Prepublication issue for EPA libraries
and State Solid Waste Management Agencies
ECONOMIC IMPACT ANALYSIS
OF ANTICIPATED HAZARDOUS WASTE MANAGEMENT REGULATIONS
OP THE LEATHER TANNING AND FINISHING INDUSTRY
This report (SW-lS?c) describes work performed
for the Office of Solid Waste lender contract no. 68-01-4339
and is reproduced as received from the contractor.
The findings should be attributed to the contractor
and not to the Office of Solid Waste.
The reader is advised to utilize the information
and data herein with caution and judgement.
Copies will be available from the
National Technical Information Service
U.S. Department of Commerce
Springfield, Virginia 22161
U.S. ENVIRONMENTAL PROTECTION AGENCY
1978
-------
This report was prepared by Development Planning and Research
Associates, Inc., Manhattan, Kansas, under Contract No. 68-01-4339.
Publication does not signify that the contents necessarily reflect/
the views and policies of the U.S. Environmental Protection Agency,
nor does mention of commercial products constitute endorsement by
the U.S. Government.
An environmental protection publication (SW-157c) in the solid waste
management series.
-------
PREFACE
The attached document is a Contractor's study prepared with the supervision
and review of the Hazardous Waste Management Division of the U.S. Environ-
mental Protection Agency (EPA). Its purpose is to provide a basis for
evaluating the potential economic impact of hazardous waste management
regulations established by EPA pursuant to the Resource Conservation and
Recovery Act of 1976 (P.L. 94-580).
The study supplements EPA technical studies on assessment of hazardous ;
waste and costs of complying with the hazardous waste management regula-
tion for the leather tanning and finishing industry. The technical studies
survey existing and potential waste streams and disposal methods and
technologies within this category and presents the costs associated with
appropriate control technology. This study supplements those analyses by
estimating the broader economic effects (including product price increases,
continued viability of affected plants, employment, industry growth and
foreign trade) of the compliance by a specified disposal technology.
This study has been submitted in fulfillment of Contract No. 68-01-4339 by;
Development Planning and Research Associates, Inc. Work was completed as
of February 1978. The study is based primarily upon an earlier analysis
that had been completed by the Contractor which was modified and updated
to appropriately reflect recent changes that may have occurred.
This report represents the conclusions of the Contractor. It has been re-
viewed by the Hazardous Waste Management Division of EPA and approved for
publication. Approval does not signify that the contents necessarily re-
flect the views of the Environmental Protection Agency.
-------
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY vi
I. INTRODUCTION 1
A. Scope and Organization of this Report 1
B. Data Sources 1
II. METHODOLOGY 3
A. Industry Structure and Subcategorization , 4
B. Financial Profile of the Industry 4
C. Model Plants 6
D. Pricing Patterns 7
E. Waste Treatment Technological Options and Costs 7
F. Analysis of Economic Impacts 7
III. STRUCTURE OF THE INDUSTRY 17
A. Industry as a Process 18
B. Characteristics of the Industry 18
C. Importance of Integrated Capacities 28
D. Level rf Diversification 28
E. Employment Characteristics 29
F. Ownership Type and Size 31
G. Industry Segments 31
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY 36
A. General Financial Situation 36
B. Cost Structure of the Industry 38
C. Industry Profitability 44
D. Financial Structure of the Industry 47
E. Cost of Capital - After Tax 50
F. Assessment of Ability to Finance New Investment 51
V. PRICES AND PRICE DETERMINATION 54
A. Leather Prices, Demand, and Supply 54
B. Imports of Finished Leather Products into the
United States 61
C. The Raw Hide Market 68
VI. MODEL PLANTS 78
A. Types and Sizes of Model Plants 78
B. Investment 82
C. Model Plant Capacity and Utilization 84
D. Annual Sales of Model Plants 84
E. Cost Structure of Model Plants 85
F. Model Plant Annual Profits 92
G. Annual Cash Flows 92
-------
TABLE OF CONTENTS (continued)
VII. HAZARD WASTE MANAGEMENT COSTS 95
A. Hazardous Waste Management Guideline and
Recommendations 95
B. Hazardous Waste Management Treatment and Disposal
Technology 95
C. Status of Industry Hazardous Waste Management 96
D. Hazardous Waste Management Costs 97
VIII. ECONOMIC IMPACT ANALYSIS . 99
A. Price Effects 99
B. Financial Effects 102
C. Production Effects 108
D. Employment and Community Effects 110
E. Balance of Trade Effects 110
IX. LIMITS OF THE ANALYSIS 111
A. General Accuracy 111
B. Range of Error 112
C. Critical Assumptions 113
Selected References
-------
EXECUTIVE SUMMARY
The general purpose of this report is to present the economic impact
analysis of hazardous waste management regulations (Resource Conserva-
tive and Recovery Act of 1976, P.L.94-580) on the Leather Tanning and
Finishing Industry (SIC 3111). Much of the emphasis for analysis was
placed on four major topics. They included development of a methodology,
analysis of financial conditions, analysis of pricing practices, and
projection of actual economic impacts. In addition, the authors included
substantial information on the industry structure. To follow is a summary
of the findings.
Methodology
The methodology of evaluating economic impacts included a comparison
between projections of effects on certain economic variables or character-
istics with compliance with the given regulations and without compliance
(baseline). Economic variables assessed include: (1) price effects on
producers, consumers and suppliers, (2) profitability and financial
status of the industry and plants, (3) expected plant closures, (4)
employment changes (5) community conditions, and (6) balance of payments.
Structure of the Industry
The Leather Tanning and Finishing Industry, as defined within SIC 3111,
includes leather tanneries, converters and contract tanneries. While
all are engaged in tanning, curing, finishing, storing and marketing
leather, only the regular tanners and some-contract tanners (leather
finishers) will be impacted by the regulations to control hazardous
waste (HW). Leather converters primarily buy hides and skins and
have them processed into leather on a contract basis by others. Their
establishments, therefore, do not generate hazardous waste.
In 1976, there were estimated to be about 250 establishments that are
either regular leather tanneries or leather finishers who generate sub-
stantial amounts of solid waste. Of these about 30 are vegetable tan-
neries and generally do not generate hazardous waste, thus leaving 220
potentially impacted plants. Most, of the plants are located in the
Northeast and Lake States.
The size of plants varies from a production of less than 100 hides per
day to over 2,000 hides per day.
The genera"! process of the industry includes converting a putrescible
raw animal hide into usable finished leather. However, within this
general process there is virtually no end to the variety of leathers
than can be produced.
Financial Conditions
In recent years, financial conditions exhibited in the leather industry
have been depressed. Three conditions account for much of the financial
VI
-------
decline. First, foreign leather and leather goods producers have gained
a large share of the U.S. leather market by underpricing U.S. producers.
Second, foreign tanners also purchase large quantities of raw hides,
pushing their price up and increasing domestic tanners costs which are
difficult to pass on to consumers. Finally, the availability of synthetic
substitutes has reduced aggregate demand for leather.
The situation has improved in 1974, 1975 and 1976, however, the financial
status of the leather industry does not appear to be highly favorable.
Profits before tax as a percent of sales average about 2 to 2^ percent in
the early 1970's and climbed to 6 and 6% percent in 1974 and 1975. A 4 to
6 percent profit before tax can probably be expected for the immediate future.
Prices
The price of leather was at a record level in 1976 with a wholesale price of
$1.11 per square foot. This is up from a price of $.80 per square foot the
previous year. Price fluctuations in the 1970's represent the first major
price movements in the industry in about 10 years as prices during the 1960's
were relatively stable at around $.60 to $.65 per square foot.
Hide prices have moved in a fashion similar to wholesale leather prices as
there is typically a somewhat stable hide to leather price spread.
Economic Impacts
Based on costs provided by the EPA technical contractor- , economic impacts
were analyzed on key industry factors including: (1) price, (2) financial
conditions, (3) production, (4) employment, (5) communities and (6) foreign
trade. For the most part, the impacts on the industry are expected to be modest.
The price increase required to offset HW disposal costs and maintain profits
for the industry will generally be 0.5 percent or less of the product prices
for the various segments of the industry. However, two industry segments
would require substantially higher percentage price increases. Thru-the-
blue cattlehide and cattle split tanners would require price increases of
1.8 and 3.4 percent respectively. This reflects a combination of less valu-
able final products and relatively high waste generation per unit of production.
Because they operate in a highly competitive market, tanners have little
success in passing through increased costs of production to consumers.
Thus, the expscted price increases actually occurring are estimated to be
only a small portion of the required price increases listed above.
Generally, the impacts on financial conditions in the industry will be small.
However, thru-to-blue and split tanners will be exceptions, as impacted
]_/ Battelle Columbus Laboratories, Cost of Complying with Hazardous Waste
Management Regulations, draft report for EPA, Contract No. 68-01-4360,
October 12, 1977.
Vll
-------
plants in these segments are estimated to have after-tax incomes reduced
39 percent and 57 percent respectively. Considering only HW management
requirements, both types of plants would maintain positive income streams
and positive net present values. However, if HW management costs are 20
or more percent higher than those provided for the study, then split tanners
are estimated to become financially threatened as their net present values
become negative.
As plants are expected to be able to maintain profitability after costs for
hazardous waste management, no plant closures are estimated to occur solely
because of HW management regulations. Therefore, production losses attribu-
table to the regulation are estimated to be minimal, if any.
The small impacts on prices, plant profitability and production establish
the level of impacts on the other critical economic variables considered;
employment, community and balance of trade effects. For each of these areas
of concern, impacts from hazardous waste management regulations are expected
to be small.
VI11
-------
I. INTRODUCTION
A. Scope and Organization of this Report
The Environmental Protection Agency is responsible for establishing
hazardous waste management regulations for various industries including
the Leather Tanning and Finishing Industry (Standard Industrial Classi-
fication 3111) under the provisions of the Resource Conservation and
Recovery Act of 1976. The purpose of this report is to analyze the
economic impact of such regulations on the Leather Tanning and Finishing
Industry.
There are four phases of analysis included in the work scope. They include:
(1) determination of the financial structure of the impacted industrial
sectors, (2) assessment of the pricing practices and effects in the industry,
(3) development of an impact analysis methodology, and (4) estimation and
projection of actual economic impact.
The following economic impacts were analyzed and, to the extend that they
were found to be significant, are described in this report.
1. Price and production effects - short and long-run effects on
suppliers and consumers, possible curtailments and closures
with special attention to small businesses;
2. Financial effects - pre-tax income, other profit parameters
and capital availability;
3. Employment and wage effects;
4. Community impacts; and
5. Foreign trade consequences.
The basic organization of this report consists of establishing the overall
Tanning Industry's situation including discussions on the industry's struc-
ture, financial and pricing characteristics. From these data, representative
model plants are developed which serve as a baseline (before hazardous waste
management regulations) from which impacts can be measured. Finally, the
model plants are impacted utilizing waste management costs provided by EPA
and the overall industry impacts determined.
B. Data Sources
The most commonly used and, in many cases, the most readily available sources
of industry information including employment, location, value of shipment
and product data are available from the U.S. Department of Commerce, parti-
cularly its Census of Manufactures. Annual Survey of Manufactures and In-
dustrial Outlook. Additionally, the Tanners' Council of America publ ishes
an annual report, the Leather Industry Statistics, which contains the most
recent industry production data. Financial data are somewhat limited as
much of the published data are aggregated such that information concerning
-------
just the Leather Tanning Industry are not available. These sources of
financial data include the Robert Morris Associates, Statement Studies;
Troy's Almanac of Business and Industrial Financial Ratios; and the
Internal Revenue Service's, Source Book of Statistics of Income.
The above sources do provide sufficient data such that generalizations
concerning the industry as a whole can be made. However, much more de-
tailed information was required in order to accurately represent the in-
dustry for the impact analysis. Information of such a nature was obtained
from a recently distributed data collection portfolio which provided vdata
on about 200 tanneries in the industry.]./
Of the 302 data collection portfolios sent, 135 responses were received
reflecting various stages of completion. A technical contractor also
utilized a survey of the industry and was able to provide additional
information concerning some 65 tanneries. Thus, in total, some infor-
mation was available for about 200 tanneries in the industry.
Also, plant visitations were utilized to gain insight to problems about
the industry, its operation, and foreseeable problems concerning the
implementation of waste management regulations.
If The data collection portfolios were developed, distributed and analyzed
under EPA Contract No. 68-01-4182 dated 9/20/76 as amended. The study
was designed to assess the economic impact of water effluent controls
on the leather tanning industry.
-------
II. METHODOLOGY
The methodological approach utilized to assess the likely economic impact
of proposed hazardous waste management requirements pursuant, to the
Resource Conservation and Recovery Act of 1976 (P.L. 94-580) on the
Leather Tanning and Finishing Industries is summarized in this chapter.
In this study, economic impact is defined as the comparison between (1)
the projections of the likely effects on plant, local area, U.S. and
foreign activity which would result from an industry's compliance with
a given level of hazardous waste management requirements and (2) projec-
tion of industrial activity and changes which would likely occur in the
absence of the Act (baseline).
In particular, the principal economic variables of interest in this
study are:
1. Price effects - including effects upon industry's suppliers
and consumers
2. Profitability, growth and capital availability
3. Number, size, and location of plants that can be expected to
close or curtail productions
4. Changes in employment
5. Community impacts
6. Balance of payments consequences
7. Any other impacts
Economic impacts were evaluated for hazardous waste management which is
defined practices involved in the handling and disposal of such land
destined waste. Waste management requirements for the Leather Tanning
and Finishing Industry are described in a separate EPA report I/.
The impact analyses focus on price increases, plant closures, curtail-
ment of production, dislocations of production, unemployment, community
Impacts, and balance of trade effects.
I/ Battelle Columbus Laboratories, Cost of Complying with Hazardous Waste
Management Regulations, draft report for EPA, Contract No. 68-01-4360,
October 12, 1977.
-------
Several interrelated analyses are used to evaluate likely economic impacts
resulting from hazardous waste management regulations on the Leather Tanning
and Finishing.Industry. These in-depth analyses include: (1) characteriza-
tion and subcategorization of the technical and economic structure of the
industry and segments, (2) description of the financial profile of the
industry and segments, (3) construction of representative model plants,
(4) evaluation of pricing patterns within the industry, (5) determination
of technological options for meeting designated levels of solid waste
management and the costs associated with each option, and (6) analysis of
economic impacts.
The analysis, however, is not a simple sequential analysis; rather it
employs interacting feedback steps. The schematic of the analytical
approach is shown in Figure 1. Due to the fundamental causal relation-
ships among the financial and production effects and other impacts, a
greater emphasis is devoted to plant closure analysis.
A. Industry Structure and Subcategorization
The industry structure and subcategorization phase of the methodology
primarily involves describing and segmenting the industry in terms of past
and current economic characteristics. The purpose of this phase of the
analysis is to provide an information base to be used in subsequent analysis.
In particular, the information on industry characteristics is useful in
determining an appropriate disaggregation design for industry subcategoriza-
ti on.
Subcategorization involves segmenting the plants within the industry into
relatively homogenous classes with respect to plant size, regional dif-
ferences, technology employed, number of products, existing level of
pollution, scale of technological processes, level of output, or other
relevant factors important for assessing the economic and financial
impact of waste management. The delineation of industry subcategories
developed in the early stages of the analysis serves as the basis for
the definition and construction of representative model plants and the
determination of technological options and costs for waste handling and
disposal.
B. Financial Profile of the Industry
The ability of firms within the industry to pass on and/or absorb costs
for hazardous waste management is determined in part by past and expected
financial conditions of those firms. Under the heading "financial pro-
file of the industry," various factors are studied to develop insight
into the financial characteristics of actual plants in the industry. Much
of the data compiled in this section is also useful in determining finan-
cial profiles of representative model plants.
-------
Industry
Industry
Structure
Industry
Financial
Data
EPA Hazardous
Waste Management
Costs
Plant Closures
Due to
Regulation
Employment
Effects
1
Community
Effects
Subcate-
gorization
1
Model Plant.
Parameters
Budget Data
Development
Model
Financial
Analyses
Price
Increases
Shutdown
Analysis
Production-
Expected
Effects
Foreign
Trade
Effects
Industry
Pricing
Financial
Profiles
Figure 1. Schematic of economic impact analysis of hazardous solid waste
management regulations.
-------
Key financial statistics include after-tax profit as a percent of sales,
after-tax profit as a percent of invested capital, sales to total assets
ratios, sales per employee, assets per employee, and after-tax profit to
net worth. As costs are generated primarily from paying for a service,
most impacts will be on current revenues and operating expenses. Financial
factors related to the ability to finance new investments will not be
important as little, if any, investment will be required. The data com-
piled in this phase of the analysis provide an information base useful
for projecting key technical and economic factors and for carrying out
subsequent economic impact analysis.
C. Model Plants
The model plant concept represents a systematic framework from which to
assess likely economic impacts on individual types and sizes of actual
plants within the industry. Usually more than one model plant is required
for an industry in order to represent various types and sizes of existing
plants or plants which are likely to be constructed after the promulgation
of the regulations.
Model plants represent a variety of financial, economic, and technical
variables such ?s sales, investment, fixed and variable costs, profits,
size, type or process, etc. Model plant profiles are constructed from
data and information gathered in the industry characteristics and sub- .
categorization and financial profile phases of a previous analysis.
Additional data, as required, are generally obtained from industry
representatives, trade publications, and from engineering cost-synthesis
methods.
The applicability of utilizing model plant data for assessing expected
economic impacts of hazardous waste management regulations rests prin-
cipally on the representativeness of the selected model plant(s). For
example, the economic concept of "economies-of-scale" in production is
often present in processing plants, e.g., average unit costs of production
are usually lower in large plants as compared with medium or small plants
of the same type. Although predicted to be small, the economies-of-scale
in solid waste management, in effect, will further compound the economies-
of-scale relationships among differing sizes of plants.
Other processing factors, e.g., type of manufacturing process employed
(technology) may also affect waste streams and, thus, impacts. This
again may necessitate further segmentation of an industry and the in-
clusion of additional model plants for more comprehensive analysis.
-------
D. Pricing Patterns
The analysis of pricing patterns in the Leather Tanning Industry focuses
on factors determining supply and demand. Market structure and the nature
of competition are evaluated which, for the Leather Industry, involves the
inclusion of the influence that international markets and competition
assert on the domestic industry's prices. Finally, the ability of impacted
tanneries to recover the increased costs of hazardous waste regulations is
assessed.
E. Waste Treatment Technological Options and Costs
Hazardous waste management options and associated costs are made avail-
able from a separate EPA report I/. The technical and cost data from the
report are general and apply to certain categories of waste streams
developed in industries. The acceptability and unit costs of technology
used for waste stream categories are assumed to be constant for any size
or type of plant that produces a certain type of waste stream. The tech-
nical study on costs of complying assumed all leather tanners create the
same waste stream .category, solids and sludges containing hazardous waste.
All leather tanners will be assumed to dispose of the waste in secured
landfills.
In relation to the model plants, the costs per metric ton of waste will
be constant for all plant sizes and segments. Segments will produce
greater waste loads per unit of output and, thus, effect costs of waste
management. Sizes of plants, however, will only be significant in
assessing the ability to cover costs as technical reports contain no
information relating size of plants to waste loads generated or costs.
F. Analysis of Economic Impacts
In carrying out an economic impact analysis, it is important to establish
a baseline of industry conditions that are expected without regulations
and to estimate the impact in terms of the change from this baseline
attributable to the imposition of waste management regulations. Thus,
in this study, a "dynamic baseline", namely a projection of the industry
structure in terms of number of plants, production, employment and other
parameters over time, is used as opposed to a "static" baseline which
assumes a baseline condition equivalent to that currently present.
I/ BatteHe Columbus Laboratories, Cost of Complying with Hazardous Waste
Management Regulations, draft report for EPA, Contract No. 68-01-4360,
October 12, 1977.
-------
Fundamentally, the impact analysis is similar to that usually required
for any capital budgeting study of new investments. The problem is one
of deciding whether a commitment of time or money to a project is worth-
while in terms of the expected benefits. The analysis is complicated by
the fact that benefits and costs will accrue over a period of time and
that, in practice, the analyst can not reflect all of the required
imponderables, which by definition must deal with future projections.
In the face of imperfect and incomplete information and of time con-
straints, the industry segments are described in the form of financial
budgets of model plants. Key non-quantifiable factors were considered
in the interpretation of the quantified data. Actual financial results
will deviate form the model results, and these variances will be considered
in interpreting the findings based on model plants.
The analysis of anticipated economic impacts of hazardous waste management
regulations are described as follows.
Fundamental Core Methodology
The fundamentals for analysis are basic to all impact studies. The core
methodology is described here as a unit with the specific impact analyses
discussed under the appropriate headings following this section.
The core analysis for this study was based upon synthesizing the physical
and financial characteristics of the various industry segments through
representative model plant projections. Estimated financial profiles
and cash flows are presented in the industry reports. The primary factors
involved in assessing the financial and production impact of regulations
are profitability changes, which are a function of the cost of waste
management and the ability to pass along these costs in the form of
higher prices. In reality, closure decisions are seldom made on a set
of well-defined and documented economic rules. They include a wide range
of personal values, external forces such as the inability to obtain financing
or the relationship between a dependent production unit and its larger cost
center whose total costs must be considered.
Such circumstances include but are not limited to the following factors:
1. Inadequate accounting systems or procedures. This is especially
likely to occur in small, independent plants which do not have
effective cost accounting systems.
2. Insufficient production units. This is especially true of
plants where the equipment is old and fully depreciated and
the owner has no intention of replacing or modernizing them.
Production continues as long as labor and materials costs are
covered and/or until the equipment fails entirely.
-------
3. Personal values and goals associated with business ownership
that override or constrain rational economic rules. This com-
plex of factors may be referred to as the value of psychic
income.
4. Production dependence. This is characteristic of a plant that
is a part of a larger integrated entity which either uses raw
materials being produced profitably in another of the firm's
operating units or supplies raw materials to another of the
firm's operations where the source of supply is critical. When
the profitability of the second operation more than offsets the
losses in the first plant, the unprofitable operation may con-
tinue indefinitely because the total enterprise is profitable.
5. Temporary unprofitability. This may be found whenever an owner-
operator expects that losses are temporary and that adverse
conditions will change. His ability to absorb short-term
losses depends upon his access to funds through credit or
personal resources not presently utilized.
6. Low (approaching zero) opportunity costs for the fixed assets
and for the owner-operator's managerial skills and/or labor.
As long as the operator can meet labor and materials costs, he
will continue to operate. He may even operate with gross
revenues below variable costs until he has exhausted his working
capital and credit.
7. Plant site appreciation. This factor is important in those
situations where the value of the land on which the plant is
located is appreciating at. a rate sufficient to offset short-
term losses.
These factors are generally associated with proprietorships and closely
held enterprises rather than publicly held corporations.
While the above factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficient to provide useful
and reliable insight into potential business responses to required invest-
ment and operating costs in waste management handling.
In the simplest case, a plant will be closed when variable costs (Vc)
are greater than revenues (R) since by closing the plant, losses can be
avoided.
In a more probable situation, the variable costs are less than revenues
but revenues are less than variable costs plus cash overhead expenses (TCc)
which are fixed in the short-run. In this situation, a plant would likely
continue to operate as contributions are being made toward covering a
-------
portion of these fixed cash overhead expenses. The firm cannot operate
indefinitely under this condition, but the length of this period is un-
certain. Basic to this strategy of continuing operations is the firm's
expectations that revenues will increase to cover cash outlay. Identifica-
tion of plants where variable costs plus cash overhead expenses are
greater than revenues, but variable costs are less than revenues leads
to an estimate of plants that should be closed over some period of time
if revenues do not increase. However, the timing of such closures is
difficult to predict.
In another situation, the variable costs plus cash overhead expenses are
less than revenues. In this case, it is likely that plant operations
will continue if the net present value (NPV^) of the cash flow I/ at the
firm's (industry) cost of capital (k) is greater than zero. Ifthe net
present value is less than zero, the firm could liquidate, realizing
salvage value (S) 2/ in cash, and reinvest and be financially better off,
assuming reinvesting at least at the firm's (industry) cost of capital.
Computation of net present value involves discounting the cash flow
through the discounting function:
y n
NPV = 2 A (1 + k)"n
n=0 n
where:
NPV = net present value
An = the cash flow in the n year
k = discount rate (after-tax cost of capital)
n = number of conversion periods, i.e., 1 year, 2 years, etc.
y = years
The "cash flow" including waste management related costs is described in
the subsequent sections.
Construction of the Cash Flow
The cash flow used in the analysis of hazardous waste management costs
was constructed as follows:
I/ Refer to "Construction of the Cash Flow".
2J Salvage value is defined here as the liquidation value of fixed assets
plus working capital.
10
-------
1. Initial investment taken in year t0, considered to be outlays
for fixed assets and working capital.
2. After-tax cash proceeds taken for years t-| to tn.
3. Annual replacement investment, equal to annual current depre-
ciation taken for years t] to tn.
4. Terminal value taken in year tn.
5. Annual hazardous waste management operating expenses are taken
for years t-| to tn. No added investment is assumed to be
required for hazardous waste management.
Baseline cash flow excludes costs associated with managing hazardous
solid waste.
It should be noted that a more common measure of profitability is return
on investment (ROI) where after-tax income (as defined in equation below)
is expressed as a percent of invested capital (book value) or as a percent
of net worth. These measures should not be viewed so much as different
estimates of profitability compared to net present value, but rather these
should be seen as an entirely different profitability concept.
The data requirements for return on investment and net present value
measures are derived from the same basic financial information, although
the final inputs are handled differently for each.
In the construction of the cash flow for the net present value analysis,
after-tax cash proceeds are defined as:
(1) After-tax income = (1 - t) x (R - E - I - D)
(2) After-tax cash proceeds = (1 - t) x (R - E - D) + D
where
t = tax rate
R = revenues
c. = expenses other than depreciation and interest
I = interest expenses
D = depreciation charges
Depreciation is included only in terms of its tax effect and is then
added back to obtain after-tax cash proceeds.
11
-------
There is a temptation to include outlays for interest payments when com-
puting the cash proceeds of a period. Cash disbursed for interest should
not affect the cash proceeds computation. The interest factor is taken
into consideration by the use of the present-value procedure. To also
include the cash disbursement would result in double counting. The
effect of interest payments on income taxes is also excluded from the
cash proceeds computation. This is brought into the analysis when com-
puting the effective rate of interest of debt sources of capital, which
is used in the determination of the cost of capital.
A tax rate of 20 percent on the first $25,000 income, 22 percent on
income from $25,001 to $50,000, and 48 percent on amounts over $50,000
was used throughout the analysis. Accelerated depreciation methods,
investment credits, carry forward and carry back provisions were not
used due to their complexity and special limitations.
Cost of Capital - After-tax
Return on invested capital is a fundamental notion in the U.S. business.
It provides both a measure of the actual performance of a firm as well
as its expected performance. In the latter case, it is also called the
cost of capital and this, in turn, is defined as the weighted average of
the cost of each type of capital employed by the firm -- in general terms,
equities and interest-bearing liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The cost of equity capital is estimated by two methods -- the dividend
yield method and the earnings stock price (E/P ratio) method. Both are
simplifications of the more complex DCF methodology. The dividend
method is:
c =
where
c = cost of equity capital
D = dividend yield
P = stock price
g = growth
The E/P method is simply
c = E/P
12
-------
where
c = cost of equity capital
E = earnings
P = stock price
and is a further simplification of the first. The latter assumes future
earnings as a level, perpetual stream.
The-after-tax cost of debt capital was estimated by using an estimated
cost of debt (interest rate) and multiplying it by 0.52 -- assuming a 48
percent tax rate.
d = 0.52 i
where
d = after-tax cost of debt capital
i = before-tax cost of debt (interest rate)
The sum of the cost of equity and debt capital weighted by the respective
equity to total assets and total liabilities to total assets ratios
yields the estimated weighted average cost of capital - after tax (k).
Investment
In evaluating the feasibility of new plants, investment is thought of as
outlays for fixed assets and working capital. However, in evaluating
closure of an on-going plant, the investment basis is its salvage value
(opportunity cost or shadow price) I/. For this analysis, salvage
value was taken as the sum of liquidation value of fixed assets plus
working capital (current assets less current liabilities) tied up by the
plant. This same amount was taken as a negative investment or "cash
out" value in the terminal year.
The rationale for using total shadow priced investment was that the cash
proceeds do not include interest expenses which are reflected in the
weighted cost of capital. This procedure requires the use of total
capital (salvage value) regardless of source. An alternative would be
to use as investment, net cash realization (total less debt retirement)
upon liquidation of the plant. In the single plant firm, debt retirement
would be clearly defined. In the case of the multiplant firm, the delinea-
tion of the debt by the plant would likely not be clear. Presumably this
\l This should not be confused with a simple buy-sell situation which
merely involves a transfer of ownership from one firm to another.
In this instance, the opportunity cost (shadow price) of the invest-
ment may take on a different value.
13
-------
could be reflected in proportioning total debt to the individual plant
on some plant parameter (i.e., capacity or sales). Under this latter
procedure, interest and debt retirement costs would be included in the
cash flows.
The two procedures will yield similar results if the cost of capital and
the interest charges are estimated on a similar basis. The former pro-
cedure, total salvage value, was used as it gives reasonable answers
and simplified both the computation and explanation of the cash proceeds
and salvage values.
Replacement investment was considered to be equal to the annual deprecia-
tion. This corresponds to the operating policies of some managements
and serves as a good proxy for replacement in an on-going business.
Again, no investment in hazardous waste management facilities is required
as disposal will include payment for a disposal service. This cost will
affect return on the normal investment activities but will not create
need for additional investment analysis.
Price and Production Impact Analyses
Price and production impact analyses necessarily have to proceed sim-
ultaneously. In order to evaluate these impacts, two types of analyses
are used: one is at the micro level utilizing the model plant as the
basis of the analysis to arrive at required price impacts to maintain
profitability levels; the other is at the industry level utilizing supply
and demand analysis.
Application of the preceding DCF procedure to these costs yields the
present value of hazardous waste management costs (i.e., operating
cost less tax savings). If this is known, the price increase required
to pay for hazardous waste management can readily be approximated by
the formula I/
x =
where
(PVP) (100)
U-T) (PVR)
X = required percentage increase in price
PVP = present value of pollution control costs
I/ The above procedure is conceptually correct where an average tax
rate is used. However, to insure accuracy in the machine program
where the actual tax brackets are incorporated, a more detailed
iterative process is required.
14
-------
PVR = present value of gross revenue starting in the year
pollution control is imposed
T = average tax rate
The required price increase at the plant level is evaluated in light of
the price elasticities of the commodity involved and the competitive
structure of the industry. This represents the second approach using
supply and demand analysis. The supply and demand analysis provides
some insights into likely quantities and supply response to different
prices. This allows a preliminary estimate of the production and price
impact of regulation costs. Following this, further analysis at the
micro level is performed to obtain a more detailed insight into the
plants' response to expected prices, absorption or shutdown. The indicated
plant shutdowns are then aggregated to test whether or not the lost pro-
duction could be absorbed by the remaining capacity or whether such cur-
tailments would increase prices.
Financial Impact Analysis
The financial impact analysis involves preparation of pro forma income
statements and cash flow statements following the assessment of the
likely price change. The analysis provides estimates of profitability
with and without hazardous waste management costs.
Plant Closures and Production Effects
Plant closures may result from the inability of less profitable plants
to adequately recover required waste disposal cost through increased
product prices, decreased input prices, or improvements in economic
efficiency. Often closures can be anticipated among older, smaller,
and less efficient plants as a result of economies of scale which would
lower the overall relative costs to a larger operation. Consequently,
in the long run, it is expected that the older, smaller, less efficient
plants will eventually yield to the dominance of the larger more efficient
units. However, in the short run, it is always possible that a plant may
continue to operate even when economic considerations indicate closure.
Possible exceptions will occur to the extent that smaller high cost
plants are protected by regional markets and other non-price impediments
to competition from the larger low cost plants.
Employment Impact Analysis
This analysis is concerned with estimating likely employment losses due
to curtailed production and/or plant closures as a result of the regula-
tions of concern. If the actual plants which are expected to curtail
production and/or close can be identified, employment impacts can be
estimated directly. Otherwise the employment impact analysis involves
the application of estimates of employment changes by model plants.
Employment changes in model plants are then generalized according to the
number of actual plants represented by the model plant and aggregated to
derive an estimate of total employment effects for the industry. Employ-
ment dislocations will be noted as appropriate.
15
-------
Community Impact Analysis
This task is designed to identify potential impacts on local community
economies where the impacted plant might represent a major source of
employment and income. This analysis is based on a knowledge of the
location of plants, particularly threatened plants, and a general under-
standing of the economic base of those communities and the relative
importance of threatened plants to local economies.
Balance of Payments Impact Analysis
Balance of payments impact analysis deals with those products that have
competitive positions with regard to imports and exports. The analysis
considers whether or not the estimated price changes would further
hinder competitive positions of leather tanners with regard to exports
or increase foreign imports. Where important, estimates on the amount
of trade that potentially could be impacted and total trade levels are
presented.
Other Impact Analysis
Other potential impacts may be created by the imposition of the waste
management regulations. This will likely be unique to given industries
requiring a case-by-case approach. An illustration of the possible type
of impact would be a plant that produces a critical intermediate, an
input for other industries. The loss of this plant or large price in-
creases could produce serious backward or forward effects on producers
or consumers. To the extent additional impacts are identified and are
important, these will be noted.
16
-------
III. STRUCTURE OF THE INDUSTRY
The Census of Manufactures defines the Leather Tanning and Finishing
Industry (SIC 3111) as an industry comprised of establishments pri-
marily engaged in tanning, currying, and finishing hides and skins into
leather. The Census classifies the Leather Tanning and Finishing Indus-
try into three types of establishments. These include:
1. "Regular tanneries" - the regular tannery purchases raw
materials, employs production workers in the plant to
tan, curry and finish hides and skins, and sells the
finished product. In effect, this type of establish-
ment performs all of the usual manufacturing functions
within one organization.
2. Converter - the converter typically performs only the
entrepreneural functions of the manufacturing concern
such as buying raw materials, and arranging processing
with outside factories, i.e., contract tanneries for
the production of the finished leathers. The actual
tanning and finishing of hides and skins is done on
contract by the contract tanneries. Thus these establish-
ments do not generate solid waste standards.
3. Contract tanneries - the contract tanner employs production
workers in his own establishment to process materials owned
by converters, makes products to specification but does not
become involved in the sale of the finished product.
It should be noted, however, that the above classification is not mutually
exclusive since some firms in the industry act as both regular tanners,
and leather converters or as regular tanners and contract tanners.
The Census identifies establishments that tan leather, tan and finish
"eather, and only finish leather. These establishments, furthermore,
(_re on«_ if six types of members of the Tanning; Industrial Leather Goods;
and Shoe Industrial Group, SIC 31A. The industrial group members include
the following four-digit industries:
. 3111 Leather Tanning and Finishing
. 3131 Boat and Shoe Cut, Stock and Findings
. 3142 House Slippers
. 3143 Men's Footwear except athletic
. 31^4 Women's Footwear except athletic
,. 3149 Footwear, except rubber N.E.C.
17
-------
Within the SIC 31A industrial group, the leather tanning industry has the
largest number of establishments, fourth highest number of employees and
third largest value of shipments of the six four-digit industries listed
above.
A. Industry as a Process
The Leather Tanning and Finishing Industry includes processing plants
primarily engaged in processing the raw animal hide into usable finished
leather. As mentioned previously, the industry is classified into three
types of establishments: (1) regular tanneries, (2) converter, and (3)
contract tanneries.
The various categories of tanneries help to provide an important link
between the raw hides and the Finished Leather Products Industry, by
converting the raw hides and skins into usable leather. Figure 2
illustrates many of the interrelationships of the Leather Tanning and
Finishing Industry with regards.to major supplier and customer industries.
As is shown, the Leather Tanning and Industrial Leathers account for approx-
imately 46 percent of the Meat Packing Industry's hides and skins, with
the remaining 45 percent being exported. These hides represent approximately
39 percent of the Leather Industry's total expenditures. Other expenditures
of the Leather Industry include 42 percent of the total expenditures for
materials, chemicals and processing costs and 19 percent for materials and
services provided by other establishments classified in the Leather Industry.
Thirty two percent of the Leather Industry's total sales are to
establishments which produce other leather products, 19 percent are to
other establishments in the Leather Industry and 49 percent of the Industry's
sales are to the footwear, except rubber, manufactures. The sale of leather
to the footwear manufacture represent 40 percent of the footwear manufactures'
total expenditures.
Other interrelationships are also depicted in Figure 2.
B. Characteristics of the Industry
The Leather Tanning and Finishing Industry consists of a wide diversity
of types of firms. Firm ownership ranges from family-owned companies and
closely held corporations to divisions of relatively large conglomerations.
Tanneries vary considerably in size as well as tanning techniques for tanning
a variety of hides and skins into several distinct leathers.
Number of Tanneries
The U.S. Department of Commerce has reported the number of establishments
in the Leather Tanning and Finishing Industry as follows:
18
-------
vo
Meat Packing
Industry
Hides & Skins
Materials,
Chemicals,
Processing Cost
N.E.C.
Misc.
Rubber
Products
o
Leather
Tanning and
Industrial
Leathers
©
Other
Leather
Products
Footwear
Except
Rubber
Exports
of Salt Cured
Hides
Percent leather industry's expenditures and sales.
Figure 2. Leather Tanning and Finishing Industry, Sales and Expenditures.
Source: U.S. Department of Commerce, Industrial Outlook, 1975.
Exports
of Leather
Products
Personal
Consumption
Expenditures
-------
Year Number of Establishments
1963 ' 525
1967 519
1972 517
1973 490
1974 484
1975 441
1976 430
Table l shows the total number of establishments in the Leather Tanning
and Finishing Industry by classification for 1967 and 1972. The Census has
used the primary plant operation as the delineating classification criteria.
If the direct wage and salary payments for one category were less than the
payments for the second, the plant was classified according to the category
in which the higher amount of wage and salary payments were made. In 1972,
58 percent of the establishments were classified as tanneries, 15 percent as
converters, and 27 percent as contract tanneries.
A tabulation by the Tanners' Council of America indicates a total of 431
plants (including converters) in the industry as of 30 June, 1973. Their
records also indicate a total of 19 plants (establishments) have ceased
operations between the period of 1 July 1973 and 31 December 1975. This
would result in 412 plants being in operation at the end of 1975. It is
believed that the difference in the number of plants reflects a difference
in method of classification with the Department of Commerce data including
miscellaneous small operators, many of which would be classified as taxi-
dermist by the Tanners' Council rather than tanners or finishers.
All the establishments reported by the Department of Commerce would not be
impacted by solid waste treatment requirements. Based on industry surveys,
industry contacts, and segmentation of DOC data, the probable number of
solid waste generating plants is estimated at about 250. Those not impacted
would include brokers, warehousers,. hobbyists and taxidermists to name a
few. The segmentation of the total industry is given below for all SIC
3111 plants.
Segmentation of SIC 3111 - 1976
Segment No. of Establishments (Plants)
Wet tanneries 188
Dry tanneries (Leather Finishers) 60
Plants w/solid waste 248
Leather Converters 65
Other Non-production Plants* ^ 130
Plants w/o solid waste ^ 195
TOTAL - SIC 3111 430
* Includes brokers, dealers, sales organizations, warehousers, taxidermists,
hobbyists, and others.
-------
Table 1- Total number of establishments in the Leather Tanning
and Finishing Industry by classification
Contract
Total Tanneries Converter Tanneries
1967
No. of establishments 519 314 70 135
With 1 - 19 employees 261 163 52 46
With 20 - 99 employees. 171 91 13 67
With 100 employees or more 87 60 5 22
1972
No. of establishments 517 301 76 140
With 1 - 19 employees 294 154 64 76
With 20 - 99 employees 148 89 8 51
With 100 or more employees 75 58 4 13
Source: U.S. Department of Commerce, Census of Manufactures, 1967 and 1972.
21
-------
Size of Tanneries
Based on number of employees, an indication of plant size is available from
the Census of Manufactures (Table 1). These data are restricted to the
years 1967 and 1972, but are reflective of general industry characteristics.
Plant size appears to have remained relatively constant between the period
of 1967 and 1972. In 1972, 57 percent of the total plants had less than 19
employees. This is an increase from 50 percent in 1967. In 1972, 29 percent
of the plants employed between 20 and 99 employees and 14 percent had 100
employees or more.
However, tanneries of concern to this study will be reported in a different
fashion. Instead of utilizing number of establishments for various employ-
ment groups, the tanners are disaggregated according to various size cate-
gories of their daily capacity expressed in cattlehide equivalents. These
categories, as well as the number of associated wet tanneries, are depicted
below:
Daily Capacity Number of Tanners Percent
.(cattlehide
equivalents )V
Less than 300 46 19
300 - 699 80 32
700 - 1,199 64 26
1,200 - 1,999 33 13
2,000 or more 25 5
248 100
]_/ One cattlehide equivalent equals 40 square feet of leather.
As can be seen, the tanners that are potentially impacted are somewhat more
evenly distributed according to size than are all the establishments of the
Census data, tanners and non-tanners. However, as was the case for the Census
data, the smaller size categories do represent a larger portion of the tan-
neries than the larger categories.
Types of Major Products
Six major categories of animal skins are used today in addition to imported
rare skins such as kangaroo, etc. They are as follows: cattlehides, kipskins
and calfskins; sheep and lamb skins; goat and kidskins; pigskins; horsehides;
and deer and elk skins.
The products of the industry can be identified in traditional terms based
upon primary raw materials employed and end use.
22
-------
CATTLEHIDES:
CATTLE SIDE LEATHER. This is the principal product of the industry
which accounts for approximately 67% of total industry sales. End
use includes—shoe uppers, linings, garments, gloves, sporting goods,
handbags, small leather goods, and waist belts. Side leather is
primarily chrome tanned.
CATTLE SIDE SPLIT LEATHER. Cattle side split leather is a by-product
of hides which is not processed in full thickness. Used for shoe
uppers, linings, insoles, work gloves, small leather goods, handbags,
protective industrial clothing. Chrome tanned; processed by side
leather tanners or sold to "split tanners" for finishing into
specialized products.
SOLE LEATHER. Almost entirely vegetable tanned. Major use is for
shoe soles. Secondary uses include welting, counters, box toes,
waist belts.
CATTLE SIDE PATENT LEATHER. Sub-class of chrome tanned cattle sides
finished with special compounds (polyurethanes) for glossy surface.
KIP SIDE LEATHER. Leather tanned from kips which are small hides,
intermediate between calfskins and cattlehides. Used almost entirely
for shoe uppers.
UPHOLSTERY LEATHER. Mainly vegetable tanned; some chrome retannage.
End use includes automotive and furniture upholstery.
HARNESS AND SADDLERY LEATHER. Composite group of the same plants
but possessing different characteristics useful for various parts
of equine equipage or related uses. (Collar, harness, skirting,
latigo, bridle, etc.) Also used for holsters, gun cases, etc.
SPORTING GOODS LEATHER. Combination tannages of chrome, vegetable,
alum, glutaraldehyde used for footballs, baseballs, baseball gloves
and laces.
BAG, CASE AND STRAP LEATHER. Trade description for specialized
group of leathers which are vegetable, chrome and combination
tanned. End use includes luggage, briefcases, small leather goods,
decorative items, equipment cases, straps, and heavy bookbinding.
MECHANICAL LEATHER. Vegetable, chrome and impregnated leather for
industrial uses including belting, gaskets, washers, seals for equip-
ment.
CALFSKINS. Chrome tanned leather from skins of immature cattle used
for shoe uppers and handbags. Volume is in sharp decline due to
shrinkage of raw material supply.
23
-------
SHEEP AND LAMB SKINS:
Second largest raw material category. Chrome alum, oil and combina-
tion tannages for garments, gloves, shoe uppers and linings, handbags
and wallets, bookbinding and chamois.
GOAT AND KID LEATHER SKINS:
Chrome tanned in smooth or suede finish used for shoe uppers and
linings.
PIGSKIN:
Vegetable or chrome tanned shoe uppers, gloves, garments, and small
leather goods.
HORSE HIDES:
Chrome and vegetable processed for shoe uppers, garments, baseballs.
Cordovan is included in this group.
DEER AND ELK HIDES:
Chrome and vegetable tanned for gloves, garments, and to a minor
degree for shoe uppers (buckskin).
MISCELLANEOUS AND EXOTIC LEATHERS:
Aggregate volume is minor and the number of producers in the U.S. is
less than 10. Products include Kangaroo for athletic shoe uppers,
reptile for shoe uppers, belts, and small leather goods, Peccary and
Carpincho for gloves.
In summary, cattlehides are the dominant raw material of the industry with
the major products of Cattle Side leather, Sole leather, Upholstery, Garment
and Bag, Case and Strap leathers. Sheep and Lamb skins are the second and
much smaller raw material base yielding mainly garment and glove leather,
lining and shoe stock, chamois and leather for small leather goods.
Value of Shipments
Value of shipments and other receipts of the Leather Tanning and Finishing
Industry in 1972 totaled $1,059.5 million. This included shipments of
tanned and finished leather (primary products) valued at $1,018.2 million,
shipments of other products (secondary products) valued at $11.2 million,
and miscellaneous receipts (mainly resales) valued at $30.1 million.
Estimates of the 1977 value of shipments are expected to total $1,730
million, 8.1 percent above the shipments of 1976 and 38.7 percent above
the 1972 value of shipments (Table 2). Historically the value of
shipments have fluctuated from year to year, however, the overall average
annual increase has been 5.1 percent since 1960.
24
-------
Table 2. The Leather Tanning and Finishing Industry, Value of
Shipments, 1960 to 1976
Value of Percentage
Year shipment change
(mil. $) (Ij
1960 790.7
1961 761.1 -3.7
1962 765.9 -0.6
1963 758.4 -1.0
1964 783.6 3.3
1965 856.7 9.3
1966 940.5 9.8
1967 870.1 -7.5
1968 877.9 0.9
1969 853.9 -2.7
1970
1971
1972
1973
1974
1975
1976 */
1977 */
794.4
838.3
1,059.5
1,082.0
1,075.5
1,184.0
1,600.0
1,730.0
-7.0
5.5
26.4
2.1
-0.6
10.1
35.1
8. 1
*/
- Estimated
Source: Department of Commerce, Bureau of the Census and Bureau of
Labor Statistics, BDC, U.S. Industrial Outlook, 1977.
25
-------
Shipments of tanned and finished leather (primary products) in 1972 repre-
sented 99 percent (specialization ratio) of the industry's total product
shipment. The industry specialization ratio in 1967 was 98 percent. Second-
ary products shipped by the industry in 1972 consisted mainly of boot and
shoe cut stock and findings ($2.5 million).
Shipments of tanned and finished leather from establishments classified in
industry SIC 3111 in 1972 represented 99 percent (coverage ratio) of these
products valued at $1,026.4 million shipped by all industries. In 1967,
the coverage ratio was also 99 percent. Thus for all practical purposes,
it can be concluded that all establishments of tanning and finishing leather
are classified in industry SIC 3111.
Location of Tanneries
Leather tanning and finishing establishments tend to be concentrated in
the Northeastern region of the country. As shown in Table 3, 62 percent
of the total number of establishments were located in the area in 1972.
Massachusetts ranked first, in total number of plants; New York second; and
New Jersey third, with 25, 19, and 8 percent respectively.
The second area of concentration is the East North Central region with
Wisconsin reporting 22 plants or 4.3 percent of the total. Other states
of importance in this region include Ohio, Illinois, and Michigan. The
remaining plants are scattered widely throughout the United States.
Historically, tanneries were established where there was an adequate supply
of hides, water and tanning materials (i.e., tree bark), This began in New
England and the Mid-Atlantic states and followed the cattle herds west,
though with a long time delay. As indicated above, tanneries are still
located in New England and Chicago as well as in the dairy country of
Wisconsin. However, with the recent spatial dispersion of slaughter facili-
ties away from the traditional centers such as Chicago and Kansas City, it
is expected that in time new tanneries will follow the same trend and locate
near the supply of hides.
The locations of all the wet and dry tanneries; excluding converters,
brokers, etc.; are difficult to pinpoint as adequate data are not
presently available. However, based on survey responses approximately
62 percent of the wet and dry tanners, are located in the New England
states; 8 percent were located in the Southern states; 21 percent are
located in the Midwest; and the remaining 9 percent are located in
the Western and Southwestern states.
If these percentages are extrapolated for all 248 wet and dry tanneries, the
locational breakdown appears as follows:
Area Number of Tanneries Percent of all Tanneries
Wet Dry Total
New England 101 52 153 61.7
South 19 2 21 8.5
Midwest 47 5 52 21.0
West and Southwest 21 _]_ 22 8.9
Total 188 60 248 100.0
-------
Table 3.
Location of Leather Tanning and Finishing establishments by primary state
and region, 1967, 1972
1967
;egion
Jortheast Region
•lew England Division
Maine
New Hampshire
Vermont
Massachusetts
Other
liddle-Atlantic Division
New York
New Jersey
Pennsylvania
North Central Region
East North Central Division
Ohio
Illinois
Michigan
Wisconsin
Other
West North Central Division
Minnesota
Missouri
Iowa
Other
South Region
South Atlantic Division
Delaware
Maryland
Virginia
West Virginia
North Carolina
Georgia
Other
East South Central Division
Kentucky
Tennessee
Other
West South Central Division
Texas
Other
West Reoion
Pacific Division
California
Other
TOTAL
Total Industry
Number Percent
183
16
18
1
146
2
176
108
48
20
74
12
19
10
30
3
13
2
6
NA
•5
26
6
2
4
,4
2
2
6
12
3
9
9
7
2
26
15
11
519
35.3
3.1
3.5
0.2
28.1
0.4
33.9
20.8
9.2
3.9
14.2 .
2.3
3.6
1.9
5.8
0.6
2.6
0.4
1.2
NA
1.0
5.0
1.1
0.4
0.8
0.8
0.4
0.4
1.1
2.3
0.6
1.7
1.7
1.3
0.4
5.0
2.9
2.1
100.0
Establishments with
20 or More Employees
Number
93
14
15
1
62
1
68
30
25
13
51
7
12
5
24
3
7
1
5
NA
1
18
6
1
4
4
2
1
0
10
3
7
2
2
0
9
8
1
258
f>ercent
36.0
5.4
5.8
0.4
24.0
0.4
26.4
11.6
9.7
5.1
19.8
2.7
4.7
1.9
9.3
1.2
2.7
0.4
1.9
NA
0.4
7.0
2.3
0.4
1.6
1.6
0.7
0.4
3.9
1.2
2.7
0.8
0.8
3.5
3.1
0.4
100.0
1972
Total Industry
Number
324
163
15
19
1
128
161
98
43
20
84
62
8
19
8
22
5
22
4
NA
6
12
59
27
2
1
5
4
5
2
7
12
3
8
1
20
15
5
50
42
33
9
517
Percent
62.7
31.5
2.9
3.7
0.2
24.7
31.1
19.0
8.3
3.9
16.2
12.0
1.5
3.7
1.5
4.3
1.0
4.2
0.8
NA
1.1
2.3
11.4
5.2 *
0.4
0.2
1.0
0.8
1.0
0.4
1.4
2.3
0.6
1.5
0.2
3.9
2.9
1.0
9.7
8.1
6.4
1.7
100.0
Establishments with
20 or More Employees
Number Percent"
132
78
10
14
1
53
54
26
15
13
48
39
4
10
4
19
2
9
2
NA
4
3
27
14
2
1
3
4
2
1
1
10
3
7
NA
3
3
NA
If
i;
13
1
223
59.2
35.0
4.5
6.3
0.4
23.8
24.2
11.7
6.7
5.8
21.5
17.5
1.8
4.5
1.8
8.5
0.9
4.0
0.9
NA
1.8
1.3
12.1
6.3
0.9
0.4
1.3
1.8
0.9
0.4
0.4
4.5
1.3
3.2
1.3
1.3
7.2
C.3
5.8
0.5
100.0
Source: U.S. Department of Commerce, Census of Manufactures. 1967 and 1972.
27
-------
Age of Plants and Level of Technology
The Leather Tanning and Finishing Industry can be described as having
basically old plants in terms of actual brick and mortar with slightly
over 70 percent of the plants 50 years of age or older. From the member-
ship records of the Tanners' Council, the age of tanning and/or finishing
leather plants, excluding converter, is as follows:
Percent of Members
Less than 10 years 1
10-15 years 1
15-20 years 3
20-30 years 5
30-50 years 19
Over 50 years 71
Total 100
Although the majority of industry units are in old buildings, a substantial
number of plants have been rebuilt, modernized and re-equippped at a cumula-
tive cost approaching the capital investment required for new plants. Most
plants have made major changes since 1960, although technology changes over
the last fifty years have been minimal.
C. Importance of Integrated Capacities
The industry is not characterized by any appreciable integration either
back to the raw material supply or forward to finished or fabricated
leather products. There is, in fact, less integration today than several
years ago when two major packers owned tanning facilities and four leading
shoe manufacturers operated tanneries. It is estimated that the sales
volume of tanning or finishing establishments integrated with raw material
producers is very small, less than five percent of gross annual volume.
Leather tanning facilities owned or operated by manufacturing companies
account for equally as small percentage of leather sales or value.
D. Level of Diversification
The Census of Manufactures shows the Leather Tanning and Finishing Industry
with a very high specialization ratio of 99 percent for 1972. This indi-
cates that 99 percent of sales are in the primary SIC code. The typical
production unit of the industry is not diversified for two main reasons.
First, tanning equipment and processes are specialized and non-interchange-
able in terms of raw materials or end product. Hence, most plants have
confined production to a very limited range of product.
28
-------
Second, shoe manufacturing has been and still is the principal consuming
industry. In 1962, shoes accounted for 83 percent of all leather used.
By 1972 this ratio had declined to 74 percent, and tanneries were seeking
to diversify output. Cattle side leather plants entered the garment
leather market and sought outlets in waist belts, handbags or small
leather goods. 'However, this trend does not reflect diversification of
basic product line. It indicates rather, an effort to adapt available
plants and equipment to moderately different needs of end uses other than
shoes.
A further observation is pertinent. Tanning machinery and equipment
cannot be adapted for any purpose other than treating hides and skins.
It is fixed capital which must be written off at scrap value in the
absence of demand for used machines.
E. Employment Characteristics
Employment
Total employment within the Leather Tanning and Finishing Industry has
decreased by about 19 percent since 1965, declining from 32,000 employees
in 1965 to 26,000 employees in 1976 (Table 4). However, employment
was up in both 1975 and 1976 from an eleven year low of 22,000 in 1974.
Of the total employees in 1976, production workers represented approximately
88 percent or about 23,000 individuals. For the period 1965 to 1974, the
number of production workers in the industry had declined by over 34 per-
cent, from 27,900 to 18,300 people.
Modest increases have occured in the last two years and the number of
production workers in 1976 is 25 percent over the low 1974 level. The
Leather Tanning Industry employs unskilled, semi-skilled and skilled
labor dependent on the requirement of the task being performed. Tanneries
can be either union or non-union shops with the number of tanneries in
each category being about equal.
Production workers average approximately 1,900 hours per year which repre-
sents 230 to 250 employed days per year. With respect to the production
workers productivity, Table 4 depicts the average number of hours
required to produce one cattlehide equivalent. As shown in the table,
this productivity measure has varied from year to year but has remained
reasonably close to 1.7 hours per hide since 1965.
Level of Wages
In 1974, the latest data available, the total industry's payroll amounted
to $194.3 million. The total wages paid to production workers for the
same year totaled $141.4 million or about 73 percent of the industry's
total payroll.
29
-------
TabTa 4. The Leather Tanning and Finishing Industry,
Employment Characteristics
CO
o
All Employees
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Number
(1000)
32.0
32.7
30.7
31.1
28.8
24.1
24.5
25.7
23.4
22.0
23.0
26.0
Payroll
(mil. $)
180.0
189.2
186.4
196.0
188.1
•171.5
183.9
200.0
186.5
194.3
N.A.
N.A.
Number
(1000)
27.9
28.2
26.4
26.7
24.4
20.4
20.7
22.1
19.8
18.3
20.0
23.0
Wages
(mil. $)
139.0
144,4
142.5
151.2
142.8
129.8
137.6
151.3
138.2
141.4
N.A.
N.A.
Annual
Hours/Worker
(Hours)
2,039 .
2,039
2,000
1,985
1,943
1,980
1,976
1,896
1,909
1,934
N.A.
N.A.
Juction Workers •
Annual
Wages/Worker
(Dollars)
4,982
5.121
5,398
5,663
5,852
6,363
6,647
6,846
6,980
7,727
N.A.
N.A.
Ave. Hourly
Rate
(Dollars)
2.44
2.51
2.70
2.85
3.01
3.21
3.36
3.61
3.66
4.00
N.A.
N.A.
Ave. Hours Per
Equiv. Hide
(Hours)
1.74
1.78
1.71
1.66
1.67
1.56
1.62
1.70
1.79
1.78
N.A.
N.A.
N.A. 1s defined as Not Available.
Source: U.S. Department of Commerce, Bureau of the Census.
-------
Annual wages per production worker averaged $7,727 in 1974 which represented
an increase of 55 percent over the last 10 years. During this same period,
the average hourly rate increased by 64 percent from $2.44 per hour in 1965
to $4.00 per hour in 1974.
F. Ownership Type and Size
The Leather Tanning and Finishing Industry consists of a wide diversity
of types and sizes of firms. Firm ownership ranges from family owned
companies and closely held corporations to divisions of large conglomerates.
However, the majority of the tanneries would fall into the family-owned
or closely held corporation group. This is attributable to the fact that
most tanneries are relatively small and were established years ago by either
a family or a small gorup of individuals who have remained in control of
the operation.
G. Industry Segments
The Leather Tanning and Finishing Industry has traditionally been segmented
by type of leather manufactured such as cattlehide leathers, sheep and lamb
skins, goat skins, etc. Most of the industry production data are given in
these terms. However, categorization of the industry by manufacturing pro-
cesses is more appropriate for evaluating the impact of solid waste handling
on the industry since a major factor affecting the waste production in the
leather industry is the type of manufacturing process used to convert the
various types of animal skins to finished leathers.
The following material discusses industry segments using two taxonomies:
(1) conventional industry segments, and (2) categorization of plants by
manufacturing process.
Conventional Industry Segments
Cattlehide leathers accounted for 81.3 percent of the total 1972 production
in the leather tanning and finishing industry. The major use of cattlehide
leathers is side and patent leather used for shoe uppers. This accounted
for 48 percent of total leather or 59 percent of the cattlehide processed.
Sheep and lamb skins were the second most important with approximately 10
percent of the 1972 production (Table 5).
Categorization of Plants by Type of Manufacturing Process
For the purposes of evaluating solid waste handling methods, the leather
Tanning and Finishing Industry has been divided into seven major categories
These categories generally correspond to those developed by SCS Engineers
principally by similarities in process and waste loads. The industry
categories are:
31
-------
Table 5. Percent of production and employment by conventional
industry segment, 1972.
Industry Segment
Cattlehide Leathers
Side and Patent
Sole and Belt
Upholstery
Split Leather
Harness
Bag, Case & Strap
Other I'
Calf Leather
Goat and Cabretta
Sheep and Lamb
Pig
All Other U
Converters
Percent
of industry
production
81.3
47.8
9.4
4.7
10.9
0.1
1.8
6.6
1.1
2.3
10.3
4.6
0.4
n. a.
100.0
Percent
of industry
employment
80.7
52.6
11.4
6.9
5.3
4.5
2.0
1.8
7.7
4.5
3.3
n.a.
100.0
— Includes sporting goods and mechanical
2/
— Includes horse, kangaroo, deer, reptile and exotic types.
Source: Tanners' Council of America, Inc.
32
-------
1. Cattlehide-chrome—a tannery that primarily processes raw or
cured cattle or cattle-like hides into finished leather using
chrome tanning. Hide hair can either be chemically dissolved
or saved.
2. Cattle-nonchrome (primarily vegetable)—a tannery that primarily
processes raw or cured cattle or cattle-like hides into finished
leather using less than 20 percent (by hide weight) chrome tanning;
includes vegetable, and also alum, syntans, oils, and other methods
and their combinations. Many of these plants will not be impacted
by hazardous waste management regulations.
3. Cattle-to-blue--a tannery that primarily processes raw or cured
cattle or cattle-like hides through the blue-tanned state only,
with no retanning or finishing operations, and uses chrome
tanning.
4. Cattlehide-splits--a tannery that primarily processes splits or
previously tanned hides and/or skins into finished leather, the
major wet process consisting of trimming, resplitting, retanning,
coloring, and fat-liquoring.
5. No beanhouse (NB) tannery—a tannery that primarily processes
hides and/or skins, with the hair previously removed,, into
finished leather using either chrome or nonchrome tanning
methods, primarily includes pickled sheepskins and cattlehides
and pigskins.
6. Shearlings--a tannery that primarily processes raw or cured
sheep or sheep-like skins, with the wool or hair retained on
the hide, into finished leather using chrome or nonchrome tanning;
or, a wool pullery—a plant that processes hair-on raw or cured
sheep or sheep-like skins by first removing the wool and then
pickling the skin for use by a sheepskin tannery (Category 5).
7. Leather finishers—an establishment that receives unfinished
leather to which it applies a finish and may also buff to remove
imperfections; does not perform any other tanning functions;
normally performs on a contract basis offering a service to
customers.
A brief description of the major processes are given here. More detailed
descriptions are available in published technical descriptions of the
tanning and finishing processes.
The major processes are:
1. BEAMHOUSE
This is a generic term for all the initial stages of process
after raw hides and skins are received at the tannery. The
beamhouse entails large use of water and is a major source of
tannery waste loads regarding sludge.
33
-------
2. TANYARD
The series of steps by which putrescible hides and skins are
converted into stable, non-putrescible leather utilizing
aqueous solutions containing various chemical agents.
3. RETANNING, FAT LIQUORING AND COLORING
In these process stages the specified physical properties of
leather are adjusted and set prior to surface treatment. Waste
loads are substantially reduced from the previous steps and
processes.
4. FINISHING
Devoted largely to surface appeal and characteristics. Most
important characteristic with respect to waste loads are trimmings
and buffing dust.
Table 6 depicts an estimation of the number of tanneries by size and
by general categories. Because of the limitations of available data no
further breakdown of the tanneries by category could be realistically
attempted.
34
-------
Table 6. The Leather Industry, Wet Tanners by Type and Size
to
in
Cattle
Industry Cattle Non Chrome Cattle
Size Total Chrome (primarily Splits
vegetable) (Retan)
(Daily Capacity
in Cattlehide
Equivalents)
0-299 45 15 92
300-699 80 27 8 2
700-1,199 64 21 4 7
1,200-1,999 32 22 5 4
2,000 or more 27 20 2 0
Total 248 105 28 15
Shearling
Cattle to Chrome Leather
Blue (includes other Finishers
sheepskin) (Dry)
16 3
7 1 35
7 0 25
0 1
320
3 32 5 60
Source: Industry Survey
-------
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY
Information reflective of the financial characteristics of the Leather
Tanning and Finishing Industry is particularly difficult to obtain. The
industry primarily consists of family-owned businesses or relatively small
privately-held corporations. As such, published information regarding the
financial position of the industry are not readily available. Limited
data are available from the Internal Revenue Service but these data are
relatively old (1972-74) and represent the aggregated Leather and Leather
Products Industry. Some more recent data are available from Robert Morris
Associates' Statement Studies, but these represent financial information
from less than 40 different statements.
Information used to develop this chapter on the financial profile of the
industry draws on the above named sources where applicable. Additional
information was obtained from the U.S. Department of Agriculture, U.S.
Department of Commerce, responses to the data collection portfolio as
well as discussions with persons knowledgeable of the Leather Tanning
and Finishing Industry.
A. General Financial Situation
The Leather Tanning and Finishing Industry in the United States has
experienced a somewhat volatile financial situation in recent years.
The industry declined steadily in terms of number of plants, volume
and profits from the mid 60's on and reached a low in 1972 and 1973.
Beginning in 1974 and continuing through 1975 and 1976, the industry
experienced a much brighter market situation.
The volatility of the industry varies from firm to firm as well as
differing for the various types of tanneries and their respective leather
products. Causes of this volatility are primarily resultant of changes
in the volume of leather sold as well as competition from foreign countries
for both raw hides and the market for leather and leather products. With
the exception of 1968, the United States Leather Industry's total produc-
tion declined every year from 1965 to 1974, decreasing from 32.7 million
cattlehide equivalents in 1965 to 20.0 million in 1974 (Table 7).
However, in 1975 and 1976 the industry did increase its annual production
over the previous year. In 1975, the annual production increased by 9.5
percent over the 1974 quantity produced and 1976 production, equal to 23.5
million hide equivalents, increased 7.5 percent over the 1975 production.
As shown in Table 7, the industry's value of shipments have been much
more volatile than the annual production quantitites. From 1966 to 1970,
the industry's value of shipments generally declined. Shipments then
increased from 1971 to 1973; decreased in 1974; and then increased in
1975 and 1976. Again according to the U.S. Department of Commerce
estimates, the value of shipments for 1976 are expected to increase
from $1,184 million in 1975 to $1,600 million in 1976, an increase of
35 percent.
36
-------
Table?. The Leather Tanning and Finishing Industry, production and value of shipments, imports,
and exports in current and real dollars, 1965-1976.
Co
Year
Total industry
production I/
1,000 equiv
Value of industry
shipments £/
current
real 3/
Value of leather
imports I/
current real.
Value of leather.
exports
current
i,
real
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Sources:
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21,894
23,526
I/ Tanners Council
. Edition.
2/ U.S. Department
857
940
870
878
854
794
838
1,060
1,082
1,076
1,184
1,600*
of America,
of Commerce
1,153
1,226
1,101
1,063
985
869
873
1,060
1,021
843
930
1,200*
Inc. , Membershi
, Annual Survey
67 90
75 98
68 86
81 98
86 99
87 95
83 86
139 139
127 120
125 107
88 69
.181* 135
p Bulletin Leather
39
42
42
45
42
37
43
67
83
102
140
139*
Industry Statistics,
52
55
53
54
48
40
45
67
78
88
110
104
1977
of Manufacturers and U.S. Industrial Outlook.
3/ Real dollars based on Implicit GNP Deflator (1972=100).
* Preliminary
-------
The recent upturn in the economic condition may be attributed primarily
to the increase in consumer demand for natural leather and leather prod-
ucts. This has been dampened by the influence of foreign tanneries on
domestic supply of raw leather and further expansion of imported leather
products to the United States.
Over the past decade consumer acceptance of synthetics as a substitute
for leather particularly for womens1 and childrens' shoes and handbags
has become particularly widespread. Also the decline of leather soles
has dropped to 13 percent of the shoes manufactured in 1975. As a
result a significant portion of the market previously held by leather
was lost to synthetic products. During the past few years, consumers
have developed an increased appreciation for natural leather products.
Accordingly leather increased its share of the appropriate products'
market. However, this increase was not totally absorbed by the United
States tanners as much of this increased demand was met by imported leather
and leather products.
As shown in Table 7, the value of leather imports steadily increased
from 1965 to 1971. In 1972 the value of imports increased by 66 percent
over the value of imports in 1971. Much of this increase was absorbed
by the increased demand created by the greater appreciation of leather
by consumers mentioned above. After 1972, the value of leather imports
slowly declined with a significant, 29 percent, drop between 1974 and
1975. But in 1376, imports rebounded to record levels, estimated to
value $181 million. When these trends are compared to the total industry
production it becomes apparent the values of leather imports are to a
degree inversely related to the total industry production. That is,
while the values of imports increased, the total domestic production of
the industry decreased. Thus the Leather Industry's volume of production
has fluctuated in recent years with the major cause being competition
from foreign tanners.
B. Cost Structure of the Industry
Revenues
For 1976, the Leather Tanning and Finishing Industry had estimated shipment
valued at $1,600 million (Figure 3). This estimate represents an in-
crease of about 35 percent over the value of shipment for 1975. Histori-
cally the industry's values of shipments have fluctuated from year to year,
however, since 1970, shipments have increased for every year except 1974
at which time shipments decreased 9.4 percent over the value in 1973.
In addition to experiencing a general slump in production prior to 1975-
76, the real value of the industries production has declined noticeably.
From 1966, when the real value of shipments I/ was $1,225 million (Figure
3), real revenues nave fallen to as low as $843 million in 1974; a
31 percent decrease over eight years. This decline in real terms mirrors
a decline.in production which is attributable to a variety of factors,
most significant being demand lost to foreign tanners.
I/ Value of Industry Shipment.; t where 1 = year
Implicit GNP Deflatori
(1972 = 100.0) 38
-------
OJ
1700-
1600-
1500
1400
c
(U
£• w 1300'
j= s-
XI O
C 'I-
(U
(O
1200-
noo-
1000-
900-
800-
Current
Value,
Trend
Real Value
' • \ (1972 $ = 100)
\
Trend
V
65 66 67 68 69 70 71 72 73 74 75 76
Year 19_
Figure 3. Value of industry shipments, leather tanning and finishing industry, current and
real dollars, 1965-1976.
-------
The 1976 value of shipment for the industry was based on information pro-
vided by 430 establishments. This gives the value of shipment for the
average tannery to be $3.7 million with the average annual production
being almost 60,000 cattle hide equivalents (Table 8). This compares
to an average value of shipments of $2.7 million in 1975, $2.0 million in
1972, and $1.7 million in 1967. Average production per establishment
was 50,000 cattle hide equivalents in 1975, 48,000 in 1972, and 59,000
in 1967.
Variable Costs
Within the Leather Tanning Industry, variable costs represent approximately
80 percent of the total sales. These costs include expenditures for raw
hides and/or skins, labor, tanning materials, and miscellaneous other
direct costs. According to a survey of the industry, hides and skins
represent 37.2 percent of the sales dollar, tanning materials, 14.3 per-
cent, labor, 15.1 percent and miscellaneous expenditures, 12.4 percent.
These sum to 79 percent of the sales, dollar..
The only time series available depicting the distribution of the sales
dollar is available from the Department of Commerce and is somewhat
limited in its disaggregation. These data are shown in Table 9 and
as can be seen in the table, raw materials, primarily hides, have
represented about 60 percent of the sales dollar.
Fixed Costs
Fixed costs are defined as those which do not vary with the level or quantity
of production. These include:
Sales, general and administrative
Plant and labor overhead
Taxes and insurance
Maintenance and repair
Data are not available to discuss each of the above costs separately,
therefore, fixed costs were grouped. Fixed costs vary from firm to firm
however, they usually represent 10 to 15 percent of sales.
Interest is considered a fixed cost although it is somewhat influenced
by the total sales. For the Leather Industry interest usually amounts
to 1 to 2 percent of sales. As shown in Table 10, interest costs vary
with different sizes of operations. Although there are exceptions, it
appears that the larger sized tanneries have a greater portion of their
sales dollar consumed by interest.
Depreciation is also considered a fixed cost. Typically it represents
between 5 and 10 percent of the firms total fixed assets. This would
represent an expected asset life between 10 and 20 years.
40
-------
Table 8." The Leather Tanning and Finishing Industry, total and per establisnment data,
selected years 1963 to 1976.
Item
Establishments
VALUE OF SHIPMENTS
Industry
Per establishment
VALUE ADDED
Industry
Per establishment
PRODUCTION
Industry
Per establishment
EMPLOYEES
Industry
Per establishment
Units
No.
$1,000
d.o.
d.o.
d.o.
1,000 equiv.
hides
d.o.
No.
d.o.
1963
525
758,000
1,440
273,000
520
31,325
60
31,400
60
1967
519
850,000
1,680
319,000
615
30,861
59
30,700
59
Year
1972
517
1,060,000
2,050
368,000
710
24,661
48
25,700
50
1975
441
1,184,000
2,685
N.A.
N.A.
21,894
50
22,000
50
1976
430
1,600,000
3,720
N.A.
N.A.
25,526
59
26,000
60
Source: U.S. Dept. of Commerce and Tanners Council of America.
-------
Table 9. The Leather Tanning & Finishing Industry, Distribution of
the Sales Dollar.
TOTAL
SALES
1965
1966
1967
1968
1969
1970
1971
1972
1973
Million
Dollars
856.7
940.5
870.1
177.9
853.9
794.4
838.3
1059.5
1081.5
Percent
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
RAW
MATERIALS
Million
Dollars
535.6
614.1
547.0
524.5
514.9
471.4
498.5
708.0
744.3
Percent
62.5
65.3
62.9
59.8
60.3
59.3
59.5
66.8
68.8
PAYROLL
Million
Dollars
180.0
189.2
186.4
196.0
188.1
171.5
183.9
200.0
186.5
Percent
21.0
20.1
21.4
22.3
22.0
21.6
21.9
18.9
17.3
OTHER INDIRECT
OPERATING COSTS,
TAXES & PROFITS
Mi 1 1 i on
Dollars
141.1
137.2
136.7
157.4
150.9
151.5
155.9
151.5
150.7
Percent
16.5
14.6
15.7
17.9
17.7
19.1
18.6
14.3
13.9
Source: Department of Commerce, Bureau of the Census, Census of Manufacturers.
42
-------
Table 10. The Leather Industry, Interest as a Percent of Sales (Business Receipts).
co
ASSET SIZE ($000)
FISCAL
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
Source:
ZERO
YEAR ASSETS
0.18
0.43
0.00
0.29
0.47
Department of
OVER ZERO
UNDER 100
0.33
0.52
1.34
1.20
0.37
0,79
100
UNDER
250
0.42
0.43
0.82
0.98
0.66
Q.99
250
UNDER
500
0.52
0.55
0,64
0.77
0,48
0.75
500
UNDER
1000
0.48
0.36
0.56
0.54
0...64
0.79
the Treasury, Internal Revenue
1000 5,000
UNDER UNDER
5000 10,000
0.59 0.88
0.80 0.69
0.99 0.84
0.81 0.46
0,63 0..39
0.99 0.98
Service, Source
10,000
UNDER
25,000
1.37
1.66
1.27
1.58
1.74
Book of
25,000
UNDER
50,000
— —
—
—
—
1.53
50,000
UNDER
100,000
1.14
1.67
1.85
1.27
—
100,000
UNDER
250,000
1.60
2.45
2.61
1.36
INDUSTRY
TOTAL
0.69
0.84
1.03
0.84
0.83
1.03
Statistics of Income, Annual,
Active Corporations with and without Returns.
-------
C. Industry Profitability
The Leather Tanning Industry in the United States experienced some rather
difficult times during the early 1970's, particularly in 1972 and 1973.
This was the result of the rapid rise in the price of hides and the tre-
mendous increase in cattlehide exports. Between 1970 and 1973, 31 tanneries
discontinued operations and total movement of cattlehides to tanners dropped
from 19.2 million hides in 1972 to 17.7 million in 1973.
Since 1973, the industry performance has been considerably brighter.
Demand for leather has been up and the long run picture appears to be
strong. Industry production has increased in both 1975 and 1976, with
production in 1976 being the highest since 1972. Because of higher pro-
duction and favorable leather prices, sales were at an all-time high in
1976 and profits were acceptable. The outlook for 1977 is also favorable
but industry authorities are very cautious.
Net Profits on Sales
Net profits, before taxes, expressed as percentages of sales, are depicted
in Table 11 for the years between 1970 and 1975. As can be seen in
the table prior to 1974, the industry's profits were relatively stable
but yet quite low. As was explained above, 1973 was considered a parti-
cularly bad year for the industry and accordingly profits that year
represent the poorest earned during the six year period. The recent
increased demand for leather products as well as the improvements in the
industry's raw hide supply are significant factors in the industry's
improved profitability during 1974 and 1975.
When the Leather Industry's profitability is viewed for various sized
operations it becomes apparent the medium and large tanneries tend to
be more profitable than the smaller operations (Table 12). This may
reflect some economics of scale, however it should be noticed that the
profits of the largest size category in Table 12 are consistently less
than the next smaller size category. Thus, while economies of scale
may be important, other factors such as effective management may have
more influence.
Return on Investment
Consistent information regarding the industry's return on investment is
difficult to obtain. However as reported in Robert Morris, Statement
Studies, the industry's return appears to have been between 10 and 15
percent during the 1972 to 1974 time period. In 1975, the industry's
return was determined to be 17.9 percent.
44
-------
Table 11. The Leather Tanning Industry Profitability, 1970-1975.
Profits Before
Tax as Percent
Year of Sales
1970
1971
1972
1973
1974
1975 DPRA Survey
Rober Morris
1976
(%)
2.2
2.4
2.5
1.9
6.0
6.7
6,5
4.5
Percent Profits
Before Tax
to Worth
(%)
N.A.
N.A.
10.0
14.1
12.7
17.9
2CL,Q
15.5
Cash Flow
as Percent
Sales
(X)
4.7
4.0
4.4
2.9
N.A.
N.A.
N.A.
5.7
Source: 1970 & 1971, Department of the Treasury, Internal Revenue Service,
Source Book of Statistics of Income, Annual
1972 to 1976 Robert Morris Associates, Statement Studies. Annual
1975, Information from a data collection portfolio sent to the
industry by DPRA
45
-------
Table 12. The Leather Industry, Net Profits before Tax by Asset Size, FY 1969-1973.
01
ASSET SIZE ($000)
FISCAL YEAR
1968-1969
1969-1970
1970-1971
1971-1972
1972-1973
1973-1974
ZERO
ASSETS
11.7
4.0
—
21.9
—
2.3
OVER ZERO
UNDER 100
-2.2
-0.0
-6.5
-4.6
—
-9.5
100
UNDER
250
1.7
1.2
-0.9
2.5
0.9
1,6
250
UNDER
500
2.1
2.1
0.1
-0.5
1.8
-1,1
500
UNDER
1,000
4.0
0.4
2.7
2.6
3.1
0..1
1,000
UNDER
5,000
-Percent
5.0
2.5
2.0
2.8
1.3
2,2
5,000
UNDER
10,000
of Net
7.5
3.8
5.1
1.7
1.4
1..4
10,000 25,000
UNDER UNDER
25,000 50,000
Caloc ._
6.2
0.1
5.9
6.9
3.8
2,4 6,4
50,000
Under
100,000
7.7
4.5
4.8
6.1
1.5
»*T-~
100,000
UNDER
250,000
3.8
2,7
3.6
1.9
1.0
^^.
INDUSTRY
TOTAL
4.1
2.2
2.4
2.4
1.7
1.2
Source: Department of the Treasury, Internal Revenue Service, Source Book of Statistics of Income, Annual
-------
Cash Flow
Cash flow represents the cash that is actually available for distribu-
tion, retention or use in acquiring additional assets. Utilizing data
represented also in Table 12, it has been determined that cash flows
as a percent of sales were relatively small during the period 1970 to
1973. While data are not available for 1974 and 1975, it is probable
that the increased profits would result in substantially higher cash
flows. A new Robert Morris Associates data series does show higher
cash flows in 1976 as compared to early data.
D. Financial Structure of the Industry
Assets
Leather Tanning and Finishing can be considered a raw materials oriented
industry as tanners must maintain relatively large quantities of hides
and skins which represent a major component of the firms' capital require-
ments. As shown in Table 13, current assets have represented between
61 and 75 percent of the industry's total assets between 1969 and 1975.
This reflects the large capital requirement tanners incur to maintain
adequate supplies- of raw hides and skins as well as the capital represented
by in-process leather.
Contract tanners and finishers are the major exception to the above
general statement as they do not buy hides to process and only perform
a service for hide owners. In their operations, tanning and finishing
materials and equipment would generate most of the capital requirements.
Fixed assets of the industry represent the conventional elements in
every manufacturing or processing industry, i.e., the plant, land and
equipment. In terms of the total assets, fixed asset requirements are
relatively small. This does not imply that the industry requires rela-
tively few fixed assets. Instead it reflects the significant amount of
capital required for hides as well as the fact that most tanneries are
older facilities and accordingly the costs of the fixed assets are signi-
ficantly less than if they were recently acquired.
The distribution of assets does vary between the various sizes of tanneries,
As shown in Table 14, the smaller tanneries reflect a lower proportion
of the total assets as fixed assets than do the larger tanneries. This
may be explained by the fact that the larger facilities are often newer,
or at least more modern, which represents capital expenditures propor-
tionately higher than those incurred by the older, smaller facilities.
Liabilities
Liabilities of the Leather Tanning Industry have been classified into two
basic categories: (1) current, or short term liabilities, and (2) long
47
-------
Table 13. The Leather Industry Assets, Liabilities and Equity,.Selected Years
00
Assets
Current Assets
Fixed Assets
Total Assets
Liabilities and Equity
Long Term Debt
Current Liabilities
Net Worth
Total Liabilities &
Equity
1969
70
30
100
19
28
53
100
Source: 1968-1972, Department of
1970
66
34
100
17
32
51
100
1971
61
39
100
15
27
58
100
the Treasury,
1972
70
30
100
13
29
58
100
Internal
1973
-percent-
69
31
100
16
35
49
100
Revenue
1974
75
25
100
17
33
50
100
Service,
1975
69
31
100
18
28
54
100
Source
1976
67
33
100
19
35
46
100
Book of
Industry
response
1975
65
35
100
11
28
61
100
Statistics
of Income, Annual.
1973-1976, Robert Morris Associates, Statement Studies-Annual, 1974-1977.
Response to industry data collection portfolio, 1975, Development Planning and Research
Associates, portfolio sent to industry in 1976.
-------
Table 14. The Leather Industry, Assets, Liabilities and Equity,
by Asset Size, 1972
Under
100
Assets
Current Assets
Fixed Assets
Total Assets
Liability and Equity
Long Term Debt
Current Liabilities
Net Worth
Total Liability & Equity
78
22
100
22
67
11
100
100-
249
73
27
100
21
45
34
100
250-
499
76
24
100
11
36
53
100
500-
999
73
27
100
9
30
61
100
Asset Size ($000)
1,000- 5,000- 10,000- 25,000-
4,999 9,999 24,999 49,999
69
31
100
7
38
55
100
71
29
100
4
26
70
100
81
19
100
28
17
55
100
50,000- 100,000- In
99,999 249,999
52
48
100
17
13
70 -
100
66
34
100
21
15
64
100
Source: Department of the Treasury, Internal Revenue Service, Source Book of Statistics of Income. 1971-72.
-------
term debt. The industry has maintained a much higher portion (approxi-
mately two-thirds) of its total liabilities in the form of short term
liabilities as can be seen in Table 13. These short term liabilities
typically represent accounts payable, unpaid wages, and minor plant and
equipment maintenance and replacement expenses. When expressed as a
percent of the total assets, current liabilities represent approximately
30 percent (Table 13).
Long term debt within the Leather Industry represents approximately 20
percent of the industry's total assets and 40 percent of the industry's
total liabilities. The somewhat low proportion of long term debt re-
flects the relative age of the industry as most of the facilities and
equipment were purchased many years ago and thus have been paid for
or at least represent a lower purchase price than obtainable today.
Most of the industry's long term debt represents the debts of a few
newer tanneries as well as debts incurred by older tanneries moderniz-
ing or expanding. . . .
When the industry's liability structure is viewed with respect to size
(Table 14) it becomes apparent the larger tanneries have a much more
sizeable long term debt proportion of total liabilities than the smaller
tanneries. Furthermore, the larger tanneries maintain a relatively low
overall liability commitment (33 percent of total assets) than do the
smaller tanneries (67 percent of total assets).
Net Worth
The net worth of the industry is defined as its total assets less its
total liabilities. Thus the net worth represents what portion of the
industry's assets are owned by the industry. Since 1969, the net worth,
expressed as a percent of total assets, has varied. However, it has
usually remained near the 50 to 60 percent range. These percentages
would result in a debt to equity ratio of 0.8 to 1.0.
Net worth, when viewed with regards to tannery size, appears to be
larger, when expressed in terms of total assets, for the larger sized
tanneries than for the smaller tanneries (Table 14). This would
imply that the larger tanners are less dependent on creditors for pro-
viding funds either for normal operations or capital improvements.
E. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U.S. business.
It provides both a measure of actual performance of a firm as well as
expected performance. In this latter case, it is also called the cost
of capital. The cost of capital is defined as the weighted average of
50
-------
the cost of each type of capital employed by the firm, in general terms
equities and interest bearing-liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The cost of capital was determined for purposes of this analysis by esti-
mating performance measures of the industry. The weights of the two
respective types of capital fpr the Leather Tanning Industry were esti-
mated at 39 percent debt and 61 percent equity. The cost of equity was
determined from the ratio of earnings to net worth and estimated to be
12.3 percent.
To determine the weighted average cost of capital, it is necessary to
adjust the before tax costs to after-tax costs (debt capital only in
this case). This is accomplished by multiplying the costs by one minus
the tax rate (assumed to be 48 percent). These computations are shown
below and result in the estimated after-tax cost of capital being 9.2
percent.
Before Tax After Weighted
Item Weight Tax Cost Rate Tax Cost Cost
Debt .39 9.0 .48 4.7 1.8
Equity .61 -- — 12.3 7.5
9.3
F. Assessment of Ability to Finance New Investment
The ability of a firm to finance new investment for hazardous waste manage-
ment or plant expansion is a function of several critical financial and
economic factors. In general terms, new capital must come from one or
more of the following sources: (1) funds borrowed from outside sources;
(2) equity capital through the sale of common or preferred stock; (3)
internally generated funds—retained earnings and the stream of funds
attributed to depreciation of fixed assets.
For each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For
debt financing, the firm's credit rating, earnings record over a period
of years, stability of earnings, existing debt-equity ratio and the
lenders' confidence in management will be major considerations. New
equity funds through the sale of securities will depend upon the firm's
future earnings as anticipated by investors, which in turn will reflect
past earnings records. The firm's record, compared to others in its own
industry and to firms in other similar industries, will be a major de-
terminant of the ease with which new equity capital can be acquired. In
the comparisons, the investor will probably look at the trend of earnings
for the past five or so years.
51
-------
Internally generated funds depend upon the margin of profitability and
the cash flow from operations. Also, in publicly held corporations,
stockholders must be willing to forego dividends in order to make
earnings available for reinvestment.
The condition of the firm's industry and general economic conditions are
also major considerations in attracting new capital. The industry will
be compared to other similar industries in terms of net profits on sales
and on net worth, supply-demand relationships, trends in production and
consumption, the state of technology, impact of government regulations,
foreign trade and other significant variables. Declining or depressed
industries are not good prospects for attracting new capital. At the
same time, the overall condition of the domestic and international
economy can influence capital markets. A firm is more likely to attract
new capital during a boom period than during a recession. On the other
hand, the cost of new capital will usually be higher during an expansionary
period. Furthermore, the money markets play a determining role in new
financing.
Although, these general guidelines are very important to the Leather Tanning
and Finishing Industry for assessing overall ability to finance new investment
options, they will not need to be reviewed extensively regarding hazardous
waste management. The capital requirements for waste management will be
minimal and ability of a company to maintain profitability will be the key
test in determining if the industry can adopt hazardous waste management
measures.
52
-------
Table 15. The Leather Industry, Financial Situation
Robert Morris Associates*/ DPRAj/
1972197319741975197F 1975
Pre-tax return on sales (%) 2.5 1.9 6.0 6.5 4.5 6.7
Pre-tax return on investment
10.0 14.1 12.7 20.0 15.5 17.9
Debt to equity ratio 1.1 1.1 0.9 1.0 1.4 0.8
Current assets to current
liabilities ratio 1.7 1.6 1.7 1.8 1.8 2.3
Sources: I/ Robert Morris Associates, STATEMENT STUDIES - Annual
Year No. of company statements
1972 32
1973 29
1974 31
1975 37
1976 35
2J Development Planning and Research Associates, Industry Survey
results from 135 companies for year of 1975.
53
-------
V. PRICES AND PRICE DETERMINATION
The domestic price of leather is basically a function of the cost of raw
materials (hides), the demand in the U.S. consumer market and competition
among domestic and foreign leather tanners in the market. Cost of raw
hides is determined by foreign and domestic competition for an inelastic
hide supply. Demand for raw hides has virtually no influence on the supply
of hides for the U.S. tanning industry, as the hide supply is a function
of supply-demand factors affecting the cattle industry. For the U.S.
tanners, their supply is primarily determined by the price they are willing
to pay. Unquestionably, foreign hide demand has had an increasingly signifv
cant impact on the price U.S. tanners not only are willing to pay but also
have to pay to procure hides from which their commodity is produced and
priced.
Domestically, shoes have been the major leather good relative to demand
for leather but the shoe industry has recently experienced strong compe-
tition from foreign producers. This has definitely hurt the leather in-
dustry causing declines in production, shifts to other leather good markets
and development of new markets.
In the following sections, characteristics of recent price and price
determination factors (supply and demand) will be analyzed more exten-
sively. The initial subject will include a qualitative and quantita-
tive analysis of the supply, demand and prices of leather. Then an
evaluation of leather product imports and trade restrictions affecting
leather will be presented, followed by an analysis of the raw hide market
and discussion of international trade and trade restrictions on raw hides.
A. Leather Prices, Demand, and Supply
Prices of leather and the demand and supply situation experienced by U.S.
leather tanners in recent years have been highly variable. Both bullish
and bearish markets have existed, however, until the last couple years,
a bear market was the more dominant. Although the last two or three years
have been favorable for the industry, most industry analysts are skeptical
or cautious due mainly to strong competition from foreign competition.
Leather Prices
The price of leather was at a record high in 1976. The wholesale price
averaged over $1.00 per square foot, up about 40 percent from the pre-
vious year. The price strength originated from the strong demand for
leather goods in 1976. The U.S. shoe industry increased production 1\
percent over the year, leather garment sales increased and most
other leather goods sectors experienced higher sales.
Associated with the increased leather prices were higher hide prices.
For example, heavy native steer hides average $.33 per pound or about
$.58 per square foot on a tanned leather basis. This is the second
highest current dollar price in recent years. See Table 16.
54
-------
Table 16. Leather, price per square foot, 1955 to 1976 lV
tn
en
Current Dollars
Year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Hide
Price 2J
21.7
21.7
19.2
20.0
33.6
24.0
26.1
26.6
19.6
18.0
24.3
30.4
20.5
20.6
25.2
22.4
25.4
52.1
59.0
45.3
41.1
57.8
Finished
Leather
Wholesale
Price 3_/
__/f/cn ft __
44.4
49.9
48.6
50.6
62.5
55.5
58.9
61.9
57.7
58.1
59.3
64.4
59.8
61.1
66.1
64.1
63.9
80.4
88.6
82.8
79.9
110.9
Hide to
Finished
Leather
Spread
22.7
28.2
29.4
30.6
28.9
31.5
32.8
35.3
38.1
40.1
35.0
34.0
39.3
40.5
35.9
41.7
38.5
28.3
29.6
37.5
38.8
53.1
Hide
Price
35.6
34.5
29.5
30.3
49.8
34.9
37.7
37.7
27.4
24.8
32.7
39.6
26.0
24.9
29.1
24.5
26.5
52.1
55.8
38.9
32.3
43.2
Real Dollars I/
Finished
Leather
Wholesale
Price
(t/cn ft -.
72.8
79.3
74.8
/D.5
92.6
80.8
85.0
87.7
80.6
79.9
79.8
83.9
75.7
74.0
76.2
70.1
66.6
80.4
83.7
71.1
62.8
82.9
Hide to
Finished
Leather
Spread
37.2
44.8
45.3
46.2
42.8
45.9
47.3
50.0
53.2
55.1
47.1
44.3
49.7
49.1
47.1
45.6
40.1
28.3
27.9
32.2
30.5
39.7
Hide to Finished
Leather Spread
as a Percent of
Finished Leather Price
51.1
56.5
60.5
60.4
46.2
58.0
55.7
57.0
66.0
69.1
59;1
52.8
65.7
66.2
68.8
65.0
60.3
35.2
33.4
45.3
48.5
47.9
_!/ Sources: Hide prices - USDA, Livestock and Meat Statistics
Leather prices - Department of Labor, Bureau of Labor Statistics, Wholesale Price Index.
21 Heavy Native Steer Hides converted to raw hide equivalent of one square foot tanned leather (1.75
pounds raw hide yields 1.0 square foot of tanned leather).
3_/ Upper leather, cattle and kid sides, smooth.
4/ Prices adjusted by the GNP Implicit Price Deflator, Total GNP, 1972 = 100.
-------
Historically, there has been a stable relationship between the price of
leather and the price of hides. The relationship was essentially abso-
lute and was reflected by stable margins between the raw material and
finished product prices. The margin stability was especially true for
the period from the late 1950's to 1971. After 1971, market disruptions
made it difficult to maintain historical margins and classical relationships
had to be adjusted in order to retain sales although the margin adjustment
usually resulted in a loss.
The data in Table 16 include the current and real dollar values for
leather (wholesale), cattlehides (pound-price converted to equivalent of
one square foot of leather), and the equivalent square foot price spread
or margin. The hide to finished price spread is graphed in Figure 4
which more clearly depicts the recent price spreads. Over time the ,,
current dollar price spread has been increasing at about the rate of .64-'
cents per square foot per year. Based on the 1955-76 average price spread
(x) of 35 cents per square foot, the average annual change or increase has
been about 1.8 percent per year. The increase is necessary to offset ever
increasing production costs which consume much of the price spread.
Based on a real dollars analysis, the price spread on a trend basis has
been declining at about .59 £/ cents per square foot per year. This
equates to average annual decrease of 1.4 percent per year'with the 22 year
average rea1 dollar margin (x) of 43.2 cents per square foot. Thus,
although the margin has been increasing in current dollars, the increase
has not kept pace with the value of the dollar and the margin has de-
clined in real terms.
Increased competition and declining volume has kept the industry operators
from increasing production margins sufficiently to cover costs, and maintain
historical profit levels. The industry has responded two ways: first, plants
are continually attempting and often succeeding to increase production
efficiency, second, inefficient plants unable to cover increasing costs
with the small increase in market margins are eventually forced out of
business. The existence of the latter situation is statistically por-
trayed by industry plant data.
V .64 cents per square foot per year is the coefficient of the trend
line equation: 7=27.8 + .64 t where Y-j=margin in year-j, and t=year-j,
i-1, 2, ...,22 starting with 1955.
2/ .59 cents per square foot per year is the coefficient of the trend
line equation: y=49.9 - .59t
Where: y = real dollar margin in year-j
t = year-j, i=l, 2, ...,22 starting with 1955.
56
-------
60-
50-
CO
s-
03
O 1^
O O
40
o;
UJ
a.
C£.
20
60
o:
o.
01
S-
ns
50
o40
O +->
•-i C
DC OJ
a. i.
3
Of.
30
20
x = 43.2
s = 7.7
V*= 17.8%
V* = coefficient of
variability
55 57 59 61 63 65 67 69 71 73 75 77
Year 19
Figure 4. The tanned leather equivalent price spread between the price
of cattlehides and wholesale price of leather, cents per
square foot, current and real dollars, 1955-1976.
57
-------
Demand for Leather
The demand for leather is a derived demand resulting from consumer
interest in leather products. However, to get a true perspective of
the demand for U.S. tanned leather, several other factors must be
taken into consideration in addition to the international demand for
leather.
First the domestic shoe industry, the primary customer for U.S. tanned
leather has slowly but steadily been losing its share of the domestic
market to international competition. In 1965 only 12.3 percent of the
shoes purchased in the U.S. were manufactured overseas, however, by 1976
this had increased to 47.6 percent. Indications are that this trend
will continue over the foreseeable future. During this time total U.S.
demand for shoes fluctuated only slightly but in recent years since the
advent of high inflation the trend has been down. Per capital consump-
tion reached a peak in 1968 with 4.07 pairs but since that time has
dropped to 3.43 pairs in 1975, but recovering significantly in 1976 to
3.94 pairs.
The resulting effect of the stable U.S. demand and increasing imports
is the total pairs of shoes manufactured in the U.S. has declined
steadily, from 600 million pairs in 1965 to the 1975 level of 433
million pairc, a decline of 31 percent over the 10 year period (Table
17). Production was up in 1976, 444 million pair, but this appeared
to be only an aberration as 8 months production data suggest that U.S.
shoe production will drop below 400 million pair in 1977.
A further decline in the demand for leather can be seen in Table 17
which shows the percent of U.S. manufactured shoes made with leather
soles. This has been declining steadily over the past 30 years and by
1976 only 14.6 percent of the U.S. shoes were made with leather soles,
down from 25 percent in 1965.
During the 60's the substitution of synthetics for leather in the shoe
uppers made substantial inroads in the market. In 1960 only 25 percent
of the U.S. shoes were made with synthetic uppers. By 1976 this percentage
had increased to 48 percent.
In summary the demand for leather from U.S. tanners going into the
manufacture of shoes has declined from 78 percent of the total leather
produced in the U.S. in 1970 to only 56 percent in 1975 and 59 percent
in 1976 (Table 18).
Two and three years ago, demand for leather going into leather garments
was a bright spot, accounting for 190 million square feet of domestic
leather or 14.4 percent of the 1975 domestic productions. Rapid in-
creases in imports from Korea have cast a dim shadow over that market
58
-------
Table 17. U.S. Production of Shoes 1965-1975, (1,000 Pair).
en
to
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Total U.S.
Production
626,229
641 ,696
599,964
642,427
576,961
562,318
535,777
526,655
490,033
452,955
413,439
444,087
Percent of U.S.
Production
With Leather Soles
24.6
24.8
21.7
17.4
14.8
16.4
16.0
17.0
14.0
14.2
13.3
14.6
Total
87,632
96,135
129,137
175,292
202,040
241,560
268,569
296,665
315,514
294,457
319,430
404,455
Imports
Percent of Total
U.S. Consumption
12.3
13.2
17.7
21.4
25.9
30.0
33.4
36.0
39.2
39.1
42.4
47.7
Total
Shoes
713,861
737,831
729,101
817,719
779,001
803,878
804,346
823,320
805,547
747,412
732,919
848,542
Pairs
per
Capita
3.67
3.75
3.66
4.07
3.83
3.91
3.89
3.94
3.83
3.53
3.43
3.94
Source: Tanner's Council of America, "Membership Bulletin Leather Industry Statistics".
-------
Table 18. Leather markets profile 1976-actual and 1977 projected.
Products
Shoes (non rubber)
Leather Garments
Leather Work Stoves
(million do*, prs.)
Leather Handbags
Small Leather Goods
Leather Belts
Miscellaneous
(including luggage, uphol-
stery, saddlery, lace,
latigo, skirting, collar,
mechanical)
TOTAL
Shoes (non rubber)
Leather Garments
Leather Work Gloves
(million doz. prs. )
Leather Handbags
Small Leather Goods
Leather Belts
Miscellaneous (as above)
TOTAL
Total
Market
Supply
(Millions)
848
11
5.5
30.5
68
52
N.A.
790
9
6
31
78
48
N.A.
Domestic
Production
(Millions)
444
3.4
3.6
16.5
60
48
N.A.
375
3
3.8
15
69
43
N.A.
Imports
(Millions)
1976 Actual
404
7.6
1.9
14.0
8
4
N.A.
1977 Projected
415
6
2.2
16
9
5
N.A.
Imports
As % of
Total
Market
47.6
70
35
59
12
8
N.A.
52
67
37
52
12
10
N.A.
Leather Equivalent
of Domestic Prod.
Square ft.
(Millions)
770
140
107
90
60
55
85
1307
630
130
112
83
70
48
90
1163
Percent
58.9
10.7
8.2
6.9
4.6
4.2
6.5
100.0
54
11
10
7
6
4
8
100
Source: Tanner Council of America "Membership Bulletin Leather Industry Statistics".
-------
- some imported at extremely low prices - and in 1976, utilization for
leather garments declined to 140 million square feet in 1976, 11 per-
cent of the domestic production. See Table 18.
Other areas where demand still appears strong include: leather work gloves,
8.2 percent of leather produced; leather handbags, 6.9 percent; leather
belts, 4.2 percent; small leather goods, 4.6 percent; and miscellaneous,
6.5 percent. Unfortunately, these segments represent less than 30
percent of the leather utilization in the United States. See Table 18.
Supply of Leather
The tanning industry generally responds to the demand for leather, thus
production of U.S. leather is not necessarily related to the supply of
U.S. hides. Less than half of the hides produced in the U.S. are consumed
by U.S. tanners for processing thus the U.S. tanners find themselves
competing with foreign tanneries for the available supply of U.S. hides.
On this basis, they will buy the necessary hides to fill their expected
demand at a given price. Whereas the total supply of hides available for
tanning has been increasing steadily in the U.S. the number of hides
going to the domestic tanners has been declining.
Shown in Table 19, are industry's annual production data from 1955 to
1976. The industries output has steadily declined throughout this period,
falling from 37.2 million equivalent hides in 1955 to a low of 20.0 million
in 1974. On the average, production has declined 2 percent per year. At
an output of 25 million equivalent hides, the 2 percent decline is equal
to 500,000 hides or about 20 million square feet of leather. Such a
decline is equal to the annual output of two medium sized chrome tanners.
B. Imports of Finished Leather Products into the United States
The United States is the world's largest importer of leather products
with Germany, the United Kingdom and Switzerland following in that order.
Importers know the United States is a big attractive market for foreign
leather products and the market has been growing at a rapid rate.
As a result, imports of leather goods into the U.S. have been growing
at an accelerating rate. This has created what some industry experts
perceive as a very serious threat to the domestic tanning and leather
goods industries.
This trend has occurred in other developed countries. In Germany, Sweden
and other countries, leather imports have reduced the leather tanning and
leather products industries to a fraction of their former size. The exact
reasons for this shift are many and complex. Basically, the leather industry
is labor intensive and developing countries find they have certain advantages
in competing on a cost basis (however, we have not been able to quantify
these factors on any suitable basis). Second it is an industry that does
not require a high level of technology such as the computer industry or
aircraft industry and can be adapted to developing countries. Third, a
complicated series of trade restrictions have been built up which prohibits
61
-------
Table 19. Tanning industry production, cattlehide equivalents,
1955-1976
1,000 cattlehide % change from
Year equivalents previous year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
37,220
36,810
35,820
33,810
34,090
31,850
32,226
31,596
31,325
32,187
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21,894
23,526
__
-1.1
-2.7
-5.6
+0.8
-6.6
+1.2
-2.0
-0.9 a
+2.8 c
+1.6 1
' -1.4 e
-4.3
+3.3
-10.9
-8.6
-2.6
-2.4
-14.6
-5.0
+9.5
+7.5
average annual
change from
1955 to 1976
equals -2.0%
62
-------
the U.S. tanning and leather products industries from competing favorably
in foreign markets. The second part of this section is devoted to looking
at some of these aspects. Fourth, developing countries such as Korea,
Taiwan, and Brazil see this industry as one in which they can compete on
an international basis and earn a valuable source of badly needed foreign
exchange. As a result they tend to "push" the industry in their countries.
Trends in Imported Leather Goods
Table 20 demonstrates the U.S. foreign trade in leather products. The
value of imports have tripled from 1969 to 1976 increasing from $631
million to over $2.17 billion in 1976. Exports during this period increased
rapidly but in 1976 amounted to only $111 million or only 5.1 percent of
imports.
Footwear is the major product imported accounting for two-thirds of total
imports in 1976. It makes up approximately the same proportion of total
imports today as it did 5 years ago. Leather wearing apparel has made
rapid increases since 1972 and is the second most important oroduct line.
Again in 1976, leather apparel imports made rapid increases. Handbags
and luggage make up the next most important categories with imports of
$185 million and $161 million respectively in 1976.
The following observations are obtained from viewing import statistics.
Latin American countries have good access to the United States market;
Mexico, Columbia and Brazil regularly export certain types of leather goods.
Lebanon, Morocco, Yugoslavia and Hong Kong are the only developing countries
outside Latin America which regularly export certain types of leather goods
to the United States. Some developing countries have begun to emerge as
suppliers in recent years. For example,. Israel, the Republic of Korea and
China (Taiwan) have become important exporters of leather products to the
U.S.
Trade Restrictions
Foreign sources have free access to U.S. raw hides and skins. At the same
time, U.S. tanners are denied equal access to foreign leather markets.
This is one of the primary concerns of the U.S. leather tanning industry.
Representatives of the U.S. leather industry feel that current and past
trade legislation and duties have not been effective in curtailing U.S.
imports of leather and leather products. Therefore, they are not in favor
of any further cuts in U.S. duties on competitive imports.
The following section is an overview of some of the tariffs and trade
legislation which has and/or could affect the industry. The following
discussion is largely taken from a report, Leather and Leather Products,
which was published by the United Nations in 1971.
63
-------
Table 20. United States Foreign Trade in Leather Products ($1,000)
Imports
Year
1969
1970
1971
1972
1973
1974
1975
1976
Footwear—'
435,884
559,347
678,352
832,652
976,106
982,892
1,135,348
1,452,358
Wearing
apparel
19,674
38,233
59,251
91,773
109,728
123,066
154,334
236,587
Handbags
& purses
58,420
62,974
67,606
83,623
108,211
106,853
124,776
185,000
Luggage &
flat goods
38,393
41,366
49,758
76,795
100,231
95,890
89,486
160,754
Other
products
78,643
87,282
74,188
83,561
94,380
106,723
81,963
140,086
Total
imports
631,014
789,202
929,155
1,168,404
1,388,656
1,415,424
1,585,907
2,174,785
Total
Exports
33,984
35,732
36,987
43,756
55,037
79,754
88,852
110,904
I/ Other than rubber
Source: Tanners Council of America
64
-------
Tariff Structures
Tariffs have a tendency to increase as the degree of processing or the
manufacturing content of the article increases. The leather industry is
an example of this. In all countries most raw hides and skins enter duty
free. Leather tends to carry a tariff of about 5 to 10 percent, while
leather footwear and other finished articles tend to carry tariffs of
between 10 and 25 percent. Japan and Finland are exceptions to this ten-
dency of tariffs to escalate as manufacturing content increases. Japan
has elaborate sets of restrictions on leather and leather goods imports.
It is the only country which imposes restrictions on imports of leather
itself.
Effective Rates of Tariffs
A tariff imposed on the principal product of some industry affords that
industry increased protection. In order to measure the effective degree
of protection consideration must be given to all of the relevant tariffs
and not merely those on the principal product or products of the industry.
An Effective Tariff Rate is defined as the percentage increase in value
added per unit of output in a given industry which is made possible by
the tariff structure. The effective tariff rate is a measure of the
excess remuneration of domestic factors of production, obtainable because
of the tariffs, as a percentage of what value added would be in a free-
trade situation.
A tariff on the outputs of an industry and none of the inputs results in
the effective tariff rate being higher than the nominal rate (price)
(see Table 21 ). In the Leather Industry, since the tariff rate escalates
with increasing levels of production, the effective rate of protection is
even greater than the nominal tariff applied to leather. The effective
rate of protection for footwear or other leather product industries tends
to be greater than the nominal tariffs on leather products.
The effective rate of protection is dependent on three factors: (1) the
cost structure of the industry; (2) the nominal tariff on output; and
(3) the difference between this rate and tariffs on inputs. Owing to
the sensitivity of effective rates to differences between tariffs on out-
puts and tariffs on inputs, it does not follow that because the level of
nominal tariffs is escalating effective rates must be escalating. On
the contrary, the effective rates of protection may easily be just as high
at the earlier stages of production as at the later stages of production.
This is particularly true if value added is relatively small at the earlier
stages.
Effect of Current Legislation
Current and past trade legislation and duties have not been effective in
curtailing U.S. imports of leather and leather products. Therefore, many
industry leaders are lobbying for more effective tariff rates and they are
definitely not in favor of any further cuts in U.S. duties on competitive
imports.
65
-------
Table 21. Effective Rates of Protection for Leather and Footwear Industries.
(Illustrative calculation using United States data, post-Kennedy Round tariff rates)
en
Leather
Input Structure
Hides and skins
Other inputs
Value added
TOTAL
Leather
Hides and skins
Tanning Industry
Without
Tariffs
(hypothetical )
37
29.5
27.8
94.3
Tanning Industry
(percent)
Other inputs (chemicals, detergents,
Leather
Effective rate on
Effective rate on
With .
Tariffs
(actual )
37
31
32
100
Tariff Rates
0
etc.) 5
6
tannii.g:
leather footwei
Leather Footwear Industry
Without
Tariffs
Input -Structure (hypothetical)
Leather
Other i
18.9
nputs 30.8
Value added 37.3
TOTAL
Used
Leather
Other i
Leather
32-27
27.8
ir- 47'37
11 ' 37.3
87.0
Leather Footwear Industry
(percent)
nputs (rubber, plastics, etc.)
footwear
g
•' 13 PCI Utill l>
* — OC nov^on-fr*
£O pel LGII L
With
Tariffs
(actual)
20
33
47
100
6
7
13
Source: Leather and Leather Products, United Nations, 1971.
-------
A number of trade associations, particularly the American Footwear Industries
Association, have petitioned the U.S. International Trade Commission to conduct
investigations concerning serious injury or threats of serious injury to the
industry. The Commission's findings on the basis of its investigation was
that "footwear is being imported in such increased quantities as to be a
substantial cause of serious injury to the domestic industry or certain
industries producing articles like or directly competitive with imported
articles." The Commission has not made any decision pending the completion
of its investigation.
In the past years there have been attempts to pass legislation which would
enhance the international trade position of the industry. The Kennedy Round
is one. With only one exception, the Kennedy Round decreased the effective
rates of protection through modest reductions in tariffs. Hides and skins
already entered free of duty so that no reductions were called for. Rates
for pre-tanned leather were reduced very little. In the case of finished
leather, the United States halved its rates.
The Generalized System of Preferences (GSP) is another trade legislation
which was intended to establish a system of generalized preferences in
favor of developing countries. The impact of the Generalized System of
Preferences is to permit manufactured and semi-manufactured products by
developing countries to enter duty-free. The overall objective is to en-
courage the industrialization of developing countries through increased
export earnings.
The GSP did not have any noticeable affect on hides and skins exports
because they were allowed to enter duty-free before this 1970 agreement.
In the semi-manufactured group of products, many countries have exceptions
in terms of the products covered by GSP. For example, the U.S. does not
give preferential treatment to all types of footwear. The overall affect
of .the GSP is also reduced due to the fact that many countries set upper
limits on the value of items that will be given preference. In general,
the effect of the GSP has lessened in the case of leather and leather
products because so many developed market economies have various exceptions
and restrictions imposed on items which are covered by the agreement.
In 1975 the Trade Act recommends that the Administration arrange for
international agreements which would establish procedures for the impor-
tation of certain articles, including footwear, into the United States.
In addition, the 1974 Trade Act prohibits extending the Generalized System
of Preferences.
67
-------
C. The Raw Hide Market
Cattle hides are the primary raw material used in the leather tanning industry
and are a by-product of the meat industry. For example, the value of a raw
cattlehide traditionally represents only 3 to 6 percent of the value of the
live animal. As a result, the supply of hides is highly inelastic, i.e.
neither price nor demand for hides has substantial influence on the total
hide supply.
Price and demand will alter the destination of the raw hide supply. Recently,
more of the supplies have entered the world market and international trade
has become an even greater concern relative to raw hide movement. For example,
in 1976, for the first time, over half of the cattlehides were exported to
foreign tanneries and their effect on domestic prices has been substantial.
It is vital that one look at the broad international setting to understand
the price of raw materials as well as leather and leather goods prices.
Supply of Hides
The supply of cattlehides in the U.S. has been steadily increasing over the
past two decades as shown in Table 22. In 1955, 26 million cattle were
slaughtered commercially in the U.S. including 19 million slaughtered as
Federal Inspected Slaughter (F.I.S.), and an additional 7 million were
slaughtered in other commercial establishments^/. This number remained
constant to 1960 when again 25.2 million head were slaughtered. During
the 60's the number.grew rapidly as the cattle feeding industry developed
and greatly increased the total U.S. capacity over the previously grass
fattened production. By 1970 the number increased to 35.2 million where
it stabilized for the next few years then slaughter increased to 40.9
and 42.6 million head in 1975 and 1976 respectively as the large buildup
of cattle numbers was reduced. Since 1960, the rate of cattle slaughter
increased in the U.S. at approximately 1 million head per year. Approxi-
mately 50 percent of all cattle slaughtered were classified as heavy steers.
Only 2.0 percent were bulls and stags, with the remaining 48 percent
classified as cows and heifers.
Total cattle numbers in the U.S. are estimated at 122.9 million head.
Based on this number the U.S. experienced a hide take-off rate of 35 percent
in 1976 (a recent low was hit in 1973 with a take-off rate of 27.7 percent).
The livestock industry is firmly established in the U.S. and in spite of
recognized ups and downs is committed to long term growth assuring the
tanning industry an increasing supply of cattlehides in the future.
Suppliers of other types of leather making raw material do not show the
same trend as cattlehides. Prior to 1974, calfskin supplies had been
shrinking drastically in the U.S. and, although making recent gains, are
not expected to be a dominant factor in the market in the future. Calfskin
production in 1976 was estimated at 4.5 million skins which represented
a 40 percent rise above 1974 production of about 3.2 million skins. Sheep
and lamb skins, the only other major source of hides and skins in the U.S.,
have been declining steadily in the U.S. over the past two decades. Although
the numbers are responsive to price developments in meat and wool, the long
\J Federal Inspected Slaughter means that the animal is slaughtered and
processed in a slaughterhouse and inspected by federal meat inspectors.
This allows the meat to be identified as such and in turn allows the
meat to be sold interstate.
-------
Table*22. Annual cattle slaughter in the United States, 1955-1975, (.1,1000 head)
IO
Breakdown of federally
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Cows &
hei fers
9,330
9,460
9., 031
7,509
7,538
8,567
8,554
8,670
8,964
10,452
12,712
13,055
12,710
13,771
14,284
13,677
13,856
13,932
13,293
14,755
19,838
20,815
%
Total
48.9
46.9
46.4
42.6
43.2
44.2
42.8
42.6
41.4
41.6
47.8
47.8
45.8
46.5
46.8
44.4
44.1
43.2
43.6
44.3
53.8
53.4
Steers
9,299
10,311
10,018
9,840
9,681
10,557
11,164
11 .447
12,496
14,395
13,488
13,846
14,676
15,361
15,754
16,608
17,003
17,737
16,591
17,824
16,071
17,270
%
Total
48.8
51.1
51.5
55.8
55.4
54.4
55.!)
56.3
57.7
57.3
50.7
50.7
52.8
51.9
51.6
53.9
54J
55.0
54.0
53.5
43.5
44.3
inspected
Bulls &
stags
427
415
404
293
241
272
250
222
202
286
413
418
384
460
499
508
560
581
611
740
995
907
slaughter
%
Total
2.3
2.0
2.1
1.6
1.4
1.4
1.3
1.1
0.9
1.1
1.5
1.5
1.4
1.6
1.6
1.7
1.8
1.8
2.0
2.2
2.7
2,3
Total
F.I.S,
19,056
20,186
19,453
17,642
17,460
19,396
19,968
20,339
21,662
25,133
26,613
27,319
27,780
29,592
30,537
30,793
31,419
32,250
30,521
33,319
36,904
38,992
Total
commercial
slaughter
25,723
26,862
26,232
23,555
22,931
25,224
25,635
26,083
27,231
30,818
32,347
33,725
33.869
35,026
35,237
35,025
35,585
35,774
33,687
36,811
40,900
42,644
Source: Tanners Council of America, Inc.
-------
term prospect of sheepskins from domestic sources is declining. Sheepskin
production, which was estimated at 11.5 million in 1976 dropped approxi-
mately 2 percent from the 1975 level of 11.7 million skins.
Total movement of cattlehides to U.S. tanners has been decreasing over the
past 10 years as U.S. tanners and the U.S. shoe industry have been confronted
with stiff international competition and restrictive trade legislation. Total
wettings of domestic tanneries decreased from 23.5 million hides or 66.8 per-
cent of the U.S. total cattlehide production in 1966 to 17.5 million hides
or 46.5 percent in 1974. Total wetting increased in 1975 and 1976 to 19.1
million and 20.4 million respectively. These levels represented 46 and 47
percent of the total U.S. cattlehide production in those two years. See
Table 23.
World Supply- of H.ides and Skins.
Cattle numbers in the U.S. and throughout the world were on an upward trend
prior to 1976, after which time drought in many countries and unfavorable
prices in key countries have caused cattleherd reductions. The Foreign
Agriculture Service of the USDA estimated cattle numbers in 1974 at 707
million with an estimated increase to 724 million in 1975 or approximately
a 2 percent increase. Production for 1976 was down, however, by about 2
million head and is expected to decline further in 1977, dropping to 715
million head. This is still well above historic levels as the average
1968-1972 production was 635 million head per year. See Table 24.
For countries that data are reported, the U.S. is the largest producer accounting
for about 18 percent of the world production. The USSR is second with about
15 percent. Other countries have more cattle, specifically India, but as
they are not slaughtered in the countries, no major hide production occurs
as hides are only removed from some fallen animals.
A more meaningful number is the total hides produced by country shown in
Table 25. As estimated by the Foreign Agriculture Service, total hide
production in the 1966-1970 period averaged 176 million hides per year.
This decreased slightly over the next few years as slaughter rates de-
clined but increased sharply in 1974 and 1975 to 182.7 and 198.5 million
hides respectively.
The U.S. is clearly the leader in hide production with a reported 49.9 million
estimated take off in 1975. As this estimate by the FAS includes an estimate
for death losses, we would argue that this number is probably overstated by
6-8 million hides. This is due to the fact that hides from animals which die
in the field are often not useable for tanning. When such an adjustment is
made, the FAS estimate of hide production is in line with the estimate prepared
by the Tanners' Council (Table 22). The USSR is next in importance with 37.0
million hides. Argentina and Brazil produced an estimated 13.2 and 11.3 million
hides in 1975. It is interesting to note that although Brazil has an estimated
91 million head of cattle compared to Argentina's 58 million, Argentina produces
a higher number of hides. This is due to the low quality and poor slaughter
rate in many Brazilian herds.
70
-------
Table 23. 'Movement into sites of cattlehides, expressed in number (1,000 hides)
and as a percent of total estimated slaughter I/
Year
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
Estimated
total
slaughter
35,260
35,381
36,076
36,118
35,740
36,280
36,480
34,700
37,700
41 ,800
43,582
Exports and
Re-Exports
number
14,205
11,866
12,853
14,790
15,229
15,969
17,584
16,871
18,444
21,287
25,280
percent
40.3
33.5
35.6
40.9
42.6
44.0
48.2
48.6
48.9
50.9
58.0
Imports
number
221
232
494
277
385
275
292
694
520
958
962
percent
0.6
0.6
1.4
0.7
1.1
0.7
0.8
2.0
1.4
2.3
2.2
Net Export
number
13,984
11,634
12,359
14,513
14,844
15,694
17,292
16,177
17,924
20,329
24,318
percent
39.6
32.9
34.2
40.2
41.5
43.2
47.4
46.6
47.5
48.6
55.8
Total Movement
to Tanners
number
23,572
23,607
23,617
21,096
20,199
20,189
19,218
17,733
17,536
19,067
20,397
percent
66.8 .
66.7
65.5
58.4
56.5
55.6
52.7
51.1
46.5
45.6
46.8
\J It should be noted net exports plus total movements to Tanners do not necessarily equal total estimated
slaughter. This is accounted for by the fact that not all slaughtered animals produce useable hides as
well as the fact that some hides may move to tanners before they are exported.
Source: Tanner Council of America "Membership Bulletin Leather Industry Statistics", 1976.
-------
Table 24.
CATTLE A1TO lUTTALbt UMBERS 11 SPtCIflCO COUNTRIES - 4VEK481 1966-72, 4MNJ4L 1473-7'
IN U117S Of 1.000 Mt»0
""""• *"° e'u'949
1 >364
,406
• 723
1 .839
78.974
.624
.760
.072
.909
94,942
5,482
1.931
12.309
5.697
5,411
37,377
106,246
11,911
235
7,265
3,650
1,545
5.107
14.259
32,341
4.415
40,254
706.604
1475
1 ,006
• 616
,900
,074
,031
,669
2 ,700
,506
,34*
131,626
166,842
3,406
23.032
7. 543
4,260
11,362
9,404
207,747
3.103
3,040
>4,327
14,430
6,500
4,719
14,640
79,22?
2,561
1,704
947
1.100
1.679
95,065
5,585
2,016
12.815
5,963
5.172
36,461
109,122
12,333
242
7,200
3,644
1,156
4,769
14,410
32,423
31,793
4,445
42,438
724.4(1
1474
13,694
,894
.950
.100
.146
.750
.600
.361
127.976
163.675
95.000
3.336
23.222
2.725
4,260
10.701
9.592
207,686
.011
.060
2 .841
1 .493
.966
.606
13.915
77,421
2.500
1,702
9U1
1.000
1.676
93.113
1,725
4,555
5.532
1.904
11.762
4.126
5.755
31,359
111.034
12.774
249
7,250
3,723
1.442
4,462
14,602
32,451
33.434
9,749
43,203
722.495
1977'
13,165
1.970
2,100
1,162
2,270
2,720
1,375
178,076
3.100
23.659
2.664
4,300
10,750
9,764
209,007
3,016
3.060
23.510
14,520
6.060
4.523
13.300
76,669
2.469
1,661
1,000
1.670
92,571
5,470
1.666
12.045
4.349
5,630
38.026
110,300
13,146
244
7,300
3,875
1,401
4.450
15,000
32,745
9.572
41.5T2
T15.lt 96
IS FOGSIEL!.
I/ PSEUJOH1HT.
J_l MTi OTCIODED IS THE 1TEE1CZ TOE THESE
1EE (OT CCHF1BABLE TO SUBiBJUiJT TE1HS EHW7I BEC1DSZ 07 1 BEE1I
FOKEIGH iGRICULTOHAL SERVICE. PBEPAXCD OB ESTHUTiS OH THE BASIS 07 077ICIAL STATISTICS OT funcICB GOTZBSHEUT5 . vraut 70EEIGV
EEKfRTG 07 U.S. AGRICULTURAL ATTACHES AHD 70REIGH SERVICE 077ICEES, HESOT.TS 0? OFFICE KESEABCB. AKD RELATED IHFORMATIOK.
THE OmCIU, SERTET,.
KATER11LC .
72
-------
Average 1966-70, Annual 1971-75.
10*1- -mc'i
Ul
(41U I*- 1
»[«-••,!, DT1.. P.O. 1 •
144 ,115 0
en i7» •
t7t ,101 T 1
TJ7 .110 ttl
t»J ,tSJ tit
• IS TSt Til
• IS (II ITS
Sll 513 4»s
45? Ill lie
377 40: ISt
3?.«3» 33,146 It.?6S
l.ttl 1,6*1 1.101
I,I7C I,IS4 1.111
IC.Stt 10, IX t,»33
.1.4,0 .1.111 11. .Cl
17,»74 14,700 14. Sll
1,444 l.lll I.1JS
1.444 I, lit t.tIS
41 4S 17
««t 411 ttl
^61 1.15] 1.135
»41 174 I|t
4, til S.IOI t,014
1.TT1 ».0tl T.3I.
*.!•• I.»|4 t.tOI
1.511 «.t04 It. til
176,474 174. llf |I4. t4t
It73
111
lit
ll.lt*
4t.ltl
11.140
IllIT
141
tto
l.llt
IlllO
Ft, 354
I.Otl
in
101
• 40
tI3
711
Til
471
1S5
>0.07>
1.66*.
403
1.4.4
• ,Tt3
It. 141
14.1J8
r.toi
l.tOl
475
61 1
141
Ttl
littl
t.ior
t.l.T
l.tj.
II. US
1TI.MO
l»l.
lit
It'
4,t66
/•T
41. TIT
SJ.744
JJJ
isr
•••
l.ltt
II. TIT
1S1
us
• 74
44»
• 77
too
404
• IT
110
404
its
7.4
IS. OS?
l.44t
423
I.1S&
|**»SO
.J.T.I
IS »»C
I. IS]
1.153
J:
• 45
1.11-
115
TSt
1,165
t.IK
4,741
1.117
*.«S<
HI. 447
I»7V
4.t4t
IK
lot
Itl
}l»4
t.ltl
1/7
III
4t.tTI
tl.ltt
II. It!
ISO
174
Til
i.tst
I..M
Jl.tt5
I.ISt
1,111
4,001
1 . 7 1 0
.,111
I.OIC
4. t>C
I7.ISI
• 44
TIS
553
>t4
441
14.111
I.IC'
.SI
I.IS.
11. (>:
4S..t7
17, etc
1.155
i. its
.
1.7'
41 .
TTI
l.*0t
7.0»
• .147
>.44T '
II. Ht
l*t.»4f
~\i :':r-unr; »•: tri vrt r."
;/ sa.i*x; v'*••_' »
V ir^LVCi 3V TiLCD.
Source: Foreign Agricultural Service. Prepared or estimated on the
basis of official statistics of foreign governments, other
foreign source materials, reports of U.S. Agricultural attaches
and foreign service officiers, results of office research and
related information. September 1976.
73 '
-------
Australian hide production has fluctuated widely from a low of 5.8 million
during the 1966-70 period to a high of 9.2 million in 1975. This is due
to the volatile cattle market in Australia since they have a great dependence
on the international beef market which also has fluctuated in recent years.
A very high herd build up in 1973-1974 has resulted in sharp herd reductions
and high slaughter rates in 1975.
The Demand for Raw Hides
The U.S. tanners must compete directly with foreign buyers for the supply
of hides made available as a by-product of the livestock slaughter industry.
In this section we will deal primarily with the international demand for
hides. In earlier sections we looked at the demand placed on the U.S. tanners
for leather and leather products which, in turn, translates directly into
the U.S. demand for raw hides.
Exports of raw hides have increased steadily over the past two decades.
The total international supply has been restricted by trade practices and
accordingly the U.S. Leather Tanning Industry has been gradually losing
Its market share to foreign shoe and leather-goods manufacturers. In
1966, 40 percent of the cattlehides produced in the U.S. were exported and
by 1976 net exports had increased to 56 percent. This amounted to a total
of 24.3 million hides being exported in 1976. United States tanners pur-
chased 1.0 million hides from foreign sources (primarily Canada and Mexico).
The rate at which the United States exports of raw hides has increased is
shown in Table 26. Nearly one-third of U.S. hides are exported to the
Japanese market with about 7.8 million hides exported in 1975. Mexico
and Korea are next in importance with about 2.5 million hides each. It
is significant to note the rapid increase in exports to Korea as they
jumped from 411 thousand hides in 1972 to the 2.5 million reported for
1975. Other countries with rapid increases in U.S. hide purchases are
Poland and Taiwan. The majority of the remainder of the increase in inter-
national demand for U.S. hides is reflected in the hides shipped to other
countries which doubled from 1972 to 1975 with an estimated 1.2 million
hides exported in 1975.
Argentina has traditionally been a large exporter of hides with an .annual
average of 8 to 8.5 million hides exported from 1966 to 1969. Argentine
exports declined slightly in 1970 then sharply in 1971 and amounted to only
1.3 million in 1972. This has been caused by their internal production
problems and also an attempt to completely internalize their hide industry
and eventually only export finished leather products. Brazil also internalized
the hide tanning industry and banned exports of raw hides further reducing
world supply by two million hides. Recently Brazil has become an importer
of raw hides and is now competing for raw hides on an international basis.
In summary, we are basically in a demand pull situation for raw hides.
Foreign demand for our raw hides, which now takes over 50 percent of total
U.S. produced cattlehides, will continue and possibly expand. Only the
U.S., Canada and Australia remain as major raw hide exporters. Nearly all
74
-------
Table 26. Exports of Cattlehides from the U.S. and Other Major
Exporting Countries to Countries of Destination, 1972-1975.
Country of
Destination Unit
United States:
Japan 1 ,000 pcs.
Mexico "
Korea, Republic of "
Romania "
Spain "
Canada "
Czechoslovakia "
Poland
China, Republic of (Taiwan) "
Italy
USSR
France "
Germany, West "
Hong Kong "
Hungary . "
Netherlands "
Yugoslavia "
Israel "
Turkey "
United Kingdom "
Chile
Other countries "
TOTAL
Australia
Total Cattlehide equiv. "
1972
7,769
1,806
411
1,200
854
1,121
857
568
226
263
518
771
729
68
228
449
459
132
4?
. 245
261
673
19,650
4,343
1973
7,596
2,036
908
1,006
620
905
821
766
332
605
48
591
656
98
201
160
273
140
66
199
273
452
18,752
3,878
1974
7,199
2,534
1,535
1,781
643
907
676
666
486
434
450
339
641
161
532
159
226
134
79
50
134
829
20,595
4,082
1975^
7,760
2,588
2,543
1,226
1 ,009
958
877
866
864
773
660
510
440
381
262
239
160
152
102
61
24
1,217
23,672
5,616
Canada
Total Cattlehide equiv.
Argentina
2,914 2,729 2,650 3,853
1,344
Source: USDA, Foreign Agriculture Service, Foreign Agricultural Circular,
Livestock and Meat, September, 1976.
Argentina: Tanners Council of America.
75
-------
other historical exporters such as India, the Argentine and Brazil have
internalized their leather tanning industries and no longer allow the
export of raw hides. International demand for hides has broadened with
Japan taking the lead. Korea and Taiwan have sharply increased imports
and Communist Bloc countries such as Poland, Yugoslavia, Rumania and
Czechoslovakia have more than doubled their imports of raw hides since 1965.
As a result, we see the U.S. tanners facing continued international competition
for our raw hides.
Trade Restrictions in Raw Hide Supply
Systematic restriction on exports of hides and skins appears to be the
trend in developing countries. Their basic policy is to restrict exports
of raw materials (hides and skins) while simultaneously encouraging exports,
and restricting imports, of the manufactured goods (leather and leather
products). This is done by levying taxes on exports of raw hides and skins,
imposing quotas on imports; and granting incentives for exports of manu-
factured goods.
When raw hides and skins are converted into leather their value increases by
more than two and a half times. Benefits, particularly for developing countries
are derived by restricting their exports of raw hides and skins and developing
their own domestic tanneries. Developing countries gain advantages by restric-
ting their export of raw hides and increasing their export of semi-tanned
leather due to the preferences given by other countries to pre-tanned leather.
These advantages are the results of (1) developing countries not having the
technological sophistication to develop high quality finished products; (2)
primary stages of leather processing being labor intensive, and developed
countries-finding it difficult to attract and retain sufficient quantities
of labor, and (3) developing countries being unable to keep abreast of fashion
changes as readily as developed countries.
In a review of the effects of some of its more recent tariff legislation,
such as The Kennedy Round, the U.S. Government has indicated its findings
show little effect has been made on changing existing import-export patterns.
An overview of the estimated effects of the Kennedy Round on tariff barriers
dealing with raw hides and skins follows.
•
In 1968, one-third of the approximate $452.6 million raw hides and skins
imports was supplied by developing countries to the four major import
markets: EEC, the United States, Japan, and the United Kingdom. Latin
American countries, i.e., Argentina, Brazil, and Uruguay are the main
developing country suppliers. Prior to the Kennedy Round, entrance into
major market areas was duty-free, with the exception of the United Kingdom
and the United States. The Kennedy Round negotiations abolished the tariffs
in these market areas which resulted in duty-free access to all four major
markets.
In 1968, almost one-half of the sheep and lambskin imports were supplied
by developing countries. The bigger importers were the EEC, the United
Kingdom, and the United States, the latter which is also an important
supplier. The Kennedy Round improved access to the four major markets
and "effective protection" of processing was reduced. Japan imposed
relatively high duties and quantitative restrictions on some items.
76
-------
Also in 1968, eighty-seven percent of all goat and kid skin was supplied
by developing countries. The major importers were the EEC, United Kingdom,
United States, and Japan. The Kennedy Round resulted in improved market
access and reduced the "effective protection" of major importers. Nominal
duties still apply to some varieties of goat and kid leather. The resultant
effect of these policies is that now only the United States, Canada,
Australia and New Zealand remain as open markets for the purchase of raw
goat and kid skins.
77
-------
VI. MODEL PLANTS
The Leather Tanning and Finishing Industry is comprised of nearly 250
establishments which utilize variations of basic processes to produce
differentiated types of leather. The Industry consists of establishments
primarily engaged in tanning, currying and finishing hides and skins into
leather. As this chapter is concerned with the development of economic
plants representative of tanneries and leather finishers which could be
effected by the imposition of hazardous waste management regulations, an
attempt will be made to describe models which together will typify most
tannery operations in the United States.
A. Types and Sizes of Model Plants
Tanneries vary with respect to their operating characteristics such that
several models were required to be developed. However, these models do
not totally represent all tanneries. Instead it is believed that the
models developed represent various categories of tanneries with each
respective tannery in that group having several characteristics closely
associated with the models.
The general categories of tanneries utilized in this analysis are defined
below:
1. Cattlehide-chrome--a tannery that primarily processes raw or
cured cattle or cattle-like hides into finished leather using
chrome tanning. Hide hair can either be saved or chemically
dissolved.
2. Cattle-nonchrome (primarily vegetable)--a tannery that primarily
processes raw or cured cattle or cattle-like hides into finished
leather using less than 20 percent (by hide weight) chrome tanning;
includes vegetable, alum, syntans, oils, and other methods and
their combinations.
3. Cattle-to-blue--a tannery that primarily processes raw or cured
cattle or cattle-like hides through the blue tanned state only,
with no retaining or finishing operations, and uses chrome tanning.
4. Cattle splits (retan)—a tannery that primarily processes splits
or previously tanned hides and/or skins into finished leather,
the major wet process consisting of trimming, additional splitting,
retanning, coloring, and fatliquoring.
5. Sheepskin tannery—a tannery that primarily processes sheepskins,
with the hair previously removed, into finished leather using
either chrome or nonchrome tanning methods, primarily includes
pickled sheepskins. A few plants will also tan pigskins or
pickled cattlehides (hair removed) and such plants will occas-
sionally be called no-beamhouse tanneries.
78
-------
7. Shearlings—a tannery that primarily processes raw or cured sheep
or sheep-like skins, with the wool or hair retained on the hide,
into finished leather using chrome or nonchrome tanning; or, a
wool pullery—a plant that processes hair-on raw or cured sheep
or sheep-like skins by first removing the wool and then pickling
the skin for use by a sheepskin tannery (Category 6).
8. Leather finishers—an establishment that receives unfinished
leather to which it applies a finish and may also buff to re-
move imperfections in the leather; does not perform any other
tanning functions; normally functions on a contract basis in
performing a service for a customer.
For each of the above categories at least one representative model was
considered. Where there were several corresponding tanneries associated
with a category, various representative sizes of models were developed
for that specific category. The models and their corresponding sizes are
depicted in Table 27.
Table 28 depicts the various operational characteristics of the model
plants. These characteristics were determined from the industry survey
as well as discussions with industry members. As is shown, operations
involving cattlehides predominately operate 250 days per year utilizing
approximately 85 percent of their capacity. Sheep operations commonly
operate 240 days per year with sheepskin operations utilizing 75 percent
of their capacity while shearling operations utilize 90 percent during
1976. Finishers are generally on a 250 day per year operation schedule
using 76 percent of their capacity and measure output on a square foot basis.
To compute the annual production of the other models in terms of square
footage the following standards were used:
Cattlehides yield 40 square feet per hide; cattle splits yield 8
square feet per split; and sheepskins yield 6.67 square feet per
skin or pelt.
At this time it does not appear that vegetable tanners will be impacted.
This conclusion is based on information from a recent EPA study on solid
waste practices in the leather industry. The study determined that a
typical vegetable tanner will produce no potentially hazardous waste.!'
Model plants were included, however, to facilitate future analysis if
they are eventually required to conform to similar regulations.
!_/ SCS Engineers, Inc. Assessment of Industrial Hazardous Waste Practices —
Leather Tanning and Finishing Industry, EPA report under Contract No.
68-01-3261, Report No. PB-261-018, November 1976, p. 83-84.
79
-------
Table 27. The Leather Tanning Industry, representative model plants
and respective plant capacities
CO
o
Model
Cattlehide
pulp
Cattlehide
save
Cattlehide
Cattlehide
Cattle spl
Sheepskins
Shearlings
Leather Fi
, chrome,
, chrome,
, vegetable
to blue only
its
nishers
Corresponding
Category
1
2
3
4
5
6
7
8
Units X-Small
(Units/Day)
Cattlehides 100
Cattlehides 100
Cattlehides
Cattlehides
Splits
Sheepskins —
Pelts
sq. ft.
Small
400
400
100
—
—
1,200
900
—
Size
Medium
900
900
625
—
4,250
2,400
—
14,000
Large
1
1
1
3
5
3
40
,500
,500
,500
,000
—
,800
,000
,000
X-Large
3,000
3,000
—
—
—
—
—
—
-------
Table 28. The Leather Tanning Industry, representative modf. plants'
operational characteristics
00
Model /Size
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle Vegetable
Small
Medium
Large
Cattle to blue
Large
Cattle Splits
Medium
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Finishers
Medium
Large
Category Capacity
(Units/Day)
1 & 2
100
400
900
1,500
3,000
3
100
625
1,500
4
3,000
5
4,250
6
1,200
2,400
5,800
7
900
3,000
8
14,000
40,000
Days Per
Year
250
250
250
250
250
250
250
250
350
250
240
240
240
240
240
250
250
Utilization
Rate
(%)
85
85
85
85
85
85
85
85
85
85
75
75
75
90
90
75
75
Hides Per
Year
21,250
85,000
191,250
318,750
637,500
21,250
132,812
318,750
892,500
903,125
216,000
432,000
1,044,000
194,400
648,000
65,625
187,500
Square Feet
Per Year
850,000
3,400,000
7,650,000
12,750,000
25,500,000
850,000
5,312,500
12,750,000
35,700,000
7,225,000
1,440,720
2,881,440
6,963,480
1,296,650
4,322,160
2,625,000
7,500,000
Number of
Employees
30
60
85
150
355
40
120
165
120
39
20
40
97
30
100
15
30
-------
B. Investment
The estimated book value and salvage value for each tannery model are
shown in Table 29. Also shown are current assets, current liabilities,
net working capital, total invested capital and estimated replacement
value.
Book Value of Assets
The book value of a tannery's assets represents the acquisition costs
of the various assets. As would be expected in an industry with a
substantial number of older plants and equipment, the book values of
the model's assets do not reflect significant amounts. However, the
book value does reflect the amount of capital the tannery owners have
invested in assets and accordingly represent a portion of what is
used as a basis for determining the return on the owners equity.
Operating Capital
The models' operating capital is defined as that capital necessary to
maintain the day to day operations of the tanneries. Included in the
computation of operating capital are a firm's current assets and current
liabilities. Current assets represent those assets a firm maintains that
could be converted relatively easy into cash. Current assets include such
items as raw materials inventory, finished product inventory and accounts
receivable.
As can be seen in Table 29, current assets for the models represent a
sizeable amount. This is due to the substantial quantities of hides and
leather that tanneries must maintain in their facility at any given time
in order to assure continuous operation. This reflects a sizeable addi-
tional investment requirement to the tanneries owners.
Current liabilities represent those liabilities that a firm holds that
could be demanded to be paid within a short time period. Current liabil-
ities include short term notes, accounts payable and wages payable.
The difference between current assets and current liabilities represent
the firm's operating capital or as it is sometimes called, net working
capital. Net working capital represents the quantity of capital that the
firm is required to maintain just to maintain daily cash balances. Thus
it represents an investment requirement to the tanneries' owners.
Total Invested Capital
Total invested capital is the sum of the book value of assets and the net
working capital. It represents the total amount of capital that is re-
quired to be invested in an operation by the owners. Accordingly the
total invested capital represents the investment amount utilized for de-
termining a firm's return on investment.
82
-------
Table
29.
The Leather Tanning Industry, representative model plants
investment characteristics
00
CO
Model /Size
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
Capacity
(Units/Day)
100
400
900
1,500
3,000
100
625
1,500
Fixed
Assets
291.0
448.0
1,080.0
1,995.0
3,990.0
230.0
415.6
870.0
Current
Assets
269.0
772.0
1,467.0
2,895.0
5,790.0
500.0
2,487.5
3,390.0
Current
Liabilities
______________ i
205.3
371.2
819.6
1,258.7
2,517.4
170.0
787.5
1,080.0
Net Working
Capital
r ci fino ^
^ pi ,UUU J
63.7
400.8
647.4
1,636.3
3,272.6
330.0
1,700.0
2,310.0
Total Invested
Capital
354.7
848.8
1,727.4
3,631.3
7,262.6
560.0
2,115.6
3,180.0
Salvage
Value
121.9
490.4
863.4
2,035.3
4,070.6
376.0
1,783.1
2,484.0
Cattle-to-Blue
Large
Cattle-Splits
Medium
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Finishers
Medium
Large
3,000
4,250
1,200
2,400
5,800
900
3,000
14,000 ft.2
40,000 ft.2
2,510.0 3,650.0
233.8
72.0
201.7
557.1
648.3
2,161.1
94.7
189.3
701.2
60.0
120.0
290.0
90.0
300.0
42.0
126.0
1,590.0
340.0
48.0
96.0
232.0
36.0
120.0
21.0
63.0
2,060.0
361.2
12.0
24.0
58.0
54.0
180.0
21.0
63.0
4,570.0
595.0
1,184.0
384.6
84.0
225.7
615.1
702.3
2,341.1
115.7
252.3
19.2
44.2
113.7
118.8
396.1
43.1
107.3
-------
Total invested capital requirements for the model tanners range from
$84,000 for a small sheepskin tannery to nearly $7.3 million for the
extra-large cattlehide chrome tannery. Each model's total invested
capital requirement is depicted in Table 29.
Salvage Value
The salvage value of the model tanneries represents the amount of money
that the owners could recover should the tannery cease operation. This
value will vary widely from plant to plant, depending on the age of the
facility and its condition and the use ability of the equipment as well
as the location of the plant. In some instances the salvage value of
old, obsolete plants will be equal to the site value plus the scrap
value of the equipment.
There exist only a limited market for certain types of used machinery
and equipment. Thus most of a closing plant's equipment would be
scraped.
Data are not available depicting the salvage value of tanneries. Accord-
ingly after discussions with industry members it was determined that salvage
values for most tanneries would range between 10 and 20 percent of the
tannery's fixed assets plus its net working capital.
C. Model Plant Capacity and Utilization
As tanneries vary from one to another, there appears to be no industry
rule by which the models' capacity or utilization can be accurately des-
cribed. For most tanneries their constraining factor is the number and
capacity of their drums (or for some tanners, the number and capacity of
their pits).
Commonly, tanneries will operate 5 days per week for 240 to 250 days per
year. Furthermore, their utilization rates vary for the different types
of tanneries, however usually the rates range between 75 and 90 percent
of the tanneries' capacity. The capacity and utilization rates for each
of the representative model plants were depicted in Table 28.
D. Annual Sales of Model Plants
Annual sales of the model plants were determined utilizing the production
characteristics described in Table 28 as well as estimates of final
produc p'^'ces. Prices were estimated to be reflective of the average
grade and quality of leather within each tannery type. Prices are repre-
sentative of late 1975 early 1976.
The prices utilized in this analysis are depicted below:
84
-------
Type
Pri ce
Source
Cattlehide, Chrome
Cattlehide, Vegetable
Cattlehides to the Blue
Cattle, Splits
Sheepskins
Shearlings
Leather Finishers
(on contract)
$ .86/sq. ft.
$ .94/sq. ft.
$ .508/sq. ft.
$ .234/sq. ft.
$ .726/sq. ft.
$1.15/sq. ft.
$ .15/sq. ft.
Wholesale Price Index
Cattle & Kip Sides, Smooth
Oct.-Dec. 1975 Average
From industry surveys
From industry surveys and
contacts
From industry surveys
From industry surveys
From industry surveys
From industry contacts
The annual sales for each of the tannery models are shown in Tables
30 through 33.
E. Cost Structure of-Model Plants
The cost structures for each tannery model are depicted in Tables 30,
31, 32, and 33. The major cost items are discussed below.
Raw Material
Raw materials for purposes of this analysis consisted entirely of raw
cattle hides or splits, or sheep skins or pelts. Raw cattlehides are
sold by slaughterhouses on a poundage basis and this analysis assumed
the average hide weighed 55 pounds. Prices utilized reflected the
October through December 1975 average price for Chicago Native Heavy
hides. The price was 28.7 cents per pound.
The price utilized for raw cattle splits was determined from industry
surveys and is estimated to be $.72 per split.
Raw sheepskin prices were assumed to be $1.75 per skin. These would
be received in the pickled state. The price for sheep pelts was
estimated to be $4.00 per pelt. Both the sheep skin and sheep pelt
prices were estimated utilizing the industry surveys.
Since the leather finishers are on a contract basis, they normally do
not experience raw material costs associated with the purchase of hides,
Labor
Labor costs were developed using the estimated number of employees for
each model plant multiplied times an estimate of the annual costs per
employee. These costs were developed from industry provided data and
reflect varying wages for different types and sizes of tanneries.
85
-------
Table 30. The Leather Tanning Industry, Representative Model Plants' Costs Characteristics for'the Cattlehlde
Chrome Tanneries.
00
Extra Small
SALES
COSTS
Raw Hides
Labor
Tan Materials &. Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRE-TAX INCOME
INCOME TAX
AFTER-TAX INCOME
1000
Dollars
$731.0
335.4
189.0
138.2
662.6
68.4
17.5
11.0
39.9
8.3
31.6
Percent
100.0
45.9
25.8
18.9
90.6
9.4
2.4
1.5
5.5
1.2
4.3
r
Small
1000
Dollars
$2,924.0
1,341.7
452.4
825.8
2,619.9
304.1
64.3
29.2
210.6
87.6
123.0
Percent
100.0
45.9
15.5
28.2
89.6
10.4
2.2
1.0
7.2
3.0
4.2
ATTLEHIDE CHROME TAN
Medium
1000
Dollars
$6,579.0
3,018.9
688.5
2^246.6
5,954.0
625.0
131.6
85.5
407.9
182.3
225.6
Percent
100.0
45.9
10.5
34.1
90.5
9.5
2.0
1.3
6.2
2.8
3.4
MCDTCC
Large
1000
Dollars
$10,965.0
5,031.5
1,303.5
3,741.9
10,076.8
888.2
185.4
109.7
592.1
270.7
321.4
Percent
100.0
45.9
11.9
34.1
91.9
8.1
1.7
1.0
5.4
2.5
2.9
Extra Large
1000
Dollars
$21,930.0
10,063.0
3,124.0
6,440.0
19,627.4
2,302.6
372.8
219.3
1,710.5
807.5
903.0
Percent
lobrcr-
45.9
14.2
29.4
89.5
10.5
1.7
1.0
7.8
3.7
4.1
CASH FLOW
49.2
6.7
187.3
6.4
357.2
5.4
507.8
4.6
1,275.8 5.8
-------
CO
Table 31. The Leather Tanning Industry, representative model plants' costs characteristics for the cattlehide vegetable
tanneries, the cattlehide blue tannery and the cattlehide split tannery
SALES
COSTS
Raw Hides
Labor
Tan Materials & Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRE-TAX INCOME
INCOME TAX
AFTER-TAX INCOME
CASH FLOW
Sma
($000)
799.0
335.4
293.0
106.7
7357T
63.9
14.4
1.6
47.9
10.0
37.9
52.3
Vegetable
Tanneries
11 Medium
(%)
100.0
42.0
36.7
13.3
92TO~
8.0
1.8
0.2
6.0
1.3
4.7
6.5
($000)
4,993.7
2,096.4
879.0
1,673.7
4,649.1
344.6
74.9
25.0
244.7
104.0
140.7
215.6
(X)
100.0
42.0
17.6
33.5
93TT
6.9
1.5
0.5
4.9
2.1
2.8
4.3
Large
($000)
11,985.0
5,031.4
1,523.8
4,854.5
11,409.7
575.3
143.8
155.8
275.7
118.9
156.8
300.6
(X)
100.0
42.0
12.7
40.5
9572"
4.8
1.2
1.3
2.3
1.0
1.3
2.5
Cattle-
to-Blue
($000)
18,150.0
• 14,235.0'
1,267.0
1,527.0
17,029.0
1,121.0
186.0
74.0
861.0
400.0
461.0
647.0
(X)
100.0
78.4
7.0
8.4
53T8~
6.2
1.0
0.4
4.8
2.2
2.6
3.6
Split
Tannery
($000)
1,690.7
650.3
280.0
614.2
1,545.3
145.4
30.4
16.9
98.1
33.6
64.5
94.9
• IX)
100.0
38.5
16.6
36.3
91.4
8.6
1.8
1.0
5.8
2.0
3.8
5.6
-------
Table 32. The Leather Tanning Industry, Representative Model Plants' Costs Characteristics for the Sheep and Shearling
Tanneries.
00
CO
Small
SALES
COSTS
Raw Skins or Pelts
Labor
Tan Materials & Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRE-TAX INCOME
INCOME TAX
AFTER-TAX INCOME
1000
Dollars
. 1046.0
378.0
160.7
459.2
997.9
48.1
10.5
3.1
34.5
7.1
27.4
Percent
100.0
36.1
15.4
43.9
95.4
4.6
1.0
0.3
3.3
0.7
2.6
-SHEEPSKIN TANNERIES-
Medium
1000
Dollars
2091.9
756.0
321.4
905.7
1983.1
108.8
20.9
10.5
77.4
23.7
53.7
Percenl:
100.
36.
15.
43.
94.
5.
1.
0.
3.
1.
2.
0
1
4
3
8
t*
(,
0
5
7
1
6
Large
1000
Dollars
5055.5
1827.0
779.4
1948.6
4555.0
500.5
50.5
50.6
399.4
178.2
221.2
Percent
100.0
36.1
15.4
38.5
90.0
10.0
1.0
1.0
7.9
3.5
4.4
Sma
1000
Dollars
1491.2
777.6
272.3
214.6
1264.5
226.7
44.8
37.3
144.6
55.9
88.7
SHEARLING
11
Percent
100.0
52.1
18.3
14.4
84.8
15.2
3.0
2.5
9.7
3.8
5.9
TANNERIES-
Lar
1000
Dollars
4970.5
2592.0
907.7
715.3
4215.0
755.5
149.1
124.3
482.1
217.2
264.9
ge
Percent
100.0
52.1
18.3
14.4
84.8
15.2
3.0
2.5
9.7
4.4
5.3
CASH FLOW
37.9
3.6
74.6
3.6
271.7
5.4
133.5
8.9
414.0
8.3
-------
Table 33. The Leather Tanning Industry, representative model
plants' costs characteristics for the leather finishers
Financial
Item
SALES
COSTS
Raw Hides
Labor
Finishing Chemicals
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRE-TAX INCOME
INCOME TAX
AFTER-TAX INCOME
CASH FLOW
Leather Finishers (on coi•:ract)
Medium.Large
($000)
394.0
100.0
($000)
1,125.0
100.0
162.0
135.0
78.0
375.0
19.0
41.0
34.0
20.0
95.0
5.0
324.0
400.0
288.0
1,012.0
113.0
28.8
35.6
25.6
90.0
10.0
8.5
3.9
6.6
1.3
5.3
2.2
1.0
1.8
0.3
1.5
16.9
9.0
87.1
28.3
58.8
1.5
0.8
7.7
2.5
5.2
13.8
3.7
75.7
6.7
89
-------
For the cattlehide chrome tanneries annual per employee labor costs
ranged from $6,300 for the extra small model to $8,800 for the extra
large model. For the cattle hide, vegetable tanneries annual labor
costs were estimated to be $7,325 per employee for the small and medium
model and $9,235 for the large tannery model. Labor costs for split
tanners were estimated to be $7,200 per year; cattle-to-blue tannery,
$8,000 per year; for sheepskin tanners, $8,035; for shearling tanners,
$9,200 per year; and for leather finishers, $9,000 per annum.
Tanning Materials and Other Costs
This cost classification includes expenditures for materials used in
the tanning process, miscellaneous other direct costs as well as in-
direct costs (i.e., administrative expenses). These costs vary consid-
erably for different tanneries and for the models. For cattlehide and
sheepskin tanners, they ranged between 13.3 and 43.9 percent of sales.
Leather finishers relative cost for such items were even higher, ranging
from 54.0 to 61.2 percent of sales. This high percent is because of
the absence of raw material costs in most leather finishing operations.
Depreciation and Interest
Estimates of model tanneries' depreciation and interest were developed
from industry as well as Internal Revenue Service data. The deprecia-
tion amounts utilized in this analysis are depicted in Table 34. In
this table depreciation is expressed as a percent of sales as well as
fixed assets. In terms of sales depreciation represents between 1.0
and 3.0 percent. Expressed as a percentage of fixed assets deprecia-
tion represents between 1.0 and 18.0 percent. This wide variation in
depreciation as a percent of fixed assets is reflective of the wide
variation of plant and equipment composition that exists in the industry.
Interest charges for the model plants, expressed as a percent of sales,
are also shown in Table 34. Interest charges ranged from 0.2 percent
of sales to 2.5 percent.
Total Costs
Raw hides or skins costs ranged from 36.1 percent of sales for the
sheepskin tanneries to 52.1 percent for the shearling tanneries. The
cattle tanneries raw hide costs approximated 40 percent. Labor costs
ranged from 10.5 percent of sales for the medium cattle chrome tannery
model to 36.7 percent for the small cattle vegetable model. The majority
of the models'1 labor costs represented 10 to 20 percent of sales, except
for leather finishers where labor costs represent 30 to 40 percent of
sales. Finally expenditures for tanning materials and other direct and
indirect costs ranged from 13.3 percent for the small cattle vegetable
model to 43.9 percent of sales for the small cattle chrome tannery
model to 61.2 percent for a large leather finisher.
As previously mentioned these costs are depicted for all the models on
Table 30 through 33. Total costs of all the models, including
depreciation and interest, represent between 90.3 percent and 97.7
percent of sales. This would result in a pre-tax income range of 2.3
to 9.7 percent.
90
-------
Table 34. The Leather Tanning Industry, representative
model plant depreciation and interest
Depreciation
Model/Size
Percent of
Sales
Percent of
Fixed Assets
Interest
as a Percent
of Sales
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
Cattle-to-Blue
Large
Cattle Splits
Medium
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Finishers
Medium
Large
2.4
2.2
2.0
1.7
1.7
1.8
1.5
1.2
1.0
1.8
1.0
1.0
1.0
3.0
3.0
2.2
1.5
•Percent-
6.0
14.4
12.2
9.3
9.3
6.3
18.0
16.5
7.4
13.0
1.4
1.0
1.3
6.9
6.9
9.0
8.9
1.5
1.0
1.3
1.0
1.0
0.2
0.5
1.3
0.4
1.0
0.3
0.5
1.0
2.5
2.5
1.0
0.8
91
-------
F. Model Plant Annual Profits
After-tax income, pre-tax and after-tax return on sales and return
total invested capital for the various model tanneries are shown in
Table 35. These profitabilities reflect late 1975 conditions. As
shown in the table the models' return on sales, after-tax, range from
1.3 percent to 5.9 percent. After-tax return on total invested capital
range from 2.1 percent to 23.3 percent.
G. Annual Cash Flows
Estimated annual cash flows for the different types and sizes of model
tanneries are depicted in Table 36. Cash flow, as calculated, repre-
sents the sum of after-tax income plus depreciation. In the table it
is shown in actual dollars as well as expressed as a percent of sales
and total invested capital.
92
-------
Table 35. The Leather Tanning Industry, representative
model plant profitability
Model /Size
After-Tax
Income
rsnnm
Return of Sales
Pre-Tax After-Tax
Return of Total
Invested Capital
Pre-Tax After-Tax
ont>
Cattle-Chrome
X-Small 31.6
Small 123.0
Medium 225.6
Large 321.4
X-Large 903.0
Cattle-Vegetable
Small 37.9
Medium 115.3
Large 156.8
Cattle-to-Blue
Large 461.0
Cattle Splits
Medium 64.5
Sheepskins
Small 27.4
Medium 53.7
Large 221.2
Shearlings
Small 88.7
Large 264.9
Finishers
Medium 5.3
Large 58.8
5.5
7.2
6.2
5.4
7.8
6.0
4.9
2.3
4.8
5.8
3.3
3.7
7.9
9.7
9.7
1.8
7.7
4.3
4.2
3.4
2.9
4.1
4.7
2.8
1.3
2.6
3.8
2.6
2.6
4.4
5.9
5.3
1.5
5.2
11.3
24.8
23.6
16.3
23.6
8.6
11.6
8.7
18.8
16.5
4.1
3.4
6.5
20.6
20.6
5.7
34.5
8.9
14.5
13.1
8.9
12.4
6.8
6.7
4.9
10.1
11.0
2.1
2.4
3.0
12.6
11.3
4.6
23.3
93
-------
Table 36. The Leather Tanning Industry, representative model
plant cash flow
Model /Size
Cattle-Chrome
X-Small
Small
Medium
Large
X-Large
Cattle-Vegetable
Small
Medium
Large
Annual
Cash Flow
($000)
49.2
187.3
357.2
507.8
1,275.8
52.3
215.6
300.7
Cash Flow
as a Percent
of Sales
6.7
6.4
5.4
4.6
5.8
6.5
4.3
2.5
Cash Flow
as a Percent
of Total
Invested Capital
13.9
22.1
20.7
14.0
17.6
9.3
10.2
9.5
Cattle-to-Blue
Large
Cattle Splits
Medium
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Finishers
Medium
Large
647.0
94.9
37.9
74.7
271.7
133.4
414.0
13.8
75.7
3.6
5.6
3.6
3.6
5.4
8.9
8.3
3.7
6.7
14.2
16.0
3.4
3.3
4.4
19.0
17.7
11.9
30.0
94
-------
VII. HAZARD WASTE MANAGEMENT COSTS
Hazardous waste management requirements and costs depicted in this chapter
were provided by the Hazardous Waste Management Division, Office of Solid
Waste of the Environmental Protection Agency as developed by the technical
contractors Battelle Columbus Laboratories I/ and SCS Engineers, Inc. 2_/.
These studies contained the basic data on hazardous waste management,
which were expanded to apply to all the alternative model plants developed
in the previous chapter.
A. Hazardous Waste Management Guidelines and Recommendations
Specific government guidelines are currently unavailable for either iden-
tification of hazardous waste or treatment and disposal technology. Thus,
the technology, proposed so far, represents a state-of-the-art level which
is selected as "an environmentally acceptable disposal technology" for
various "hazardous" waste streams. Such technology is currently classified
as Pathways Level III (PAIII) technology. In light of the lack of guide-
lines, the actual PAIII facilities and costs analyzed in this report are
preliminary as they may be revised after regulations and guidelines are
finally adopted 3/.
B. Hazardous Waste Management Treatment and Disposal Technology
The bulk of tanneries' solid waste stream is comprised of pieces of leather
from various plant operations and wastewater treatment sludge. For non-
vegetable tanners, most of this waste stream will contain hazardous waste,
primarily trivalent chromium with some lead, zinc and copper. As stated
earlier, vegetable tanners will usually not produce hazardous waste.
According to the treatment and disposal cost study, the PAIII technology for
the hazardous waste stream generated by the leather tanning and finishing
industry will be a secured landfill 4/. This is the compatible technology
for a waste stream containing hazardous solid and sludge waste.
The secure landfill (sometimes referred to as a "secure chemical landfill"
or a "chemical landfill"), as designated in this report, is one that will
provide complete long-term protection for the quality of surface and sub-
surface waters from hazardous waste deposited therein and against hazards
to public health and the environment.
II Battelle Columbus Laboratories, Cost of Complying with Hazardous Waste
Management Regulations, Draft Report, Environmental Protection Agency,
Contract No. 68-01-4360, Columbus, Ohio, October 12, 1977.
2/ SCS Engineers, Inc., Assessment of Industrial Hazardous Waste Practices--
Leather Tanning and Finishing Industry, Environmental Protection Agency,
Report No. PB-261018, Reston, Virginia, November 1976.
3/ Battelle, op. cit.. pp III-l to III-2.
4/ Ibid., p VI-7.
OK
-------
The secure landfill has special features beyond those possessed by "sanitary"
or "approved sanitary" landfills which enable it to handle hazardous wastes
in an environmentally adequate manner. Some of the special features or
criteria required for secure landfills are presented below:
. Secure landfill sites should be located or engineered to avoid
direct hydraulic continuity with surface or sub-surface waters.
If there is potential for hazardous wastes to percolate or leach
to ground water, then the use of impermeable barriers, such as
clay, special concrete, plastic and other liners, will be required
to accomplish suitable containment and isolation of wastes.
. Facilities for leachate collection and treatment are essential
for liquid, low-solids slurries, sludges, or other wastes from
which soluble constituents might be leached. Leachate may be
collected by the use of suitable piping at the bottom of the
cell and a sump pump. After suitable treatment, any dewatered
solids can be returned to the disposal site and the effluent
can be discharged to a sewer or stream.
. Surveillance and monitoring of the disposal site, including regular
analysis of ground and surface waters for changes in background
levels, are necessary.
. The composition and volume of each extremely hazardous waste is
known. Care is taken to segregate wastes to prevent potentially
dangerous reactions. The location of specific wastes in the
cells is recorded and mapped. Neutralization,.chemical fixation,
encapsulation, and other pretreatment techniques are often necessary
prior to burial of some wastes in a secure landfill.I/
C. Status of Industry Hazardous Waste Management
Most tanneries dispose hazardous waste in conventional sites including dumps,
landfills, trenches and lagoons. A recent study covering 136 tanneries,
showed 8 percent used open dumps, 73 percent used landfills, 18 percent
disposed of waste in trenches or lagoons and one tannery utilized agricul-
tural spreading. The 136 tanneries were serviced by 23 disposal sites of
which eight were publically owned and served 52 tanneries, five tanneries
owned their own sites and 10 sites serving 56 tanneries were privately
owned. Thus 79 percent of the tanners use privately or publically owned
sites while 21 percent maintain company sites. Of the 23 disposal sites,
only 2 were state certified to accept hazardous waste.2/
I/ Ibid., pp 37 and 38.
21 SCS Engineers, Inc., op. cit., p. 138.
96
-------
After tanners finally adopt requirements for hazardous waste management
regulations, the prior distribution of management techniques will change
as some of the current disposal sites would not be approved to handle
solid waste. However, at this time the extent of the shift cannot be
estimated.
D. Hazardous Waste Management Costs
Hazardous waste management costs are based on the industry waste stream
category, Pathways Level III technology applied, and level of waste
generated, as provided from studies by EPA contractors listed previously.
Costs depicted and discussed in this section, apply only to the treatment
and disposal of solid and sludge waste in a PAIII technology, specifically
secure landfill. Costs supplied by the EPA cost contractor are an industry
average to cover contract hauling and disposal. For the Leather Tanning
and Finishing Industry, this cost was estimated to average $55 per metric
ton per year for any plant in the industry. In the EPA study, no allowances
were included for plant location, size, or process. As some disposal costs
exist prior to adoption of PAIII technology, the impact must be assessed on
the incremental cost increases, which according to the same report equal $37
per metric ton per year.
Costs are expressed in January 1, 1977 dollars. They are costs for a
service rendered for which little or no investment costs will usually
be incurred.
Yearly costs for various types of plants will vary depending on volume of
waste generated. This is estimated for model plants based on documented
average potentially hazardous solid waste produced per thousand equivalent
hides processed!/ times hides processed annually. As there are no assumed
investment costs, neither depreciation nor interest costs on investment
will be generated. Total annual costs and costs per 1,000 equivalent
hides produced are shown in Table 37.
j_/ SCS Engineers Inc., op. cit., pp. 61-121
97
-------
Table 37. • Hazardous waste treatment and disposal costs for leather tanners and finishers based •
on incremental costs of $37 per MT I/
00
Type of tanner
Volume of
production
per day
Annual
equivalent
hide
production?/
(1,000)
P.H.W. 3/
M.T per
1,000
equiv.
hides
(1977
levels)
Incremental
costs per
1,000 equiv.
hides
$
Total
annual
incremental
costs
Cattlehide - pulp chrome
X-small
Small
Medium
Large
X-Large
Cattlehide - blue
Cattle-splits
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Leather Finisher
Medium
Large
100 hides
400 hides
900 hides
1,500 hides
3,000 hides
3,000 hides
4,250 splits
1,200 skins
2,400 skins
5,800 skins
900 pelts
3,000 pelts
14,000 sq ft
40,000 sq ft
21.3
85.0
191.3
318.8
637.5
893
180.6
36
72
174
32.4
108.1
65.6
187.5
4.9
4.9
4.9
4.9
4.9
10.0
8.6
1.66
1.66
1.66
1.66
1.66
0.16
0.16
181
181
181
181
181
370
318
61
61
61
61
61
6
6
3,860
15,380
34,630
57,700
115,390
330,410
57,430
2,200
4,390
10,610
1,980
6,590
390
1,120
I/ Pathway Level III cost less current treatment and disposal costs: $55/MT - $18/MT = $37/MT
2J Equiv. hide = 40 sq ft, split = 8 sn, ft and sheepskin = 6.67 sq ft
3_/ P.H.W. -= Potentially Hazardous Waste
-------
VIII. ECONOMIC IMPACT ANALYSIS
The resulting direct impacts arising from hazardous waste management
regulation for the Leather Tanning and Finishing Industry are expected
to vary for different types, however, the overall industry impacts should
be minor. The assumed control technology to meet regulations is disposal
in secured landfills, Pathways Level III technology. Little or no invest-
ment will be required relative to this disposal method and essentially
all impacts will originate from increased operating costs to pay for
collecting, hauling and disposing of the waste stream. Some of these
costs would be incurred without regulation as most of the hazardous waste
is currently being disposed of in landfills and/or dumps but charges for
use of these facilities are significantly less than for secured landfills.
Ultimately, the impact analysis will assess the incremental or change in
costs to go from present technology to regulation required technology,
secured landfills.
This chapter will address itself to the various types of impacts for
each of the different tannery categories that produce hazardous waste.
As vegetable tanners do not generally produce significant amounts of
hazardous waste, they will be excluded from the impact analysis. This
results in an impacted industry that potentially could include about
220 plants based on 1976 data. The impacts on these plants will be
simulated by applying added costs to the model tanneries described in
Chapter VI. The impacts are based on the production and financial
characteristics of the models and the waste management costs as pre-
sented in Chapter VII.
A. Price Effects
Required Price Increases
An implicit indication of the expected price effects of hazardous waste
management regulations used in this report is the amount of sales price
increase necessary to maintain a tannery's profitability, after related
regulation expenditures, equal to profits before the regulation. The
method of computation was described in Chapter II (Methodology), Section
F, of this report. The ability to actually pass on such costs is evaluated
in the next section.
The amount of sales price increases necessary to offset the estimated hazardous
waste management costs for the model tanneries are shown in Table 38.
Note that the required increases are estimated to be constant for all sizes
of plants. This reflects the assumption by the technical contractor for
EPA that costs per metric ton of waste are constant for plants producing
a waste stream disposed in secured landfills. Also shown in the table are
the sensitivity ranges of required price increases when costs vary +20
percent of original estimated management costs.!/
!_/ After the +20 percent sensitivity test was reviewed, the sensitivity
analysis for thru-to-blue and split tanners was expanded to +40 percent
to obtain additional information on the financial vulnerability of these
more highly impacted segments. Some of the results of the +40 percent
test are included in the text but not in the tables.
oo
-------
Table 38. Required price increases necessary to offset hazardous waste
management costs for the Leather Tanning and Finishing Industry
Model plant segment
Required price increase (%)
% of proposed waste management
80 100 120
Cattlehide - chrome (all sizes)
Cattlehide - thru-to-blue
Cattlehide - splits
Sheepskins (all sizes)
Shealings (d.o.)
Leather finishers (d.o.)
0.4
1.5
2.7
0.2
0.1
0.1
0.5
1.8
3.4
0.2
0.1
0.1
0.6
2.2
4.1
0.3
0.2
0.2
100
-------
The required price increase for cattlehide chrome tanneries are 0.5
percent of the recent price level. Plants tanning cattlehides thru-
to-blue will require price increases of about 1.8 percent of recent
prices to maintain profits. Cattlehide split tanners would need to
increase prices 3.4 percent while sheepskin,, shearling and leather
finishing operations would require price increases of 0.2 percent or
less.
Based on estimated costs, the industry would generally not require major
price increases to maintain profits. However, thru-to-blue and, in
particular, split tanneries would require significant price increases.
These higher levels reflect the fact that their product value is lower
than other tanning segments and for split tanneries, their waste generated
per unit of product is much higher than other, types of tanneries.
Expected Price Increase
The Leather Tanning and Finishing Industry is an extremely competitive
industry in which tanners operate on small profit margins. Primarily
because of the strong competition from non-impacted foreign tanners,
domestic tanners will have little success in passing on significant
price increases to recover costs specifically generated by new waste
management regulations. Also, since the percent of the required price
increase that can likely be passed on is relatively small, it is difficult
to measure with given historical data shortages and limited forecasting
techniques. Fortunately, most of the required price increases are small,
except for split tanneries, and represent a nominal portion of prices.
Split tanners face the highest relative impacts when considering required
price increases. This is the result of two factors. First, their waste
loads are high. Second and most important, they generally produce a lower
priced product. In this study, split leather was valued at less than 25tf
per square foot whereas chrome tan cattlehide leather was valued at 86<£
per square foot (approx. 1975 price levels). Thus, a 3.4 percent required
price increase represents only about $.008 per square foot in absolute
costs. The ability of the split tanners to pass this $.008 per square
foot on to consumers will depend on demand for their product, competition
from foreign leather and leather goods, sales effectiveness of tanners, and
competition from synthetics. These variables cannot be estimated but in
general it is believed that split tanners will be able to pass on less
than half of the costs which would increase the costs of splits less than
$.004 per square foot.
101
-------
B. Financial Effects
Based on model tannery profiles described in Chapter VI and the estimated
costs of waste management regulations provided by EPA, the following
financial indicators are computed under baseline (without costs of regu-
lations) and with costs of regulations:
1. After-tax income,
2. After-tax return on sales,
3. After-tax return on invested capital,
4. Cash flow,
5. Cash flow as a percent of invested capital,
6. Net present value.
The above are computed for each tannery model according to the discounted
cash flow (DCF) and return on investment (ROI) procedures outlined in
the methodology chapter, Chapter II. Furthermore, a sensitivity analysis
is performed for each model using hazardous waste management cost estima-
tes at levels of 80 and 120 percent of those provided by EPA.
The results of the model tannery analysis of the recommended pretreatment
standards are summarized in Tables 39, 40, and 41, for each tannery model.
The results are described below for each category of tannery models.
Cattlehide, Chrome
After-Tax Income. As shown in Table 39, the costs for hazardous waste
management for cattlehide, chrome tannery models results in major to moderate
reductions in the five models' income depending on size of operation.
Expressed as a percent of the baseline incomes, the costs of regulations
reduce after-tax incomes by 22 percent for the extra small model, 12
percent for the small model, 11 percent for the medium model, 12 percent
for the large model, and 7 percent for the extra large model.
Return on Sales. As would be expected with the above indicated declines
in after-tax incomes, the impacted models' returns on sales declined by
a corresponding percentage (Table 39). The impacted models' (extra
small through extra large) absolute declines of returns on sales range
from 0.7 percent for the extra small model to 0.3 percent or less for
the large and extra large models.
Return on Invested Capital. The baseline and impacted cattlehide, chrome
tannery models' returns on invested capital are also shown in Table 39.
The imposition of waste management regulations on these models result in
their ROI's being reduced in absolute percentages from 1.5 percent to 0.9
percent with reductions again decreasing as the size of model increases.
Cash Flow. Relevant information concerning the cattlehide, chrome tannery
models' cash flows are depicted in Table 40. As can be seen in the
table, the various models' cash flows are reduced, however, the reductions
are not as great as were incurred by the models' incomes. For the models,
the cash flows declined by as much as 12 percent for the extra small model
to as little as 5 percent for the extra large model.
102
-------
Table 39. Impacts of hazardous waste management regulations,
Leather Tanning and Finishing Industry
After-tax
Segment/Model Size
Cattlehide - Chrome
X-Small
Small
Medium
Large
X-Large
Baseline
Case
32
123
226
321
903
Income ($000)
% of Proposed Waste
Management Costs
802
26
no
204
290
848
100%
25
108
201
284
836
120%
25
106
197
278
824
After-tax Return on Sales (%)
Baseline
Case
4.3
4.2
3.4
2.9
4.1
*
80%
3.5
3.7
3.1
2.6
3.9
of Proposed
Management
100%
3.5
3.7
3.0
2.6
3.8
Waste
Costs
1202
3.4
3.6
3.0
2.5
3.8
After- tax Return on Investment Capital (
Baseline
Case
8.9
14.5
13.1
8.9
12.4
*
80%
7.2
12.9
11.8
8.0
11.7
of Proposed Waste
Management Costs
1002M 1202
7.1 7.0
12.7 12.5
11.6 11.4
7.8 7.7
11.5 11.3
Cattlehitie - Thru to Blue
Large 461 317 282 248
Cattlhide - Splits
Medium 65 34 28 22
Sheepskins
Small 27 24 23 23
Medium 54 45 44 44
Large 221 210 209 208
Shearlings
Small 89 81 81 80
Large 265 254 254 253
Leather Finishers
Small 5 555
Large 59 51 51 51
2.5
3.8
2.6
2.6
4.4
5.9
5.3
1.3
5.2
1.7
2.0
2.2
2.1
4.1
5.4
5.1
1.2
4.6
1.6
1.6
2.2
2.1
4.1
5.4
5.1
1.2
4.6
1.4
1.3
2.2
2.1
4.1
5.4
5.1
1.2
4.5
10.1
10.8
32.6
23.8
36.0
12.6
11.3
4.6
23.3
6.9
5.7
28.0
19.9
34.1
11.5
10.9
4.2
20.3
6.2
4.6
27.7
19.7
33.9
11.5
10.8
4.2
20.3
5.4
3.6
27.5
19.5
33,7
11.5
10.8
4.1
20.3
-------
Table 40. Impacts of hazardous waste management regulations on cash flows, Leather Tanning
and Finishing Industry
CASH FLOW ($000)
Segment/Model Size
Cattlehi de-Chrome
X-Smal 1
Small
Medi urn
Large
X-Large
Cattlehi de: Thru to
Large
Cattlehi de- Splits
Medium
Sheepskins
Small
Medi urn
Large .
Shearlings
Small
Large
Leather Finishers
Small
Large
Baseline
Case
^
49
187
357
508
1,276
Blue
647
95
38
75
272
134
414
14
76
% of
Proposed
Management
80%
43
174
336
477
1,221
503
64
34
66
260
126
404
13
68
100%
43
172
332
471
1,209
468
58
34
65
259
125
403
13
68
Waste
Costs
120%
42
171
329
465
1,197
434
52
34
65
258
125
402
13
68
CASH FLOW
AS % OF INVESTED CAP. (%)
% of Proposed Waste
Baseline
Case
13.9
22.1
20.7
14.0
17.6
14.2
15.9
45.1
33.1
44.2
19.0
17.7
11.9
30.0
Management Costs
80%
12.2
20.5
19.4
13.1
16.8
11.0
10.8
40.5
29.2
42.3
17.9
17.2
11.6
27.0
100%
12.0
20.3
19.2
13.0
16.6
10.2
9.8
40.2
29.0
42.1
17.9
17.2
11.5
27.0
120%
11.9
20.1
19.0
12.8
16.5
9.5
8.8
40.0
28.8
42.0
17.8
17.2
11.5
27.0
-------
Table 41. Impacts of hazardous waste management regulations on net present values, Leather
Tanning and Finishing Industry
Segment/Model Size
Cattlehi de-Chrome
X-Small
Small
Medium
Large
X-Large
Cattlehi de: Thru to Blue
Large
Cattlehide-Splits
Medium
Sheepskins
Small
Medium
Large
Shearlings
Small
Large
Leather Finishers
Smal 1
Large
Baseline
Case
199
788
1,682
1,687
5,820
3,514
283
222
441
2,107
826
2,613
39
427
NET PRESENT VALUES
($000)
% of Proposed Waste Management
80%
184
730
1,550
1,467
5,380
2,256
64
214
424
2.066
818
2,588
36
423
100%
181
715
1,517
1,412
5,270
1,941
10
212
420
2,056
816
2,582
36
422
Costs
120%
177
700
1,484
1,357
5,160
1,626
-45
210
416
2,046
814
2,576
35
420
-------
Cash flows as percents of invested capital decline from as much as 1.9
percentage points for the extra small to 1.0 percentage points for the
extra large tannery model.
Net Present Values. The net present values for the cattlehide, chrome
tannery models are" all positive in both the baseline case as well as after
incurring expenditures for hazardous waste management (Table 41). This
implies that it would be probable that model tanneries could remain in
operation after meeting the regulations and remain financially stable,
assuming all other factors are constant.
Cattlehides - Thru to the Blue Tanneries
As shown previously, there are a limited number of thru-to-blue tanneries,
three known. Furthermore, the operation of these plants has been sporadic
in recent years with plants closing down periodically due to supply
shortages, operational losses or changes of ownership. Therefore, the
impacts on the model plant for these operations must be viewed cautiously
as, at best, they only reveal general tendencies of impact levels for this
.highly fluctuating segment. With this in mind, the estimated impacts show
the possibility for significant declines in some financial parameters.
After-tax income, return on sales, and return on invested capital could
decrease by over 35 percent (Table 39). Cash flows are estimated
to be reduced by about 28 percent and cash flows as a percent of invested
capital will drop from 14.2 percent to 10.2 percent. The net present value ,
(Table 41) declines but is still positive even if costs are 40 percent i-igher
than estimated.. Thus those plants that are in operation should be able to
cover waste management costs.
Cattlehide Split Tanneries
Only one model cattlehide split tannery was developed. The imposition of
hazardous waste management costs on this model reduces its base case after-
tax income from $65,000 to $28,000 with a corresponding decrease in its
returns on sale (from 3.8 to 1.6 percent). This reduction affects the
models return on investment by decreasing from 10.8 percent in the base
case to 4.6 percent after the imposition of waste related costs (Table
39). These are the largest impacts incurred by any model plant as
split tanneries waste loads are the second highest of the industry and
they produce the lowest valued product.
As shown in Table 40, the cattlehide split tannery's cash flow is
reduced from $95,000 to $58,000 after hazardous waste management regula-
tions. This results in the cash flow expressed as a percent of invested
capital decreasing from 15.9 percent in the base case to 9.8 percent.
The models net present value remains positive after hazardous waste manage-
ment costs are incorporated into the model. However, the NPV does become
critically low, dropping from $283,000 to $10,000 and if costs are increased
20 and 40 percent the NPV ranges from.a negative $45,000 to a negative
$100,000. Thus, split tanners will be able to maintain minimum viability
on the average but depending on costs, specific plants could be finan-
cially theatened.
t
106
-------
Sheepskin Tanneries
Sheepskin tannery models were utilized to depict the no-beamhouse tannery
operations. The resultant impacts of hazardous waste management costs on
these models are generally low and are depicted below.
After-Tax Income. As shown in Table 39, the sheepskin tannery models'
incomes are reduced by $4,000, $10,000 and $12,000 for the small, medium
and large models, respectively. These reductions represent declines in
income of 15 percent for the small model and 19 and 5 percent for the
medium and large models, respectively.
Return on Sales. The sheepskin tanneries' returns are reduced from fairly
low levels in the base case to even lower levels. After hazardous waste
management, the small models return on sales is only 2.2 percent and the
medium models is 2.1 percent. The large models' return is reduced from
4.4 percent to 4.1 percent by the imposition of regulations (Table 39).
Return on Invested Capital. Table 39 also depicts the sheepskin models
return on invested capital both before and after hazardous waste management
costs. As shown in the table, the returns are reduced; however, the magni-
tudes of the reductions are not great and the impacted returns appear to
be relatively healthy with the past waste management returns being 27.7
and 19.7 percent for the small and medium models and 33.9 percent for the
large model.
Cash Flow. The cash flows of the sheepskin models are shown in Table 40.
In actual dollars, the imposition of hazardous waste management results in
reductions of $4,000 for the small model, $10,000 for the medium model,
and $13,000 for the large model. 'Compared to the respective amounts of
the models' original cash flows, these reductions represent reductions
of less than 14 percent of the models cash flows.
Cash flows expressed as a percent of total invested capital are reduced
from 45.1, 33.1 and 44.2 percent to 40.2, 29.0 and 42.1 percent for the
small, medium and large sheepskin tannery models, respectively.
Net Present Values. The net present values in the base case are all
positive with the small models' NPV being $222,000, the medium model
being $441,000 and the large models' NPV being $2,107,000. After
hazardous waste costs, the NPV are reduced to $212,000, $420,000, and
$2,056,000 respectively (Table 41).
Shearling Tanneries
The resultant model tanneries' impacts on shearling tanneries are also
generally low. For example, the small shearling tannery model will incur
a reduction of 9 percent> or $8,000 of its base case incomes by paying
costs to dispose in a secure landfill. This will result in a reduction
of the models return on sales from 5.9 percent to 5.4 percent and the
return on invested capital will decline from 12.6 percent to 11.5 percent
(Table 39). The small models' cash flow will decline by $9,000 to an
after control amount of $125,000 which will result in the cash flow as a
percent of invested capital decreasing from 19.0 percent in the base case
to 17.9 percent after impacts (Table 40). As shown in Table 41,
the models' NPV,will decline from $826,000 in the base case to $816,000
after incurring hazardous waste management costs.
107
-------
The large shearling tannery models' income will decline by 4 percent from
$265,000 to $254,000 when hazardous waste management regulations are met.
This will result in the models' return on sales to decrease from 5.3 to 5.1
percent and its return on invested capital to decrease from 11.3 to 10.8
percent (Table 39). The models' cash flow will decline by only $11,000
to an after controls amount of $403,000. This cash flow reduction will
correspond to a decrease in its cash flow expressed as a percent of in-
vested capital decreasing from 17.7 to 17.2 percent (Table 40). The
large shearling tannery models net present value before hazardous waste
expenditures, its NPV is reduced by 1 percent to $2,582,000.
C. Production Effects
The Leather Tanning and Finishing Industry can accurately be depicted as
having experienced a deteriorating phase until 1975 and 1976 at which time
total industry production increased for the first time in eight years. Prior
to 1975, industry production dropped substantially each year from a peak
physical, volume of 32.4 million cattlehide equivalents in 1967. The volume
in 1974 was less than 20 million cattlehide equivalents, or a decline of
38 percent from the peak year (1967).
Two major factors have contributed to the decline experienced by the
industry:
1. Increased international competition
2. Increased competition from synthetic leathers both in
terms of physical product and price.
During 1975, the tanning industry experienced a growth situation which
resulted in the industry's annual production to increase from less than
20 million cattlehide equivalents in 1974 to nearly 22 million by the end
of 1975. This growth situation was partially resultant of improvements
in the domestic tanners competitive environment as well as increased de-
mand by consumers for the natural look (i.e., leather).
Production of leather is dominated by the large and medium sized plants.
Thirty one percent of the tanneries are categorized as large (or extra-
large) and handle approximately 68 percent of the industry's volume. Twenty
one percent of the tanneries are categorized as medium and process an esti-
mated 19 percent of the volume. The remainder, about 50 percent, are small
or extra small operations which as an aggregate produce only 13 percent
of the total industry volume.
Plant Closures
According to the records of the Tanners' Council of America, 45 tanneries
have shut down or ceased operation between 1968 and 1975. The reasons for
these closures vary, however, some of the more important factors include:
108
-------
. increased iinternational competition
. increased strides in the production of synthetic leather
. higher per unit cost of production in some plants --
especially the smaller size
. lower per unit profit
. difficulty in meeting (physically and financially) occupational
safety requirements
. plants becoming physically worn out
. inadequate owner income
. present owner reaching retirement age
It is anticipated tanneries will continue to close in the future for the
same or at least similar reasons as those stated above. This must be
considered when estimating plant closures attributed to hazardous waste
management requirements.
As was discussed in Chapter II, Methodology, barring unusual circumstances,
most firms would cease operations if they could not adequately absorb
required costs. The most obvious measurement of a firm's ability to absorb
the costs is its ability to maintain a positive income after incurring
hazardous waste management expenditures.
If the situation arises where incomes are negative, some firms will remain
in operation as long as they can cover their variable costs (positive cash
flows). However, as they will eventually be required to meet their over-
head expenses, these firms cannot operate in this manner indefinitely.
The remaining situation that could arise is when firms maintain a positive
income and generate a net present value (NPV) of their cash flows at their
cost of capital which are positive. This indicates that these firms are
earning a return on their operation which exceeds their cost of capital.
If their NPV's are negative then the firms could liquidate, realizing salvage
value in cash, and reinvest in a more financially viable investment (one
which would earn at least their cost of capital).
With the above in mind, review of the model plants' impacts reveal that in
all situations, the models maintained positive profitability levels after
incurring the costs of hazardous waste management (Table 39). Further-
more, review of Table 40 reveals that all tannery models maintained
positive cash flows after meeting the proposed regulations.
Review of the models' net present values indicate that all models maintain
positive net present values. Thus for these tanneries with positive NPV's,
it can be expected that very few, if any, will close due to hazardous waste
management regulations.
109
-------
Production Loss
As discussed in the previous section, of the estimated 230 leather tanneries
and finishers that potentially could produce hazardous waste, it is not
anticipated that any will cease operation solely because of regulations of
concern. Accordingly, it is doubtful that the leather industry's total
production will be affected. This is particularly true since, during the
last two years, total domestic leather produced increased by 18 percent
or 3.5 million cattlehide equivalents annually. During this time, the
Tanners' Council of America reported additional closures. Thus it appears
the industry does have the capability to absorb the volume lost by those
operations ceasing operations within a reasonable range.
D. Employment and Community Effects
The estimated number of employees in the Leather Tanning and Finishing
Industry is estimated to be 26,000 in 1976, up from 23,000 in 1975. His-
torically, however, the number of employees has declined. In 1967, employ-
ment was approximately 31,000.
As there are no projected plant closures attributable solely to hazardous
waste management, it is anticipated there will be no loss of employment
resulting from the imposition of the regulation. Accordingly, it is
doubtful that communities will be affected either.
E. Balance of Trade Effects
The impacts of hazardous waste management are expected to result in little
or no effect on the United States' balance of trade. As discussed in pre-
vious sections, the Tanning Industry has historically been losing volume
to international competition. However, the majority of these losses are
attributable to trade restrictions and agreements and not so much due to
lack of competitive prices. Additionally, since domestic leather prices
are not expected to increase because of hazardous waste management, it is
doubtful that the competitiveness of the domestic tanners will be
affected and thus their ability to compete on the international market
will remain approximately the same.
110
-------
IX. LIMITS OF THE ANALYSIS
There is little published information regarding the structure, pricing
and economic data of the Leather Tanning and Finishing Industry. Much
of the descriptive data used in this report were originally compiled by
the Tanners' Council of America for inclusion in the previous EPA reports
concerning the Leather Industry and, at the time, were considered to be the
most complete and accurate source available. This information has been
updated for utilization in this report. Also, information from an industry
data collection portfolio provided additional input for the report. Never-
theless, much of the information required to develop this report still did
not exist in quantifiable form but was derived from personal discussions
with individuals knowledgeable of the industry. This chapter discusses
the general accuracy of the report and some of the key assumptions in-
volved.
A. General Accuracy
The data and other information used in this study were drawn from published
governmental reports, the industry trade association, an industry data
collection portfolio, and from extensive contacts with individual tanneries.
Information on the status of hazardous waste generation, recommended manage-
ment technologies and costs were furnished by EPA. Every effort was made
to verify the data and other information used.
Detailed data on size distribution by types of plants are not available.
Using industry size distributions from the Census of Manufactures, together
with information obtained from the Tanners Council, the technical contractors
and contacts, segmentation of size and type of plants were made for each
industry.
Financial information concerned with investments, operating costs and
returns was not available for individual plants or firms. As a result,
the financial aspects of the impact analysis were, of necessity, based
on synthesized costs and returns for "representative" types of model plants.
These costs and returns were developed from a variety of sources including
published research from universities and government agencies, information
obtained from the data collection portfolio and published financial per-
formance data.
Throughout the study, an effort was made to evaluate the data and other
information used and to update these materials wherever possible. Checks
were made with informed sources in both industry, government and universities
to help ensure that data and information used were as reliable and as repre-
sentative as possible. For example, construction costs, working capital
requirements, proportions of capital financed through debt and equity and
profitability ratios were checked with the appropriate persons in industry
firms who are experienced and knowledgeable in these matters. Efforts were
made to use the latest data available.
Ill
-------
Specifications of the contract require the Contractor to use waste manage-
ment costs provided by EPA. The Office of Solid Waste Hazardous Waste
Division, EPA, through its technical contractors, provided recommended
alternative disposal systems and annual operating costs which were adapted
to the types and sizes of "representative" model plants used in this analysis,
The recommended alternative primarily consisted of disposal in secure land-
fills, Pathway Level III technology. Level of waste generation by plant
type was taken from the EPA Assessment study and checked to the extent
possible by the Contractor.
Given the accuracy of the costs for disposal in secure landfills, it is
believed that the analysis represents a usefully accurate evaluton of the
economic impact of the proposed pretreatment guidelines.
B. Range of Error
Different data series and different sections of the analysis will have
different possible ranges of error.
Errors in Data - Estimated data error ranges as an average for the industry
are as follows:
Error Range
(Percent)
1. Information regarding the organization and
structure of the industry, number, location
and size of plants, and.other information
descriptive of industry segments +_ 10
2. Price information for products and raw
materials : +.15
3. Cost information for plant investments and
operating costs , • • +_ 15
4. Financial information concerning the industry +_ 10
5. Hazardous waste management costs +_ 30 to 40
112
-------
C. Critical Assumptions
In an economic impact analysis of most any industry, it is inevitable
that simplifying assumptions must be made to bring the problem into a
framework of analysis consistent with the constraints of time, budget
and data availability. The major critical assumptions used in this
analysis are as follows:
1. Types and sizes of the model plants are representative of plants
actually existing in the industry and of plants expected to be
built in the future.
2. It is assumed the financial data are representative of costs
and returns of existing plants or new plants to be constructed
after promulgation of proposed regulations. As stated earlier,
the model plant financial data are on a constant 1975 dollar
basis and can be adjusted at future times to reflect the future
economic activity.
3. Levels of profitability reflected in model plant profiles (based
primarily on the average of the period from 1970 to 1975 so as
to include years of high and low profits) will be the same in the
future.
4. It was assumed that the economic impacts of hazardous waste manage-
ment on those products not included in the detailed analysis of
"representative" plants could be evaluated in general terms
through associating them with those "representative"model plants
for which detailed analyses were made. This association was based
primarily on the fact that models were developed for a single
product plant which represented a majority of industry segment's
production. In most cases, there were actual plants producing
products in similar combinations to the model plants which was
the primary objective where possible.
5. Hazardous waste management costs and waste stream characteristic
estimates were supplied by the Office of Solid Waste, Hazardous
Waste Division, EPA. It is assumed that these data are realistic
in terms of:
(a) Applicability of disposal technology recommended.
(b) Annual operating costs for the technology.
113
-------
Selected References
1. Baker, Allen J., "Hides and Skins," Livestock Marketing:'.Situation,
Economic Research Service, USDA, Washington, D. Ci, November,
1971.
2. National Commission on Water Quality, Economic Impact of Water
Pollution Controls on Selected Food Industries, The Leather
Tanning Industry, November, 1975.
3. New England Tanners Club, "Leather Facts," Peabody, Mass., 1972.
4. Poats,Fred, "Cattle Hides and Shoe Prices." Marketing and Transpor-
tation Situation, Marketing Economic Division, USDA, Washington,
D.C., August, 1972. '
5. Poats, Frederick J. and Thompson, John W., "Alternative Markets for
Cattle Hide Trim," Marketing Economics Division, Economic
Research Service, USDA, Washington, D. C., February, 1965.
6. Robert Morris Associates, Annual Statement Studies, 1973-1977.
7. Tanners' Council of America, "Membership Bulletin Leather Industry
Statistics, 1955-1976," Trade Survey Bureau, Tanners' Council
of America, Inc., New York, N.Y., 1977
8. Thompson, John W., "Marketing Spreads for Leather Products," Marketing
and Transportation Situation, Marketing Economic Division,
Economic Research Service, USDA, Washington, D. C., February, 1965.
9. Thompson, John W., and Poats, Frederick J., "Economics of Segmenting
Cattle Hides," Marketing Economics Division, Economic Research
Service, USDA, Washington, D. C., 1965.
10. Troy, Leo, Almanac of Business and Industrial Financial Ratios, 1976.
11. United Nations/Industrial Development Organization Vienna, "Marketing
and Export Possibilities for Leather and Leather Products Manu-
factured in Developing Countries," United Nations, New York,
New York, 1972.
12. United Nations/CTAD, "The Kennedy Round Estimated Effects on Tariff
Barriers," United Nations, New York, 1968.
13. United Nations/CTAD, "Leather .and Leather Products," United Nations,
New York, N.Y., 1971.
------- |