EPA-230/3-76-014
      ECONOMIC  IMPACTS  OF PULP AND
      PAPER INDUSTRY COMPLIANCE WITH
        ENVIRONMENTAL REGULATIONS
                     VOLUME II
Price and Demand Effects on the  Industry's Major Product Sectors

                           \

                     MAY 1977
           U.S. ENVIRONMENTAL PROTECTION AGENCY
               Office of Planning and Evaluation
                  Washington, D. C. 02460

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ECONOMIC IMPACTS OF PULP AND PAPER
       INDUSTRY COMPLIANCE WITH
      ENVIRONMENTAL REGULATIONS
                    VOLUME II

     PRICE AND DEMAND EFFECTS ON THE INDUSTRY'S
              MAJOR PRODUCT SECTORS

                   Prepared by:

                   Claire R. Canty
                   Louise M. Firth
                  Fred D. lannazzi
                 Nelson R. Lipshutz
                  Henry R. Martin
              Peter L. Oliver, Project Leader

                       of

                 Arthur D. Little, Inc.


                     Report for

            Office of Planning and Evaluation
           U.S. Environmental Protection Agency


                     June 1977

                 EPA-230/3-76-014

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                       TABLE OF CONTENTS

                                                           Page

List of Tables                                                    v

List of Figures                                                  vii

 I.   INTRODUCTION                                ,            1

     A.   PURPOSE AND SCOPE                                  1

     B.   KEY BASES OF ANALYSIS                               4

 II.   OVERVIEW                                               5

     A.   MARKET STRUCTURE                                  5

     B.   LONG-RUN PRICE IMPACTS                              5

     C.   COST RECOVERY REQUIREMENTS FOR THE
          EXISTING INDUSTRY                                  5

     D.   OUTPUT EFFECTS                                     9

III.   PRODUCT SECTOR ANALYSES                                13

     A.   CONTAINERBOARD                                   13

     B.   PACKAGING PAPERS                                  23

     C.   RECYCLED PAPERBOARD                              32

     D.   CONSTRUCTION PAPER                                42

     E.   MARKET PULP                                       44

     F.   PRINTING, WRITING AND RELATED PAPERS                56

     G.   BLEACHED BOARD                                   63

     H.   TISSUE                                            72
                               111

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                   TABLE OF CONTENTS (Continued)

                                                            Page

III.   PRODUCT SECTOR ANALYSES (Cont'd.)

     I.     NEWSPRINT AND UNCOATED GROUNDWOOD PAPER         81

     J.     SPECIALTY PAPERS                                  89

APPENDIX - PRODUCT SECTOR PRICE SERIES AND
          ECONOMETRIC EQUATIONS                            97
                               IV

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                                  LIST OF TABLES

Table No.                                                                      Page

    1-1      U.S. Production and Trade by Paper Industry Product Sector, 1974        2
   11-1      Concentration in Pulp and Paper Products — 1975                       6
   II-2      Long-Run Price Impacts of Studied Environmental Regulations            8
   II-3      Investment Required by Existing Mills to Comply with Studied
            Regulations                                                         10
   11-4      Price Increase Necessary for Existing Mills to Recover the Cost of
            Selected Environmental Regulations                                   11
   11-5      Price Elasticity of Demand Pulp, Paper and Paperboard Products          12
  111-1      U.S. Containerboard Production, 1973                                14
  III-2      Corrugated Shipping Container End Uses                               16
  III-3      Concentration of U.S. Kraft Linerboard Suppliers, 1975                 17
  III-4      Concentration of U.S. NSSC Corrugating Medium Suppliers, 1975        18
  III-5      Containerboard Price Trends                                          19
  III-6      Effect of Environmental Regulations on Unbleached Kraft
            Paperboard Prices                                                    21
  III-7      Effect of Environmental Regulations on NSSC Corrugating
            Medium Prices                                                       22
  III-8      U.S. Packaging  Paper Shipments, 1973 by Major Product                26
  III-9      Concentration of U.S. Unbleached Kraft Papers Suppliers, 1975          29
  111-10     Concentration of U.S. Packaging Paper (Excluding Unbleached
            Kraft) Suppliers, 1975                                               30
  111-11     Unbleached Kraft Paper Price Trends                                  31
  111-12     Effect of Environmental Regulations on Unbleached Kraft
            Paper Prices                                                         33
  111-13     U.S. Recycled Paperboard Production  by Major Grades
            and Uses, 1973                                                      35
  111-14     Concentration of U.S. Recycled Paperboard Suppliers, 1975             38
  111-15     Recycled Paperboard Price Trends                                     39
  111-16     Effect of Environmental Regulations on Recycled Boxboard Prices       40
  111-17     Concentration of U.S. Construction Paper Suppliers, 1975               43
  III-18     Effect of Environmental Regulations on Construction Paper Prices        45
  111-19     Free World Dissolving Pulp Demand by Major Application, 1973          47
  III-20     U.S. Consumption of Bleached Market Pulp, 1973                      48
  111-21     Concentration of North American Market Pulp Suppliers, 1975           51
  III-22     Effect of Environmental Regulations on Dissolving Pulp Prices           55
  III-23     Concentration of U.S. Printing and Writing Paper Suppliers, 1975         58
  III-24     Effect of Environmental Regulations on Printing and Writing
            Paper Prices                                                         61
  III-25     U.S. Boxboard  Production by Major Grades and  Uses, 1973              64
  III-26     Folding Carton End-Uses,  1974                                        66

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                            LIST OF TABLES (Continued)

Table No.

  111-27     Concentration of Bleached Paperboard and Bristols, 1975               67
  III-28     Bleached Paperboard and Recycled Boxboard Price Trends              69
  III-29     Effect of Environmental Regulations on SBS Board Prices               71
  III-30     1974 Tissue Production - By Product                                 74
  111-31     1974 Sanitary Tissue Shipments — Consumer vs. Industrial Market        75
  III-32     Concentration of Tissue Suppliers, 1975                               77
  111-33     Effect of Environmental Regulations on Tissue Prices                   80
  111-34     Concentration of North American Newsprint Suppliers, 1975            84
  111-35     Concentration of Uncoated Groundwood Paper Suppliers, 1975          85
  III-36     Effect of Environmental Regulations on Newsprint Prices               88
  III-36A   Concentration of U.S. Special Industrial Paper Suppliers, 1975           93
  III-37     Concentration of U.S. Wet Machine Board Suppliers, 1975              94
  III-38     Concentration of U.S. Molded Pulp Suppliers, 1975                     95
                                         VI

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                                  LIST OF FIGURES

Figure No.                                                                       Page

   11-1      Long-Run Price Increase Resulting from Environmental
            Regulations in the Pulp and Paper Industry                               7
  111-1      Unbleached Kraft Board — Forecast of Demand and
            Capacity Utilization                                                   24
  III-2      NSSC Corrugating Medium — Forecast of Demand and
            Capacity Utilization                                                   25
  III-3      Unbleached Kraft Paper — Forecast of Demand and
            Capacity Utilization                                                   34
  III-4      Recycled Paperboard — Forecast of Demand and
            Capacity Utilization                                                   41
  III-5      Bleached Paper Pulp Market Price versus Capacity Utilization              52
  III-6      Dissolving Pulp Market Price versus U.S. Capacity Utilization              53
  III-7      Printing and Writing Paper Market Price versus Capacity Utilization        60
  III-8      Printing and Writing Papers — Forecast of Demand and
            Capacity Utilization                                                   62
  III-9      Bleached Boards and Bristols Market Price versus
            Capacity Utilization                                                   70
  111-10     Bleached Board and Bristols — Forecast of Demand and
            Capacity Utilization                                                   73
  111-11     Tissue Market Price versus Capacity Utilization                          79
  111-12     Tissue — Forecast of Demand and Capacity Utilization                   82
  III-12A   Newsprint Market Price versus Capacity Utilization                       87
  111-13     Forecast of Newsprint Consumption and Capacity Utilization             90
                                         Vll

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                            I.   INTRODUCTION

     This volume addresses the supply/demand/price impacts for each of the pulp and paper
industry's major product sectors. It brings together all of the descriptive information, data, and
econometric analyses which were  applied to estimate the price/demand effects of the studied
environmental regulations and the potential for short-run shortages. It describes the economic
characteristics of each product sector in sufficient detail to allow readers unfamiliar with the
industry  to  understand  its key economic  characteristics  and how price increases caused by
regulations and accompanying restrictions in potential demand compare with historical price,
demand and supply trends.

     For the purposes of this analysis, Arthur D. Little, Inc. subdivided the paper industry into
13 major product sectors and selected, of these, 10 as representative products or product groups
for the econometric analyses (Table 1-1). To provide a complete description of the entire paper
industry  and to facilitate future studies, Arthur D. Little also outlined the economic character-
istics of the three remaining product sectors: bleached packaging papers, construction paper, and
specialty papers. Available historical price data for bleached packaging and construction papers
are not sufficiently accurate for econometric analyses. Specialty papers were excluded from the
impact analyses because water effluent guidelines have not yet been proposed for this sector.

     The 13 major product sectors were chosen primarily on the basis of common  markets or
applications and also to combine products that usually are produced together. In some cases, the
products within a sector are complementary; in others, they compete directly with each other
(and sometimes with nonpaper products) for various end uses.

A.  PURPOSE AND SCOPE
     To assist various government agencies in making decisions concerning environmental regu-
lations for the U.S. paper industry, the EPA retained Arthur D. Little to undertake a com-
prehensive study aimed  at measuring  the  potential economic impacts resulting from  the
industry's total cost to comply with the following existing and proposed regulations:

     •   Water Regulations — those issued by EPA for existing and new capacity. Two
         levels of control for the existing industry are assessed — that for compliance with
         BPT ("best practicable control technology currently available")  which is required
         for 1977 and BAT ("best available technology economically achievable") which is
         required for 1983. New capacity control costs are based on the  New Source Per-
         formance  Standards (NSPS) currently in effect. These regulations do not affect
         pretreatment standards and other costs associated with use of municipal  treat-
         ment facilities, but the latter were considered in the mill closure analysis.
     •   Air Regulations  —  those issued by  states (State  Air Quality  Implementation
         Plans — SIP) for the existing industry, and those issued by EPA as they apply to
         new capacity.
     •   Noise Regulations — those issued by the Occupational Safety and Health Admin-
         istration (OSHA) for compliance with a 90-dBA noise level using engineering
         and/or administrative controls  to achieve compliance.  Noise regulations  apply
         equally to both existing and new capacity.

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                              TABLE 1-1




U.S. PRODUCTION AND TRADE BY PAPER INDUSTRY PRODUCT SECTOR, 1974
(Thousands

of Short

Product Sector Production
Containerboard
Unbleached Kraft1
NSSC Medium1
Packaging Papers
Unbleached Kraft
Other
Recycled Paperboard
Construction Paper
Market Pulp
Bleached Paper Grade
Dissolvingl
Printing/Writing Papers
Bleached Board and Bristols
Tissue
Uncoated Groundwood Papers
Newsprint
Groundwood Specialties
2
Specialty Papers
TOTALS

13,333
4,175

4,197
1,207
7,634
1,764

3,296
1,611
10,887
4,979
4,086

3,480
1,246
731
62,626
Tons)

Imports
10

142
24
60

2,219
226
217
__


7,398
117
	 8
10,421


Exports
1,743
71

224
283
26

1,557
806
302
375
24

188
53
128
5,780

Apparent
Consumption
11,590
4,114

5,322
7,375
1,798

3,958
1,031
10,802
4,604
4,062

10,690
1,310
611
67,267
 Denotes sectors which were analyzed econometrically.

2
 Includes special industrial papers and wet machine board.
SOURCE:  U.S. Department of Commerce and American Paper Institute.

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     Three types of existing or proposed environmental regulations were not included in these
economic impact analyses:

     •  All regulations affecting woodland management (e.g., use of herbicides and pesti-
         cides), harvesting practices, and alternate timberland uses;
     •  Regulations which mandate fuel switching and/or require S02 removal. (This study
         assumes the use of low-sulfur fuel.)
     •  "Nonsignificant deterioration" regulations under consideration by Congress which
         would tighten current air emission limitations for new or expanded pulp and paper
         mills; and
     •  Priority pollutants regulations, currently being studied by the EPA for possible
         inclusion  in the 1983 water effluent guidelines..

     The study analyzes cost recovery  impacts of the above water, air, and noise regulations on
the pulp, paper, and paperboard product sectors of the total paper and allied products industry.
Thus,  the  analysis  does not  include  costs or  impacts associated  with timberlands, or pa-
per/paperboard converting operations  (except in cases where converting is done at the paper
mill). The study also excludes specialty paper products, for which Federal water effluent guide-
lines have not yet been proposed; such  products account for less than 2% of total U.S. paper and
paperboard production. Specific product sectors studied are:

         Sector                                                 % of U.S. 1974 Capacity

         Unbleached Kraft Paper                                             7.1
         Unbleached Kraft Paperboard                                       22.6
         NSSC Corrugating Medium                                           7.2
         Recycled  Paperboard                                              14.0
         Construction Paper                                                 3.5
         Bleached  Market Pulp                                               7.81
         Dissolving Pulp                                                    3.81
         Printing/Writing Paper                                             18.8
         Bleached  Board and Bristols                                          8.3
         Tissue                                                            7.0
         Newsprint and Uncoated Groundwood                    .             8.1
         Bleached  Packaging Paper                                            2.1
            Total (Excluding Pulp and Construction Board)                     98.7
         1.  Based on total pulp.

     In 1975, the above product sectors accounted for about 45% of the paper and allied products
industry's sales, 55% of its assets and 42% of its employment.

     The report assesses the industry's incremental costs to meet the environmental regulations
defined above. Then it estimates the following economic impacts of these costs on the product
segments they affect directly and on the industry and economy as a whole:

          Price and Demand Effects
          Short-Term Capacity Constraints
          Secondary Impacts on Suppliers
          Closure and Employment Effects
          External Financing Requirements
          Balance of Trade Effects

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B.  KEY BASES OF ANALYSIS
     The results of this analysis should be interpreted in the light of the following key assump-
tions and study parameters:

     1. The base case assumed that regulatory timetables and standards will be enforced with no
exceptions. It is already evident that this assumption does not hold in the case of EPA's BPT
water guidelines which required effective treatment systems to  be operating by July 1977; a
number of mills report that they will be unable to meet this deadline and some have been allowed
to continue with lower quality standards to 1978-1980. A  sensitivity analysis was performed to
test the capital effects of stretching the effective compliance date to January 1980. The 1977
closure estimates excluded  any mill  that indicated it had obtained a variance in the 1977
guidelines, or timetables;  however, such mills were often judged to be likely candidates for closure
by 1983.

     2. Starting dates for the forecasts  were: January 1976 — for the industry's capital and
financing requirements; January 1975  — for environmental control and operating costs (includ-
ing capital recovery). The earlier date was used for operating costs because the 1975 recession
prevented most paper companies from raising prices in 1975 and 1976; thus the incremental costs
incurred since January 1975 generally are not reflected in 1976 prices.

     3. Product quality will not change significantly through 1983. There has been much in-
dustry discussion about employing lower-brightness, higher-yield pulp in their products, thus
reducing pollution loadings as well  as costs. However, as yet, there is no evidence that this trend
has begun; thus, it would be  very speculative to predict its timing and effects.

     4. Competitive pricing is  assumed in all price, demand, and capacity forecasts. To the
extent that  Federal price controls or guidelines are imposed and sustained, the capacity and
capital requirement forecasts made in this report would be altered.

     5. Cost models and dollar projections employ constant 1975 dollars, unless otherwise noted.
This assumes no "real" inflation relative to the general  GNP deflator. If the paper industry
experiences real cost inflation, its price, capital, and financing requirements will be higher than
that projected here. However, its relative cost-recovery price increases resulting from the studied
regulations would not change.

     6. Chase Econometric's, May 17, 1976,  Economic Growth  Forecasts for the Council  on
Environmental  Quality were used as the bases for  the demand and capacity forecasts. The
industrial production index  and GNP series in the Chase forecasts reflect a mild recession in
1978-1979 followed  by four years  of sustained growth to  1983. Chase Econometrics predicted
average annual growth rates of 4.3% for GNP and 6.5% for industrial production, 1976-1983.

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                               II.  OVERVIEW

     This chapter summarizes  the  impact of the studied environmental regulations on the
individual pulp and paper product sectors.

A.  MARKET STRUCTURE
     Most of the  paper industry and its major product sectors are quite competitive. Market
share concentration of the industry's largest firms clearly illustrates this. At the level of aggrega-
tion  of a 4-digit  SIC code, an  industry is  generally considered oligopolistic if the four-firm
concentration ratio is more than 50% and the eight-firm concentration ratio 65%. Throughout the
U.S. economy, the concentration ratio for specific products is generally higher than that for the
corresponding four-digit SIC industry without oligopoly being indicated. The product sectors
described in Chapter III are generally five- to seven-digit SIC product categories (e.g., linerboard
is a seven-digit product).

     Table II-l shows that all sectors except dissolving pulp (where the largest firm has 44% of
the market) uncoated groundwood and wet machine board have low to moderate concentration
ratios. Environmental regulations will contribute to a trend toward increasing concentration in
the paper industry by increasing the minimum efficient scale of new mills and generally increas-
ing barriers to entry by making it more difficult for small to medium firms to expand capacity.

B.  LONG-RUN PRICE IMPACTS
     In the long-run, prices in the pulp  and paper industry will primarily reflect new mill costs
and profit margins. Long-run price impacts for each product sector were estimated using new mill
cost  models for representative  products in each product sector. The calculated prices were
consistent with the discounted life-cycle  cash flows of the mills, using a  10% cost of total capital.
Comparison of the projected price with environmental controls and the price without yielded the
estimated long-run price impact.

     The relative price impacts vary by product sector, from an estimated 15.6% for  NSSC
corrugating  medium  to a low of 4.1%) for tissue (Figure II-l and Table II-2). The variation in
impact is a function of product value as  well as the environmental costs associated with produc-
ing it. For example, the long-run price increase due to the studied regulations is estimated to be
$31 per ton for both NSSC corrugating medium and tissue. However, because of different product
values  this  increase  translates into a relative price  impact of 15.7%'  for NSSC and 4.1%: for
converted tissue. The other reasons for variability in impact are process-specific. For example, a
stand-alone NSSC mill has process characteristics which make effluent more costly  to control
than most other sectors.

C.  COST  RECOVERY REQUIREMENTS FOR THE EXISTING INDUSTRY
     The prices required for existing pulp and paper mills to recover their incremental environ-
mental could reflect an estimate of intermediate-run price impacts during the period 1977-1983.
Existing  mills are required to comply with regulations similar to those for new mills, but they
generally have implemented some environmental controls already. In estimating price increases
necessary for existing mills to recover incremental costs of compliance with the studied regu-
lations, it was assumed that none of these costs were reflected in the  base 1975  market prices
which were held down by the 1974-1975  recession.  The required price increase was computed by

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                                  TABLE II-l
 Containerboard
   NSSC Corrugating
   Unbleached Kraft
 Construction Paper
 Market Pulp
   Bleached Pape
   Dissolving
 Newspaper
 Printing & Writing
 Recycled Paperboard
 Specialty Paper
 Tissue
 Unbleached Kraft Paper
 Uncoated Groundwood
 Wet Machine Board
CONCENTRATION



IN PULP AND
1975

Percent
PAPER PRODUCTS


of U.S. Capacity
Top 4 Firms Top 8 Firms
Bristols
ng Paper

Linerboard

rade**



d


aper
d

44.9
36.4
27.8
34.8
57.7
30.9
77.0
44.0
26.1
23.3
25.7
55.8
41.0
65.2
77.9
67.1
49.9
46.2
57.0
81.0
50.5
100.0
64.5
42.1
38.2
42.1
77.6
64.9
84.8
92.0


Total
Number
of Firms
26
40
21
28
23
25*
8
14
71*
101
51*
51*
28*
20*
11
 *Approximate number of producers.
**North American producers and capacity.
 SOURCE:  ADL estimates.   See Vol.  II—Product sector descriptions for
          basis of estimates.

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Industry Aggregate


Bleached Board (SBS)


Newsprint
NSSC Corrugating.
Medium
Printing & Writing
Bond Paper

Book Paper
Recycled
Recycled Boxboard

Gypsum Linerboard


Tissue

Tissue

DCinked Tissue


Unbleached Kraft
Linerboard

Unbleached Kraft
Bag Paper
                                                  FIGURE 11-1
                                   LONG-RUN PRICE INCREASE RESULTING FROM
                        ENVIRONMENTAL REGULATIONS IN THE PULP AND PAPER INDUSTRY1

                            $/Tpn Without
                       Environmental  Regulations
$327 £
^ 7-3Z

362 £
^g 8.0%

280 £
H3 5.7%

198 £

436 J~~
449

260 P"
219 f

7SA f_
782 ^
15-7%

^y 6.4%
l%i§| 6'2*
NSPS Water! 1
OSHA Noisel^

}/; 5.3% . 	 .
J^6.3% riiPAU M

^H4-i%
^ 5.4%

185 £
1^10.3%

297 5~

[^^J^IO.1%
	 1 — i i.i 1 — 1.^-1 	 1 	 1 — 1 	 1 i i 	 1 1 t i i
^.x
           woodland regulations.
100.0          105.0         110.0          115.0
            Relative I'rir.e Increase  Necessary
      (100.0 = I'rii-p without  Knv IriinmCMit.il Controls)

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                                                           TABLE II-2
oo
Bleached Board & Bristols
Containerboard
  NSSC Corrugating Medium
  Unbleached Kraft Linerboard
Newsprint
Printing & Writing
  Bond Paper
  Book Paper
Recycled Board
  Recycled Boxboard
  Gypsum Linerboard
Tissue
  Tissue
  Deinked Tissue
Unbleached Kraft Bag Paper
    WEIGHTED AVERAGE
LONG-RUN PRICE IMPACTS
OF STUDIED ENVIRONMENTAL REGULATIONS
$/ton, Without
Environmental
Regulations
$362
198
1 185
280
436
449
260
219
754
782
297
327
Increase in
NSPS Water
$
$24
25
14
12
21
21
12
13
22
30
21
19
%
6.6%
12.6
7.5
4.1
4.8
4.7
4v6
5.9
2.9
3.8
7.1
5.8
NSPS
$
$3
2
2
1
3
3
1
1
3
5
3
2
Price/Ton
Air
%
0.8%
1.0
1.1
0.3
0.7
0.7
0.4
0.5
0.4
0.6
1.0
0.6
From
OSHA Noise
$ %
$2
4
2
3
4
4
2
2
6
9
6
3
0.6%
2.1
1.1
1.0
0.9
0.9
0.8
0.9
0.8
1.2
2.0
0.9
Price After
Cumulative Increase
$ ^Increase
$391
229
203
296
464
477
275
235
785
826
327
351
8.0%
15.7
9.7 .
5.7
6.4
6.2
5.8
7.3
4.1
5.6 .
10.1
7.3
         Source:  ADL Estimates.

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adding the estimated incremental operating costs' to the investment expenditures (Table II-3),
which were annualized by the level recovery method, using a  10% cost of total capital. The
annualized costs were converted to a per ton cost based upon the capacity existing in 1975 that
was estimated to still be in operation by 1977 and 1983.

     The required price increases for the existing industry to recover the incremental cost of the
studied  regulations range from a high of 7.9%  for uncoated groundwood to a low of 3.7% for
construction paper (Table II-4). As was the case with the estimated long-run impacts, most of
the impact is  from water regulations and the relative impact differences were caused by unit
value differences and process-specific factors.

D.  OUTPUT EFFECTS
     As a result of the price increase caused by environmental regulations, reductions in quantity
demanded  will occur for products with a price elasticity of demand  greater than zero. Price
elasticities  of  demand calculated from econometric models are consistently inelastic, ranging
from 0.1 for bleached  board and  bristols to 0.90 for unbleached kraft paper with a  weighted
average of 0.37 (Table  II-5).

     The elasticity of demand indicates the reduction in output that will occur as a result of a
price increase. For example, if the  price  of unbleached kraft bag paper increases by lO'-'o, the
quantity demanded will fall by 9% because the price elasticity of demand is 0.9.
 1. See Volume I, Chapter 3.

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                             TABLE II-3

                INVESTMENT REQUIRED BY EXISTING MILLS
                TO COMPLY WITH STUDIED REGULATIONS
(Millions of
Bleached Board &
Bristols
Bleacked Pkg.
Construction Paper
Dissolving Pulp
Newsprint
NSSC Medium
Printing & Writing
Recycled Paperboard
Tissue
Unbleached Kraft Paper
Unbleached Kraft
Paperboard
Uncoated Groundwood
Total
1977
Water
$177
54
34
102
162
112
595
187
268
122
373
62
$2,250
1983 •
Water
$144
36
24
52
91
108
363
54
155
90
258
41
$1,410
SIP
Air
$102
21
9
22
54
28
193
34
68
76
232
20
$860
Dollars)
OSHA
Noise
$19
6
23
9
29
30
101
55
48
15
50
15
$400

Total
$439
117
90
185
336
278
1,252
330
539
303
913
138
$4,920
Source:  ADL estimates.
                                  10

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                                                       TABLE II-4
                                            PRICE INCREASE NECESSARY FOR
                                         EXISTING MILLS TO RECOVER THE COST OF
                                           SELECTED ENVIRONMENTAL REGULATIONS
Bleached Boards
& Bristols
Bleached Pkg.
Construction Paper
Dissolving Pulp
Newsprint
NSSC Medium
Printing & Writing
Recycled Paperboard
Tissue
Unbleached Kraft
Paper
Unbleached Kraft
Paperboard
Uncoated
Groundwood
Weighted Ave.
1975
Price
$353
376
246
398
265
193
591
215
769
242
195
335
$292
$ 8
10
3
13
10
5
12
5
15
6
5
11
$8
1977
$
.08
.16
.50
.88
.67
.00
.79
.08
.30
.26
.83
.90
.40
Wat :.r
%
2.3%
2.7
1.4
3.5
4.0
2.6
2.2
2.4
2.0
2.6
3.0
3.6
2.9%
1983
$6.11
6.27
2.57
9.69
5.99
4.28
7.50
1.61
8.82
4.97
4.73
10.79
$5.44
Water
%
1.7%
1.6
1.0
2.4
2.3
2.2
1.3
0.7
1.1
2.1
2.4
3.2
1.9%
SIP
$
$2.79
2.47
.91
1.86
2.31
1.21
3.09
.89
2.57
2.50
2.41
2.52
$2.20
Air
%
0.8%
0.6
0.4
0.5
0.9
0.6
0.5
0.4
0.3
1.0
1.2
0.8
0.7
OSHA Noise
$ .67
.84
2.12
.58
1.33
1.26
1.60
1.28
2.12
.62
.69
1.36
$1.18
0.2%
0.2
0.9
0.1
0.5
0.7
0.2
0.6
0.3
0.3
0.4
0.5
0.4%
Cumulative
$ %
$17.65
19.74
9.10
26.01
20.30
11.75
24.98
8.86
28.81
14.35
13.66
26.57
$17.22
5.0%
5.3
3.7
6.5
7.7
6.1
4.2
4.1
3.7
5.9
7.0
7.9
5.9%
          SOURCE:   ADL estimates.  See Volume 1, Chapter 3 for details of cost data and Volume 1, Chapter 4,
                   for a cost sensitivity analysis (range of cost/price estimate).

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                                TABLE II-5
                       PRICE ELASTICITY OF DEMAND
                   PULP.  PAPER, AND PAPERBOARD PRODUCTS
 Product

 Bleached Board
 & Bristols
 Bleached Market Pulp
 Dissolving Pulp
 Newsprint
 NSSC Corrugating
 Medium
 Printing & Writing
 Paper
 Recycled Paperboard
 Tissue
 Unbleached Kraft
 Linerboard
 Unbleached Kraft
 Paper
Estimated
Elasticity *
.18
lp .46
.63
.22
.35
.26
d .46
.45
95% Confidence
Interval
+ .18
+ .35
+ .32
+ .09
+ .09
± •!*
± '35
+ .18
.50

.90
+ .27

+ .26
  All Paper  & Board
     Eq. 1:  Weighted
      Sector Prices
     Eq. 2:  Wholesale
          Price Index
,37
.57
+ .08
+ .27
*Equation for Arc elasticity of demand:
                                               AP
                          (Q,  + Q0)/2  •   (P.  + P.)/2
Source:  Derived from econometric models estimated by Arthur D. Little, Inc.
                                  12

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             III.  PRODUCT  SECTOR ANALYSES

A.  CONTAINERBOARD

1.  Product Description
     Containerboard is the largest single product category in the United States paper industry. It
accounted for more than 60% of total paperboard production and more than 30% of total paper
and paperboard production in 1973. This category includes a series of products which are used
primarily  in  the  construction of corrugated shipping containers for secondary packaging
purposes:

     (1) Linerboard, made  either from  unbleached  kraft pulp, wastepaper, or a com-
        bination of both;

     (2) Corrugating medium, made either from a combination of semi-chemical (NSSC)
        pulp and wastepaper, or entirely from wastepaper; and

     (3) Container chip and filler board, made entirely from wastepaper.

     Linerboard provides the top and bottom substrate of a corrugated container.  Corrugating
medium is the fluted material between the linerboard layers.  Container chip and filler board is
used to form the partitions or to line the inside of the corrugated container.

     Unbleached kraft linerboard and semi-chemical corrugating medium dominate this product
sector, accounting for about 91% of 1973 containerboard production (Table III-l). This descrip-
tion will emphasize these products; the supply/demand/price characteristics  of the recycled
products will be included under the recycled paperboard section.

     Since linerboard forms the surface layer of the corrugated sandwich, its chief function is to
provide  the strength required of the container,  primarily resistance to bursting and crushing.
Standard physical requirements for corrugated containers in the United States are set forth in
Section 3 of Rail Rule 41, which governs shipping containers for goods shipped by rail across state
borders. Similar standards for containers used for goods shipped by truck are contained in Rule
222 of the National  Motor Freight Classification. Unbleached kraft linerboard produced in  the
United States (typically at a basis weight of 42 lb/1000 sq. ft.) fully provides the strength required
to meet Rules 41 and 222. The basis weight of recycled  linerboard must be increased to more than
42 lb/1000 sq. ft. if this material is to match the strength of 42-pound kraft liner.

     The chief function  of corrugating medium  is to  provide  a low-cost material for the corru-
gated inner layer. Tearing resistance and folding properties can be minimal, since these proper-
ties are  provided by the linerboard layers. Thus, both semi-chemical and recycled corrugating
medium (the latter containing more than 25% wastepaper) are applicable for this use. The most
common basis weight for corrugating medium is 26 lb/1000 sq. ft.

     Container chip and filler board generally  consists of paperboard that is lighter than 26
lb/1000 sq. ft. It is employed either as single sheets or as the facing of corrugated materials used
for interior packaging such as partitions, dividers, pads, and cushioning.
                                         13

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                            TABLE III-l
             U.S.  CONTAINERBOARD PRODUCTION,  19731
                     BY.MAJOR PRODUCT
                                       Thousand  Tons        —£—
Linerboard
  Unbleached Kraft                         12.6642            68
  Recycled                                    289           	1_
  Sub Total                                12.953             69
Corrugating Medium
                                                  3
  Semi-Chemical                             4,234             23
  Recycled                                  1,129           	6_
  Sub Total                                 5,363             29
Container Chip and Filler Board
                                                  3
  Recycled                                    317
  Total                                    18,633            100
   Includes Exports
   Includes 128,000  tons  of  Solid Bleached Board
   Includes small  amounts of Unbleached  Kraft
  SOURCE:  API,  Statistics  of  Paper  and  Paperboard,  1974

                                14

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2.  Demand
     In 1973, apparent domestic containerboard consumption was 16.9 million tons. Demand for
the products in this group is directly related to the shipping container requirements of the full
spectrum  of American industry; thus, it is strongly,influenced by the main macro-economic
indicators including the industrial production index and GNP.

     Most containerboard material is consumed in the major metropolitan areas where the box
plants that convert containerboard into corrugated containers are concentrated to be near their
customers. About 38% is consumed in the Midwest, 26% in the South, 18% in the Northeast, and
18'V in the West.

     Table III-2 shows a breakdown of 1973 shipments of corrugated box by major end use. Here
it can be seen that food applications are the most important end uses for corrugated shippers.
Paper, wood and allied products and glass products are also important end-use market areas.

     The only real competitive threat to corrugated shipping containers has come from the use of
heavy-gauge shrink plastic film. This film can be wrapped around a pallet of packages and then
shrunk by the application of heat to hold the  load securely. However, because of the superior
cost/performance characteristics of the corrugated containers, shrink film now competes only in
limited applications. Other products have not encroached significantly into corrugated container
markets.

     Probably because corrugated containers have become established as an essential low-cost
packaging material with few substitutes, its price elasticity of demand is low. Arthur D. Little's
econometric analysis indicates price elasticities of 0.50 for linerboard and 0.35 for NSSC medium.

3.  Supply
     U.S. containerboard capacity was about  19.2 million tons in 1973. The industry has an-
nounced plans to expand capacity at the rate of about 3.0% per year (1976-1979). Interestingly,
virgin  liner  and medium capacity will expand more slowly (2.7% per year) than the recycled
products;  this is a reversal of the historical pattern and reflects mounting expansion obstacles for
virgin pulp products.

     About 80% of U.S. linerboard production is in the South and the remainder is in the West.
Production of semi-chemical  corrugating medium is distributed roughly 60% in the Northeast
and North  Central  regions,  35% in the South,  and 5% in the West (in proportion to  the
distribution of the hardwood pulpwood used for this product). Recycled containerboard products
are manufactured near the major population centers.

     Although there  are about 28 U.S. suppliers of kraft linerboard and NSSC medium, eight of
these account for 57% of total linerboard capacity, while 20 companies share the remaining 43%
(Table III-3). Eight  companies account for 46% of total NSSC corrugating medium capacity,
while about  21 companies share the balance (Table III-4). Production of recycled containerboard
products is more fragmented.

     The  leading containerboard suppliers are large, integrated and financially strong manufac-
turers. Being a low-cost producer is a key to success. This implies that substantial vertical
integration is desirable — both backward to the control of pulpwood resources and forward to the
converting of corrugated containers.
                                           15

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                            TABLE III-2
              CORRUGATED SHIPPING CONTAINER END USES

                              (1973)
                                                    1
Food
                                                  Share of  Total Shipments
                                                          (Percent)
     Meat Products
     Canned Fruits & Vegetables
     Beverages
     Bakery & Confectionary Goods
     Fresh Fruits & Vegetables
     Dairy Products
     Other
           Subtotal

Paper, Wood & Allied Products
Glass Products
Chemicals & Allied Products
Electrical/Electronic Equipment
Metal & Fabricated Metal Products
Rubber & Misc. Plastic Products
Textile Products
Furniture & Fixtures
Transportation Equipment
Machinery
Other

Total
 27.8

 15.3
  9.2
  6.6
  6.4
  6.1
  4.3
  4.0
  3.3
  2.6
  2.4
 12.0

100
 Basis:  Square Footage Shipped
  Source:   Fibre  Box  Association
                                 16

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                            TABLE III-3
         CONCENTRATION OF U.S. KRAFT LINERBOARD SUPPLIERS, 1975
                                      of U.S. Total        Number of Mills
International Paper                      11.7                    5
Weyerhaeuser                              8.4                    3
Georgia Kraft (Mead & Inland Container)   7.8                    3
St. Regis                                 6.9                    3
Union Camp                                6.8                    2 ,
Container Corp.  of America                5.6                    2
Ownes Illinois                            5.0                    2
Continental Can                           4.8                    3

Top eight companies                      57.0

Others (about 20 companies)              43.0

Total (about 28 companies)     .         100.0
SOURCES:  Lockwood's directory of the Paper and Allied Trades, 1975.
          Arthur D. Little, Inc., estimates.
                                  17

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                            TABLE III-4
CONCENTRATION OF U.S. NSSC CORRUGATING MEDIUM SUPPLIERS,  1975
                                                                 Number
                                                 of U.S.  Total   of  Mills
Owens  Illinois

International Paper

Weyerhaeuser

Container  Corp.  of America

Menasha

Packaging  Corp.  of America

Hoerner-Waldorf

Stone
8.9
7.5
6.5
4.9
4.9
4.8
4.6
4.1
2
2
3
2
2
1
2
1
 Top  eight companies
 46.2
Others (about 21 companies)
53.8
 TOTAL  (29 companies)
100.0
SOURCES:  Lockwood's directory of the Paper and Allied Trades, 1975.
         Arthur D. Little, Inc., estimates.
                                 18

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     Industry practice confirms this view. The leading containerboard producers listed in Ta-
bles III-3 and III-4: (1)  are integrated to pulp; (2) control a significant portion of the woodlands
that support their pulp mills; and  (3)  are forward integrated to the production of corrugated
shipping containers. Furthermore, roughly 80% of total corrugated container shipments in 1973
was generated by integrated linerboard suppliers.

     Because of the barriers to entry, posed primarily by the vertical integration requirements in
linerboard, the containerboard industry will become more concentrated. New entrants into this
business are unlikely except through the acquisition of existing firms or possibly entry into the
recycled products components business.

4.  Prices
     Containerboard is a commodity-oriented industry that offers little opportunity for product
differentiation or  brand identity. Orders go to the  supplier that is most readily available and
offers the lowest price. Thus, selling price is the major marketing tool.

     Table III-5 shows the price increases which have occurred between  1971, when average
operating rates were at the 85%-90%  level;  1974, when  operating rates  were at a practical
maximum (about 95%-99% of capacity), and the 1975 recession when operating rates averaged 80-
83%.  From 1973 to  1974, prices increased between 34% and 41%, depending on  grade.  These
significant  price increases reflected not only  a tight  supply/demand situation, but also pass-
through of accumulated cost inflation that producers were unable to pass on when price controls
were in effect. Prices remained firm in 1975 despite low capacity utilization primarily because of
production curtailments to hold inventories in check.
                                     TABLE III-5

                          CONTAINERBOARD PRICE TRENDS
                     (Annual Average  Contract Prices,  $/Ton)

Product                                   1971     1972     1973     1974     1975

Unbleached Kraft Linerboard          ' 112      126      142      180      195


NSSC Corrugating Medium                 112      119      136      169      193


Recycled Corrugating Medium            108      116      130      164      185


Container Chip and Filler              115      120      140      185      188




 SOURCE:    Arthur D.  Little, Inc.,  Industry Survey.


                                          19

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5. Import/Export Balance
     In addition to meeting domestic consumption, large amounts of linerboard are exported to
foreign markets. About 1.6 million  tons of unbleached kraft linerboard (13%  of total  U.S.
production)  were exported  in 1973. Domestic linerboard producers are in a favorable export
position because their wood is less costly, and their mills larger and more efficient than those of
producers in the other major producing regions (Canada and Scandinavia). U.S. Exporters ship
from the Pacific Northwest to Asian and Latin American markets and from the South to Western
European and Latin American markets. The economics of production and shipping do not favor
export of  other containerboard grades, such as corrugating medium or the recycled products.
Thus, these are not significant export products.

     There are no significant imports of containerboard materials. Consequently, this industry
has a favorable impact on the U.S. balance of payments.

6. Price Impacts
     The relative long-run price increases estimated for the two container board products studied
(linerboard and NSSC corrugating medium) will be higher than average. These products have a
lower than average unit value and the impact upon NSSC mills is large because of the particular
characteristics of the process.

     As shown  in  Table III-6, the  long-run price increase in linerboard due to the studied
regulations will be 10.3%. The existing industry requires a 7.3% price increase to recover the
incremental costs of compliance with the studied regulations.

     The long-run price increase  in NSSC corrugating medium due to the studied regulations is
15.6',o (Table III-7). This figure,  however, is based upon a stand-alone NSSC mill integrated to
pulp and  it is unlikely that such a mill would be constructed.  The more  likely situation is
construction of an NSSC mill at a site with linerboard to minimize effluent control costs. This
15.6% estimate therefore is in the upper range of the likely price impacts.

     In sharp contrast,  existing  NSSC mills will  require a 6.1% price increase to recover the
incremental cost of compliance with the studied regulations.

     Linerboard and NSSC corrugating medium are bonded together to form cartons. The final
consumer will see  price increases in products  that are shipped in the  corrugated boxes. For
example, the price impact on canned vegetables will be 0.15% of the selling price because of the
combined impact of linerboard and NSSC price increases.

7. Output Effects
     The  price  elasticity of demand was estimated at 0.50 for linerboard and 0.35  for NSSC
corrugating  medium.  This means that the long-run price increase of 10.3% in linerboard will
result in a 5.2% decline in demand and the 15.6% increase in NSSC price will result in a  5.5%
decline in demand.
                                          20

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                                            TABLE  III-6




                                  EFFECT OF ENVIRONMENTAL REGULATIONS
Environmental
Regulation
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
OSHA Noise
Total
11975 Price
2
Baseline Price
ON UNBLEACHED KRAFT PAPERBOARD PRICES
Existing Industry
Investment Necessary
Required Price Increase Long-Run Price Effect „
$ Millions $/Ton % 1975 Price $/Ton % Baseline Price"

$373 $5.38 3.0%
258 4.73 2.4
15 8.1%

232 2.41 1.2
2 1.1
50 .69 .04 2 < 1.1
$913 $13.21 7.0% 19 10.3%
$195
$185
      New Capacity Differential - 5%
SOURCE:   Arthur D.  Little, Inc.,  estimates.

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                                                      TABLE  III-7
                                            EFFECT  OF  ENVIRONMENTAL REGULATIONS
                                            ON NSSC CORRUGATING  MEDIUM PRICES
      Environmental
       Regulation
                                           Existing  Industry
                          Investment
                           Required
                          $ Millions
      Necessary
    Price Increase
 $/Ton
% 1975 PriceJ
                        Long-Run Price Effect
$/Ton
% Baseline Price
K)
K)
EPA Water

  1977

  1983

  NSPS


Federal Air

  SIPS

  NSPS


OSHA Noise

      Total
                                    $112

                                     108
                                      28
                                      30
                                    $278
 $5.00

  4.28
  1.21
  1.26
$11.75
    2.6%

    2.2
    0.6
    0.7
    6.1%
                                                                                   25
$31
                                                 12.6%
       1.0


       2.0

      15.6%
                1975 Price  $193

                Baseline Price   $198

                New Capacity Differential:  3%
         SOURCE:  Arthur D. Little, Inc., estimates.

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8. Supply/Demand Balance
     NSSC  corrugating medium will face a tight capacity situation in 1977-78 if demand is
ebullient. Both NSSC and unbleached kraft board face potential tight capacity situations in
1982-93 (Figures III-l and III-2).

     Since no mill shutdowns are forecast for this sector, any tight capacity will be the result of
demand growing  at  a faster  rate than capacity expansions and not environmentally-related
pollution closures.

B.  PACKAGING PAPERS

1. Product Description
     Table III-8 lists the  major products that comprise  the packaging papers sector and shows
their 1973 shipments. This sector consists of two major categories:

     •  Unbleached kraft paper, which is used  primarily for grocery bags and sacks and
        shipping sacks (multi-wall bags);
     •  Bleached kraft and relatively minor quantities of bleached and unbleached sulfite
        packaging papers (primarily glassine and greaseproof papers), which are utilized
        for  a variety of specialty wrapping bag and food carton inner-wrap applications.

     The  unbleached kraft paper  sector is characterized by large-volume production in large-
scale  mills fully  integrated to pulp. Most of the manufacturers produce linerboard and un-
bleached kraft paper in the same mill since both products use the same type of pulp (primarily
unbleached  softwood  made from southern pine or Douglas fir).  Often this  dual product mix
encompasses one  or more "swing machines"  which can be shifted back and forth between the
heavy grades of sack kraft paper and the lightweight grades of linerboard. Market conditions and
prevailing prices  for  the two products determine the grade mix. Most unbleached kraft paper
producers are forward integrated to converting and in aggregate have about a 50% share of the
multi-wall bag market and a 75% share of the grocery bag and sack market.

     Strength is the most sought-after property in unbleached kraft paper. The essential  proper-
ties are tearing and bursting strength to fit the product's primary application in  bags and sacks.

     Bleached kraft and  non-kraft packaging papers have much  the same applications as un-
bleached kraft papers, but the end uses are highly fragmented and more specialized. Strength is
somewhat less important and  visual and printing characteristics much more important than for
unbleached kraft.

     Nearly all  bleached  packaging papers are produced in mills integrated for the most part to
bleached kraft pulp. The main exceptions are glassine, greaseproof, and vegetable parchment
papers  — which  are used as inner linings for food packages (e.g., dry cereal and cake  mixes),
specialty bags and a variety of other products. They are produced from various bleached and
unbleached softwood sulfite and kraft pulps, often in nonintegrated mills.
                                           23

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                                     FIGURE 111-1
                             UNBLEACHED KRAFT BOARD
                   FORECAST OF DEMAND AND CAPACITY UTILIZATION
                                      DEMAND
  TONS
DEMANDED*
       20000--


       18000-
       *

(000)   16000-


       14000-


       12000-


       10000-
CAPACITY
UTILIZED
         100.0
          90.0--
          80.0-
          70.0--
          60.C--
                      I   I   II   I   I  _L   L  I   I   I
                   75    76    77    78    79    80    81    82    83
                                  CAPACITY UTILIZATION
                                  J	\	1
                                                                       Range of
                                                                       demand Forecast
                   75    76

*Total U.S.  Consumption
                                   78    79    80    81    82    83
                                                                        	High Growth
                                                                        	Medium Grov:
                                                                        . . .Low Growth
                                         24

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         7000-
         6000-
  TON S
DEMANDED*
 (000)
         5000-
         4000-
                                      FIGURE 111-2
                              NSSC CORRUGATING MEDIUM
                    FORECAST OF DEMAND AND CAPACITY UTILIZATION
                                      DEMAND
                                                                        Range of
                                                                        Demand Forecast
                   75    76    77    78     79    80    81    82    83
                                  CAPACITY UTILIZATION
CAPACITY  100-°""
UTILIZED

          90.0--
          80.0
          70.0--
          60.0--
             4
                         4-
                   75    76

*Total  U.S. Consumption
                                  i   i   i
                                                                 	High Growth
                                                                 	  Medium Growth
                                                                 	  Low Growth
                               77    78    79    80    81    82    83
                                         25

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                                TABLE.111-8

          U.S. PACKAGING PAPER SHIPMENTS,  1973 BY MAJOR PRODUCT
                                            Thousand
                                              Tons -
Unbleached Kraft Papers

  Wrapping                                      272             5.2

  Bag and Sack (Except Shipping Sack)         2,006            38.2

  Shipping Sack                               1,026            19.6

  Other Converting                              715            13.6

    Subtotal                                  4,019            76.6


Bleached Packaging Papers

  Wrapping                                      151             2.9

  Bag and Sack (Except Shipping Sack)           254             4.8

  Shipping Sack                                 104             2.0

  Other Converting                              489             9.3

    Subtotal                                    998            19.0


Glassine, Greaseproof and Vegetable i'archment   230             4.4



    TOTAL                                     5,247           100.0
SOURCE:  American Paper Institute, Statistics of Paper and Paperboard, 1975
                                  26

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     Econometric analysis was employed only for the larger unbleached kraft component of the
packaging papers sector, because it was not possible to obtain an accurate composite of historical
bleached packaging paper prices owing  to the many grades included in this  sector. However,
Arthur D. Little believes that the elasticity of demand is somewhat higher and cost pass-through
potential somewhat lower than that of unbleached kraft paper.

2. Demand
     The growth rate for unbleached kraft and other packaging paper demand is now among the
lowest of all the paper industry  product sectors. Persistent substitution of plastic film, partic-
ularly in the grocery bag and multi-wall bag markets and to a lesser extent in shopping bags, has
caused paper demand to remain almost static since  1968. Plastic substitution has been relatively
more severe in the bleached kraft and glassine paper sectors, which cost more than unbleached
kraft and which must compete  to a  greater degree with  the  excellent barrier  properties and
acceptable graphics of plastic film. From 1964 to 1974,  total  U.S. consumption of unbleached
kraft paper has grown at the rate of 2.7% per year while demand for all other packaging papers
has grown at the rate of 1.3% per year.

     The  Arthur D.  Little econometric analysis found  that  unbleached kraft  paper  demand
correlates most closely with the Gross National Product. This probably reflects the fact that its
primary markets are  split  between consumer markets  (grocery  bags)  and industrial  markets
(multi-wall bags).

     Polyethylene  film is the primary substitute product for all packaging papers, particularly
those used in grocery and merchandise stores. Its initial penetration was into markets for multi-
wall  bags (primarily fertilizers and chemicals). Now polyethylene film has become more of a
complementary product in these markets; it is used in the inner layer of the multi-wall bag to
provide moisture proofing while the paper provides abrasion and impact resistance. Most of the
slow growth in multi-wall bags is  now accounted for by a trend toward bulk shipment of fertilizers
and chemicals. Polypropylene film also is used as a substitute for packaging papers but not nearly
to the same extent as polyethylene film.

     The substitution of plastic  film for packaging papers appears to have abated in 1973 and
1974, primarily because of plastic shortages and rapidly rising prices. Arthur D. Little antici-
pates, however, that large supplies of plastics and their raw materials will be brought on-stream
over the next ten  years and these will cause supply unbalances that will reactivate  the sub-
stitution effect on packaging papers.

     Almost all packaging papers (of all grades) are distributed direct from the manufacturer to
the paper converter. As indicated previously, many of the paper producers are integrated forward
to converting, particularly in the case of multi-wall bags and grocery  sacks. Integrated bag and
sack producers account for over 50% of the production and sales of these products.

     The  price elasticity of demand for unbleached kraft packaging paper calculated by the
econometric methods in this study was  0.9. This was the  highest coefficient measured for any
pulp and paper sector. The relatively high value is undoubtedly caused by the substitution effect
from plastics. Arthur D. Little believes that the price elasticity of bleached packaging paper may
be even larger since they are higher priced and thus face greater substitution from plastics.
                                           27

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3. Supply
     About 94% of U.S. unbleached kraft paper is produced in mills fully integrated to pulp and
usually to timberlands. Surprisingly,  in view of the commodity nature of the product, 6% of the
production comes from 16 nonintegrated mills, most of which are very small (less than 50 tons per
day). Usually these are located adjacent to a pulp supplier.

     In view of the  competitive pressure from  both plastic substitutes  and large integrated
producers, many of the nonintegrated producers are experiencing a cost/price squeeze and thus
have a relatively high closure potential mainly for economic reasons. These mills were not
included in  Arthur D. Little's closure analysis since the EPA has assigned them to the non-
integrated coarse-paper sector where water effluent guidelines have not yet been proposed.

     There are 38 integrated  unbleached kraft  paper  mills, of which  the  seven largest have
capacities exceeding  500 tons/day and account for 47%  of the integrated capacity. The median
mill size is around 300 tons/day. Since 1960, there has been a steady increase in average mill size
but little change in the dominance of the integrated mill.

     Table III-9 lists the 1974  capacity of the 12 largest producers of unbleached kraft papers.
Together they account for 81% of U.S. capacity while the top six firms account for 53%. All are
vertically integrated from woodlands  to the converting and marketing of grocery, multi-wall and
other bags. Thus,  this is one of the most highly concentrated as well as most vertically integrated
sectors of the paper industry.

     In the other packaging papers product sector, the nonintegrated mills — primarily glassine
and parchment — have a more significant market share (35%), and the average mill size is far
smaller than in the unbleached kraft sector. This pattern has remained essentially the same since
1960; thus, this market is considerably more fragmented in terms of mill  size as well as variety of
product mix.

     Table III-10 shows the capacity shares of  producers of packaging papers excluding un-
bleached kraft. It indicates that this sector is much less concentrated than the unbleached kraft
papers sector since few companies place any emphasis on this product line and all suppliers
produce these grades as a small part of their total production. In addition, there is a much lower
incidence of complete vertical integration from woodlands to converted product.

     Most packaging papers are produced  in the  South, as is  the case with other products made
in integrated kraft pulp mills. The South accounts for 62% of packaging and industrial converting
paper capacity, the West for 15%, the North Central for  12% and the Northeast regions for 11%.

     Consistent with the low consumption growth for all  packaging papers, capacity  is being
expanded at a very low rate. The announced capacity expansion commitments between 1973 and
1977 average only 1% per year for unbleached kraft paper and 0.3% per year for other packaging
papers.

     The extremely low growth in consumption, the threat of continued  substitution by plastics
and the entrenched position of the major suppliers combine to make entry of new firms difficult if
not unfeasible.  Because of its slow growth, the market  can be supplied readily by incremental
expansions of existing mills.


                                          28

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                               TABLE  III-9





    CONCENTRATION OF U.S. UNBLEACHED KRAFT PAPERS'SUPPLIERS.  1975

Company
International Paper
St. Regis
Union Camp
Continental Can
Crown Zellerbach
Oilman Paper
Longview Fiber
Georgia Pacific
Hudson
Top Eight Companies
Others (about 20 companies)
TOTAL (about 28 companies)
% of U.S.
Total
12.7
12.4
8.3
7.6
6.7
6.2
6.1
4.9
4.5
69.4
30.6
100 . 0

No. of Mills
3
4
1
1
5
1
1
2
1



SOURCES:     Lockwood's Directory of the Paper and Allied Trades, 1975.



            Arthur D. Little,  Inc., estimates.
                                    29

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                                TABLE 111-10
CONCENTRATION OF U.S. PACKAGING  PAPER  (EXCLUDING UNBl.:-...~'r;:.-.: KRAFT) SUPPLIERS, 1975
                                                  % of U.S.
                                                    Total    Number of Mills
Crown Zellerbach

St. Regis

International Paper

Scott

Riegel

Weyerhaeuser

Lrovm

Georgia Pacific

Top Eight Companies

Others(about  20 companies)

   TOTAL  (about 28 companies)
14.5
9.2
6.1
5.2
4.9
4.5
4.0
4.0
52.4
47.6
6
3
2
2
1
2
2
1


100.0
SOURCES:  Lockwood's Directory  of  the Paper and Allied Trades, 1975.
          Arthur D. Little,  Inc.,  estimates.
                                        30

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4. Prices
     Table III-11 shows the significant price increases achieved by the major unbleached kraft
packaging paper grades since January 1973. It indicates that the prices of both the multi-wall and
grocery bag grades have risen 61% mostly since March 1974, when price controls were beginning
to be lifted for the U.S. pulp and paper industry.

     Prices for these grades were relatively stable in the 1960's because of a general condition of
excess capacity, intense competition from plastics, and productivity improvements in kraft pulp
and paper. However, as the supply/demand balance tightened in 1973, the producers found that
they could pass on their cost inflation and improve their profit margins by increasing prices.

     Published market price composites  are not available for  the  many grades of bleached
packaging papers. Industry contacts, however, indicate that price increases since 1973 have been
higher  for the bleached and specialty packaging papers, reflecting larger cost increases for
bleached pulp products.
                                       TABLE III-11

                          UNBLEACHED KRAFT PAPER PRICE TRENDS

                        (Annual Average  Contract Prices, $/Ton)
                                        Grocery Bag        Shipping
                                         and  Sack              Sack

                     1971                   137                 161


                     1972                   158                 170


                     1973                   170                 184


                     1974                   204                 219


                     1975                   240                 257
                     SOURCE:   Arthur D.  Little, Inc., Industry Survey.
                                         31

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5. Import/Export Balance
     There has been continual U.S. trade activity in packaging papers but the tonnages have
been small relative to domestic production. Since 1970, unbleached kraft papers exports varied
from 100,000-185,000 tons (2.6-4.4% of production) while imports grew to a peak of 120,000 tons in
1973 (3.1% of production).

     Both imports and exports of packaging papers, other than unbleached kraft, appear to be
rising. In 1973, imports were 90,000 tons (7.3% of production) while exports were 28,000 tons (2.3%
of production).

6. Price Impacts
     The long-run price increase for unbleached kraft paper will be higher than average (10.1%)
as a result of the studied environmental regulations (Table ni-12). The existing industry requires
a price increase of 5.9%, which is about the industry average, to cover the incremental cost of
environmental regulations for existing mills.

7. Output Effects
     The price elasticity of demand for unbleached kraft paper is higher than that of any other
paper product studied  (0.90). As a  result, the reduction in quantity  demanded due to price
increases caused by environmental regulations is higher than in other product sectors. The long-
run price increase (10.1%) will reduce demand by 9.1% while the price increase necessary to cover
the incremental cost to existing industry (5.9%) will reduce demand by 5.3%.

8. Projected Supply/Demand  Balance
     Demand for this sector is forecast to grow at an average rate of 2.5% over the period 1976 to
1983 (Figure III-3). Capacity  utilization rates are also forecast  to be lower than the industry
average throughout the period. As a result, there should be no price pressure from tight capacity
throughout the 1976-1983 period.

C.  RECYCLED  PAPERBOARD

1. Product Description
     As the name implies, recycled paperboard is manufactured from wastepaper rather than
virgin pulp. Generally a variety of commodity wastepaper grades is used,  the chief of which are
old corrugated containers, waste newspapers,  and mixed  wastepaper.  Occasionally,  small
amounts of virgin fibers are also added.

     Table III-13 shows that recycled paperboard's largest application is boxboard. It dominates
the low-cost, commodity end of the boxboard market, but competes strongly with solid bleached
board in the high-value end.  (See Section B-7, Bleached  Board and Bristols.) The boxboard
grade is usually pigment-coated or sometimes lined with bleached or deinked pulp to improve its
appearance and printing characteristics. A stiffer and heavier grade is used to make set-up boxes
for such items as shoes and hardware; this grade is usually fabricated with a paper outer layer to
enhance its appearance and printability.
                                          32

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                                                 TABLE 111-12

                                     EFFECT OF ENVIRONMENTAL REGULATIONS
                                       ON UNBLEACHED KRAFT PAPER PRICES
Environmental
 Regulation
                                    Existing Industry
Investment
 Required
$ Millions
       Necessary
     Price Increase
  $/Ton
% 1975 Price"
                        Long-Run Price Effect
$/Ton
% Baseline Price
EPA Water

  1977

  1983

  NSPS
   122

    90
  6.26

  4.97
    2.6%

    2.0
                                                  21
                                                  7.1%
Federal Air

  SIPS

  NSPS
    76
  2.50
    1.0
                                                                 1.0
OSHA Noise

      Total
    15
  $303
   .62
$14.35
     .3

    5.9%
 _6

$30
      2.0
     10.1%
  "1975 Price
  "Baseline Price
      242

      297
   New Capacity Differential    23%

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         5000-
         4 5 00--
  TONS
DEMANDED*

 (000)
         4000-
         3500- •

             *',
CAPACITY
UTILIZED
       /  100.0
          90.0--
          80.0- -
          70.0-
          60.0--  '
                                         FIGURE MI-3
                                 UNBLEACHED KRAFT PAPER
                       FORECAST OF DEMAND AND CAPACITY UTILIZATION
                                      DEMAND
  Range of
  Demand Forecast
                   75     76    77    78    79    80    81    82    83
                                  CAPACITY UTILIZATION
	  High Growth
	  Medium Grov;
••-•-•  Low Growth
                                  i   i   i
                   75    76    77    78    79    80    81    82    83

*Total U.S.  Consumption
                                            34

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                               TABLE  111-13
                  U.S.  RECYCLED PAI'ERBOARD PRODUCTION
                    BY  MAJOR GRADES AND USES,  1973
Boxboard
   Folding
   Set-Up
      Sub Total
Thousand Tons

    2,522
      465
    2,987
 32.0
  5.9
 37.9
Containerboard
   Corrugating Medium
   Linerboard
   Chip & Filler Boards
      Sub Total
    1,129
      289
      307
    1,725
 14.3
  3.7
  3.9
 21.9
All Other
   Gypsum Wallboard Facings
   Tube, Can-& Drum'Stock
   Exports
   Other
      Sub Total
    1,050
      901
       31
    1,191
    3,173
 13.3
 11.4
  0.4
 15.1
 40.2
      Total
     7,885
100.0
SOURCE:  API Statistics of Paper and Paperboard, 1975.
                                  35

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     Recycled paperboard is much less important in the containerboard market, where it com-
petes with two well entrenched virgin pulp products: NSSC corrugating medium, and unbleached
kraft linerboard. (See Section B-l, Containerboard.) The chip and filler board (container liners)
component of this market, however, is held almost entirely by recycled paperboard.

     The  next most important  application is  gypsum  wallboard  facings,  which is the liner
material used to make gypsum wallboard. In this application, recycled paperboard faces no direct
competition,  but gypsum wallboard competes with a variety of interior wall panelling materials.

     Tube, can, and drum stock is a still smaller application. It consists of paperboard that is
wound into spiral cans that range from small orange juice cans to large drums for commodities
such as chemicals. Unbleached kraft paper and paperboard compete  strongly in this market.
Recycled paperboard also has a variety of other uses such as cardboard and specialty products;
production statistics on these are not  reported separately by either the API or the Department of
Commerce.

2.  Demand
     Recycled paperboard  draws its  demand from a broad cross-section of the U.S. economy.
About 70% comes from packaging applications in the form of boxes, corrugated containers, and
spiral-wound cans and drums. These  packages are used principally in packaging food (primarily
dried foods),  durable  goods and chemical commodities. Recycled paperboard's use in gypsum
wallboard facings accounts for 11% of its demand and makes it somewhat sensitive to fluctuations
in the construction market. With this fairly broad-based demand,  it is not surprising that the
macroeconomic variable which correlates most closely with historic recycled paperboard demand
is the industrial production index.

     Substitution by other paper industry products (greater than in any other product sector) has
been a key reason for recycled paperboard's slow growth. Solid bleached board  made  major
penetrations  into the folding cartons used in food applications (particularly wet foods) and in
high-margin nonfood applications such as drugs, cosmetics, and toys. Bleached board displaced
recycled paperboard  in these applications because the buyers place a  premium on cleanliness,
aesthetics, or favorable strength/weight relationship.  Recycled paperboard still dominates in
applications where an inner liner is used (e.g., cereals or crackers)  and where low cost is a key
criterion for the carton stock (e.g., in soap, detergents, and paper goods).

     Recycled paperboard was the original linerboard material in corrugated containers, but now
it has been displaced  almost  completely by unbleached kraft linerboard. This displacement
might slow or even stop, in light of kraft linerboard's slow capacity expansion, which foreshadows
large future price increases. Corrugating medium has been one of recycled paperboard's fastest
growing markets, but even here the competing NSSC corrugating medium has enjoyed a more
rapid growth  and increased market share. Little substitution is occurring in chip and filler board.
However,  container users are learning to use less of this material by doing without partitioning
and by using  the packaged products to contribute to the structural support of the container.

     Gypsum wallboard (which is made exclusively with a recycled paperboard liner material) is
a well-entrenched construction product used for both new construction and remodelling. As a
result, its demand does not fluctuate as sharply as the building cycle. It  does face substitution by
other wall panelling materials, but this has been relatively minor thus far.


                                            36

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     Plastics have not had an important substitution impact in the major markets for recycled
paperboard. However, plastics are often used in conjunction with recycled paperboard in blister
or bubble packaging of products such as toys and hardware parts which are mounted on a printed
piece of paperboard. This approach effectively reduces the paperboard required to package the
product.  The net result of displacement by competing products plus the relatively slow growth of
its major markets is that total demand for recycled paperboard has not grown since the early
1960's. Its annual rate of growth as averaged -0.6% from 1964 to 1974 and 0.8% from 1969 to 1974.
The  price elasticity of demand measured in the Arthur D. Little econometric analysis was 0.46,
which is close to the average for all pulp and paper products.

3. Supply
     In 1974, U.S. capacity for recycled paperboard stood at 8.7 million tons. Regionally, this
capacity  is distributed fairly evenly in  proportion to the country's population distribution. This
reflects the fact that wastepaper, the principal raw material, is most economically obtained from
the major metropolitan areas.

     Table III-14 shows that recycled paperboard is one of the least concentrated sectors in the
paper industry. The top 16 companies account for just over 50% of total U.S. capacity, but more
than  100 companies have significant capacity in this product line.  Note, however, that there is
considerable  product specialization particularly in boxboard, containerboard, and gypsum wall-
board facings.

     Vertical integration is most pronounced in gypsum wallboard facings followed by boxboard
and containerboard. All gypsum wallboard producers make their own wallboard facings; there is
only one  significant independent  supplier of this material. About 50% of the folding boxboard
capacity  is forward integrated to folding carton production.  There is also substantial forward
integration by the recycled corrugating medium producers. Many  of the smaller corrugated
container converters have integrated backward to recycled corrugating medium, since this was
their least-cost method of integrating back to one of their major raw materials.

4. Prices
     Recycled paperboard prices, as did prices of most paper and paperboard products, moved
strongly upward after the 1970 recession, and especially after price controls were removed in mid-
1974 (Table 111-15). Between  1971 and 1975, clay coated boxboard registered the largest  gain
(88%)  in this sector,  followed by corrugating medium (71%), gypsum linerboard (68%), and
container chip and filler (63%). Prior  to 1971, these product prices were essentially stable  in
current dollars but declined in constant dollars.

     Gypsum linerboard was  the only product whose contract price declined during  the  1975
recession. However, this may be misleading since the major wallboard producers are all vertically
integrated, leaving a very thin market for arm's-length sales. Prices of the other major grades of
recycled  paperboard held up throughout 1975, reflecting the general pattern of price stability for
the rest of the paper industry.
                                           37

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                                     TABLE II1-14

             CONCENTRATION OF U.S.  RECYCLED PAPERBOARD  SUPPLIERS, 1975
                                                      % of U.S.         Number of
                                                        Total             Mills

CCA                                                          6.9            10
Whippany                                                    6.9              5
Sonoco                                                      5.4            10
U.S.  Gypsum                                                4.1              7
PCA                                                          4.1              5

Federal Paperboard                                        3.9              8
National  Gypsum                                            3.6              5

Newark Boxboard                                           _ 3.3_           _JL.

Top  Eight  Companies                                      38.2

Others (about 93  companies)                             61.8

   TOTAL  (about 101 companies)                         100.0

SOURCES:   Lockwood's Directory  of the Paper and Allied  Trades,  1975.
            Arthur  D. Little,  Inc., estimates.

   5.  Import/Export Balance
       Wastepaper is plentiful and cheap in most of the world's industrialized regions. This factor,
   coupled with widespread imposition of import duties to protect domestic recycled paperboard
   industries, effectively keeps imports and exports to a minimum. In 1973, U.S. imports of recycled
   paperboard were 27,000 tons  (0.4% of consumption), and exports were 207,000 tons  (2.6% of
   production). Most  of the exports were to  South  America and Japan where the wastepaper
   supplies are relatively tight.

   6.  Price Effects
       Table III-16 shows the  price impacts, investment and  annualized cost for  recycled
   paperboard mills compliance with the studied environmental controls. The price  effects for this
   sector are low to moderate, with a long-run price impact of 5.8% compared to 7.8% for the
   industry aggregate. The existing industry must have a 4.0% price increase to cover incremental
   compliance costs. As expected, the 1977 water regulations and NSPS water regulations will
   account for the major portion (75%)  of the projected total price  increase. This sector  is not
   required to meet any New Source Performance Standards for air quality. SIP air control  costs are
   required for both new sources  and existing mills for power boiler emissions. However, SIP costs
   account for only 20% of the sector's environmental cost increases through 1983.

                                           38

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                                  TABLE  111-15
                         RECYCLED PAPERBOARD PRICE  TRENDS


                       (Annual  Average  Contract Prices  $/Ton)
                                   1971     1972    1973     1974     1975

  Clay  Coated  Boxboard           144      150      180      260      270


  Gypsum Linerboard                94        97      111      168      158


  Recycled Corrugating Medium   108      111      130      164      185


  Container Chip and  Filler      115      120      140      185      188



  SOURCE:   Arthur D.  Little,  Inc., Industry Survey.
    The effect of the projected price increase on consumer prices is likely to be small. Most
recycled paper board is made into boxes used to package relatively high-value products. Average
paperboard values run 2-5% of the cost of the packaged product. Therefore, the environmentally
related paperboard price increases (4-6%) would increase packaged product prices only 0.1-0.3%.

7. Output Effects
    Price increases from environmental regulations will reduce demand  l%-2.4%. Long-run
price increases required will reduce demand at the higher end of this range.

8. Projected Supply/Demand Balance
    Estimated mill closures or slower rates of capacity expansion resulting from water pollution
regulations will not create a tight supply situation through 1983, because the forecast capacity
utilization rate does not exceed 90% throughout the period (Figure III-4). This conclusion does
not change at the upper and lower bounds of the demand and capacity projections.
                                        39

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                                            TABLE 111-16
                EFFECT OF ENVIRONMENTAL REGULATIONS ON RECYCLED BOXBOARD PRICES
                    Existing Industry
Investment
Environmental Required
Regulation $ Millions
EPA Water
1977 $187
.1.983 54
NSPS
Federal Air
SIPS 34
NSPS
OSHA Noise . 55
Total $330
11975 Price
2
Hr.seline Price
3
Wou C.anai-ifv Differential
Necessary Long-Run Price Effect
Price Increase . Recycled Boxboard Gypsum Linerboard
$/Ton % 1975 Price $/Ton % Baseline Price $/Ton % Baseline Price

$5.08 ' 2.4%
1.61 0.7
$12 4.6 $13 5.9%

1.89 0.6 1 0.4 1 0.5
—
1.28 2 0.8 2 0.9
$8.86 4.0% $15 . 5.8 $16 7.3%
$215 $270 $158
$260 219
- 4% 38%

Corrugating Medium
$/Ton % Baseline Pric.

—
—
$13 6.9%

1 0.5
—
2 1.1
$16 8.5%
$185
188
2%
SOURCE:  Arthur D. Little, Inc., estimates.

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          10,000  -
           8,000  -
  TONS
DEMANDED*

  (000)
           6,000  -
                                          FIGURE 111-4
                                    RECYCLED PAPERBOARD
                        FORECAST OF DEMAND AND CAPACITY UTILIZATION
                                      DEMAND
                       75    76     77    78    79    80    81  .  82    83
CAPACITY
UTILIZED
            100.0-
             90.0-
             80.0-
             70. fl-
               . 0-
                                    CAPACITY UTILIZATION
                       75    76
        *Total U.S. Consumption
77   78    79    80    81    82    83
                                           High growth
                                           Medium grow;
                                           Low growth
                                             41

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D.  CONSTRUCTION PAPER

1.  Product Description
     Construction paper is a component of SIC 2661 (Building Paper and Building Board Mills).
The Department of Commerce also includes hardboard and insulation board in this industry
subcategory, but for effluent guideline purposes, the EPA has considered the latter products
under the wood products industry because of their relatively low-effluent loadings and close
market relationship with wood products.

     Construction paper  comprises sheathing papers, felts (roofing, floor covering, automotive
sound deadening, industrial, pipe covering and refrigerator), asbestos and asbestos-filled paper,
and flexible wood-fiber installation. Except for asbestos paper, these materials are usually made
primarily from wastepaper. Almost all forms of construction paper are converted at the mill site
to the end product, e.g., shingles, which is then sold to the construction trade.

     Gypsum linerboard, the facing material for gypsum wallboard, is included in the recycled
paperboard sector, since  it is a paperboard product made entirely from wastepaper. The only
other significant paper-based products employed in construction are overlay and print  sheets
used for decorative wall panels; these papers are included in the specialty paper sector.

2.  Demand
     Like  all building materials, the demand for construction paper subdivides into new con-
struction and replacement (or remodelling)  components. The replacement market is a large
component because roofing  shingles,  which require relatively frequent replacement, are the
largest end use.  Also, floor underlayment and sheathing papers are required for many remodelling
projects. Thus, the construction paper market does not experience as severe year-to-year fluctua-
tions in demand as do most other commodity construction materials. Construction paper demand
grew at a fairly  steady average rate of 1.8% per year between 1964 and 1974, with only a modest
drop in consumption during the construction industry recession in 1973 and 1974.

     There are no significant direct product substitutes for construction paper. However, shifts in
other construction materials use, such as the substitution of wooden floors by vinyl tile and wall-
to-wall carpeting, have reduced the consumption of underlayment paper.

     Almost all construction paper is transferred internally since it is typically consumed cap-
tive ly by manufacturers of building material end products. The final product is then distributed
by regular construction industry wholesale and retail channels.

3.  Supply
     Table III-17 shows that  the capacity distribution of the major construction paper producers
is highly concentrated among five companies. Like  all of the construction paper producers, the
top five are integrated forward to the conversion of final products. This market share advantage
generally stems from a national network of mills coupled with multi-product distribution to the
construction industry.

     Construction paper mills are generally near major metropolitan areas, which produce both
their source of wastepaper raw materials and their  major markets. Furthermore, most of these
mills have access to municipal effluent treatment systems, which allows them to avoid spending


                                          42

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                           TABLE 111-17



       CONCENTRATION OF U.S. CONSTRUCTION PAPER SUPPLIERS, 1975




                                    % of U.S.
Company                           -   Total         Number of Mills

GAF                                   17.6               8

Celotex                               15.4              10

Lloyd Fry Roofing                     14.7              13

Certain - Teed                        10.0               7

Bird & Son                             9.7               4

Johns - Manville                       5.1               3

Flintkote                              4.4               2

Congoleum                              4.1               1

Top Eight Companies                   81.0

Others (about 15 companies)           19.0

   TOTAL (about 23 companies)        100.0
SOURCE:  Lockwood's Directory of the Paper and Allied Trades, 1975.
         Arthur D. Little, Inc., estimates.
                                43

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capital for their own inefficient-sized water treatment plants. Not surprisingly, therefore, con-
struction paper production is roughly proportional to the country's population distribution with
34% in the North Central region, 29% in the South, 26% in the Northeast and 10% in the West.

     Since vertical integration from paper to conversion and wholesale distribution is the domi-
nant company structure, it also would be highly risky for an independent supplier of paper alone
to enter. Given the product's growth rate of 1-2% per year, most future capacity expansion is
likely to come from incremental expansion of existing mills.

     Costs for incremental additions or even for new mills are relatively low by paper industry
standards so the required investment  does not pose a difficult entry barrier.  Nor does fiber
resource control pose a significant barrier at this time since the required wastepaper raw material
is still plentiful near most metropolitan areas.

4.  Prices
     Most construction  paper is, as previously mentioned, captively produced by the manufac-
ture of the final product. Therefore, it is difficult to develop an accurate historical trend in selling
prices for  the paper. Although the retail prices of the final products can be ascertained, they do
not necessarily reflect trends in the cost of the intermediate materials. The difficulty of compiling
an accurate historical trend for construction paper  prices was the principal reason for omitting an
econometric analysis for this sector.

     In  view of the vertically-integrated  and oligopolistic characteristics of the construction
paper market, the product's value or transfer price of the paper probably has been more  stable
than that  of most other paper industry products. Therefore, its price probably increased less than
that of the average paper industry product between 1971 and 1975.

5.  Import/Export Balance
     Construction paper imports and exports traditionally have been relatively small. In 1974, a
peak year, imports were  60,000 tons (3% of consumption), while exports were 26,000 tons (1.4% of
production).  Standardized production  techniques and use of  a wastepaper furnish tends to
eliminate  any relative cost/quality  advantages for both importers and exporters. There is no
reason to expect that this pattern of minimal trade will change through 1983.

6.  Price Impacts
     Long-run price impacts were not estimated for construction paper nor was an econometric
supply/demand model employed. The price increase necessary for the existing industry to recover
the incremental cost  of the studied environmental regulations  was estimated at 3.7%; the
breakdown of this price is shown in Table 111-18.  The necessary price increase is less than the
industry average, principally because most mills use municipal treatment systems.

E.  MARKET PULP

1.  Product Description
     Market pulp (i.e.,  pulp that is sold rather than used internally by the producer) consists
primarily  of dissolving pulp  and bleached paper pulps both of which are made from the  sulfite
and kraft processes. Market sales of the unbleached chemical pulps, groundwood pulp, and
                                           44

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                                   TABLE  III-18

     EFFECT OF  ENVIRONMENTAL  REGULATIONS ON CONSTRUCTION  PAPER PRICES
                                            Existing  Industry
Environmental
 Regulation

EPA  Water

  1977

  1983

  NSPS
Investment
 Required
$ Millions
  $34

   24
        Necessary
      Price  Increase   .
 $/Ton    % 1975 Price
 3.50           1.4%
 2.51           1.0
Federal Air

  SIPS

  NSPS
                            .91
                  .04
OSHA Noise
   Total
    23


  $90
                                                               2.21
$9.04
                  .09
                                                                              3.7%
           L1975. Price »  $246
SOURCE:   Arthur D. Little,  Inc.,  estimates.


   deinked waste pa per are relatively small. Dissolving and special alpha pulps consist of highly
   refined bleached pulps with a high content of alpha or pure cellulose fibers. These pulps are used
   primarily as the raw material for rayon and acetate fibers, cellophane, and a variety of cellulose
   chemicals and specialty papers. Both dissolving and paper pulps are freely traded throughout the
   world; thus, the U.S. market is highly sensitive to world market conditions.

       The chief quality characteristics looked for in dissolving pulp are that it be extremely free
   from dirt and other impurities and have an alpha cellulose content appropriate for the end-use
   applications. Thus, different grades are supplied for acetate, rayon, cellophane, specialty papers,
   and cellulosic chemicals.  Quality consistency is extremely important; thus, a long period of
   product testing  is normally required before a customer will shift to a new dissolving pulp supplier.
                                           45

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     The bleached and semibleached grades of kraft and sulfite pulp currently constitute about
86% of the total pulp purchased by U.S. mills that are not integrated or only partially integrated
to on-site pulp production. The primary products produced by such mills are printing and writing
papers, sanitary tissue and related papers,  mainly  of a specialty nature. Part of the supply of
bleached papermaking pulps is produced by dissolving pulp mills, all but two of which, in the
United States, currently produce both dissolving and paper grade pulps. The paper grade pulp
mills, however, are not able to produce dissolving pulp without substantial reinvestment.

     The chief function of the  paper grade pulps is to provide a white surface and sufficient
strength to make the product usable. In both printing and tissue papers, a blend of hardwood and
softwood pulps is used, sometimes in conjunction with groundwood pulp, to provide the desired
properties of surface smoothness, opacity, softness, and strength. The short hardwood fibers are
used to provide a smooth  printing surface and opacity while the long-fiber softwood pulps are
used to provide most of the required strength. Distinctions are also made between the coarse fiber
softwood pulps derived from southern pine and Douglas fir and the generally more highly sought
after softwood pulp  derived from northern  spruce. Generally  a premium price is  paid for the
northern  pulp except when the  supply/demand balance is extremely tight. Southern hardwood
pulp also has a somewhat  lower utility than northern hardwood  pulp in  the eyes of many
customers because it often contains a larger proportion of oak fibers, which cause  problems in
papermaking.

2.  Demand

     •   Dissolving Pulp

     Table 111-19 shows estimates of 1973 world dissolving pulp consumption (excluding Com-
munist countries). This indicates the dominant share of demand held by rayon and acetate fibers.
These fibers accounted for  about 70% of consumption in 1973. The remaining 30% was made up of
a variety of relatively small applications. Because there are few producers of rayon and acetate
fibers,  cellophane and cellulosic fibers and  also relatively few  suppliers  of dissolving pulp, this
market probably comes closest to being a  bilateral oligopoly of any pulp and paper industry
sector.

     From 1960 through 1973, U.S. consumption of dissolving pulp grew at an apparent average
rate of 1% per year. However, examination of the trend shows that U.S.  consumption peaked in
1968 and by 1973 had declined by a total of 13%. World demand appears to have peaked in  1970
but is declining at a slower rate than U.S. demand. Thus, dissolving pulp represents a product
that appears to have reached full maturity and is now declining.

     The primary reasons for this trend are  the static total  demand for rayon and declining
demand for  acetate fibers  and cellophane, while other dissolving pulp applications are growing
only slowly.  Rayon and acetate fibers are facing intense competition, particularly from polyester
fibers,  and cellophane is being replaced by plastic packaging films. However, there are no direct
substitutes to  displace dissolving pulp itself in any of its major applications. The  econometric
analysis in this study calculated a low price elasticity of demand of 0.49 in the United States
market.
                                          46

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                                 TABLE I11-19

         FREE WORLD  DISSOLVING  PULP  DEMAND  BY  MAJOR APPLICATION,  1973

                                  Dissolving
     Application                 Pulp  Used                     % of Total
                              (000  metric tons)
Rayon

     Staple and Tow                 1,750               .            44.1

     Regular & H.T.  Filament         590                           14.8

     SUBTOTAL                       2,340                           59.9


Acetate and Triacetate

     Filament, Staple & Tow          380                            9.6


Cellophane                            510                           12.8


Special Industrial Papers            380                            9.6


Cellulosic Chemicals,  etc.           360                          _ 9.1


     TOTAL                          3,970                          100.0
SOURCE:   Arthur D.  Little, Inc.,  estimates.
    •   Bleached Market Pulp

    Table 111-20 shows estimates of the approximate U.S. end-use subdivision for bleached
market pulp in 1973. It indicates the importance of the printing/writing paper and tissue paper
markets, which together constitute about 80% of the demand. In 1973, bleached market pulp
amounted to 21% of the total bleached pulp consumed in the United States, the balance being
consumed by integrated mills.
                                     47

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                                  TABLE  III-20
                U.S.  CONSUMPTION OF  BLEACHED MARKET PULP,  1973
                                                 Consumption
 Application
Thousand.Tons
Percent  of Total
 Printing/Writing Papers
 Tissue
 Other Paper Products
    2,000


    1,200


      300
        51
        31
 Fluffing  Pulp
      400
        10
                                         3,900
                                100
 SOURCE:   Arthur  D. Little,  Inc.,  estimates.
     The total U.S. consumption of bleached market pulp has grown at^a very steady rate of
nearly 6% per year since 1960 with only a slight reduction in the growth rate during the five years
prior to 1973. Underlying this trend were: 1) the demand for printing/writing and tissue papers,
which grew faster than the industry average, and 2) the low and stable pulp prices, which
permitted nonintegrated producers to maintain their cost competitiveness.

     Since 1968, there has been a modest tapering off of the growth rate in printing/writing paper
(more pronounced in tissue paper), but this has been compensated for in part by the extremely
rapid growth in fluffing pulp, which is used for disposable diapers and bed pads. Thus, bleached
market pulp is still one of the fastest growing areas in the pulp and paper industry. However, the
tight supply of bleached pulp and the extremely rapid price increases in 1973 and 1974 created a
cost squeeze for the nonintegrated mills which still persisted through 1976, causing them to lose
market share. This development could well cause slower growth in market pulp demand. How-
ever, the econometric analysis in this study indicates that the historic price is relatively inelastic.
                                         48

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     No other materials offer any significant direct competitive threat to bleached paper pulp.
Pulp substitute materials derived from plastics have been developed but these are several times
more expensive than wood pulp even at the new pulp price levels. The synthetic wood pulps are
being experimented  with  as  blending pulps primarily to provide  high-strength properties in
specialty applications which either require high-strength, water resistance, or a combination of
both.

     While total demand for bleached market pulp has grown at  a fairly steady  rate, there has
been a dramatic shift in consumption from the sulfite to the kraft grades. Between 1960 and 1973,
for  example, sales of bleached sulfite pulp dropped in  half while that  of the bleached and
semibleached kraft grades tripled. This shift has been caused mainly by the fact that bleached
sulfite pulp capacity has remained static (as  a result of pollution-related closures and  few
expansions) and increasing amounts have been diverted to captive use. Thus, the rapid shift does
not represent an overwhelming preference for kraft pulp.

     The softwood grade of kraft pulp offers superior strength properties in comparison with
softwood sulfite. In balanced supply/demand markets, a price discount of $5-15/ton for sulfite
pulp reflects this disadvantage. However, sulfite  does offer superior softness and somewhat better
opacity and thus is still desirable in certain tissue paper and writing paper grades.  Hardwood
kraft pulp comes close to sulfite's strength and opacity properties, but sells at a lower  price. Still
sulfite's main difficulty appears to be the uncertainty of how long its supply will be maintained in
light of current state and Federal water effluent regulations.

3.  Supply
     Canada is the main  source of supply for bleached market pulp consumed in the United
States. Canadian imports account for 53% of the bleached market paper pulps consumed in the
United  States. However, it supplies only about 12% of the dissolving pulp consumed in the
United States.

     Because their locations are relatively remote and because pulp can be exported duty-free
while  most paper products cannot,  most of the  Canadian pulp mills specialize in market pulp
rather than integrating to on-site paper  production. From 1960  through  1972,  Canadian pulp
producers expanded their capacity very rapidly and operated well below capacity while providing
increasing amounts of pulp to the U.S. and other world markets. In  1973 and 1974, however, the
Canadians  operated near full capacity except during mill and railroad strikes. Canadian expan-
sion commitments indicate that capacity will increase more slowly through 1980.

     The U.S. domestic supply of bleached market pulp comes from  two sources. One is the mills
that specialize in producing market  pulp; these,  however, produce primarily dissolving pulp and
thus,  have  only a small share of the paper pulp market. The largest portion of the bleached
market-pulp supply comes from mills that are integrated to paper and paperboard. Often, during
an expansion program, the pulp mill is  built larger than the paper or paperboard mill to take
advantage of economies of scale; the company then sells market pulp until it expands its paper
mill to equal the pulp mill capacity.  Thus, there  is a continual shifting in and out of the bleached
paper pulp market as companies become more or less  integrated to pulp.

    The problem of changing degrees of forward integration is not present with dissolving pulp
in that  all  the North American mills are dedicated to this product or to a combination of this


                                           49

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product and bleached paper pulp. However, one U.S. dissolving pulp mill is partially owned by
companies that produce rayon fiber and thus is integrated forward to rayon operations not located
at the pulp mill.
                                                          j

     Table 111-21 shows the shares of North American capacity for dissolving pulp and bleached
paper grade pulp held by the the major producers. It indicates that the dissolving pulp capacity is
especially concentrated.  Bleached paper grade  pulp is not dominated by one producer as is
dissolving pulp with the top four firms accounting for 32% of the market.

4.  Prices
     The substantial  world trade in bleached papermaking pulps causes prices for these com-
modities to follow changes in  the total world ratio between production and capacity more closely
than the operating ratio within a  given country. Moreover,  pulp  prices tend to lead rather than
follow paper prices. Historically, when the ratio of total world production to total capacity moves
up to around 92%, as it did in 1974, market pulp prices rise strongly and suppliers' profit margins
increase. When world demand falls to 90-92% of world  supply, profit margins tend to stabilize.
(That is, prices increase only if costs of the most efficient suppliers increase.) Finally, when world
operating rates drop below 90%, margins, and often prices, tend to erode.

     The econometric analysis in this study found reasonably good correlations between U.S.
bleached pulp supply/demand relationships and price  and employed this data because it was
more current and available in more detail than world data. Figure III-5 plots these U.S. capacity
utilization and price data since 1965.

     Dissolving pulp prices are much less sensitive to changes in capacity utilization and have
fluctuated  more  gradually than  paper pulp  prices. With relatively few  buyers  and sellers,
purchase contracts traditionally have included price protection clauses and are of longer duration
than the typical paper grade  pulp contract. This price change smoothing and muted response is
demonstrated  in Figure  III-6, which plots U.S. capacity utilization versus price since 1963.

     Paper grade pulp prices  dropped to about their lowest levels of the last decade in 1971, when
world average  pulp mill operating rates were around 89% of capacity and North America, Europe
and Japan were in a business recession. There were modest price  increases of $5-15 per short ton
in 1972, as the economy and operating rates began to  improve.  Then in 1973  and 1974,  prices
increased at unprecedented rates as operating rates reached maximum levels. In North America,
for example, average contract prices for bleached softwood kraft  pulp  increased  100%  (by
$160/ton) between the third quarters of 1972 and 1974, and those for bleached hardwood kraft
pulp, 165%  (by $200/ton). Dissolving pulp prices rose about 87% from 1972  to January 1975
starting from a higher base of about $220/ton. Spot prices for relatively small orders throughout
the world were considerably above contract prices in 1973 and 1974 but these differentials were
removed as the market weakened in the second  half of 1974. These increases  allowed  the
producers to cover the accumulated  cost inflation they  had been unable to pass on in weak
markets or under price controls, and brought their 1974 profits to a record high level.

     The lack of price responsiveness to changes in historical operating rates was caused primar-
ily by two factors. First,  in the 1960's the producers were able to hold their costs down  because
inflation rates were low and  they were able to improve productivity steadily by enlarging and
modernizing their mills. Second, the Canadian bleached pulp  industry was expanding its capac-
ity at about 20%/year and this influx kept prices low despite fluctuations in U.S. operating rates.

                                           50

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                              TABLE III-21

      CONCENTRATION OF NORTH AMERICAN MARKET.PULP SUPFLf.LRS, 1975


                                   % of Total North America	Number
Company                       Dissolving Pulp   Bleached Paper Pulp  of Mills

ITT Rayonier                        44                  4.3             7

International Paper                 14                  5.9             6

Procter & Gamble                    10               (not in top 8)     1

Ketchikan Pulp                       9                   -              1

Alaska Lumber                        9                   -              1

Canadian Cellulose                   8                  6.7             2

Weyerhaeuser                         4                 11.3             5

Tembec Forest Products               2               (not in top 8)     1

  Total (Dissolving Pulp)          100

Parsons & Whittemore                                    7.0             2

B. C. Forest Products                                   5.7             2

MacMillan Bloedel                                       5.3             1

Georgia Pacific                                         4.3             2

  Top Eight Companies                                  50.5

  Other Suppliers (about 17 companies)                 49.5

    TOTAL (Paper Pulp)                                100.0
 Mill closed September 1977.
SOURCE:  Lockwood's Directory of the Paper and Allied Trades.
         Arthur D. Little, Inc., estimates.
                                    51

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                                   FIGURE 111-5


                           BLEACHED PAPER PULP MARKET PRICE
                              VERSUS CAPACITY UTILIZATION
;$/ton)


  400
   300
   200
   100
              4
 -H-
41'
 —i~t •
                 -— r-t —
                            W

                         -
                                     /-T\

                             7?
                                              ipacit
                                         .Ht.il
.^at.ipp51
                              _f-»._,..
                            4-J-r+
                   Constant Dollar  Price - -
                             J5.H61
                       Lars)
                                               •— f-f-*
                                                                                     .^
                                                                       ./_.
                                                                      ±
                     1965  1966  1967  1968  1969  1970  1971  1972  1973  19
       *Capacity Utilization calculated from Total Bleached Sulfite and Kraft
        Production and Capacity.
                                          52

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                              FIGURE 111-6

                    DISSOLVING PULP MARKET PRICE
                   VERSUS U.S. CAPACITY UTILIZATION
                                                       U.S. Capacity
                                                       •''••  Utilization
: Current   Dollar Price     I
"onstantCollar Price
                                                                              1.0
                                                                              0.9
                                                                              0.8
 1964  1965  1966   1967  1968  1969  1970  1971   1972  1973  197A
                                 53

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5. Import/Export Balance
     The United States is a net exporter of dissolving pulps and a net importer of bleached paper
grade pulps.  In  1974, the United States imported 226,600 tons and exported 788,200 tons of
dissolving pulp. In that same year, it imported 3.1 million tons and exported 1.5 million tons of
bleached paper grade pulp. Bleached paper pulp thus ranks second  to newsprint in import
volume and second to kraft linerboard in export volume.

     The trend in exports has been down from a high point reached in 1970. Imports have
increased  modestly from  a  previous high  in  1969. Tariffs are seldom  levied on pulp, thus
facilitating large-scale international trade.

     The U.S.  pulp export  position has been based largely upon  its comparatively low-cost
pulpwood and large mills. On the other hand, Canadian wood costs, on average, have been higher
than those of southern U.S. mills, but they have equally large mills with greater specialization in
the market pulp; this accounts for their large export volume to the United States. Thus, nearly all
of the pulp imports come from Canada, the world's largest producer of market pulp. U.S. exports
are largely to Western Europe, South America, and Japan.

6. Price Impacts
     As mentioned previously, the demand for dissolving pulp is gradually declining. As a result,
no new dissolving pulp mills will be built in the United States. The ability of existing mills to
recover the incremental costs of compliance with the studied regulations will depend upon
market conditions. The existing industry requires a 6.5% price increase to recover environmental
costs (Table  IH-22).

     Few new mills will be built that are not integrated back to bleached paper pulp. The long-
run price effects for the consuming product sectors (primarily printing/writing paper and tissue)
incorporate the costs of environmental regulations on bleached pulp.

7. Output Effects
     The price elasticity of demand estimated for dissolving pulp is 0.63. If existing mills are able
to increase prices by the 6.5% necessary to recover incremental control costs, demand will decline
by 4.1%.

8. Supply/Demand Balance
     The dissolving pulp sector is not growing. Capacity utilization rates will be moderate to low
unless a major mill closes down. In the latter case, some short-term price pressure could result.

     Over  half of the bleached  pulp sold in  the  United States is imported from Canada, the
world's largest producer. Bleached market pulp is a residual product since most domestic paper
producers sell what they can after meeting their own papermaking  requirements. If capacity is
tight in the  United States  tissue  and printing/writing  paper sectors, the supply of bleached
market pulp is also likely to be tight.
                                           54

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                                            TABLE 111-22




                  EFFECT OF ENVIRONMENTAL REGULATIONS  ON   DISSOLVING PULP PRICES
  Environmental Regulation







  EPA WATER




    1977




    1983




    NSPS







  FEDERAL AIR




    SIPS




    NSPS







  OSHA NOISE







      TOTAL
                                                                 Existing  Industry
Investment Required    Necessary Price Increase.,
  $/Millions









        102




         52.
         22
 $/Ton      % 1975 Price
13.28




 9.69
 1.86
        185
                          .58
26.01
3.5%




2.4
0.5
                0.1
   1975  Price   $398
SOURCE:  Arthur D. Little, Inc., estimates.

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F. PRINTING, WRITING AND RELATED PAPERS

1. Product Description
     The printing, writing, and related papers sector consists of four product groupings: coated
printing and converting paper, uncoated book paper, writing paper, and related papers. Industry
statistics also include bleached bristols in this sector, but since these are produced in bleached
paperboard mills,  this analysis includes them  within the bleached board  sector. All of the
printing/writing papers employ bleached pulp and are used primarily for printing, publishing,
stationery, and a variety of paper converting applications.

     The commodity grades generally are sold by the producer directly to large customers; both
commodity and specialty grades are distributed through paper merchants or other wholesalers to
small printers, publishers, and paper converters. The paper is usually finished by the paper mill
into rolls or sheets ready for final use by the printer or converter.

2. Demand
     Printing and  writing papers are used in a variety of applications; hence, consumption is
influenced by a number of demand patterns. Coated printing paper, particularly the publication
grade, is influenced not only by the business cycle effect on advertising expenditures but also
upon the share of the advertising market that magazines are able to maintain in competition with
direct mail, newspapers, television, and radio. The rapid increases in postal costs incurred by the
magazine industry have caused a substantial reduction in the  weight of publication paper over
the past ten years  in order to reduce magazine weight and distribution costs. Hence, measuring
consumption on the basis of tons of paper consumed understates the growth in surface area and
dollar value.

     Book printing growth primarily affects the growth of uncoated book, offset paper and coated
paper that employs a nongroundwood base sheet. The large schoolbook segment of this market is
heavily influenced by Federal and state aid to education programs while demand in the  trade
book segment is influenced heavily by shifts in disposable personal income and educational levels
of the population.

     The general commercial printing sector of the market consumes the whole spectrum of the
printing  paper grades for a  wide  variety  of applications including direct mail advertising,
brochures, catalogs, circulars, flyers, and financial documents. This diversity of end uses causes
consumption to  correlate well with the GNP. Label and wrap printing, which is a specialized
component of the commercial printing industry, also has a consumption pattern that follows the
GNP. This sector consumes primarily paper coated on one side only.

     One of the largest components of the writing paper grade  category is register bond or forms
bond used  for a variety of business  forms. As a result, consumption in this end use fluctuates
closely with the industrial production index. Other major writing paper applications include
business stationery, copy machine paper, and personal stationery. The combined demand for
these applications also correlates with GNP.

     U.S. consumption of all printing and writing paper grades grew at the rate of 5.5% per year
between 1960 and 1968, and 5.2% per year between 1968 and 1973, on a tonnage basis. Within this
grade spectrum, forms bond grew at about 10% per year while the growth of coated one-side label
and  paper has been about 2%  per year.

                                          56

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     There has been some experimentation with plastic printing papers, but these products have
found only relatively small market niches in applications which require high tear strength and
water resistance. Examples are certain types of maps and book covers and children's books. Thus,
plastic printing papers have not threatened the large-volume applications for wood fiber papers
primarily because they are considerably more expensive on both a tonnage and surface area basis.

     There has been considerable competition among the various grades of printing papers for
certain applications. In magazine printing, for example, coated papers have virtually displaced
uncoated groundwood papers, which once held this entire market. More recently, carbonless copy
papers have been displacing forms bond and  carbon paper in business forms. Obviously, these
shifts created advantages for certain suppliers but they generally do not affect the overall demand
for paper in a given application outside of possibly causing a change in the weight of paper used.
Only the coated/uncoated groundwood substitution had a significant effect on demand for two
product sectors.

     Price elasticity of demand for printing/writing papers is among the lowest of the industry's
product sectors according to this study's econometric analyses. It indicates a coefficient of 0.26.
This is not surprising in light of the essential information-transfer functions the products perform
and the absence of significant nonpaper substitutes.

3. Supply
     Printing/writing papers are produced by an extremely wide variety of processes. They may
be made in paper mills integrated to all of the bleached chemical pulps (kraft, sulfite, soda, and
cotton fiber), to groundwood pulp and to deinked wastepaper, as well as in mills not integrated to
pulp. In general,  the producers of the large-volume commodity grades are fully integrated to
kraft, groundwood or sulfite pulp mills while the producers of higher priced specialty papers are
either not integrated or only partially integrated to chemical fiber or  deinked pulp. Most of the
paper machines,  particularly  the  smaller ones, are quite versatile  and produce a variety of
printing/writing paper grades.

     The market is relatively fragmented compared with most  other paper  industry product
sectors. Table 111-23 shows that the 8 largest producers, all of whom are integrated to pulp,
account for 42% of U.S. capacity, but over 60 other firms compete in this product sector.

     A look at specific products lines within the printing and writing category, however, reveals a
much greater supplier concentration. Consolidated Papers, for example, has nearly a 10% share of
the total U.S. capacity for coated papers and an even larger share of the magazine paper market
in which it specializes. Great Northern-Nekoosa is  the leading  supplier in the writing paper
sector, particularly in forms bond, although it has only a 4.4% share of the total printing/writing
paper market.

     The supply is considerably more concentrated on the West Coast than elsewhere with Boise
Cascade, Crown Zellerbach, Georgia-Pacific,  Simpson Lee, and Weyerhaeuser providing all of
the market requirements except for some specialty grades which are  shipped in from the East.
There are also concentrations of supply in the North Central and Northeastern regions, but the
suppliers there do not appear to be enjoying any significant monopolistic advantages since the
papers are shipped long distances between regions in the large eastern and central markets.
                                           57

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                            TABLE  111-23

  CONCENTRATION OF U.S.  PRINTING AND WRITING  PAPER SUPPLIERS.  1975
Company
International Paper
Champion
Mead
Great Northern-Nekoosa
Scott
Westvaco
Hammermill
Boise Cascade
Top Eight Companies
Other Suppliers (About
% of
U.S. Capacity
9.6
6.1
6.0
4.4
4.1
4.1
4.0
3.8
42.1
63 Companies) 57.9
Number of
Mills1
8
4
4
6
4
3
6+
4

    TOTAL                              100.0
 Partial ownership of mill indicated by +.
SOURCE:   Lockwood's Directory of the Paper and Allied Trades, 1975.
         Arthur D.  Little, Inc., estimates.
                                 58

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4.  Prices
     As was the case with most other paper products, printing and writing paper prices rose
rapidly after price controls were lifted in March 1974. Throughout most of the  1960's, however,
prices were very stable in spite of several significant cycles in the supply/demand balance. This
pattern  probably  was caused by the entry of new producers attracted by the relatively high
growth of this sector coupled with productivity improvements which held costs in line. The rapid
price increases  in 1973-74, were  caused by a very  tight supply/demand balance coupled with
rapidly rising costs,  particularly the cost of bleached chemical pulp for  nonintegrated mills.
However, producers that were not integrated to pulp production were  barely able to maintain
their profit margins because market pulp prices rose faster than the prices they obtained for their
end products.  Producers that were  integrated to pulp,  however, were able to improve profit
margins significantly. Figure III-7 shows the trend in printing/writing paper prices versus capac-
ity utilization since 1967.

5.  Import/Export Balance
     U.S. imports and exports of printing  and writing papers are small and nearly in balance. In
1973, for example, imports amounted to 180,000 tons and exports to 229,000 tons. Imports and
exports are low principally because these grades carry a relatively high import duty in the United
States and in most other countries. The U.S. import duty on coated papers is so high that there
have been no imports of this grade since before 1960.

6.  Price Impacts
     The printing/writing papers sector  is comprised of many products. The long-run price
impact was estimated using two major product categories — book paper and bond paper — that
would have representative impacts. The estimated long-term impact will be a 6.3% increase ($28
per ton)  over the price of book paper and bond paper  that would prevail in the absence of the
studied regulations. The existing printing/writing paper industry requires an increase of $25 per
ton, which is equivalent to 4.2% of the 1975 composite price for the sector (Table 111-24).

     Consumers will  face price increases in books and magazines as a result of price increases in
printing/writing papers. The price of a $0.75 magazine could increase by 1.2% ($0.09) as a result
of the studied environmental regulations.

7.  Output Impacts
     The price  elasticity of demand estimated for  printing/writing  papers is 0.26. This means
that a long-run  price  increase of 6.3% will  be accompanied by a demand reduction of 1.6%.

8.  Supply/Demand Balance
     Printing/writing papers are one of the high-growth sectors of the pulp and paper industry.
According to the demand forecast based upon the Chase Econometrics CEQ scenario, there will
be tight  capacity  during the 1980's  (Figure III-8). If demand grows at the upper bound of the
forecast,  some capacity pressure  could occur in 1977. If a recession fails to materialize in 1978,
tight capacity could occur beginning in 1980 even with moderate growth in demand. Some mills
will shut down as a result of water effluent regulations, amounting to 2.2% of 1977 capacity and
3.9' < (cumulative) of 1983 capacity.
                                          59

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                           FIGURE 111-7
                   PRINTING AND WRITING PAPER
                          MARKET PRICE
                   VERSUS CAPACITY UTILIZATION
 500-
 400
$/Ton
 300 -
                                 Capacity Utilization
                 Current Dollar Price
                         Constant Dollar  Price
                                                                1.0
                                                               -  .9
                                                               -  .8
 200-
 100 -T
          1967  1968  1969  1970  1V71  1972   1973  1974
                               60

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                                             TABLE II1-24


             EFFECT OF ENVIRONMENTAL REGULATIONS ON PRINTING AND WRITING  PAPER PRICES
                                           Existing Industry	    Long-Run  Price  Effect
Environmental Regulation

EPA WATER
1977
1983
NSPS
FEDERAL AIR
SIPS
NSPS
Investment Required
$/Millions

595
363
—

193
	
Necessary
$/Ton

12.79
7.50
—

3.09
	 _
Price Increase $/Ton % Baseline Price"
% 1975 Price1

2.2 — • —
1.2
21 4.7

0.5 3 0.7
— __ _ _
 OSHA NOISE
     TOTAL
  101
1,252
 1.60
24.98
0.3
4.2%
28
               0.9
6.3%
  1975 Price:   $591


 2
  Baseline Price:   Book Paper and Bond Paper Composite  =  $445.


SOURCE:  Arthur D.  Little, Inc.,  estimates.

-------
                                          FIGURE 111-8
                                 PRINTING AND WRITING PAPERS
                        FORECAST OF DEMAND AND CAPACITY UTILIZATION
                                                                          - Range of
                                                                           .Demand Forecas:
        16000-T
        15000-t
        14000-
        13000-

  TONS
DEMANDED*
        12000
 (000)

        11000-
        10000-
         9000—
                                      DEMAND
                                  No Recession   / /   /
                            J	1	1	1	1	1	1
1	1	L.
•I   '   I
75    76    77     78    79    80    81    82    83
                                   CAPACITY UTILIZATION
                                             No Recession
CAPACITY
UTILIZED
         100.0
          90.0--
          80.0--
          70.0-
          60.0--
*Total U.S. Consumption
                    75     76    77    78    79    80    81    82    83
            High Growth
            Medium Growth
            Low Growth

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G.  BLEACHED BOARD

1.  Product Description
     Bleached board and bristols were combined in the economic analysis because while they are
sold to totally different  markets, they are produced in the same mills, in some cases by inter-
changeable machines. Thus, the capacity utilization rates of the suppliers reflect the demand
levels of both products.

     Bleached paperboard, often referred to as SBS (solid bleached sulfate), is by far the larger-
volume and faster-growing product with about four million tons produced in 1974. It is used
almost entirely to produce folding  cartons  and paper cups, plates and trays. SBS is  produced
from a combination of fully bleached hardwood and softwood pulps made by the sulfate or kraft
process. Most of this board is coated with clay  pigment and/or polyethylene film to enhance its
printing characteristics and/or barrier properties.

     Bleached bristols production amounted to about 1.1 million tons in 1973 and 1974. Principal
applications are tabulating and index cards, file folders and tags. Unlike SBS, these products are
usually made from semibleached pulp and are  not coated. Demand for bristols has been  essen-
tially static since 1969 primarily because of declining use of tabulating cards as business ma-
chines are  designed for greater use of tape input/output  and larger  internal memory banks.
Therefore, the discussion will focus  on the larger and faster growing markets for bleached board.

2.  Demand
     Boxboard applications are by  far the largest and most pivotal markets for bleached board;
hence, the discussion of demand characteristics focuses on  this market. Boxboard encompasses
all paperboard materials used to produce folding cartons, milk cartons, cups/plates/trays,  set-up
boxes and related products. Materials from two other industry product sectors compete with SBS
in many of these applications: recycled paperboard and unbleached kraft. Boxboard accounted
for  nearly 30% of all paperboard  production and about  15% of total paper and  paperboard
production in  1973. Table 111-25 shows that  SBS and  recycled board are by far  the most
important grades, with about 95% of total 1973 boxboard production.

     Recycled paperboard is generally made from mixed grades of wastepaper. The folding type
is usually pigment-coated  or lined with bleached or deinked pulp to improve its appearance and
printing characteristics.  The set-up or nonfolding type, which is heavier and stiffer, is sometimes
coated or made with a white liner,  but usually employs a coated-paper outer  liner. Its principal
applications are shoe boxes, department store boxes, and hardware boxes.

     Boxboard demand, as measured by apparent  domestic consumption, was about 8.2 million
tons in 1973. Total  demand increased  at the rate of about  1% per year from  1968 to 1973. SBS
consumption increased  at the  rate of about 3% per year,  while  consumption  of recycled
paperboard declined at  the rate of  about 2.1%  per year during this period. SBS gained market
share at the expense of  recycled board  primarily because its performance/cost relationship has
been superior to that of recycled board in many applications where they compete directly. Most of
this direct competition occurs in folding carton applications, which accounted for about 55% of
total boxboard production in 1973.
                                          63

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                              TABLE 111-25
          U.S.  BOXBOARD PRODUCTION J3Y_ }IAJOR GRADES  AND USES,  1973
  Solid Bleached Paperboard




     Folding Carton




     Milk Carton and Food Service




     Linerboard
     Exports




        Total Bleached Paperboard
Thousand Tons








       1728




       1594




        128




        134




        280




       3864
 20




 19




  2




  2




 _3_




 46
  Recycled Paperboard




     Folding Carton




     Set-Up




     Other




        Total Recycled Board
2522
465
1191
30
5
14
4178 4y
  Unbleached Kraft Paperboard




     Folding Carton
        455
        TOTAL BOXBOARD
        8497
100
SOURCE:  API,Statistics of Paper and Paperboard, 1974
                                  64

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     Table 111-26 shows a breakdown of 1974 folding carton shipments by major end use. Food
packaging, both  dry  and wet, is the  largest folding  carton  application.  SBS  dominates in
applications where:

     •  Cleanliness is important — e.g., wet/moist/oily food packaging. (The U.S. Food
        and Drug Administration has prohibited use of recycled board in  direct contact
        with wet foods.)
     •  Aesthetics are important — e.g., high value added drug/cosmetic packaging where
        high quality printing is desired and the higher cost of SBS can be absorbed more
        easily.
     •  A high strength/weight relationship is  important —  e.g., beverage carriers (al-
        though coated unbleached kraft board is also strong in this application).

     Recycled paperboard dominates in applications where:

     •  An inner lining is used — e.g., dry cereal/crackers packaging.
     •  Economics is the dominant criterion for the carton  stock used  e.g., lower value-
        added packaging for soap, detergents and paper goods.

     Competition  from nonpaper products has  also been important in most bleached board
applications. Plastics  have made a significant penetration into boxboard markets. Frozen food
cartons are being threatened by plastic bags; milk  cartons are  being displaced by blow-molded
high density polyethylene milk bottles; and paper cups/plates/trays are facing significant com-
petition from polystyrene containers.

     In spite of the intense intra- and inter-industry competition which bleached board faces, its
price elasticity of demand is the lowest of the paper industry product sectors. The econometric
analysis used in this study indicates a coefficient of 0.18 over the period 1960-1974.  This low price
sensitivity is probably due mainly to the fact that the prices of all competing materials moved in
the same direction at about the same rate. Thus,  the cross-elasticity of demand was insignificant
over this period. In addition, packaging materials no longer are  discretionary consumption items
but are fundamental to the entire U.S. distribution  system.

3.  Supply
     Bleached  board  capacity was about 3.4 million tons in 1973 and the sector achieved an
annual operating rate of 98%. Operating rates in this sector traditionally have been higher than
that of any other paper industry sector, generally fluctuating between 90% and 100% of capacity.
The bleached board producers apparently appraise their practical maximum capacity more
realistically than producers in other sectors. Another factor which smooths year-to-year fluctua-
tions in operating rate is that many producers use their paperboard machines to produce market
pulp when bleached board demand is weak, thus shifting their capacity to another product sector.

     There are about 20 SBS board producers in the United States, of which the eight largest
accounted for approximately 67% of 1975  U.S.  bleached paperboard capacity (Table 111-27).
Thus, bleached paperboard is a relatively concentrated market  sector.
                                           65

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                                   TABLE 111-26
                           FOLDING CARTON END-USES, 1974
                             % of Total Tons
% of Total Dollars
 Food-Dry




 Food-Wet




 Soap




 Paper  Goods




 Beverage Carriers




 Hardware




 Biscuits & Crackers




 Candy




 Retail & Laundry




 Medicinal




 Perishable Bakery




 Tobacco




 Textiles




 Cosmetics




 Other
20.4
13.8
8.6
6.1
8.1
5.7
6.1
4.6
4.8
5.0
3.6
3.1
2.8
2.3
5.0
15.1
15.1
6.9
6.1
6.7
8.2
4.0
4.6
4.1
6.9
4.6
2.4
2.9
4.6
7.8
                                    100
       100
SOURCE :   Paperboard  Packaging  Council
                                     66

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                              TABLE III-27'
        CONCENTRATION OF BLEACHED PAPERBOARD AND BRISTOLS.  1975
Producer
International Paper
Westvaco
Eastex
Federal Paperboard
Potlatch
Weyerhaeuser
Continental Can
Champion
Top 8 Companies
Other Suppliers (About
% of U.S. Total
25.1
7.5
7.0
6.9
5.4
5.3
5.0
4.9
67.1
18 Companies) 32.9
Number of Mills
6
1
1
1
1
2
1
1


    TOTAL                          100.0
SOURCES:   Lockwood's Directory of the Paper and Allied Trades, 1975.
          Arthur D. Little, Inc., estimates.
                                  67

-------
     All of the leading producers of bleached paperboard are integrated to on-site pulp produc-
tion, and control a significant portion of the woodlands that support their pulp mills. Most are
integrated forward to the production of folding cartons, ^ilk cartons, or other end products. Most
of the bleached paperboard mills are located near their fiber resources in the South and in the
West.

4.  Prices
     Table 111-28 shows that the price differential between bleached paperboard and recycled
paperboard has been increasing since  1973. In 1973, the differential between solid bleached and
recycled paperboard was $58/ton compared with $70/ton by late  1974. However,  most of the
apparent increase was caused by a trend to reduce the weight of bleached board to make it more
competitive by offering a greater area yield per ton. Since the  strength and stiffness character-
istics of SBS are superior to those of recycled  board at  a  given caliper level, a  higher-caliper
recycled board must typically be used to provide performance similar to that of SBS. Thus, prices
for a given application must be compared on an  area basis to truly reflect  the economic
competitiveness  of recycled boxboard versus SBS board. This factor plus printability advantages
means that the  current price differential reflects a competitive equilibrium between SBS and
recycled paperboard.

     Competition from recycled paperboard and plastics, however,  apparently limited the price
increase that the bleached  board producers  could obtain. In 1975,  solid bleached board sold at
only $15 per ton more than bleached softwood  pulp, although it cost  considerably more to
produce. Nevertheless, most  producers refrained from shifting their machines to market pulp
because they believed the resulting addition to pulp supply would undermine prices and thus
"ruin" the market.

     Figure III-9 shows the bleached board  and bristols price  trend versus capacity utilization
since 1960. Both  current and real prices trended downward until 1972. Prices rose sharply in 1973-
1974, but not as much as those of many other paper products. Price movements  have not been
sensitive to changes in capacity utilization. This insensitivity can probably be explained by the
moderate  concentration of the bleached  board sector coupled  with the need to maintain a
price/performance equilibrium with competing products.

5.  Import/Export Balance
     Imports of bleached paperboard are insignificant. Some bleached paperboard (about 7f/V> of
1973 production) is  exported to markets where U.S. producers are competitive by virtue of their
large scale and relatively low cost of fiber resources.

6.  Price Effects
     As indicated in Table 111-29, there will be a long-term price increase oi'8% in bleached board
because of the studied environmental regulations. The existing industry requires a 5'/'o increase
over 1985  market  prices to recover the incremental cost of compliance with  the  studied
regulations.

     The effect of this price  increase upon the end consumer  will  be small. The 8% long-term
price impact translates into an 0.4% increase in the price of a half gallon of milk sold in an SBS
carton.
                                           68

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                               TABLE  III-28
       BLEACHED PAPERBOARD AND RECYCLED BOXBOARD PRICE TRENDS

                          (Dollars per Ton)


                                    Bleached         Recycled Boxboard
Year                               Paperboard     (20-Point Clay-Coated)
1973      January                      210                  152


1974      January                      250                  190


          March                        280                  220


          May                          280                  230


          September                    320                  260


          October                      350                  260


          November           .          350                  280


1975      January                      350                  280
SOURCE:  H.C. Wainwright and Company, industry price surveys.
                                   69

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                                       FIGURE 111-9
                             BLEACHED BOARDS AND BRISTOLS
                                     MARKET PR ICE
                              VERSUS CAPACITY UTILIZATION
  300-
$/Ton
  200-
  100 - •
                                          Current  Dollar  Price.
                         :.T.-£onstant Dollar Price ••--
      I     T     j      i     j      j     j      j     j      i     i      j      i     i      i
     1960  1961  1962  1963 1964  1965  1966  1967  1963   1969  1970  1971   1972  1973
                                           70

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                                              TABLE III-29

                                   EFFECT OF  ENVIRONMENTAL REGULATIONS
Environmental
Regulations
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
ON SBS BOARD PRICES
Existing Industry
Investment Necessary
Required Price Increase , Long-Run Price Effect
• $ millions $/Ton % 1975 Price $/Ton % Baseline Price

$174 $8.08 2.3%
141 6.11 1.7
24.0 ' 6.6%

102 2.79 .08
3.0 0.8
OSHA Noise
  19
   .67
0.2
  2.0
0.6
     Total
$436
$17.65
  1975 Price = $353


 2
  Baseline Price =- $362


  New Capacity Differential = 2.5%



  SOURCE:   Arthur  D. Little,  Inc., estimates.
5.0%
$29.0
8.0%

-------
7. Output Effects
     The price elasticity of demand measured for bleached board is quite low (0.18), and, as a
result, the impact of a price increase upon demand is small. The long-term price increase of 8%
will reduce demand by 1.4%. The price increase required by existing industry (5.0%) will reduce
demand by 0.9%.

     The elasticity of demand estimated in the econometric model could be understated because
of the pricing  behavior of bleached board producers during the late sixties and seventies, when
prices for SBS board were about the same as those for bleached market pulp. Producers appear to
have held prices down to prevent greater inroads by plastic substitutes. If, unlike the period 1968-
1974, the studied environmental regulations cause the price of SBS board to increase faster than
prices of substitutes, the reduction in demand could be greater, and capacity utilization rates will
fall.

8. Projected Supply/Demand Balance
     High operating rates are forecasted for the bleached board product sector for much of the
1976 to 1983 period (Figure 111-10). This sector has traditionally operated at higher capacity
utilization rates than the industry, in part because of the more realistic definition of maximum
capacity by bleached board mills. Some capacity pressure could appear as early as 1977. If the
1978 recession forecast by Chase Econometrics fails to materialize, a tight capacity situation will
exist by 1980.

     No mill shutdowns will result in  this product sector from environmental regulations. The
main  reason that expansion may not occur in this sector in response to high operating rates is
uncertainty over the price of plastic substitutes.

H.  TISSUE

1. Product  Description
     The tissue sector of the pulp and paper industry comprises both sanitary and nonsanitary
grades of tissue paper that  are sold to consumer and industrial market sectors. Sanitary tissue
grades include bathroom and facial tissue,  napkins, towels, and wipers. Nonsanitary tissue grades
include waxing,  wrapping,  and cellulose  wadding tissues. The so-called thin  papers, such as
carbonizing tissue,  are  not  included  in  the tissue  market.  They are included in the print-
ing/writing and related papers sector,  with which they are more closely related from a market
point of view.

     Table 111-30 shows that the sanitary tissue  segment accounted for about 94% of total 1974
tissue production. Table 111-31 shows that consumer tissue  accounted for  about 70% of total
sanitary tissue production in 1974.

     All of the above  tissue grades are usually  made from a combination of various bleached
pulps,  including sulfite and kraft (both softwood and hardwood), small amounts of groundwood
pulp, and deinked or high-grade wastepaper.
                                          72

-------
                                    FIGURE 111-10
                           BLEACHED BOARD AND BRISTOLS
                   FORECAST OF DEMAND AND CAPACITY UTILIZATION
          7000-'


          6500-'

  TONS
DEMANDED* 6000
 (000)
          5500- -


          5000- -


          4500- -
                                       DEMAND
CAPACITY 100-°"
UTILIZED

          90.0--
          80.0--
          70.0--
          60.0--
              t't
                              No 1978 Recession
                   75    76    77    78     79    80    81    82    83
                                   CAPACITY UTILIZATION
                                                                           Range  of
                                                                           Demand Forecast
                                                                  No  1978 Recession
                                                                  	 High Growth
                                                                  	 Medium Growth
                                                                  	 Low Growth
                                     4-
                    75    76    77    78    79    80    81    82     83

                   :ion
        „....„..- ^v^l derived  from the econometric model in cc
        Econometrics forecast of  economic  indicators for Ct.q.
Total U.S. Consumption
SOURCE:   Demand  level derived from the econometric model  in  conjunction with Chase
                                         73

-------
                              TABLE  111-30
                        1974 TISSUE PRODUCTION
                             BY PRODUCT
Sanitary                           Thousand Tons               % of Total
Bathroom. Tissue                        1474                       36
Towels      '                           1332                       33
Napkins                    "             439                       11
Facial Tissue                           355                        9
Wipers                                   43                        1
Other Sanitary                          176                       -_4_

     Total Sanitary Tissue             3819      '  .              _94_

Non-Sanitary                   '.
Wrapping                                 '66                       1.5
Waxing                                   52                       1.3
Industrial Cellulose Wadding             32                       0.7
Miscellaneous Tissue                    108                      _?_•_?_

     Total Non-Sanitarv Tissue          258                       6
SOURCE:   American Paper lustitur
     Total 1974 Tissue Production      4077                       100
                                    74

-------
                                    TABLE   III-31
                       1974 SANITARY  TISSUE  SHIPMENTS

                       CONSUMER VS.   I NT)USTRIAL M\:
-------
     In the future, the demand for tissue products is expected to relate  more closely to such
factors as  consumer disposable income  and population growth (since tissue displacement of
reusable fabrics has subsided). As such, the tissue market will probably grow more slowly than
real GNP through 1983. However, the consumer segment of the tissue industry will continue to be
more recession-proof and less subject to cyclical swings in consumption levels than the pulp and
paper industry or the economy as a whole.

     Consumer tissue is the paper industry's principal consumer product. Tissue producers rely
heavily on consumer marketing/advertising/promotion to sell their product in consumer markets.
Consumer sanitary tissue is usually sold on a direct basis from the paper producer/converter to
the grocery chain store. Both brand name and private label products follow this pattern.

     Industrial sanitary tissue is typically distributed  through  paper merchants or industrial
maintenance supply houses. From this distribution level, the product is ultimately purchased by
the major fast food chains, as well as by hotels, restaurants, and institutional end-users.

     Because of the product's high bulk, it is very expensive to ship tissue over long distances.
Thus, tissue normally  is distributed on a regional basis, usually within 300 miles of converting
locations (which are themselves typically  located next to paper mills and near population
centers).

     Other than going back to reusable  cloth fabrics, there are no economical substitutes for
sanitary tissue products. However, it  is possible that  continued escalation of tissue prices may
cause some consumers to economize  on  tissue use and possibly shift back to some extent to
reusable cloth products. In the nonsanitary tissue area, waxing tissue has been and continues to
be replaced by plastic film and foil materials, primarily  because of the latter's superior perform-
ance characteristics.

     The price elasticity of demand  for  tissue calculated by the econometric analysis in this
study was 0.45 or about average for the bleached paper sectors. This moderately low coefficient is
not surprising in light of tissue's essential uses, fairly low cost, and lack of significant substitutes.

3. Supply
     U.S. tissue capacity was 4.3 million tons in 1974.  Unlike most paper industry sectors, tissue
production is spread evenly throughout the country (mostly near major metropolitan areas), as
opposed to being centered near the primary fiber resource areas of the South and West.

     The four largest  tissue producers are  Scott, Procter and Gamble, Kimberly Clark, and
American Can (Table  111-32).  These four producers accounted for about 56'/c of total U.S. tissue
productive  capacity in 1975. Thus, this  market sector  is relatively concentrated compared to
other paper industry sectors.

     In addition  to having substantial  financial resources, the leading  tissue producers are
largely vertically integrated. The major tissue producers: (1) are integrated to pulp on a company
                                           76

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                             TABLE 111-32

                 CONCENTRATION OF TISSUE SUPPLIERS, 1975
% U.S. Capacity
24.1
e 12.8
9.9
9.0
6.7
6.6
6.0
2.5
Number of Mills
8
5
5
4
6
1
5
2
Scott

Procter and Gamble

Kimberly Clark

American Can

Crown Zellerbach

Fort Howard

Georgia-Pacific

Brown

Top Eight Companies                   77.6

Other Suppliers (About 43 Companies)  24.9

  TOTAL                              100.0
SOURCES:  Lockwood's Directory of the Paper and Allied Trades, 1975.
          Arthur D. Little, Inc., estimates.
                                 77

-------
basis, although  not necessarily on a  mill-site basis,1 (2) control  a significant  portion of the
woodlands that support their pulp mills; and (3) are fully integrated on-site to tissue converting.
The practice of these industry leaders  implies that substantial vertical integration is an impor-
tant component for success.

4.  Prices
     Most tissue paper producers convert their  product at the site where the tissue paper is
made.2 The  amount of tissue paper sold in the form of jumbo rolls (unconverted) is very small.
Thus, the most meaningful tissue prices are converted product prices.

     Figure III-11 shows the trend in tissue prices and capacity utilization since 1963. This figure
shows that like most other paper markets, the tissue paper prices increased relatively little during
most of the  1960's.  In 1973, however, a fairly tight supply/demand balance, coupled with rising
costs, began to generate significant price escalations although not nearly as high as those in other
paper industry sectors. Between November 1973 and October 1974, average sanitary tissue prices
increased by about 30%. Note that the price series do not reflect promotional discounts granted
the retailers particularly during weak markets and this masks the correlation with capacity
utilization. (Tissue  is the only product sector that does not reflect discounts in its market price.)

     When discussing tissue prices, it is important to understand that there is significant product
differentiation in terms of quality and  brand name identification in the consumer market sector.
Brand name tissue products, which rely strongly on consumer advertising for product differen-
tiation are priced higher than private-label tissue  products. Also, tissue grades that utilize a large
proportion of deinked wastepaper are generally priced below products made largely from chem-
ical wood pulp fiber. This reflects a somewhat lower consumer acceptance for tissue made from
the typical wastepaper furnish, apparently because of the product's slightly off-white color. In the
industrial market sector, there is far  less product differentiation and  price is viewed as a key
determinant of a successful marketing  program.

5.  Import/Export Balance
     There  have been no significant imports of any tissue materials to the United States in the
last 10 years, and  exports have been  less than  1% of total U.S. production over  this  period.
Prevailing tariffs plus high transportation costs for bulky tissue products explain this low level of
international trade.

6.  Price Impacts
     Of all the products studied, tissue had the  highest price per ton in 1975, at $760 per ton.
Principally because of its high unit value, the tissue sector will incur the smallest relative price
impact as a result of the environmental regulations studied. The long-term price increase of $31
per ton is only  4.1% higher than the  long-term price that  would prevail without the  studied
regulations. The existing industry requires a price increase of about $29 per ton to cover the
incremental cost of compliance with the studied environmental regulations (Table HI-33).
 1. More than half of the output of this industry comes from tissue mills not integrated on-site to pulp.
 2. In this case, converting refers to the functions of printing, die cutting, rewinding, folding/interleaving, and final
   packaging.
                                            78

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$/Ton
                                 FIGURE 111-11
                             TISSUE MARKET PRICE
                         VERSUS CAPACITY UTILIZATION
                                Tissue
                                                                              L .9
                                                                              j


                                                           ,*_1~ Capacity Utilization

                                                                                .8
                                                -  Current Dollar Price
                                                   Constant Dollar Price
                                                                              -1.0
          1963  1964  1963  1956  .1.96?    1968.1969  1970  1971  1972  1973  1974
                                      79

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OO
o
                                                  TABLE  111-33


                            EFFECT OF ENVIRONMENTAL  REGULATIONS  ON TISSUE PRICES
Environmental Regulation
EPA WATER
1977
1983
FEDERAL AIR
SIPS
NSPS
OSHA NOISE
TOTAL
Existing Industry
Investment Required Necessary
$ Millions $/Ton

268 15.30
155 8.82

68 2.57
—
48 2.12
539 28.81

Price Increase..
% 1975 Price
o
2.0
1.1

0.3
—
0.3
3.7
Long-Run Price Effect
$/Ton % Baseline Price

—
22 2.9

—
3 0.4
6 0.8
31 4.1
       1975  Price:   $769
      'Baseline Price:   $754
      SOURCE:   Arthur D.  Little,  Inc.,  estimates.

-------
     Since tissue is consumed as a final product and the converting operations are done on-site,
the price impacts estimated also represent the ultimate relative price impact the consumer will
face. In the long run, the consumer will therefore incur a 4.1% increase in the price of tissue.

7.  Output Effects
     The price elasticity of demand for tissue estimated by the econometric model is 0.45. This
means that  the price increase due to the  studied environmental regulations of 4.1% will be
accompanied by a 1.8% reduction in demand compared to the demand level that would have been
obtained without a price increase.

8.  Supply/Demand Balance
     The forecast demand for tissue will result in average to low capacity utilization rates for the
studied period (Figure 111-12). Some price pressure may occur in 1983 because of estimated mill
shutdowns, which are equivalent to 147,000  tons or 3.3% of 1975 capacity.

I.  NEWSPRINT AND UNCOATED GROUNDWOOD PAPER

1.  Product Description
     These  products  were grouped  in this analysis because they  both utilize a substantial
proportion (usually greater than 50%)  of groundwood pulp in their fiber make-up, and they are
often produced in the same mill. Other common characteristics are that both products are
uncoated and are used in printing applications that do not require long storage or reuse since the
groundwood pulp discolors when exposed to ultraviolet  light. Thus,  they are used for products
such as newspapers (the dominant application), telephone directories, some mail order catalogs,
and other printed articles that are  generally discarded within one year.

     Newsprint is by far the largest major grade in this category, with a total U.S. consumption
of about 11 million tons in 1974. It is generally made from a pulp furnish consisting of about 80%
unbleached  groundwood  and 20% semibleached kraft or unbleached sulfite  pulp (West Coast
groundwood pulp is often lightly bleached). Three U.S. newsprint mills produce  newsprint
entirely from waste newspapers; as a result of their successful market penetration, this recycling
trend is likely to grow in areas with high population and  wastepaper densities.

     Uncoated groundwood  paper is  generally made from  a furnish  consisting of  30-50% of
bleached chemical pulp and  50-70% of bleached groundwood pulp. Its principal applications are
for telephone directories, catalogs, paperback books, low-priced magazines,  comic books, and
general commercial printing.

2.  Demand
     U.S. newsprint consumption  has  increased at an average rate of 2.6%/year since  1964. This
puts it in one of the slower growth categories in the paper industry. Relatively rapid growth in the
suburbs has compensated for the demise of the large metropolitan dailies and the relatively slow
growth of all metropolitan newspapers. Consumption is highly related to growth in GNP because
advertising space is the key determinant of newspaper size or lineage and therefore significantly
affects newsprint" consumption. Newspaper  advertising has faced stiff competition from radio and
particularly TV  advertising  media; thus, newsprint competes indirectly with these alternative
methods of advertising.
                                          81

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                                     FIGURE 111-12
                                       TISSUE
                    FORECAST OF DEMAND AND CAPACITY UTILIZATION
          5500--

  TONS
DEMANDED* 5000--
 (000)
         4500- -
          4000- -
          3500-
                                      DEMAND
                                                               Range of
                                                               Demand Forecast
                             i   i   i
                    I   J   I .  '   I
                   75    76    77     78    79    80    81    82    83
                                   CAPACITY UTILIZATION
CAPACITY
UTILIZED
         100.0--
90.0--


80.0-


70.0--


60.0--
                                                                  	  High Growth
                                                                  	  Medium Growth
                                                                  * • **  Low Growth
                                   i   i   i
                    75    76    77    78    79    80    8.1    82    83

*Total U.S.  Consumption
                                            82

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     Recently, a few new applications for groundwood papers have begun to develop in areas
where no more than short-term use is required. The increasing price differential between ground-
wood and groundwood-free papers  which occurred in 1974 increased the incentive to shift to
groundwood.  One  such  comparatively new application is in  business forms where, in 1976,
approximately 80,000 tons of newsprint and uncoated groundwood paper was substituted for the
traditional forms bond paper which is made from 100% bleached chemical pulps.

     U.S. consumption of uncoated groundwood papers grew at the average rate of 2.9% per year
(1970-1976) making it a somewhat higher growth area than  newsprint. However, uncoated
groundwood papers have been replaced by coated  papers in catalogs and  magazines, and their
consumption has also suffered from the demise of low-cost pulp magazines and comic books. The
major recent growth areas have been business forms and advertising printing. Demand appears to
be bolstered  by the fact  that the price differential below groundwood-free printing  papers
widened appreciably during 1974. In January 1975, for example, there was a $205/ton differential
between No. 3 uncoated offset book paper and catalog-grade groundwood paper,  whereas a year
earlier the differential was about $100/ton. This development should increase the use of uncoated
groundwood paper in a number of commercial printing applications.

     The  price elasticity of demand  for newsprint, as computed in this  study, ranges  from a
relatively high 0.85 when measured by U.S. production to a relatively low 0.22 when measured by
U.S. consumption (although the latter coefficient is not statistically significant). The most likely
explanation for this pattern is that competition  between U.S. and Canadian newsprint mills
introduces substantial cross-elasticity.

3. Supply
     Canadian newsprint mills play a pivotal role in supplying U.S. needs and, hence, are a key
factor in the industry's competitive structure. Canada has become the world's largest newsprint
producer by virtue of the suitability and relatively low cost of its pulpwood supply. Furthermore,
there usually are no duties on newsprint, which enhances  Canada's  exports. In 1974, Canadian
mills supplied about 70% of U.S. newsprint consumption and U.S. mills supplied the remaining
30%.

     Table 111-34 lists the capacity  of the major North American newsprint suppliers. This does
not necessarily reflect their share of the U.S. market since many of the Canadian  producers have
substantial overseas  exports. The  recent acquisition of the Price Company by Abitibi Paper
Company has given it a  dominant 17% share of North American capacity. International Paper,
with a 10% share, traditionally was  the major supplier.

     North American newsprint supply is relatively concentrated. The top 14 firms have nearly
an 80% share of the total North American capacity and about an equal total share of the North
American market, while  the top five producers have about a 50% share.

     Table 111-35 lists the capacity of the major U.S. uncoated groundwood paper producers.
Imports of groundwood paper from Canada or elsewhere are not significant (117,000 tons in 1974);
an import duty, coupled with the freight advantage enjoyed by  U.S. producers in shipping  this
product,  makes it difficult for nondomestic suppliers to compete.
                                          83

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                            TABLE III-34



        CONCENTRATION OF NORTH AMERICAN NEWSPRINT SUPPLIERS, 1975


                                 % of                         Number  ,...
Company                  North American Capacity             of Mills

Abitibi-Price                    17.0                          11+

International Paper               9.9                           3

MacMillan-Bloedel                 9.7                           3

Consolidated Bathurst             7.4                           5

Bowaters                          7.4                           5

Ontario Paper                     5.2                           2

Kimberly-Clark                    4.2                           1+

Boise Cascade                     3.7                           2+

  Top Eight Companies            64.5

  Other Suppliers (6 Companies)  35.5

  Total                         100.0
   Partial ownership in a mill indicated by +
SOURCE:  "Newsprint Statistics", American Newspaper Publishers Assn.
          April 12, 1974
                                   84

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                            TABLE 111-35
      CONCENTRATION OF UNCOATED GROUNDWOOD PAPER SUPPLIERS, 1975
                                % U.S. Total             No. of Mills

Great Northern-Nekoosa            27.4                       2

Bowaters                          16.8                       1

St. Regis      .                   12.4                       2

Fraser                             8.6                       1

Appleton                           5.7                       1

Crown Zellerbach                   5.3                       2

Georgia Pacific                    4.7                       1

Kennebec River                     3.9                       1

   Top Eight Companies            84.8

   Other Suppliers (about
     12 Companies)                15.2

   Total                         100
SOURCE: - Lockwood's Directory of the Paper and Allied Trades, 1975.
        -Arthur D. Little, Inc., estimates.
                                  85

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     Traditionally, the uncoated groundwood paper market has been viewed as an alternative
use for old newsprint machines that are no longer competitive in the newsprint market. This is
the route of entry used by all current suppliers. Recently, however, Great Northern-Nekoosa and
Eraser Paper have installed new machines to increase their market share. These two companies,
along with Bowater and St. Regis, are the major U.S. producers.

4.  Prices
     Newsprint prices traditionally have risen in gradual steps and have declined infrequently
even though U.S. operating rates have fluctuated sharply. One explanatory factor is that fluctua-
tions  in world operating rates were not as severe as in the United States and prices behaved
accordingly because of the substantial amount of newsprint trade between countries. Another
factor is the relatively high market concentration and price leadership exhibited by six of the
major North American producers.

     Figure  III-12A, however, shows that U.S. prices increased significantly beginning at the end
of 1973 and rose rapidly after U.S. price controls were fully lifted in June 1974. The increases, led
by Canadian firms trying to bolster their low profitability, were still not as high as in most other
produce sectors,  another indicator of an oligopolistic market.  The western U.S. market, where
newsprint traditionally sold below eastern prices, established a price premium in 1974; this was
made possible both by tight market conditions  and the fact that two producers dominate  the
western market.

     A similar trend of price escalation took place for uncoated groundwood paper. As discussed
earlier,  groundwood-free printing and  writing paper prices increased  even more rapidly than
those of the uncoated groundwood grades. This  rapid increase indicates that uncoated ground-
wood  prices relate more closely to newsprint prices, with which they are usually associated from a
supply standpoint. The resulting  wider price differential between the groundwood and non-
groundwood grades makes the former more price competitive and should stimulate its demand.

5.  Import/Export Balance
     As mentioned previously, newsprint is the  largest-volume paper product  imported by  the
United  States. In 1974, U.S. publishers imported  7.4 million tons, worth about  $1.5 billion,
almost all of it from Canada. The United States is  a relatively small newsprint exporter with a
1974  volume of  about  190,000 tons, worth $55 million. Most U.S.  newsprint mills are more
concerned about capturing  a greater  share  of their  own market  than with  vying with  the
Canadians in third markets.

     An import duty plus a freight rate advantage  for U.S. mills has kept imports of uncoated
groundwood paper to a minimum. In 1974, reported imports were about 117,000 tons,  but
additional amounts were imported under a "newsprint" designation to avoid the duty. Exports
were small, about 53,000 tons.

6.  Price Impacts
     Newsprint prices will increase by 5.7%, or  $16 per ton in the long run as a result of the
studied regulations  (Table 111-36). The existing industry requires a price increase of 1.1% or
$20.33 per ton over the 1975 price of $265 to recover the incremental cost of compliance with the
studied regulations. The reason for the apparent disparity between the price increase required by
                                           86

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   300



$/Ton

   200
   100
     o :
                                    FIGURE III-12A
                               NEWSPRINT MARKET PRICE
                             VERSUS CAPACITY UTILIZATION
                                 U.S. Producers Only
                                               Current Dollar Price
                                                                                  1.1
                                                                                .. 1.0
                                                                                  0.9

                                                                                  Capacity
                                                                                  Utiliza-
                                                                                  tion

                                                                                  0.8
                                                                                   0.7
             |  T   Constant Dollar  Price
             '•:'-' --H? J—	u...:u.    I
— — -^
___.:..
• i-- i •
	
(1938 Dol]
	 1.
: t'i !
	 :.

ars)
I !
	 	
' 1 '
" i
• ; • i
• '• ' t
                                                                      i-U '.
              1964   1965  1966  1967  1968  1969  1970  1971  1972  1973  1974
                                            87

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                                                   TABLE III-36
oo
oo
Environmental
Regulation
EPA Water
1977
1983
NSPS
Federal Air
SIPS
NSPS
OSHA Noise
Total
EFFECT OF ENVIRONMENTAL REGULATIONS ON NEWSPRINT PRICES
Existing Indus try
Investment Necessary
Required Price Increase 1 Long-Term Price Increase-
$ Millions $/Ton % 1975 Price $/Ton % Baseline Price"
e
162 $10.67 4.0%
91 5.99 2.3
$12 4.3%

54 2.31 0.9
~ — 1 0.3
29 1.33 0.5 3 1.1
$336 $20.30 7.7% $16 5.7%
             1975 Price $265

            2
             Baseline Price $280


             New Capacity Differential 6%




             SOURCE:  Arthur D. Little, Inc., estimates.

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existing industry and the long-run increase is that the latter impact is based upon a new mill
integrated to semi-bleached kraft pulp whereas a substantial portion of the existing industry
employs sulfite, pulp, the effluent of which is more costly to control.

     Increases in the price of newsprint will ultimately be reflected in newsprint prices. The long-
run price increase of 5.7% will result in a 2.7% increase in newspaper prices (0.5
-------
                              FIGURE 111-13

                   FORECAST OF NEWSPRINT CONSUMPTION
                        AND CAPACITY UTILIZATION
           14,000-
          12,000-
     000
     tons*
           10,000-
            8,000-
                *
                              U.S. Consumption
                                                                              Range
                                                                                 of
                            Demand
                          Forecast
                               78    79    80    8
1828384
                          Capacity  Utilization
            100
   Operating   Q
   Rate
                                                         Without
                                                         Recession
                                                               With
                                                               Recession
                    76    77    78    79    80    81    82    83    84
30 lb. basis weight
                                          90

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     The special industrial paper sector comprises a variety of paper and paperboard grades
designed for such specialized end uses as abrasive paper, absorbent paper, cable wrapping paper,
electrical insulation, vulcanized fiber, and resin impregnating stock. These are for the most part
highly technical products sold under exacting specifications to industrial users. They are made
from  a  variety of  fibers including  bleached  kraft and sulfite pulps,  unbleached kraft  pulp,
wastepaper, and cotton.

     Wet machine board includes binder  board,  shoe board  (e.g., counterboard, heel board,
innersoles, etc.), automotive panel board, chair seat backing, coaster board, luggage board, panel
board, and table-top  board. This material is formed on cylinder  board  machines much like
recycled paperboard. However, unlike most other paper and paperboard products which are dried
by being passed around heated drums, wet machine board is air dried after the paper is formed
and dewatered. Its fiber furnish consists almost entirely of wastepaper, supplemented in  some.
cases by nonwood fibers such as cotton.

     Molded  pulp  products include bituminous fiber pipe, egg cartons,  packaging trays (for
meats, produce, and food), molded pulp plates and dishes, and various other molded pulp and
paper-mache  articles.  These products are categorized under the Department of Commerce's SIC
2646, which is part of the converted paper products sector. However, the water effluent problems
of these mills are closer to those of paper mills than of converting plants. Pulp molding differs
from papermaking in  that it employs batch rather than continuous operations and much  lower
water volumes in the pulp molding and pressing operation. While the producers of molded pulp
are  fairly  well  represented in the API, their production statistics are  not reported by that
organization  except  for the   relatively limited  data  published  in  the annual  Census  of
Manufactures.

     Molded  pulp products use wastepaper predominantly (56%) but also consume a substantial
amount of bleached and unbleached wood pulp (44%). Wastepaper is used primarily to make egg
cartons, while virgin wood pulp is employed for trays and plates.

2. Demand
     Since special industrial  paper is used  in an extremely wide variety of technical and
industrial applications, demand correlates well with the industrial production index. From 1964
to 1974, demand grew  at an average rate of 4.4% per year. Although there are few direct substitute
materials, a number of the end products, such as  decorative laminates and luggage,  compete with
substitute products made from other materials.

     Wet machine board demand has remained essentially static since 1964, although there have
been year-to-year fluctuations as a result of changes in overall economic activity.  For example,
because so much of the product goes into shoe innersoles,  total demand is influenced by dis-
posable personal income. Since it has many industrial applications, demand for wet machine
board also correlates with the  industrial output.  Over the past 10-12 years, however, demand for
wet  machine board  has remained  static  because of significant product substitutions.  Most
important has been the substitution  of vinyl plastics in shoe innersoles, and, to a lesser extent, in
automotive paneling and luggage.
                                           91

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     Molded pulp demand is linked almost entirely to consumer disposable income with the
exception of the component used for bituminous fiber pipe. The Department of Commerce data
on production, imports and exports, is very sketchy and neither the API nor other trade associ-
ations collect statistics on this industry sector. The Department of Commerce data indicates that
production has been  essentially static for the total industry since 1964.  Significant product
substitutions have occurred in several molded pulp sectors, particularly in egg cartons and  meat
trays, which have been displaced by foamed polystyrene plastic.

3. Supply
     Most special industrial paper is produced in the Northeast (57%), the South (22%), and the
North Central (19%) regions. In 1974, 77% of U.S. capacity was held by 71 mills not integrated to
pulp, while 13 integrated mills made up the remaining 23% of capacity. Table  III-36A indicates
that the supply of special industrial paper is not particularly concentrated, with the  top  eight
producers accounting for 42%  of total capacity and the top two producers for 16.5%.

     Wet machine board is produced primarily in the Northeast, which accounts for about 80% of
the U.S. capacity. The balance comes from the North Central (18%) and Southern (12%) regions.
Table 111-37 shows that  wet machine board capacity is very concentrated at the top; the largest
two producers account for over 55% of the total U.S. capacity.

     The molded pulp sector is also heavily concentrated at the top; the two largest producers
operate  11 of the 26  U.S. molded pulp mills  (Table  111-38). Capacity statistics seldom are
reported for any of these mills. However, the two largest producers probably have  more than 50%
of U.S. capacity. The balance is fragmented among 13 producers.

     Molded pulp production is  distributed fairly evenly  over the major U.S. regional sub-
divisions. Of the 26 molded pulp mills, nine are located in the Northeast, seven in the North
Central, six in the West, and four in the South. The evenness if caused primarily by the fact that
the various molded pulp products require either virgin wood  pulp or wastepaper raw materials.

4. Prices
     Because of their  low volume and fragmented applications, no published price series were
found for the specialty  paper sectors.  Future studies that wish  to  analyze this sector econo-
metrically will have to resort to producer surveys not only for price information, but also for
molded  pulp production and/or shipment data.

     In  view of the industrial orientation and specialized nature of the grades included, it is
reasonable to assume  that this sector's rate of price increase since 1971 has approximated the
paper industry average. Special industrial paper prices probably rose fastest (close to the rate for
printing/writing papers)  while wet machine board prices probably have experienced the smallest
increase since 1971.

5. Import/Export Trends
     Special industrial paper  is the only component in the specialty paper sector with significant
trade (mainly exports). In 1974, exports of special industrial paper reached a high of 117,000 tons,
or 20%  of production, while imports were 2,000  tons, or 0.5% of consumption.  U.S. technical
know-how in achieving required product properties, coupled  with large mills (relative to those in
Europe  and Canada) is probably the main reason for this favorable trade balance.


                                           92

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                           TABLE III-36A
CONCENTRATION OF U. S. SPECIAL INDUSTRIAL PAPER SUPPLIERS. 1975
                                      % of         Number of
       Company                      U.S. Total       Mills
       Brown                           9.4            2

       Union Camp                      7.1            1

       Scott                .           4.7            1

       St. Regis                       4.5            2

       Hollingsworth & Vose            4.5            4

       Riegel                          4.1            4

       Knowlton Brothers               4.0            2

       James River                     3.8            2

       Top eight companies            42.1

       Other suppliers (about
            43 companies)             57.9

                          Total      100.0
       Sources:  Lockwood's Director of the Paper and Allied Trades, 1975

                 Arthur D.  Little, Inc., estimates.
                                93

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                    -  TABLE III-37

 CONCENTRATION OF U.S. WET MACHINE BOARD SUPPLIERS, 1975

                                     U.S.        NUMBER
COMPANY                             % TOTAL     OF MILLS
Davey                                33.8           3

Texon                                22.1           2

Colonial Fibre                       17.6           3

Spaulding Fibre                       4.4           2

George Jenkins                        3.7           1

Shryock Brothers                      3.7           1

Rogers Corporation                    1.5           1

Milton Leatherboard                   1.5           1
Top Eight Companies                  88.3          14

Other Suppliers (3 Companies)        11. 7         	3_
Total                               100.0          17
Sources:  —Lockwood's Directory of the Paper and Allied
            Trades, 1975

          —Arthur D. Little, Inc. Estimates
                            94

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                       TABLE III-38

   CONCENTRATION OF U. S. MOLDED PULP SUPPLIERS, 1975
Company                                         Number of Mills

Diamond International                                6

Keyes Fiber                                          5

Packaging Corp. of America                           2

Formar Containers                                    2

Fiber Form                                           1

General Molding Corp.                                1

Henry Molded Products                                1

Kerding Inc.                      '                   1

Lass Pulp Molding                                    1

Molded Container                                     1

Old Towne Pulp Products                              1

Packaging Co. of California                          1

Pennsylvania Egg Carton                              1

Tekmold, Inc.                                        1

Woodstream Corp.                                     1
(1) Based primarily on number of mills since capacity figures
    are not publicly available for much of this sector
Source:  Lockwood's Director of the Paper and Allied Trades, 1975.
                               95

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     U.S. trade in wet machine board is much more modest in absolute terms, but not in relative
terms. In 1974, exports were about 11,300 tons (9% of production) while imports totaled 5,900 tons
(5% of consumption). The predominant use of wastepaper raw material limits any trade advan-
tage among the industrialized countries where  the product is both produced and consumed.
However, the United States accounts for nearly all of North and South America's capacity and
hence is the dominant supplier for both continents.

     There are no published statistics on molded pulp imports or exports. This is a relatively low-
value product which faces high duties in most countries. Therefore, it is unlikely that its imports
or exports are significant.
                                           96

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              APPENDIX
           PRODUCT SECTOR
PRICE SERIES AND ECONOMETRIC EQUATIONS
                  97

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                        PRODUCT SECTOR PRICE SERIES
                           (dollars per ton)

              BLEACHED            DISSOLVING
Year         MARKET PULP             PULP              TISSUE        SBS BOARD

1968            134                  176                 422            178
1969            139                  182                 447            183
1970            162                  195                 467            187
1971            152                  203        .         489            187
1972            163             -     208                 495            195
1973            193                  207                 507            226
1974            295                  300                 638            293
1975            351                  398                 769            353
                                  PRINTING &       UNBLEACHED
              NEWSPRINT            WRITING         KRAFT PAPER

1968            142                  299                 128
1969            147                  309                 143
1970            152                  308          .       158
1971            157                  304                 147
197?.            165                  318                 163
1973            175                  373                 177
1974            210                  515                 211
1975            260                  591                 263
                   CONTAINERBOARD
            UNBLEACHED                               RECYCLED
            KRAFT BOARD              NSSC             BOARD
1968            107                   101               123
1969            117                   110               122
1970            120                   112               124
1971            119                   113               124
1972            126                   119               129
1973            142                   136               150
1974            180                   169               206
1975            195                   193               215
                                      99

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                     ECONOMETRIC MODELS


1. FORMULATION OF MODELS
     To identify the potential impacts of Federal pollution control requirements, the economic
relationships described so far were combined into a model which included:

     •  Industry supply functions.
     •  Market demand functions.

Initially, capacity growth functions were estimated but the equations were not reliable. An-
nounced industry commitments for net capacity expansion as published by the API were com-
bined with simple extrapolation for the years 1980 through 1983 to examine capacity pressures.

     Demand equations  and supply equations were specified for many of the product sectors
studied in this report. The demand equation included a macro-economic variable to represent the
income effect, the transaction price of the product and for those sectors with substitute products
(bleached board and unbleached kraft paper), the price of the predominant plastic substitute,
which was incorporated in the form of a ratio to the price of the product. Due to the fact that the
price of substitute  products  has moved with the prices of paper goods in  the studied period
(multi-colinearity) and perhaps the use of aggregate product group price data, the elasticity of
substitution could not be measured for these products.

     For some of the product sectors and for the industry aggregate equation, the specified supply
equation did not explain a large percentage  of the movement in prices. Prices of paper products
correlated best with the  price of energy. For many  of the low-valued product sectors, capacity
utilization rates were inversely related  with  price — a statistical oddity  rather than a real
phenomenon.

2. STATISTICAL TECHNIQUE
     In  product sectors where variable cost explained price movements in a consistent fashion,
the two-stage least squares statistical technique was used to estimate the parameters of the
demand equation. In other sectors, ordinary least squares, with a lagged price term, was used to
estimate the  parameters of  the demand equation.  The equations for the  individual product
sectors are part of Volume II, while equations for the aggregate of all paper and paperboard are at
the end  of this Appendix.

3. ERROR  IN VARIABLES
     The product sector groupings used in this report were based upon similarity of process and
market. In aggregating across products in a product group, some of the effects may have been
obscured. Also, on the supply side, wood, labor and energy prices were paper industry aggregates
and not specific to individual products.

     Although an effort was made to use consistent data throughout the historic period, changes
in the base capacity and products classified in one grade versus another  may have introduced
error to the data base.
                                         100

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4. LIMITATIONS OF ECONOMETRIC ANALYSIS
     The econometric equations were  used to  estimate future  demand  for paper products
(through 1983) and the reduction in demand that will occur as a result of price increases. Based
upon the differences between Equation 1 and Equation 2, the underlying structure of the demand
for paper products could still be changing; the full effects of the price increases of 1973-74 may not
be yet fully reflected in the marketplace. The impact of this is that the forecast demand levels
may be too high.

     An upper and lower boundary forecast was made to indicate the expected variation from the
forecast due to the equation. Additional differences from the forecast can arise from changes in
the underlying demand structure for paper and paperboard and errors in the Chase Econometric
forecast.

5. PRODUCT  SECTOR EQUATIONS
     The econometric equations for the product sectors appear on the following pages. They
represent the demand equation actually used in the analysis and to forecast output growth and
elasticity of demand.
                                         101

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                          SECTOR: BLEACHED HOARD
                                                    BRISTOLS
DEMAND EQUATION:

          Quantity = 172.49 - 1,54 PRICE -i- .1.5939 GNP
                                                      t-2
          Right Hand
           Variable
           -A,
          PRICE
          GNP t_2
          Constant
                                    Estimated
                                   Coefficient
                                   -1.54077
                                    1.59392
                                  172.491
      R* = .7626

      Durbin Watson (adj. for 0 gaps) =  1.5609

      F-Statistic (2,  29) = 46.5765

      Time Period:  1967-1974

      Method:  2-Stage Least Squares

SUPPLY EQUATION:
          Price =2.11  LABOR +.66 FJLP - 1.4999
          Right Hand
           Variable
                LABOR
                PULP
                                    Estimated
                                   Coefficient
                                     2.11
                                      .66
               (% idle capacity)    -1 4999
           C
      R2 w .7611

      Durbin Watson  (adj. for 0 gaps) = 1.2464
      Time Period:  1967-1974
      Method:   Ordinary Least Squares
T-Statistic
-1.92972..
 9.57283
 1.23087
                                                     Standard Error = 4.44%
                                                     Mean Value of 4 = 1,134
 T-Statistic
  12.5007
  15.1013

  -.0357
                                                      Standard Error = 4.73%
                                                      Mean Value of Y = 145.84
                                        102

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                        SECTOR:  TOTAL BLEACHED PULP
       CONSUMPTION - -2.59011 MARKET PRICE + 5.70859GNP
                     + 169.998 WAGE PRICE FREEZE
Right Hand
Variable
MARKET PRICE
GNP. 0
Estimated
Coefficient
-2.59011
5.70859
T-Statistic
2.26267
28.1319
              WAGE PRICE FREEZE     169.998              3.04338
              -  •— •  '  —— 	  	   —. —  	 	   --	  	 -	
                     o
            2
           R  = .9429              Standard Error =3.8%
           Durbin Watson =• 1.3270       Mean Value of Y =•= 3760.05
           Time Period = 1964 - 1974, quarterly
           Method:   Two-Stage Least Squares
SUPPLY EQUATION;
          PRICE - 3.36258 WOOD + 5.50454  (LABOR -1- ENERGY)
                  -178.635 %IDLE CAPACITY
      Right Hand              Estimated
       Variable              Coefficient            T-Statistic
      WOOD                     3.36258                6.52964
      LABOR + ENERGY           5.50454                7.89451
      % IDLE CAPACITY         -178.635                3.01970
      R2 =  .5275                     Mean of Y - 123.47
      Durbin Watson  (adj. for 0 gaps) =  .3714
     Time Period:  1964-1974
                                                 Standard Error -  IQ.87/,
     Method:  Ordinary Least  Squares
                                    103

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                      SECTOR:  . DISSOLVING PULP

 DEMAND EQUATION:

             PRODUCTION - 371.385  -  1.31388 PRICE
                                                 t-2
  Right Hand
   Variable

  Constant
  HOUSEHOLDS
+ 3.6981 HOUSEHOLDS

    Estimated
  Coefficient

  371.335
  -1.31388

    3.69810
T-Statistic

 2,62175 -..
 2.18955
 3.39564
R  = .5152

Durbin Watson (adj. for 0 gaps) = 1.2720

F-Statistic (2,41) = 2.15533

Time Period:  1964-1974, quarterly

Method:  Ordinary Least Squares
                    Standard  Error  =  5.93%

                    Mean  of Y =  405.977
                                104

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                     SECTOR:  NEWSPRINT CONSUMPTION




DEMAND EQUATION:




           PRODUCTION - 2761.53 - 13.07 PRICE _4 + 13.13 IIP
Right Hand
Variable
Constant
Price .
Estimated
Coefficient
2761.53
-13.07
T-Statistic
5.62
4.03
           IIP                     13.13




 R2 - .39




 Durbin Watson (adj. for 0 gaps) = 1.61




 F-Statistic (2,41) - 9.1




 Time Period:  1968-1976, quarterly




 Method:  Ordinary Least Squares
        3.11










Mean of Y - 2655




Standard Error = 7.20/
                     ' O
                                    105

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Product Sector:  NSSC Corrugating MejiinU
CONSUMPTION =•<    b  •+ b  Price + b0 GNP
                  o    o          2  .
          Variable

       Constant (b )
       Price
        GNP
Value of
Coefficient
-484.50
-3.251
2.214
t-statistic
4.63
3.67
14.085
Statistics

R2 = .88
Durbin Watson = 1.248
Number of Observations = 32
F-Statistic (2, 29) = 108.2
                     Standard Error:  3.9
                     Mean of Y:  934
                     Time Period:  1968-1975^ quarterly
                     Method:  Two-Stage Least Squares
  PRICE = C  + C (labor + energy + wood)  + C_[^(labor + energy + wood)]
           O    I                           £„  \j
                                Value of
        Variable
      Constant (C )
      Labor + Energy +
      Wood
      Production
      Capacity
(Labor +
  Statistics
             Coefficient
               18.09

                2.64
              Energy + Wood)     -1.61
  R  = .78
  Durbin Watson = .93
  Number of Observations = 32
  F-Statistic = 52.57
t-statistic
   2.12

  10.22


   8.22
                      Standard Error:   5.0
                      Mean of Y:   88
                      Time Period:   1968-75,  quarterly
                      Method:  Ordinary Least Squares
                                  106

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                 SECTOR:  PRINTING & WRITING
DEMAND EQUATION;




               QUANTITY
                    -440.5 - 3.35267 PRICE + 32.6263 IIP
                                                        t-2
Right Hand
Variable
PRICE
IIPt-2
Constant
.8975
Estimated
Coefficient
-3.35291
32.6262
-440.528
Standard Error
T-Statistic
•3.6946
14.2989
2.163
= 3.76%




R




Durbin Watson (adj. for 0 gaps) = 1.0938




Time Period:  1967-1974        Mean of Y - 2336.41




Method:  Two Stage Least Squares
                                 "10
SUPPLY EQUATION;




       PRICE - 3.984 LABOR + (.111 x 10 -")




               + .942 PULP
                                                10
                                                  2°
Right Hand
Variable
LABOR
1
( ~c ) x 10
PULP
Estimated
Coefficient
3.427
.518 x 10~10
1.11098
T-Statistic
8.98940
3.32091
11.2001
 R  = .7559                            Standard Error:  5.89%




 Durbin Watson (adj. for 0 gaps) = 1.2200




 Time Period:  1967-1974               Mean Value of Y:  243.631




 Method:  Ordinary Least Squares
                             107

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Product Sector:



CONSUMPTION,.-
                 RECYCLED BOARD
bo - .bx Pricet_2
                                    'Index of  Industrial Production +
                « Paper Operating Rate


                              Value of
          Variable
    Constant  (b  )
               o
                             Coefficient
    Price
          t-2
                                                  t-statistic
481.66
-6.50
6.97
1253.08
.82*
2.59
2.94
2.39
     Index of  Industrial

     Production



     Paper Operating Rate
     '•Not  statistically  significant or  different  from  zero.
Statistics



R2 =  .75



Durbin Watson =  1.15



Number of  Observations:   30



F-Statistic  (3,  36) =  25.58
                                        Standard Error:  5.2%



                                        Mean of Y:  1802



                                        Time Period:  1968-1975, quarterly



                                        Method:  Ordinary Least Squares
                                 108

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                               SECTOR;   TISSUE


DEMAND EQUATION:

             Quantity = 712.256 - 1.68946 PRICE + 1.48279 PERSONAL CONSUMPTION
                                                                              t-2
Right Hand
 Variable

PRICE
PERSONAL CONSUMPTION

Constant

R2 = .8555
                                 t-2
                                           Estimated
                                          CoefficJent

                                            -1.68946
                                             1.48279
                                             712.256
                                   Standard Error =
             Durbin Watson = 1.3100  Mean Value Y
             F Statistic (2,33) = 97.7072
             Time Period:  1966-1974, quarterly
             Method:  Two-Stage Least Squares
          3.65%
          908.472
SUPPLY EQUATION:
             Price = 1.15026* PRICE      4- 5.55377
                     - 148.522  ((C - Q)/C)
               LABOR
             Right Hand
              Variable

             PRICE PULP
             PRICE LABOR
             C - Q/C  (% idle capacity

             R2 = .4776
             Durbin Watson = 1.7022
                        T-Statistic

                         ''5:03400
                         12.4979
                          5.87949
 Estimated
Coefficient

  1.15026
  5.55477
  -l':8.522

 Standard Error = 5.25%
 Mean Value Y = 302.958
                                                     T-Statisti-c

                                                      10.6108
                                                      14.4451
                                                       1.84829
             Time Period:   1966-1974,  quarterly
             Method:   Ordinary  Least Squares
                                           109

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Product Sector:   UNBLEACHED KRAFT bOARD



CONSUMPTION =
bQ -
                        PRICE    + b2 GNP
          Variable
    Constant (b )
               o
    PRICE
         t-1
    GNP.
Value of
Coefficient
-1551.29
-12.24
6.64
t-statistic
3.61
3.59
11.71
Statistics



R2 = 83



Durbin Watson =1.07



Number of Observations = 32



F-Statistic (2, 29) = 69.03
                    Standard Error:  5.9%



                    Mean of Y:  2425



                    Tii.ie Period:  1969-1975, quarterly



                    Method:  Ordinary least squares
                                 110

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Product Sector:   UNBLEACHED KRAFT PAl'ER  (Equation 1:  Without substitution)



CONSUMPTION     a  - a. Price  . + a.' GNP
           t     o    1      t-1    2     t
          Variable
      Constant  (a )
                 o
      Price
      GNP
           t-1
Value of .
Coefficient
937.5
-5. AS
0.80
t-statistic
7.62
6.85
5.58
Statistics




R2 = 66



Durbin Watson = 1.63



Number of Observations =  35



F-Statistic  (2. 32) = 31.37
Standard Error:  4.7%



Mean of Y:  924.7



Time Period:  1967-1975, quarterly



Method:  Ordinary Least Squares
                                  111

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Product Sector:



CONSUMPTION -  I
                  UNBLEACHED KRAFT i'.-.PER (Equation 2:  with substitution)


                                , ,    Price
          Variable
      Constant  (b )
                 o
      Price
           t-2
      Price
           t-2
"t-2
      Substitution Price
                                     Substitution Price
                                                            •f b. GNP
                                                               4
                              Value of

                             Coefficient




                                1114.20



                                -6.39





                                58.2659*
                                                       t-2
        t-statistic




           8.05



           7.59





           1.53*
      GNP                      0.583                 2.44



      *Not statistically different from zero at 95% confidence interval
Statistics




R2 =  .75



Durbin Watson =1.32



Number of Observations = 30



F-Statistic  (3, 26) = 25.9
                                          Standard Error:   4.0%



                                          Mean of Y:   934.4



                                          Time Period:   1968-1975,  quarterly



                                          Method:  Ordinary Least Squares
                                  112

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