United States
Environmental Protection
Agency
Office of Water
Regulations and Standards
Washington DC 20460
EPA 440/2-84-002
January 1984
Water and Waste Management
Economic Impact Analysis
of Effluent Limitations and
Standards for the Battery
Manufacturing Industry
QUANTITY
-------
ECONOMIC IMPACT ANALYSIS
OF
EFFLUENT STANDARDS AND LIMITATIONS
FOR THE BATTERY MANUFACTURING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
401 M Street, Southwest
Washington, D.C. 20460
Submitted by:
JRB Associates
A Company of Science Applications Inc.
8400 Westpark Drive
McLean, Virginia 22102
February 1984
-------
This project has been funded with Federal funds from
the U.S. Environmental Protection Agency under contract
number 68-01-6348. The content of this report does not
necessarily reflect the views or policies of the U.S.
Environmental Protection Agency, nor does mention of
trade names, commercial products, or organizations
imply endorsement by the U.S. Government.
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Chapter
SUMMARY
1
TABLE OF CONTENTS
Title
INTRODUCTION
1.1 PURPOSE
1.2 INDUSTRY COVERAGE
1.3 INDUSTRY SEGMENTATION
1.4 ORGANIZATION OF REPORT
STUDY METHODOLOGY
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
OVERVIEW
STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
STEP 2: SUPPLY-DEMAND ANALYSIS
2.3.1 Basic Assumptions
2.3.2 Market Structure Conditions
2.3.3 Projections of Industry Conditions
2.3.4 Data Sources and Limitations
STEP 3: COST OF COMPLIANCE ESTIMATES
STEP 4: PLANT-LEVEL SCREENING ANALYSIS
STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS
2.6.1 Return on Investment (ROI) Analysis
2.6.2 Discounted Cash Flow Analysis
2.6.3 Data Sources and Assumptions
STEP 6: CAPITAL REOUIREMENTS ANALYSIS
STEP 7: PLANT CLOSURE ANALYSIS
STEP 8: ASSESSMENT OF OTHER IMPACTS
STEP 9: SMALL BUSINESS ANALYSIS
STEP 10: ASSESSMENT OF NEW SOURCE IMPACTS
LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
INDUSTRY DESCRIPTION
3.1
3.2
3.3
3.4
MARKET
4.1
4.2
OVERVIEW
FIRM CHARACTERISTICS
FINANCIAL STATUS OF COMPANIES
PLANT CHARACTERISTICS
3.4.1 Storage Batteries
3.4.2 Primary Batteries
STRUCTURE
OVERVIEW
END-USE MARKETS AND SUBSTITUTES
4.2.1 Cadmium Anode Batteries
4.2.2 Calcium Anode Batteries
4.2.3 Lead Anode Batteries
4.2.4 Leclanche (Carbon-Zinc) Cells
4.2.5 Lithium Anode Batteries
4.2.6 Magnesium Anode Batteries
4.2.7 Zinc Anode Batteries
4.2.8 Miscellaneous Battery Types
S-l
1-1
1-1
1-1
1-2
1-5
2-1
2-1
2-3
2-4
2-5
2-7
2-9
2-10
2-10
2-11
2-11
2-11
2-13
2-15
2-16
2-18
2-19
2-20
2-21
2-22
3-1
3-1
3-1
3-5
3-7
3-7
3-12
4-1
4-1
4-3
4-8
4-9
4-10
4-12
4-12
4-12
4-14
4-16
-------
TABLE OF CONTENTS (Continued)
Chapter Title Page
4.3 CONSUMPTION AND PRICE TRENDS 4~18
4.4 IMPORTS AND EXPORTS ^-20
4.5 UNIT VALUE OF BATTERY PRODUCTS ^"21
4.6 BATTERY INDUSTRY PRICE DETERMINATION ^~2^
5 BASELINE PROJECTIONS OF INDUSTRY CONDITIONS 5-1
5.1 DEMAND-RELATED FACTORS 5-2
5.1.1 Time Series Analysis 5-2
5.1.2 Regression Analysis 5-5
5.1.3 Summary of Forecasts 5-8
5.2 SUPPLY FACTORS 5-11
5.2.1 Employment 5-11
5.2.2 Number of Industry Establishments 5-12
in 1990
5.2.3 New Battery Plants 5-15
5.2.4 Prices 5-16
5.2.5 Profitability 5-16
5.3 SUMMARY OF BASELINE CONDITIONS 5-16
6 COST OF COMPLIANCE 6-1
6.1 OVERVIEW 6-1
6.2 COST ESTIMATION METHODOLOGY 6-2
6.3 COST FACTORS, ADJUSTMENTS, AND ASSUMPTIONS 6-2
6.4 POLLUTANT PARAMETERS 6-3
6.5 CONTROL AND TREATMENT TECHNOLOGY FOR EXISTING 6-5
AND NEW SOURCE DISCHARGERS
6.6 INDUSTRY COMPLIANCE COSTS 6-6
7 ECONOMIC IMPACT ASSESSMENT 7-1
7.1 PRICE AND QUANTITY CHANGES 7-1
7.2 MAGNITUDE OF PLANT-SPECIFIC COMPLIANCE COSTS 7-3
7.3 SCREENING ANALYSIS 7-3
7.4 PLANT-LEVEL PROFITABILITY ANALYSIS 7-6
7.5 CAPITAL REQUIREMENTS ANALYSIS 7-9
7.6 PLANT CLOSURE POTENTIAL 7-11
7.7 OTHER IMPACTS 7-19
7.7.1 Employment, Community, and Regional Effects 7-19
7.7.2 Foreign Trade Impacts 7-19
7.7.3 Industry Structure Effects 7-19
7.8 NEW SOURCE IMPACTS 7-22
7.8.1 New Source Compliance Costs 7-22
7.8.2 Economic Impacts on New Sources 7-25
7.8.3 Total New Source Compliance Costs 7-26
8 REGULATORY FLEXIBILITY ANALYSIS g-1
8.1 INTRODUCTION 8-1
11
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TABLE OF CONTEND (Continued)
Chapter Title
8.2 ANALYTICAL APPROACH
8.2.1 Overview
8.2.2 Definition of Small Entities
8.3 BASELINE CONDITIONS
8.4 COMPLIANCE COSTS
8.5 ECONOMIC IMPACTS ON SMALL ENTITIES
8.6 POTENTIAL EFFECTS OF SPECIAL CONSIDERATIONS
FOR SMALL ENTITIES
9 LIMITATIONS OF THE ANALYSIS
9.1 DATA LIMITATIONS
9.2 METHODOLOGY LIMITATIONS
9.2.1 Price Increase Assumptions
9.2.2 Profit Impact Assumptions
9.2.3 Capital Availability Assumptions
9.2.4 Establishment Definitions
9.2.5 OSHA Requirements
9.3 SUMMARY OF LIMITATIONS
APPENDIX A: PROFITABILITY ANALYSIS METHODOLOGY
APPENDIX B: COMBINED IMPACTS OF OSHA 150 AND 50 yg/m3 PELS
9-1
9-1
9-2
9-3
9-3
9-4
9-4
9-4
9-5
A-l
B-l
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LIST OF TABLES
Table Title gage
1-1 RELATIONSHIP OF TECHNICAL INDUSTRY SUBCATEGORIES 1~3
TO ECONOMIC INDUSTRY SEGMENTS
3-1 CONCENTRATION RATIOS OF BATTERY MANUFACTURING 3~3
INDUSTRY
3-2 FINANCIAL CHARACTERISTICS OF SELECTED BATTERY 3~6
MANUFACTURERS
3-3 NUMBER OF FIRMS AND PRODUCTION FACILITIES MANU- 3-8
FACTORING BATTERIES IN EACH PRODUCT GROUP
3-4 DISTRIBUTION OF BATTERY MANUFACTURING ESTABLISH- 3-9
MENTS BY EMPLOYMENT SIZE, 1977
3-5 GEOGRAPHIC DISTRIBUTION OF BATTERY PLANTS 3-10
3-6 COMPARISON OF SINGLE- AND MULTIPRODUCT NON-LEAD- 3-13
ACID BATTERY PLANTS
4-1 VALUE OF BATTERY SHIPMENTS BY END-USE MARKET, 1967-1977 4-2
4-2 MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE 4-4
ELASTICITIES FOR BATTERY SUBCATEGORIES
4-3 PRIMARY BATTERY PRODUCTION, 1973-1977 4-17
4-4 HISTORICAL TRENDS IN THE BATTERY INDUSTRY 4-19
4-5 BATTERY INDUSTRY IMPORTS AND EXPORTS, 1967-1977 4-23
4-6 AVERAGE VALUE PER POUND OF PRODUCTION 4-25
5-1 ANNUAL GROWTH RATES FOR REAL STORAGE AND PRIMARY 5-3
BATTERIES SHIPMENTS
5-2 SUMMARY OF REGRESSION MODEL RESULTS 5-7
5-3 BASELINE DEMAND PROJECTIONS FOR THE BATTERY 5-9
PRODUCT SEGMENTS
5-4 SUMMARY OF BASELINE PROJECTIONS 5-17
6-1 COST PROGRAM POLLUTANT PARAMETERS 6-4
6-2 BATTERY INDUSTRY TOTAL COMPLIANCE COSTS FOR EXISTING 6-7
SOURCES
6-3 BATTERY INDUSTRY COMPLIANCE COSTS FOR EXISTING 6-9
SOURCES AT SELECTED OPTIONS
iv
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LIST OF TABLES (Continued)
Table Title Page
7-1 ESTIMATED PRICE AND PRODUCTION CHANGES 7-2
7-2 DISTRIBUTION OF PLANTS BY ANNUAL COMPLIANCE COST 7-4
TO REVENUES RATIOS
7-3 DISTRIBUTION OF PLANTS BY ESTIMATED CHANGE IN 7-5
RETURN ON SALES
7-4 POSTCOMPLIANCE RETURNS ON INVESTMENT (ROIs) 7-7
7-5 POSTCOMPLIANCE INTERNAL RATES OF RETURNS (iRRs) 7-8
7-6 COMPLIANCE CAPITAL COSTS RELATIVE TO FIXED ASSETS 7-10
AND ANNUAL CAPITAL EXPENDITURES
7-7 SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT 7-12
CLOSURES DUE TO THE REGULATION
7-8 SUMMARY OF POTENTIAL PLANT CLOSURES BEFORE 7-18
CONSIDERATION OF BASELINE CLOSURES
7-9 SUMMARY OF POTENTIAL EMPLOYMENT IMPACTS 7-20
7-10 SELECTED REGULATORY ALTERNATIVES AND INCREMENTAL 7-23
COMPLIANCE COSTS FOR NEW SOURCES IN BATTERY
MANUFACTURING INDUSTRY AND SUBCATEGORY AVERAGES
8-1 COMPLIANCE COSTS OF LEAD-ACID BATTERY MANUFACTURING 8-4
FACILITIES BY SIZE OF FACILITY
8-2 COMPLIANCE COSTS OF NON-LEAD-ACID BATTERY MANU- 8-5
FACTORING FACILITIES BY SIZE OF FACILITY
-------
LIST OF FIGURES
Figure Title Page
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
4-1 VALUE OF BATTERY IMPORTS AND EXPORTS, 1967-1981 4-22
VI
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SUMMARY
PURPOSE
This report identifies and analyzes the economic impacts of water pollu-
tion control regulations on the battery manufacturing industry. These regula-
tions include effluent limitations and standards based on BPT (best practical
control technology currently available), BAT (best available technology eco-
nomically achievable), PSES (pretreatment standards existing sources), NSPS
(new source performance standards), and PSNS (pretreatment standards new
sources), that have been promulgated under authority of Sections 301, 304, 306,
307, 308, and 501 of the Federal Water Pollution Control Act, as Amended (the
Clean Water Act). The primary economic impact variables of interest include
price changes, plant closures, substitution effects, changes in employment,
shifts in the balance of foreign trade, changes in industry profitability,
structure, and competition, and impacts on small business.
INDUSTRY COVERAGE
Batteries store electrical energy through the use of one or more electro-
chemical cells in which chemical energy is converted to electrical current. A
typical battery cell consists of two dissimilar materials (called cathodes and
anodes) immersed in an electrolyte (a substance which in solution is capable of
conducting an electric current). When the metal electrodes are connected to an
electric circuit, current flows.
There are at least two dozen battery types, as defined by their basic
electrolyte couple type, and many variations of each, depending on battery
structure, variations in chemistry, and production methods. Sixteen of these
battery types represent at least 98 percent of the volume of shipments of bat-
teries in the U.S. For purposes of this study, the battery industry consists
S-l
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of establishments that manufacture these 16 types of batteries. A list of
these appears in Table S-l. The remaining battery types were omitted from
detailed analysis in this study because they are no longer in production, are
of little commercial significance, or are experimental (e.g., nickel-zinc and
fuel cells).
The companion technical study categorized the industry according to the
basic anode material used and, to some extent, according to whether the electro-
lyte was acid or alkaline. The basic groupings are: cadmium, calcium, lead,
l_eclanche, zinc, lithium, and magnesium. Table S-l shows the relationship
between the technical and economic industry classification schemes.
STUDY APPROACH
The basic approach used to assess the economic impacts likely to occur as
a result of the costs of each regulatory alternative was to develop a model of
the operational characteristics of the industry and to use the model to compare
industry conditions before and after compliance with the regulations. Supple-
mentary analyses were used to assess linkages of industry conditions to other
effects such as employment, community, and foreign trade impacts. For the
lead-acid, zinc, and cadmium battery industry segments there are five alterna-
tive regulatory options considered in the economic study; each option represents
increasing levels of compliance costs and, generally, pollution abatement. For
the other industry segments three regulatory options were considered. Specifi-
cally, the study proceeded in the following steps:
Step 1: Description of Industry Characteristics
The first step in the analysis is to develop a description of the basic indus-
try characteristics. The characteristics of interest are those that would enable
estimation of key parameters which describe the initial impacts of the regulations
These include the determinants of demand (e.g., demand elasticities), market
structure, the degree of intraindustry competition, and financial performance.
These basic characteristics are described in Chapters 3, 4, and 5 of the report.
S-2
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TABLE S-l. RELATIONSHIP OF TECHNICAL INDUSTRY
SUBCATEGORIES TO ECONOMIC INDUSTRY SEGMENTS
BATTERY PRODUCT GROUPS
Mercury-Cadmium
Nickel-Cadmium
Silver Oxide-Cadmium
Calcium
Lead Acid
Carbon Zinc and
Related Types
Lithium
Magnesium Carbon
Magnesium Reserve
Thermal
Alkaline Manganese
Carbon Zinc-Air
Mercury-Ruben
Mercury Cadmium-Zinc
Nickel-Zinc
Silver Oxide-Zinc
TECHNICAL SUBCATEGORY
Cadmium Anode
Calcium1
Lead
Leclanche
o
Lithium Anode^
Magnesium Anode^
Zinc Anode, Alkaline Electrolyte
-'•Includes magnesium, lithium, calcium anode, and other thermal batteries.
^Does not include thermal.
S-3
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Step 2: Industry Supply and Demand Analysis
The second step in the analysis is a determination of likely changes in
market prices and industry production levels for each battery product group and
for each regulatory option. The price/output model assumes that to the extent
industry structure and market strength will allow, firms will adjust price and
output levels to maintain precompliance return on investment. Some firms will
be able to pass all of their compliance costs on to their customers in the form
of higher prices, while other firms will have to absorb all or part of their
compliance costs in the form of reduced profit margins. The estimates of post-
compliance price and output levels are used in the plant level analyses (Steps
4, 5, 6, and 7) to determine postcompliance revenue and profit levels for
specific plants in each product group.
Step 3; Analysis of Cost of Compliance
Investment and annual compliance costs for 233 production facilities (includes
64 zero dischargers) were estimated in a separate study by EPA's Effluent
Guidelines Division. For three technical subcategories (lead, zinc, and cadmium)
there are five sets of costs, corresponding to increasing levels of pollution
control. For the remaining subcategories four options were considered. For
purposes of this report, the regulatory options are labeled "Level 0," "Level 1,"
"Level 2," etc. A description of the control and treatment technologies and
the rationale behind these compliance cost estimates appear in Chapter 6.
Step 4; Screening Analysis
The screening analysis uses a basic profit/operational parameter to separate
those plants with obviously small impacts from those with potentially significant
impacts. The primary variable is the degree of gross profit margin reduction
(change in return on sales). In general, if return on sales (ROS) falls by
less than 1 percent, these plants are not considered candidates for closure.
Plants with greater reductions in profits were subjected to a more detailed
financial analysis to determine if they are likely plant closures.
S-4
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Step 5: Plant Level Profitability Analysis
Two basic measures of profitability are used so that one may serve as a
check on the other—return on investment (ROI) and internal rate of return
(IRR). Plants with after-compliance ROI below a threshold value of 6 percent
and/or with after-compliance IRR below 13 percent are considered likely plant
closures. The baseline ROI is 12 percent and the baseline IRR is 23 percent.
The use of these approaches is hampered by a lack of plant-specific data on a
number of input variables such as value of shipments, profit margins, asset
values, and cash flow. However, using industrywide parameters obtained from
various published sources and companywide data from corporate annual reports,
representative values are developed for each of the key parameters (e.g.,
return on investment) and applied to the specific plants.
Step 6: Plant-Level Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a profit-
ability perspective, it is also necessary to assess the ability of firms to
make the initial capital investment needed to construct and install the required
treatment systems. Capital requirements of the regulation are evaluated in
terms of the amount of the initial compliance capital investment in relation
to normal annual plant and equipment expenditures and in relation to plant
fixed assets. Although these ratios indicate the magnitude of the investment
burden, no single critical value is used for these measures.
Step 7: Assessment of Plant Closure Potential
The seventh step involves the assessment of the degree of impacts on indi-
vidual plants. These assessments were made by evaluating the above-mentioned
financial variables in conjunction with nonfinancial factors and nonquantifiable
factors, such as substitutability of products, plant and firm integration, the
existence of specialty markets, and expected market growth rates.
S-5
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Step 8: Assessment of Other Impacts
"Other impacts" which result from the basic plant closure, price, and
quantity changes include impacts on employment, industry structure, the special
case of small entities, and imports and exports. These impacts are assessed
through the use of industrywide and firmwide ratios calculated from public
data sources (e.g., value of shipments per employee) and other supplementary
analyses that are described where the results are reported in the appropriate
sections of the report.
Step 9: Small Business Analysis
The Regulatory Flexibility Act requires Federal regulatory agencies
to consider small entities throughout the regulatory process. This analysis
addresses these objectives by identifying and evaluating the economic impacts
that are likely to result from the promulgation of BPT, BCT, BAT, NSPS, PSES,
and PSNS regulations on small business in the battery manufacturing industry.
Most of the information and analytical techniques in the small business analysis
are drawn from the general economic impact analysis which is described above
and in the remainder of this report. The specific conditions of small firms
are evaluated against the background of general conditions in battery markets.
Step 10: Estimation of New Source Impacts
Newly constructed facilities and facilities that are substantially modified
are required to meet the new source performance standards (NSPS) and/or the
pretreatment standards for new sources (PSNS).
The costs of the selected new source standard are defined as those that
are incremental over those for existing standards. These costs are estimated
for the period 1980 to 1990 under the assumption that all of the increases in
capacity during that period will be subject to new source standards. The
assessment of economic impacts on new sources is based upon a comparison of
the foregoing cost estimates and by analogy of the impact conclusions for similar
S-6
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existing sources described above. The primary variables covered are identical
to those for existing plants plus the potential of the regulation for fostering
barriers to entry or causing intraindustry shifts in competitiveness.
Limitations
In performing these analyses a number of assumptions, empirical estimates,
and judgments were made. These factors are discussed in detail in various
appropriate sections of the report. The major limitations arise from a lack of
extensive time series data on industry characteristics and plant and firm-level
data on product mix, value of shipments, financial performance, employment, and
cyclical behavior. All assumptions and judgments were made in a very conserva-
tive manner. That is, if there is any bias in the analysis, it is to overesti-
mate the economic impacts of the regulatory options.
OVERVIEW OF INDUSTRY CHARACTERISTICS
The 1977 domestic production of both primary and secondary batteries
amounted to $2.6 billion. Seventy-five percent of this amount represented
storage batteries used in a multitude of products and applications.
The storage battery market is dominated by the lead-acid and nickel-cadmium
types. The lead-acid battery accounts for 90 to 95 percent of storage batteries.
About 82 to 86 percent of lead-acid batteries are used for starting, lighting,
and ignition (SLl) applications, primarily for the automobile market. The
other 14 to 18 percent goes to the industrial and consumer market. Nickel-
cadmium batteries are used in a wide variety of consumer and industrial products.
There are two basic types of nickel-cadmium batteries—vented and sealed.
Vented nickel-cadmium batteries are large heavy products used primarily for
aircraft engines. Sealed nickel-cadmium batteries are smaller and portable.
They are used to power a variety of products such as calculators, portable
tools, toys, and emergency lights.
11977 Census of Manufactures; the figure for 1980 is $3.5 billion.
S-7
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Most primary batteries are used in consumer products such as flashlights,
toys, games, watches, calculators, hearing aids, and electronic equipment.
Sales of primary batteries for use in consumer products generally represent 70
to 75 percent of total primary battery shipments.
The EPA data base used in the economic impact analysis identified 170
firms and 240 battery "production facilities." A production facility, in this
context, is defined differently than that of "establishment" used by the Census
of Manufacturers. A production facility is a specific battery product line as
defined by cathodeanode pair. The primary data base upon which the plant-by-
plant impact analysis is based is the 240 production facilities identified by
EPA (referred to as "plants" in this report).
The firms are heterogeneous, consisting of large diversified firms, large
firms that specialize in battery manufacturing, and small independent one-plant
firms. The majority of establishments are owned by small, private companies
that deal primarily in one particular aspect of the battery market. The
production of primary batteries is highly concentrated and that of storage
batteries is less concentrated, but still considerable.
The financial characteristics of specific battery operations were difficult
to determine because of the lack of detailed plant-level data. However it is
estimated that the industry is generally financially sound and growing at a
rate slightly above that of the real GNP over the long run.
FINDINGS
The key findings reported are investment and annual costs, economic impacts
and the impacts on small entities.
Compliance Cost
Table S-2 shows the estimated investment and total annual compliance cost
in 1983 dollars by technical subcategory for the selected regulatory alternatives
S-8
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TABLE S-2. BATTERY INDUSTRY COMPLIANCE COSTS
FOR EXISTING SOURCES AT SELECTED OPTIONS
(1983 Dollars)
SUBCATEGORY
Cadmium
Direct
Indirect
Subtotal
Calcium
Direct
Indirect
Subtotal
Lead
Direct
Indirect
Subtotal
Leclanche
Direct
Indirect
Subtotal
Lithium
Direct
Indirect
Subtotal
Magnesium
Direct
Indirect
•Subtotal
Zinc
Direct
Indirect
Subtotal
Total
Direct
Indirect
Subtotal
SELECTED
LEVEL
Level 1
Level 1
None
None
Level 1
Level 1
None
Level 0
None
None
None
a
Level 1
Level 1
CAPITAL
COST
179,233
464,703
643,936
0
0
0
818,501
7,113,711
7,932,212
0
62,554
62,554
0
0
0
0
54,562
54,562
131,419
506,127
637,546
1,129,153
8,201,657
9,330,810
ANNUAL
COST
54,861
159,410
214,271
0
0
0
509,777
4,068,506
4,578,283
0
31,540
31,540
0
0
0
0
29,545
29,545
34,920
146,288
181,208
599,558
4,435,289
5,034,847
aThe selected option is a combination of Level 2 and Level 0,
SOURCE: Table S-3.
S-9
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Descriptions of the technical characteristics of these options appear in
Chapter 6 of this report and in the Development Document. The regulations
would add $5.0 million to the annual costs of battery manufacturing. This
represents 0.22 percent of the value of shipments of plants incurring costs.
Associated investment costs would be $9.3 million, representing 1.6 percent
of fixed assets of plants incurring costs. Table S-3 shows the compliance
costs for the other regulatory options that were considered but not selected.
Industry Impacts
The economic impacts expected to result from these compliance costs are
generally mild. The primary variables of interest are summarized in Table S-4.
The mild economic impacts result from the fact that compliance costs as a per-
cent of revenues are generally small (less than 1 percent) and the demand
for battery products is not very sensitive to changes in relative prices.
In general, the market factors for these products are strong, so that
the bulk of the impacts will result from the intraindustry distribution of
compliance costs and the subsequent change in the competitiveness among the
various plants. All plants are estimated to have a low potential for closure
at the selected option, since their profitability measures are adequate and
their capital investment requirements relative to fixed assets and annual
capital expenditures are not prohibitive. Estimated regulation-induced
changes in prices, output, and profit margin are all less than 1 percent and
there are no employment, industry structure, or foreign trade impacts due to
the regulation. Under the Level-4 scenario which is not being promulgated
two nickel-cadmium plants and four lead-acid plants are estimated to be likely
closures. Although the nickel-cadmium plants are small, they account for a
noticeable market share in certain product lines (i.e., sealed nickel-cadmium
batteries), and the loss of their combined capacity would increase concentration
and, possibly, alter the pricing behavior of sealed nickel-cadmium batteries.
The lead plants are small relative to market size.
S-10
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TABLE S-3. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS EXISTING SOURCES
(1983 Dollars)
SUBCATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Calcium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lead
Direct Dischargers
Indirect Dischargers
Subcategory Total
Leclanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lithium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Magnesium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
TOTAL INDUSTRY
Direct Dischargers
Indirect Dischargers
Industry Total
LEVEL 0
CAPITAL ANNUAL
COST $ COST $
88,289 33,675
481,931 110,413
570,220 144,088
a a
6,442 4,850
6,442 4,850
762,761 485,756
6,914,867 3,962,238
7,677,628 4,447,994
NA NA
62,554 31,540
62,554 31,540
00 721
0 8,877
0 9,598
30,526 11,876
41,277 21,274
71,803 33,150
73,429 26,600
377,372 128,835
450,801 155,435
955,005 558,628
7,884,443 4,268,027
8,839,448 4,826,655
LEVEL 1
CAPITAL ANNUAL
COST $ COST $
179,233 54,861
464,703 159,410
643,936 214,271
a a
6,442 4,850
6,442 4,850
818,501 509,777
7,113,711 4,068,506
7,932,212 4,578,283
NA NA
62,554 31,540
62,554 31,540
0 721
0 8,877
0 9,598
0 20,776
54,562 29,545
54,562 50,321
131,419 34,920
506,127 146,288
637,546 181,208
1,129,153 621,055
8,208,099 4,449,016
9,337,252 5,070,071
LEVEL 2
CAPITAL ANNUAL
COST $ COST $
214,229 70,920
607,718 204,882
821,947 275,802
a a
6,442 4,850
6,422 4,850
968,117 580,628
8,382,220 4,718,750
9,350,337 5,299,378
NA NA
62,554 31,540
62,554 31,540
0 721
0 8,877
0 9,598
0 20,776
54,562 29,545
54,562 50,321
149,148 55,753
592,211 232,590
741,359 288,343
1,331,494 728,798
9,705,707 5,231,034
11,037,181 5,959,832
LEVEL 3
CAPITAL ANNUAL
COST $ COST $
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
890,668 690,947
7,711,642 5,615,313
8,602,310 6,306,260
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
149,148 55,753
592,211 232,590
741,359 288,343
1,039,816 746,700
8,303,853 5,847,903
9,343,669 6,594,603
LEVEL 4
CAPITAL ANNUAL
COST $ COST $
911,463 195,119
2,192,308 716,501
3,103,771 911,620
NA NA
NA NA
NA NA
1,457,984 870,594
12,623,623 7,075,294
14,081,607 7,945,888
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
159,181 80,579
799,185 368,307
958,366 448,886
2,528,628 1,146,292
15,615,116 8,160,102
18,143,744 9,306,394
aNo direct dischargers reported.
NA - Not applicable.
SOURCE: EPA.
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TABLE S-4. BATTERY INDUSTRY SUMMARY OF IMPACTS FOR SELECTED OPTION
IMPACT MEASURE
Investment Compliance Cost
(thousands of 1983 $)
Annual Compliance Cost
(thousands of 1983 $)
Annual Compliance Cost/Revenues
for Plant Incurring Costs (%)a
Price Change (%)
Production Change (%)
Plant Closures
Other Impacts
IMPACT
9,330.8
5,034.8
0.22
0.21
0.06
0
0
a!76 plants incur costs.
SOURCE: Chapter 7.
S-12
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Table S-5 summarizes plant closure potential by regulatory option before
consideration of any baseline plant closures (i.e., plants that might close,
even without the regulation). As described in Chapter 5, baseline closures
are projected to include around 20 to 33 small lead-acid plants between 1977
and 1990. Consequently, it is possible that the lead-acid plants would close
even without the regulation. However, it is difficult to determine, from the
data, whether or not the baseline closures would be the same lead-acid
establishments that are listed in Table S-5 as having a high potential for
closure under Level 4.
Impacts on Small Entities
i'he regulations will have a greater impact on the profitabilities of
small plants than they will on that of larger ones. This is primarily because
of economies of scale in the water pollution control technologies. Because
of these economies of scale, the average unit compliance cost for small
plants is greater than that for larger ones. However, these costs will cause
no plant closures at the selected options and six plant closures at Level 4.
The effect of the OSHA Lead Standards on these conclusions are assessed in
Appendix B of this report. Specifically, it is concluded that the OSHA
standards will not alter the conclusion that the impacts of the effluent
guidelines are mild.
All 6 projected plants expected to close as a result of the Level 4 tech-
nology are small. Two of the 6 (the nickel-cadmium plants) belong to large
corporations. The other 4 are small independent lead-acid plants. A regula-
tory flexibility analysis appears in Chapter 8 and provides a description of
the impacts on small entities.
Industry Structure Effects
Since there will be no plant closures at the selected option, there will
be no immediate readily observed industry structure effects. However, the
S-13
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TABLE S-5. SUMMARY OF POTENTIAL PLANT CLOSURES
BEFORE CONSIDERATION OF BASELINE CLOSURES
BATTERY
PRODUCT GROUP
Lead-Acid
Nickel-Cadmium
Other
Total
NUMBER OF REGULATORY NUMBER OF
PRODUCTION FACILITIES OPTION3 PROBABLE CLOSURES
167
9
64
240
Levels 0-3
Level 4
Level 4
All Levels
Level 4
0
4
2
0
6
aThere are no closures estimated for levels 0 through 3.
SOURCE: Table 7-7.
S-14
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compliance cost per unit is larger for smaller plants than for larger plants.
Moreover, there is a trend in the industry toward increasing industry concen-
tration and closing of small plants. The combined effects of these develop-
ments will be a deterioration in the competitive position of small plants
relative to large plants. The deterioration of the relative competitiveness
of small plants is especially noteworthy in the lead-acid product group. The
increase in industry concentration is not likely to affect the price-determin-
ing behavior of the industry, since the market position of the 8 largest lead-
acid battery firms relative to each other will not change significantly.
General Impacts
As summarized in Table S-4, the estimated impacts of the selected options
on prices, production levels, and foreign trade are small. The projected 6
plant closures under Level 4 involve between 250 and 400 jobs. However, these
numbers are small relative to the size of the communities in which the plants
are located; hence, there will be no significant community impacts. Because
industry output is expected to grow approximately 3 to 5 percent annually,
quantity reductions of fractions of a percent will not be noticeable.
New Source Impacts
Newly constructed facilities and facilities that are substantially modi-
fied are required to meet the new source performance standards (NSPS) and/or
the pretreatment standards for new sources (PSNS). EPA considered three or
more regulatory alternatives for selection of NSPS and PSNS technologies.
The considered options are equivalent to those discussed for existing sources
and are described in Chapters 6 and 7 and in the Development Document.
The cost of the new source standards are defined as those that are incre-
mental over those for existing standards. New source investment costs are
estimated to average 0.14 percent of plant assets and new source annual costs
S-15
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are estimated to be 0.04 percent of revenues of new sources. The new source
selected option cost will total $0.7 million in annual costs and $1.2 million
in investment costs to 1990. As reported in Chapter 7, these costs are not
enough to cause significant barriers to the construction of new plants, nor
are they likely to cause plant closures or job losses.
S-16
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1. INTRODUCTION
1.L PURPOSE
This report identifies and analyzes the economic impacts of water pollu-
tion control regulations on the battery manufacturing industry. These regula-
tions include effluent limitations and standards based on BPT (best practical
control technology currently available), BAT (best available technology
economically achievable), NSPS (new source performance standards), and PSES
and PSNS (pretreatment standards for existing sources and new sources) that
are being promulgated under authority of Sections 301, 304, 306, 307, 308, and
501 of the Federal Water Pollution Control Act, as Amended (the Clean Water
Act). The primary economic impact variables addressed in the analysis are
price changes, plant closures, substitution effects, changes in employment,
shifts in the balance of foreign trade, changes in industry profitability,
structure, competition, and impacts on small business.
1.2 INDUSTRY COVERAGE
Batteries store electrical energy through the use of one or more electro-
chemical cells in which chemical energy is converted to electrical current. A
typical battery cell consists of two dissimilar materials (called cathodes and
anodes) immersed in an electrolyte (a substance which in solution is capable of
conducting an electric current). When the metal electrodes are connected to an
electric circuit, current flows.
There are at least two dozen battery types, as defined by their basic
electrolyte couple type, and many variations of each, depending on battery
structure, variations in chemistry, and production methods. Sixteen of these
battery types represent at least 98 percent of the volume of shipments of bat-
teries in the U.S. For purposes of this study, the battery industry consists
of establishments that manufacture these 16 types of batteries. A list of
1-1
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these appears in Table 1-1. The remaining battery types were omitted from
detailed analysis in this study because they are no longer in production,
are of little commercial significance, or are experimental (e.g., nickel-zinc
and fuel cells).
1.3 INDUSTRY SEGMENTATION
There are a number of ways in which battery types may be classified for
study and different data sources often use one, ignore others, and/or confuse
two or more classification schemes. Examples of some commonly used classifi-
cation schemes include:
Nomenclature System Example
end-use flashlight
size D
shape cylindrical, rectangular
cathode-anode couple carbon-zinc
inventor's name Leclanche cell
electrolyte type acid or alkaline
usage mode primary cell.
No single classification system is ideal in every single context. The appropri-
ateness of a given system is determined by its intended use. There are three
methods of segmenting the industry that are pertinent to this study—according
to the basic anode material used; whether the batteries are of the primary or
secondary types; and according to the cathode-anode couple (the dissimilar
metals used; also called the negative and positive plates).
The companion technical study categorized the industry according to the
basic anode material used and, to some extent, according to whether the electro-
lyte was acid or alkaline. The basic groupings are: cadmium, calcium, lead,
leclanche, zinc, lithium, and magnesium. This categorization seems appropriate
since the primary purpose of the study was an evaluation of production processes
and their effluents.
1-2
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TABLE 1-1. RELATIONSHIP OF TECHNICAL INDUSTRY SUBCATEGORIES
TO ECONOMIC INDUSTRY SEGMENTS
BATTERY PRODUCT GROUPS
Mercury-Cadmium
Nickel-Cadmium
Silver Oxide-Cadmium
Calcium
Lead-Acid
Carbon-Zinc and
Related Types
Lithium
Magnes ium-Carbon
Magnesium Reserve
Thermal
Alkaline Manganese
Carbon Zinc-Air
Mercury-Ruben
Mercury Cadmium-Zinc
Nickel-Zinc
Silver Oxide-Zinc
TECHNICAL SUBCATEGORY
Cadmium Anode
Calciuml
Lead
Leclanche
n
Lithium Anode^
Magnesium Anode^
Zinc Anode, Alkaline Electrolyte
^•Includes magnesium, lithium, calcium anode, and other thermal batteries.
not include thermal.
1-3
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While the anode classification scheme may be appropriate from a technical
viewpoint, it is expected that economic and financial impacts of the regula-
tions will vary with the type of product, end use, and industry organization.
This is because the determinants of demand, availability of substitutes, and
pricing latitude will vary with these factors. For this reason, battery type
as described by its cathode-anode pair is the primary segmentation scheme used
in the economic study. Table 1-1 shows the relationship between the technical
and economic industry classification schemes.
Batteries are also classified according to whether they are storage (also
called secondary) or primary. A storage battery can be recharged by connecting
it to a source of electrical current. Primary batteries, on the other hand,
are not rechargeable. Instead, such batteries are usually discarded after the
charge has been drained. The standard starting, lighting, and ignition (SLI)
automobile battery is the most common example of a storage battery, while a
calculator or flashlight battery are common examples of primary batteries.
Some cathode-anode pairs can be made in either primary or storage configurations.
However^ one of the two usually accounts for most of industry volume and, for
this reason, each cathode-anode pair is usually classified as being either
primary or secondary.
In addition to classifying batteries by whether they are storage or pri-
mary, they may also be classified as dry cells and wet cells. Dry cells are
generally smaller and more mobile, since their contents are nonspillable.
Examples of these are flashlight and hearing-aid batteries. Wet cells are
generally larger; heavier, and less mobile. The automobile battery, weighing
35 to 40 pounds, is the most obvious example of this type. Battery sizes vary
from large lead-acid industrial storage batteries weighing as much as 6,000
pounds to small hearing-aid or watch batteries. Production and shipment data
on each specific size are extremely difficult to find. For this reason, much
of the analysis is done on the basis of weight or value of battery production.
Wherever possible, however, reference is made to number of units.
1-4
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1.4 ORGANIZATION OF REPORT
The remainder of this report consists of eight additional chapters.
Chapter 2 presents an overview of the methodology used in the study. Chapters 3
and 4 describe the basic industry characteristics of interest, and Chapter 5
offers some of the future critical parameters for a better understanding of
the expected characteristics of the industry during the 1985 to 1990 time
period, when the primary economic impacts of the proposed regulations will be
felt. Chapter 6 describes the pollution control technologies being recommended
by EPA and their associated costs. The information in this chapter is derived
primarily from the companion technical study and is published in the Develop-
ment Document for Effluent Limitations Guidelines and Standards for the Battery
Manufacturing Point Source Category, prepared by EPA's Effluent Guidelines
Division in February 1984. Chapter 7 presents the economic impacts estimated
to result from the incurrence of the costs described in Chapter 6. Chapter 8
discusses the impacts on small business, as a subset of the general impacts,
and Chapter 9 outlines some limitations of the data, methodology, and assump-
tions used.
1-5
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2. STUDY METHODOLOGY
2.1 OVERVIEW
An overview of the analytical approach used to assess the economic impacts
likely to occur as a result of the costs of each regulatory option is illustrated
in Figure 2-1. For three industry segments five alternative regulatory options
are considered in the economic study; each option represents increasing levels
of compliance costs and, generally, pollution abatement. For the other four
industry segments, three regulatory options are considered. The basic approach
used in this study is to (1) develop a model of the price and output behavior
of the battery manufacturing industry and (2) assess the likely plant-specific
responses resulting from the compliance costs estimated for each regulatory
option described in Chapter 6. This model explicitly considers, for each
regulatory option, the changes in output caused by reductions in quantity
demanded due to higher prices as well as changes in supply due to plant closings.
The model of price and output behavior of the industry is used, in con-
junction with compliance cost estimates supplied by EPA, to determine post-
compliance industry price and production levels for each major battery product
group and for each regulatory option. Individual plant data are then analyzed
under conditions of the postcompliance industry price levels, for each regula-
tory option, to isolate those plants whose production costs would appear to
change significantly more than the estimated change in their revenues. Those
plants whose estimated production costs change significantly more than their
estimated revenue will change are subjected to a financial analysis that uses
capital budgeting techniques to determine likely plant closures. The industry
model is then reviewed for each regulatory option to incorporate the reduced
supply into the analysis. Finally, other effects that flow from the basic
price, production, and industry structure changes are determined. These
2-1
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EPA POLLUTION
CONTROL COSTS
ho
I
ro
I MDIIS TRY
SEGMENTATION
INDUSTRY
STRUCTURE
MARKET
STRUCTURE
FINANCIAL
DATA
INDUSTRY
ANALYSIS
MICROECONOMIC
ANALYSIS
PRICE INCREASE
ANALYSIS
COMMUNITY
EMPLOYMENT
EFFECTS
SCREENING
ANALYSIS
IDENTIFICATION
OF HIGH-
IMPACT
SEGMENTS
MODEL
FINANCIAL
ANALYSIS
PLANT
CLOSURES
FIGURE 2-1. ECONOMIC ANALYSIS STUDY OVERVIEW
-------
include employment, community, and foreign trade impacts. Specifically, the
study proceeded in the following ten steps:
1. Description of industry characteristics
2. Industry supply and demand analysis
3. Analysis of cost of compliance estimates
4. Plant-level screening analysis
5. Plant-level profitability analysis
6. Plant-level capital requirements analysis
7. Assessment of plant closure potential
8. Assessment of other impacts
9. Small business analysis
10. Assessment of new source impacts.
Although each of these steps is described separately in this section, it is
important to realize that there are significant iterations among them, as
shown in Figure 2-1.
2.2 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis is to develop a description of the basic
industry characteristics that would enable estimation of the impacts of the
regulation. These characteristics, which include the determinants of demand
(e.g., demand elasticities), market structure, the degree of intraindustry
competition, and financial performance, are described in Chapters 3 and 4
of this report.
The sources for this information include government reports, proprietary
market research studies, textbooks, trade association data, the trade press,
discussions with various trade association representatives and individuals
associated with the industry, visits to five battery manufacturing plants,
an EPA industry survey, and plant-by-plant compliance cost estimates developed
by EPA's Effluent Guidelines Division. From the first step, several observa-
tions were made which influenced the remainder of the analysis. These were:
2-3
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• Generally low demand elasticity for the total industry,
due primarily to a lack of substitutes for batteries
• Somewhat higher elasticities (although still generally
inelastic) for individual battery product groups, due
to the ability to substitute one battery type for another
• Relative price levels and demand elasticities between
now and 1985 not to change significantly
• Low estimated compliance costs for most plants
• A wide variation in estimated unit compliance costs
among plants
• A lack of plant-level data on a number of key varia-
bles, such as profitability.
These observations indicated that if significant economic impacts are to
result from the compliance costs, they would be caused by variations in condi-
tions among plants and firms within the industry. For this reason, there
is a need for analytical methods that would account for these interplant
and interfirm variations.
2.3 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis, Step 2 of the study approach,
is to determine the likely changes in market prices and industry production
levels resulting from each regulatory option for each battery product group.
The estimates of postcompliance price and output levels are used in the
plant-level analysis to determine postcompliance revenue and profit levels
for specific plants in each product group. If prices can be successfully
raised without significantly reducing product demand and companies are able
to maintain their current financial status, the potential for plant closings
will be minimal. If prices cannot be raised to fully recover compliance
costs because of the potential for a significant decline in product demand
or because of significant intraindustry competition, the firms may attempt
to maintain their financial status by closing higher cost and/or less efficient
2-4
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plants. A separate supply-demand analysis is developed for each of the 16
product groups and the results for each product group is reported in Chapter 7,
»
These analyses were conducted according to the assumptions and analytical tech-
niques described in the following subsections.
2.3.1 Basic Assumptions
Short-run price behavior can be inferred from the interaction of the
supply and demand curves. However, lacking the necessary data to estimate
supply curves for the various battery product groups, pricing behavior was
inferred from the price elasticities developed in Chapter 4 and market
structure information described in Chapter 3. In addition, the following
basic assumptions were employed:
• Each battery product is a homogeneous good with a
separate market mechanism of its own. (The substitu-
tion possibilities between battery types are considered
in the determination of demand elasticities.)
• Each market is currently at "equilibrium," or will
be when the regulations become effective.
• If possible, firms will attempt to maintain their
current financial status by passing through industry-
wide cost increases in the form of higher prices.
The equilibrium assumption reflects the intent of the analysis to repre-
sent pricing behavior in a "normal" period. That is, a period during which
quantities supplied and demanded are in relative balance. If the analysis
was conducted under an assumption of excess demand as in a strong cyclical
expansion, or under an assumption of excess supply, the baseline financial
performance and price changes might be misstated for normal periods.
2-5
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The third assumption is reflected in the following algorithm:
P. = Pn + .22 + ROI (Ice)
j. u ,-,
Q0
Qi = Qo + ( i - Q) e Qo
po
P Q 0 0 P (AFC)
P0 = 1 1 + ( Q - 1)( 1)
2
P P
Q2 = Qi + 2 -
x
pl
where
PQ = initial precompliance price (from Chapter 4)
PI, ?2> PS. etc. = successive rounds of price changes
CC = total annualized compliance cost (from EPA cost estimation)
QO = initial precompliance quantity (from 308 Survey)
ROI = return on net assets (from Appendix A)
Ice = investment compliance costs per unit of output (from EPA cost
estimation)
e = demand elasticity (from Chapter 4)
Ql> Q2> Q3» etc. = successive rounds of quantity changes
AFC = average fixed costs = ratio of fixed cost to revenues (from
industry sources).
2-6
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Equations (1) and (2) are iterated to solve for successive price/quantity
adjustments until it converges. This algorithm solves for the price and
quantity that will approach the precompliance return on net assets. The
application of the algorithm differs from one battery product group to another,
to reflect differing market structures among the product groups. The following
paragraphs describe the market structure conditions used.
2.3.2 Market Structure Conditions
Economic theory predicts different pricing behaviors for competitive,
oligopoly, monopoly, or other types of markets. Many economic impact studies
begin by assuming perfect competition. However, some of the product groups
covered in this study exhibit some characteristics that are indicative of non-
competitive markets. Each product group was characterized according to the
market structure that appears to describe its nature. Three types of markets
applied.
The first is a perfectly competitive market structure in which all firms
have identical cost structures. In this situation, the industry marginal cost
curve is found as a horizontal summation bf individual marginal cost curves.
Given similar compliance requirements among firms, the supply curve shifts up-
ward by the exact amount of the compliance cost and the position of each firm
relative to its competitors remains unchanged. For the perfectly competitive
market the compliance costs used in the algorithm above is the mean for all
plants in the product group. Product groups treated in this manner include
vented nickel-cadmium, silver-cadmium, calcium, Leclanche, magnesium reserve,
mercury-Ruben, nickel-zinc, mercury cadmium-zinc, and silver oxide-zinc.
The second market structure involves market in which each seller has a
significantly different cost function from the others. In this situation,
the price increase will approximate the amount that the lower-cost producers
2-7
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(including pollution control costs) would need to maintain their precompli-
ance financial performance. The rationale for this conclusion is that
producers will attempt to move toward their original equilibrium output, but
at prices sufficient to maintain their equilibrium return on equity or assets.
That is, when required to incur pollution control expenses they will raise
prices sufficiently to cover the additional variable and fixed costs (including
a return to the additional invested capital). However, the price change
necessary for the low-cost plants will generally be lower than that for the
high-cost plants. If the high-cost plants attempt to recover their full costs
they will be charging more than the low-cost plants and, consequently, would
lose all their business, providing there is sufficient capacity among low-cost
producers (i.e., an individual firm faces a perfectly elastic demand curve).
Thus, the price change is generally determined from the cost functions of
the low-cost plants. In Chapter 6, the plants that cannot operate at these
new prices are isolated. The product groups falling into this category include
lithium, magnesium thermal, and alkaline manganese.
Because of the high concentration ratios for some of the product groups,
oligopolistic pricing behavior might be expected. For this market structure,
the algorithm above is applied to one or the average of a few firms in the
product group. It is assumed that one or a few firms will have the ability,
because of their market power, to impose their most desired price and output
strategy on the other firms in the market for the product group.
The oligopolistic pricing model is used for those product categories
that exhibit characteristics of oligopoly markets, such as:
• Few firms in the product group
• High four-firm concentration ratio (greater than 75
percent)
• Low degree of foreign competition (less than 10 per-
cent of U.S. sales)
2-1
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• Abnormally high profitability (return on assets)
• Low demand elasticities
• Large capital requirements (ratio of fixed costs to
variable costs)
• Large degree of integration of production, marketing,
and distribution
• Large degree of specialized knowledge.
Industries that exhibit the first three of these characteristics are
those in which the pricing and output actions of one firm will directly affect
those of others in the industry. While these conditions do not guarantee oligo-
polistic behavior; they are necessary conditions for one and good indicators
that one exists. Abnormally high profits in an industry would, in time, nor-
mally attract new entrants to the industry, thereby increasing price competition
and industry marginal costs. However; very high profits over long periods of
time that are not explained by such factors as excess risk, unusual amounts
of technological innovation, or firm size may be an indicator of an imperfect
market structure. Such conditions may occur when entry into an industry is
difficult. The last three of the previously mentioned points are indicators
of difficulty of entry. Product groups treated as if there were price leader-
ship by a few producers include lead-acid, and sealed nickel-cadmium. Product
groups containing only one firm were also considered in this group.
2.3.3 Projections of Industry Conditions
It is necessary to determine if the key industry structure parameters
would change significantly by the mid-1980s. Projections of industry condi-
tions began with a demand forecast. The demand in 1985 is estimated via a
consensus of several economic forecasting techniques, including econometric
models, trend analysis, and market research analysis. An examination is also
made of the factors which might affect the real cost of manufacturing batteries
(i.e., relative to the cost of other manufactured goods). No reason is found
to expect the real price of battery products to increase between now and 1985.
2-9
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It is concluded from the projections of industry conditions that only minor
changes in market structure would occur in the base case. For this reason,
the market structures previously described are used to develop the pricing
algorithms.
2.3.4 Data Sources and Limitations
A significant limitation to the analysis of market structure is that little
information on the variation in key parameters, such as production costs and
profit rates among plants, is available to the study team. In place of this
data, industrywide averages are used. For example, 12 percent return on assets
is used for the lead battery subcategory. These averages are estimated from
various published data sources and information from discussions with industry
personnel during site visits. The key published sources include Census of
Manufactures, company annual reports, Standard and Poor's Corporation Records,
the FTC's Quarterly Financial Statistics, and other Government reports which
include data from site visits. Appendix A details the estimating procedure
used. Compliance cost data, on the other hand, are available for specific
plants and an examination of them shows wide variation in unit compliance
cost from one plant to another within each subcategory. For this reason, the
economic impact analysis is conducted under the assumption of equal profit
margins among plants, but with varying compliance costs.
The postcompliance market price levels are used, in a later step, to
assess the financial condition of individual battery manufacturing facilities.
2.4 STEP 3: COST OF COMPLIANCE ESTIMATES
Investment and annual compliance costs for 240 production facilities are
estimated by EPA's Effluent Guidelines Division. Various sets of costs, corres-
ponding to increasing levels of pollution control are considered. For purposes
of this report the regulatory options are labeled "Level 1," "Level 2," etc.,
in order of increasing levels of pollution control. A description of the
2-10
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control and treatment technologies and the rationale behind these compliance
cost estimates appear in Chapter 6 and in Sections V, IX, X, XI, and XII of
the Development Document.
2.5 STEP 4: PLANT-LEVEL SCREENING ANALYSIS
The screening analysis uses a basic operational/profit ratio to separate
those plants with obviously small impacts from those with potentially significant
impacts. The criterion is the degree of gross profit margin (return on sales)
reductions.
In general, if a plant's ROS is estimated to fall by less than 1 percent,
that plant is not considered to be a candidate for closure. Although some
of these plants will probably experience some drop in their profitabilities,
these changes would be small. Estimates of profitability changes for these
plants are recorded, but they are not subject to a detailed financial analysis.
Plants that have changes in ROS estimated to be greater than 1 percent are
subjected to a more detailed financial analyses described in Steps 5 through 7.
2.6 STEP 5: PLANT-LEVEL PROFITABILITY ANALYSIS
Two different measures of financial performance are used to assess the
impact of the proposed regulations on the profitabilities of individual plants:
return on investment (ROI) and internal rate of return (IRR). The use of these
techniques involves a comparison of the measures with critical values which
are described below.
2.6.1 Return on Investment (ROI) Analysis
The return on investment represents the ratio of annual profits after
taxes to the net assets of a plant. This measure is based on accounting income
rather than cash flows and fails to account for the timing of cash flows, there-
by ignoring the time value of money. However, this technique has the virtue of
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simplicity and common usage in comparative analysis of profitabilities of finan-
cial entities. Because of a lack of data on individual plant profits and lack
of evidence on the difference in profit rates among product groups, a common
baseline return on assets is assumed for all plants. This common return on
assets value was developed using aggregate industry and model plant data. The
procedure used to estimate baseline profit rates is described in Appendix A.
The ROI impact is assessed by calculating the after-compliance ROI for
each plant and comparing it to average values experienced by major manufacturing
industries. Plants with after-compliance ROIs below those experienced by the
industry averages are considered potential plant closures. The underlying
assumption is that plants cannot continue to operate as viable concerns if they
are unable to generate a minimum return on investment at least equal to that of
other manufacturing activities. The precompliance ROI used is the same for
all plants in the industry and the postcompliance ROIs differ from one plant
to another because they reflect variations in plant-specific compliance costs.
The threshold value for ROI is set at a range of 6 to 8 percent. A range
is used because it is difficult to explicitly specify a single value below
which all plants will close. This difficulty arises from the observation
that the threshold value for a given firm will depend upon a number of factors
that vary significantly within and between industries. The most important of
these factors include capital structure (debt/total assets), tax rates, and
salvage value. The range of 6 to 8 percent is based upon a review of ROIs for
the 33 major industry groups for which aggregate financial data are published by
the Federal Trade Commission (FTC). During the time period for which most of
the plant data base was developed (1977-1978), the range of ROIs for these 33
major manufacturing industries was 6 to 18 percent. It is assumed that, all
other things being equal, if other industries remained in operation within this
range, then a battery manufacturing firm operating within this range could not
significantly increase its profitability by liquidating its assets and investing
in another manufacturing business. That is, its opportunity cost is zero or
2-12
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negative. If a battery manufacturing operation's ROI falls below this range,
there would be a positive opportunity cost of staying in the battery industry
and, consequently, there would be a plant closure. Thus, if ROI for a plant
falls into the 6 to 8 percent range or below, it is considered a potential
plant closure. The baseline ROI for the industry is estimated to be 12 percent.
This estimate is based on an evaluation of data in corporate annual reports,
previous government reports, Federal Trade Commission and Census of Manufactured
data, and communications with industry personnel. These sources are described in
Appendix A.
The after-compliance ROI (R0l2i) is estimated for each plant using the
following algorithm:
ROI2i
PROFIT! i + DPROFITj;
where
PROFIT]^ = Precompliance profit of plant i
DPROFIT^ = Change in profit of plant i
Ai = Precompliance assets value of plant i
= Compliance capital investment for plant i
These variables are further defined in Appendix A.
2.6.2 Discounted Cash Flow Analysis
Discounted cash flow (DCF) approaches take into account both the magnitude
and the timing of expected cash flows in each period of a project's life and
provides a basis for transforming a complex pattern of cash flows into a single
number. There are two major techniques for applying DCF analysis: the inter-
nal rate of return (IRR) method and the net present value (NPV) method. Both
techniques will provide the same plant closure decisions in this application.
This analysis uses the IRR technique. The following paragraphs describe the
application of this approach.
2-13
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The IRR for an investment is the discount rate that equates the present
value of the expected stream of annual cash flows (A-p) with the initial invest-
ment (AQ). It is represented by that rate r, such that
n
(3) I AT (1 + r)~T = AQ
T=l
where AQ is the initial investment, A^ is the annual cash flow for period
T, and n is the number of periods the cash flow is expected. Standard methodo-
logy calls for solving the equation for r and then comparing to some required
cutoff, or "hurdle," rate to determine acceptability of the investment. A
relatively conservative approach is to select the cost of capital as the hurdle
rate. If the annual cash flow A-p is a constant series (A), then Equation 3
can be transformed to:
n
(4) A0/A = I (1 + r)~T.
T=l
n
Since the values for r corresponding to various values of £ (1 + r)~T are pro-
T=l
vided in standard present value tables, r can be found by simply dividing the
initial outlay by the cash flow (i.e., AQ/A) to obtain a factor which can then
be used in conjunction with a present value table to determine the discount
rate. Appendix A provides a derivation of this relationship. Thus, the IRR
is expressed as a function of AQ, A, and n. Since n may remain fixed in our
analysis (e.g., 10 years), the IRR is a function only of A/AQ. In brief, if
the cash flow is constant, and if the initial investment occurs at time T = 0,
then the ratio of cash flow for any given year to initial investment is suffi-
cient to calculate IRR. For this analysis, the initial investment is the
market value of the plant plus the pollution control investment at purchased
price, plus working capital.
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2.6.3 Data Sources and Assumptions
Most of the data used in this analysis were estimated from a combination
of publicly available information and the technical 308 Survey. The details
of these estimation techniques and data sources are provided in Appendix A.
The following are the most important variables:
• Precompliance plant revenues = PiQ]_> where P^ is
average sales price reported by industry sources
(described in Chapter 4) and QI (production in
pounds) is reported in the 308 Survey.
• Postcompliance revenues = P2Q2> where ?2 is defined
in the microeconomic supply-demand analysis (Step 2 above)
and Q2 = Ql + E(AP/P1)(Q1), where E is the demand
elasticity.
• Pollution control costs are supplied by EPA. Since
proposal of this regulation in November 1982, only the
lead anode subcategory has been recosted and reanalyzed
thoroughly. In all other subcategories, with the excep-
tion of one Leclanche plant, no changes have been made.
• Baseline profits are estimated from industry sources and
average factors from company annual reports. Baseline
profit margin = 6 percent, return on assets = 12 percent,
and IRR = 23 percent as explained in Appendix A.
• Depreciation charges are assumed to be a straight line
over 10 years.
• Assets are determined as a percentage of revenues. Averages
for the appropriate 4-digit SIC codes (1977 Census of
Manufactures) and the FTC's Quarterly Financial Reports
are used.
• Initial cash outlay, AQ, is defined as the liquidation
value of plant assets. The liquidation value of plant
assets are assumed to equal 100 percent of current
assets + 30 percent of fixed assets (assumption based
on industry sources).
• Income tax rates are assumed to be 30 percent, however, a
sensitivity analysis using a 40 percent rate indicated no
additional plant closures.
2-15
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• The critical value of IRR is assumed to be 13 percent.
The rationale for this value is presented in Appendix A.
• Annual cash flows, At (baseline and after compliance) are
constant and defined as
At = After Tax Profit + DEPt
where:
- PROFIT = 6 percent
- DEP = Annual depreciation charges assumed to be 2.5
percent of revenues.
The sources for these estimates are described in Sections 3, 4, and 7 and in
Appendix A of this report.
2.7 STEP 6: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing the potential for plant closures from a profit-
ability perspective, it is also important to assess the ability of firms to
make the initial capital investment needed to construct and install the required
treatment systems. Some plants which are not initially identified as potential
closures in the profitability analysis may encounter problems raising the amount
of capital required to install the necessary treatment equipment. To assess the
financial impact of committing the capital necessary to install the specified
pollution control systems, two ratios are calculated:
9 compliance capital investment
estimated fixed plant assets
, compliance capital investment
estimated annual capital expenditures,
2-16
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The investment requirements-to-assets ratio provides a measure of the
relative size of the required pollution control investment as compared to the
size of the existing facility, and the investment requirements-to-normal an-
nual capital expenditures ratio measures the magnitude of the capital invest-
ment required for compliance in relation to the precompliance average annual
capital expenditures of the plant. The latter ratio reflects, to some extent,
the practice of viewing the level of normal precompliance capital expenditures
as a budget standard of what a firm considers to be a viable expenditure level.
From this perspective, the ratio of capital investment requirements to normal
annual capital expenditures suggests the extent that resources would have to
be diverted from the normal investments used to sustain and improve the plant's
competitive position.
Although these ratios provide a good indication of the relative burden
created by the compliance requirement, they do not precisely indicate whether
or not firms can afford to make the investments. If, for example, the same
investment requirements were placed on a firm that is already highly leveraged
(as indicated by a high debt/equity ratio) and a firm that is not leverged (as
indicated by a debt/equity ratio of zero); the highly leveraged firm is likely
to experience the most significant impact. In addition, the capital require-
ments must be evaluated together with other factors, such as profitability.
For example, a plant that is extremely profitable would consider the risk of
more leverage or increased cost of capital resulting from expansion more worth-
while than would a low-profit plant.
The data to be used in these calculations are:
• Compliance capital investment is taken from the
technical contractor's cost estimate.
• Plant fixed assets were estimated, as in the profit
analysis above, from industrywide data published in
Census of Manufactures and the FTC's Quarterly
Financial Ratios.
• Annual capital expenditures at the plant level were
extrapolated from industry-level ratios from Census of
2-17
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Manufactures and annual reports (i.e., capital expendi-
tures ± revenues).
Although the extrapolation of industry-level parameters to plant-specific
parameters understates, somewhat, the variation in characteristics among plants
and firms, the resulting estimates appear to provide a valid indication of the
impacts that might occur as a result of the regulations.
2.8 STEP 7: PLANT CLOSURE ANALYSIS
The plant-level analysis examined the individual production units manufac-
turing each product group to determine the potential for plant closures and
profitability changes. The decision to close a plant, like most major invest-
ment decisions, is ultimately judgmental. This is because the decision involves
a wide variety of considerations, many of which cannot be quantified or even
identified. Some of the most important factors are:
• Profitability before and after compliance
• Ability to raise capital
• Market and technological integration
• Technological obsolescence
• Market growth rate
• Other pending Federal, state, and local regulations
• Ease of entry into market
• Market share
• Foreign competition
« Substitutability of the product
• Existence of specialty markets.
Many of these factors are highly uncertain, even for the owners of the
plants. However, this analysis was structured to make quantitative estimates
of the first two factors, as described above, and to qualitatively consider the
importance of the others. In this analysis, the first two factors are given
the greatest amount of weight and the importance of the other factors vary from
plant to plant but are of lesser importance in the final plant closure estimates,
2-18
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To provide a format to assess the combined effects of these factors, a matrix
which clearly displays assessments for each of these factors was developed and
is presented in Chapter 7- This matrix provides a format that facilitates
the evaluation of the combined effects of the key variables.
2.9 STEP 8: ASSESSMENT OF OTHER IMPACTS
"Other impacts" include economic impacts that flow from the basic price,
production, and plant-level profitability changes. These impacts include
impacts on employment, communities, industry structure, and balance of trade.
The estimate of employment effects flows directly from the outputs of the
industry-level analysis and the plant closure analysis. The algorithms used
are:
A direct = employment at + (AQr)(Q/employee)
employment closed facilities
A Qr = change in quantity produced at the remaining plants, which is
derived from the microeconomic and plant-level analyses.
Q/employee = baseline quantity produced per employee (average for industry)
Employment estimates for the closed production facilities are taken from the
technical industry survey.
Community impacts result primarily from employment impacts. The critical
variable is the ratio of battery industry unemployment to total employment in
the community. Data on community employment are available through the Bureau
of the Census and the Bureau of Labor Statistics. Sometimes countywide data
will have to be relied upon in the absence of community-specific data.
The assessment of industry structure changes is based on examination of
the following before and after compliance with the regulation:
• Numbers of firms and plants
• 4- and 8-finn concentration ratios
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• Variance of average total production cost per unit
• Effects of plant closures on specialty markets.
Decreases in the first factor and/or increases in the second factor would indi-
cate an increase in industry concentration and may change the pricing behavior
of the industry. Such potential changes were qualitatively evaluated. An
increase in variability of average costs would indicate that some firms have
become more competitive than others, as a result of the regulation. The long-
term implications of such developments are examined.
As described in Chapter 4, imports and exports are a very small portion of
battery industry activity and, considering the small price effects projected in
this study, it does not appear that significant changes in the balance of trade
would result from the regulation.
2.10 STEP 9: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, required Federal regulatory agencies to
consider "small entities" throughout the regulatory process. An initial
screening analysis is performed to determine if a substantial number of small
entities will be significantly affected. If so, regulatory alternatives that
eliminate or mitigate the impacts must be considered. This step in the study
addresses these objectives by identifying the economic impacts that are
likely to result from the promulgation of BPT, BAT, NSPS, PSES, and PSNS regu-
lations on small businesses in the battery manufacturing industry. The primary
economic variables covered are those analyzed in the general economic impact
analysis such as compliance costs, plant financial performance, plant closures,
and unemployment and community impacts.
Most of the information and analytical techniques in the small business
analysis are drawn from the general economic impact analysis which is described
above and in the remainder of this report. The specific conditions of small
2-20
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firms are evaluated against the background of general conditions in the indus-
try as described in the remainder of the report. Since small firms account
for only a small portion of battery manufacturing activity, they are assumed
to be price takers and general market characteristics (demand, supply, equilib-
rium price) are considered exogenous variables to the small business analysis.
Five alternative criteria for defining "small" battery manufacturing
plants were selected for examination and the impacts on small plants under each
criteria were assessed. In addition, the potential impacts of small business
exemptions (tiering) under each of the five alternative sizes were examined.
Value of production was the primary variable used to distinguish firm size.
This is because plant-level employment data were considered less reliable and
plant-level production data did not allow consistent comparisons across the
product groups. The five size categories are less than $1 million, $l-$2.5
million, $2.5-$5 million, $5-$10 million, and greater than $10 million.
Finally-, the Small Business Administration provided EPA with data
regarding the financial condition of battery manufacturing firms. The data are
grouped by size of firm. Analysis of this data has been performed and is dis-
cussed in Chapter 8.
2.11 STEP 10: ASSESSMENT OF NEW SOURCE IMPACTS
The assessment of economic impacts on new sources is involved in two pri-
mary tasks. First, compliance costs are estimated and, second, the potential
for economic impacts resulting from the compliance costs is evaluated. The
cost estimates employed the following assumptions and definitions:
e Compliance costs for new source standards are defined
as incremental costs from the costs of the selected
standards for existing sources.
e> The compliance costs per unit of output (pound of
batteries) for new sources are assumed to be equal
to the industry subcategory average for that of
existing sources that use the same technology.
2-21
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The second task in the new source analysis, the assessment of economic
impacts, is based upon the aforementioned cost data and analogy to the impact
conclusions for similar existing plants described above. The primary variables
considered are identical to those for existing plants plus the potential of
the regulation to foster barriers to entry or industry structure changes.
2.12 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
Various assumptions and estimates were made in the calculation of compli-
ance costs and in the analyses performed to assess their impacts. These factors
unavoidably affect the level of accuracy which can be assigned to the conclu-
sions. The assumptions relating to the estimation of plant-specific compliance
costs are outlined in Chapter 6 of this report and are discussed in detail in
the accompanying Development Document. Even though these assumptions have a
bearing on the accuracy of the economic impact conclusions, they are not dis-
cussed in detail in the economic impact analysis.
The assumptions and estimates that have the greatest impact on the accu-
racy of the conclusions are related to the data used for the analyses. Since
no economic survey was conducted to collect plant-specific financial data (e.g.,
return on investment, profit margin, asset turnover ratios), the data used in
this report had to be estimated and/or extrapolated from a variety of sources
such as company annual reports, Census of Manufactures, Federal Trade Commission
reports on major industries, and previous Federal Government studies of the
industry. The major assumptions made in estimating and extrapolating these
data are discussed in Chapter 9.
2-22
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3. INDUSTRY DESCRIPTION
3.1 OVERVIEW
This chapter describes the operational characteristics of plants and
firms in the battery manufacturing industry which are pertinent to determining
industry behavior when faced with additional pollution control requirements.
In subsequent chapters of this report this information is used to project
general trends in the industry (Chapter.5) and to assess the potential economic
impacts of the proposed regulations (Chapter 7).
The primary economic unit considered in this study is the individual
establishment or product line. This is the basic unit around which capital
budgeting decisions are made. That is, a single-plant or multiplant firm
will make decisions regarding opening, closing, or modifying operations on a
plant-by-plant basis. For example, a specific plant considered unprofitable
for one company may still be a viable operation for another and, if sold, may
remain in operation. In addition, financial and economic characteristics at
the company and industry levels must also be examined because they affect
investment decisions at the plant level. By examining some basic industry
parameters such as number, size, and location of plants and firms, employment,
and financial characteristics, this chapter provides the basic descriptive
information to be used to model the pertinent behavioral characteristics
which lead to plant closings and other economic impacts.
3.2 FIRM CHARACTERISTICS
According to the 1977 Census of Manufactures, the battery industry con-
sists of 175 firms which operated 276 manufacturing establishments. The EPA
Technical Survey (completed in 1979) identifies 240 production facilities and
3-1
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132 firms that account for most of industry production. Firms that manu-
facture batteries may be described as:
• Large, diversified firms
• Large battery manufacturers—batteries as main line of
business
• Small independents with more than one plant
• Independents with only one plant.
The majority of the plants are owned by small, private companies that
deal primarily in one particular aspect of the battery market. The trend in
recent years has been for major diversified firms to become more vertically
integrated by buying many of the smaller independents and using them as
component suppliers and/or distributors of finished batteries.
As shown in Table 3-1, production of primary batteries is highly concen-
trated with 4-firm and 8-firm concentration ratios of 87 percent and 94
percent, respectively. For storage batteries, the figures are 57 percent
and 84 percent, respectively. Nevertheless, it should be noted that no single
firm accounts for over 20 percent of the total market in the storage industry.
As shown later in this report, production of individual battery types is even
more concentrated. The majority of battery plants belong to small, private
firms which serve regional demand. Little public information is available on
these companies. Because of OSHA, EPA, and the Department of Transportation
regulations, there is concern that capital costs to install safety and health
apparatus as well as environmental controls could pose economic problems for
the smaller manufacturers in this industry. These regulations are further
explained in Chapter 5 (Baseline Projections of Industry Conditions).
3-2
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TABLE 3-1. CONCENTRATION RATIOS OF BATTERY MANUFACTURING INDUSTRY
SIC 3691 -
Storage Batteries
1977
1972
1967
SIC 3692 -
Primary Batteries
1977
1972
1967
TOTAL
($ Millions)
1,985.2
950.3
579.4
661.1
318.3
327.9
4 LARGEST
COMPANIES
57
58
60
87
91
85
8 LARGEST
COMPANIES
84
85
81
94
96
95
20 LARGEST
COMPANIES
93
93
92
99
99
99
SOURCE: Concentration Ratios in Manufacturing—1977 Census of Manufactures,
3-3
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Thirteen major producers of storage and primary batteries appear to
dominate the field.
Storage Batteries
• ESB, Inc. (subsidiary of Inco, Ltd.)
• Globe-Union, Inc.
• Delco-Remy (division of General Motors Corporation)
• Eltra, Inc. (subsidiary of Allied Corporation)
• General Battery (division of Northwest Industries)
• General Electric
• Eagle-Pitcher
• East-Penn
• Chloride, Inc. (British firm)
• Gould, Inc.
Primary Batteries
• Union Carbide
• ESB, Inc. (subsidiary of Inco, Ltd, that has recently been divested)
• P.R. Mallory and Company (subsidiary of Dart Industries).
Some of these firms are highly diversified and integrated, such as
General Electric, General Motors, and Union Carbide, while other major firms
such as Globe-Union and P.R. Mallory are primarily engaged in the manufacture
of batteries.
The primary battery market is dominated by these companies, with Union
Carbide (Eveready Division) accounting for over 50 percent of the market, ESB
(Ray-0-Vac Division) accounting for about 20 percent, and Mallory accounting
for about 10 percent of the market. Most of the battery sales of the major
producers are concentrated in the consumer market, while the smaller companies
tend to specialize in industrial and commercial sectors. Yardney.. for example,
3-4
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a medium-sized firm, sells largely to the military, while Bright Star accounts
for large shares of the burglar alarm and industrial flashlight markets.
The storage battery market is served by a few large producers and numer-
ous small regional companies. In the SLI (starting, lighting, and ignition)
storage batteries sector, the major producers of batteries for installation
by original equipment manufacturers are Delco-Remy division of General Motors,
ESB (supplies Chrysler), and Globe-Union (supplies several auto firms).
Leaders in the SLI replacement market are ESB, Globe-Union, General Battery
Corporation, Delco, Gould, Eltra Corp., and Chloride, Inc. The industrial
lead-acid storage batteries sector is dominated by ESB, Gould, and Eltra.
Finally, the leading suppliers of nickel-cadmium batteries are Marathon
Battery, General Electric, Union Carbide (Eveready Division), Gould, SAFT
Inc., and McGraw Edison.
3.3 FINANCIAL STATUS OF COMPANIES
To assess the financial status of the battery manufacturing industry,
financial data have been obtained on the 13 battery companies whose financial
statements are publicly available. Of the 13 firms, 3 are primarily engaged
in battery manufacturing, while the other 10 are more diversified. The
nature of the business lines of most of these firms are discussed in Section 3.2.
Table 3-2 lists these companies, their sales revenues, and their long-term
debt to equity (D/E) and before-tax return on equity (ROE) ratios. Between
1975 and 1977 more than half of the 13 companies had'better ROEs than the U.S.
all-manufacturing average. Among the less profitable companies are the 2
smaller companies of the sample, Yardney Electric Corporation and FDI, Inc.
(battery operations now discontinued), whose ROEs have been below the all-
manufacturing average from 1975 to 1977.
Some industry sources report that many of the smaller companies have
been finding their manufacturing operations to be less profitable than those
of larger firms in the industry. As a result, many have become assemblers of
3-5
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TABLE 3-2. FINANCIAL CHARACTERISTICS OF SELECTED BATTERY MANUFACTURERS
1977 Company Sales
($ Millions)
Total Battery
1977 Long-Term
Debt/Equity
Before-Tax Return on Equity (%)
COMPANIES PRIMARILY ENGAGED
IN BATTERY MANUFACTURING
Globe-Union, Inc.
P. R. Mallory & Co.
Yardney Electric Corp.
DIVERSIFIED COMPANIES
Eagle-Picher Indus., Inc.
Eltra Corp./Prestolite &
C&D Batteries Division
of Allied Corp.
FDI, Inc.**
General Electric Co.
General Motors Corp./
Delco-Remy Division
Gould, Inc.
Inco, Ltd./ESB, Inc.
Marathon Mfg. Co.
Northwest Indus., Inc./
General Battery Corp.
Union Carbide Corp.
U.S. AVERAGE, ALL MANUFACTURING
391.9
341.8
15.9
474.0
922.1
309.6
207.5
N/At
N/A
N/A
74.2
17,518.6
54,961.0
1,619,6
1,953.3
306.1
1,876.5
7,036.1
N/A
N/A
N/A
330.1
703.2
N/A
N/A
N/A
43.6
28.5*
18.7*
33.0
25.9
277.3
21.6*
6.8*
36.7
53.3
28.0*
77.3
47.0
32.7
1977
43.7*
21.9
13.8
28.6*
21.6
17.6
31.8*
39.8*
25.7*
9.2
20.9
33.1*
17.4
23.2
1976
24.8*
19.4
7.0
27.6*
22.7*
11.7
31.0*
38.0*
19.6
22.2
31.0*
32.1*
23.8*
22.7
1975
16.4
7.6
7.8
26.6*
21.6*
-109.4
25.4*
18.1
15.1
21.7*
35.1*
30.4*
27.1*
18.9
1974
21.7
11.3
**
29.3*
23.2
31.9*
13.4
19.9
39.3*
28.6*
29.4*
36.1*
23.4
1973
16.9
18.8
**
26.6*
23.7*
33.5*
35.9*
22.6*
28.3*
-55.2
24.0*
26.1*
21.8
*Better than All Manufacturing average.
fNot available.
**Has closed battery manufacturing operations or merged into another firm.
SOURCES: Company annual reports and Quarterly Financial Report on Manufacturing, Mining and Trade, FTC.
-------
purchased parts, ceased manufacturing, opting instead to service and distribute
batteries purchased from major manufacturers, or left the industry altogether.
Other industry sources report that the profitability of small firms are
not significantly different from that of larger firms. To examine this ques-
tion, data on financial ratios of a number of firms grouped by firm size were
obtained from SBA's FINSTAT data base. The small firms in this data base show
better financial performance than those firms shown in Table 3-2. It was
concluded that although the representativeness of this data base could not
be precisely determined, the data do not support the hypothesis that small
battery manufacturing firms have generally lower profit rates than larger
battery manufacturing firms. The analysis of the FINSTAT data base is
further described in the Small Business Analysis.
3.4 PLANT CHARACTERISTICS
The EPA has identified 179 active production facilities that manufacture
storage batteries and 61 plants that manufacture primary batteries.^
Table 3-3 lists the number of firms and production facilities identified by
EPA by type of battery. Table 3-4 presents the 1977 distribution of the
battery establishments identified by the Department of Commerce and their
value of shipments by employment size. Table 3-5 shows the distribution of
battery establishments throughout the United States. In general, they are
quite widely dispersed among the regions. Plant age varies widely—from new
to over 80 years old. At present, new plants are being constructed and old
plants are being expanded in both the primary and storage segments.
3.4.1 Storage Batteries
As shown in Table 3-4, the storage battery industry segment consists of
many small plants existing alongside a number of large ones. However, these
•'•According to the Census of Manufactures, there were 218 storage battery
establishments and 58 primary battery establishments in operation in 1977.
The census definition of "establishment" and the EPA definition of a
"facility" are inconsistent. Therefore, the numbers do not match precisely.
3-7
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TABLE 3-3. NUMBER OF FIRMS AND PRODUCTION FACILITIES
MANUFACTURING BATTERIES IN EACH PRODUCT GROUP1
BATTERY TYPE
Primarily Storage
Lead-Acid
Nickel-Cadmium
Silver Oxide-Cadmium
Nickel-Zinc
Mercury-Cadmium
Subtotal
Primarily Primary
Leclanche
Carbon Zinc-Air
Alkaline Manganese
Mercury-Ruben (Zinc)
Mercury Cadmium-Zinc
Silver Oxide-Zinc
Magnesium-Carbon
Magnesium Reserve
Lithium
Thermal (Magnesium)
Calcium
Subtotal
Total
NUMBER OF PLANTS
# OF
FIRMS
114
9
1
1
126
9
2
5
3
1
6
3
4
7
1
_ 3
44
170
ZERO
DISCHARGE
56
2
59
3
2
2
10
69
DIRECT
DISCHARGE
8
3
1
1
13
12
1
1
1
17
30
INDIRECT
DISCHARGE
103
4
107
7
4
1
7
1
4
1
_2
34
141
TOTAL
167
9
1
1
1
179
19
2
8
4
1
9
3
4
7
1
3
61
240
•'•Note: Because of the existence of multiproduct plants and firms, the actual
number of establishments and firms is lower than the number of pro-
duction facilities in the table.
SOURCE: EPA Technical Survey.
3-8
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TABLE 3-4. DISTRIBUTION OF BATTERY MANUFACTURING ESTABLISHMENTS
BY EMPLOYMENT SIZE, L977
NUMBER OF EMPLOYEES
SIC 3691 - Storage Batteries
1 to 4 employees
5 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
1,000 to 2,499 employees
Total
SIC 3691 - Primary Batteries
1 to 4 employees
5 to 9 employees
10 to 19 employees
20 to 49 employees
50 to 99 employees
100 to 249 employees
250 to 499 employees
500 to 999 employees
Total
Total of SICs 3691 and 3692
NUMBER OF
ESTABLISHMENTS
39
31
14
25
24
48
31
5
1
218
15
6
4
3
4
8
12
6
58
276
%
18
14
6
12
11
22
14
2
0
100
26
10
7
5
7
14
21
10
100
VALUE OF
SHIPMENTS
($ Millions)
4.8
12.5
14.1
45.6
120.9
631.3
849.3
1
J 304.0
1,982.5
0.8
3.6
8.1
5.4
7.7
67.8
214.4
358.4
666.2
2,648.7
%
0
1
1
2
6
32
43
15
100
0
1
1
1
1
10
32
54
100
NOTES: These census figures do not precisely match those in the EPA data
base because these figures refer to "establishments" and the figures
used in the EPA data base and in the economic impact anlaysis (in
Chapter 7) refer to production "facilities." Production facilities
are individual product lines as defined by cathode-anode pair. Per-
centages may not total 100 due to rounding
SOURCE: 1977 Census of Manufactures.
3-9
-------
TABLE 3-5. GEOGRAPHIC DISTRIBUTION OF BATTERY PLANTS
DIVISION
3691 - Storage
Batteries
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
Mountain
Pacific
Unidentified
United States Total
3692 - Primary
Batteries
New England
Middle Atlantic
East North Central
West North Central
South Atlantic
East South Central
Unidentified
United States Total
ALL ESTABLISHMENTS
TOTAL
4
29
33
24
29
14
20
4
46
15
218
1
15
11
3
8
1
19
58
%
2
13
15
11
13
6
9
2
21
7
100
2
26
19
5
14
2
33
100
> 20
EMPLOYEES
3
20
21
16
20
11
12
2
22
7
134
1
8
9
3
6
1
5
33
< 20
EMPLOYEES
1
9
12
8
9
3
8
2
24
8
84
0
7
2
0
2
0
14
25
VALUE OF
SHIPMENTS*
($ MILLIONS)
**
325.4
286.2
42.5
252.1
33.6
121.3
**
256.8
N/A
1,982.5
**
20.6
**
**
**
**
**
666.1
%
N/A
16
14
2
13
2
6
N/A
13
N/A
100
3
100
*Columns do not add to totals to avoid confidential disclosures.
**Not disclosed to avoid individual company disclosures.
NOTE: Percentages may not total 100 due to rounding.
SOURCE: 1977 Census of Manufactures.
3-10
-------
few large plants account for a major share of the total value of shipments
(the 37 largest plants account for 58 percent of 1977 shipments). Moreover,
during the last 20 years the number of smaller plants in the industry has been
declining, while the number of plants with 20 or more employees has increased
from 106 to 134 (between 1958 and 1977). The number of firms with less than
20 employees decreased from 170 to 84 during the same period.
The storage battery industry consists basically of two types that are in
commercial use: the lead-acid battery and the nickel-cadmium battery.
Lead-Acid Batteries
The lead-acid battery industry produces two basic types of batteries:
SLI (starting, lighting, and ignition) batteries and industrial batteries.
SLI batteries generally weigh 30 to 40 pounds each and are primarily used in
automotive applications, either as original equipment for new cars or as
replacement batteries. Industrial lead-acid batteries are a heterogeneous
class of batteries used to power a wide variety of industrial, commercial,
and consumer products.
Industrial lead-acid batteries can be further divided into two broad
classes: wet and sealed. Wet industrial lead-acid batteries are similar in
construction and operation to SLI batteries, but they are available in a much
wider variety of shapes and sizes for use in a very wide range of applications.
For example, there are 200- to 300-pound batteries for use in coal mining
equipment and 5,000- to 6,000-pound batteries for use in locomotives and
utilities. Sealed lead-acid batteries are different in construction and more
portable than wet lead-acid batteries. They range in size from as little as
one or two ounces to several pounds and come in a variety of shapes. They
are used in a wide range of applications such as rechargeable lanterns, garden
tools, and emergency lighting. The volume of production (by weight) of this
type of battery is only a small fraction of that of total industrial batteries.
3-11
-------
There are 205 individual establishments primarily engaged in the manufac-
ture of lead-acid batteries in the United States. Eighty-two to 86 percent of
the volume (by weight) is in SLI batteries and 14 to 18 percent is in industrial
batteries. The SLI battery production is currently producing more than 60 mil-
lion batteries per year. This production level represents approximately 80 per-
cent of the SLI industry segment's estimated maximum capacity of 75.5 million
batteries per year. About 25 percent of these batteries are sold to original
equipment manufacturers, while the remainder goes to the replacement market.
Nickel-Cadmium Batteries
There are two types of nickel-cadmium (Ni-Cad) batteries made: a vented
wet cell and a dry cell. EPA has identified 9 plants in the United States
that manufacture Ni-Cad batteries. These plants vary widely in size, ranging
from several thousand to several million pounds in annual production.
3.4.2 Primary Batteries
Most primary batteries are manufactured in establishments having more
than 250 employees (as shown in Table 3-4). Eighty-six percent of the pro-
duction comes from only 18 of the 58 plants in the primary battery industry.
A number of plants produce more than one primary battery type. A tabulation
of these plants appears in Table 3-6. Primary batteries are manufactured in
many shapes and sizes for use in a wide range of applications. For example,
there are button cells weighing only a few grams for use in calculators or
hearing aids and lantern batteries weighing five or six pounds or more. The
number and size of establishments producing primary batteries are shown in
Table 3-4, and the number of firms producing each battery type is shown in
Table 3-3.
3-12
-------
TABLE 3-6. COMPARISON OF SINGLE- AND MULTIPRODUCT NON-LEAD-ACID BATTERY PLANTS
PRODUCT GROUP
Alkaline Manganese
Carbon-Zinc
Silver Oxide-Zinc
Mercury-Ruben
Mercury Cadmium-Zinc
Carbon Zinc-Air
Calcium
Magnesium Reserve
Magnes ium-Carbon
Lithium
Nickel -Cadmium
Other
Total
TECHNICAL
SUBCATEGORY
Zinc
Leclanche
Zinc
Zinc
Cadmium
Zinc
Calcium
Magnesium
Magnesium
Lithium
Cadmium
TOTAL NUMBER
OF PRODUCT LINES
IN SUBCATEGORY
8
19
9
4
1
2
3
4
3
7
9
4
73
NUMBER OF
SINGLE PRODUCT
PLANTS
4
13
2
0
0
1
0
3
2
6
4
4
39
NUMBER OF
MULTIPRODUCT
PLANTS
4
6
7
4
1
1
3
1
1
1
5
0
34
ONE OTHER
BATTERY
PRODUCT
1
3
3
0
0
0
3
1
0
1
2
0
14
TWO OTHER
BATTERY
PRODUCTS
2
2
2
2
0
1
0
0
1
0
3
0
13
THREE OTHER
BATTERY
PRODUCTS
1
1
2
2
1
0
0
0
0
0
0
0
7
OJ
SOURCE: EPA Technical Survey.
-------
4. MARKET STRUCTURE
The primary determinants of the demand for battery products, which are
described in this section, are the end-use markets, the nature of competitive
products, price elasticity, and the role of imports and exports. This infor-
mation is used in Chapter 5 to project the demand for batteries and to describe
the expected characteristics of the battery industry in the 1985 to 1990
period, and in Chapter 7 to estimate the potential economic impacts of the
regulations.
4.1 OVERVIEW
The 1977 domestic production of both primary and storage batteries
amounted to 2.6 billion dollars.-'- Seventy-five percent of this amount repre-
sented storage batteries used in a multitude of products and applications.
Table 4-1 presents the value of battery shipments by major end-use markets.
The storage battery market is dominated by the lead-acid and nickel-
cadmium types. The lead-acid battery accounts for 90 to 95 percent of storage
batteries. About 82 to 86 percent of lead-acid batteries are used for starting,
lighting, and ignition (SLI) applications, primarily for the automobile market.
The other 14 percent goes to the industrial and consumer market. Nickel-cadmium
batteries are used in a wide variety of consumer and industrial appliances.
Most primary batteries are used in consumer products such as flashlights,
toys, games, watches, calculators, hearing aids, and electronic equipment.
Sales of primary batteries for use in consumer products generally represent
70 to 75 percent of total primary battery shipments.
^•Census of Manufactures, 1977; the 1980 figure was $3.5 billion (current
dollars).
4-1
-------
TABLE 4-1. VALUE OF BATTERY SHIPMENTS BY END-USE MARKET
1967-1977
(Millions of Dollars)
Storage Batteries
Automobile
Original Equipment
Replacement
Industrial
Standby auxiliary power
Motive power
Government, consumers, and other
TOTAL STORAGE BATTERIES
Primary Batteries
Consumer
Lighting
Electronic equipment
Toys and games
Industrial
Government
TOTAL PRIMARY BATTERIES
1967
102
307
409
33
54
87
95
591
106
77
45
228
31
69
338
% OF
TOTAL
17
52
69
6
9
15
16
100
31
23
13
67
9
20
100
1973
176
582
758
49
96
145
157
1,060
110
82
59
251
44
50
345
% OF
TOTAL
17
55
72
5
9
14
15
100
32
24
17
73
13
14
100
1977
277
1,095
1,372
51.5
255.4
306.9
223
1,902
183
152
104
439
85
85
609
% OF
TOTAL
15
58
A3
3
13
16
12
100
30
25
17
72
14
14
100
NOTE: Percentages may not total 100 due to rounding.
SOURCES: Based on Predicasts, Inc., Batteries and Electric Vehicles E36,
Cleveland, Ohio, 1974, and JRB extrapolation of trends for 1977,
4-2
-------
4.2 END-USE MARKETS AND SUBSTITUTES
For most applications, there is Little or no substitution of other pro-
ducts for batteries. Substitution is generally limited to switching from
one battery type to another. Thus, in addition to an overall industry analysis,
a separate treatment of each battery type is included. Price elasticities
for the various battery types are not available directly. However, they can
\
be inferred from demand-related factors. The following discussion presents
a development of price elasticity estimates based on an examination of the
nature of the end-use markets, availability of substitute products, and the
strength of consumer demand. Table 4-2 serves as a summary for this dis-
cussion.
For purposes of this discussion, batteries are classified as being wet
cell types or dry cell types. This classification more accurately reflects
end-use markets than does the "primary versus storage" classification. The
"dry cell" group can be thought of as smaller, lighter batteries primarily
for portable use, such as in flashlights, calculators, and hand-held tools,
whether they are primary (e.g., carbon-zinc) or storage (e.g., nickel-cadmium).
The lead-acid battery is a typical example of a wet cell battery. It is
generally larger and less portable and has specific applications, such as
in automobiles and industrial trucks.
Eighty-two percent of the lead-acid battery production is for the automo-
bile market. There is little or no ability to substitute other products in this
application. Consumers might postpone purchasing a new battery for a limited
time by recharging their old ones, purchasing used batteries, driving less, and
postponing the purchase of a new car. However, these measures would have only
a limited effect and are more responsive to income changes than price changes.
Industrial lead-acid batteries are used primarily in industrial vehicles such as
forklifts, mining equipment, and railroad equipment. Few economically feasible
substitutes exist for these uses, although in the short term, delaying the
4-3
-------
TABLE 4-2. MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE ELASTICITIES FOR BATTERY SUBCATEGORIES
BATTERY TYPE
Cadmium Anode
Mercury-Cadmium
Nickel -Cadmium
Silver Oxide-
Cadmium
Calcium Anode
Calcium
Lead Anode
Lead-Acid
Lead-Acid
Reserve
Dry
Dry and
Wet
Dry
Special
Pri-
marily
Wet
Wet
MAJOR MARKETS
Specialized
Military & Indus-
trial Applica-
tions (extreme
temperatures &
long shelf life)
Calculators ,
Walkie Talkies,
Portable Tools,
& Appliances
Space,
Appliances ,
Tools, T.V. Sets
Military, Aero-
space, & Nuclear
Autos
Industrial
Military
PERCENT
OF PRODUCT
VALUE !
NA
1 to 50
1 to 20
NA
0.2 to 0.7
1 to 10
SUBSTITUTES
None
Alkaline
Silver-Oxide
Ni-Cad
Silver Oxide-Zinc
Magnesium Anode
Thermal
Rebuilt & used
batteries, public
transportation
None
RELATIVE
PRICE OF
SUBSTITUTE2
NA
lower
higher
lower
lower
lower
NA
NA
RELATIVE
SUBSTITUT-
ABILITY
low
moderate
moderate
«•
low
very low
NA
ESTIMATED
ELASTICITY
-03 to -0.6
-0.6 to -0.8
-0.6 to -0.8
-0.3 to -0.6
-0.3
-0.3 to -0.6
^Includes only the purchase value, not total life-cycle cost.
^Includes lead-acid reserve.
NA = Not applicable.
SOURCE: JRB estimates.
-------
TABLE 4-2. MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE ELASTICITIES FOR BATTERY SUBCATEGORIES (Continued)
BATTERY TYPE
Leclanche
Carbon-Zinc
Lithium Anode
Lithium
Magnesium Anode
Magnesium-
Carbon
Magnesium
Reserve
Magnesium
Thermal
Dry
Dry
Dry
Special
MAJOR MARKETS
Flashlights,
Radios, Photo-
graphic Equipment
Toys, Industrial
Electric Watches
Military,
Aircraft, Marine,
Mining
Emergency Light-
ing & Radio
Systems, Marine
Applications
Military, Aero-
space, Alarm &
Sensing Applica-
tions
PERCENT
OF PRODUCT
VALUE !
1 to 50
1 to 25
1 to 20
NA
NA
SUBSTITUTES
Alkaline Manganese
Nickel-Cadmium
Silver-Oxide
Mercury-Ruben
Silver Oxide-Zinc
Alkaline Manganese
None
Calcium Anode
RELATIVE
PRICE OF
SUBSTITUTE2
higher
higher
higher
lower
higher
lower
NA
higher
RELATIVE
SUBSTITUT-
ABILITY
high
moderate
low
NA
low
ESTIMATED
ELASTICITY
-0.8 to -1.2
-0.6 to -0.8
-0.3 to -0.6
-0.3 to -0.6
-0.3 to -0.6
'-Includes only the purchase value, not total life-cycle cost.
2Includes lead-acid reserve.
NA = Not applicable.
SOURCE: JRB estimates.
-------
TABLE 4-2. MAJOR END-USE MARKETS, SUBSTITUTES, AND PRICE ELASTICITIES FOR BATTERY SUBCATEGORIES (Continued)
BATTERY TYPE
Zinc Anode,
Alkaline
Electrolyte
Alkaline
Manganese
Carbon Zinc-
Air
Mercury-Ruben
Nickel-Zinc
Silver Oxide-
Zinc
Dry
Dry
Dry
Dry
MAJOR MARKETS
Flashlights,
Radios, Photo-
graphic Equip-
ment, Watches
Lighting & Sig-
naling Systems,
Portable Trans-
ceivers, Night-
Vision Devices,
Satellite Commu-
nications
Hearing Aids,
Watches, Cameras,
Electronic
Instruments
Defense, Space,
Watches, Hearing
Aids, Cameras
1 PERCENT
OF PRODUCT
VALUE !
1 to 75
1 to 50
1 to 20
1 to 20
SUBSTITUTES
Carbon-Zinc
Silver-Oxide
Nickel-Cadmium
Akl aline Manganese
Silver-Oxide
Alkaline Manganese
Mercury-Cadmium
Alkaline Manganese
RELATIVE
PRICE OF
SUBSTITUTE2
lower
higher
higher
higher
higher
lower
lower
lower
RELATIVE
SUBSTITUT-
ABILITY
moderate
low
moderate
moderate
ESTIMATED
ELASTICITY
-0.6 to -.08
-0.3 to -0.6
-0.6 to -0.8
-0.6 to -0.8
^-Includes only the purchase value, not total life-cycle cost.
^Includes lead-acid reserve.
NA = Not applicable.
SOURCE: JRB estimates.
-------
purchase of new batteries by rebuilding or repairing used ones could occur. In
short, the demand for lead storage batteries is highly price inelastic. For
these reasons, an initial estimate for the price elasticity of -0.3 seems
plausible as the high end of a likely range for the lead-acid subcategory.
While the price elasticity for dry cell batteries as a group is also
inelastic, it appears to be greater than that of lead-acid batteries. This
is because they generally represent a larger proportion of end-product value
(ranging from about 1 to 75 percent), and, for some uses, can be eliminated
through the use of direct electricity generation. For these reasons, the
high end of the plausible range for dry cell batteries would appear to be
about -0.5. There is, however, a possibility of substitution of one type of
dry cell battery for another. For example, a flashlight or portable radio
could use an alkaline, a carbon-zinc, or a nickel-cadmium battery. Alkaline
batteries are considerably more expensive than carbon-zinc batteries, but
provide a longer service life. Nickel-cadmium batteries, although quite
expensive, are rechargeable, thus providing the potential for longer service
life. However, their power reserve is generally somewhat smaller than alka-
line batteries. Carbon-zinc batteries appear to have the highest price
elasticity of the various types discussed in this report. This is because
(1) they have the shortest useful life, making their price more visible to
consumers, since they must purchase new ones more frequently; and (2) several
other battery types are possible substitutes, since the uses for these
batteries are most often of a general nature (e.g., toys, flashlights, radios),
requiring no unusual performance characteristics. For these reasons, a
price elasticity of between -0.8 and -1.2 seems plausible, assuming the prices
relative to competing products remain constant. The remaining battery types
are replaced less frequently and a larger proportion of their uses are for
more specialized applications (e.g., calculators, space, defense, electronic
equipment, watches, hearing aids). For these reasons, the estimated price
elasticities are lower than those of carbon-zinc.
4-7
-------
As mentioned above, these elasticity estimates, along with the major
contributing factors, are summarized in Table 4-2. A more detailed discussion
of each battery product group is provided below.
4.2.1 Cadmium Anode Batteries
The cadmium anode subcategory includes mercury-cadmium, nickel-cadmium,
and silver oxide-cadmium batteries, each of which is discussed separately
below.
Mercury-Cadmium
Mercury-cadmium batteries are manufactured in small quantities for
special military and industrial applications. Their principal advantages are
long shelf life (up to five years in temperate conditions) and the ability to
operate over a wide range of temperatures (-40° to +75°C). Because they are
heavier and bulkier than other primary batteries, they are used primarily in
applications requiring the desired shelf life and operating temperature
ranges. For most of these applications, few substitutes are available.
Nickel-Cadmium
The nickel-cadmium (Ni-Cad) battery" is the second most common storage
cell today. Total shipments of Ni-Cad batteries amounted to $103.8 million
in 1977, representing 5 percent of total storage battery shipments.
Ni-Cad batteries are produced in both vented and sealed types. The
structure of Ni-Cad vented cells is basically similar to that of the lead-acid
battery, while the sealed cells are made in button, cylindrical, rectangular,
and other shapes to suit various space and capacity requirements. Vented Ni-
Cads are used primarily in aircraft, while the sealed type is used in consumer-
oriented products such as calculators, flashlights, portable appliances, and
power tools. In consumer product applications, Ni-Cad batteries compete with
primary cells such as carbon-zinc and alkaline types. While Ni-Cad batteries
4-8
-------
are generally four to six times more expensive than most primary batteries,
their longer life, due to recharging capabilities, makes them more economical
and convenient for many applications.
Recent marketing efforts by the sealed portable lead-acid battery produc-
ers may affect the competitive position of both primary and Ni-Cad batteries.
The chief reason for this is that sealed lead-acid batteries have a self-dis-
charge rate (percent of ampere hour capacity left) of about 2 percent per
month as compared to 1 percent per day for Ni-Cads. Thus, for applications
in which the battery stands unused for long periods of time, the lead-acid
battery will require less frequent recharging than the Ni-Cad battery.
Silver Oxide-Cadmium
Silver oxide-cadmium cells are composed of a silver-oxide cathode cell
and a cadmium anode. The principal advantage of silver oxide-cadmium cells
is a much more rugged construction which greatly increases the cell's life
in terms of charge/discharge cycles. The energy density (power-to-weight
ratio) of silver oxide-cadmium cells are two to three times that of nickel-
cadmium cells. Silver oxide-cadmium systems may replace silver-zinc cells
for relatively high discharge rate applications where a longer cycle life
is needed. They may also substitute for nickel-cadmium cells in applica-
tions requiring higher power output at some sacrifice in cycle life. The
greatest disadvantage of the silver oxide-cadmium battery is its high cost.
The utilization of the two most expensive electrode materials in the construc-
tion of this cell makes it more expensive than the silver-zinc system. This
factor has limited the use of silver oxide-cadmium cells to satellites and
other space applications. Recently, however, this cell has been used com-
mercially in appliances, tools, and portable television sets.
4.2.2 Calcium Anode Batteries
All calcium anode batteries currently produced are thermal batteries.
Thermal batteries are special-purpose reserve systems in which the solid
4-9
-------
electrolyte is nonconducting at ambient temperatures. The battery is activated
by melting the electrolyte, thus making the latter conductive. Activation is
generally achieved by igniting a pyrotechnic heat source within the battery.
The lifetime of the battery can range from minutes to days, and operating
temperatures are generally between 400 and 600 degrees centigrade. Upon
cooling, the electrolyte solidifies and the battery becomes inoperable.
Calcium anode thermal batteries are produced at three plants in limited
quantities. While total production volume is not known, employment at the
three plants is estimated at 240. Virtually all production is used for
military, aerospace, and nuclear applications.
Calcium thermal batteries are preferred in applications involving minimum
battery weight and volume, short life, and high discharge rate.
4.2.3 Lead Anode Batteries
The lead anode subcategory includes lead-acid and lead-acid reserve
batteries, each of which is discussed separately below.
Lead-Acid
In 1977, $1.7 billion of lead-acid batteries were manufactured in the
United States, representing about 67 percent of the value of all battery ship-
ments and 90 percent of all storage batteries. Lead-acid batteries are mainly
used in SLI and industrial applications.
In 1977, SLI batteries represented 82 percent of the overall lead-acid
battery shipments and were used primarily in automobiles, trucks, buses,
aircraft, and boats. About 77 percent of the SLI battery production went to
the replacement market, while the remainder was purchased by original equip-
ment manufacturers. SLI batteries generally come in 6- or 12-volt types and
are available in a number of sizes, depending on specific application. There
are two major types of SLI batteries: those with lead-antimony grids and
those with lead-calcium grids (or maintenance-free batteries).
4-10
-------
The other major market for lead-acid storage batteries is the industrial
sector (about 18 percent of the value of the 1977 lead-acid shipments).
Major applications for industrial lead-acid batteries are for motive power in
material handling equipment (e.g., forklifts), mining vehicles, yard locomo-
tives, and for standby power sources and load leveling in telephone and
electric utility systems. These industrial batteries can weigh as much as
6,000 pounds, whereas SLIs generally weigh between 35 and 40 pounds. Indus-
trial batteries also include some smaller batteries used for both commercial
and consumer products, such as emergency lighting, communications equipment,
portable tools, and alarm systems. Many of these are sealed units with gel
or paste electrolytes.
For most current uses, there is little or no ability to substitute other
products for lead-acid batteries. Consumers of SLI batteries might postpone
purchasing a new battery for a limited time by recharging their old ones, pur-
chasing used batteries, driving less, or postponing the purchase of a new car.
However, these measures would have only limited effect and are more responsive
to income changes than price changes. Likewise, industrial lead-acid battery
users may, in the short term, delay the purchase of new batteries by rebuilding
or repairing used ones, or using equipment powered by other sources of energy. *-
Lead-Acid Reserve Cell
As a "reserve" cell, the lead-acid reserve battery is shipped to the
user in an inert state and must be activated immediately before use. Activa-
tion is accomplished by releasing an acid into the cell, and within a short
period of time the cell is in a ready state. Lead-acid reserve cells are used
in limited quantities in military applications.
1-The literature contains a number of studies that indicate strongly that
the elasticity of demand for auto travel with respect to price (i.e., cost
of travel) is inelastic, whereas the income elasticities for products such
as automobiles are quite elastic. See Consumer Demand in the United States
by H. S. Houthaker and L. D. Taylor; Interindustry Forecasts of the American
Economy by C. Almon et al.; and The Data Resources Inc. Model, 1977 edition,
DRI, Lexington, Mass.
4-11
-------
4.2.4 Leclanche (Carbon-Zinc) Cells
This is the most popular and least expensive type of battery. In 1977,
U.S. shipments of carbon-zinc cells were valued at $317 million, representing
52 percent of total primary battery shipments. This is a decrease from 60
percent in 1973 (see Table 4-2), which is due to competition from other types
of batteries such as alkaline manganese and nickel-cadmium.
Carbon-zinc cells are made in cylindrical, rectangular, or flat forms of
various sizes. They are best used when they are run intermittently at rela-
tively low drains (under 100 milliamperes) but are inefficient in heavy drain
devices such as toys and electronic flashes. However, low prices make carbon-
zinc batteries very popular in a wide range of applications such as flashlights,
radios, clocks, and tape recorders.
4.2.5 Lithium Anode Batteries
Lithium is the earth's lightest solid element. While weighing only about
one-thirtieth the weight of lead, lithium can generate up to eight times as
much electricity. For this reason, major research efforts have been directed
toward developing lithium storage batteries for electric cars. However, to
date this type of battery is still in the development stage and is produced
in very limited quantities. The only lithium batteries produced in commercial
quantities today are small primary types, mainly for use in pacemakers,
electric watches, and lanterns. They compete strongly with mercury-zinc and
silver-zinc batteries because of their longer life and thin designs.
4.2.6. Magnesium Anode Batteries
The magnesium anode subcategory contains magnesium carbon, magnesium
reserve and thermal cells, each of which is described separately in the
following paragraphs.
4-12
-------
Magnesium-Carbon Batteries
The magnesium-carbon cell is patterned after the carbon-zinc cell, but
it uses a magnesium alloy anode. This cell has longer storage life and
greater ability to withstand high heat and humidity than the carbon—zinc
cell. Magnesium-carbon cells are primarily used in military applications
where batteries are stored under severe conditions. This cell is also some-
times used commercially in aircraft emergency systems and in marine and
mining operations. Magnesium batteries are more expensive than carbon-zinc
cells because of material costs.
Magnesium Reserve Batteries
Magnesium reserve cells are used in situations requiring an extremely
long shelf life and high reliability. The battery is shipped and stored in
an inert state and activated when necessary. This type of battery is used
for life-jacket lights and life-raft lights, emergency radio beacons, life-
buoy lights, signal-flare initiations, divers' and frogmen's lights, depth-
charge initiations, and radio power supplies. In most of these uses the
battery is not tested before use and when activated will be expected to
operate continuously until completely discharged. Some types can be acti-
vated by immersion in seawater.
Magnesium Thermal Batteries
Thermal batteries are special-purpose reserve systems in which the solid
electrolyte is nonconducting at ambient temperatures. The battery is activated
by melting the electrolyte, thus making the latter conductive. Activation is
generally achieved by igniting a pyrotechnic heat source within the battery.
The lifetime of the battery can range from minutes to days, and operating
temperatures are generally between 400 and 600 degrees centigrade. Upon
cooling, the electrolyte solidifies and the battery becomes inoperable.
4-13
-------
Thermal batteries have the following special properties: rapid and
reliable activation, virtually no deterioration during storage, moderately
high discharge rates for short times after activation, no required maintenance,
compactness, mechanical ruggedness, and operability over a wide ambient tem-
perature range. They are used for military and aerospace systems and for
alarm and sensing applications.
In comparison with calcium batteries, magnesium thermal batteries are
heavier, bulkier, and have a lower discharge rate. On the other hand, they
are less expensive, more stable, and have a longer life.
4.2.7 Zinc Anode Batteries
The zinc anode subcategory includes aklaline manganese, carbon zinc-air,
mercury-Ruben, nickel-zinc, and silver oxide-zinc, each of which is described
separately below.
Alkaline Manganese
In 1977, there were $111 million worth of alkaline manganese batteries
shipped, representing 18 percent of the primary battery market (See Table 4-2).
The alkaline dry cells are produced primarily in button, cylindrical, and
rectangular shapes. They are usually interchangeable with carbon-zinc cells
in a wide range of applications, such as calculators, flashlights, camera
equipment, toys, radios, tape recorders. Alkaline cells cost about three to
four times the cost of carbon-zinc cells but have higher energy density,
longer life, and better performance under heavy-drain applications. For
continuous heavy-drain uses, the alkaline cell performs better than any
other primary battery, although the nickel-cadmium storage battery is quite
competitive in this regard. This battery is also often used for light and
intermittent duties when cost is not a factor, because of its superior stability
and long life. Some alkaline manganese batteries are rechargeable and used
as storage batteries.
4-14
-------
Carbon Zinc-Air Batteries
The carbon zinc-air cell is usually composed of an alkaline electrolyte,
anode of amalgamated zinc, and air-depolarized carbon cathode. Some of these
batteries contain acid electrolytes. The carbon zinc-air system offers a
unique combination of high energy density and high power density at relatively
low cost. Carbon zinc-air cells are used in portable transceivers, semaphore
devices, highway flashing systems, lighthouses, railway signals, night-vision
devices, and satellite communications.
Mercury-Ruben Batteries
The mercury-zinc (Ruben) cell is the third largest selling primary bat-
tery type. Total shipments in 1977 amounted to $65 million, or 11 percent of
total primary battery shipments (see Table 4-2). The mercury-zinc battery is
composed of a zinc anode and a mercury oxide cathode. This battery has rela-
tively steady discharge characteristics, a high capacity-to-volume ratio, good
high temperature characteristics, and good resistance to shock, vibration, and
acceleration. This cell is used as a power source for miniaturized electronic
equipment, such as hearing aids, electronic watches, calculators, light meters,
and electric-eye devices. Frequently, the cell is used as a secondary volt-
age standard in regulated power supplies, radiation detection meters, potentio-
meters, computers, and voltage recorders. Substitution by silver-zinc and
lithium cells is possible for many of the mercury-zinc cell applications.
The Weston cell differs from the Ruben cell in that it uses a cadmium
sulfate-mercury sulfate system and is contained in a glass vessel. Before
production of the Weston cell ceased in 1977, it was used as a primary volt-
age standard. However, there is currently no known commercial production.
Silver Oxide-Zinc Batteries
Silver-zinc storage cells are composed of a silver oxide cathode, zinc
anode, and a strong alkaline electrolyte. The most important feature of the
4-15
-------
silver-zinc cell is its high power-to-weight ratio (as much as six times that
of the nickel-cadmium cell). Silver-zinc cells are available in both storage
and primary configurations. Storage silver-zinc cells have shorter life, in
terms of the number of possible charge/discharge cycles, than nickel-cadmium
and silver-cadmium cells. Because of its high cost, the silver-zinc storage
cell is mainly used in military and aerospace applications where cost is of
lesser importance than performance. The primary silver oxide-zinc battery
has been the fastest growing primary battery in recent years, with an average
annual growth rate of 67 percent between 1973 and 1977. Sales reached $54
million in 1977 (see Table 4-3).
The usual configuration of the silver-zinc cell is similar to the mercury-
zinc cell, but it uses a silver oxide cathode. Although more expensive than
mercury cells, silver-zinc cells have been replacing mercury cells in many
applications, such as hearing aids, electric watches, and electronic instruments,
The primary reason for this is the performance advantages that silver-zinc
cells have over mercury cells, such as higher voltage, greater capacity, and
superior low-temperature capacity (silver-zinc cells remain operative at
-50° Fahrenheit while mercury-zinc capacity drops considerably around 40° Fahr-
enheit and becomes virtually inert around the freezing point).
4.2.8 Miscellaneous Battery Types
There are a number of battery types that were considered for inclusion
in this study, but were omitted during the course of the research because
they are not made in commercial quantities. Examples of these are nuclear
batteries, advanced lead-acid batteries, lithium storage batteries, and nickel-
iron batteries.
The first three of these battery types are experimental or made to order
for special applications. Nickel-iron batteries were once used in applications
such as material handling, railway lighting, and telephone exchange system
equipment. They are now produced only in limited quantities primarily for
experimental purposes. Substitution by lead-acid and nickel-cadmium batteries
4-16
-------
I
M
^J
TABLE 4-3. PRIMARY BATTERY PRODUCTION,1973-1977
(Current Dollars)
TYPE
Carbon-Zinc
Alkaline Manganese
Mercury-Zinc
Silver-Zinc
Other
Total
1973
$ MILLION
208
57
32
7
42
346
% OF
TOTAL
60
16
9
2
12
100
1975
$ MILLION
263
80
43
18
45
449
% OF
TOTAL
59
18
10
4
10
100
1977
$ MILLION
317
111
65
54
62
609
% OF
TOTAL
52
18
11
9
10
100
COMPOUNDED
AVERAGE ANNUAL
GROWTH (%)
11.1
18.1
19.4
66.7
10.2
15.2
NOTE: Percentages may not total 100 due to rounding.
SOURCES: Census of Manufactures; Portable Energy Sources: Batteries, Fuel Cells, Solar Cells,
Business Communications Co., Stanford, CT, 1977; and EPA Technical Survey.
-------
has taken place in most applications because of some major disadvantages of
nickel-iron cells. These disadvantages are their high cost, inferior low-
temperature performance, lower terminal voltage requiring larger batteries
for the same energy content, and the low maximum current which can be drawn
from the battery.
4.3 CONSUMPTION AND PRICE TRENDS
Between 1967 and 1980, shipments of storage batteries grew from $0.578
billion to $2.57 billion, representing a compounded average annual growth rate
of 12.4 percent (see Table 4-4). During that time, primary battery shipments
grew from $308 million to $953 million, averaging 9.1 percent per year. In
constant dollars, the compounded annual average growth rates were 6.8 and 4.2
percent for storage and primary battery shipments, respectively. During the
same period, the real gross national product (GNP) in constant dollars grew
at an average rate of 3.0 percent. Longer-term trends exhibit somewhat lower
rates for storage and higher rates for primary batteries. These are described
in Chapter 5 of this report.
Wholesale prices of both storage and primary batteries grew at an average
annual rate of 4.8 percent during the 13-year period. This was significantly
lower than the average growth of all commodities (7.6 percent).
The prices of lead and zinc, the 'two major metals used in battery manu-
facturing, grew at annual rates of 9.6 and 9.0 percent, respectively. However,
these prices peaked in 1979 and dropped about 40 percent by 1983. There are
several reasons for the rapid price increases during the 1970s. First, the
rise in lead prices has been due largely to a number of structural shifts in
its markets and in the industry, which have "one-time-only" changes which will
not be perpetuated. These structural shifts include strikes, unusual sudden
increases in world demand, especially from Japan and Eastern bloc countries,
and OSHA regulations, which are estimated to add between zero to about one
cent to a pound of lead.-'- According to industry sources, this price escalation
^-Occupational Safety and Health Administration, Economic and Environmental
Analysis of the Current OSHA Lead Standard, CRA Project No. 536.6, prepared
by Charles River Associates, 1982.
4-18
-------
TABLE 4-4. HISTORICAL TRENDS IN THE BATTERY INDUSTRY
STORAGE BATTERIES
Number of Employees (000)
Value of Shipments
(millions of current dollars)
(millions of 1967 dollars)
Price index for Storage Batteries
PRIMARY BATTERIES
Number of Employees (000)
Value of Shipments
(millions of current dollars)
(millions of 1967 dollars)
Price Index for Primary Batteries
PRICE OF LEAD (cents/lb)
PRICE OF ZINC (cents/lb)
ALL COMMODITIES WHOLESALE PRICE
INDEX
GNP (1972 dollars)
1967
19.3
577.5
577.5
100.0
H.O
307.6
307.9
100. 0
14.00
14.35
100.0
1008.0
1968
19.0
633.7
628.7
100.8
11.3
330.8
327.2
101. 1
13.21
14.00
108.7
1052.0
1969
19.9
697.0
677.4
102.9
10.8
340.5
329.6
103.3
14.93
15.15
113.0
1079.0
1970
20.8
769.8
696.0
110.6
9.4
329.5
312.9
105.3
15.69
15.82
110.4
1086.0
1971
21.1
828.2
737.5
112.3
9.4
350.5
294.8
118.9
13.89
16.92
113.9
1108.0
1972
22.1
968.6
857.2
113.0
8.4
348.1
262.5
123.2
15.34
17 .72
119.1
1186.0
1973
23.9
1070.8
938.5
114.1
8.7
380.7
307.3
123.9
16.31
20.84
134.7
1255.0
1974
23.4
1234.2
980.3
125.9
9.5
423.3
329.2
128.6
22.49
35.94
160.1
1246.0
1975
21.7
1302.3
899.4
144.8
9.0
473.7
313.1
151.3
21.52
38.89
174.9
1234.0
1976
23.1
1519.7
1026.1
148.1
10.4
627.1
395.6
158.5
23.10
37.38
183.0
1300.0
1977
25.9
1982.5
1218.5
162.7
11.0
666.1
412.4
161.5
30.74
35.21
194.2
1372.0
1978
27.2
2269.6
a
a
12.2
759.1
468.6
162.0
33.70
31.00
209.3
1433.0
1979
27.6
2607.1
a
a
12.1
851.5
500.6
170.1
52.60
37.30
235.6
1483.0
1980
24.7
2571.8
a
a
11.8
952.9
539.9
176.5
44.36
37.00
268.8
1481.0
1981
NA
NA
NA
NA
NA
NA
NA
182.2
36.50
44.50
NA
1510.0
COMPOUNDED
AVERAGE ANNUAL
GROWTH RATE
1967-1977 (Z)
12.4
6.8b
4.8b
_
9.1
4.2
4.6
9.6
9.0
7.6
3.0
-p-
I
aPrice index of storage batteries unreported for years beyond 1977.
bBased on years 1967 to 1977.
SOURCES: U.S. Department of Commerce, Census of Manufactures and Survey of Current Business.
-------
is not expected to continue at such high levels. Moreover, as the data in
Table 4-4 show, the price of lead has dropped significantly from its 1979
high and it is expected that there will be a lead surplus throughout the 1980s.
For these reasons, it is expected that lead prices will remain low. Therefore,
as a conservative estimate, there is no reason to expect the price of lead
to increase more or less than that of other raw materials over the long run.
4.4 IMPORTS AND EXPORTS
Imports and exports traditionally have been an insignificant factor in
the storage battery market. In recent years, only 2 percent of the domestic
consumption of storage batteries has been from imports.
In the past, and to some extent today, transportation-associated problems
have been a stumbling block in developing import-export markets. Shipping a
vented battery with electrolyte is not only costly, but difficult as well, in
that batteries could discharge while in transit. This explains the location
of battery manufacturing plants near their markets.
In addition to direct imports of batteries, a number of foreign-made bat-
teries enter the U.S. market indirectly via imported automobiles. The number
and origin of batteries entering the U.S. market in this way may be determined
(
by examining sales of cars in the United States. During the late 1970s and
early 1980s, imports have been around 25 percent of the total number of auto-
mobiles sold in this country. Japan, with most of the imported automobile
market, is the leading exporter of storage batteries in this sense. Germany,
Italy, and the United Kingdom, in that order, are the other three major
exporters of storage batteries contained in automobiles. If these indirect
imports are counted together with direct imports, the growth rate of imports
would exceed that of exports.
The SLI battery has also been imported to the United States indirectly
via imported motorcycles. Recently, however, two of the major exporters of
motorcycles, namely Taiwan and Japan, have found it advantageous to manufacture
4-20
-------
motorcycle batteries in the United States—a factor which may influence this
trend.
Exports of American-made storage batteries account for about 2 percent of
the value of storage battery shipments. U.S. technology in primary batteries
has enabled this country to successfully penetrate export markets, as evidenced
by primary battery exports in 1975 and 1981 (see Figure 4-1). In past years,
Japan and Taiwan were able to compete successfully with the U.S. for the flash-
light and transistor radio battery market. However, there is no evidence to
date that they can compete against U.S. technology in the high-performance
batteries. The data available in this area preclude a comprehensive assessment
by product group. However, as the figure shows, aggregate industry data
indicate no evidence of secular changes that would significantly affect the
conclusions of this study.
Import and export statistics are summarized from 1965 to 1981 in Table 4-5
and shown graphically in Figure 4-1. These figures do not account for batteries
included as an integral part of end-use products such as automobiles.
4.5 UNIT VALUE OF BATTERY PRODUCTS
Since batteries within each subcategory are made in numerous sizes,
configurations, and electrochemical properties, it is difficult to standardize
the analysis on a single unit. Department of Commerce documents report battery
activity in terms of millions of units and dollars. However, given the diver-
sity of battery types and sizes, units are of little use to this study. EPA's
Effluent Guidelines Division, which conducts the technical analysis, reports
production in the form of weight of product produced. They also reported that
the wastes at most battery plants are of the order of magnitude of 1 percent,
with a possible upper bound of 5 percent. Thus, in this report the weight
of the product is used as a unit of output measure and the average value per
pound for each battery type is calculated. For some battery types, this
figure is the value of industry shipments for the battery type divided by
the number of pounds produced. For some battery types the production weight
4-21
-------
Millions
of Dollars
(Shipments)
140-
130-
120-
110-
100-
90-
80-
70-
60-
50-
40-
30-
20-
10-—>"
"
Primary
, Batteries
/ Expert
Primary
Batteries
/ Import
/
• Storage
/ Batteries
/ / Export
• / Storage
ter
/ / Batteries
*^
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82
SOURCES:
U.S. Bureau of the Census, U.S. Commodity Exports and Imports as
Related to Output, U.S. GPO, Washington, D.C.; and U.S. Imports for
Consumption and General Imports. These data exclude batteries that
are components of end-use products.
FIGURE 4-1. VALUE OF BATTERY IMPORTS AND EXPORTS, 1967-1981
4-22
-------
TABLE 4-5. BATTERY INDUSTRY IMPORTS AND EXPORTS, 1967-1977
(Millions of Dollars)
ro
u>
YEAR
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
IMPORTS
STORAGE
7.8
8.9
11.7
13.2
12.8
14.2
21.6
31.2
24.0
28.1
32.0
38.5
44.8
51.1
53.1
PERCENTAGE
OF DOMESTIC
CONSUMPTION*
1.4
1.4
1.7
1.7
1.6
1.5
2.0
2.5
1.9
1.9
1.6
1.7
1.7
2.0
NA
PRIMARY
8.5
11.2
12.2
11.1
12.2
17.4
17.4
21.5
17.6
32.1
33.0
39.7
47.6
61.4
79.6
PERCENTAGE
OF DOMESTIC
CONSUMPTION**
2.8
3.4
3.6
3.4
3.5
5.0
4.6
5.3
4.0
5.4
5.3
5.6
6.0
6.9
NA
EXPORTS
STORAGE
16.0
18.2
19.5
22.7
22.5
25.8
28.1
45.4
50.0
56.0
59.0
51.2
43.8
54.1
67.3
PERCENTAGE
OF DOMESTIC
CONSUMPTION
2.8
2.9
2.8
3.0
2.7
2.7
2.6
3.7
3.9
3.8
3.0
2.3
1.7
2.1
NA
PRIMARY
10.3
12.0
12.6
14.7
15.1
17.9
22.9
35.5
49.3
67.9
73..0
86.3
102.2
129.8
139.0
PERCENTAGE
OF DOMESTIC
CONSUMPTION
3.4
3.6
3.7
4.5
4.3
5.1
6.1
8.7
11.2
11.5
11.7
12.1
12.8
14.7
NA
*Domestic consumption estimates do not include changes in inventory.
n
**Data include battery parts but do ot include batteries imported as components of end-use products.
NA = Not available.
SOURCES: U.S. Bureau of the Census, U.S. Commodity Exports and Imports as Related to Output, U.S. GPO,
Washington, B.C.; and U.S. Imports for Consumption and General Imports.
-------
and value of shipments for 1972 and 1973 are estimated from previous EPA
reports on the industry and adjusted to January 1978 dollars using the Bureau
of Labor Statistics wholesale price indexes for storage batteries and for
primary batteries, as appropriate.^ For other battery types, price lists
from such sources as the General Services Administration, retail store cata-
logs, and battery manufacturers are used. For the wet cell lead-acid bat-
teries, a value of $0.60 per pound was used based on extrapolation from a 1978
figure of $0.50 per pound. The resulting estimates of battery value per pound
for each battery type are shown in Table 4-6. The analyses for the lead-acid
battery product group are done using 1983 dollars. However, since the analyses
for the other product groups are done useing 1978 dollars, the values for these
products shown in the table are in 1978 dollars.
4.6 BATTERY INDUSTRY PRICE DETERMINATION
Increased costs of battery manufacturing will, in whole or in part, be
passed through to customers in the form of higher prices. The amount that
can be passed through depends upon the market acceptance of price increases
as measured by price elasticity of demand and the pricing behavior and
power in the industry. Price elasticity estimates for the various product
groups are presented in Section 4.2.
If large firms set prices, smaller firms may be forced to accept their
lead. As indicated in Chapter 6, since unit compliance costs are usually
lower for larger or newer plants, firms operating smaller or older plants
could be forced to absorb the difference. If firms perceive their industry
as competitive, they will be more reluctant to increase prices than firms in
basically noncompetitive industries.
o
EPA, "Assessment of Hazardous Waste Practices: Storage and Primary Batteries '
Final Report (SW-120c), prepared by Versar, Inc., Springfield, Virginia, for
the Office of Solid Waste, 1975.
4-24
-------
TABLE 4-6. AVERAGE VALUE PER POUND OF PRODUCTION
BATTERY TYPE
Cadmium Anode
Mercury-Cadmium
Nickel-Cadmium Vented
Nickel-Cadmium Sealed
Silver Oxide-Cadmium
Calcium Anode
Calcium
Lead Anode
Lead-Acid, Wet
Lead-Acid, Gel
Lead-Acid Reserve
AVERAGE $ VALUE PER POUNDa
31.70
8.03
160.00
250.00
.60
5.59
Leclanche
Carbon-Zinc and
Related Types
Lithium Anode
Lithium
1.39
16.00
Magnesium Anode
Magnes ium-Carbon
Magnesium Reserve
Thermal
Zinc Anode
Alkaline Manganese
Miniature Alkaline Manganese
Carbon Zinc-Air
Mercury-Ruben
Nickel-Zinc
Silver Oxide-Zinc
4.08
26.27
26.27
3.39
4.00
10.36
26.27
aLead-acid batteries are in 1983 dollars; all other figures are in 1978
dollars.
SOURCES: EPA, Economic Impact Assessment of Proposed Effluent Limitation
Guidelines for the Battery Industry Point Source Category (Draft,
by Kearney Management Systems, 1976-1977); EPA, Assessment of
Industrial Hazardous Waste Practices: Storage and Primary Batteries
Industries, Office of Solid Waste Management Programs, 1975; GSA,
Federal Supply Service, Federal Supply Schedules 61, Parts I, II,
III, and VIII; Sears Roebuck, Inc., Merchandise catalog; and 1977
Census of Manufactures.
4-25
-------
The lead-acid subcategory is moderately concentrated with four firms
accounting for 66 percent and eight firms accounting for 85 percent of indus-
try production. Alongside these large firms there exist many small and medium-
sized firms that might be expected to have higher average costs and a lower
availability of investment capital. Competition among the larger firms is
likely to mitigate their ability to immediately pass along all increased costs
of doing business. However, given the low price elasticities of demand, their
costs will ultimately be passed along. The smaller firms, if they are faced
with high unit compliance costs, will be in a poorer competitive position.
The existence of localized specialty markets may mitigate competition between
smaller and larger firms. However, information gathered is insufficient to
fully assess the magnitude of each specialty market situation. Where this is
known to be a specific factor it is indicated in the economic impact estimates
in Chapter 7.
Production of primary batteries is highly concentrated with four-firm
and eight-firm concentration ratios of 87 and 94 percent, respectively.
Production of individual battery types is even more concentrated, since, as
can be seen in Table 3-2 (Chapter 3), many of the subcategories have only a
half dozen or fewer plants. High concentrations such as these imply that
the industry's ability to increase their product prices to cover increased
costs is limited only by the strength of market demand, which, as shown in
Table 4-2, is estimated to have low to moderate demand elasticities.
The information in this chapter is used in Chapter 5 to project market
conditions in the industry and in Chapter 7 to estimate variables such as
plant revenues and price and production impacts of the regulation.
4-26
-------
5. BASELINE PROJECTIONS OF INDUSTRY CONDITIONS
This section provides projections of conditions in the battery industry
to 1990 under the assumption that there are no additional water pollution
control requirements resulting from the Clean Water Act. These projections
are used in Chapter 7, together with other information such as estimated
compliance costs, to assess the incremental economic effects of the effluent
control requirements on future industry conditions.
The baseline projections in this report provide a general point of refer-
ence for the analysis and are not intended to be a comprehensive, authoritative
forecast of future industry conditions. Although minor changes to the base-
line could result from a more comprehensive treatment of forecasting techniques,
they are not likely to alter significantly the study's overall conclusions
regarding the extent of the economic impacts from the effluent guidelines.
The primary variables of interest are divided into two broad categories
for consideration in this report—demand-related factors and supply-related
factors. Demand-related factors include the value of battery products shipped,
the type of battery products shipped, and price elasticity. The supply factors
considered are cost of producing batteries, employment, number of baseline
closures, and number of new plants.
The basic approach followed in developing the projections begins with
demand forecasts under the assumption that the economy will grow fairly
steadily and battery prices will remain constant relative to general price levels,
Using the results of the demand forecasts, industry supply factors are assessed
to determine if there would be any significant changes in the relative costs
or profitability of producing batteries over the next decade.
5-1
-------
5.1 DEMAND-RELATED FACTORS
The primary reason for beginning the baseline projections with the demand
analysis is that it is hypothesized that the battery industry supply factors
will adjust to demand conditions. This is expected because: (1) the demand
for batteries is a derived demand, depending on the sales and use of thousands
of other products such as automobiles, flashlights, electronic calculators,
and other electronic equipment, and is, therefore, complementary to the demand
of these other products; and (2) the battery industry is a very small propor-
tion of the total economic activity in the U.S. and is, therefore, more likely
to react to general trends, rather than influence them.
Demand forecasting is an inexact discipline, with considerable dependence
on individual judgment. Each forecasting technique has its own particular
advantages and disadvantages, which could result in different types of errors.
To mitigate the likelihood of bias because of such occurrences, two statistical
techniques are examined. These include time series analysis and regression
analysis. To augment these techniques, information and estimates provided by
other authors are also reviewed.
5.1.1 Time Series Analysis
Time series analysis is a useful, but sensitive, forecasting tool. The
results are extremely sensitive to the time period selected for the analysis.
Furthermore, the technique is generally more appropriate for broad economic/
demographic variables than for very specialized industries. A particular
industry may have undergone one or two influential technological or market
changes during part of a 20- or 30-year history, which would bias the calcula-
tion of a long-term trend line. On the other hand, aggregate economic vari-
ables tend to "average out" such changes and, consequently-, exhibit a more
uniform growth pattern. Table 5-1 summarizes the industry's growth pattern
over the historical period.
5-2
-------
TABLE 5-1. ANNUAL GROWTH RATES FOR
REAL STORAGE AND PRIMARY BATTERIES SHIPMENTS
YEARS
1949 - 1960
1960 - 1970
1970 - 1980
1975 - 1980
1949 - 1980
GROWTH RATES
STORAGE
1.5%
4.8%
3.5%
5.3%
3.8%
PRIMARY
5.0%
5.7%
5.6%
11.5%
5.2%
TOTAL
INDUSTRIAL
PRODUCTION
4.9%
5.0%
3.2%
4.5%
4.2%
SOURCE: JRB Associates estimates.
5-3
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Storage Batteries
During the 1950s, the value of storage battery shipments in constant
dollars showed no growth at all. During the 1960s and 1970s, industry
growth, more or less, paralleled that of total economic activity as measured
by the Federal Reserve Board Index of Total Industrial Production. The com-
pounded average annual growth rate from 1960 to 1970 was 4.8 percent compared
to 5.0 percent for total industrial production and from 1970 to 1980 the
figures were 3.5 and 3.2 percent, respectively. The growth rate for the 1949-
1980 period was 3.8 percent compared to 4.2 percent for industrial production.
Several market and technological developments in the storage battery
industry over the time period appear to explain, to a large extent, the sharp
shifts in storage battery industry growth patterns. The first of these is the
switch from 6-volt to 12-volt storage, lighting, and ignition (SLI) batteries
during the 1950s. Twelve-volt batteries have thinner plates, which might
result in earlier replacement than 6-volt batteries. The second significant
change is increasing power demands on SLI batteries resulting from increased
popularity of power options in automobiles (such as air conditioning and
power windows). The third development is the general trend toward increased
number of miles driven per year by motorists through the 1950-1980 period.
The fourth development is that of maintenance-free batteries, which might be
changing the value of shipments data more than volume of shipments data,
because of their higher price. Finally, the growing commercialization of
nickel-cadmium batteries during the 1970s has made possible a number of new
consumer products as well as some replacement of primary batteries by these
storage batteries.
Primary Batteries
Unlike the storage batteries, primary batteries experienced significant
growth in shipments during the 1950s. Average annual growth in the value of
shipments (constant dollars) during the 1950s was approximately 5.0 percent.
During the 1960s the average annual growth rate increased to 5.7 percent,
5-4
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and in the 1970s it averaged around 5.6 percent annually. These rates appear
to parallel general economic activity.
The recent growth in the primary battery industry is due mainly to innova-
tions in the battery and battery-using industries. In the primary battery
industry, innovations include the commercialization of new chemical systems
and new sizes and shapes of batteries (e.g., nickel-cadmium, silver-oxide, and
mercury-Ruben batteries). In battery-using industries, recent innovations such
as solid-state electronic equipment (e.g., calculators, hearing aids), dispos-
able flashlights, and smoke alarms have been quite successful in the market-
place and have caused rapid growth in the use of the "newer" batteries.
Furthermore, the newer batteries have been replacing carbon-zinc batteries in
many applications. Thus, the rapid growth of the newer products is partially
offset by the falling share of the market of the older products.
5.1.2 Regression Analysis
Regression analysis is a statistical technique that can be used to sum-
marize the relationship between the fluctuations in the value of a variable
(i.e., the dependent variable) and variables that are believed to cause these
fluctuations (i.e., the independent variables). In demand analysis, it is
used to explicitly relate changes in quantities of a product demanded to the
level of economic activity in industries or sectors that use the product,
and to the prices of the product, its substitutes, and its complements.
Specifically, the demand for batteries can be expressed in equation form:
Da = bl 7a + b2 Pa + b3 PS + b4 c + bO + e
where
Da = Demand for batteries in market a
ya = an appropriate activity variable in market a
5-5
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pa = prices of product a, appropriately deflated
ps = the prices of substitutes, appropriately deflated
bg, b^ , b2, b3, and b^ = the parameters of the relationship to be estimated
t = a measure of technological change
e = stochastic error term.
After testing a variety of functional forms, the demand model specifica-
tion shown in Table 5-2 was finally selected for use in the forecast. The
independent variables in the primary batteries equation are the total GNP in
constant dollars and a price variable for primary battery products. The inde-
pendent variables in the storage batteries equation are the GNP in constant
dollars and the price variable for storage batteries. Total GNP is used as the
activity variable because of the pervasive use of batteries by the consumer and
the commercial and industrial sectors of the economy. The price variables for
primary and storage batteries are constructed by deflating the appropriate
Federal Reserve Board (FRB) producer price index for batteries by the FRB
index for total manufacturing. These price variables represent the relative
prices of batteries compared to other manufactured products. These indices
are appropriate for this analysis because (a) long time series for the prices
of the various battery products are not readily available and (b) these
price indices are constructed as an aggregation of the changes in the price
of the various types of battery products in the market.
Table 5-2 also summarizes the results of the demand equations for primary
and storage batteries. The high R^'s (R^ = 1 represents a perfect fit) suggest
that a significant portion of the movement in the dependent variables is
explained by the movement in the independent variables. Additionally, both
the activity and price variables in each equation are significant at the 95
percentile level.
5-6
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TABLE 5-2. SUMMARY OF REGRESSION MODEL RESULTS
Demand Model: log Da = ctQ + a.]_ log Pa + 0,2 log Ya + e
EXPLANATORY
VARIABLES
Intercept
Price
GNP ($1972)
R2
Sample Time Period
PRIMARY
BATTERIES3 >b
-3.9866
(-3.829)
-.5253
(-2.331)
1.3832
(9.099)
.8706
1949-1980
STORAGE
BATTERIES3 »b
.6592
(-.996)
-.778
(-2.626)
1.0384
(10.558)
.8781
1957-1980
aCorrected for autocorrelation.
bThe t-statistics are in parentheses.
5-7
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The regression equations in Table 5-2 together with exogenously prepared
forecasts of the explanatory variables (GNP and relative battery prices) are
used to project value of battery shipments in constant dollars over the 1983-
1990 period. An evaluation of the trend of the prices for batteries indicates
no reason to expect that they would increase at a faster rate than other goods
in the economy. Therefore, the real prices for primary and storage batteries
are assumed to be constant over the forecast period. The forecasts for the
activity variables (i.e., GNP) were developed by the consulting firm Data
Resources Inc.^- This source projects a compounded annual average growth
rate of 3.5 percent through 1990 for real GNP.
5.1.3 Summary of Forecasts
Table 5-3 presents the forecasts developed from the time trend analysis
and the regression model for primary and storage batteries for the 1981-1990
period. The predictions for the explanatory variables are also shown in
this table. The time trend technique provides a check on the regression
model. Forecasts based on both the regression models and the time trend
analyses indicate that there will be significant growth in battery shipments
during the 1980s. Shipments of primary batteries are expected to grow at a
faster rate than those of storage batteries.
For the storage battery segment, the forecasts based on the regression
model are in general agreement with those based on the trend analysis. For
1985 both forecasts call for shipments of $1.4 billion in 1967 dollars ($3.2
billion in 1981 dollars). For 1990, the forecast based on the regression
model is somewhat lower than that based upon the trend analysis ($1.65 billion
versus $1.69 billion in 1967 dollars). The compounded annual growth rates
from 1980 to 1990 is 3.6 percent based upon the regression model and 3.8 per-
cent based upon the trend analysis.
'•Data Resources, Inc., Long-Term Review, Winter, 1982-1983.
5-8
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TABLE 5-3. BASELINE DEMAND PROJECTIONS FOR THE BATTERY PRODUCT SEGMENTS
(In 1967 Dollars)
Cn
YEARS
1983
1984
1985
1986
1987
1988
1989
1990
ANNUAL
RATE
1980-
1990
TIME TREND
($000)
PRIMARY
BATTERIES
629
661
696
732
770
810
852
896
5.2%
STORAGE
BATTERIES
1,304
1,353
1,405
1,458
1,514
1,572
1,631
1,693
3.8%
DEMAND MODEL*
($000)
PRIMARY
BATTERIES
562
604
639
672
707
739
769
794
3.9%
STORAGE
BATTERIES
1,288
1,346
1,405
1,459
1,516
1,567
1,614
1,653
3.6%
b
RELATIVE PRICE
PRIMARY
.67
.67
.67
.67
.67
.67
.67
.67
0
STORAGE
.75
.75
.75
.75
.75
.75
.75
.75
0
GNPU
(billions
of 1972
dollars)
1509.2
1575.6
1641.7
1702.6
1765.9
1823.8
1876.0
1919.6
3.5%
aFrotn equations in Table 5.2.
"Federal Reserve Board Producer Price Index for batteries deflated by the producer price index for total
manufactured goods; 1967 = 1.0.
cData Resources, Inc., Long-Term Review, Winter, 1982-1983.
-------
For primary batteries, the forecasts based on the regression model are
significantly lower than those based upon the trend analysis. 1990 shipments
are expected to be $794 billion (1967 dollars) based on the regression model
and $896 billion based on the trend analysis. The compounded average annual
growth rate is 3.9 percent based on the regression model and 5.2 percent
based on the trend anlaysis.
Other sources including the American Metal Market, Chemical Week, govern-
ment reports, and interviews with a number of industry personnel contacted
during the course of the study indicate that the market for battery products
is likely to expand fairly rapidly during the 1980s. From these sources, a
number of trends and potential technological developments could affect the
validity of the estimates above. These are:
• Maintenance-free batteries may increasingly dominate
the lead-acid battery industry. This will result in
increased demand for lead-calcium alloy. To meet this
demand, lead smelters will decrease the proportion of
scrap lead to virgin lead.
• Research and development geared toward developing new
types of batteries could threaten the long-term future
for lead-acid batteries. Such R&D is also being done to
improve lead-acid technology, but such improvements would
be minor compared to the theoretical potential of some
other systems (e.g., lithium batteries).
• The recent trend of making smaller SLI batteries is expected
to continue. This trend is increasing especially in the
automobile industry, which is improving its fuel economy
by reducing the size and weight of batteries in cars and
trucks. The demand for these smaller batteries will
increase because of the expected shorter average useful
battery life of the smaller-sized batteries.
• Increased cost of electric power production has made the
storage of electrical energy by utilities for use during
peak demand periods more cost-effective. This trend will
have a positive effect on lead-acid battery growth.
5-10
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• The development of a practical electric vehicle holds the
promise of revolutionizing this industry. Although there
are a number of test electric vehicles on the road today,
none appear to be able to replace completely the internal
combustion engine at this time. Assuming that an electric
automobile using a fairly conventional lead-acid technology
becomes popular, each 100,000 vehicles sold could increase
industry value of shipments by 6 percent. One hundred
thousand vehicles represent about 1 percent of annual U.S.
auto sales.
• A trend toward diesel engines would increase demand for
SLI batteries, since diesel engines require two batteries.
These factors could affect the demand for batteries. However, because
of the uncertainty inherent in predicting technological breakthroughs and
world energy prices most of these factors are not incorported in the demand
forecast.
5.2 SUPPLY FACTORS
The primary supply-related factors of interest are employment, industry
establishments, prices, profits, industry location, and other Federal regula-
tions.
5.2.1 Employment
In general, it is expected that employment will increase with growing
industry activity, but at a lower rate than that of value of shipments or
value added. The lower rate results from a trend of increasing productivity
in the battery industry and inflation in recent years. From 1963 to 1977,
the value of shipments increased almost steadily from $32 to $45 thousand (in
1967 dollars) or 2.5 percent per year. The increased productivity resulted
from improvements in products and production processes, increases in the
proportion of industry production at larger plants (which generally have
greater capital investment per employee than smaller plants), and changes in
product mix. Thus, the growth in production was largely the result of
increased labor productivity. Since there is little evidence indicating
significant changes in these productivity trends, value of shipments
5-11
-------
per employee is expected to continue to grow at the historic rate of 2.5 per-
cent per year and thus reach $54.8 thousand in 1985 (1967 dollars) and $62
thousand in 1990. Using the above demand forecast, 1990 storage battery
employment is projected to be 26.7 thousand, about 9 percent higher than
1977- Likewise, 1985 employment is projected to be 25.1 thousand, about 3
percent above the 1977 level.
Primary battery employment increased from 8.5 thousand in 1963 to 10.7
thousand in 1977, representing a compounded average growth rate of 1.8 per-
cent per year. During this period, the real value of shipments per employee
increased from $26.8 thousand to $38.6 thousand (1967 dollars), which repre-
sents an average growth of about 2.6 percent per year. Extrapolating this
growth rate to 1990 and 1985 results in estimates of $54.1 thousand and
$47.5 thousand per employee, respectively. Given the above demand forecast
($794 million in 1990 and $639 million in 1985), this would mean 14.7 thousand
primary battery employees in 1990, about 37 percent higher than in 1977; and
13.4 thousand employees in 1985, about 26 percent higher than 1977.
5.2.2 Number of Industry Establishments in 1990
Storage Batteries
The storage battery industry appears to be following a long-term trend
toward fewer and larger plants. The Census of Manufactures reports that the
number of establishments dropped 13 percent between 1963 and 1977, from 252
to 218. There are a number of reasons for this trend, most of which will
probably be operating throughout the 1980s. These are (1) rapidly increasing
operating costs at older, more labor-intensive plants relative to newer and
larger plants; (2) changes in products and production technology; (3) geo-
graphical shifts in markets; and (4) costs of compliance with health, safety-
and environmental regulations.
The basic problem of many older, labor-intensive plants is their inability
or unwillingness to keep up with changing, lower-cost production technologies
5-12
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developed during the past 20 years. The primary changes in production techno-
logy include the replacement of rubber battery cases with plastic ones, auto-
matic battery lid sealers and other assembly equipment, faster grid-casting
machines, and the stamping and drawing grid-making processes. Product changes
have included a shift from the use of 6-volt to the use of 12-volt SLI batteries,
and the development of "maintenance-free" batteries which generally use a lead-
calcium alloy instead of the more traditional lead-antimony alloy. The manu-
facture of lead-calcium grids requires more sophisticated and, therefore, more
expensive equipment than that of lead-antimony grids. It is also expected
that, in addition to a continuation of these trends over the next decade, there
will be a general reduction in size of the SLI battery and some possible new
battery configurations to accommodate the growing popularity of electric
vehicles. These technology changes require significant investments in capital
equipment and product development, which makes it difficult for small firms
with limited access to investment capital to survive.
Many smaller lead-acid battery firms serve local, regional, or specialty
markets and, consequently, do not maintain a national marketing and advertising
network to promote and distribute their products. In addition, battery manu-
facturing has traditionally been located near markets, because of the basic
transportation economics of the industry. As a result, they are particularly
vulnerable to geographic shifts in population distribution. Thus, .as the
U.S. population shifts west and south, the growth in volume of the older,
smaller plants in the northeast will be limited and their financial position
will likely deteriorate.
Lead-acid battery producers are particularly vulnerable to health, safety,
and environmental regulations. EPA and OSHA lead-air standards have already
added significantly to production costs and investment expenditures. Moreover,
additional OSHA requirements (150 yg/m^ permissible exposure limit for lead)
became effective in June 1983 and a more stringent requirement (50 yg/nP
PEL) will become effective in 1986. OSHA has estimated that compliance with
these new regulations are quite costly and may cause a significant number
of closures of small and medium-sized plants and alter the structure of the
5-13
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lead-acid subcategory. Because it is too soon to observe the actual impacts
of these regulations and because of the drastic alterations these regula-
tions might have on the industry, two different forecasts of baseline plant
closures are presented.
The first scenario uses trend extrapolation to project that plants will
continue to close at the same rate as during the 1963 to 1977 time period
(about 1.5 - 2.5 per year). Thus, between 1977 and 1990, there would be an
additional 20 to 33 plant closures in the lead-acid battery industry. This
scenario is used as the baseline against which the impacts presented in
Chapter 7 are estimated.
The second scenario uses OSHA compliance cost estimates for the OSHA 50
Mg/rn-^ permissible exposure limit to estimate the impacts of the OSHA regula-
tions on the lead-acid plants in EPA's data base. This analysis indicates
that 44 small plants would close as a result of the OSHA rules. (The OSHA
Economic Impact Analysis, using a somewhat different methodology, reports
estimates of 42 small and 5 medium-sized plant closures.)^ The economic impacts
of the effluent guidelines under this scenario (i.e., post-OSHA 50 ug/m
permissible exposure limit for lead) are also estimated. These estimates are
included in Appendix B.
Primary Batteries
The number of primary battery plants have been increasing over the past
15 years. The size of these plants generally range from 40 to 500 employees,
with less than a handful as small as the small lead-acid plants (i.e., less
than 20 employees). Most of them are owned by large companies. In recent
years there has been some consolidation of operations by these companies,
that is, merging the operations of small plants with other small and large
plants. Industry personnel report that some of these consolidations are
encouraged by environmental regulations. At this time, there does not appear
to be any significant reason to expect more than a handful of such consolida-
2OSHA, op. cit.
5-14
-------
tions or any baseline plant closures for other reasons in this industry
segment over the next 10 years.
5.2.3 New Battery Plants
Little information has been uncovered which would allow a precise estimate
of the number of new plants that might be built between now and 1990. However,
using information in the previous sections of this report, several observations
can be made.
Production and market economies in the storage battery industry make it
highly unlikely that any plant of less than $20 to $30 million in capacity
would be built today. With plants of this size, the projected increase in
demand (assuming the 1990 estimate of $794 million in 1967 dollars) could be
met with 26-40 new plants' if output at existing plants remained unchanged.
An additional 1 or 2 plants of this size would account for capacity lost
from the closure of about 30 small plants. If, however, the increased capacity
is installed at existing establishments or the capacity utilization rates
increase, the number of new plants would be fewer. Industry sources report
that the latter scenario is more likely. Thus it is doubtful that, at the
given demand projections, there would be more than 4 or 6 new lead-acid
plants built during the 1980s.
The size of future primary battery plants can vary widely, depending
upon the degree of specialization in specific battery types. However, a
rough estimate of $5 to $10 million in capacity per plant is consistent with
current trends. With plants of this size, it would take 25 to 50 new plants
to meet the projected demand increase of $254 million (1976 dollars) if
there is no expansion of current facilities. While, at this time, no con-
sistent estimates have been found regarding expansion plans at current
facilities in the primary battery segment of the industry; it appears that
most of the required added capacity will be at existing facilities. Thus, it
is doubtful that there would be more than 10 new primary battery plants built
during the 1980s.
5-15
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5.2.4 Prices
Over the past 20 years, average battery prices increased at a slower rate
than the aggregate price levels and the price level for the total electrical
equipment industry. During the late 1970s, however, there has been an unusual
jump in some prices, because of raw material and energy cost increases. How-
ever, the prices during the 1980-1983 period were significantly lower. It
has become clear that the unusual fluctuations around the late 1970s and
early 1980s were cyclical phenomena and not indicative of long-run trends.
For these reasons, it is expected that the prices of batteries will increase
o
at approximately the same rate as the general economic price levels.
5.2.5 Profitability
Since the industry has generally low demand elasticities, it is anticipated
that most increases in production costs occurring through 1990 will be passed
on. Although industry competition and potential for foreign imports in some
industry subcategories could mitigate, somewhat, their ability to maintain
profit margins in the future, this potential occurrence has not been quantified
in this study.
5.3 SUMMARY OF BASELINE CONDITIONS
A summary of baseline conditions appears in Table 5-4. Between now and
1990, shipments will increase at an annual rate close to that of the long-term
GNP trend. However, because of increasing labor economies of scale and a
trend toward larger plants, growth in employment in the industry will be
lower than that of output. In 1990 the average plant size will be signifi-
cantly larger. This is especially true of the lead-acid segment of the indus-
try; since it is projected that there will be a number of small plants that
will cease to manufacture batteries and since the newer technologies in lead-
acid battery production are only practicable for larger plants. Although
page 4-19.
5-16
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TABLE 5-4. SUMMARY OF BASELINE PROJECTIONS
I
M
~~j
Value of Shipments
(Billions of 1967 Dollars)
(Billions of 1981 Dollars)
(Annual rate -%)
No. of Employees (000)a
No. of Plants3
No. of Firms
Price Level (1967 = 100)
Return on Sales (%)e
(Before Taxes)
Industry Competition
STORAGE BATTERIES
1977
1.2
2.7
24.5
215
112-132
16 2b
.06-. 14
Moderate
1980
1.2
2.7
NA
209
NA
221b
.06-. 14
Moderate
1985
1.4
3.2
3.6%
25.1
195-202
NA
c
.06-. 14
Moderate
1990
1.7
3.9
3.6%
26.7
182-195
NA
c
.06-. 14
Moderate
PRIMARY BATTERIES
1977
0.4
0.7
10.7
57
17
161d
.06-. 14
Moderate
1980
0.5
0.9
NA
57
17
176. 5d
.06-. 14
Moderate
1985
0.6
1.1
3.9%
13.4
57-62
NA
c
.06-. 14
Moderate
1990
0.8
1.5
3.9%
14.7
57-67
NA
c
.06-. 14
Moderate
aUnder the second scenario (47 baseline plant closures due to OSHA regulations using OSHA's plant
closure estimates), there would be 162 plants in 1985 and 1990, and employment will be somewhat lower.
bBureau of Labor Statistics Producer Price Index for Storage Batteries (1967 = 100).
cPrice increases are projected to be equal to those of the general price levels. However, under the
second scenario (OSHA price impacts of about 6 percent), the prices would be somewhat higher.
dBureau of Labor Statistics Producer Price Index for Primary Batteries (1967 = 100).
eUnder the second scenario (47 baseline plant closures due to OSHA regulations using OSHA's plant closure
estimates), return on sales may be higher for the plants remaining in the industry, due to a higher capacity
utilization at the reamining plants.
NA = Not available.
SOURCE: JRB Associates estimates.
-------
increased industry concentration is expected in the lead-acid battery industry
(because of the projected exits of small firms and possible consolidations
of larger firms), the information available does not allow a precise quantita-
tive determination of the magnitude of this development. Similar forces at
work in the primary battery sector would lead to consolidation in the mature
product lines (e.g., carbon-zinc batteries). However, the dynamic nature
of technological developments in the newer battery types (including lithium
batteries and some types that are still in the research and development
stage such as nickel-zinc) has made it difficult to project trends in consoli-
dation of these products.
Except for a one-time increase of 3 to 6 percent due to OSHA regulations,
prices of battery products are projected to increase at about the same
rate as the general price levels in the economy. This is because no extra-
ordinary relative price changes in the basic factors of production are pro-
jected. Thus, relative to other prices in the economy, battery prices are
projected to remain constant.
Insufficient information is available to reliably estimate changes in
profitability measures for the industry. This results from the dynamic nature
of the technology and industry structure described previously as well as the
uncertainties in predicting fluctuations in interest rates, cost of capital
and energy prices. Because of this shortcoming the economic analysis is
performed under the assumption that profit rates remain at current levels.
Economic impacts of OSHA regulations that became effective in June 1983
could significantly change the structure of the industry. The implications
for these industry structure changes on the economic impact estimates is
considered in a sensitivity analysis described in Chapter 9 (Limitations).
Although insufficient information is available to quantitatively disag-
gregate industry growth projections into the specific battery type, enough
information was available to categorize the various battery types according
to whether they are expected to be above, below, or approximately equal to
5-18
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the average growth rate for the industry. The results of this categorization
are:
Battery Type
Cadmium Anode
Mercury-Cadmium
Nickel-Cadmium
Silver Oxide-Cadmium
Calcium Anode
Calcium
Lead Anode
Lead-Acid
Lead-Acid Reserve
Leclanche
Carbon-Zinc and
Related Types
Lithium Anode
Lithium
Magnesium Anode
Magnes ium-Carbon
Magnesium Reserve
Thermal
Zinc Anode
Alkaline Manganese
Carbon Zinc-Air
Mercury-Ruben
Nickel-Zinc
Silver Oxide-Zinc
Growth Rate
Lower
Higher
Average
Average
Average
Lower
Lower
Higher
Average
Average
Higher
Higher
Lower
Higher
Lower*
Higher
*Nickel-zinc batteries are experimental. If they become commercialized they
would probably grow at a considerably higher rate than that of the industry.
5-19
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6. COST OF COMPLIANCE
6.1 OVERVIEW
The recommended water treatment control systems, costs, and effluent limi-
tations for the battery manufacturing industry are enumerated in the Develop-
ment Document for effluent limitation guidelines and standards of performance.
That document identifies various characteristics of the industry, including
manufacturing processes; products manufactured; volume of output; raw waste
characteristics; supply, volume, and discharge destination of water used in
the production processes; sources of waste and wastewater; and the constitu-
ents of wastewater. Using those data, pollutant parameters requiring limita-
tions or standards of performance were selected by EPA. The primary criteria
for this selection were that both the nature of the pollutant parameters and
the volume of discharge must be significant.
The EPA Development Document also identifies and assesses the range of
control and treatment technologies within each industry subcategory. This
involved an evaluation of both in-plant and end-of-pipe technologies that could
be designed for each subcategory. This information was then evaluated for
existing surface water industrial dischargers to determine the effluent limi-
tations required for the best practical control technology currently available
(BPT), and the best available technology economically achievable (BAT). New
direct dischargers are required to comply with new source performance standards
(NSPS), which require best available demonstrated control technology. New and
existing dischargers to publicly owned treatment works are required to comply
with pretreatment standards (PSNS and PSES). The technologies were analyzed
to calculate cost and performance. Cost data were expressed in terms of invest-
ment, operating and maintenance costs, plus depreciation, and interest expense.
Pollution characteristics were expressed in terms of median and mean concentra-
tion levels (per liter of water as well as volume of production) for each
subcategory.
6-1
-------
6.2 COST ESTIMATION METHODOLOGY
The estimation of the costs presented in this section began with the
selection of specific wastewater treatment technologies and in-process control
techniques. The components of these techniques were combined into alternative
wastewater treatment and control systems appropriate for each battery industry
technical subcategory. The selection of the specific treatment systems was
based upon an examination of raw waste characteristics, considerations of
manufacturing processes, and an evaluation of available treatment technologies
discussed in Section V of the Development Document. The rationale for selec-
tion of these alternative systems is presented in Sections IX and X of the
Development Document, and the selected techniques are enumerated and described
in Sections VII and VIII of that document. Investment and annual cost esti-
mates for each treatment technique were based on wastewater flow rates and
raw waste characteristics for each subcategory. The costs were then aggregated
to represent the investment and annual operating costs for the appropriate
treatment systems. Data corresponding to the flow rates reported by each
plant in the category were used to provide plant-specific cost estimates for
use in the economic impact analysis.
6.3 COST FACTORS, ADJUSTMENTS, AND ASSUMPTIONS
In developing the compliance cost estimates a number of critical factors
had to be estimated, and adjustments and assumptions had to be made by EPA.
These are described in the Development Document and summarized below:
• All costs are estimated in first-quarter 1982 dollars
and adjusted to June 1983 dollars for the economic impact
analysis using the EPA Sewage Treatment Plant Construction
Cost Index.
• Capital costs include equipment costs (i.e., equipment
purchase price, delivery charges, and installation costs)
and system cost (i.e., contingency, engineering, and
contractor's fees).
• Capital costs are amortized over 10 years at a 12 percent
interest rate.
6-2
-------
Annual labor cost (including supervision, fringe benefits,
and overhead) is $21 per hour of direct labor (1982 dollars)
based on a base labor rate of $9 per person-hour for skilled
labor (Bureau of Labor Statistics 1982 national wage rate for
skilled labor) plus $12 for supervision and plant overhead.
The cost of electrical energy is $0.0483 per kilowatt-hour,
which is based on the electricity charge rate for March
1982 reported in the Department of Energy's Monthly Energy
Review.
6.4 POLLUTANT PARAMETERS
The selection of pollutant parameters for the application of effluent
limitation guidelines was primarily based on a review of laboratory analyses of
wastewater samples from several battery manufacturing plants and on responses
to a mail survey submitted to all known battery manufacturers. This informa-
tion was used to estimate the concentration of each of the 129 priority pollu-
tants as well as other variables considered to be "traditional parameters" in
the study of water pollution. The specific approach to selecting pollutant
parameters is presented in Sections V and VI of the Development Document.
Table 6-1 lists the parameters selected as inputs to the cost program.
The values of these pollutant parameters were used in determining materials
consumption, sludge volumes, treatment component sizes, and effluent characteris-
tics. Individual subcategories of the battery industry commonly encompass a
number of widely varying waste streams, which are present to varying degrees
at different facilities. The raw waste characteristics shown as inputs to the
waste treatment systems represent a mix of these streams including all signifi-
cant pollutants generated in the subcategory and will not, in general, corres-
pond precisely to process wastewater at any existing facility. The process by
which these raw wastes are defined is explained in Section X of the Development
Document.
6-3
-------
TABLE 6-1. COST PROGRAM POLLUTANT PARAMETERS
Parameter, Units
Flow, MGD
pH, pH units
Turbidity, Jackson units
Temperature, degree C
Dissolved Oxygen, mg/1
Residual Chlorine, mg/1
Acidity, mg/1 CaC03
Alkalinity, mg/1 CaC03
Ammonia,, mg/1
Biochemical Oxygen Demand, mg/1
Color, chloroplatinate units
Sulfide, mg/1
Cyanides, mg/1
Kjeldahl Nitrogen, mg/1
Phenols, mg/1
Conductance, microohms/cm
Total Solids, mg/1
Total Suspended Solids, mg/1
Settleable Solids, ml/1
Aluminum, mg/1
Barium, mg/1
Cadmium, mg/1
Calcium, mg/1
Chromium, Total, mg/1
Copper, mg/1
Fluoride, mg/1
Iron, Total, mg/1
Lead, mg/1
Magnesium, mg/1
Molybdenum, mg/1
Total Volatile Solids, mg/1
Parameter, Units
Oil, Grease, mg/1
Hardness, mg/1
Chemical Oxygen Demand, mg/1
Algicides, mg/1
Total Phosphates, mg/1
Polychlorobiphenyls, mg/1
Potassium, mg/1
Silica, mg/1
Sodium, rag/1
Sulfate, mg/1
Sulfite, mg/1
Titanium, mg/1
Zinc, mg/1
Arsenic, mg/1
Boron, mg/1
Iron, Dissolved, mg/1
Mercury, mg/1
Nickel, mg/1
Nitrate, mg/1
Selenium, mg/1
Silver, mg/1
Strontium, mg/1
Surfactants, mg/1
Beryllium, mg/1
Plasticizers, mg/1
Antimony, mg/1
Bromide, mg/1
Cobalt, mg/1
Thallium, mg/1
Tin, mg/1
Chromium, Hexavalent, mg/1
SOURCE: EPA Development Document, Table VIII-1.
6-4
-------
6.5 CONTROL AND TREATMENT TECHNOLOGY FOR EXISTING AND NEW SOURCE DISCHARGERS
The treatment systems considered vary from one subcategory to another„
Five regulatory alternatives were considered for the lead, cadmium, and zinc
subcategories; three alternatives were considered for the calcium, lithium, and
magnesium subcategories; and one alternative was considered for the Leclanche
subcategory. Generally, these alternatives are arranged in order of increasing
cost and, generally, pollution abatement. The treatment technologies are
described in detail in Sections IX, X, XI, and XII of the Development Document.
Listed below is a brief summary of the treatment technologies considered for
each subcategory:
Cadmium, Lead, and Zinc
Level 0 Lime Settle (LS)
Level 1 LS, Flow Reduction (FR)
Level 2 Lime Settle Filter (LSF), FR
Level 3 Sulfide Settle Filter (SSF), FR
(zinc subcategory only)
Level 4 LSF or SSF, reverse osmosis (lead
and zinc subcategories) LSF, ion
exchange (cadmium subcategory)
Calcium, Lithium, Magnesium
Level 0 Lime Settle
Level 1 Lime Settle Filter (LSF)
Level 2 Complete Recycle/Zero Discharge
Leclanche
Level 0 Complete Recycle/Zero Discharge
The considered options for new sources to achieve NSPS or PSNS are identical
to options considered for existing sources in each subcategory. The selected
options and costs for new sources are reported in Section 7.8 along with the
estimates of economic impacts on new sources.
6-5
-------
6.6 INDUSTRY COMPLIANCE COSTS
Table 6-2 shows the estimated investment and total annual compliance
costs by battery type and industry technical subcategory in 1983 dollars.
These costs were developed by arraying the technological options for each
plant in order of increasing total annual costs. The cost estimates are based
on the regulatory flows and take into account treatment in place. Since the
BPT/Level 0 regulatory flow is on the whole larger than the BAT/Level 1 flow,
and the in-process controls tend to be relatively inexpensive, the cost of
Level 1 was less than Level 0 for a number of plants. Thus, for the purpose
of evaluating the economic impacts, it was assumed that the plants would install
the least expensive treatment to meet the requirements of Level 0. Hence, in
those cases where the cost of Level 1 was less than Level 0, it was assumed
that the lower Level 1 costs would be incurred to meet the Level 0 limits and
no incremental cost would be incurred in meeting the Level 1 limits. This
rearraying of the compliance cost data serves to maintain consistency in
the underlying assumption that the owner or operators of a given plant will
select abatement technologies on an economically rational basis. That is,
for a given target level of abatement the lowest cost option will be used,
even if it surpasses the target level.
As Table 6-2 shows, the most costly control option (Level 4) would add
$9.3 million to the annual cost of manufacturing batteries in the United
States (1983 dollars). Direct dischargers would incur $1.1 million and indirect
dischargers would incur $8.2 million of this figure. Associated investment costs
are $2.5 million for direct dischargers, $15.6 million for indirect dischargers,
and $18.1 million for the entire industry. As shown in the table the costs
for most other options are significantly lower. For example, Level 1 would
incur a total industry annual cost of $5.1 million and an investment cost
of $9.3 million. It should also be noted that the lead-acid battery product
group accounts for 90 percent of total industry annual costs and 85 percent
of industry investment costs (for example, at the Level 1 option). Average
6-6
-------
TABLE 6-2. BATTERY INDUSTRY TOTAL COMPLIANCE COSTS FOR EXISTING SOURCES
(1983 Dollars)
SUBCATEGORY
Cadmium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Calcium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lead
Direct Dischargers
Indirect Dischargers
Subcategory Total
Leclanche
Direct Dischargers
Indirect Dischargers
Subcategory Total
Lithium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Magnesium
Direct Dischargers
Indirect Dischargers
Subcategory Total
Zinc
Direct Dischargers
Indirect Dischargers
Subcategory Total
TOTAL INDUSTRY
Direct Dischargers
Indirect Dischargers
Industry Total
LEVEL 0
CAPITAL ANNUAL
COST $ COST $
88,289 33,675
481,931 110,413
570,220 144,088
a a
6,442 4,850
6,442 4,850
762,761 485,756
6,914,867 3,962,238
7,677,628 4,447,994
NA NA
62,554 31,540
62,554 31,540
00 721
0 8,877
0 9,598
30,526 11,876
41,277 21,274
71,803 33,150
73,429 26,600
377,372 128,835
450,801 155,435
955,005 558,628
7,884,443 4,268,027
8,839,448 4,826,655
LEVEL 1
CAPITAL ANNUAL
COST $ COST $
179,233 54,861
464,703 159,410
643,936 214,271
a a
6,442 4,850
6,442 4,850
818,501 509,777
7,113,711 4,068,506
7,932,212 4,578,283
NA NA
62,554 31,540
62,554 31,540
0 721
0 8,877
0 9,598
0 20,776
54,562 29,545
54,562 50,321
131,419 34,920
506,127 146,288
637,546 181,208
1,129,153 621,055
8,208,099 4,449,016
9,337,252 5,070,071
LEVEL 2
CAPITAL ANNUAL
COST $ COST $
214,229 70,920
607,718 204,882
821,947 275,802
a a
6,442 4,850
6,422 4,850
968,117 580,628
8,382,220 4,718,750
9,350,337 5,299,378
NA NA
62,554 31,540
62,554 31,540
0 721
0 8,877
0 9,598
0 20,776
54,562 29,545
54,562 50,321
149,148 55,753
592,211 232,590
741,359 288,343
1,331,494 728,798
9,705,707 5,231,034
11,037,201 5,959,832
LEVEL 3
CAPITAL ANNUAL
COST $ COST $
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
890,668 690,947
7,711,642 5,615,313
8,602,310 6,306,260
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
149,148 55,753
592,211 232,590
741,359 288,343
1,039,816 746,700
8,303,853 5,847,903
9,343,669 6,594,603
LEVEL 4
CAPITAL ANNUAL
COST $ COST $
911,463 195,119
2,192,308 716,501
3,103,771 911,620
NA NA
NA NA
NA NA
1,457,984 870,594
12,623,623 7,075,294
14,081,607 7,945,888
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
NA NA
159,181 80,579
799,185 368,307
958,366 448,886
2,528,628 1,146,292
15,615,116 8,160,102
18,143,744 9,306,394
aNo direct dischargers reported.
NA = Not applicable.
SOURCE: EPA.
-------
unit compliance costs and the distributions of compliance costs among plants
in the industry is discussed further in Chapter 7 of this report.
The costs for the selected options are shown in Table 6-3. The total
industry capital and annual costs are $9.3 million and $5.0 million, respec-
tively.
6-8
-------
TABLE 6-3. BATTERY INDUSTRY COMPLIANCE COSTS
FOR EXISTING SOURCES AT SELECTED OPTIONS
(1983 Dollars)
SUBCATEGORY
Cadmium
Direct
Indirect
Subtotal
Calcium
Direct
Indirect
Subtotal
Lead
Direct
Indirect
Subtotal
Leclanche
Direct
Indirect
Subtotal
Lithium
Direct
Indirect
Subtotal
Magnesium
Direct
Indirect
Subtotal
Zinc
Direct
Indirect
Subtotal
Total
Direct
Indirect
Subtotal
SELECTED
LEVEL
Level 1
Level 1
None
None
Level 1
Level 1
None
Level 0
None
None
None
Level 2
Level 1
Level 1
CAPITAL
COST
179,233
464,703
643,936
0
0
0
818,501
7.113JJA
7,932,212
0
62,554
62,554
0
0
0
0
54,562
54,562
131,419
506,127
637,546
1,129,153
8,201,657
9,330,810
ANNUAL
COST
54,861
159,410
214,271
0
0
0
509,777
4,068,506
4,578,283
0
31,540
31,540
0
0
0
0
29,545
29,545
34,920
146,288
181,208
599,558
4,435,289
5,034,847
SOURCE: Table 6-2.
6-9
-------
7- ECONOMIC IMPACT ASSESSMENT
This chapter describes the economic impacts likely to occur as a result
of the costs of the effluent control technologies described in Chapter 6. It
is based upon an examination of the estimated compliance costs and other eco-
nomic, technical, and financial characteristics of each of 240 battery manufac-
turing facilities of various sizes and configurations and the analytical
methodology described in Chapter 2. These plants represent 93 percent of the
estimated industry production facilities and at least 98 percent of the indus-
try's production capacity. The primary variables considered include the effect
of the pollution control costs on prices, battery industry profitability,
industry structure and competition, small business, employment, communities,
imports and exports, and the potential for plant closures.
7.1 PRICE AND QUANTITY CHANGES
Table 7-1 shows the industrywide price and production change for each
compliance option estimated from the pricing strategy model described in
Chapter 2. For most product groups price changes are small, exceeding 0.5 per-
cent of before-compliance prices for only two product groups for the most
costly option considered (Levels 0 through 2 for lithium and Level 4 for cadmium
silver-oxide batteries). The price increases for the selected options for
existing sources range from a low of zero for several products to a high of
0.5 percent in the magnesium reserve battery group. The quantity reductions
were obtained by multiplying the expected price increases by the demand
elasticities shown in Table 4-3. The resulting quantity reductions for the
selected option range from zero for several subcategories to 0.3 percent for
magnesium reserve batteries.
The price changes estimated in Table 7-1, when added to existing price
levels, represent the prices that firms will probably be able to obtain for
their products after compliance with the regulations. It is expected that
7-1
-------
TABLE 7-1. ESTIMATED PRICE AND PRODUCTION CHANGES
Cadmium
Cadmium Silver-Oxide
Mercury -Cadmium
Nickel-Cadmium
Calcium
Calcium
Lead
Lead-Acid
Leclanche
Carbon-Zinc &
Related Types
Lithium
Lithium
Magnesium
Magnes ium-Carbon
Magnesium Reserve
Thermal (Magnesium)
Zinc
Alkaline Manganese
Carbon Zinc-Air
Mercury Cadmium-Zinc
Mercury (Ruben)
Nickel-Zinc
Silver Oxide-Zinc
LEVEL 0
dP dQ
=04 .03
0 0
.03 .03
.03 .02
.26 .08
.01 .01
.91 .73
0 0
.40 .24
.13 .08
.03 .02
0 0
.09 .07
.07 .06
e e
.04 .03
LEVEL 1
dP dQ
.09 .07
0 0
.04 .03
.03 .02
.27 .08
.01 .01
.91 .73
0 0
.50 .30
.13 .08
.03 .02
0 0
.11 .09
.08 .06
e e
.06 .05
LEVEL 2
dP dO
.13 .10
0 0
.05 .04
.03 .02
.31 .07
.01 .01
.91 .73
0 0
.50 .30
.13 .08
.06 .05
0 0
.13 .11
.11 .09
e e
.12 .10
LEVEL 3
dP dO
.36 .29
0 0
.07 .06
NA NA
.37 .11
NA NA
NA NA
NA NA
NA NA
NA NA
.06 .05
0 0
.23 .19
.11 .09
e e
.12 .10
LEVEL 4
dP dQ
.88 .71
0 0
.12 .10
NA NA
.46 .14
NA NA
NA NA
NA NA
NA NA
NA NA
.09 .07
0 0
.23 .19
.22 .18
e e
.17 .14
dP = Percentage change in price.
dQ = Percentage change in quantity.
NA = Not applicable.
e = Experimental.
SOURCE: JRB Associates estimates.
7-2
-------
those firms that cannot earn a profit at these new price levels will suffer
financial losses by most measures of financial performance (e.g., return on
investment, sales, or equity) and probably will leave the industry. An
assessment of the ability of individual plants to earn a profit at these esti-
mated postcompliance price levels is presented in Sections 7.3 through 7.5.
7.2 MAGNITUDE OF PLANT-SPECIFIC COMPLIANCE COSTS
As described in Chapter 2, the ratio of total annualized compliance cost
to annual plant revenues was calculated for each of the 214 facilities for
which compliance cost and other data were available. The total annualized com-
pliance cost figure includes variable costs (operating, maintenance, fuel,
labor, etc.) plus capital costs (depreciation plus interest expense). Plant
revenues were estimated by multiplying production volumes (reported in the tech-
nical 308 Survey) by the average product prices per pound (reported in Table 4-6,
page 4-25). The distribution of the compliance cost to revenue ratios are shown
in Table 7-2. For the selected options, 14 production facilities had ratios of
costs to revenues in excess of the threshold value of 1 percent. The number
of facilities with ratios greater than 1 percent varies from one alternative
to another. For example, for Level 4, 32 facilities exceed the threshold value.
All facilities with compliance cost/revenue ratios of less than 1 percent
are considered to have a low probability for plant closure.
7.3 SCREENING ANALYSIS
The screening analysis involves a calculation of expected declines in
return on sales (ROS) for each plant. The estimated decline in ROS results
from the reduced quantity demanded due to higher prices and the assumption
that these plants must absorb the difference between compliance costs and the
changes in market prices which were reported in Section 7.1. The estimated
profit declines are shown in Table 7-3. As the table shows, 11 plants are
expected to experience profit declines of more than 1 percent of sales
7-3
-------
TABLE 7-2. DISTRIBUTION OF PLANTS BY ANNUAL
COMPLIANCE COST TO REVENUES RATIOSl
(Number of Plants)
1
COMPLIANCE COST AS A PERCENTAGE OF REVENUES
PRODUCT GROUP
Cadmium
Cadmium Silver-Oxide
Mercury-Cadmium
Nickel -Cadmium
Caic turn
Calc ium
Lead
Lead-Ac id
Leclanche
Leclanche
Lich ium
Lithium
Majznes ium
Magnes ium-Carbon
Magnesium Reserve
Thermal (Maenesium)
Zinc
Alkaline Manganese
Carbon Zinc-Air
Mercury Cadmium-Zinc
Mercury (Ruben)
Nickel-Zinc
Silver Oxide-Zinc
TOTAL
NUMBER OF
FACILITIES
SAMPLED
1
1
9
3
141
19
7
3
4
1
8
2
1
4
1
9
214
LEVEL 0
£1% 1-2? 2-42
1
1
9
3
129 6 6
19
7
3
4
1
8
2
1
4
1
8 1
201 5 7
LEVEL 1
4%
1
1
5 2 2
NA
118 11 8 4
NA
NA
NA
NA
NA
5 3
2
1
4
1
7 1 1
182 17 11 4
'-Total Compliance Costs include operating and maintenance, depreciation, interest and profit. Alternatives refer to
different pollution control technologies with increasing levels of cost from lower-numbered alternatives to the higher
numbers.
NA - Not Applicable.
SOURCE: JRB Associates estimates.
7-4
-------
TABLE 7-3. DISTRIBUTION OF PLANTS BY ESTIMATED CHANGE IN RETURN ON SALES1
(Number of Plants)
PRODUCT GROUP
Cadmium
Cadmium Silver-Oxide
Mercury-Cadmium
Nickel -Cadmium
Calcium
Calcium
Lead
Lead-Acid
Leclanche
Leclanche
Lithium
Lithium
Magnesium
Magnesium-Carbon
Magnesium Reserve
Thermal (Magnesium)
Zinc
Alkaline Manganese
Carbon Zinc-Air
Mercury Cadmium-Zinc
Mercury (Ruben)
Nickel-Zinc
Silver Oxide-Zinc
TOTAL
NUMBER OF
FACILITIES
SAMPLED
1
1
9
3
141
19
7
3
4
1
8
2
1
4
1
9
214
LEVEL 0
£1% 1-2% 2-4%
1
1
9
3
132 3 6
19
7
3
4
1
8
2
1
4
1
8 1
204 4 6
LEVEL 1
<1% 1-2% 2-4%
1
1
9
3
131 3 7
19
7
3
4
1
8
2
1
4
1
8 1
203 4 7
LEVEL 2
<1% 1-2% 2-4%
1
1
9
3
129 5 7
19
7
3
4
1
8
2
1
4
1
8 1
201 5 8
LEVEL 3
<1% 1-2% 2-4%
1
1
8 1
NA
158 5 7
NA
NA
NA
NA
NA
8
2
1
4
1
8 1
200 6 8
LEVEL 4
<1% 1-2% 2-4%
1
1
6 1 2
NA
126 5 10
NA
NA
NA
NA
NA
5 3
2
1
4
1
7 1 1
195 10 13
I
t_n
1A1terantives refer to different pollution control technologies with increasing levels of cost from lower-numbered
alternatives to the higher numbers. These increasing alternative* correspond to either increases or no change in
the level of pollution abatement.
NA = Not applicable.
SOURCE: JRB Associates estimates.
-------
under Level 1, the most predominant selected scenario. Of these, 10 are lead-
acid battery plants and one is a silver oxide-zinc plant. Under the Level 4
option, 23 plants would experience profit margin declines of more than 1 per-
cent. The likelihood of closures for these plants as a result of the regula-
tion is described in Section 7.6.
In summary, 11 plants at the selected options and 23 plants at the most
costly options will experience impacts greater than the ROS threshold values.
The following two sections present a more detailed financial analysis for
these 23 plants.
7.4 PLANT-LEVEL PROFITABILITY ANALYSIS
Two different measures of financial performance are used to assess the
impact of the regulation on the profitabilities of individual plants: return
on investment (ROI) and internal rate of return (IRR). The use of these tech-
niques involves a comparison of the measures with critical values. As described
in Section 2.6.1, a critical value of 6 percent is used for the ROI analysis;
and a critical value of 13 percent is used for the IRR analysis.
Table 7-4 shows the estimated ROIs before and after compliance with the
regulations for each of the 23 plants that are potentially affected at the
highest option. For the selected options, all plants are above the threshold
value of 6 percent. These estimates indicate that there would be a signifi-
cant decline in the profitabilities of these plants, although the decline will
not be enough to cause any plant shutdowns.
To confirm these results, estimates of the internal rates of return (IRR)
were also calculated using the methodology described in Chapter 2 and Appen-
dix A. The estimated postcompliance IRRs are shown in Table 7-5. For the
selected alternatives only the silver-oxide plant would have an IRR below the
critical value of 13 percent. All other facilities would be profitable by this
7-6
-------
TABLE 7-4. POSTCOMPLIANCE RETURNS ON INVESTMENT (ROI)
(Percentages)
Product Group
Alkaline
Manganese-
Zinc
Silver Oxide-
Zinc
Nickel-Cadmium
Lead-Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
ROI Before
Compliance
12
12
12
12
ROI After Compliance
LEVEL 0 LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
12 12 10 10 09
12 12 10 10 09
12 12 10 10 09
08 07 07 07 08
11 11 10 10 09
10 10 10 09 08
10 10 10 09 05
11 11 11 09 04
08 08 07 06 06
08 08 07 07 07
09 08 07 07 07
08 08 07 07 07
08 08 08 07 07
08 08 09 08 08
09 09 08 08 08
10 10 09 09 08
10 10 09 09 09
08 10 09 09 09
10 10 09 09 09
10 10 10 09 09
10 10 10 10 09
10 10 10 10 09
10 10 10 10 10
SOURCE: JRB Associates estimates.
7-7
-------
TABLE 7-5. POSTCOMPLIANCE INTERNAL RATES OF RETURNS (IRRs)
(Percentages)
Product Group
Alkaline
Manganese-
Zinc
Silver Oxide-
Zinc
Nickel-Cadmium
Lead-Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
LEVEL 0
23
23
23
16
21
20
18
21
16
16
18
16
17
18
18
20
20
20
20
20
21
21
20
IRR After
LEVEL 1
23
23
23
14
20
20
18
20
16
16
17
16
17
18
18
19
20
20
20
20
21
21
21
Compl
LEVEL
20
20
18
12
19
20
18
20
13
15
15
15
16
18
17
19
19
19
19
20
20
20
21
iance
2 LEVEL 3
20
20
18
12
19
18
17
18
13
14
14
14
16
17
17
18
19
19
19
19
20
20
21
M
LEVEL 4
17
17
17
15
17
14
8
6
10
11
12
12
13
15
15
16
17
17
17
18
18
19
20 •
SOURCE: JRB Associates estimates.
7-8
-------
measure. The IRR values for the 23 affected plants will be used in Section
7.5, together with other information, to assess the plant closure potential
for the industry.
7.5 CAPITAL REQUIREMENTS ANALYSIS
As described in Chapter 2, two ratios were calculated to assess the finan-
cial impact of committing the capital necessary to install the specified pollu-
tion control systems:
t compliance capital investment
estimated fixed plant assets
, compliance capital investment
estimated annual capital expenditures
The investment requirements-to-assets ratio provides a measure of the
relative size of the required pollution control investment as compared to the
size of the existing facility, and the investment requirements-to-annual
capital expenditures ratio measures the magnitude of the capital investment
required for compliance in relation to the precompliance average annual
capital expenditures of the plant.
These ratios were calculated for each of the 23 plants. Since complete
plant-level financial data were unavailable, the precompliance values of
the ratios were estimated from industry-level data for SIC 3691 and SIC 3692
appearing in the 1977 Census of Manufactures. The compliance investment costs
were taken from the Development Document, and the production data, from which
plant revenues and assets were estimated, were taken from the EPA Technical
Survey. The resulting ratios measure the relative burden of the investment
requirements and are shown in Table 7-6.
Compared to plant fixed assets, compliance investment costs are substantial
for a number of lead-acid and nickel-cadmium battery manufacturing facilities.
7-9
-------
TABLE 7-6. COMPLIANCE CAPITAL COSTS RELATIVE TO FIXED ASSETS AND ANNUAL CAPITAL EXPENDITURES
(Percentages)
i
M
o
Product Group
Zinc Anode
Alkaline
Manganese-
Zinc
Silver Oxide-
Zinc
Cadmium Anode
Nickel -Cadmium
Lead Anode
Lead-Acid
Plant
I.D.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
COMPLIANCE CAPITAL COST
AS A PERCENTAGE OF FIXED ASSETS
LEVEL 0
0
0
0
22
7
4
10
7
15
20
14
17
13
04
15
09
07
08
09
09
08
08
12
LEVEL 1
0
0
0
33
10
6
11
6
17
20
15
17
16
08
15
10
07
08
10
09
09
08
08
LEVEL 2
6
4
5
35
10
6
12
6
20
22
20
20
18
08
16
12
08
10
11
10
11
10
09
LEVEL 3
6
4
5
35
10
12
17
14
18
20
18
18
16
08
15
11
08
09
10
09
11
09
09 ,
LEVEL 4
12
8
7
0
15
31
46
35
30
33
29
29
27
25
13
17
13
15
17
15
17
14
14
COMPLIANCE CAPITAL COSTS AS A PERCENT-
AGE OF ANNUAL CAPITAL EXPENDITURES
LEVEL 0
0
0
0
106
33
17
50
32
60
80
56
68
26
08
60
36
28
32
36
36
32
32
48
LEVEL 1
0
0
0
159
47
31
54
29
68
80
60
68
64
32
60
40
28
32
40
36
36
32
32
LEVEL 2
29
18
24
169
47
31
60
29
80
88
80
80
72
32
64
48
32
40
44
40
44
40
36
LEVEL 3
29
18
24
169
47
60
82
66
72
80
72
72
64
32
60
44
32
36
40
36
44
36
36
LEVEL 4
56
41
36
0
72
150
222
167
120
132
116
116
108
100
52
68
52
60
68
60
68
56
56
SOURCE: JRB Associates estimates,
-------
For the selected options, the ratio ranges from zero to 33 percent of fixed
asset value (fixed assets are one-third to one-half of total assets). The
pollution control equipment would add substantially to the asset base of
these plants. For example, the plant with the highest compliance investment
costs would have to increase its fixed assets by about one-third. These
estimates do not, by themselves, indicate whether or not a plant closure
will occur. They are evaluated, simultaneously with other financial and non-
financial variables, to determine the potential for closure (see Section 7.5).
Compliance investment costs are large in comparison to normal annual
capital expenditures in the industry. Selected option investment costs for
1 of the 23 plants are greater than their estimated precompliance annual
capital expenditures. For 8 plants they amount to more than half of annual
precompliance capital investment expenditures. Investment expenditures of
this magnitude indicate a significant burden on the firms' ability to main-
tain their existing capital investment plans, although they do not by them-
selves indicate a plant closure. That is, they indicate that significant
investment resources would have to be diverted from precompliance "normal"
investments for a period of one to two years. "Normal" investments are those
used to sustain and improve the plants' operations.
7.6 PLANT CLOSURE POTENTIAL
Although major investment decisions, such as plant closure decisions, are
made largely on the basis of their financial performance, they are ultimately
judgmental. That is, in addition to financial variables, decision makers must
consider a number of other factors, such as market growth potential, the exist-
ence of specialty markets, intraindustry competition, the potential for tech-
nological obsolescence, marketing techniques, and substitution potential for
the products. Table 7-7 summarizes a number of factors relevant to the invest-
ment decisions relating to the 23 plants shown in Tables 7-4, 7-5, and 7-6.
The information in Table 7-7 was drawn from earlier sections of this report.
The last column contains the study team's evaluation of the potential for
7-11
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION
PRODUCT
GROUP
Zinc:
Alkaline
Manganese-
Zinc
Silver
Oxide-Zinc
PLANT
1
2
3
4
5
MARKET
SHARE
Small
Small
Small
Small
Small
GROWTH
OF
PRODUCT
GROUP
High
High
High
High
High
DEGREE OF
SUBSTITU-
TION
Moderate
Moderate
Moderate
Moderate
Moderate
PRICE
ELASTICITY
,6 — ,8
.6 - .8
.6 - .8
.6 - .8
.6 - .8
EXISTENCE
OF
SPECIALTY
MARKETS
Low
Low
Low
Medium
Medium
REGULA-
TORY
OPTION
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
ACC
REV.
(%)
0
0
0.4
0'.4
1.2
0
0
0.4
0.4
1.3
0
0
0.7
0.7
1.3
1.4
1.9
2.7
2.8
2.8
0.4
0.6
0.8
1.5
1.5
A
ROS
(%)
0
0
0.36
0.36
1.15
0
0
0.33
0.33
1.21
0
0
0.68
0.68
1.17
1.3
1.7
2.0
2.0
2.0
0.27
0.45
0.65
0.65
1.21
ROI
($)
12
12
10
10
9
12
12
10
10
9
12
12
10
10
9
8
7
7
7
8
11
11
10
10
9
IRR
(%)
23
23
20
20
17
23
23
20
20
17
23
23
18
18
17
16
14
12
12
15
21
20
19
19
17
ICC
FA
(%)
0
0
6
6
12
0
0
4
4
8
0
0
5
5
1
22
33
35
35
0
7
10
10
10
15
ICC
NPE
0
0
29
29
56
0
0
18
18
41
0
0
24
24
36
106
159
169
169
0
33
47
47
47
72
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY
COST
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Medium
Medium
Low
Low
Low
Low
Low
Low
ACC/Rev. = Ratio of annual compliance cost to revenues in percentages.
AROS = Estimated change in return on sales in percentages.
ROI = Estimated postcompliance return on net assets in percentages (critical value is 6 percent).
IRR = Estimated postcompliance internal rate of return in percentages (critical value is 13 percent).
ICC T FA = Ratio of compliance investment cost to plant fixed assets in percentages.
ICC * NPE = Ratio of compliance investment cost to typical annual plant and equipment expenditures.
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Cadmium:
Nickel-
Cadmium
Lead :
Lead-Acid
PLANT
6
7
8
9
10
MARKET
SHARE
Small
Small
Small
Insig.
Insig.
GROWTH
OF
PRODUCT
GROUP
Medium
High
High
Medium
Medium
DEGREE OF
SUBSTITU-
TION
Low
Moderate
Moderate
Low
Low
PRICE
ELASTICITY
0 - .3
.6 - .8
.6 - .8
0 - .3
0 - .3
EXISTENCE
OF
SPECIALTY
MARKETS
Low
Low
Low
Low
Low
REGULA-
TORY
OPTION
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
ACC
REV.
(%)
0.6
0.6
0.6
1.0
1.7
0.7
0.8
0.8
1.1
3.1
0.5
0.6
0.6
1.0
3.7
2.4
2.8
3.3
3.9
4.9
2.6
2.6
3.0
3.5
4.5
A
ROS
(%)
0.36
0.54
0.54
0.88
1.61
0.66
0.78
0.82
1.10
3.10
0.22
0.57
0.57
0.98
3.67
2.1
2.4
2.9
3.4
4.3
2.3
2.3
2.6
3.1
3.9
ROI
($)
10
10
10
9
8
10
10
10
9
5
11
11
11
9
4
8
8
7
6
6
8
8
7
7
7
IRR
(%)
20
20
20
18
14
18
18
18
17
8
21
20
20
18
6
16
16
13
13
10
16
16
15
14
11
ICC
i
•
FA
(%)
4
6
6
12
31
10
11
12
17
46
7
6
6
14
35
15
17
20
18
30
20
20
22
20
33
ICC
i
NPE
17
31
31
60
150
50
54
60
82
222
32
29
29
66
167
60
68
80
72
120
80
80
88
80
132
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY
COST
Low
Low
Low
Low
Low
Low
Low
Low
Low
High
Low
Low
Low
Low
High
Low
Low
Low
Low
High
Low
Low
Low
Low
High
I
I-1
u>
ACC/Rev. = Ratio of annual compliance cost to revenues in percentages.
AROS = Estimated change in return on sales in percentages.
ROI = Estimated postcompliance return on net assets in percentages (critical value is 6 percent).
IRR = Estimated postcompliance internal rate of return in percentages (critical value is 13 percent).
ICC T FA = Ratio of compliance investment cost to plant fixed assets in percentages.
ICC T NPE = Ratio of compliance investment cost to typical annual plant and equipment expenditures.
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Lead-Acid
Lead-Acid
Lead-Acid
Lead-Acid
Lead-Acid
PLANT
11
12
13
14
15
MARKET
SHARE
Insig.
Small
Small
Small
Moderate
GROWTH
OF
PRODUCT
GROUP
Medium
Medium
Medium
Medium
Medium
DEGREE OF
SUBSTITU-
TION
Moderate
Moderate
Moderate
Moderate
Moderate
PRICE
ELASTICITY
0 - .3
0 - .3
0 - .3
0 - .3
0 - .3
EXISTENCE
OF
SPECIALTY
MARKETS
N/A
Low
Low
Medium
Some
REGULA-
TORY
OPTION
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
ACC
i
REV.
(%)
1.9
2.5
2.9
3.5
4.4
2.5
2.5
2.9
3.4
4.3
3.1
3.1
3.6
4.3
5.5
3.3
3.3
3.3
4.0
5.0
1.7
1.7
2.0
2.4
3.0
A
ROS
(%)
1.6
2.1
2.5
3.0
3.8
2.1
2.1
2.5
3.0
3.7
2.8
2.8
3.2
3.9
4.9
3.0
3.0
2.9
3.5
4.4
1.4
1.4
1.6 '
1.9
2.4
ROI
($)
9
8
7
7
7
8
8
7
7
7
8
8
8
7
7
8
8
9
8
8
9
9
8
8
8
IRR
(%)
18
17
15
14
12
16
16
15
14
12
17
17
16
16
13
18
18
18
17
15
18
18
17
17
15
ICC
FA
(%)
14
15
20
18
29
17
17
20
18
29
13
16
18
16
27
4
8
8
8
25
15
14
16
15
13
ICC
T
NPE
56
60
80
72
116
68
68
80
82
116
26
64
72
64
108
8
32
32
32
100
60
60
64
60
52
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY
COST
Low
Low
Low
Low
High
Low
Low
Low
Low
High
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
ACC/Rev. = Ratio of annual compliance cost to revenues in percentages.
AROS = Estimated change in return on sales in percentages.
ROI = Estimated postcompliance return on net assets in percentages (critical value is 6 percent).
IRR = Estimated postcompliance internal rate of return in percentages (critical value is 13 percent).
ICC * FA = Ratio of compliance investment cost to plant fixed assets in percentages.
ICC -i- NPE = Ratio of compliance investment cost to typical annual plant and equipment expenditures.
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
PRODUCT
GROUP
Lead-Acid
Lead-Acid
Lead- Ac id
Lead- Ac id
Lead- Ac id
PLANT
16
17
18
19
20
MARKET
SHARE
Small
Insig.
Insig.
Insig.
Insig.
GROWTH
OF
PRODUCT
GROUP
Medium
Medium
Medium
Medium
Medium
DEGREE OF
SUBSTITU-
TION
Moderate
Low
Low
Low
Low
PRICE
ELASTICITY
0 - .3
0 - .3
0 - .3
0 - .3
0 - .3
EXISTENCE
OF
SPECIALTY
MARKETS
Some
Sig.
Small
Small
REGULA-
TORY
OPTION
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
ACC
*
REV.
(%)
1.3
1.5
1.8
2.1
2.7
1.4
1.4
1.8
2.1
2.6
1.3
1.3
1.6
1.9
2.4
2.8
2.8
3.3
3.9
4.9
0.5
0.5
0.5
0.6
0.8
A
ROS
(%)
1.0
1.2
1.4
1.6
2.1
1.1
1.1
1.4
1.6
2.0
1.0
1.0
1.2
1.5
1.9
2.5
2.5
2.9
3.4
4.3
0.1
0.1
0.1
0.2
0.2
ROI
($)
10
10
9
9
8
10
10
9
9
9
8
10
9
9
9
10
10
9
9
9
10
10
10
9
9
IRR
(%)
20
19
19
18
16
20
20
19
19
17
20
20
19
19
17
20
20
19
19
17
20
20
20
19
18
ICC
i
FA
(%)
9
10
12
11
17
7
7
8
8
13
8
8
10
9
15
9
10
11
10
17
9
9
10
9
15
ICC
T
NPE
36
40
48
44
68
28
28
32
32
52
32
32
40
36
60
36
40
44
40
68
36
36
40
36
60
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY
COST
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
ACC/Rev. = Ratio of annual compliance cost to revenues in percentages.
AROS = Estimated change in return on sales in percentages.
ROI = Estimated postcompliance return on net assets in percentages (critical value is 6 percent).
IRR = Estimated postcompliance internal rate of return in percentages (critical value is 13 percent).
ICC * FA = Ratio of compliance investment cost to plant fixed assets in percentages.
ICC * NPE = Ratio of compliance investment cost to typical annual plant and equipment expenditures.
-------
TABLE 7-7. SUMMARY OF DETERMINANTS OF POTENTIAL FOR PLANT CLOSURES DUE TO THE REGULATION (Continued)
]
PRODUCT
GROUP
Lead-Acid
Lead-Acid
Lead-Acid
1
PLANT
21
22
23
MARKET
SHARE
Insig .
Insig.
Insig.
GROWTH
OF
PRODUCT
GROUP
Medium
Medium
Medium
DEGREE OF
SUBSTITU-
TION
Low
Low
Low
PRICE
ELASTICITY
0 - .3
0 - .3
0 - .3
EXISTENCE
OF
SPECIALTY
MARKETS
Low
Low
Low
REGULA-
TORY
OPTION
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
ACC
REV.
(%)
0.8
0.9
1.2
1.4
1.8
0.9
1.1
1.2
1.4
1.8
0.9
0.9
1.0
1.2
1.5
ROS
(%)
0.5
0.5
0.8
0.9
1.2
0.6
0.7
0.8
1.0
1.2
0.5
0.5
0.6
0.7
0.9
ROI
($)
10
10
10
10
9
10
10
10
10
9
10
10
10
10
10
IRR
(%)
21
21
20
20
18
21
21
20
20
19
20
21
21
21
20
ICC
FA
(%)
8
9
11
11
17
8
8
10
9
14
12
8
9
9
14
ICC
NPE
32
36
44
44
68
32
32
40
36
56
48
32
36
36
56
POTENTIAL
FOR CLOSURE
BECAUSE OF
REGULATORY
COST
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
ACC/Rev. = Ratio of annual compliance cost to revenues in percentages.
ROS = Estimated change in return on sales in percentages.
ROI = Estimated postcompliance return on net assets in percentages (critical value is 6 percent).
IRR = Estimated postcompliance internal rate of return in percentages (critical value is 13 percent).
ICC FA = Ratio of compliance investment cost to plant fixed assets in percentages.
ICC NPE = Ratio of compliance investment cost to typical annual plant and equipment expenditures.
-------
plant closures, based on a review of the combined effects of the other col-
umns in the table.
In general, the market factors for these products are strong, so that
the bulk of the impacts will result from the intraindustry distribution of
compliance costs and the subsequent change in the competitiveness among the
various plants. All plants are believed to have a low potential for closure
at the selected option, since their profitability measures are adequate and
their capital investment requirements relative to fixed assets and annual
capital expenditures are not prohibitive. Under the Level-4 scenario, 2
nickel-cadmium plants and 4 lead-acid plants are estimated to be likely
closures. Although the nickel-cadmium plants are small, they account for a
noticeable market share in certain product lines (i.e., sealed nickel-cadmium
batteries) and the loss of their combined capacity would increase concentra-
tion and, possibly, alter the pricing behavior of sealed nickel-cadmium
batteries. The lead plants are small relative to market size.
Table 7-8 summarizes plant closure potential by regulatory option before
consideration of any baseline plant closures (i.e., plants that might close,
even without the regulation). As described in Chapter 5, baseline closures are
projected to include around 20 to 33 small lead-acid plants between 1977 and
1990. Consequently, it is possible that the lead-acid plants would close even
without the regulation. However, it is difficult to determine from the data,
whether or not the baseline closures would be the same lead-acid establishments
that are listed in Table 7-8 as having a high potential for closure.
As described in Appendix B, EPA has estimated that the implementation of
the OSHA 50 ug/m^ Permissible Exposure Limit (PEL) for lead will cause about
44 small plant closures in the lead-acid product group. These 44 plants include
all of the lead-acid battery plants shown in Tables 7-4 through 7-7. The lead-
acid plants remaining after OSHA compliance will experience mild impacts (less
than a 1 percent change in return on sales) and, consequently, will pass the
screening analysis (Step 5 of the study approach).
7-17
-------
TABLE 7-8. SUMMARY OF POTENTIAL PLANT CLOSURES
BEFORE CONSIDERATION OF BASELINE CLOSURES
BATTERY
PRODUCT GROUP
Lead-Acid
Nickel-Cadmium
Other
Total
NUMBER OF
PRODUCTION FACILITIES
167
9
64
240
REGULATORY
OPTION3
Levels 0-3
Level 4
Level 4
All Levels
Level 4
NUMBER OF
PROBABLE CLOSURES
0
4
2
0
6
aThere are no closures estimated for Levels 0 through 3.
SOURCE: Table 7-7.
7-18
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7.7 OTHER IMPACTS
7.7.1 Employment, Community, and Regional Effects
As shown in Table 7-9, the 6 plants estimated to have a high potential
for closure under Level 4 employ between 250 and 400 people out of a total
industry employment of 37,000. Since each of these firms is located in
different areas of the country, no significant community impacts are expected.
7-7.2 Foreign Trade Impacts
As described in Chapter 3, foreign trade has not been a major factor in
the battery industry. However, the possibility exists that during the 1980s,
competition for markets from Far Eastern producers could intensify as their
technology advances. If there were a significant price effect from the regu-
lations, the U.S. competitive position could be damaged. However, as shown in
Table 7-1, the price increases estimated to result from the regulations are
quite small, amounting to fractions of a percent. Price increases of this
magnitude would not be large enough to induce consumers to switch battery
brands.
7.7.3 Industry Structure Effects
The potentially high-impacted plants (the 23 plants that passed through
the screening analysis) are small relative to the plants that produce most of
the industry output. The average compliance cost per unit of production for
these plants is significantly higher than that of the larger plants. As shown
in Chapters 5 and 6, the baseline conditions of the industry indicate increasing
industry concentration and closing of small plants. Moreover, unit costs of
compliance with other Federal regulations are also higher for small plants than
those for large plants. The combined effect of these developments will be a
deterioration in the competitive position of small plants relative to large
plants.
7-19
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TABLE 7-9. SUMMARY OF POTENTIAL EMPLOYMENT IMPACTS
Nickel -Cadmium
Lead
Other
Employment
Number of Number of in Closed
Number Employees Regulatory Probable Production
of Plants (000) Option Closures Lines
9 1-2 Level 4 2 220 - 320
167 24 - 25 Level 4 4 30-80
64 9-11 All 0 0
Total
240
37
Level 4
250 - 400
SOURCES: Tables 7-7 and 7-8 and EPA Technical Survey.
7-20
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Of particular importance in this regard is the cost of meeting the new
OSHA lead-air standards. A 150 yg permissible exposure limit (PEL) became
effective in June 1983, and a 50 yg PEL will become effective in 1986. An
EPA analysis of the impacts of meeting the OSHA lead-air standards indicates
that the OSHA requirement alone could cause the closing of 40 small lead-acid
plants. An OSHA analysis of the same regulations using a different analytical
approach concludes that 42 small and 5 medium-sized plants will close, thereby
eliminating 13 percent of industry capacity. Among these closings will be
the "high compliance cost" lead-acid plants listed above.
The deterioration in the relative competitiveness of small plants is
especially true in the lead-acid product group. The combined effect of all
Federal regulations on these plants could be so great that only those small
plants with specialty markets could remain in the industry over the long run.
Specialty markets, in this context, may be a specific type of battery with
very narrowly defined specifications meant for a particular use, the volume of
which would not support a major portion of the industry. A specialty market
may also be a specific geographic region in which a local producer has a cost
advantage over nationwide firms, because of high transportation costs to the
region. In a specialty market a small battery manufacturer may earn more
than the "normal" profit margin, so that the firm could absorb much of the com-
pliance costs and still remain profitable.
A substantial shift in industry concentration is likely to occur in the
sealed nickel-cadmium industry segment under the Level 4 option, which is not
being promulgated. Of the 9 nickel-cadmium plants there are only 6 that
manufacture sealed nickel-cadmium batteries in the U.S. These plants belong
to large firms. One of these 6 plants accounts for 60 to 65 percent of
industry output. This plant will incur no compliance costs, since it has no
effluent. About 15 to 20 percent of output is accounted for by 2 plants
whose compliance costs will be substantial (Level 4 annual costs amount to
over 3 percent of annual revenues). These 2 plants are estimated to be
likely closures under the Level 4 option. A third nickel-cadmium plant will
7-21
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experience significant profit reduction; but this reduction will not be enough
to cause the plant to close. This plant is considered to have a low closure
potential. At all other options, none of these plants is considered likely
or borderline closure candidates, because the technologies are considerably
less expensive.
If these 2 plants closed, industry capacity would drop substantially
(15 to 20 percent). To the extent that this void would be filled by the indus-
try's largest producer (the firm with 60 to 65 percent of the market), this
industry sector would become significantly more concentrated. The long-run
impact of increased concentration could be a reduction in price competition
within this industry segment.
7.8 NEW SOURCE IMPACTS
Newly constructed facilities and facilities that are substantially modified
are required to meet the new source performance standards (NSPS) and/or the
pretreatment standards for new sources (PSNS). EPA considered three or more
regulatory alternatives for selection of NSPS and PSNS technologies. The
considered options are equivalent to those discussed for existing sources and
are described in Chapter 6 and in the Development Document. The final selec-
tions were found to be identical to the alternatives shown in the second column
of Table 7-10. The following paragraphs discuss the costs and impacts of
these alternatives.
7.8.1 New Source Compliance Costs
The cost of implementing the new source technologies depends upon the
nature of new sources in the battery industry, the number of new sources, and
the definition of costs used. There is considerable uncertainty regarding the
first two factors and this uncertainty has affected the approach used to assess
new source costs and impacts. Although projections of general activity levels
in the industry are presented in Chapter 5 of this report, the data are insuffi-
cient to reliably forecast the number of plant modifications and the proportion
7-22
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TABLE 7-10.
SELECTED REGULATORY ALTERNATIVES AND INCREMENTAL COMPLIANCE COSTS
FOR NEW SOURCES IN BATTERY MANUFACTURING
INDUSTRY AND SUBCATEGORY AVERAGES
SUBCATEGORY
Cadmium
Direct
Indirect
Calcium
Direct
Indirect
Lead
Direct
Indirect
Leclanche
Direct
Indirect
Lithium
Direct
Indirect
Magnesium
Direct
Indirect
Zinc
Direct
Indirect
TOTAL
r SELECTED
EXISTING
SOURCE
LEVEL
1
1
None
None
1
1
None
0
None
None
None
b
1
1
-
SELECTED
NEW SOURCE
LEVEL
2
2
2
2
2
2
0
0
1
1
2
2
2
2
-
INCREMENTAL3
COSTS * ASSETS
(Percentage)
0.06
0.12
0.08
0.08
0.13
0.16
0.00
0.00
0.00
0.00
0.00
0.00
0.06
0.10
0.14
ANNUAL COSTS3
* REVENUES
(Percentage)
0.03
0.06
0.04
0.04
0.03
0.04
0.00
0.00
0.15
1.8
1.18
0.00
0.03
0.05
0.040
aThe costs used for this ratio represents the difference between the new source
alternatives and the existing source selected alternatives.
selected option is a combination of Level 2 and Level 0.
7-23
-------
of output that will be at new versus existing plants. In addition, insufficient
information is available to estimate the impacts of the regulatory requirements
on the design of new plants nor, alternatively, the impacts of new production
technologies on pollution control requirements. For these reasons, the follow-
ing three assumptions were employed in estimating new source compliance costs:
• Compliance costs for the lead-acid battery product
group are based upon a normal plant analysis.
• For the non-lead-acid product groups, the compliance
cost per unit of output (pound of batteries) for new
sources is assumed to be equal to the industry sub-
category average for that of existing sources which
use the same treatment technology.
• Compliance costs for new sources are to be expressed
as ratios, or percentages, relative to the unit value
of output or plant assets, as appropriate (e.g., annual
compliance costs •=• revenues and investment compliance
costs T plant assets).
The second assumption implies that the costs may include retrofitting
costs which are incurred when the same technology is applied to existing plants.
To the extent that retrofitting costs are significant, the resulting compliance
costs are overestimated. Moreover, because there are economies of scale in
most of the considered pollution control technologies and because the average
new plant size for some subcategories is expected to be larger than the average
existing plant (as described in Chapter 5), it is expected that the new source
cost estimate will be biased upward. The effect of this bias on the economic
impact analysis would be to overstate the impacts. There is insufficient infor-
mation available to the study team to quantify the bias. However, it is
believed that the estimates shown are reasonable approximations for use in an
industrywide assesment of impacts. To the extent that existing plants have the
new source technology in place, costs may be underestimated for a green-field
site.
For purposes of evaluating new source impacts, compliance costs for new
source standards are defined as incremental costs from the costs of selected
7-24
-------
standards for existing sources. For example, the cost shown for the cadmium
subcategory is the cost of Level 2 minus that of Level 1. For those subcate-
gories with no regulation for existing sources, the cost shown represents that
of installing the system over the current practice in the industry. For those
subcategories where the existing and new source options are identical, there
is zero incremental cost.
Table 7-10 shows annual compliance costs as a percentage of revenues and
investment compliance cost as a percentage of plant assets. New sources will,
on average, incur annual costs equal to 0.04 percent of revenues and investment
costs equal to 0.14 percent of plant assets. The costs ratios vary considerably
from one subcategory to another. For example, new source incremental annual
costs are zero for the Leclanche subcategory and 0.06 percent of revenues for
indirect discharger cadmium battery manufacturers. Similarly, capital costs
range from zero to 0.16 percent of plant assets. These averages are based
upon the product mix of existing sources.
7.8.2 Economic Impacts on New Sources
The assessment of economic impacts on new sources is based upon the cost
data shown in Table 7-10 and analogy to the impact conclusions for similar
existing plants described in Sections 7.1 through 7.7. The primary variables
of interest are identical to those for existing plants plus the potential of
the regulation in fostering barriers to entry or causing intraindustry shifts
in competitiveness.
As Sections 7-1 through 7-6 demonstrate, the impacts of regulatory alter-
natives 0 through 3 will cause no plant closures and will generally involve
price increase and profit reduction of less than 1 percent. Thus, the new
source alternatives will cause no general economic impact for these subcate-
gories. The cost ratios shown in Table 7-10 indicate differences in cost
of production of significantly less than 1 percent of revenues. Moreover,
7-25
-------
the new source requirements will add only a fraction of a percent to the asset
value of a plant. Cost differentials of this magnitude do not constitute a
significant competitive advantage or disadvantage for new versus existing
plants; nor do they imply significant incremental barriers to entry of new
capacity into the industry.
7.8.3 Total New Source Compliance Costs
Estimates of the cost of the new source standards were developed by (a)
forecasting the increase in industry output from 1980 to 1990, (b) estimating
the proportions of the added output that will be subject to new source require-
ments, (c) estimating the compliance costs per unit of output for new sources,
and (d) multiplying compliance cost per unit of output by estimated increase
in capacity. In following these steps, three assumptions and inferences were
made. These are:
• The increase in the value of industry output over 1980 is
taken from the base-case demand forecast in Chapter 5
($1.2 billion for storage batteries and $600 million for
primary batteries in 1983 dollars).
• The amount of industry output subject to new sources
standards is assumed to be equal to the forecated
growth in industry output above.
• The annual compliance cost per unit of output and the
investment compliance cost as a percentage of plant
assets are assumed to be equal to those for existing
sources for the same pollution control technology.
(To the extent that new plants are larger and that
these costs include retrofitting costs, these esti-
mates could be overestimated.)
Using this approach, the new source selected option will cost the industry
$1.2 million in investment costs and $0.7 million in annual costs by 1990, in
1983 dollars.
7-26
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8. REGULATORY FLEXIBILITY ANALYSIS
8.1 INTRODUCTION
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to con-
sider "small entities" throughout the regulatory process. The RFA requires an
initial screening analysis to be performed to determine if a substantial number
of small entities will be significantly impacted. If so, regulatory alterna-
tives that eliminate or mitigate the impacts must be considered. This analysis
addresses these objectives by identifying and evaluating the economic impacts
of the aforementioned regulations on small battery manufacturers. As described
in Chapter 2, the small business analysis is developed as an integral part of
the general economic impact analysis and is based on the examination of the
distribution by plant size of the number of battery manufacturing plants, com-
pliance costs, and potential closures as a result of the regulations. The
primary economic impact variables include production cost, profitability, plant
closures, capital structure, equality of goods, industry structure and competi-
tion, changes in imports and exports, and innovation and growth in the industry.
Most of the information in this section is drawn from the general economic impact
analysis which is described in Chapters 1 through 7 of this report. Specifically,
the areas covered in the Regulatory Flexibility Analysis include:
• Description of the analytical approach to the RFA
• Definitions of small entities in the battery manu-
facturing industry
• Baseline conditions of small entities in the battery
manufacturing industry
• Direct compliance cost
• Economic impacts
• Effects of special considerations for small entities.
8-1
-------
8.2 ANALYTICAL APPROACH
8.2.1 Overview
The analytical approach used for this analysis follows the basic approach
used for the general analysis of the economic impacts of the regulations
described in Chapter 2 of this report. That is, the industry is divided into
product groups that correspond, as closely as possible, to homogeneous markets.
The demand and supply characteristics of each of these markets are then studied
to project precompliance industry conditions at the time the regulations are
expected to become effective (mid-1980s). The specific conditions of small
firms are evaluated against the background of the general conditions in each
product group market. Since small firms account for only a small portion of
battery manufacturing activity, they are assumed to be price takers and general
market characteristics (demand, supply, and equilibrium price) are considered
exogenous variables to the small-firm analysis.
8.2.2 Definition of Small Entities
A specific problem in the methodology was the development of an acceptable
definition of small entities. The Small Business Administration (SBA) defines
small entities in SIC 3691 (Storage Batteries) and SIC 3692 (Primary Batteries)
as firms of fewer than 2,500 employees. Since there are about 200 firms in the
industry and since employment in the two industry sectors are 11,000 and 25,000,
respectively, the SBA definition would include almost the entire industry. It
was also observed that many battery plants are owned by major Fortune 500 cor-
porations (e.g., Union Carbide, General Motors, Dart Industries). For these
reasons the SBA definition was not used as a basis for defining small entities
in the battery manufacturing industry. Instead, a definition was sought which
would account for firm size in comparison to total industry size and to unit
compliance costs (unit compliance costs increase significantly in reverse
proportion to plant size) and would provide EPA with alternative definitions
of "small" plants. Moreover, since the available data on compliance cost and
8-2
-------
production were on a plant basis, the individual production facility, rather
than firm, was used as the basis for the analysis.
Value of production was the primary variable used to distinguish firm
size. This is because plant-level employment data were considered less reliable
and plant-level production data did not allow consistent comparisons across
the product groups. Five alternative criteria for determining "small" battery
manufacturing plants were selected for examination and the impacts on small
plants under each definition were assessed. In addition, the potential impacts
of small business exemptions (tiering) under each of the five alternative sizes
were examined. The five size categories are: less than $1 million, $l-$2.5 mil-
lion, $2.5-$5 million, $5-$10 million, and greater than $10 million.
8.3 BASELINE CONDITIONS
The number of battery manufacturing plants falling into each size cate-
gory is shown in Tables 8-1 and 8-2. The table also shows the value of
production of different sized plants, along with the percentages of the
industry totals for each. As the table shows, the industry is characterized
by a few large plants which account for most of the production and many
smaller plants producing a smaller portion of industry output. As described
in Chapter 5, between 20 and 30 closures of small lead-acid plants are expected
between 1980 and 1990, even without these regulations. Moreover; implementa-
tion of the OSHA lead-air standard alone, which became effective in 1983, is
expected to cause about 40 to 47 closures. Any new lead-acid plants to be
built in the future are expected to be large ones, because only large plants
are currently considered economically feasible. Thus, small lead-acid plants
are considered to be economically weak, except for those serving specialty
markets.
In contrast to the lead-acid category, no baseline closures are expected
in the non-lead acid industry segment; although like the lead-acid segment, the
average plant size is also expected to increase. Thus, it is likely that the
8-3
-------
TABLE 8-1. COMPLIANCE COSTS OF LEAD-ACID BATTERY MANUFACTURING FACILITIES BY SIZE OF FACILITY
(In 1983 Dollars)
00
I
-p-
FACILITY
SIZE (By Value
of Production)
<$l Million
(% of Total)
SI-2.5 Mill ion
(Z of Total )
?2.5-5 Mil lion
« of Total)
$5-10 Million
(I of Total)
>?IO Mil lion
(% of Total)
TOTAL INDUSTRY
(% OF TOTAL)
NUMBEK OF
FACILITIKS
IN SAMPLE
9
(10.6)
8
(9.4)
5
(5.9)
13
(15.3)
50
(58.9)
85
(10.0)
VALUE OF
PRODUCTION
(? Millions)
4.914
(0.3)
12.480
(0.7)
18.989
(I. I)
90.118
(5.3)
1,572.592
(92.6)
1,699.093
(100)
LEVEL 0
INVESTMENT
COMPLIANCE
COST
182,890
(2.2)
261,096
(3.1)
225,894
(2.7)
648,345
(7.7)
7,148,809
(84.4)
8,467,034
(100)
ANNUAL
COMPLIANCE
COST
107,886
(2.1)
187,697
(3.7)
112,004
(2.2)
467,357
(9.2)
4,185,368
(82.7)
5,060,312
(100)
ANNUAL COM-
PLIANCE COST
AS A PERCENT
OF REVENUE
(Percentage)
2.20
1.50
0.59
0.52
0.27
0.30
LEVEL I
INVESTMENT
COMPLIANCE
COST
182,684
(2.3)
244,890
(3.1)
203,682
(2.6)
613,000
(7.8)
6,573,223
(84.1)
7,817,479
(100)
ANNUAL
COMPLIANCE
COST
106,767
(2.4)
141,595
(3.1)
94,924
(2.1)
378,680
(8.4)
3,786,617
(84.0)
4,508,583
(100)
ANNUAL COM-
PLIANCE COST
AS A PERCENT
OF REVENUE
(Percentage)
2.17
1.13
0.50
0.42
0.24
0.27
LEVEL 2
INVESTMENT
COMPLIANCE
COST
210,203
(2.3)
284,568
(2.7)
250,200
(2.7)
783,433
(8.5)
7,691,221
(83.8)
9,219,625
(100)
[ANNUAL COM-
ANNUAL
COMPLIANCE
COST
124,308
(2.4)
167,910
(3.2)
117,745
(2.3)
463,992
(8.9)
4,344,389
(83.3)
5,218,344
(100)
PLIANCE COST
AS A PERCENT
OF REVENUE
(Percentage)
2.53
1 .35
0.62
0.51
0.28
0.31
NOTES: The indust ry totals differ from those r<; ported in Chapter 6, because of differences in sampl e s xzti.
Percentages may not total 100 due to rounding.
SOURCE: EPA and JHB Associates estimates
-------
TABLE 8-2. COMPLIANCE COSTS OF NON-LEAD ACID BATTERY MANUFACTURING FACILITIES BY SIZE OF FACILITY
(1978 dollars)
00
I
t-n
FACILITY SIZE
(By Value of
Product ion)
< $1 Million
(1 of Total)
$1-2.5 Million
(I of Total )
$2.5-5 Million
(% of Total)
$5-10 Million
(Z of Total)
$10-20 Million
U of Total)
> $20 Million
(1 of Total)
TOTAL INDUSTRY
(% of Total)
NUMBER OF
FACILITIES
IN SAMPLE
21
(32.3)
8
(12.3)
8
(12.3)
6
(9.2)
8
(12.3)
lit
(21.5)
65
(100)
VALUE OF
PRODUCTION
($ Mill ion)
5.2
(0.6)
13.6
(1.7)
2R.8
(3.6)
42.2*
(5.2)
121.3
(15.0)
596.9
(73.9)
808.0
(100)
LEVEL 0
INVESTMENT
COMPLIANCE
COST
77,944
(8.3)
126,383
(13.4)
132,129
(14.0)
169,689
(18.0)
189,493
(20.1)
248,043
(26.3)
943,681
(100)
ANNUAL
COMPLIANCE
COSTS
28,771
(8.7)
40,256
(12.2)
50,600
(15.3)
52,391
(15.9)
55,326
(16.8)
102,550
(31.1)
329,894.5
(100)
ANNUAL
COMPLIANCE
COSTS
AS A PERCENT
OF REVENUES
(Percentage)
0.56
0.30
0.18
0.14
0.05
0.02
0.04
LEVEL 1
INVESTMENT
COMPLIANCE
COST
84,505
(8.1)
114,968
(U.O)
168,860
(16.2)
170,088
(16.3)
194,897
(18.7)
307,371
(29.5)
1,040,689
(100)
ANNUAL
COMPLIANCE
COSTS
29,600
(7.2)
54,276
(13.2)
61,292
(14.9)
62,834
(15.3)
83,057
(20.2)
119,538
(29.1)
410,597
(100)
ANNUAL
COMPLIANCE
COSTS
AS A PERCENT
OF REVENUES
(Percentage)
0.37
0.40
0.21
0.14
0.07
0.02
0.05
LEVEL 2
INVESTMENT
COMPLIANCE
COST
87,374
(8.0)
115,943
(10.6)
169,495
(15.5)
181,738
(16.6)
194,897
(17.8)
346,087
(31.6)
1,095,534
(100)
ANNUAL
COMPLIANCE
COSTS
30,335
(7.3)
54,497
(13.0)
61,580
(14.7)
64,564
(15.4)
83,057
(19.9)
124,317
(29.7)
418,350
(100)
ANNUAL
COMPLIANCE
COSTS
AS A PERCENT
OF RKVENI'ES
(Percentage)
0.59
0.40
0.21
0.15
0.07
0.02
0.05
^Data for B of the 73 production facilities were not adequate for inclusion in this table.
NOTE: Percentages may not total 100 due to rounding.
SOURCE: EPA and JRB estimates.
-------
small plants counted in Table 8-1 will still be in operation when the regula-
tions become effective. Moreover, there is no reason to expect the proportion
of industry output produced by these small plants to change.
The projections of baseline conditions are based on industry-level data
provided by Census of Manufactures. Limitations to these data preclude estima-
tion of plant-specific activities. Consequently, the assessment of impacts on
small business was developed primarily with the data base of existing plants
from the EPA 308 Survey and industry trade sources. However, an examination
was made of small firm financial data available in the SBA FINSTAT data base
to determine if the current financial performance of small battery firms are
different from that of larger battery firms.1 The FINSTAT data showed wide
variations in financial ratios from one firm to another. In addition, the
baseline financial ratios used in impact analyses in Chapter 7 are more con-
servative than those computed from small firms in the FINSTAT data (i.e.,
those in FINSTAT indicate better baseline profit rates), although the averages
are consistent with the figures used in the impact anlaysis. For example,
the average sales-to-asset ratio calculated from FINSTAT data is 2.6, com-
pared to 2.0 used in Chapter 7. Net profit/sales of small firms in the
FINSTAT data base average 10.8 percent compared to 6 percent in Chapter 7.
The FINSTAT data also show an ROI of 15.6 percent for small firms compared
to 12 percent used in the analysis above. In view of these findings and in
view of a number of ambiguities and inconsistencies found in the FINSTAT
data, it is concluded from this examination that the data do not support
the hypothesis that the baseline financial performance of small firms is
significantly different from that of larger ones. Thus, although there is
qualitative evidence that small-firm financial performance is poorer than
that of larger ones, the financial data available do not support that
hypothesis.
^•Memorandum from JRB Associates to EPA, August 16, 1983,
8-6
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8.4 COMPLIANCE COSTS
This section describes the compliance costs that will be incurred by
small firms. The economic impacts that result from the regulation begin
with the compliance costs incurred at the plant level. Table 8-1 shows the
compliance cost estimates for the lead-acid battery manufacturing sector by
plant size. For each of the five size categories and for each regulatory
option, the table shows the estimated investment and total annual compliance
costs. This table was taken from the same data sources used in Chapter 6
(Cost of Compliance). The proportion of total lead-acid battery output and
industry sector compliance costs attributed to both small and large plants
are also provided in Table 8-1. For example, 10.6 percent (9 plants) of the
lead-acid plants in the sample produce less than $1 million annually. Plants
in this size group produce 0.3 percent ($4.9 million) of the value of industry
output and will incur 2.4 percent ($106,767) of the industry's annual compli-
ance cost and 2.3 percent ($182,684) of the industry's investment cost under
Level 1, the selected option. The annual Level 1 compliance costs for these
9 plants would be 2.17 percent of their combined revenues.
In contrast to these very small plants, 58.9 percent (50 plants) of the
plants have annual production values in excess of $10 million. These 50
plants produce 92.6 percent ($1.6 billion) of the value of lead-acid battery
production in the sample and account for 82.7 percent ($4.2 million) of the
industry sector's annual cost and 84.4 percent ($7.1 million) of the industry
sector's investment cost under Level 1. The annual compliance cost for
these 50 plants would be 0.28 percent of their combined revenues. For all
regulatory options, compliance costs as a percent of revenues is signifi-
cantly larger for the smaller than for the larger plants.
Table 8-2 shows compliance costs estimated for the non-lead-acid sector.
The observations made from Table 8-2 are also similar to those made for the
lead-acid sector (Table 8-1). That is, unit compliance costs are generally
inversely proportional to plant size. For this reason, the regulations will
reduce the profitabilities of small plants more than it will for large plants.
8-7
-------
8.5 ECONOMIC IMPACTS ON SMALL ENTITIES
As described previously and shown in Tables 8-1 and 8-2, the average
unit compliance costs of small plants are expected to be higher than those
of larger plants. Following the assumptions of relatively homogeneous product
groups and relatively free market conditions described in Chapter 2, the costs
of the regulation will foster a drop in the returns on sales (ROS) of many
small plants. It is estimated that at the selected pollution control option
(Level 1) there will be 11 plants whose ROSs will fall by more than 1 percent.
The drop in ROS will not be enough to cause any plant shutdowns.
8.6 POTENTIAL EFFECTS OF SPECIAL CONSIDERATIONS FOR SMALL ENTITIES
For purposes of this study, the granting of special considerations for
small entities is considered in terms of the most extreme special considera-
tion, the exemption of small entities from the regulation. Such an exemption
would have the following impacts:
• It would decrease the total cost of implementing
the regulations.
• It would mitigate the negative economic impacts
of the regulations.
• It would decrease the effectiveness of the regu-
lations (i.e., amount of pollutants removed
from the effluent).
The amount of total costs of compliance avoided by special exemptions
increases with the size definition of small entities. These figures are
shown in Tables 8-1 and 8-2. For example, under regulatory Level 1 (the
selected option), $107,000 of annual cost and $183,000 of investment cost
would be avoided in the lead-acid sector if the plants with production values
of under $1 million were exempted. In addition, 9 very small plants would
incur no additional costs. If an exemption were set for plants with produc-
tion values of under $10 million, 16 percent ($721,967) of the lead-acid
8-8
-------
sector's annual costs and 16 percent ($1.2 million) of the lead sector's
investment cost would be avoided at Level 1 option. Moreover, 41 percent of
the plants in the sample would be exempt from the regulation; there would be
no plant closures and price, production, and profit impacts would be small.
Similarly, the implications of the other definitions for "small entities"
can be seen in Tables 8-1 and 8-2. It should be noted that these results
are influenced by the fact the production and compliance cost data on 56
zero-discharging lead-acid plants and 19 discharging lead-acid plants are
not included in the analysis. It does not appear that the inclusion of
these omitted data would significantly change the overall findings of this
study.
8-9
-------
9. LIMITATIONS OF THE ANALYSIS
This section outlines the major limitations of the economic impact
analysis. It focuses on the limitations of the data, methodology, assumptions,
and estimations made in the analyses performed to assess the economic impacts
of the compliance costs.
9.1 DATA LIMITATIONS
The accuracy of the conclusions of this report depends largely on the
accuracy of the data used in the analyses, especially those of the estimated
compliance costs, and plant financial and economic characteristics.
The assumptions relating to the estimation of plant-specific compliance
costs are outlined in Chapter 6 of this report and described in detail in the
technical Development Document.
In the absence of a detailed financial survey for the battery manufacturing
industry, a financial profile of the industry was developed based on extensive
review of trade literature and published financial reports. This financial
profile is subject to the following major assumptions and limitations:
• Lacking plant-specific operating ratios such as profit
margin, assets value, fixed and variable costs of pro-
duction, salvage value, and tax rates, industry average
estimates were applied to the plants. The methodology
for estimating these financial variables is explained
in Appendix A. An examination of a limited data base
of small business financial data indicated that the
baseline financial performances of small firms are not
significantly different from those of larger ones.
• Lacking plant-specific revenues data, plant revenues
were estimated by multiplying production of each plant
(in pounds) reported in the technical 308 Survey by an
9-1
-------
average industry price per pound of production. The
actual price per pound could vary considerably from one
battery configuration to another, even within the same
chemical system type. In some cases, market research was
able to identify specific battery types and prices at a
specific plant so that adjustments were made as required.
• The cost of capital used for the cost analysis was
estimated to be 12 percent for the entire industry,
despite the fact that it can differ from firm to firm.
A sensitivity analysis of plus and minus 20 percent
of this figure showed that the results of the study
would not be significantly affected.
• Only a single year's plant production data were collected
in the EPA survey. For most plants these data were for
either 1976, 1977, or 1978. For several plants, these
data were for 1982. Multiple years' production data would
have enabled a more in-depth analysis encompassing the
cyclical nature of the industry. However, these were
neither peak nor trough periods for the industry or the
general economy and are, therefore, considered to be
representative of average conditions in the industry
over the long run.
• To stress the conservative nature of the study effort,
all quantity changes were calculated at the higher end
of the elasticity estimate range and the lower end of
the plant revenue estimates.
These limitations inhibit the ability of the impact analysis to address speci-
fic plant closure decisions in cases where the regulations exert a significant,
but not overwhelming, impact upon the plant (i.e., borderline cases). An over-
riding feature of the manner in which the limitations, inferences, and extrapo-
lations were dealt with in the analysis is that a "conservative" approach was
taken. That is, judgments were made that would more likely result in over-
stating the economic impacts than understating them.
9.2 METHODOLOGY LIMITATIONS
In addition to the data limitations described above, this study is also
subject to limitations of the methodology used. These limitations are related
9-2
-------
to critical assumptions on price increase, profit impact, and capital avail-
ability.
9.2.1 Price Increase Assumptions
It is assumed that the industry's pricing behavior follows a scenario that
will cause the baseline return on assets for the dominant firms in the industry
to be maintained. This assumption generally results in a price change that is
insufficient for all plants in the industry to recover all compliance costs
and maintain profitability, since average unit compliance costs vary among
the plants. This price increase assumption is justified by observations made
regarding the demand and industry structure characteristics. That is, the
price elasticities of demand for most battery products are inelastic and the
industry exhibits some characteristics of noncompetitive market behavior.
9.2.2 Profit Impact Assumptions
The basic measures of profit impact used in this study are the after-
compliance internal rate of return and return on net assets. Due to the
difficulty and uncertainties of forecasting the fluctuation in annual cash
flows, it is assumed that annual cash flows remain constant over the period
of the analysis. The rationale for this assumption is that while cash flows
vary from year to year, they would tend to average around a normal level
over a period of time. The assumption of constant cash flow is believed to
have little effect on the accuracy of the analysis.
Another limitation relates to the ability of the profit impact methodo-
logy to assess the combined effects of the business cycle and the timing of
the effective date of the regulation. As previously mentioned, portions of
the study rely on inferences from only one year or a few years of data. Where
this occurred, care was taken to insure that any point estimate was not taken
for an extreme year, such as a trough of a recession or a peak of an expansion.
The time periods used were indicative of neither a peak nor a trough for the
9-3
-------
industry or the general economy; and are, therefore, considered to be repre-
sentative of average conditions in the industry over a long period of time.
9.2.3 Capital Availability Assumptions
The impacts of the capital investment requirements were assessed through
an evaluation of the investment costs in comparison to typical annual capital
expenditures in the industry and to plant fixed assets. Although this tech-
nique does not provide a precise conclusion on a firm's ability to make the
investment, it does provide a good indication of the relative burden of the
requirement.
9.2.4 Establishment Definitions
For the purpose of this study, the focus of the analysis is on the
impacts of the regulations on the battery manufacturing operations of a plant.
As a result, when a plant includes manufacturing activities other than battery
manufacturing, only the battery manufacturing operations are evaluated.
That is, the economic impact analysis is focused on the compliance costs and
revenues of the battery manufacturing operations of the plant.
9.2.5 OSHA Requirements
The assessment of the impacts of the OSHA requirements on the baseline
conditions of the battery manufacturing industry may be hindered by the lack
of knowledge regarding the current state of compliance with the OSHA lead
standard. The cost estimates used were taken directly from the OSHA report
and are sensitive primarily to variation in plant size, while they lack
sensitivity to technology in place. Nevertheless, the plant closure estimates
(44 small plants) reported in Appendix B are in general agreement with those
estimated by OSHA (42 small and 5 medium-sized plants).
9-4
-------
9.3 SUMMARY OF LIMITATIONS
Although the factors previously mentioned may affect the quantitative
accuracy of the impact assessments on specific battery plants, it is believed
that the results of this study represent a valid industrywide assessment of
the economic impacts likely to be associated with effluent guideline control
costs.
9-5
-------
APPENDIX A
PROFITABILITY ANALYSIS METHODOLOGY
This appendix describes the methodology used in the plant-level profit-
ability analysis. It includes the rationale for the use of the profitability
measures selected—return on investment and internal rate of return—and the
methods used for estimating values for the specific data used in the calcula-
tion of these profitability measures.
General
Three general approaches can be taken to analyze plant-level profitability
for purposes of capital budgeting decisions: the payback period, financial
ratio analysis, and discounted cash flow (DCF) techniques. The payback
period is not applicable for plant closure analysis since the plant receives
no financial return on its pollution control investment.
Financial Ratio Analysis
The second approach to measuring product and plant profitability is to
compare financial ratios that are key measures of profitability, such as
return on investment (equity, assets) and return on sales. Of these, return
on investment (ROI) is the most commonly used measure. The ROI represents
the ratio of annual profits after taxes to either the original or the average
investment in the project. The principal virtue of this method is its sim-
plicity and its common usage in comparing overall profitabilities of finan-
cial entities. Its principal shortcomings are that it is based on accounting
income rather than cash flows, and that it fails to account for the timing
of cash flows, thereby ignoring the time value of money. Since the ROIs for
the individual battery plants were not available to the study team, a broad
range of estimates was developed using aggregate industry and sample plant
data. The estimation procedure is described later in this appendix.
A-l
-------
Discounted Cash Flow Analysis
Discounted cash flow (DCF) approaches take into account both the magni-
tude and the timing of expected cash flows in each period of a project's
life and provide a basis for transforming a complex pattern of cash flows
into a single number. There are two major techniques for applying DCF
analysis: the internal rate of return (IRR) method and the net present value
method. Both techniques will generally provide the same profit impact
and plant closure conclusions. This study uses the IRR approach as this
technique provides a direct measure of the relative profitability of various
projects. The remainder of this appendix describes the suggested implementa-
tion of the IRR technique.
The IRR for an investment is the discount rate that equates the present
value of the expected stream of cash outflows with that of the expected inflows.
It is represented by that rate r, such that
n
£ AT,, (1 + r)~T = 0
T=0
where Af is the cash flow for period T, and n is the last period in which the
cash flow is expected. Standard methodology calls for solving the equation
for r and then comparing to some required cutoff, or hurdle, rate to determine
acceptability of the investment. A relatively conservative approach is to
select the cost of capital as the hurdle rate. If the initial cash outlay
(AQ) occurs at time T=0, and if the cash flow is an even series (A), then
-*T
= £(l+r) . Since the values for r corresponding to various values of
^ are provided in standard present value tables, r can be found by
simply dividing the initial outlay by the cash flow (i.e., AQ/A) to obtain a
factor that can then be used in conjunction with a present value table to
look up the discount rate. Exhibit A (at the end of this Appendix) provides
a derivation of this relationship. Thus, the IRR is expressed as a function
of AQ, A, and n. Since n may remain fixed in our analysis (e.g., 10 years)
the IRR is a function only of A/AQ.
A-2
-------
Estimation of Baseline Financial Ratios
Since no survey of industry financial and economic data was conducted,
information from published sources or industrywide data and data on "model"
or "typical" plants found in literature was used to estimate typical finan-
cial and operating ratios for the industry. Since the resulting estimates
are not precise calculations of the variables, they cannot be used to make
exact predictions of plant-level impacts. However, they allowed the develop-
ment of a reasonable range of likely impacts that could result from the
regulations. The following data sources were used in the analysis:
• Census of Manufactures, 1972 and 1977
• Company annual reports for Union Carbide Corp.; Eltra
Corp.; ESB Inc.; Globe Union, Inc.; P.R. Mallory, Inc.
• Lead-Acid Battery Manufacture - Background Information
for Proposed Standards (DRAFT), EPA 450/3-79-028a, EPA,
Office of Air Quality Planning and Standards, November
1979.
The last source used data obtained at site visits to develop financial
statements for two model "representative" lead-acid battery plants—a 100-
battery-per-day plant (about 1 million pounds per year) and a 250-battery-per-
day plant (about 2.5 million pounds per year). The model financial statements
are shown in Tables A-l and A-2. The financial characteristics of these data
were confirmed, to some extent (as the data permitted), by information gathered
at plant visits. Separate calculations were done for "very small" (less than
1 million pounds per year) and small plants (between 1 and 10 million pounds
per year). However, since the data on "small" plants conflict with data in
corporate annual reports and site visit reports, only the ROI for the "very
small" plants was actually used in the analysis. This decision favors a
conservative approach to impact assessment since the ROI for the "very small"
plants is lower than that for the small. Financial ratios from FTC and
company annual reports were also compiled. However, these sources do not
A-3
-------
TABLE A-l. ESTIMATED FINANCIAL DATA FOR
SMALL LEAD-ACID BATTERY MANFUACTURING PLANTS1
BEFORE NSPS LEAD AND SULFURIC ACID MIST CONTROLS
MODEL PLANT SIZE
Revenue^
Operating Expenses
Earnings Before Taxes
Earning Rate Before Taxes
Taxes3
Earnings After Taxes
Earning Rate After Taxes
100 BPD
$540,000
470,400
69,600
12.9%
20,400
49,200
9.1%
250 BPD
$1,350,000
1,168,500
181,500
13.4%
74,100
107,400
8.0%
Wet and Wet/Dry Formation.
on operating rate of 80 percent and battery price of $27.00 per
battery.
•^Calculated at 22 percent of first $50,000 and 48 percent on remainder of
earnings before taxes rather than at official rate of 20 percent of first
$25,000, 22 percent of next $25,000 and 48 percent of remainder over
$50,000.
SOURCE: Lead-Acid Battery Manufacture—Background Information for Proposed
Standards (DRAFT EIS). EPA-450/3-79-028a, Office of Air Quality
Planning and Standards, November 1979*
A-4
-------
TABLE A-2. BASELINE ECONOMICS CAPITAL INVESTMENT FOR
EXISTING LEAD-ACID BATTERY PLANTS WET AND DRY FORMATION
(In Thousands of Dollars)
Manufacturing
100 BPD 250 BPD
Fixed Investment
Casting $ 15.0 $ 24.5
Pasting 6.7 10.0
3-P Process 10.0 11.6
Formation 12.5 17.5
Land 15.0 20.0
Building 68.6 101.8
Other Fixed Investment
OSHA 23.3 26.0
SIP - particulates 35.0 35.0
Total Fixed Investment
Accumulated Depreciation*-
Fixed Investment After Depreciation
Current Assets^
Total Assets Before Control $264.0 $338.6
^•Building at 0.25; process equipment at 0.66; OSHA, SIP at 0.133.
100 percent of fixed investment after depreciation.
SOURCE: Lead-Acid Battery Manufacture — Background Information for Proposed
Standards (DRAFT EIS). EPA-450/3-79-028a, Office of Air Quality
Planning and Standards, November 1979.
A-5
-------
directly measure the financial parameters for any single battery product group,
since they represent multiproduct entities. Therefore, an industrywide average
for each parameter was applied to each product group. The variables, whose
values were taken from published sources, include sales, total gross assets,
net assets, total fixed assets, and net profit for corporations engaged in the
manufacture of electrical and electronic equipment, the industry group to which
battery manufacturing belongs. The data sources and values are indicated in
Table A-3 and its footnotes. These variables were used to calculate baseline
values for the following parameters: return on sales, sales to assets, profits
to assets, cash flow, and internal rate of return. The variables are shown
in the table. The last column of the table is a consensus of values for a
typical battery manufacturing plant and represents the values used in the
impact analyses presented in Chapter 7. It is important to note that many of
the data sources relate to broader industry groups than just battery manufac-
turing. For example, the FTC data is dominated by nonbattery electrical and
electronics equipment and most of the firms participate in many diverse
activities and only consolidated financial data is available. For these reasons,
greater weight was given to the model plant in determining some of the baseline
parameters. Although the study team had only limited access to plant-level
financial data, these estimates represent a range of plausible conditions
under which the regulation was promulgated.
Baseline Internal Rate of Return
Using the values in the table, the baseline IRR is calculated as follows:
(1) A0 = SV = SV A (0.65) (0.5) = 0.325
VS VS A VS
(2) A_ = ROS + PEP = .06 (VS) + .025 = .085
VS VS
(3) Ao/A = l (1 + r)~t = -325/.085 = 3-82
if AQ/A = 3.82, then IRR = 23%
This is the baseline IRR used in the impact analysis.
A-6
-------
TABLE A-3. DERIVATION OF BASELINE FINANCIAL RATIOS
FOR THE BATTERY MANUFACTURING INDUSTRY
VARIABLE
1. Return on Sales
2. Value of Shipments *
Total Assets (VS/A)
3.. Fixed Assets/Value of
Shipments (FA/VS)
4. Current Assets/Value of
Shipments (CA/VS)
5. Fixed Assets/Total Assets
(FA/TA)
6. Baseline ROI
7. Tax Rate
8. Salvage Value (SV)
Current Assets
Fixed Assets
Average
9. Annual Capital Exp./VS
(CAP EXP/VS)
10. Depreciation/ Value
Shipments (DEP/VS)
11. Cost of Capital (COC)
UNITS
Percent
Ratio
Ratio
Ratio
Ratio
Percent
Percent
Percent
Percent
Percent
Percent
SOURCES
MODELL
PLANT
9
2.1
0.25
0.25
0.5
19
29
NA
NA
NA
NA
SITE
VISITS
5
NA
NA '
NA
NA
NA
NA
X
NA
NA
NA
CENSUS
NA
NA
0.25
NA
NA
NA
NA
NA
5.8
NA
NA
2
ETC
6.1
1.7
0.27
0.35
0.38
8.4
30
NA
NA
2.5
NA
CORPORATE
ANNUAL3
REPORTS
4-8
1.2-2.1
0.2-0.25
0.3-0.5
0.3-0.6
5-13
33-50
NA
5-6
2-4
NA
4
CONSENSUS
6
2
0.25
0.25
0.50.
12
30%6
100
305
"65*
5
2.5
13
•'•Lead-Acid Battery Manufacture—Background Information for Proposed Standards, EPA 450/3-79-028a, EPA,
Office of Air Quality Planning and Standards, November 1979.
2Federal Trade Commission, Quarterly Financial Reports for Electrical and Electronics Equipment, 1977-1978.
^For Eltra Corp.; ESB, Inc.; Globe Union, Inc.; Gould, Inc.; P.R. Mallory; Eagle Pitcher Industries, Inc.;
Union Carbide Corp.; Northwest Industries; and General Electric Company.
^The consensus is used as the baseline value.
^Assumptions based on industry sources.
6A sensitivity analysis at 40 percent was also used.
X • Qualitative information provided.
NA " Not available or applicable.
A-7
-------
Threshold Value for IRR Analysis
The threshold value for the IRR calculations is the cost of capital,
which is defined as the weighted average of cost of equity and cost of debt,
that is:
(i x D) + (& x E)
k =
D + E
where:
k = Discount rate
i = Interest rate of debt capital
e = Cost of equity capital
D = Debt capital
E = Equity capital.
Interest rates on commercial loans are generally 1 to 2 percentage points
above prime interest rates (i.e., interest rates that banks usually charge
their best, most credit-worthy creditors). Data Resources, Inc. (DRI) fore-
castes that prime rates between 1985 and 1995 would average about 10.5 percent.1
Assuming a premium of 1.5 percent, it is projected that interest rates on
debt would average about 12 percent over that period of time.
For this study, cost of equity is defined as the rate of return on a risk-
free investment such as the U.S. Treasury Bond plus a risk premium factor.
The DRI forecasts show that 10-year U.S. Treasury Bond yields would average
about 9 percent over the 1985-1995 time period.2 In the financial literature
the long-run normal risk premium on stock investment is estimated to be 5 per-
cent. ^ As the result, the cost of equity is expected to average around 14 percent,
Resources, Inc., U.S. Long-Term Review, Winter 1982-1983.
2Ibid.
•^Alfred Rappaport, "Strategic Analysis for More Profitable Acquisitions",
Harvard Business Review, July-August 1979.
A-8
-------
Finally, the Federal Trade Commission's Quarterly Financial Report
indicates that book values of debt and equity in the electrical and electronic
equipment industry each average approximately 50 percent of total capital
during 1978-1982. As indicated in Table A-3, the salvage values of assets
average approximately 65 percent of book value. Since debt is due in full at
liquidation of the plant, it actually represents about 77 percent of the
plant liquidation value (50 * 65 = 0.77), and equity accounts for 23 percent.
Thus, the cost of capital of the nonferrous metals forming industry is
estimated to be 12.5 percent ([12 x 0.77] + [14 x 0.23]). This figure is
rounded out to 13 percent to insure a conservative plant closure threshold
value.
A-9
-------
EXHIBIT A
PRESENT VALUE OF AN EVEN CASH FLOW
This exhibit explains that if net cash flow is the same for each period,
and the initial outlay occurs at time 0, the internal rate of return (r) may
be calculated by dividing the initial outlay by the cash flow to obtain a
factor which can be used in conjunction with a present value table to find r.
In the relationships that follow:
AQ = initial investment
Al * ^-2 m ^3 = * • • ^n °* Annual cash flow
r = internal rate of return
n = number of years cash flows are expected
Calculation of r requires solving the following equation for r:
n -t
j AT (1 + r) - 0
T=0
n
n -t
£ AT (1 + r) -A0 - 0
T-l
A | (1 + r) - A0
T-l
| (1 + rl - A0/A
T-l
r can thus be calculated by simply looking up the discount rate corresponding
to y (1 + r)~c on a present value table.
T-l
A-10
-------
APPENDIX B
COMBINED IMPACTS OF OSHA 150 and 50 yg/m3 PELS
This appendix presents an evaluation of the sensitivity of the economic
impact estimates presented in Chapters 7 and 8 to the promulgation of the
OSHA standards for the occupational exposure to lead.
BACKGROUND
In 1978 the Occupational Safety and Health Administration promulgated
standards for occupational exposure to lead in the battery manufacturing and
other industries. A 150 yg/m3 permissible exposure limit (PEL) became
effective in 1983 and a 50 yg/m3 PEL is scheduled to become effective in
1986. OSHA estimated that these regulations will cause price increases of 3 to
5 percent and the shutdowns of 42 small and 5 medium-sized plants.1 Because
compliance with the OSHA regulations is quite costly and may cause a signi-
ficant number of closures of small and medium-sized plants, the results
of the EPA economic impact analysis described in Chapters 7 and 8 may require
modification. To evaluate this possibility, the industry baseline analysis
is modified to incorporate the impacts of the OSHA costs.
APPROACH
To assess the impact of the OSHA rules on the lead-acid plants in EPA's
data base, cost of compliance with the OSHA rules was estimated for the
plants in EPA's data base and the profit impact analysis methodology described
in Chapter 2 is applied. The cost estimates are based on those in the OSHA
economic impact analysis report and are shown in Table B-l. These estimates
^-Occupational Safety and Health Administration, Economic and Environmental
Analysis of the Current OSHA Lead Standard, CRA Project No. 536.60, sub-
mitted by Charles River Associates, 1982.
B-l
-------
TABLE B-l. SUMMARY OF OSHA COMPLIANCE COSTS FOR LEAD-ACID BATTERY PLANTS
(150 pg/m3 plus 50 yg/m3 PEL)
PLANT SIZE
(Batteries/Day)
<300
301 - 500
500 - 1,200
1,200 - 3,000
>3,000
ANNUAL COST3
($ per Battery)
150 PEL
7.45
2.58
2.01
1.52
0.94
50 PEL
0
0
0
0
.24
TOTAL
ANNUAL
OSHA COSTS
7.45
2.58
2.01
1.52
1.18
ANNAUL COST
AS PER-
CENTAGE OF
REVENUES15
(%)
31.0
10.7
8.4
6.3
4.9
aUnweighted averages for plants in the OSHA study inflated to 1983 dollars
using Engineering News Record Construction Cost Index.
°This ratio uses a price of $24 per battery.
SOURCE: OSHA, Economic and Environmental Analysis of Current OSHA Lead
Standard, CRA Project No. 536.60, submitted to OSHA by Charles
River Associates, 1982.
B-2
-------
are extrapolated to the EPA data base on the basis of plant size. Other infor-
mation that may be pertinent to a plant-by-plant cost estimation, such as equip-
ment in place or plant-specific financial data, is not available. For this
reason, these estimates are considered an approximation of what OSHA costs
might be for specific size groupings, rather than a precise set of plant-
specific compliance costs.
RESULTS
Using the pricing algorithms presented in Chapter 2, the price increase
expected to result from the combined 150 and 50 PELs is 5 percent. Given
these price changes large plants (>3000 batteries per day) and intermediate-
sized plants (1,201-3,000 batteries per day) will experience only small declines
in profit margins «1 percent). These profit declines are not enough to
cause plant closures. Plants in the 501-1,200 batteries per day group will
experience greater profit margin reductions. Although these profit changes
are substantial (about 3 percent of revenues on average), most of these plants
can remain in operation. However, the smaller plants (under 500 batteries
per day) will not remain financially viable, according to the ROI and IRR
tests. These plants experience annual compliance costs above 10 percent of
revenues and will experience ROIs below the threshold value of 6 percent and
IRRs below the 13 percent threshold. Forty-four of the 111 plants in EPA's
data base fall into this size group. These plants account for about 2 percent
of U.S. production of lead-acid batteries.
IMPLICATIONS FOR EPA ECONOMIC IMPACT ANALYSIS
The EPA economic impact analysis utilized a two-stage profit analysis
test. First, in a "screening analysis," all lead-acid battery plants expected
to experience profit margin declines of more than 1 percent of revenues are
enumerated. Fifteen of the 111 plants are in this category. These plants
are then subjected to a more detailed financial analysis using return on
investment and internal rate of return ratios. All other plants will experi-
ence minimal economic impacts. Fourteen of the 15 plants screened out would
B-3
-------
close due to the OSHA rules, according to the above analysis of the impacts
of the OSHA standards. Each of the remaining 96 plants in EPA's data base
would experience extremely small compliance costs in comparison to their
revenues and would not close due to the effluent guidelines. Moreover, the
price impact of the effluent guidelines is also small relative to that of
the OSHA rule (0.3 percent versus 5 percent). Thus, the incremental impacts
of the effluent guidelines are minor.
B-4
-------
50772 d_, ____^_
REPORT DOCUMENTATION
PAGE
1. REPORT NO.
EPA 440/2-84-002
3. Recipient's Accession No.
4. Title end Subtitle
Economic Impact Analysis of Effluent Limitations and Standards
for the Battery Manufacturing Industry
5. Report Dete
January 19
Authors)
8. Performing Organization Rept. No.
9. Performing Organization Name and Address
JRB Associates
A Company of Science Applications, Inc.
8400 Westpark Drive
McLean, Virginia 22102
10. Project/Tesk/Worfc Untt No.
11. ContractCO or Grant(G) No.
(O 68-01-6348
(G)
12. Sponsoring Organization Name and Address
U.S. Environmental Protection Agency
Office of Water Regulations and Standards
401 M Street, S.W.
Waohington. B.C.—20460
13. Type of Report & Period Covered
Final
14.
ciingto
lementary
15. Suppl
Notes
16. Abstract (Limit: 200 words)
The U.S. EPA issued effluent guidelines and limitations for the Battery Manufacturing
Point Source Category in March, 1984. This report estimates the economic impact of
pollution control costs in terms of price changes, effects on profitability potential
plant closures, unemployment, and other secondary effects. A plant by plant analysis
of the 149 battery manufacturing facilities that are expected to incur costs as a result
of this regulation was conducted.
17. Document Analysis a. Descriptors
b. Identifiers/Open-Ended Terms
c. COSATI Reid/Group
18. Availability Statement
19. Security Class (This Report)
20. Security Class (This Page)
21. No. of Pages
(See ANSI-239.18)
See Instruction* on Reverse
22. Price
OPTIONAL FORM 272 (4-77)
(Formerly NTIS-35)
Department of Commerce
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