containers
3. Caps and closure?
4. Drums, barrels, pails
5. Edging for canons
6. Film canisters
7. Semi-rigid container (T.V. dinner trays, etc.)
Recreational Equipment
1. Aluminum boats
2. Bar-B-Q Grills
3. Basketball backboards
4. Camping equipment
(ice boxes, camp stoves, etc.)
5. Exercising equipment
6. Fabricated play houses
7. Folding camp cots and chairs
8. Golf cans
9. Picnic jugs
10. Playground equipment
11. Portable swimming pool frames and sheathing
12. Prefabricated baseball dugouts
Transportation
1. Aircraft, bus, and train ceilings
2. Aircraft parts, equipment and trim
3. Arm rests
4. Automotive trim
5. Baggage racks
6. Biqcle fenders
7. Car bodies
8. Commercial truck sheathing
9. Comevors
10. Highway guard rails
11. Instrument panels
12. Interior door panels and trim
13. License plates
14. Locomotives and pans
15. Miscellaneous parts, horn shells, voltage regulators,
oil caps, braces, oil filters, canisters, clutch
plates for automatic transmissions, etc.
16. Mobile home sheathing and interior components
17. Railroad and street cars
18. Recreational vehicle
19. Shipbuilding and repairing
20. Snowmobiles
21. Station wagon flooring
22. Trailer sheathing
23. Truck and bus bodies
24. Window frames
3-26
-------
TAJLL; 3-12
TYPICAL USES OF
PRE-COATED METAL STRIP (cont.)
Miscellaneous
1 Ath:etic and sporting goods
2. Blackboards < metal)
3. Bread boxes
4_ Camera shells a:.d parts
5: - Casket hand'es
6. Corr.mun.-rations equipment
7. Dental equipment
8. Dispersing rr.ad.mes. to\-e!s etc.
9 Draperv fixtures and curtain rods
10 Electrical measuring equipment
11 Games, tovs
12. House numbers
13. Instrument gauge faces, clocks, thermometers, etc
14. Instrument' panels
15 Luggage
16 Mail boxes
17. Meta! sigr.s /interior and exterior)
IS. MorL'Cians goods
19. Mus'caJ instruments
20. Ordnance i- accessories
21. Photographic equipment
2"2 Picture frames
23. Pins and mechanical pencils
24. Tool and tackJe boxes
25. Utensils
26. Window blinds, \enetian blinds, pivot shades,
and accessories
Source: National Coil Coaters Association, Technical Bulletin No. 4, 1975.
3-27
-------
TABLE 3-13. CONSUMPTION OF COATED COIL BY MAJOR MARKET
(Thousand of tons)
MARKET
1975
1976
1977
1978
1979
1980
1981
1975 - 1981
AVERAGE ANNUAL
COMPOUND GROWTH
RATE
Building Products
Aluminum
Steel
Transportation
Aluminum
Steel
Containers and
Packaging
Aluminum
Steel
Appliances
Aluminum
Steel
Furniture, Fixtures
and Equipment
Aluminum
Steel
Other
294.0
611.1
905.1
20.1
199.8
219.9
127.4
62.6
190.0
5.8
81.9
87.7
1.2
63.2
75.2
536.1
348.8
788.5
1,137.3
32.7
712.8
745.5
158.8
73.1
231.9
5.6
72.3
77.9
1.2
86.8
88.0
846.4
340.3
876.4
1,216.7
67.0
923.4
990.4
180.0
64.4
244.4
18.8
92.9
111.7
3.4
76.5
79.9
1,082.9
356.4
983.9
1,340.3
55.5
1,063.7
1,119.2
199.6
60.0
259.6
8.3
88.3
96.6
3.2
68.8
71.0
1,169.3
304.3
1,109.5
1,413.8
83.4
926.5
964.9
202.6
58.3
260.9
6.9
108.1
115.0
3.8
68.5
70.3
1,116.1
271.6
899.1
1,170.7
27.2
875.5
902.7
196.5
36.0
232.5
5.5
99.4
104.9
2.5
60.0
62.5
763.7
266.9
845.5
1,112.4
27.7
907.7
935.4
202.9
32.5
235.4
6.1
94.8
100.9
5.2
56.7
61.9
923.0
(T)
3.0
18.3
2.6
3.8
4.9
5.3
TOTAL
2,014.0 3,127.0 3,726.0 4,056.0 3,941.0 3,237.0 3,369
6.1
Source: National Coil Coaters Association, News Release.
3-28
-------
Building Products
This is the largest market for coated coil and accounts for 33 percent of
total shipments in 1981. The principal coated coil products in the building
and construction areas are residential and industrial siding; garage doors;
mobile home siding; rain carrying eauipment; awnings; canopies; industrial,
rural, and portable building panels; and lighting fixtures. The maior
advantage coil coating has over substitute materials is cost. This lower cost
is realized both in terms of economies in the manufacture of these products
and in the labor costs involved in installing them on houses and buildings.
For these reasons, coated coil has a dominant position in the metal
exterior building products market. Other maior substitute materials for
pre-coated coil in building products consists of vinyl (or plastic) siding,
wood, brick, stone and glass. Considering construction costs, vinyl siding is
the most cost-effective of the alternative materials. However, vinyl is not
as durable as metal siding. Therefore, the coated coil's share of this market
appears secure in the near future.
Transportation
The primary products sold in this market are cold-rolled steel with
zinc-rich primer coatings for vehicle bodies and coated coil for instrument
gauges and dials. The zinc primers are utilized on the underside of hoods,
doors, and fenders for rust prevention of the unexposed surfaces. The zinc
primers are cost efficient for the automobile industry because the elimination
of most of the concern over rust allows for the use of thinner gauge metal.
Likewise, the use of pre-coated metal coil for making gauges and dials also
results in significant cost savings for automobile makers, since these parts
can simply be stamped out of pre-coated coils and directly installed on the
assembly line.
The transportation market is the second largest user of coated coil and
accounts for 30 percent of total industry shipments in 1981. This market is
also the fastest growing market, with an average annual compound growth rate
of 18.3 percent over the 1975 to 1981 period. This strong growth rate is due
to heavy market penetration by zinc primer coatings as more parts per car are
3-29
-------
using this specialty coated steel. This market penetration explains why
shipments of coated coil to the transportation market increased hy 4 percent
in 1981 despite a decline in nuirber of automobiles produced.
Industry sources indicated that there is still a significant degree of
growth potential remaining in the zinc primer area (such as application of
first coat primer to the opposite side of zincrometal coated side), as well a?
a number of other new applications in the transportation market which have not
yet been developed. Therefore, a strong rate of growth is anticipated for this
market.
Containers and Packaging
Canning is the third largest market for coil coating. A substantial
proportion of three-piece painted cans are pre-coated. An even larger
proportion of the ends and tabs are stamped from coated coil. However, the
two-piece cans cannot use pre-coated metal, because they are compression
drawn. The growth in popularity of two-piece cans offers a viable, lower cost
substitute in cases where these cans are practical. In .addition, the passage
of laws restricting the sale of disposable cans and containers poses a threat
to metal can production as well as the coated coil shipments.
Appliances
In 1981, shipments of coated coil in the appliance market represented
less than 3 percent of total coated coil production.
Industry sources indicate that coated coil is less expensive than
post-painting in the manufacture of appliances due to substantial savings in
labor and overhead cost. The major disadvantage is that pre-coated coil
requires careful handling, and special welding and joining techniques which
8 /
appliance manufacturers must become accustomed to. However, industry
sources report that once this learning process is complete, the use of coated
7/Modern Metals, July 1982.
3-30
-------
9/
coils will reduce the total cost of assembling some end product. The coil
coating industry anticipates further market penetration in the appliance
industry as the coating and application technologies are further refined and
as appliance manufacturers become more accustomed to handling and working with
pre-finished materials.
The portion of the compliance costs that can be passed through in higher
prices depends upon the market acceptance of price increases, measured by the
price elasticity of demand and price setting behavior in the industry. The
following section presents a discussion of these factors.
3.4 PRICE DETERMINATION
Increased costs of coil coating will, as a whole or in part, be passed
through to customers in the form of higher prices. The amount that can be
passed through depends upon the price-setting behavior in the industry (i.e.
intra-industry competition) and the market acceptance of price increases as
measured by the price elasticity of demand. The following discussions cover
these topics.
3.4.1 Industry Competition
The level of competition is assessed through the evaluation of industry
concentration, pricing practices, profitability, capacity utilization rates,
capital intensity, and product specialization.
Analysis of market shares, based on 1976 production data reported by the
62 sample plants, indicates that the coil coating industry is not highly
concentrated and the four and eight largest coil coaters account for 42 and 59
percent of the market share, respectively.
For the 62 sample plants with production data, production rates varied
from approximately 11 million square feet for some of the smaller plants to as
Q/
Modern Metals, March 1982
3-31
-------
much as 1 billion square feet per year. However, almost all the plants had
annual production rates that were less than 300 million square feet
in 1976. As shown in Table 3-2, the following distribution of production
rates was found for the industry:
26 plants with less than 100 million square feet of annual
production
22 plants with annual production rates of 100-200 million
square feet
14 plants with annual production rates greater than
200 million square feet.
Coated coils are generally sold on a bid or contract basis. The
importance of price in the bidding process varies with the level of capacity
utilization in the industry, the ability to meet specified delivery schedules,
specialized services required, and geographical location. Because coil
coating is capital intensive, firms consider it important to maintain high
levels of capacity utilization. Therefore, in periods of low demand, price
competition becomes a more important factor than in periods of high demand.
Industry sources have stated that for most years, capacity utilization
has been very high. The recessions of 1975 and 1980-1981 were notable
exceptions, when the industry experienced substantial production decreases.
In general, for periods when the economy is good and capacity utilization is
high, customers view the ability to meet short delivery schedules more
important than price in selecting suppliers.
The production capabilities of most coil coaters are not identical.
While most coil coaters have the physical ability to coat aluminum, galvanized
steel, or cold-rolled steel, the level of technical expertise varies between
firms. In addition, services such as three color coating, laminating, print-
ing, embossing, etc., as well as the ability to coat extremely thin or heavy
Production figures reflect one side of metal coated.
3-32
-------
gauges are not offered by every coil coater. Therefore, firms which offer
more specialized services and expertise are generally less subject to pricing
pressures than firms producing more homogeneous products.
Geographic location can also be an important competitive factor. Trans-
portation costs for shipping the coils (which can weigh as much as 25 tons
each) to and from the coater can be substantial. Due to the weight limita-
tions on roads, only one or two of the larger coils can be transported by a
truck at one time. Therefore, location of a potential coater plays an
important role in the total cost of painting the metal. Ideally the coater
should be located between the rolling mills where the coils are produced and
the purchaser of the coated coil.
Industry sources have indicated that historically, overseas competition
of pre-coated metal has been minimal. Although separate statistics on coated
coil shipments in Canada and Mexico are not available, the National Coil
Coaters Association (NCCA) lists five member firms in Canada and one firm in
Mexico. These six firms, two of which are foreign operations of U.S. firms,
represent less than 15 percent of the number of firms in the U.S. However,
the high charges for transportation of the coils and the insignificant level
of import competition in the past, appear to indicate that these foreign
competitors will not in the future provide a significant degree of competition
to U.S. firms.
3.4.2 Demand Elasticity
The price elasticity measures the degree of responsiveness of quantity
demanded to price changes. An elasticity coefficient of between -1.0 and 0
refers to a generally inelastic (less responsive) market reaction to price
increases, while a coefficient of -1 or less will portray an elastic (more
responsive) market reaction. A price increase for a product with an inelastic
coefficient will yield a less than proportional reduction in quantity demanded
while a similar price increase for a product with an elastic coefficient will
3-33
-------
result in a more than proportional reduction in quantity demanded. For
example, if a product with a price elasticity coefficient of -0.6 experience a
price increase of 2 percent, the quantity demanded will decrease by 1.2 per-
cent (i.e., 0.6 times 2) which is less than the price increase.
Numerous inquiries were made seeking to identify previous demand studies
on coil coating or on a similar intermediate product. However, no related
or similar type study was identified. In the absence of historical pricing
data, the study team inferred elasticity estimated from qualitative
information on demand determinants. The following two factors were used in
developing preliminary elasticity estimates for pre-coated coil:
The number and closeness of substitutes
The proportion of the coated coil cost to the total cost of
the final product.
If there was ample supply of direct substitutes, the demand elasticity
would be high. On the other hand, if the use of substitutes requires costly
product design or otherwise adds substantially to end-product cost, then the
elasticity is estimated to be low. In addition, the greater the price of the
coil coating product in proportion to the total cost of a final good,
the greater the potential impact on the final product's price and, hence, on
demand for both the final product and coil. The following paragraphs describe
the factors affecting the elasticity estimates for coil coating's four largest
markets: transportation, building products, cans, and appliances. Table 3-14
serves as a summary of this discussion.
The following individuals were contacted during 1978-1979:
Bureau of Mines, Division of Economic Analysis - Adams
Department of Commerce, Bureau of Resources, Indus. Products
Division - H. Bodansky
Bureau of Mines, Division of Economic Analysis - R. Johnson
Council on Wage and Price Stability - M. Ligget
Department of Commerce, Industry Analyst - V. Tvedt
Bureau of Economic Analysis - E. Roberts
General Services Admin., Federal Supply Service - L. Mitchell
Department of Commerce, Business Policy - B. Downey
3-34
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TABLE 3-14. FACTORS AFFECTING ELASTICITIES FOR
FOUR MAJOR MARKETS OF THE
COIL COATING INDUSTRY
Major Markets
Number and
Closeness of
Substitutes
Ratio of
Coated
Coil Cost to
Total Cost
Qualitative Estimated
Elasticity Elasticity
Estimate Coefficient
Transportation
Building Products
Cans, Ends, & Tabs
Appliances
Few
Moderate
Moderate
Moderate
Small
Small
Small-
Moderate
Small
Inelastic
Inelastic
Inelastic
Inelastic
-.2
-.2
-.4
-.5
Source: JRB Associates estimates.
3-35
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Building Products
As shown in Table 3-14, the number and closeness of substitutes is con-
sidered to be moderate, since coil coated products appear to have a clear cost
advantage over alternative products. Considering both coated coil product
prices and the cost of construction, the total cost of coil coating as a pro-
portion of the total cost of building products is minimal. Based on these
findings, it was concluded that the demand for coated coil for building
products is generally inelastic and has an elasticity coefficient of -0.2.
This means that if price goes up by 1 percent, the quantity of building
products demanded will decrease by 0.2 percent.
Transportation
The economies resulting from the use of pre-coated metals appears to give
coated coil significant competitive advantages in the transportation market.
Based on this finding plus the fact that the cost of coated coil accounts for
a relatively small portion of the total cost of an automobile, it is likely
that the demand for coated coil in this market is relatively inelastic. The
elasticity coefficient is estimated to be -0.2, thus a price increase of
1 percent will result in a 0.2 percent drop in quantity demanded.
Container and Packaging
The increasing demand for pre-coated cans, lids, and tabs, and the pro-
duction economies offered by pre-coating appear to provide a strong market
position for coated coil cans. Even though pre-coated three-piece cans face
competition from glass and two-piece cans, there are many canning applications
for which substitutes do not offer practical alternatives. Therefore, the
demand appears to be relatively inelastic and is assigned an elasticity
coefficient of -0.4. This means a price increase of 1 percent will be
followed by a 0.2 percent reduction in quantity demanded.
3-36
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Appliance
Published appliance elasticity estimates by Houthakker and Taylor, and
12/
Ernst & Ernst show that home appliance demand is inelastic (elasticity
coefficients are between -0.3 and -0.8). In areas where the use of pre-coated
coil is technically acceptable, coil coating offers significant production
economies over alternative finishes for some applications. For other prod-
ucts, coated coil may be used because of superior physical performance
characteristics, even though it may add a small increment of additional cost
to the end-product. Because of these factors, the demand for coil coating
services in this market is probably less elastic than the end-product demand
for appliances and is assigned an elasticity coefficient of -0.5. Thus a
price increase of 1 percent will result in a quantity reduction of 0.5 percent.
Total Industry
Because information on product mix at specific plants is not available,
it is difficult to relate the above elasticities, which are estimated by major
market, to the demand reductions for specific metals and coatings. Therefore,
the high end of the above range (-0.2 to -0.5) of elasticity estimates was
used to estimate quantity changes due to the regulations which are reported in
Chapter 6. That is, it is assumed that an elasticity coefficient of -0.5
would apply to the entire industry. This assumption is conservative, because
it results in overstatement of the industry overall quantity changes due to
price increases.
Significance of Elasticity Findings
The significance of the elasticity findings is evaluated in terms of how
they are used in the analysis. The elasticity estimates enter the analysis
12/
Elasticity coefficient estimates for home appliances:
Houthakker and Taylor, Selected Elasticities:
- Kitchen and other household appliancesshort run elasticity of -0.6337
Ernst and Ernst, Selected Elasticities:
- Household refrigerators and freezersshort run elasticity of -0.3
- Household appliances, n.e.c.short run elasticity of -0.8.
3-37
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primarily at two points. The first is a qualitative assessment regarding the
capability of the industry to pass through costs. The second use of the
elasticity estimates in the analysis is in the determination of the quantity
demanded reductions resulting from the price increases.
As discussed in Sections 3.2 to 3.4, the coil coating industry exhibits
some of the characteristics of non-competitive market such as unusually high
profitability, high capital intensity, low degree of foreign competition and
low demand elasticity. As explained in Section 2.3, such not perfectly
competitive market is expected to be able to raise prices to recover cost
increases. Because the price elasticity is low, it is expected that the
industry will assume a cost-plus-markup pricing strategy and price increases
can be estimated using equation 1 in Section 2.3.
The elasticity estimate is then used to determine the quantity demanded
reductions resulting from the price increases using equation 4 in Section 2.3.
These quantity changes will then be used to estimate the impacts of cost
increases on the industry profit.
Because the price changes, the compliance costs and the elasticities are
generally low, moderate errors in the elasticity estimates for the coil
coating industry would not significantly alter the conclusions regarding plant
closures and other impacts reported in the study. For example, if elasticity
estimates were increased by 30 percent, (-0.65 instead of -0.5) there would be
an additional 0.25 percent drop in quantity demanded for the industry beyond
that estimated in Section 6.1 for the most expensive treatment alternative.
Finally, it should be noted that price elasticity will not change
significantly during recessionary periods. As described in Appendix B, the
fluctuations in demand for a product during a recession results usually from
changes in aggregate income, and not from price changes.
3.4.3 Summary of Findings on Price Determination
The analysis of market structure and performance of the coil coating
industry reveals that industry prices are not determined in a manner that
3-38
-------
would occur in a perfectly competitive market. Although the concentration
ratios are low and capital requirements are high, there are significant
amounts of product/service specialization and geographical market
segmentation. Moreover, the industry has been more profitable than most
manufacturing businesses, and the demand for coated coils is experiencing
rapid growth and is highly inelastic. These findings suggest that the
industry compliance costs can be passed through to their customers.
3-39
-------
4. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the coil coating
industry to 1990 under the assumption that there would be no water pollution
control requirements resulting from the Clean Water Act. These projections
are used together with estimated compliance costs and other information to
assess the effects of the effluent control requirements on future industry
conditions .
baseline projections in this report provide a general point of refer-
ence for the analysis and are not intended to be a comprehensive, authori-
tative forecast of future industry conditions. These projections provide a
plausible picture of future developments, and thus can be used as a benchmark
for comparison. Although minor changes to the baseline projections may result
from a more comprehensive treatment of forecasting techniques, they are not
likely to significantly alter the study s overall conclusions regarding the
extent of the economic impacts of the effluent guidelines.
The basic approach followed in developing the projections begins with a
demand forecast. Then, using the resulting initial volume estimates, industry
supply factors are assessed to determine if there would be any significant
changes in the level of capital requirements and anticipated growth in terms
of the number of plants and quantity of production.
4.1 DEMAND FORECASTS
The primary reason for beginning the baseline projections with the demand
analysis is based on the hypothesis that the coil coating industry supply
factors will adjust to demand conditions. This results from three factors:
(1) the coil coating industry group is very small compared to the total
economic activity in the U.S. and is. therefore, more likely to react to
general trends rather than influence them; (2) the demand for coated coils is
a derived demand, depending on the demand for housing, transportation equip-
ment, cans and containers, and home appliances.
4-1
-------
Demand forecasting is an inexact discipline, with considerable dependence
on individual judgement and simplifying assumptions. Each forecasting tech-
nique has its own particular advantages and disadvantages, which could result
in different types of errors. The requirement for this study is not a
precise, comprehensive forecast of industry condititons; instead this study
requires an approximate estimate of the likely trends in quantity of coated
coils demanded. To make this approximation, regression analysis was
performed.
Regression analysis is a statistical technique used to summarize the
relationship between the fluctuations in the value of a variable and that of
the variables that are believed to cause these fluctuations, or explanatory
variables. It is an empirical tool that is extensively used in business and
economic analysis to explain relationships between variables and to predict
market phenomena. In demand analysis it is used to relate changes in
quantities demanded for a product to the level of activity in economic
entities that use the product. Once such a relationship is established, a
forecast of the future demand conditions can be made based on exogenous
predictions of the explanatory variable.
In this analysis, the relationship between coil shipments and real Gross
National Product over the 1962 to 1981 period was tested. Using the least-
square linear regresion technique, the demand equations for coil coating
shipments were estimated. The estimated demand equations are:
Total shipments:
Yfc = -3,548.30 + 4.915 Xt (R2 = 0.93)
Aluminum Shipments:
Y = -483.52 + 0.896 X (R2 = 0.79)
Steel Shipments:
Y = -3,064.78 + 4.020 Y (R2 = 0.92)
where: Y = coil shipments (in thousands of tons)
X = real GNP (in billions of 1972 dollars)
2 . .
R = correlation coefficient.
4-2
-------
The high correlation coefficients indicate that the explanatory variable
(i.e., real GNP) do capture a very large percentage of the movement
(variation) in the coil coating shipments and would provide very reasonably
accurate forecasts. Based on Predicasts' forecasts of real GNP (3.3 percent
from 1981 to 1990), the projection of coil coating shipments are derived from
the regression equations and reported in Table 4-1. These projections show
that coil coating shipments are projected to grow about 7.4 percent annually
between 1981 and 1990. This rate is more than twice that expected for the GNP
which is expected to grow by 3.3 percent a year.
The projected strong growth rate for the coil coating industry seems to
be reasonable. Industry sources expect continued market penetration in the
already large transportation market (as more parts per car will use zinc
primer coatings) and new applications (such as first coat primer to the
opposite side of zincrometal coated side) are developed . In addition, the
industry projects strong growth in the appliance market as appliance
manufactur
materials.
manufacturers become more accustomed to handling and working with pre-finished
2/
4.2 SUPPLY FORECASTS
4.2.1 Number of Facilities in 1985
This section addresses the number of baseline closures and new sources
that might be expected during the 1982 to 1985 period. The above forecasted
increase in demand through the 1980s can be supplied by (a) increasing
capacity utilization at current plants, (b) modifying current plants to
increase their capacity (c) constructing new plants and (d) increasing
imports. Since the coil coating industry is expected to grow rapidly,
baseline closures would not likely result from economic trend (i.e., they may
result, nevertheless, from special situations).
/Modern Metals, March 1982.
2/
'Modern Metals, July 1982.
4-3
-------
Annual
Growth Rate (%)
TABLE 4-1
PROJECTION OF TOTAL SHIPMENTS
OF COATED COILS
(Thousands of Tons)
Year
1975
1976
1977
1978
1979
1980
1981
Projected
1985
1990
Coil
Total
2,014
3,127
3,726
4,056
3,941
3,327
3,369
4,910
6,410
Coating Shipments
Aluminum
580
720
782
841
800
702
668
1,060
1,330
Steel
1,434
2,403
2,944
3,215
3,141
2,535
2,701
3,850
5,080
Real GNP
($ Billion)
1,234
1.300
1,372
1,437
1,483
1,481
1,510
l,720a
2,025a
1975 - 1980
1979 - 1980
1980 - 1981
Projected (%)
1981 - 1990
1981 - 1985
1985 - 1990
10.0
-17.9
4.1
7.4
9.9
5.5
3.9
-12.5
-4.8
8.0
12.2
4.7
12.1
-19.3
6.5
7.3
9.3
5.7
3.7
-0.1
2.0
3.3
3.3
3.3
Predicasts1 forecasts
SOURCE JRB Associates estimates,
4-4
-------
During the 1979 to 1981 period capacity utilization at coil coating
facilities has been lower than in 1978 (the peak year in quantity shipped).
As a result, a significant portion of the increased demand between 1982 and
1985 can be met by increasing operating levels at existing facilities.
Assuming the industry was operating at full capacity in 1978, the 1978 ship-
ments (4.056 million tons) would approximate the industry capacity. In this
case, an additional capacity of 855,000 tons is needed by 1985. Table 4-2
presents the estimated capacity expansion requirements for the coil coating
industry and the number of new lines needed. Assuming the general industry
rule of one square foot of coated surface per pound of steel and three square
feet per pound of aluminum, the additional capacity needed in 1985 is esti-
mated to be 1.32 billion square feet for aluminum and 1.27 billion square feet
for steel.
New modern coating lines can accomodate up to 60-inch widths and coat at
speeds of 300 to 400 feet per minute depending on the type of coating being
applied. Given these specifications (along with assuming operating
parameters of 80 hours per week, 50 weeks per year, and & downtime factor of
30 percent), it is estimated that the aluminum and steel coating sectors will
each need 3 to 4 new lines, for a total of 6 to 8 lines by 1985.
Since the coil coating industry will continue to outperform the general
economy, no baseline closure is expected.
4.2.2 Capital Requirements for New Sources
The NCCA has estimated that a new line with the capability to coat
60-inch widths at speeds up to 300 to 400 feet per minute would cost appro-
ximately $15 million to install, excluding the cost of plant building
construction. Based on 1977 Census of Manufactures data for the Coating,
Engraving and Allied Services, n.e.c. industry segment (SIC 3479), it is
3/
Based on information gathered from NCCA and site visits.
4-5
-------
TABLE 4-2
PROJECTED CAPACITY EXPANSION
REQUIREMENTS FOR COIL COATING, 1981 - 1985
Industry Capacity
a/
Aluminum
Shipments
Steel
Shipments
Total
Shipments
Thousands of tons
Million sa. ft.
840
5,040
3,215
6,430
4,055
11,470
Projected 1985 Shipments
Thousands of tons 1,060
Million sq. ft. 6,360
3,850
7,700
4,910
14,060
Projected Additional
Capacity Needed
Thousands of tons
Million sq. ft.
220
1,320
635
1,270
855
2,590
Estimated .New Lines
Needed0'
3-4
3-4
6-8
Estimated Capital Needed
for New Lines
(Million of 1978 Dollars)
Equipment
Building
d/
45 - 60
15 - 20
45 - 60
15 - 20
90 - 120
30 - 40
a/
..Assume to be equal to 1978 shipments which is the peak year.
General industry rule is 3 sq. ft. of aluminum per pound and 1 sq. ft. of
.steel per pound.
Estimated annual production of one line in 360 - 480 million sq. ft.,
assumming: 60 inch width; 300-400 ft/minute capability; 80 hrs/week and
.50 weeks/year.
'$15 million per line as estimated by National Coil Coaters Administration
Estimated to be about 30 percent of equipment based on 1977 Census of
Manufactures data for SIC 3479.
SOURCE: JRB Associates estimates.
4-6
-------
estimated that plant buildings cost about 30 percent of equipment cost or $5
million for a new line. Using this estimate, it is projected that the
industry will need between $120 and $160 million to finance the additional
capacity for 1985.
4.3 SUMMARY OF BASELINE CONDITIONS
The following summarizes the major conditions of the baseline analysis:
The industry output will grow at an average compounded growth rate of
7.4 percent between 1981 and 1990, about twice that expected for the
general economy as measured by GNP.
There will be no baseline closure.
Between 6 to 8 new coil coating lines will be needed by 1985 to meet
the increase in demand for coated metal.
The capital requirements for the new lines are estimated to be between
$120 and $160 million (1978 dollars).
Technological changes in the appliance industry may increase the use
of coated coils relative to other materials used in appliances.
4-7
-------
5. WATER POLLUTION CONTROL OPTIONS AND COSTS
5.1 OVERVIEW
The alternative water treatment control systems, costs, and effluent
limitations for the coil coating industry are enumerated in the Development
Document. That document also identifies various characteristics of the
industry, including manufacturing processes; products manufactured; volume of
output; raw waste characteristics; supply, volume, and discharge destination
of water used in the production processes; sources of waste and wastewaters;
and the constituents of wastewaters. Using these data, pollutant parameters
requiring limitations or standards of performance were selected by EPA.
The EPA Development Document also identifies and assesses the range of
control and treatment technologies within each industry subcategory. This
involved an evaluation of both in-plant and end-of-pipe technologies that
could be designed for each subcategory. This information was then evaluated
for existing surface water industrial dischargers to determine the effluent
limitations required for the Best Practicable Control Technology currently
available (BPT), and the Best Available Technology economically achievable
(BAT). Similar evaluation were performed for existing dischargers to publicly
owned treatment works (POTWs) to develop Pretreatment Standards for Existing
Sources (PSES). Finally, New Source Performance Standards (NSPS) and
Pretreatment Standards for New Sources (PSNS) were also developed for new
direct and indirect dischargers, respectively. The identified technologies
were analyzed to calculate 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 concentration levels (per liter of water as well as volume of
production) for each subcategory.
5.2 POLLUTANT PARAMETERS
The pollutant parameter selection for effluent guidelines was based on
analysis of data from the following sources:
Laboratory analysis of samples of wastewater collected from
various coil coating plants.
5-1
-------
Analysis of responses to questionnaires submitted to coil coating
plants.
Chemical suppliers to the coil coating industry.
These sources were used to estimate the concentration of each of the
129 priority pollutants as well as other variables considered to be
"conventional pollutants" in the study of water pollution. The specific
approach to selecting pollutant parameters is presented in Sections V and VI
of the Development Document.
5.3 CONTROL AND TREATMENT TECHNOLOGIES
The alternative pollution control technologies that are most applicable
for the reduction of the selected pollutants in the coil coating industries
are described in detail in Sections IX through XIII of the Development
Document.
Four treatment alternatives are evaluated for the existing sources:
Treatment Level 1: lime and settle.
Treatment Level 2: lime and settle, plus flow reduction by quench
water recycling.
Treatment Level 3: Treatment Level 2 plus filtration.
Treatment Level 4: similar to Treatment Level 3 but substitutes
ultrafiltration for conventional filtration.
However, it is determined that Treatment Level 4 may not be technically
feasible (Section X of the Development Document) and, for this reason excluded
it from further consideration. As a result, the economic impact analysis is
limited to the first three alternatives.
For new sources, three alternative treatment technologies are analyzed:
Treatment Level 1: similar to existing source Treatment Level 3 with
the addition of multistage countercurrent cascade rinsing
5-2
-------
Treatment Level 2: similar to new source Treatment Level 1 but
substitutes ultrafiltration for conventional filtration
Treatment Level 3: similar to new source Treatment Level 2 but
substitutes sedimentation with membrane filtration.
Because of potential technical difficulties explained in Section XI of the
Development Document, the latter two options may not be technically feasible.
Furthermore, it is estimated that these two treatment options are more
expensive and achieve less pollutant reduction benefits than new source
Treatment Level 1. For these reasons, only Treatment Level 1 is considered
for new sources.
5.4 COMPLIANCE COST ESTIMATES
5.4.1 Critical Assumptions
A number of critical assumptions were used to estimate compliance costs.
These assumptions are outlined in the Development Document and summarized
below:
Estimated compliance costs are incremental (that is provisions are
made for equipment-in-place) .
Subsidiary costs associated with system construction are included in
the system cost estimates. These include administrative and labora-
tory facilities, line segregation, yardwork, engineering, legal costs,
fiscal and administrative expenses, interest during construction,
garage and shop facilities, and land.
Costs for sludge holding and disposal are estimated to be $10,000 per
plant for the aluminum subcategory.
Depreciation was straight line at 10 percent per year for
10 years.
All costs are expressed in January 1978 dollars.
Where a batch, continuous or haul-away 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.
Operation and maintenance costs assumed continuous operation
24 hours a day, 5 days a week, for 52 weeks a year.
5-3
-------
Nonsupervisory labor costs assumed an average wage rate of
six dollars an hour, the average wage rate reported by the Bureau of
Labor Statistics (BLS) 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.
Treatment Level 1 for existing sources is based on BPT technology and
does not require flow reduction. Compliance costs for this treatment
alternative were calculated based on plant current flow rates which
often times are not the optimum treatment flow rates. For this
reason, the compliance costs of Treatment Level 1 are in many cases
greater than that of Treatment Level 2 which achieves more pollutant
reduction. In such cases, it was assumed that the costs of Treatment
Level 1 are equal to those of Treatment Level 2.
5.4.2 Compliance Costs of Existing Sources
Unit, plant average, and total annual compliance costs for existing
sources, by industry segment and by type of discharge status are presented in
Table 5-1. Incremental annual compliance costs are presented in Table 5-2.
Total annual compliance costs for the 62 sample plants for which production
and compliance cost data were available ranged from $5.9 million for Treatment
Level 1 to $9.1 million for Treatment Level 3.
Total annual compliance cost burden for the 62 sample plants projected to
the 68 known dischargers in the industry in 1976 ranged from $6.4 million for
Level 1 to $10.0 million for Treatment Level 3.
Tables 5-1 and 5-2 also show that:
The average unit compliance costs (average cost of compliance per
square foot of annual production) are the highest for the captive
plant segments.
The highest unit compliance cost was 0.17 cents for the direct
discharge captive plants at Treatment Level 3.
The plants in the adjunct plant segment had the highest average annual
compliance costs per plant.
The average unit compliance costs for indirect discharge plants were
slightly higher than for those plants that discharge directly to
surface waters.
5-4
-------
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5-5
-------
TABLE 5-2. INCREMENTAL ANNUAL COMPLIANCE COSTS FOR
COIL COATING EXISTING SOURCES
Percentage Increase Percentage Increase Between
from Treatment Level 1 to Treatment
Industry Segments Level 2 Level 3
Toll Goaters 1% 54%
Captives 2% 61%
Adjunct 5% 49%
Average 3% 55%
Level 1 -
Level 2
1%
2%
5%
3%
Level 2 -
Level 3
53%
59%
42%
51%
Source: JRB Associates estimates.
5-6
-------
The industry's total annual compliance costs for Treatment Level 3
were 50 percent higher than the estimated costs for Treatment Level 1.
Plant distribution of unit annual compliance costs by industry segment is
contained in Table 5-3. Only in the captive plant industry segment were there
plants with unit compliance costs greater than 0.4 cents per square foot.
Also, over 75 percent of the toll coaters and adjunct plants had unit
compliance costs of less than 0.1 cents per square foot.
Total capital investment compliance costs are found in Table 5-4.
Projected for all 68 dischargers in the industry, compliance investment costs
were found to range from $17.1 million at Treatment Level 1, to $20.5 million
for Treatment Level 3.
5.4.3 Compliance Costs of New Sources
As indicated in Section 5.2, only one treatment technology is considered
for new sources. Table 5-5 summarizes the compliance cost estimates of this
technology by each technical subcategory. These costs apply to existing
facilities that are substantially modified and to greenfield (new) plants.
The compliance costs reported in Table 5-6 are estimated for model plants
developed from selected sample plants surveyed by EPA. As shown in Table 5-5,
those model plants are different in size from the typical new plant developed
in Chapter 4 (see Table 4-2). Based on information from site visits and NCCA,
it is estimated in Chapter 4 that a typical new plant will have a production
capacity of 420 million square feet (measuring one side of metal) or 78.1
million square meter (measuring both side of metal). The costs of a new
source were obtained in Section 4.2 for a new source with a capacity of 78.1
million square meter, therefore compliance costs were calculated for a new
source of that size to evaluate the magnitude of this pollution control
investment.
5-7
-------
TABLE 5-3.
DISTRIBUTION OF SAMPLE PLANTS AND PRODUCTION
BY UNIT ANNUAL COMPLIANCE COST
Plants with Unit Annual Compliance Costs (^/sq.ft) between:
O-.l .1-.2 .2-.3 .3-.4 .4-.5 .5-.6 .6-.7 Total
i/
Treatment Level 1
Number of Plants
Toll Coater
Captive
Adjunct
Total
Plant Production
(Z of Total)
Production (Z)
Toll Coater
Captive
Adjunct
Total
Treatment Level 2
Number of Plants
Toll Coater
Captive
Adjunct
Total
Plant Production
(Z of Total)
Production (Z)
Toll Coater
Captive
Adjunct
Total
Treatment Level 3
Number of Plants
Toll Coater
Captive
Adjunct
Total
Plant Production
(Z of Total)
Production (Z)
Toll Coater
Captive
Ad j unc t
Total
Mess than 1Z
'Maw «/*« ttAA .,** t-n 1 AH *IAV
12
10
16
36
86
74
92
86
12
10
16
36
86
74
92
86
10
4
11
25
79
34
79
69
* A** t- s4 11 A ^rt rf
5
7 1 5
5
1915
14
17 3 5
8
12 1 1
5
7 1 5
5
19 1 5
14
17 3 5
8
12 1 1
3 4
833
7 1 2
16 10 5
10 11
46 7 8
17 1 2
21 6 3
17
1 24
21
1 62
100
* 100
100
* 100
17
1 24
21
1 62
100
* 100
100
* 100
17
1 3 2 24
21
1 3 2 62
100
1 3 2 100
100
* 1 * 100
5-8
-------
TABLE 5-4. CAPITAL INVESTMENT COMPLIANCE REQUIREMENTS FOR
COIL COATING EXISTING SOURCES
Investment Costs
($ Thousands)
Industry Segment
Plants
Level 1
Level 2
Level 3
Total for Sample Plants
Toll Coater ,
a/
Direct Discharge
Indirect Discharge
Subtotal
Captive .
Direct Discharge
Indirect Discharge
Subtotal
Adjunct ,
Direct Discharge
Indirect Discharge
Subtotal
a/
Direct Discharge
Indirect Discharge
62
2
15
17
11
13
24
15
6
21
28
3-4
15,520
475
3,712
4,187
2,413
3,852
6,265
3,384
1,684
5,068
6,272
9,248
15,844
531
3,770
4,301
2,446
3,904
6,350
3,506
1,687
5,193
6,483
9,361
18,868
783
4,426
5,209
2,812
4,443
7,255
4,474
1,930
6,404
8,069
10,799
Projected Total For All
Plants in Industry
Direct Discharge
Indirect Discharge
68
29
39
17,050
6,700
10,350
17,392
6,911
10,481
20,547
8,514
12,033
a/
Includes plants that reported to be both direct and indirect dischargers
Source: JRB Associates estimates.
5-9
-------
TABLE 5-5. NEW SOURCE COMPLIANCE COSTS
Steel Galvanized Aluminum
Subcategory Subcategory Subcategory
Plant Production ,
Capacity (10 xro )a/ 12.19 11.50 29.08
Flow Rate (1/hr) 617 632 2,213
Compliance Costs
(Thousands of 1978 Dollars)
Investment 171.5 172.5 316.8
Annual 51.3 51.8 89.6
a/
Represents area of both sides of metal
Source: Environmental Protection Agency.
5-10
-------
TABLE 5-6. NEW SOURCE COMPLIANCE COSTS FOR A PLANT WITH 78.1
MILLION SQUARE METER PRODUCTION CAPACITY
Steel
Subcategory
78.1
25.2
20.0
0.316b/
3,956C/
523.1
156.4
2.1
0.6
Galvanized
Subcategory
78.1
25.2
20.0
0.343b/
4,294C/
545.2
163.6
2.2
0.6
Aluminum
Subcategory
78.1
25.2
20.0
0.475b/
5,947C/
573.4
162.2
2.3
0.6
Plant Production .
Capacity (10 xm )
Plant Revenues
(Million of Dollars)
Plant Assets Value
(Million of Dollars)
Flow .Rate
1/nf
1/hr
Compliance Costs
(Thousands of 1978 Dollars)
Investment
Annual
Compliance Costs of Revenues (%)
Investment
Annual
Investment to Assets Value (%) 2.6 2.7 2.9
Represents area of both sides of metal.
Estimated by EPA.
c/
Assume plant operation is 24 hours a day and 260 days a year.
Estimated based on the following formula:
C°St A =l Flow B ^ X C°St B
Source: JRB Associates estimates.
5-11
-------
Table 5-6 shows that the compliance costs for a new plant with 78.1
million square meter in production capacity vary from $523,100 for a steel
plant to $573,400 for an aluminum plant. Table 5-6 also indicates that the
required water pollution control system represents a relatively small
additional investment (less than 3 percent of plant assets value) to the new
sources.
5-12
-------
6. ECONOMIC IMPACT ANALYSIS
This chapter provides an estimate of the economic impacts which are
associated with the costs of the effluent treatment technologies described in
Chapter 5. The analysis is based upon an examination of the estimated com-
pliance costs and other economic, technical, and financial characteristics of
the 62 coil coating plants for which production and price data are available,
and uses the methodology described in Chapter 2. The primary economic impacts
examined include changes in industry profitability, plant closures, substi-
tution effects, changes in employment, shifts in imports and exports, and
industry structure effects.
The 62-plant sample represents 80 percent of the plants in the industry
and contains a wide range of both large and small plants within each industry
segment. Therefore, the sample appears to adequately represent the industry
for the purposes of this study.
6.1 PRICE AND QUANTITY CHANGES
As discussed in Chapter 2, it is expected that the coil coating industry
would assume a cost-plus-markup pricing strategy. Table 6-1 shows the esti-
mated industry-wide price increases due to the regulations and the resulting
quantity changes at each compliance level. The price increases were small for
all treatment options and did not exceed 2 percent. Similarly, the quantity
reductions were also very small, not exceeding one percent at any treatment
option. The small changes in quantity demanded relative to the growth rate
proiected in Chapter 4 for the coil coating industry (over 7 percent annually
between 1981 and 1990) suggests that the major impacts to the extent they
exist, will be intra-industry. That is, the degree to which the unit
compliance costs are unequally distributed across the industry will determine
the extent of the impacts.
After the industry-wide price and quantity adjustments were determined,
attention was focused on the analysis of individual plant impacts. The plants
that were subjected to a detailed impact analysis were selected by a screening
analysis described in the following section.
6-1
-------
TABLE 6-1.
ANTICIPATED INDUSTRY PRICE AND PRODUCTION CHANGES
dP
dP/P,
dQ
dQ/Q
Treatment
Level 1
Treatment
Level 2
Treatment
Level 3
(c/Sq. ft.)
.07
.07
.10
1
1
1
(%)
.12
.15
.73
(000 Sq. Ft.)
59,100
61,200
91,800
-.56
-.58
-.87
6.2 SCREENING ANALYSIS
The purpose of the screening analysis is to identify plants which may
experience a significant degree of regulatory impact. As described in
Chapter 2, the plant change in profit margin (dPM.) served as the basic
variable in the screening analysis. The dPM. values were calculated for each
of the 62 sample plants included in this economic impact analysis. Based on a
selected initial dPM screening value of 2 percent, 19 of the 62 plants had
declines in profit margin greater than this screening value and were
identified as "high impact potential" plants. These plants were subjected to
further analysis described in the following sections to determine the
likelihood of closure. Table 6-2 presents the results of the screening
analysis.
6.3 PROFIT IMPACT ANALYSIS
As described in Section 2.6, the assessment of the impact of compliance
on plant profitability is based on the plants' after compliance return on
investment (ROI) ratios, investment being defined as total plant assets (i.e.
current assets plus net property, plant and equipment). Because plant-
specific baseline financial characteristics (e.g., plant profit margin, assets
value, variable and fixed costs of production) were not available, average
6-2
-------
TABLE 6-2. RESULTS OF SCREENING ANALYSIS
SEGMENTS
Toll Coaters
Adjunct
Captives
NUMBER OF
PLANTS IN
SAMPLE
17
21
24
PLANTS WITH POTENTIAL
FOR SIGNIFICANT IMPACT
NUMBER
4
2
13
PERCENT OF
SAMPLE
24
10
54
Total 62 19 31
Source: JRB Associates estimates
industry financial and operating ratios were attributed to each plant. The
resulting estimated baseline characteristics were described in Section 3.2.3
and summarized below:
average before tax profit margin is 17 percent
average total assets to sales ratio is 65 percent
average variable cost to total cost of production is 67 percent
Plants in the toll coater and adjunct groups with after compliance ROI less
than 8 percent were considered to be "potential" plant closures. Table 6-3
shows estimated ROIs before and after compliance with the regulation for each
of the 6 "high impact potential" toll coater and adjunct plants. This table
indicates that none of these 6 high impacted plants were found to be potential
closures for any of the three treatment options.
As explained in Section 2-6, the profit impact analysis for captive
plants is based on the ratio of "pre-compliance profit to annual compliance
costs." A ratio of less than 1.0 indicates a "potential" plant closure.
Table 6-4 presents the results of the profitability analysis of the 13 "high
impact potential" captive plants. None of these plants were found to be
"potential" plant closures for any of the treatment options.
6-3
-------
TABLE 6-3. PROFIT IMPACT ANALYSIS OF HIGH IMPACT
TOLL COATER AND ADJUNCT PLANTS
Post Compliance ROI (%)
Pre-Compliance
Plant ROI(%) Level 1 Level 2 Level 3
Toll Coaters
TC3
TC5
TC11
TC14
26.8
23.3
11.3
22.3
21.9
19.4
9.8
18.9
22.0
18.9
9.9
19.0
19.5
16.6
9.2
16.9
Aduncts
A19 18.1 14.0 14.0 12.1
A21 18.7 15.3 15.3 13.9
Source: JRB Associates estimates.
6-4
-------
TABLE 6-4. PROFIT IMPACT ANALYSIS OF HIGH
IMPACT CAPTIVE PLANTS
Plant
Cl
C3
C5
C7
C9
Cll
C13
C16
C17
C19
C20
C21
C23
Profit
Level 1
3.3
5.9
6.7
2.7
3.1
4.9
7.3
7.7
3.1
2.7
5.6
6.6
1.9
to Annual Compliance Costs
Level 2
3.2
5.9
6.4
2.6
3.1
4.9
6.6
7.7
3.1
2.7
5.6
6.2
1.9
Level 3
2.2
3.0
4.4
1.8
1.8
2.7
4.9
4.0
3.1
1.6
3.1
4.9
1.6
Source: JRB Associates estimates.
6-5
-------
6.4 CAPITAL REQUIREMENTS ANALYSIS
As presented in Chapter 2, the ratio of "compliance capital investment to
revenues" (CCI/R) was used to evaluate a firm's ability to raise the capital
necessary to install the pollution control systems. Although the CCI/R ratio
does not precisely indicate whether or not firms can afford to make the
required investments, it provides a good indication of the relative magnitude
of the compliance capital investment requirements. The ratio CCI/R was
calculated for each of the 19 "high impact potential" plants and compared to
the plants' respective capital availability threshold values which were set at
10 percent for the toll coaters and 30 percent for the captive and adjunct
plants.
Table 6-5 presents the result of the capital requirements analysis. No
potential plant closures were found in either of the three industry segments
for any of the three treatment options.
6.5 PLANT CLOSURE POTENTIAL
As indicated in the profit impact and capital requirements analyses,
these regulations are not expected to force any plant closure.
The above plant closure analysis focused on 62 sample plants. Six plants
were excluded from the analysis due to lack of data on plant production
volume. The 62-plant sample appears to be representative of the total
industry, therefore, the results of the analysis on this plant sample should
closely reflect the impacts of the regulations on the six missing plants.
Since, there are no potential plant closures estimated in the 62-plant sample,
there would be no potential closures inferred for the total 68 known
dischargers in the industry.
6.6 OTHER ECONOMIC IMPACTS
The proposed effluent regulations examined in this report may have
economic impacts other than the plant closure potentials discussed above. The
substitution potential of other processes and materials, and possible
6-6
-------
TABLE 6-5. CAPITAL REQUIREMENTS ANALYSIS OF HIGH IMPACT PLANTS
Plant
Toll Coaters
TC3
TC5
TC11
TC14
Ad iuncts
A19
A21
Captives
Cl
C3
C5
C7
C9
Cll
C13
C16
C17
C19
C20
C21
C23
Compliance
Level 1
7.7
5.0
6.3
7.3
10.9
8.7
14.7
10.5
7.8
19.5
19.3
10.8
5.9
4.0
17.8
21.4
11.5
3.3
19.3
Capital Investment
Level 2
7.7
7.0
6.3
7.3
11.0
8.7
14.8
10.5
5.3
17.8
19.3
10.8
7.1
4.0
17.8
21.4
11.5
3.3
19.3
to Revenues (%)
Level 3
9.2
9.6
7.8
8.7
11.4
9.0
15.6
12.2
5.7
18.5
19.9
13.2
7.6
4.2
18.5
22.3
11.9
4.8
20.4
Source: JRB Associates estimates.
6-7
-------
community, employment, foreign trade and industry structure implications will
be addressed in the following discussions.
6.6.1 Substitution Effects
As indicated in Table 5-1, the compliance costs for the coil coating
industry are small. The price increases (see Table 6-1) which are projected
to occur with compliance range from 1.1 percent for Treatment Level 1 to only
1.7 percent for Treatment Level 3. Price increases of such magnitude result
in reductions in quantity demanded of 0.6 and 0.9 percent, respectively. Such
quantity changes are rather insignificant in comparison to the future growth
for the coil coating industry projected in Chapter 4. Thus, the substitution
effect appears to be small.
6.6.2 Community and Employment Impacts
Since there are no plant closures anticipated as the result of the
effluent regulations, there are no anticipated community and employment
impacts expected in the coil coating industry.
6.6.3 Foreign Trade Impacts
As stated in Section 3.2. foreign trade competition in the coil coating
industry has not been significant in the past. The minimal price impact
resulting from compliance costs is not expected to accelerate foreign trade
competition in the industry. Thus, foreign trade impacts resulting from
compliance costs are expected to be negligible.
6.6.4 Industry Structure Effects
Since there are no projected plant closure and estimated quantity changes
would be small for all three treatment alternatives, the regulations would
have very little effect on the structure of the coil coating industry.
6.7 NEW SOURCE IMPACTS
Table 6-6 compares the compliance costs of the alternative treatment
technologies for new sources and existing sources with same production
6-8
-------
TABLE 6.6 COMPARISON OF COMPLIANCE COSTS FOR NEW AND
EXISTING SOURCES (1978 Dollars)
TREATMENT ALTERNATIVES
Steel Subcategory
Existing Sources
Level 1
Level 2
Level 3
New Sources
Level 1
Galvanized Subcategory
Existing Sources
Level 1
Level 2
Level 3
New Sources
Level 1
Aluminum Subcategory
Existing Sources
Level 1
Level 2
Level 3
New Sources
Level 1
PLANT CAPACITY
(106 x m2)
12.19
12.19
11.50
11.50
29.08
29.08
FLOW RATE
(1/hr)
617
632
COMPLIANCE COSTS
INVESTMENT ANNUAL
($000) ($000)
5,377
2,292
2,292
372.9
305.0
311.0
98.3
77.4
78.8
171.5
172.5
51.3
4,811
1,651
1,651
359.4
288.1
293.0
94.9
72.3
73.5
51.8
16,670
4,599
4,599
500.7
355.7
364.0
148.1
103.2
105.4
2,213
316.8
89.6
Source: Environmental Protection Agency.
6-9
-------
capacity. This table shows that the new source treatment technology are less
expensive than all three treatment alternatives for existing sources. The new
source treatment technology achieves greater pollutant removals than any of
*
the alternatives for existing sources. The reason for its costs to be lower
is because the addition of countercurrent rinsing substantially reduces the
flow rate, and consequently, the size of the required treatment system.
Countercurrent rinsing is not recommended to existing sources because it
requires substantial retrofitting cost and shut down of the plant.
Since the compliance costs are lower for new sources than for existing
sources, the regulations will not deter new entry.
6-10
-------
7. SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. The RFA requires
an initial screening analysis to be performed to determine if a substantial
number of small entities will be significantly affected. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
chapter addresses these objectives by identifying and evaluating the economic
impacTts of the aforementioned regulations on small coil coaters. As described
in Chapter 2, the small business analysis is developed as an integral part of
the general economic impact analysis and is based on the examination of the
distribution by plant size of the number of coil coating plants, plant
revenues, wastewater volumes, compliance costs and potential closures from the
regulations .
As mentioned in Section 2, two alternative approaches were selected to
define small coil coating plants for purposes of regulation development.
These approaches are based on the following factors:
Plant annual production
Plant wastewater flow rates.
7.1 SMALL BUSINESS ANALYSIS BASED ON PLANT ANNUAL PRODUCTION
Table 7-1 presents the distribution by annual production of the number of
coil coating plants, plant production, flow rates and compliance costs. The
five size categories are:
Plants with less than 50 million sqft in production
Plants with 50 to 100 million sqft in production
Plants with 100 to 200 million sqft in production
Plants with 200 to 300 million sqft in production
Plants with over 300 million sqft in production.
7-1
-------
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-------
Table 7-1 indicates that at Treatment Level 3, the ten plants with less
than 50 million sqft in production discharge only 5 percent of the total
wastewater discharged while they account for 11.7 percent of total annual
compliance costs. In contrast to these small plants, the eight plants with
annual production over 300 million sqft discharge 21.4 percent of the
wastewater and incur only 15.2 percent of total annual compliance costs.
Finally, this table also shows that the unit annual compliance costs ($ per
thousand sqft) are also greater for small plants ($3.83 for plants with less
than 50 million sqft in production at Treatment Level 3) than for larger
plants ($0.30 for plant with production over 300 million sqft).
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT FLOW RATES
For purposes of developing water pollution regulations, plant wastewater
flow rate is a reasonable definition of plant size, as flow rates often vary
with production volume. Additionally, plant flow rate often correlates with
pollutant volume.
Table 7-2 presents the distribution of the 62 coil coating sample plants
by plant flow rates for the number of plants, plant production, revenues,
compliance costs and potential closures. The plant size categories are as
follows:
Plants with less than 30,000 gallons per day (gpd)
Plants with 30,000 to 50,000 gpd
Plants with 50,000 to 100,000 gpd
Plants with over 100,000 gpd.
Table 7-2 indicates that about 40 percent (24 plants) of 62 sample plants
discharge less than 30,000 gpd. These "small" plants account for 11.5 percent
of total wastewater discharged and about 18 percent of total coil coating
square footage. Annual compliance costs for these 24 plants vary between $1.6
million (27.9 percent of total annual costs) at Treatment Level 1 and $2.5
million (27.6 percent of total costs) for Treatment Level 3.
7-3
-------
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s c
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8"
8
g
7-4
-------
Finally, unit annual compliance costs ( $ per thousand sqft) are also
greater for small plants ( $1.31 for plants with less than 30,000 gpd) than
for larger plants ( $0.65 for plants with over 100,000 gpd).
7-5
-------
8. LIMITATIONS OF THE ANALYSIS
This section discusses the major limitations of the economic impact
analysis. It focuses on the limitations of the data, methodology, assump-
tions, and estimations made in this report.
The economic impacts assessed are the results of the proposed effluent
water requirements only. The assessment does not include the economic impacts
from such items as air pollution control, OSHA requirements, solid waste
requirements, and cost resulting from other regulations.
8.1 DATA LIMITATIONS
The accuracy of the conclusions of this report depends largely on the
accuracy of the data used in the analyses, especially that of the estimated
compliance costs, and plant financial and economic characteristics.
A critical data input to this study is the compliance cost estimates. The
assumptions relating to the estimation of compliance costs are outlined in the
technical Development Document and summarized in Section 5.4 of this report.
In the absence of a financial survey for the coil coating industry, a
financial profile of the coil coating industry was developed based on
extensive review of trade literature and published financial reports. This
financial profile is subject to the following major assumptions and
limitations:
Only a single year's plant production data (1976-1977) were
collected in the EPA industry survey. Multiple years production data
would have enabled a more in-depth analysis, emcompassing the cyclical
nature of the industry. As shown in Figure 3-2 in Chapter 3, the
1976-1977 period was neither a peak nor a trough for the industry and
the general economy and is, therefore, considered to be representative
of average conditions in the industry over the long run.
An average industry price was used to derive sales revenue estimates
for each plant.
Average industry-wide financial ratios such as profit margin and
assets turnover ratios were developed based on financial data on coil
coating reported by one company. However, as indicated in Section 3.2
8-1
-------
these estimates were verified by various officials of the National
Coil Coaters Association as representing the general financial
conditions of the industry.
8.2. METHODOLOGY LIMITATIONS
The limitations of the data used in the study also necessitated certain
assumptions 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
discounted value of the plant's cash flow with the plant's estimated salvage
value. The application of this approach requires plant-specific data on cash
flows and salvage values, and since data at this level of specificity were not
available for this study, this approach was not deemed to be practical. As an
alternative method, profitability impacts were measured through the use of
return on investment (assets) and profit margin ratio analyses. Although
these financial ratio analyses are based upon accounting data and do not
account for the time value of money, they are widely used in comparative
financial analyses and are simple to apply.
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 assessed through an evaluation of compliance
investments in comparison to cash flow. Although this technique does not
provide a precise conclusion on a firm's ability to make the investment, it
does provide a good indication of the relative burden of the requirement.
Another limitation relates to the ability of the methodology to assess
the combined effects of the business cycle and the timing of the effective
date of the regulation. As previously mentioned, portions of the study rely
on inferences from only one or a few years of data. Where this occurred, care
was taken to insure that any point estimate was not taken for an extreme year,
such as a trough of a recession or a peak of an expansion. As shown in Figure
8-2
-------
3-2 and Table 3-11, the 1976-1977 time period was neither a peak nor a trough
for the industry or the general economy; and is, therefore, considered to be
representative of average conditions in the industry over a long period of
time.
Finally, long term profitability estimates were used to project closures
since major investment decisions are made primarily on the basis of long run
expectations. Economic analysis generally distinguishes between long run and
short run outcomes. Decisions regarding variable costs and relatively small
amounts of resources are generally made on short run criteria. On the other
hand, decisions regarding large investment in fixed assets are made on the
basis of long run expectations. This means that large capital expenditures
are generally made based on the expected return on the investment over a
period of years. Cyclical fluctuations in the general economic conditions
usually do not affect the outcome of these decisions but only their timing.
8.3 SUMMARY OF LIMITATIONS
Although the above factors may limit the quantitative accuracy of the
input assessments, it is believed that the results of this study represent a
valid industry-wide assessment of the economic impacts associated with
effluent guideline control costs.
8-3
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APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
To assess the impact of compliance on plant profitability, the plants'
post-compliance return on assets (ROl) ratios were calculated and compared
to a threshold value. The threshold value was set at a level that would
generate to the stockholders/owners a return on investment (i.e., after
taxes return on equity) equal to the opportunity cost of other investment
alternatives, which in this case is defined as the U.S. Treasury bond yield,
The ROI threshold value was expressed by the following equation:
BTROI
NPBT = NPBT x EQUITY
ASSETS EQUITY ASSETS
= BTROE x EQUITY
ASSETS
= ATROE x
1
x EQUITY
(1 - tT ASSETS
where
(1)
BTROI = Target before taxes return on assets
NPBT = Net profit before taxes
ASSETS = Assets book value
EQUITY = Equity book value
BTROE = Target before taxes return on equity
ATROE = Target after taxes return on equity
t = Average corporate tax rate.
Using the above equation and the projected U.S. Treasury bond yield (or target
after taxes ROE) of 12 percent, the corporate tax rate is 40 percent and the
equity to assets ratio is 60 percent, the before taxes ROI threshold value
would be 12 percent.
A-l
-------
However, the above threshold value was based on the assumption that the
book value of the plant equals its liquidation value. In practice, the liqui-
dation value of a plant is generally a fraction of its book value. Assuming
that the liquidation value is 80 percent of the book value, the liquidation
value of stockholders' equity is only 80 - 40 = 40 or 40/60 = 67 percent of
its value if liquidation value equaled book value.
Percent
Assets book value 100
Assets liquidation value 80
Book value of equity 60
Debt 40
Liquidation value of equity
(Assets liquidation value - debt) 40
As a result, a 12 percent return on equity book value (BVROE) would yield
a real ROE of 18 percent (12 * .67). Consequently, an effective ROE of 12
percent requires 8 percent BVROE (12 x .67) and a corresponding 8 percent
before taxes ROI (based on equation .12 --- (1 - .4) x 40/100 = .08).
Table A-l presents estimates of profit impact threshold values based on
various assumptions on assets liquidation value and equity to assets ratio.
A-2
-------
TABLE A-l. ESTIMATED ROI THRESHOLD VALUES THAT GENERATE 12 PERCENT ROE
ASSUMING VARIOUS ASSETS LIQUIDATION VALUES AND EQUITY TO ASSETS RATIOS
Assets Liquidation Value (Percent of Book Value)
Equity/Assets Ratio
0.3
0.4
0.5
0.6
0.7
*No solution.
50%
if
*
*
2.0
4.0
60%
*
*
2.0
4.0
6.0
70%
*
2.0
4.0
6.0
8.0
80%
2.0
4.0
6.0
8.0
10.0
90%
4.0
6.0
8.0
10.0
12.0
100%
6.0
8.0
10.0
12.0
14.0
A-3
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APPENDIX B
ELASTICITY ESTIMATES
A literature search and numerous inquiries of government agencies and
industry groups were conducted in an effort to identify existing demand studies,
the results of which could be applied to coil coating. However, no directly
applicable study was found. Instead, elasticity estimates were developed
by qualitatively evaluating the key determinants of elasticity. The key deter-
minants are the number and closeness of substitutes and the proportion of the
coated coil cost to the total cost of the final product. The greater the
number and closeness of substitutes, the greater will be the potential for con-
sumers to switch to alternative materials or final products. Also, the smaller
the value of the coated coil in proportion to the cost of the final good, the
less impact it will have on final goods price and, ultimately, final goods
demand. Although there is uncertainty regarding the reliability of the elasti-
city estimates it is believed they are of an appropriate order of magnitude.
There are two questions regarding the stability of demand elasticity.
First, is elasticity different during different parts of the business cycle?
And second, will elasticity change over time? To answer these questions it
is necessary to distinguish between income and price effects. Part of the
fluctuations in demand for a product results from changes in aggregate income,
while part results from price changes of the product relative to other pro-
ducts. A recession may not cause the price of a product relative to its sub-
stitutes and complements to change, so that there is no reason to expect a
change in demand elasticity of the product. That is, as illustrated in Figure B-l
the recession will cause a leftward shift of the demand curve from DiD-i to
i i
D2DJ , while leaving the supply curve S^S^ essentially unchanged. Thus
the slope (representing elasticity) of the new demand curve at the point of
intersection A£ with the supply curve is only slightly different than at
the starting point A]_.
B-l
-------
Price
Quantity
FIGURE B-l. ILLUSTRATION OF SHIFTS OF DEMAND AND SUPPLY CURVES
B-2
-------
Elasticity will change, however, with movement along the demand curve.
i i
Thus, if the supply curve shifts from S^Si to 8282 while the demand curve
remains unchanged, the elasticity (as represented by the slope of the demand
curve at intersections point A3) will change. Since coil coating is a
rapidly-growing product, it is expected that elasticity will change over the
next five to ten years. However, present information is insufficient to
quantify this speculation. Since no immediate change in the closeness and
availability of substitute products is expected, it does not appear that
these long-run elasticity changes will be of significance during the imple-
mentation period for this regulation.
Finally, it should be noted that the uncertainty of the elasticity esti-
mates is balanced somewhat by the observation that the results of the study
are not significantly affected by moderate changes in these estimates. Because
the price changes, the compliance costs, and the elasticities are generally low
in the coil coating industry, moderate errors in the elasticity estimate would
not significantly alter the conclusions regarding plant closures and other
impacts reported in the study. For example, if elasticity estimates were
increased by 30 percent (-0.65 instead of 0.5), there would be an additional
0.25 percent drop in quantity demanded at Treatment Level 3. For this reason,
moderate errors in the elasticity estimate will not significantly alter the
study conclusions regarding plant closures, price effects, and other eocnomic
impacts.
B-3
* U. S. GOVERNMENT PRINTING OFFICE 1982 381-082/333
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