ve/EPA
                United States
                Environmental Protection
                Agency
              Office of Pesticides and
              Toxic Substances
              Washington DC 20460
EPA 560/11-80-21
                Toxic Substances
TSCA Economic
Analysis  Series
                Economic Impact Analysis of
                Proposed Test Rule for
                Chloromethane and Chlorobenzenes
                Support Document for Proposed
                Health Effects Test Rule
                Toxic Substances Control Act
                Section 4
'A

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                                 EPA-560/11-80-021
                                 June 1980
         ECONOMIC IMPACT ANALYSIS
    OF PROPOSED TESTING REGULATIONS FOR
     CHLOROMETHANE AND CHLOROBENZENES
                    by
                David Mayo
              Joanne Collins
              Barrett Riordan

              MATHTECH, Inc.
          1611 North Kent Street
          Arlington,  VA.     22209
          Contract No.  68-01-5864
             Project Officer:
                Sammy K.  Ng
       OFFICE  OF REGULATORY ANALYSIS
        OFFICE OF TOXIC SUBSTANCES
          Washington, DC   20460
   U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF PESTICIDES AND TOXIC SUBSTANCES
          WASHINGTON, DC   20460

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                        PREFACE

     The attached document is a contractor's study done
with the supervision and review of the Office of Pesticides
and Toxic Substances of the U.S. Environmental Protection
Agency.  The purpose of the study is to analyze the potential
economic impact on manufacturers complying with proposed
testing rules.  These proposed rules were prepared by the
EPA Office of Pesticides and Toxic Substances to implement
Section 4 of the Toxic Substances Control Act.
     This report was submitted in fulfillment of Task Order
Number 1 of Contract Number 68-01-5864, by MATHTECH, Inc.
Work was completed as of May 1980.
     This report is being released and circulated at approx-
imately the same time as publication in the Federal Register
of a proposed health effects test rule under Section 4 of
TSCA.   The study is not an official EPA publication.  It will
be considered along with any comments received by EPA before
or during the proposed rulemaking proceedings in establishing
final regulations.  Prior to final promulgation of these test
rules,  the accompanying study shall have standing in any EPA
proceeding or court proceeding only to the extent that it
represents the views of the contractor who performed the study.
It cannot be cited, referenced, or represented in any respect
in any such proceedings as a statement of EPA's views regarding
the subject industry or the economic impact of the regulation.

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                        TABLE OF CONTENTS

        ECONOMIC IMPACT ANALYSIS FOR TESTING REGULATIONS

                CHLOROMETHANE AND CHLOROBENZENE
CHAPTER I.  EXECUTIVE SUMMARY,
I.A,
I.B,
I.B,
I.B,
I.C,
I.C,
I.C,
I.C.

I.D.
            1.
            2.

            1.
            2.
            3,
    -Introduction	
    Objectives and Methodology  	
    Level I Economic Impact Analysis  .  .
    Level II Economic Impact Analysis.  .
    Conclusions	
    Acrylamide 	
    Chloromethane—Level I Analysis.  .  .
    Chlorobenzenes—Level I and Level II
      Analysis 	
    Limits to Analysis 	
CHAPTER II.  ECONOMIC IMPACT METHODOLOGY
        II.A.
        II.B.
        II.B.I.
        II.B.2.
        II.B.3.
        II.B.4.
        II.B.5.
        II.C.
        II.C.I.
        II.C.2.
        II.C.3.

        II.C.4.
        II.C.5.
        II.C.6.
        II.C.7.
    Introduction	  .  .
    Level I Economic Impact Analysis  .
    Demand Sensitivity 	  ,
    Market Expectations	
    Cost Characteristics 	  ,
    Industry Structure 	  .
    Summary	
    Level II Economic Impact Analysis.
    Direct Costs 	
    Demand and Substitution	
    Production Costs and Industry
      Structure	
    Expectations 	  .
    Impact Assessment	,
    Additional Considerations.  .  .  .  ,
    Summary	,
CHAPTER III.


        III.A.
        III.A.
        III.A.
        III.A.
        III.A.
        III.A.
        III.A.
        III.A.
        III.B.
        III.B.
        III.B.
        III.B.
        III.B.
        III.C.
LEVEL I ECONOMIC EVALUATION:
 CHLOROMETHANE 	
                                                  II- 1

                                                  II- 1
                                                  II- 2
                                                  II- 3
                                                  II- 4
                                                  II- 5
                                                  II- 7
                                                  II- 7
                                                  II- 8
                                                  II- 9
                                                  11-10

                                                  11-12
                                                  11-13
                                                  11-14
                                                  11-16
                                                  11-17
                                                  III-  1
1.
2.
3.
4.
4.a
4.b
4.c

1.
2.
3.
4
          Overview	Ill-  1
          Direct Costs of Testing	Ill-  1
          Production and Producers 	  Ill-  2
          Manufacturing Process	Ill-  4
          Product Uses	Ill-  4
          Silicones	Ill-  6
          Lead Alky Is	Ill-  8
          Other Uses	Ill-  8
          Potential for Economic Impact	Ill-  9
          Demand Sensitivity 	  Ill-  9
          Market Expectations	Ill-10
          Cost Characteristics 	  Ill-10
          Industry Structure 	  III-ll
          Conclusions	III-ll
          References to Chapter III	  111-12

                         .                (Continued)

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                  TABLE OF CONTENTS  (Continued)
                                                          Page
CHAPTER IV.  ECONOMIC EVALUATION: CHLOROBENZENE	IV- 1

        IV.A.     Level I Analysis	IV- 1
        IV. A.I.   Overview	  IV- 1
        IV.A.I.a  Direct Testing Costs  	  IV- 2
        IV.A.l.b  Production Process  	  IV- 4
        IV.A.l.c  Production and Manufacturers 	  IV-13
        IV.A.l.c.lMonochlorobenzene	IV-13-
        rv.A.l.c.2Dichlorobenzenes	IV-16
        IV.a.l.c.3 Trichlorobenzenes.  .	IV-17
        rv.A.l.c.4 Tetrachlorobenzenes.  .  .	IV-17
        IV.A. l.c.5 Pentachlorobenzene	IV-18
        IV.A.l.d  Imports and Exports	IV-18
        IV.A.l.e  Product Uses	IV-26
        IV.A. I.e.lMonochlorobenzene	IV-26
        IV.A.l.e.2 o-Dichlorobenzene	IV-27
        IV.A.l.e.3 p-Dichlorobenzene	IV-27
        IV.A.l.e.4 Trichlorobenzenes	IV-28
        IV.A.l.e.5 Tetrachlorobenzenes	IV-28
        TV.A.I.e.6 Pentachlorobenzene	IV-28
        IV.A.2.   Potential for Economic  Impact	IV-29
        IV.A.2.a  Demand Sensitivity	IV-29
        IV.A.2.b  Market Expectations	TV-30
        IV.A.2.C  Cost Characteristics  	  IV-30
        rv.A.2.d  Industry Structure	IV-31
        IV. A. 3.   Summary	IV-31
        IV.B.     Level II Evaluation	IV-32
        IV.B.l.   Overview	IV-32
        TV.B.2.   Demand Analysis	IV-33
        IV.B.2.a  Specifications 	  IV-33
        IV.B.2.b  Estimation 	  IV-35
        IV.B.2.C  Interpretation 	  IV-43
        IV.B.3.   Industry Structure  and  Competition  .  .  IV-46
        TV.B.3.a  Methodology	IV-46
        rv.B.S.b  Change in Industry  Structure 	  IV-47
        IV.B.3.C  Regional Structure  	  IV-50
        rv.B.3.d  Individual Plant Characteristics  .  .  .  IV-52
        rv.B.3.d.l Dow Chemical; Midland,  Michigan.  .  .  .  IV-53
        IV.B.3.d.2 Monsanto Chemical; Sauget, Illinois.  .  IV-54
        rv.B.3.d.3 Montrose Chemical; Henderson, Nevada  .  IV-54
        rv.B.3.d.4 Olin Corporation; Mclntosh, Alabama.  .  IV-54
        IV.B.3.d.5 PPG Industries; Natrium,
                    West Virginia	IV-56
        IV.B.3.d.6 Standard Chlorine Chemical; Delaware
                    City, Delaware and  Kearney,
                    New Jersey	IV-56
        IV.B.3.d.7 Specialty Organics; Irwindale,
                    California	IV-57
                                                 (Continued)
                                  ii

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         TABLE OF CONTENTS  (Continued)
IV.B.3.e.  Interpretation	IV-59
IV.B.4.    Market Expectations  	   IV-60
IV.B. 5.    Alternative Approaches	IV-65
IV.B.S.a.  Proposed Approach  	   IV-65
IV.B.S.b.  Alternative I 	   IV-68
IV.B.S.c.  Alternative II	   IV-69
IV. B. 6.    Impact	IV-69
IV.B.6.a.  Methodology 	   IV-71
IV.B.6.a.l.Annualized Direct  Costs of Testing.  .   IV-72
IV.B.6.a.2."Worst Case" Scenario 	   IV-74
IV.B. 6.a. 3.Results	IV-77
IV.B.S.b.  Summary and Interpretation	rv-85
IV.B. 7.    Limits of Analysis	IV-87
IV.B.8.    Conclusions	IV-89
           References to Chapter IV	IV-92

APPENDIX:  Econometrics, Regression Analysis  .  .   A-l
                       iii

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                 LIST OF TABLES
TABLE III-l:

TABLE  IV-1:


TABLE  IV-2:


TABLE  IV-3:

TABLE  IV-4 :

TABLE  IV-5 a s

TABLE  IV-5b:

TABLE  IV-Sc;

TABLE  IV-5d!


TABLE  IV-5e:


TABLE  IV-5fj

TABLE  IV-6:


TABLE  IV-7 :


TABLE  IV-8 :

TABLE  IV-a:

TABLE  IV-10:

TABLE  IV-1X:

TABLE  IV-12 :

TABLE  IV-13 •

TABLE  IV-14 ;
CHLOROMETHANE.
ESTIMATED TEST COSTS,
 CHLOROBENZENES.  .  .
PRODUCTION SUMMARY, LOWER CHLORO-
 BENZENES, MONOCHLOROBENZENE  .  .  ,

MANUFACTURERS 'OF CHLOROBENZENES.  ,

IMPORTS OF CHLOROBENZENES	

USES OF MONOCHLOROBENZENE.  .  .  .  ,

USES OF 0-DICHLOROBENZENE.  .  .  .  ,

USES OF p-DICHLOROBENZENE.  .  .  .  ,
USES OF 1,2,4- and 1,2,3-
 TRICHLOROBENZENE. .  .  . ,
USES OF 1,2,4,5-
 TETRACHLOROBENZENE.
USES OF PENTACHLOROBENZENE  .  .  .

CHLOROBENZENES PRODUCTION AND
 PRICES	

CAPACITIES OF RECENTLY CLOSED
 CHLOROBENZENE PLANTS	
CHLOROBENZENE PRODUCERS,  1979.  .  ,

IMPORTS BY COUNTRY OF ORIGIN  .  .  .

EXPORTS BY COUNTRY OF DESTINATION.

CHLOROBENZENES REQUIRING  TESTING  .

SUMMARY OF ESTIMATED TEST COSTS.  ,

OVERALL ANNUALIZED TEST COSTS.  .  .

PER-UNIT ANNUALIZED TEST  COSTS  .  .
Page

III-3


 IV-5


 IV-14

 IV-15

 IV-19

 IV-21

 IV-22

 IV-23


 IV-24


 IV-25

 IV-26


 IV-37


 IV-4 9

 IV-58

 IV-61

 IV-62

 IV-6 6

 IV-67

 IV-7 4

 IV-7 8
                                             (Continued)
                       IV

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             LSIT OF  TABLES  (CONTINUED)
                                                    Paqe
TABLE  IV-15: PRICE AND CONSUMPTION IMPACTS
               OF TESTING COSTS FOR THREE
               REGULATORY ALTERNATIVES 	   IV-80

TABLE  IV-16: COST INCREMENT FOR PCNB	   IV-84

TABLE  IV-17: SENSITIVITY ANALYSIS OF ANNUALIZED
               COSTS FOR CHLOROBENZENES	   IV-90

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                LIST OF FIGURES

                                                  Page

FIGURE III-l:   END USES OF CHLOROMETHANE.  .  .  .  III-5

FIGURE III-2:   END USES OF SILICONES	III-7

FIGURE IV-la-d: SCHEME FOR PRODUCTION OF
                 CHLOROBENZENES	    IV-6

FIGURE IV-2:    SEQUENTIAL REACTIONS SHOWING
                 RELATIVE RATES IN THE LIQUID
                 CHLORINATION OF BENZENE ....    IV-12

FIGURE IV-3a:   MONOCHLOROBENZENE, QUANTITY
                 PRODUCED  (Q) AND REAL
                 PRICE  (P)	    IV-38

FIGURE IV-3b:   ORTHO-DICHLOROBENZENE, QUANTITY
                 PRODUCED  (Q) AND REAL
                 PRICE  (P)	    IV-39

FIGURE IV-3C:   PARA-DICHLOROBENZENE, QUANTITY
                 PRODUCED  (Q) AND REAL
                 PRICE  (P)	    IV-40

FIGURE IV-4:    CHLOROBENZENES  PRODUCERS AND
                 PROCESSORS, LOCATIONS  	    IV-51

FIGURE IV-5:    SHIFT IN SUPPLY CURVE DUE  TO
                 TESTING COSTS  	    IV-76

FIGURE IV-6:    CHLOROBENZENES  MATERIAL FLOW
                 FOR PCNB PRODUCTION	    IV-83
                        Vi

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                        CHAPTER I

                    EXECUTIVE  SUMMARY
 I. A.  Introduction
      The  Toxic  Substance  Control Act  (TSCA,  15  USC 2601)
 was  signed  into law  in  October  1976.   It was the culmina-
 tion of several years of  debate and evaluation  regarding
 the  role  of the Federal government  in protecting the
 populace  from the effects of  toxic  substances in the
 environment.  One of the  major  focuses of  TSCA  is to
 determine the toxic  effects of  existing and  potential
 substances.
      In order to implement this objective  of TSCA,
sets of testing requirements are being developed  on a
case by case basis.   Section 4CbiCU of TSCA instructs
the EPA Administrator to  consider the relative  costs of
various test protocols and methodologies which may be re-
quired.  In general, emphasis is placed on considering the
economic impacts of actions taken under the Act in addi-
tion to environmental and social impacts.
     The purpose of this study is to determine when sig-
nificant economic impacts may occur as a result of parti-
cular testing regulations and to estimate the magnitude of
these impacts.  Although benefits to society, such as a
                            1-1

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reduction of disease incidence, may result from the testing
of chemical substances, this study deals only with the
economic costs associated with imposing testing regulations.

I.E. Objectives and Methodology
     In order to determine the economic impact of testing
requirements, a two-level impact analysis scheme has been
devised.  The overall objectives of these analyses are  (1)
to determine whether there is any significant potential
for adverse economic impact resulting  from testing regula-
tions; and  (2) where the possibility of an adverse impact
exists, to estimate the magnitude of the economic impact.
Level I economic impact analysis is concerned with the
first objective, whereas Level II deals with in-depth analysis
of impacts.
I.B.I.    Level I Economic Analysis
     Level I Analysis involves determining whether the poten-
tial for adverse impact exists.  As such, it investigates
those market characteristics which indicate the likelihood
of economic impacts due to the regulation.  The market
characteristics investigated in Level  I analysis include:
 (1) demand sensitivity,  (2)  cost  characteristics,  (3)
 industry  structure,  and  (4)  market  expectations.
     The information concerning these  factors must be
readily developed, so that all substances recommended  for
EPA consideration by the Interagency Testing Committee,
                           1-2

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or selected by EPA for possible testing/ can be  subjected
to Level I Analysis.  In light of this, the tests  chosen
and the variables examined to determine the potential  for
impact must be conservative in nature.  That is, we wish to
minimize the probability of falsely rejecting a  chemical
substance for Level II analysis; i.e., a Level II  analysis
should be indicated if there is any possibility  of adverse
economic impact.

I.B.2.    Level II Economic Impact Analysis
     For those chemical substances where Level I analysis
indicates a significant potential for adverse economic
impacts, a comprehensive -economic impact analysis  is
conducted.  At this level an in-depth investigation
concerning the market characteristics is undertaken and
estimates of the important variables are made.  The direct
cost of the test protocol is integrated with these
estimates in order to determine the magnitude of the
economic impacts.
I.C. .Conclusions
I.C.I.    Acrylamide
     No testing requirement for acrylamide is being proposed,
Therefore, an economic impact analysis was not performed on
this chemical.
                           1-3

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I.C.2.    Chloromethane—Level I Analysis
     As described above and discussed in Chapter II, a
set of four market attributes are investigated in order
to determine the potential impact of testing requirements.
The results of these investigations indicate that the chloro-
methane industry should be relatively well-insulated from
significant adverse economic impacts.
      This conclusion is based upon the following considera-
tions:  First, demand for chloromethane appears to be
insensitive to changes in price.  That is, an increase in
price is expected to result in a proportionately smaller
decrease in the quantity demanded.  The primary use of
chloromethane is in the production of silicones, and the
demand for silicones is particularly insensitive to price.
In addition, the market for silicone products is clearly
expanding, indicating that the demand for chloromethane
will be increasing.
     The cost structures for each firm in the industry
appear to be relatively similar.  This is because the pro-
duction process is simple and almost universally employed.
This would indicate a competitive market situation and no
individual firm can be singled out as particularly suscep-
tible to adverse impact due to testing costs.
     In light of the results, a Level II analysis does not
appear to be required.
                            1-4

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I.C.3.    Chlorobenzenes—Level I and Level II Analysis
     From a Level I investigation of the four market charac-
teristics discussed in Chapter II, it was determined that a
potential for economic impact exists for the Chlorobenzenes
industry.
     The highest volume chlorobenzene is monochlorobenzene,
which is used primarily as an organic intermediate for the
manufacture of numerous organic compounds.  The market for
monochlorobenzene is characterized by many potential substi-
tutes which suggests that the demand for monochlorobenzene could
be price sensitive.   The commercial dichlorobenzenes (para-
and ortho-)  appear to face similar market conditions.  Although
the higher Chlorobenzenes appear to face less competition from
substitutes, their production levels are significantly lower.
In addition to these market characteristics, the expectations
for the chlorobenzene market appear to be quite low.  This is
due to their weak market performance over the past few years
and pessimism regarding the outlook for end-uses of chlorobenzene,
     On the cost side, due to the fact.that the higher Chloro-
benzenes are produced sequentially, the cumulative effect of
testing Chlorobenzenes could be significant.  The cost structures
for firms in the industry appear to be similar and there are
no unique factor inputs.  Thus, in addition, the industry can
be characterized as competitive.
                           1-5

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     On the basis of competitiveness, potential price sensi-
tivity, and production complementarity, the chlorobenzenes
can be considered a potentially sensitive product group and,
thus, a candidate for Level II economic impact analysis.
     The major findings  of the Level II analysis do not support
the conclusion of a significant economic impact from the impo-
sition of testing regulations.  Although the Level I analysis
indicated potential price sensitivity, when the demands for
the three lower chlorobenzenes were estimated all three demands
were characterized as price inelastic.  In addition to this,
the testing costs, on an annualized basis, will not be large
either in absolute or a relative sense, even when the effects
of sequential "cascading" are considered.
     The industry appears to have reorganized along more viable
lines, as several financially marginal producers have abandoned
the chlorobenzenes market in recent years.  Although the
domestic market outlook is static, growth in the export markets
for chlorobenzenes may tend to mitigate these level expectations,
     These factors lead to a conclusion that the economic
impact of a chlorobenzenes testing rule will be minimal, at
worst.  This conclusion is valid for any of the three testing
options considered, however, the proposed approach clearly
produces the least impact.
                          1-6

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I.D. Limits to Analysis
     Analysis, such as described here, is invariably an
uncertain instrument.  For this reason, an approach based on
the "worst case" has been developed.  The objective is to
never overlook a situation where substantial adverse economic
impact may arise as a result of regulatory action.
     The overall approach used here to analyse economic
effects is that of partial equilibrium analysis.  This
approach considers all factors not directly accounted for in
the analysis to be held constant.
     Also, note that processors  (according to common industry
usage of the term) are not included in the impact analysis.
To the extent that processors share the burden of test costs
the costs to producers will be lower; thus, in the analysis,
the impact on producers is probably overstated.
                         1-7

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                       CHAPTER II
              ECONOMIC IMPACT METHODOLOGY
II.A.     Introduction
     In keeping with the overall objectives of the Toxic
Substances Control Act, EPA intends to analyze the economic
impact of proposed Section 4 test rules.  The objectives
of these analyses are (1) to determine if there exists a
potential for significant adverse economic impact as a
result of imposition of a test rule, either at the level
of the firm, the industry, or the economy as a whole;  (2)
to determine if that impact potential will actually be
realized through .imposition of a specific test rule; and
(3) to estimate the magnitude of the potential economic
impact.
     The analytical methodology adopted to satisfy these
objectives reflects the hierarchial nature of the objectives,
Initially all chemicals and chemical groups subjected to
testing requirements are examined to determine the potential
for adverse economic impact.  Those found to possess a
significant potential are further examined to determine the
extent to which specific rules will cause this potential to
be realized.  Ultimately those deemed sensitive to testing
requirements (i.e., high testing costs and vulnerable market
characteristics) are examined in detail in order to quantify
the full range of economic impacts that may be associated
with the rule.
                          IT-1

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     The methodology for determining impact potential for
all chemicals is termed, "Level I Analysis."  The in-depth
analysis of economic impacts for chemicals targeted during
the initial procedure is termed, "Level II Analysis."  The
following sections outline these methodologies in more
detail.

II.B.     Level I Economic Impact Analysis
     As described above, Level I analysis acts as a filter
to allow those chemical substances potentially adversely
impacted to be differentiated from others.  This is deter-
mined by the incidence of testing costs and the existence
of certain market characteristics.  The market characteris-
tics of interest are those readily available parameters
that can signal the presence of potential for economic
impact as a result of regulatory action.
     EPA's approach  to  screening chemicals  for economic  effects
due  to testing requirements  is  conservative in nature.   That
is,  EPA has decided  that for this purpose,  it is more desir-
able to err on the side of signalling  potentially significant
impact when there is none, than it  is  to  conclude that fur-
ther economic analysis  of the impact on a chemical  is unneces-
sary, when in fact there may be economic  effects.
     The market characteristics selected for Level I
consideration are also those important for Level II analysis
and fall, generally,  into four major categories:  demand
sensitivity,  market expectations,  cost characteristics,  and
                          II-2

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 industry  stucture.  Level  II analysis  treats  these  categories
 in a more rigorous and quantitative manner.
II.B.I.   Demand Sensitivity
     The  imposition of testing rules under the Toxic Sub-
 stances Control Act manifests itself,  in an economic sense,
principally through the price mechanism.  This is the basic
premise upon which both Level I and Level II  analyses are
based.
     The  cost of testing chemical substances  can be considered
an additional fixed cost;  the total cost of testing does not
vary with the total level  of production of the chemical.
 (However, depending on the reinbursement scheme decided upon,
the cost  to an individual  firm may be  affected by that firm's
 level of production, processing or sales.)  As such, the cost
of testing raises the firm's total costs and  average cost
 (average cost is the total cost divided by the quantity
produced).  For those firms where the  average cost exceeds
the price received, the rational decision is  to allocate
resources to other more productive uses rather than to con-
tinue producing the chemical in question.  Thus, the industry
becomes willing to supply  less and the price  of the product
rises.
     Adverse economic impacts generally arise through reduc-
tions in the quantity demanded of the  regulated chemical
due to the higher price.   The magnitude of this demand
                            II-3

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reduction (and thus, of impact) is critically dependent
upon the sensitivity of demand to price; that is, how much
demand declines when the price rises.
      Level I methodology requires a detailed description of
 the uses for the subject chemical substance.  Each use is
 examined to determine principal and potential substitute
 substances and their prices.  Given this information, it
 is possible to judge the probable sensitivities of the
 various markets for the chemical, i.e., many good substitutes
 lead to  an initial presumption of sensitivity to impact, and
 conversely, lack of good substitutes leads to a presumption
 of insensitivity-  This is true even for "captive" markets
 where vertically integrated firms produce chemicals for their
 own use alone.  In the long run, no firm can be expected to
 continue consuming its own products if it can buy comparable
 materials externally at a lower overall cost.
           While sensitivity information is assigned consider-
 able importance in deciding whether or not to subject a
 substance to Level II analysis, demand cannot often be un-
 ambiguously labeled either "sensitive" or "insensitive."
 Thus, information on substitutability must be integrated
 with information from other categories in order for an
 informed judgement to be made.
 II.B.2.  Market Expectations
     Level I analysis requires an investigation of chemical
end-use markets to determine their broad, long term outlook.
                           II-4

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In the absence of specific information,  current  and  recent
historical trends are assessed on the presumption that
expectations are conditioned, in large part,  by  near term
performance.  High market expectations,  of course, will
tend to lessen the potential for economic impact from
testing regulations, while low expectations will increase it.
     Firms will treat the costs of EPA's testing rules in
a manner analogous to conventional capital investment.  This
means that firms will consider not only current profitability
but also future expectations for the chemical to be
regulated.  Obviously, many factors enter into a firm's
assessment of the future, and many exist on a totally ad  hoc
basis with .little applicability in a categorical sense among
different firms and products.  Others are capable of at
least limited assessment.  For instance, regulatory  require-
ments addressing air and water pollution problems may have
powerful market effects quite unrelated to TSCA.

II.B.3.    Cost Characteristics
     The behavior of production costs at the level of the
firm and of the plant is an important indicator of the
probability of impact.  Generally speaking, if a plant is
      f
operating at a point where product price just covers
average cost, imposition of testing costs will force it to
abandon the market (assuming other factors do not change).
On the other hand, if the industry as a whole is operating
at a point where price exceeds average cost, there is a
                           II-5

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good probability that testing costs can be absorbed  (i.e.,
in the form of decreased profit) with no effect on price or
production at all.
     There are two particularly important points to be
examined in this area at Level I.  The first is the existence
of unique production factors.  These could take the form of
a proprietary, low cost production process, a unique source
of raw material, or a particularly advantageous geographical
location (when transportation costs are a factor).  The pre-
sence of any of these factors signals that firms are in a
position to at least partially absorb testing costs.
     Another major  factor  is the  presence  of  complementarity
in production.  Often  several chemicals  are produced jointly
within the  same process.   While the proportions  of  each
might be subject  to variation within physical limits,  it  is
impossible  to produce  one  without producing significant
quantities  of the others.   Thus,  an investment decision
involving one of  such  a group of  chemicals must  be  examined
in light of the entire group.   In such cases,  the presence of
a commercially valuable by-product can mitigate  the effects
of testing  costs, since the incremental  average  cost would be
distributed over  a  larger  quantity of outputs.   This situa-
tion will tend to insulate the target chemical from the
imposition of testing  costs.   On  the other hand,  if testing
costs make the entire  group unattractive economically.- the
resulting economic  impact  can have multiple effects.
                            I.T-6

-------
 II.B.4.   Industry Structure
      Industry structure refers in an economic sense to the
 number and size distribution of producers.  It is usually
 cited as an indicator of the presence of competitive or
 noncompetitive forces in a particular market.  The existence
 of a single producer, for instance, is usually a strong
 indication of monopolistic market behavior, while many small
 producers probably indicate competition.
      Markets that to one extent or another are noncompetitive
 are much  more  likely to absorb the cost of testing rules
 without  adverse impact, than are competitive markets^ Again,
 this result follows from the fact that noncompetitive
behavior results in price being set in excess of average cost.
      It should be noted that examination of industry structure
 does not encompass the overall size of firms.  This is because
 testing costs represent an investment in the continuation
 of activity in certain markets and, as such, will be evaluated
 in the same manner as any other investment opportunity faced
 by a firm (i.e., will the return in the particular invest-
 ment exceed the firm's cost of capital?).  Each investment
 in testing costs will have to stand on its own, regardless
 of the size or structure of.the firm.

 II.B.5.   Summary
      Level I analysis is a means of selecting for further
 economic analysis those chemicals or groups of chemicals
                             II-7

-------
which are most likely to be adversely impacted by EPA test-
ing  rules.   In general,  those selected for in-depth (Level
II)  analysis will possess some combination of the following
market characteristics:
      o  A number of good technical and economic substi-
         tutes in its most important end uses;
      o  An "impact prone" industry structure, characterized
         by intense price competition;
      o  Regional markets uninsulated by transportation
         costs;
      o  Absence of special production situations that
         would allow cost absorption;
      o  Nonoptimistic expectations for future market
         performance.
      The process for ultimately weighing and balancing
these factors at Level I is by necessity somewhat judgemental
and  qualitative; however, a key objective is to not
mistakenly reject a substance for Level II consideration.
Therefore,  errors will be on the side of additional Level  II
analysis (i.e.,  for chemicals not impacted).

II.C.     Level  II Economic Impact Analysis
     For each  chemical substance  for which it is determined
through Level  I  analysis  that a potential for adverse economic
effect exists, an intensive economic impact  analysis is conducted,
Economic impact  is considered within the conventional economic
concept of opportunity cost, which is the value of foregone
opportunities.   The  following section outlines the general
approach followed in. such an analysis and discusses the
                           II-8

-------
 important  factors in estimating the  economic  impacts.   The
 steps involved in conducting Level II analysis  build upon
 the foundation formed by the Level I analysis.  Whereas/
 the Level  I objective is to identify cases where  a potential
 for economic impact exists, the Level II analysis attempts
 to quantify the factors considered to be of greatest  impor-
 tance.  In order to estimate the economic impact  of  testing
 requirements, five areas of investigation are involved:
     o  Direct cost of the tests;
     o  Demand characteristics and substitution
        possibilities;
     o  Production cost behavior;
     o  Industry structure- and competition; and
     o  Future market expectations.
Each of these will be discussed in turn.

II.C.I.    Direct Costs
     The initial step in determining the economic effects
of test requirements is to determine the costs of the tests
that may be required.  The direct costs of testing are the
 costs of all tests required in the test rule.   Direct costs
 are principally those associated with the testing laboratory.
 However, compliance with the test rules will also involve
 costs of an administrative nature.  Since costs may  vary
 substantially depending on the laboratory doing the  testing
 and the specified parameters  (level and number  of doses,
                            II-9

-------
duration, labor productivity, and wage rates) a range of
costs will generally be calculated.  This range of costs
is expected to encompass the minimum and maximum.
     For economic impact evaluation, the total direct
testing costs are computed on an annualized basis.  Annual-
ized costs depend on expectations about the future markets
for the chemical.  Therefore, the proper procedure is to
discount the costs of testing over the expected life of
the product.  In most cases, a capitalization period of 20
years, and a pre-tax cost of capital of 20 percent, will be
used.  The capitalization period will be revised as necessary
in light of the expectations concerning future markets.
 II.C.2.   Demand and Substitution
      After the direct costs of the testing program have
 been determined, it is necessary to investigate the manner
 in which these costs interact with demand and other market
 factors to determine changes in price and output.   The
impact on price is  of  predominate  importance,  since price
 changes  are the driving variables  behind  almost all
 subsequent impacts.
      The effect of testing costs on the price of the sub-
 stance is the result of the interaction of cost and demand
 factors.  On the supply side, the total cost of a test rule
 can be considered an increase in the fixed cost of producing
 the chemical.  That-is, the cost depends on the number of
 tests required, not on the quantity of the chemical produced,
                           11-10

-------
Thus, the marginal cost of producing the chemical  is unaf-
fected  (marginal cost is additional cost of producing an
additional unit of output) and the supply curve shifts
principally in response to the decisions of individual
firms to dispense with unprofitable facilities or  to shift
resources to more productive activities.
     The degree to which the price of the chemical product
will increase depends also on the demand for the product.
The price elasticity of demand is used to measure this
sensitivity.  It is defined as the proportionate change
in quantity demanded as a result of a small proportionate
change in price (ED = %A Q/%A P) .  The elasticity of demand
reflects such factors as the end-uses for the substance  (and
the demand for the final products), the substitutes for it
(and their supply costs), and any complementary goods
associated with it.  Generally, through the use of econo-
metric methods, the relevant variables (e.g., "own" price
elasticity, cross-price elasticities, etc.) are estimated
in order to determine the impact of the testing program on
the production of the chemical substance and the effect on
products which are substitutes for it.
     Estimates of demand elasticity, when combined with
information on direct testing costs, provide the essential
basis for impact estimation.  To fully understand the process,
however, supply side variables must also be estimated.
                          11-11

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II.C.3.   Production Costs and Industry Structure
     This component of the analysis links the outputs of the
previous section to subsequent impacts on production, employ-
ment, and profitability, etc.  It focuses primarily on the
capital and operating costs associated with the chemical
production process.  Behavior of such costs is of  interest
initially in order to assess the ability of producers to
absorb testing costs, and thus, on their ability to
continue production.
     In this respect, production costs are investigated
from several standpoints.  First of all, the peculiarities
of the production processes involved are of central interest.
The  presence of joint products and complementarities may
have considerable bearing on the economics of production
for  the substance being  regulated.  For joint  products
the  costs of production  must be considered together, in
comparison to the revenues from all of the products.  Thus,
if testing costs are imposed on one product, the impact on
total costs may be minor.  On the other hand, if testing costs
are  imposed on several,  or all, products, the cumulative
impact on costs may be significant.  In addition,  fixed
factors of production, such as patents and inputs  from
existing, upstream processes, can greatly affect cost functions,
Such factors are extremely important in determining the ability
of firms to absorb testing costs without adjusting price or:
quantity.  They are evaluated through detailed engineering
analysis.
                           11-12

-------
     Also important are questions of. industry structure.
These also reflect on the relationship between price and
average cost, and help specify  firm and industry behavior.
The' number of firms in the national market, as well as
their plant size and size distribution, are examined.
Transportation costs and market regional!zation are investi-
gated in order to determine if geographical location is a
factor insulating firms from the effect of testing costs.
II.C.4.    Expectations
     Expectations play a very significant role in the firms'
investment decision concerning testing costs.  The costs of
      *
testing are a form of investment which may provide no
increase in revenue and, thus, may decrease the overall rate
of return on the company's investments.  In estimating the
effect of the testing costs on the investment decision,
expectations about the demand for the product, future costs
of capital, and the future costs of production inputs are
crucial.  If for example, demand: is expected to increase
significantly for a product due to the introduction of a
new end use, the firm may be willing to "invest" in the
testing rather than shut down the operation, which may have
been the decision in the absence of the new market.
     Unfortunately, expectations are a most difficult factor
to quantify.  Expectations formation models have been derived
for various uses and these can be applied whenever feasible.
                          11-13

-------
However, direct expectational information from the industry
sources is perhaps more relevant.  This is collected on an
ad hoc basis and integrated to provide a picture of future
trends.

II.C.5.   Impact Assessment
      The  final step in the economic impact analysis  brings
together the results of each step of the investigation.  At
this point, the econometric estimates of demand elasticities
are combined with the estimates of direct costs in order to
determine price adjustments.  These results are integrated
with the results of the investment and industry analyses in
order to predict the effects on production and employment,
profitibility changes, and effects on other markets, etc.
For purposes of this analysis, it is assumed that each pro*
ducing firm pays a share of the test costs for those chemicals
it produces, based on its proportion of production (processing
firms are not considered at this point, since a definition of
such will be clarified through comment on the proposed test rule)
      U)   C^ - aAj T£
where
           Cjj • Test cost  for the  i   chlorobenzene
            13   paid by the jth firm
           a,, - Pij/TP1
            JL J         A
            Tt • Total cost for  testing the i
                 chlorobenzene
                                     th
           P4. • Production of the  i   chlorobenzene
            13   by the jra firm
           TPt - Total production of the i
                 chlorobenzene

                           11-14

-------
The total cost imposed by tasting a chemical substance  i§
the sum of the costs to those firms producing it)
     (2)  Ct •
where
                                                  th
          C, • Total cost imposed by testing the i
               chemical.
it follows that tha total costs of tasting a group of chem
ioals (such as the chlorobenzenes) is the sum of the indi-
vidual costs t
     (3)  TC - | C1
where
          TC - Total direct costs of tasting
               chlorobenzenes .
     It should b« notad furthar that this analysis traats
tasting costs as though thay ara all inourrad in a singla
yaar.  In raality, thay will probably ba inourrad ovar a
two-to-thraa-yaar pariod.  To tha axtant that costs fall
in othar yaars, rathar than immadiataly, tha impact will
ba lass, thus tha "singla yaar" assumption raflacta tha
philosophy of consarvatism (i.a., tha "worst casa" approach).
     In addition to tha diract af facts, tha impact on tha
usars of tha product (i.a., its consumers) dua to tha increase
in price can be estimated.  This utilizes the price elasticity
of demand and the predicted price change to estimate the
effects on consumers of the product.  The measure of this
effect is the change in consumers' surplus, which is the
                           11-13

-------
amount consumers would be willing to pay, to purchase given
amounts, in excess of the amount actually paid.  This can
be considered the change in the net benefits consumers
derive from the product.  Of course, the consumers of the
product will in most cases be producers themselves, and the
change in consumers' surplus measures the impact on these
subsequent producers.
     In this manner, the results of all parts of the investi-
gation are integrated and summarized.  Thus, the quantified
impacts are combined with the qualitative factors to produce
a unified estimate of the probable economic impact of
testing requirements.
II.C.6.   Additional Considerations
     Analysis such as described above, no matter how well
executed, is invariably an uncertain instrument.  Such uncer-
tainty necessitates the use of the most conservative data
and procedures in order that each estimate account for the
"worst case."  This is an overall policy applying to all
components of the analysis at all times.  The objective is
never to overlook a situation where substantial adverse
economic impact arises from regulatory actions.
     The overall approach used here to analyze economic
effects is that of partial equilibrium analysis.  The approach
considers all factors not directly considered in the analy-
sis to be held constant.  In most cases, this assumption is
                           11-16

-------
valid; the incremental costs of testing are small  relative
to total costs and no impacts outside the directly affected
industry are expected.  Thus, for example, the direct  costs
of testing are calculated by summing the costs of  individual
tests.  However, depending on the tests required and their
temporal sequence, a demand may be placed on testing
laboratories and other specialized resources which, when
combined with the supply or availability of factors may
significantly affect the costs of testing.  The result of
                ^
this is that the cumulative impact of testing requirements
may, in fact, be greater than the sum of the individual
economic impact analyses.
     It should also be noted that EPA's policy on  testing
cost reimbursement is a major uncertainty and is not thus
far incorporated into the methodology in any rigorous  way.
The manner, distribution, and timing of reimbursement  cash
flows could conceivably affect the estimation of economic
impact very broadly.
II.C.7.   Summary
     In summary, an economic impact analysis of EPA's
test rules involves in-depth investigation of several
factors related to the chemical production process.  These
factors are,  for the most part,  identified in the Level I
analysis.   The Level II analysis investigates these factors
in more detail and attempts, where possible,  to quantify
the important variables.
                           11-17

-------
     After the direct costs of the test rules are ascer-

tained, econometric and investment analyses are required

to determine the impact of these costs on prices and

quantities, which in turn, determine the impacts on pro-

duction and employment.  The result is consciously biased
                       9
to present the "worst case" arising from the imposition

of testing regulations.
                           11-18

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                       CHAPTER III

               LEVEL I ECONOMIC EVALUATION

             CHLOROMETHANE  (METHYL CHLORIDE)



 III.A.    Overview


 III.A.I.  Direct Costs of Testing

      The proposed tests for chloromethane are shown below,

 together with their estimated costs;


          Tests                   Dollars (thousands)


 Oncogenic (Hamster and Mouse;
   Inhalation)                       $650 - $1,200


Teratology (Rabbit and Mouse;
   Inhalation)                         50 -    100
   TOTAL                             $700 - $1,300


     Based on: Cost Analysis Methodology and Protocol Esti-
mates, TSCA Health Standards and FIFRA Guidelines.Draft
Report submitted to U.S. Environmental Protection Agency,
Office of Regulatory Analysis, by Enviro Control, Inc.,
April 3, 1980.  Adjusted to correspond to proposed test rule,
      Annualizing the total cost at 20 percent cost of capital

for 20 years gives a range of-$144,000 to $266,500.  The broad

range reflects considerable variability in cost among testing

laboratories.  This variability probably greatly outweighs

variation among firms in cost of capital and investment time

horizon.
                            III-l

-------
III.A.2.   Production and Producers
      Domestic production of chloromethane was 478 million
Ibs. in 1977, and 454 million Ibs. in 1978.lf2  Preliminary
production data for 1979 indicate that 449 million Ibs. of
chloromethane were produced , approximately the same volume
as 1978.  These production figures are understated since at
least three companies  (General Electric, Diamond Shamrock,
and Vulcan Materials) produce other products from chloromethane
in a continuous process which does not require separation of
chloromethane from the process stream, and therefore do not
                                                        4
report production to the International Trade Commission.
      Exports for chloromethane for 1978 amounted to 8.-3 million
    14
Ibs.    Exports of chloromethane cannot be compared with pre-
vious years since export data for this chemical were not pub-
lished prior to 1978.                   	
      Import data for chloromethane are not reported separately
by the government, but since total imports for all chlorinated
                                                        14
hydrocarbons amounted to only 15.8 million Ibs. in 1978,
chloromethane imports are probably not a significant factor.
      The plant capacities for companies which produce chloro-
methane are given in Table III-l.
      There are at least 13 producers of chloromethane with
plants at 17 locations. ' ' '   The total annual capacity of
these plants is over 750 million Ibs.  Of these plants, three
companies with more than 50 percent of total capacity are
located in the Gulf Coast area of Texas and Louisiana.  With
                            III-2

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                                TABLE  III-l:  CHLOROMETHANE  (METHYL CHLORIDE)
                                               PRODUCTION SUMMARY
Production
Year
1977
1978
1979
Million
Lba.
478
454
449 (P)
Price
$
14
14
~
Value of Shipments
Quantity
Sold
Million U>s.
195.9
	
	
Sales
Million $
26.9
	
—
Unit
$
.14
	
	
Imports
Million UJB.
Not Reported
Separately
8.3

Exports
Not Reported
Separately


I
OJ
                            SOURCE: 1,2,3,15.



               END USES OF CHLOROMETHANE
MANUFACTURERS
Percent
Chi or ome thane
Production
50 %
30-35%
3- 4%
3- 4%
3- 4%
4%
Used
in
Manufacture of
Si 11 cones
Tetraroethyllead
and
Tetramethylethyllead
Herbicides
Butyl Rubber
Methylcellulose
Miscellaneous
Projected
Growth Rate
10% - 12%
negative
stable
stable
stable
stable
Substitute
for
Chloromethane
none
none
	
	
methyl alcohol
•"" •"••
         SOURCEi 4,6
Company
Allied Chemical
Ansul
Conoco Chemicals
Diamond Shamrock
Dow Chemical

Dow Corning

B.I. DuPont
Ethyl

General Electric
Shell Chemical
Stauffer Chemical
Union Carbide
Vulcan Materials

TOTAL
Location
Moundsville, MV.
Marinette, HI
West lake, LA
Belle, HV
Plaquemine, LA
Preeport, TX
Carrol ton, KV
Midland, MI
Deepwater, NJ
Baton Rouge, LA
Louisville, KY
Naterford, NY
Axis, AL
Louisville, KY
Institute, HV
Geismar, LA
Hichita, KS

Approx.1978
Capacity
Million Lbs.
25
n.a.
100
> 50
150
70
20
15
50
100
50
50
10
15
50
n.a.

775
Percent
Captive
Use

100%

100%







100%
100%


100%


                                                                   SOURCEi 5,6,7,16.

                                                                   n.a.-Hot Available.

-------
the exception of one plant in Kansas, the remaining chlorome-
thane plants are located east of the Mississippi River in
West Virginia, Kentucky, Michigan, New York, New Jersey, and
Wisconsin.
      It should be noted that some of the companies do not iso-
late chloromethane prior to using it as an intermediate in the
manufacture of further chlorinated hydrocarbons such as methyl-
ene chloride  (CH-CIO, chloroform (CEUC1), and carbon tetra-
chloride  (CC14).

III.A.3.   Manufacturing Process
      Chloromethane can be manufactured either by the hydro-
                                                                  4
chlorination of methanol or by the direct chlorination of methane.
The vast majority of the present capacity is based on methanol as
a starting material.   The reason for the almost universal use of
the hydrochlorination  of methanol process may be the availability
                                                         1 4
and low price  (64 per Ib. in 1978) of synthetic methanol. '

III.A.4.   Product Uses
      Most methyl chloride production is used captively for the
production of silicone fluids, silicone resins, silicone .elas-
tomers, chlorinated hydrocarbons, surfactants  (surface active
agents), lubricants, and as a catalyst carrier in the production
of butyl rubber.
      Figure III-l shows the percentage of the chloromethane
production which entered the manufacture of various products
during 1978.  Approximately 50 percent went to the manufacture

                            III-4

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                                       FIGURE  III-1:   END USES OF  CHLOROMETHANE,  1978
H
H
               •ethyl
               alcohol
                CH4

               ethane
         HC1

     hydrochloric
         acid
CH3C1
or
                       chloroMthane
       chlorine
                                                                    •iacellaneoua
                                                                         4%
                                                            aerosols
                                                            carbon tetrachloride
                                                            chlorofom
                                                            •ethylene chloride
                                                            •ethyl aercaptan, 2,2,3-tri*ethyl butane
                                                                    tetra«ethyllea.d
                                                                         and           —| antiknock compounds
                                                                    tetra*ethylethy1lead
                                                                         30-35%
                                                                    herbicidea
                                                                    (•ethyl arsenatea, etc.)
                                                                         3-4%
                                      •agneaiua ^ ^
                        ithyl
    silicon
+ tetrachloride
                                                                       •agneaiuM
                                                                        chloride
                                                                    Manufacture
                                                                        of
                                                                    butyl  rubber
                                                                        3-4%
                                                                    quaternary aMonium
                                                                         coapounda
                                                                         3-4%
                                                                    •ethylcelluloae
                                                                         3-4%
                                                                    export!
                                                                         2%
                haloailanaa  * >Mter > ailiconea
                                         50%
                    SOURCE:    4,6,7,8,9,10,11

-------
of halosilicanes which were, in turn, used for the manufacture
of silicone  (siloxanes and polysiloxanes). '6'7  This is a
growing market with informal estimates projecting silicone
production increases in the vicinity of 10 to 12 percent
                                                    »
annually.    Silicone production is divided into three major
types: silicone fluids, silicone resins, and silicone elastomers;
with the silicone fluids having the largest production  (142.4
million Ibs. in 1977)1  (see Figure III-2).

III.A.4.a. Silicones
      Currently, the largest single use of silicones is for
construction sealants and adhesives.  These materials are
solventless, liquid-reactive products used to produce long-
lasting bonds between durable substrates such as metals, ceramics,
glass, plastic, and wood.  They often replace various types of
                                                   8 9 10 11
metal fasteners such as screws, rivets, welds, etc. ' '  '
      In general, almost all silicones end-use markets are
expanding; a very rough consensus estimate of the growth rate
would seem to lie between 8 and 14 percent per year.   Overall,"
the use of silicones as foam stabilizers for polyurethanes
appears to be the single most rapidly growing area, but others
are expanding as well.  For example, silicones are increasingly
being used in place of PCBs in transformers and in place of
fluorocarbons in antiperspirants.  Surface coatings for wire
                                                4 7
and cable are another growing use for silicones.  '
                            III-6

-------
                                       FIGURE III-2: END USES OF  SILICONES
H
H
I
    Silicones
    growth rate
    10% per year
    in 1980
                        Silicone Fluids
                        *    142.4*
                          million Ibs.
i'l
o
"3
                             3
                      adhesives
                      lubricants
                      protective coatings
                      coolant
                      mold-release agent
                     -^dielectric fluid
                      heat transfer agent
                      wetting agent
                      foam stabilizer for polyurethanes
                      diffusion pumps
                      antifoaming agent
                      textile finishes
                      weatherproofing concrete
 Silicone  Resins
'     18.6*
  million Ibs.
                                                                  sealants
                                                                  laminate (with glass  cloth)
                                                                  filament winding
                                                                  molding compounds
                                                                troom temperature curing  agent
                                                                  electrical insulation
                                                                  impregnating electrical  coils
                                                                  modifier for alkyd resins
                                                                  vibration-damping  devices
                        Silicone Elastomers
                               52.5*
                           million Ibs.
                             encapsulating electronic parts
                             electrical insulation
                             gaskets
                            -^surgical membranes
                             automobile engine components
                             flexible windows for face masks, air locks,
                             medical devices used within the body
                             miscellaneous mechanical devices
                                                                                                 etc.
                  *1977 Data from Synthpt;tc ftrgajn;tc Chcpicalpf' U.S.  International  Trade  Commission,

-------
     Although silicone resins in many  cases  cost more  than


substitute products, they are very often preferred because


of their performance characteristics.   In particular,  the


cost of silicone products does not seem to be  a deterrent to


their use where their excellent heat resistance, durability, and

                                             4 7
dielectric properties are of primary concern.  '




III.A.4.b. Lead AlkyIs


      The second major use for chloromethane is lead alkyIs


for gasoline additives (i.e., tetramethyl- and tetramethyl-


ethyllead).  This market is shrinking  dramatically due to


Federal standards limiting the amount  of lead that may be added


to gasoline.  Ethyl chloride and methyl tertiarybutyl ether


are expected to be the main substitutes.  However, lead alkyIs


will continue to be manufactured for export and for vehicles-


weighing over 6,500 Ibs., even when more stringent lead limita-

                     6 7
tions go into effect. '




III.A.4.C. Other Uses


      Chloromethane is also a catalyst carrier solvent for the


manufacture of butyl rubber, a widely  used material for inner


tubes for truck and bus tires.  Another use is the manufacture


of quaternary ammonium compounds which are surfactants having


many applciations.  Chloromethane is also utilized in the manu-
                                         r

facture of methylcellulose, although a process using methanol
                                          t
                                          *- —     ^

may be substituted.  In addition, chloromethane is used for


the manufacture of methyl arsenate, a  herbicide widely used


          6,7,11
on cotton.


                           III-8

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III.B.     Potential for Economic Impact
                                           •
      As described in Chapter II, Economic Impact Methodology,
a series of market characteristics are considered in assessing
the potential impact of testing requirements on chloromethane.
These are (1) demand sensitivity, (2) market expectations,
(3) cost characteristics, and (4) industry structure.

III.B.I.   Demand Sensitivity
      The first factor of importance is demand sensitivity as
approximated by the availability of substitutes in consumption.
It is clear from the discussion above that the central market
for consideration is that for silicones.  While lead gasoline
additives currently consume 30-35 percent of current production,
this market might be seriously diminished for regulatory reasons
other than those potentially imposed under TSCA and, thus, need
not be considered here.  Other uses amount to around ten percent,
none of which merit significant Level I attention.
      As can be seen from Figure III-2, silicones produced from
chloromethane have a multitude of uses.  While each use has
available substitutes, they are in general, technically inferior.
Silicones are often employed for their heat resistant properties
and very few substitutes offer their physical and chemical
characteristics.  In the construction adhesive area, which
provides the largest single market for silicones, these materials
                   -.£.'->O-n.
substitute not only for other materials, but for skilled labor
as well.  In such cases, demand is particularly insensitive
                     ,±«*
to price.  Over all, demand for silicones appears to be
                            III-9

-------
quite price insensitive, and thus, also the demand for chloro-
methane.

III.B.2.   Market Expectations
      Closely  tied to the above observation is the clear
optimism of the chemical industry regarding the future of
silicone products.   Uses for silicones are expanding, and
the markets for almost every silicone use are growing
rapidly.  Silicones fluids, for example, have recently been
found to make excellent mold-release agents and are expected
to penetrate  this important market rapidly.  In additionr the
increasing use of silicones as replacements for PCBsr and
fluorocarbons suggests rapid growth in the markets for sili-
cones.  As noted previously, the industry appears to expect
an annual eight-to-ten percent growth rate in the silicones
market.
III.B.3.    Cost Characteristics
       In terms  of technological  structure,  the  production of
chloromethane is generally  uniform.   This is  due  to  the preva-
lence  of the  methanol  process  in the  production of chloromethane.
                                      t
As  mentioned  above,  the widespread use of this  process may  be
due to the availability and lower relative prices of the
feedstocks used in  this process, as well as the relative ease
of  handling the raw materials  and control of  the  chemical
reaction.   It is not expected  that the imposition of testing costs
will alter this cost structure.

                            111-10

-------
III.B.4.   Industry Structure
     Cost structure for the industry appears homogeneous,
that is, it appears to vary little among firms.  There are no
unique factor inputs and the production process is simple and
almost universally employed.  Transportation costs are not
significant.  The existence of an entire range of plant sizes
indicates that scale economies are not an important factor.
Under such conditions, the existence of 13  producers would
tend to signal presence of a competitive industry.

III.C.     Conclusions
     Although a competitive industry with low transportation
costs would often be regarded as possessing potential for
economic impact and, thus, a candidate for further analysis,
the insensitivity of demand with respect to price changes in
the silicones market  and the extremely optimistic industry
outlook point to very minor repercussions as a result of the
imposition of testing requirements.
     This conclusion is reinforced considerably when estimated
direct testing costs are annualized on a per-pound basis.  If
annual production remains at a 450 million pound level  la very
           f--'
conservative assumption), the additional cost will be only
.06 cents per pound, certainly an extremely small amount by
any standard and, in this case, amounting to only .4 percent
of current price.  For this reason, no production and employ-
ment effects are anticipated.

                            III-ll

-------
REFERENCES FOR CHAPTER III


      Synthetic Organic Chemicals, United States Production
and Sales, 1977, USITC Publication 920, U.S. International
Trade Commission, U.S. Government Printing Office, Washington,
D.C.

      Syntheti'c Organic Chemicals, United States Production
and Sales, 1978, U.S. International Trade Commission, U.S.
Government Printing Office, Washington, D.C.


      Preliminary Report on U.S. Production of Selected Syn-
thetic Organic Chemicals (Including Synthetic Plastics and
Resin Materials) Preliminary Total, 1979, S.O.C. Series C/P-80^1
U.S. International Trade Commission, Washington, D.C. March 198'0,

     4
      Draft Preliminary Evaluation of the Economic Positions
of Selected Chemcals, prepared for Office of Toxic Substances
U.S.Environmental Protection Agency, August 1979,


      Directory of Chemical Producers, 1979, SRI International,
Menlo Park, California.

      Initial Report of the Interagency Testing Committee to
the Administrator, Environmental Protection Agency, EPA-560-
10-78/0001, January 1978.

      Chemical Product Synopsis, Mannsville Chemical Products,
Mannsville, New York, December 1978.

     8"Market Newsletter," Chemical Week, February 29, 1979.

     9Chemical Week, March 21, 1979, page 40.

      Chemical and Engineering News, October 29, 1979, page 11.


    ^Condensed Chemical Dictionary, Ninth Edition, Van
Nostrand, 1977.

    12Foreign Trade Reports, FT410, United States Exports,
Schedule E, Commodity by Country, Quantity, and Value, Current
and Cumulative, Bureau of the Census, U.S. Department of Com-
merce, Decembe'r 1978.
                          111-12

-------
      Foreign Trade Reports, FT135, United States General
Imports, Schedule A, Commodity Groupings, Commodity by
Country, Bureau of the Census, U.S. Department of Commerce,
December 1978.

    14
      Imports of Benzenoid Chemicals and Products, 1978,
USITC Publication 990, U.S. International Trade Commission,
Washington, D.C., July 1979.


      "Synthetic Chemicals Price List," Chemical Marketing
Reporter, January 1 of each year.


      Toxic Substances Control Act Chemical Substance Inventory,
Volumes" 1-5, U.S. Environmental Protection Agency, Office of
Toxic Substances, Washington, D.C., May 1979.
                           111-13

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                       CHAPTER IV
          ECONOMIC EVALUATION:  CHLOROBENZENES
IV.A.     Level I. Analysis
IV.A.I.   Overview
     The chlorobenzene group of chemicals totals 12 compounds,
of which 11 are considered under the proposed test rule.*
These 11 compounds are as follows:
          Monochlorobenzene;
          o-Dichlorobenzene, (1,2-);
          p-Dichlorobenzene, (1,4-);
          m-Dichlorobenzene, (1,3-);
          1,2,4-Trichlorobenzene;
          1,2,3-Trichlorobenzene;
          1,3,5-Trichlorobenzene;
          1,2,4,5-Tetrachlorobenzene;
          1,2,3,4-Tetrachlorobenzene;
          1,2,3,5-Tetrachlorobenzene; and
          Pentachlorobenzene.
Commercially, monoehlorobenzenes .and dichlorobenzenes are manu-
factured from chlorine and benzene feedstocks in a joint
process where the relative amounts of monochlorobenzene, o-,
and p-dichlorobenzenes can be partially altered by choice of
process conditions.   Trichlorobenzenes, tetrachlorobenzenes,
and pentachlorobenzenes are produced sequentially.
      Hexachlorobenzene is not considered in the test rule.
                            IV-1

-------
     Chlorobenzenes are currently produced domestically by
six companies, are imported by several others, and processed
by an undetermined number of firms.  The overall production
capacity probably exceeds 600million Ibs. per year. Chlorobenzenes
are primarily used as organic intermediates and as solvents
in chemical processes.

IV.A.I.a. Direct Testing Costs
      The direct costs of conducting required tests  are  those
 costs borne specifically in the  laboratory accomplishment
 of the tests.   In addition to these laboratory-related  costs,
 manufacturers  and processors will also bear other indirect
 costs of an administrative nature in connection with overall
 TSCA Section 4 compliance.
      The costs estimated here for the purpose of impact
 analysis are those of meeting testing requirements.
 Actual costs may be greater to the extent that optional
 testing is performed, but such optional testing is not con-
 sidered to be a true cost of the regulation.   In particular-, it
 is assumed that an industry reimbursement system will be
 successfully implemented, and thus, that required tests will be
 performed only once for the benefit of the entire  group.
      It is recognized that the actual costs of any  testing
 scheme can vary substantially in practice  for any' chemical
 tested,  depending upon a number  of factors;  including
 for example, the laboratory performing the test, number of
                           IV-2

-------
dose levels,  species,  routes of exposure, extent of pathology
conducted, duration  of tests,  labor productivity, and wage
rates.  Thus,  for  this analysis,  a range of costs was calcu-
      34
lated.    Such a range should bracket the actual expected
value of the direct  costs.   Calculations were performed by
Borriston Laboratories, a commercial testing laboratory
owned by Enviro Control, Inc.  under contract to MATHTECH, Inc.
     Under the proposed regulation, the 11 chlorobenzene com-
pounds specified for testing can be grouped according to the
level of chlorination.  These groups are:
          o  Monochlorobenzene
          o  Dichlorobenzene:  l,2-(ortho); 1,4-(para);
             l,3-(meta)
          o  Trichlorobenzene: 1,2,4-; 1,2,3-; 1,3,5"
          o  Tetrachlorobenzene:  1,2,4,5-; 1,2,3,4-;
             1,2,3,5-
          o  Pentachlorobenzene
     These  compounds  will be  subjected to a testing regime,
whereby a number of tests are specified on six of the chemicals.
Further tests  may be  required if positive results from the initial
set of- tests indicate a need  for further testing. The set of tests
varies for  some of  the  chlorobenzenes but, generally is made up of
the following:
          o  Subchronic;
          o  Oncogenicity;
          o  Structural teratology;
          o  Reproductive,
                            IV-3

-------
     Table IV-1 shows the range of  costs  for  the specified
tests by chlorination level.   It  should be  noted that
the proposed test rule specifies  tests and  protocols  only for
the six "representative  sample" chlorobenzenes—monochlorobenzene,
ortho- and para-dichlorobenzene,  1,2,4-trichlorobenzene,
1,2,4,5-tetrachlorobenzene, and pentachlorobenzene.   In order
to analyze the economics of the alternative approaches to
testing, a worst case analysis  has been conducted, assum-
ing the imposition of testing requirements for the addi-
tional five compounds.   Table IV-1 costs cannot be totaled
since they do not reflect the specific reimbursement and
exemption alternative approaches.  These will be examined
in Section IV.B.5. et seq.
     Differing costs among the various compounds for  the  same.
tests reflect the different species and application requirements
of the test rule.  Exemptions  for NCI testing have been
included.  Note, as mentioned  above, that this  total  includes
neither indirect costs nor the value of tests that could  be
additionally required.   These  adjustments will  be made on a
general basis as part of overall  impact assessment.

IV.A.l.b. Production Process
     Chlorobenzenes are  produced  by the chlorination  of benzene
in the presence of various catalysts.  Commercial production
of the mono-, di-, tri-, tetra- and pentachlorobenzenes takes
place in a series of chlorination reactions,  each of  which is
a chlorination of the previous chlorination products  in the series.
                           IV-4

-------
                        TABLE  IV-1:   ESTIMATED TEST COSTS, CHLOROBENZENES

                                           ($ thousands)
2
Compound
Monochlorobenzene
Dichlorobenzene
Trichlorobenzene
Tetrachlorobenzene
Pentachlorobenzene
Oncogen ic
Effects
a
	 a
$328-983
328-983
328-983
Teratogenic
Effects
$ 50-100
50-100
27- 81
27- 81
	
Reproduc-
tive
Effects
$110-220
110-220
57-171b
57-171
57-171
Subchronic
Effects
$ 32-96
32-96
28-84
28-84
28-84
                  SOURCE: Cost Analysis Methodology and Protocol Estimates, TSCA Health
            Standards and FIFRA Guidelines"!Draft Report submitted to U.S. Environmental
            Protection Agency, Office of Regulatory Analysis, by Enviro Control, Inc.,
            April 3, 1980.  Adjusted to correspond to proposed test rule.
                  aTesting for oncogenic effects  for monochlorobenzene and ortho-  and
            para-dichlrobenzene will be carried out by the National Cancer Institute  and
            is exempted  from the test rule.  Oncogenic effects are not exempted for meta-
            dichlorobenzene.  This cost would  be  $650-1,200  thousand.
                  bl,2,4-trichlorobenzene is exempted from reproduction effects testing.

-------
                            FIGURE IV-la:
                           MONOCHLOROBENZBNE AND
                           O- and p-DICHLOROBENZENES
                           PRODUCTION SCHEME
                                         C12
                                    Chlorine
     Monochlorobenzene
                                 C6»6
                                 Benzene

                               Ferric Chloride
                               or other Catalyst
Recycle
                                           Mixture
                                          o- and p-
                                      Dichlorobenzenes
                                                   Highly Chlorinated
                                                        Benzenes
Sale
                                  to
                               Further
                             Chlorination
Waste
                                      Separation
                                           i
                                             Sale
                                              as
                                           Mixture
                                             o-dichlorobenzene
                                                   p-dichlorobenzene

-------
FIGURE IV-lb:  TRICHLOROBENZENES  PRODUCTION SCHEME
                    Cl
                              Cl.
        Mixture
 o- and p-dichlorotenzenes   +    Chlorine
                          Ferric Chloride
                          or  Other Catalysts
                      Mixture
                Trichlorobenzenes
     to
  Further
Chlorination
                         v
                        Sale
                         as
                      Mixture
     Y
Separation
                                1,2,4-
                           trichlorobenzene
             1,2,3-
       trichlorobenzene

-------
                           FIGURE  IV-lc:   TETRACHLOROBENZENES PRODUCTION SCHEME
         Cl
oo
\*A. \*-l
?B1 X^Sci ^*S
and 1 1 and f 1

Mixture of
Trichlorobenzene
- . ^
_JMix
Tetrachlor
i
1
Separation
(difficult)
i


1,2,4,5- 1,2,3,
+ ci2

Chlorine
f
:ure
6 benzenes
f
I
Sale


L
Waste
4-
trachlorobenzene Tetrachlorobenzene
1 1

O-n
+ ci2
Cl
1,2,4- Chlorine
Trichlorobenzene



>
z



r
L
1 ]C1
Clkj^
Cl
1,2,4,5-
Te trachlorobenzene


>


/
         Sale
          to
     Further
Chlorination
 y        J^
Sale      t<
 o
Further
Chlorination
Sale
to
Further
Chlorination

-------
                       FIGURE IV-Id:   PENTACHLOROBENZENE PRODUCTION SCHEME
                A.
                   o
                 Benzene
Chlorine
                 Pentachlorobenzene
VO
              Y
             Sale
      V
 Intermediate
      in
 Manufacture
 of Other
 Chemicals
             *Not in use at this time.
                                                   B.
                       ci
                      O
                                                              ci
and
               ci
                                                             Cl
                                                     Tetrachlprobenzenes
                                                          Mixture
                         Chlorine


                     Iodine and
                     Aluminum Chloride
                     Catalyst
                                                                             V
                                               ci

                                      Pentachlorobenzene
                                                                    4
                                                                  Sale
                                                  Intermediate
                                                        in
                                                  Manufacture
                                                  of Other
                                                  Chemicals

-------
     In the past, most chlorobenzenes were produced in a one-
step, batch process and separated from each other by physical
properties using appropriate techniques, such as crystalization
and distillation.  As of now, using more exact operating
conditions and specific catalysts, the products are obtained
from separate chlorination steps using distinct processes.
Therefore, various manufacturers may be producers at one stage
in the chlorination series but not at another; for example,
a firm may purchase tetrachlorobenzenes and produce pentachloro-
benzenes.
     Monochlorobenzene is produced by the catalytic chlorination
of benzene,  o- And p-Dichlorobenzene are produced at the same
time.  The monochlorobenzenes may be recycled along with un-
reacted benzene.  This procedure, along with the appropriate
choice of catalyst, results in some flexibility in the pro-
duction ratios of monochlorobenzene and the dichlorobenrenes,
as well as the production ratios of o-dichlorobenzene to p-
dichlorobenzene.  Hydrochloric acid is a by-product of the
reaction, and a small proportion of 1,3-dichlorobenzene  (meta)
is also obtained,  although the current procedure appears to
be to dispose of the 1,3-dichlorobenzene while recovering the
hydrochloric acid.
     The trichlorobenzenes consist of three isomers; 1,2,4-
trichlorobenzene; 1,2,3-trichlorobenzene; and 1,3,5-
trichlorobenzene.  The trichlorobenzene isomer produced and
the quantity produced depend upon the choice of starting (raw)
                          IV-10

-------
material for the chlorination reaction, and the relative  rate
of reaction  (K values) for the specific chemical reactions
involved (see Figure  IV-2).  A mixture of o- and p-
dichlorobenzene results in a mixture of 1,2,4- and 1,2,3-; and
chlorination of o-dichlorobenzene yields a mixture of 1,2,3-
and 1,2,4-trichlorobenzene—primarily 1,2,4-trichlorobenzene.
No 1,3,5- is formed at all.  Chlorination of p-dichlorobenzene
yields 1,2,4-trichlorobenzene only.  Any m-dichlorobenzene
present in the mixture as an impurity will be chlorinated to
a mixture of 1,2,4-trichlorobenzene and 1,3,5-trichlorobenzene.1
     In actuality, either a mixture of o- and p-dichlorobenzenes
or o-dichlorobenzene  is  chlorinated in the presence of ferric
chloride catalyst at 25°-30°C.  1,2,4-Trichlorobenzene is
obtained by distillation from a mixture of 1,2,3- and 1,2,4-
trichlorobenzenes.  Although 1,3,5-trichlorobenzene is formed
in small quantities during chlorination of dichlorobenzenes,
it is normally only obtained by special methods.  Two of
these are diazotization of 2,4,6-trichloroaniline followed
                    1 28
by alcohol treatment '   and reaction of  hexachloro-
                                     27
benzene and alcoholic caustic potash.
     There are three isomers of tetrachlorobenzene: 1,2,4,5-
tetrachlorobenzene; 1,2,3,4-tetrachlorobenzene; and 1,2,3,5-
tetrachlorobenzene.  1,2,3,4-tetrachlorobenzene is produced
by chlorination of 1,2,3-trichlorobenzene in the presence of
a catalyst.  1,2,4,5-Tetrachlorobenzene is produced by chlorina-
tion of 1,2,4-trichlorobenzene using iodine and antimony
chloride catalyst.
                          IV-11

-------
FIGURE IV-2:  SEQUENTIAL REACTIONS SHOWING
              RELATIVE RATES  IN THE LIQUID
              CHLORINATION OP BENZENE
     SOURCE; Kirk-Othroer Encyclopedia of Chemical
Technology, ThTrd Edition/ Volume 5, 1979, p. 801.
                   IV-12

-------
     1,2,3,5-Tetrachlorobenzene may be produced by chlorination
of 1,3,5-trichlorobenzene using an aluminum amalgam as a catalyst.
It is believed that this process has not been used commer-
cially.  In fact/ it is believed that this isomer is presently
                                                          2
only manufactured as an impurity and disposed of as waste.
     Pentachlorobenzene is produced by chlorination of tetra-
chlorobenzenes in the presence of a catalyst.
IV.A.I.c. Production and Manufacturers
     Table IV- 2 gives production data for the various chloro-
         5345
benzenes. '''   The data are understated because quantitites
used internally are not fully reported.  Current manufacturers
of chlorobenzenes, along with plant locations and capacities,
are listed in Table IV-3.  Three manufacturers, Dow, Monsanto,
and Standard chlorine/ account for more than 75 percent of
chlorobenzenes capacity.
IV.A.I.c.l     Monochlorobenzene
     Monochlorobenzene is the highest volume product in the
chlorobenzene group, although production has generally been
declining over the past decade.  Statistics for 1977 and 1978,
as shown in Table IV-2, indicate that production of monochloro-
benzene dropped from 325.5 million Ibs. in 1977 to 295.4 million
Ibs. in 1978, a decrease of almost ten percent.  Cumulative
production, as of September 1979, was 249 million Ibs. indicat-
ing a small recovery.  Total production for 1979 is estimated
to be 325.5 million Ibs—equal to the 1977 production levels.
                          IV-13

-------
                     TABLE IV-2:   PRODUCTION SUMMARY,  LOWER  CHLOROBENZENES
                                MONOCHLOROBENZENE
h*
Jfc
Production
Year
1977
1978
Million
Ibs.
325.5
295.4
Price0
C/lb.
low high
26* 29*
26* 29*
Sales
Quantity
(Million Ibs.)
174.8
96.4
Million $
35.1
21.2
$/lb.
.20
.22
Exports
Million
Ibs.
Not
reported
separately
Imports
Million
Ibs.
1.05
.98
o-DICHLOROBENZENE
Production
Year
1977
1978
Million
Ibs.
47.4
41.1
Price0
«/lb.
27*
26 £
Sales
Quantity
(Million Ibs )
55.7
44.0
Million $
15.3
11.8
$/lb.
.27
.27
Exports
Million
Ibs.
7.7
20 .Ob
Imports a
Million
Ibs.
.86
p-DICHLOROBENZENE
Production
Year
1977
1978
Million
Ibs.
65.1
41.2
Price0
C/lb.
23$
27 $
Sales
Quantity
(Million Ibs.]
62.0
38.1
Million $
14.2
10.3
$/lb.
.23
.27
b
Exports
Million
Ibs.
Not
reported
separately
a
Imports
Million
Ibs.
.02
              SOURCE:  Imports: FT135, U.S. Dept. of Commerce  and  Imports of Benzenoid Chemicals, USITC;
         Exports: FT410,  U.S. Dept. of Commerce.
              a!977 Imports of o-, p-dichlorobenzene mixture  were .33 million Ibs.; 1978 imports of o-,
         p-dichlorobenzene mixture were 0.5 million Ibs.
              ^Exports are reported  for o- and p-dichlorobenzene  combined.
               Asking  price for- early January (Chemical Marketing Reporter).

-------
                                   TABLE IV-3; MANUFACTURERS OF CHLOROBENZENES
a
in

Company

Dow Chemical
Monsanto
Montrose Chemical Corp.
(50% owned by Stauffer,
50% by Chris Craft)
Olin Corporation
PPG Industries
Specialty Organ ics Inc.
Standard Chlorine Chenjv-
ical Co. t Inc.

TOTAL

Location

Midland, MI
Sauget, IL
Henderson, NV


Mclntosh, AL
Natrium, WV
Irwindale, CA
(processor)

Delaware City, DE
Kearny, NH
(processor)

1978 Capacity, million Ibs.

mono*
220
150
70



90


150

680
0*
30
X




20
2

50
16
118
P*
30
X




30
2

75
15
152
1,2,4
tri*
X





X


X


1,2 ,4 £
tetra*
X








X


penta*





X






                    SOURCES:   SRI Directory Chemical Producers, 1979, and Synthetic Organic
               Chemicals,  International Trade Commission,  1978.
                    * mono=monochlorobenzene; o=ortho-dichlorobenzene; p=para-dichlorobenzene
               1,2,4 tri=lf2,4-trichlorobenzene; 1,2,4,5 tetra=l,2,4,5-tetrachlorobenzene;
               penta=pentachlorobenzene.

                    Information on plant capacity  is not  available.

-------
     Dow Chemical, PPG Industries, Monsanto, Montrose, and
Standard Chlorine Chemical Co. are producers of monochloroben-
zenes, with total available capacity  in excess of  680 million
Ibs. per year.  Vertac, Allied, and Dover Chemical were  formerly
important producers of MOrlochlorobenzenes.  All three have  now
left the market, the latter two since  1977.6'7  Others are also
believed to have ceased production, indicating a clear deficiency
in demand  relative to production potential.
IV.A.I.e.2.    Dichlorobenzenes
     The second highest volume group  of chlorobenzenes is the
dichlorobenzenes.  Although the ratio of total production of
the o- and p-dichlorobenzenes has fluctuated widely, the unit
value of o-dichlorobenzene has exceeded that for p-dichlorobenzene
in recent years.
     As a result of the joint nature  of the chlorobenzenes
production process, all producers of  monochlorobenzene—-except
Montrose—also produce o- and p-dichlorobenzenes.  Two com-
panies, Specialty Organics, Inc. in California and Standard
Chlorine Chemical Company in Delaware, do not produce mono-
chlorobenzene, but instead resolve o- and p-dichlorobenzene
mixtures into their component isomers.
     Production of o-dichlorobenzene  was 47.4 million Ibs.  in
19775and 41.1 million Ibs. in 1978?35  while p-dichlorobenzene
production was 65.1 million Ibs. and  41.2 million  Ibs. in 1977
and 197835 respectively.  Data for 1979 is not yet  available.
                          IV-16

-------
IV.A.I.e.3     Trichlorobenzenes
     An estimated 45 million Ibs of trichlorobenzenes were
produced in 1976, with production levels off considerably
during 1978 and 1979.   At present, the International Trade
Commission lists only Dow Chemical Company and Standard Chlo-
rine Chemical Company as producers of 1,2,4-trichlorobenzene;
and PPG Industries along with Standard Chrorine as producers
of mixed 1,2,3- and 1,2,4-trichlorobenzenes.
     Present annual production of trichlorobenzenes is esti-
mated at 15 to 20 million Ibs. per year by Dow Chemical?^- Pro-
duction increased from 9.3 million Ibs. in 1970 to 28.3 million
Ibs. in 1973.  Production data is not available from the ITC
for 1974 to present.  However, based upon the isomer composition
of 1,2,3- and 1,2,4-trichlorobenzenes mixtures, and information
from Dow Chemical,  ' , MATHTECH estimates of the isomers within
the total trichlorobenzene production for 1978 have been made.
They are 1,2,4-trichlorobenzene, 16 million Ibs.; 1,2,3-
trichlorobenzene, four million Ibs.; and 1,3,5-trichlorobenzenes,
six thousand Ibs.
IV.A.I.e.4     Tetrachlorobenzenes
     For tetrachlorobenzenes, it is estimated that the production
                        r
of ten million Ibs. of tetrachlorobenzenes includes six million
Ibs. of l,2,4,5-tetrae|Llorobenzene.  The quantity of 1,2,3,5-
                      • r
isomer formed as a by-product is estimated from Dow data and
specific reaction rates to be approximately three million Ibs.
per year.20'21

                          IV-17

-------
     Production of tetrachlorobenzenes appears to be down from
the reported 1973 consumption of 18 million Ibs. of 1,2,4,5-
tetrachlorobenz ene.2 °'21
     According to the TSCA Inventory there are two producers
of tetrachlorobenzenes.

IV.A.I.e.5     Pentachlorobenzene
     Production for pentachlorobenzene is reportedly five to
ten million Ibs. per year.  This chemical is used for the manu-
facture of pentachloronitrobenzene (PCNB). Production data for
PCNB is included in a composite of data  for 11 cyclic fungicides
and is not available separately.   The 01in Corporation is the
only domestic manufacturer of pentachlorobenzene and uses it
captively.

IV.A.l.d. Imports and Exports
     Exports are not reported separately for o- and p-
dichlorobenzenes.  As a group, 20.8 million Ibs., valued at
$6.2 million, were exported worldwide in 1978, with 85 percent
                                     g
shipped to Canada, Mexico, and Japan.    Exports accounted for
about 25 percent of the total United States production of o-
and p-dichlorobenzenes in 1978.
     Imports of chlorobenzenes are tabulated in Table IV-4 for
years 1974 to 1978.  The total imports of all isomers of chloro-
benzenes were 4.6 million Ibs., valued at $1.3 million in 1978.
                                          rt
This was up from 2.3 million Ibs. in 1977.   Although combined
imports of chlorobenzenes were up in 1978 over 1977, imports of
                           IV-18

-------
                     TABLE IV-4:  IMPORTS OF CHLOROBENZENE8 (Lbs.)
                                                   'MJ/1&

1974
1975
1976
1977
1978
*
1,485,106
8,373,478
6,185,753
1,053,402
902,957
0
1,631,404
110,230
887,375
864,655
none
reported
o<9*
none
reported
2,608,238
855,370
331,390
50,000
4
i' —
—
	
—
24,030
4
31,006
6,506
4,851
25,575
106,021
"»
—
3,912,144
266,990
J6.614
1,102
V
2,770,245
1,934,578
_^
—
—

21,525
33,680
9,460
26,655
—
' «?«
940,715
(Mixture)
—
: 	 •'
	
2,074,151
£•0-
1,467,819
79,366
39,683
39,683
1,371,261
•:•*
—
—
—
—
—

8.347,820
17.058,220
8,249,482
2.348.074
4.609,522
vo
         SOURCES: References 12 through 16

-------
o- and p-dichlorobenzenes  and trichlorobenzenes were down.
A large part of  the  increase in combined imports is attributed
to an increase of  1,2,4,5-tetrachlorobenzene imports,  up from
approximately 39 thousand  Ibs.  in 1977 to 1.4 million in 1978;
and an increase  in imports of 1,3-dichlorobenzene.   There is
no indication that pentachlorobenzene is currently  being
imported.12'16

IV.A.I.e.  Product  Uses  (See Tables IV-5a through f.)

IV.A.l.e.l.    Monochlorobenzene
        Monochlorobenzene  is used primarily In the  manufacture
of organic intermediates for dyes and herbicides, and as a
solvent  in pesticide and degreasing formulations.  In the past/
monochlorobenzene  was an important raw material for the manu-
facture  of phenol  and DDT.  However, in recent years monochloro-
benzene  production has declined as phenol producers have shifted
                                          „ ,1
to  less  expensive  cumene as a raw material and as the use of
DDT (a downstream product of monochlorobenzene ' )  has become
severely restricted.  In addition, imports recently have made
considerable inroads into  the domestic benzenoid dye market.
      The use of monochlorobenzene and o-dichlorobenzene as a
 solvent carrier in  the manufacture of isocyanates is expected
 to increase.  Isocyanates are used in the manufacture of
 polyurethanes,  and  polyurethane production is predicted to
 be 7.5 percent greater in  1979 than in 1978?    Also, Rubicon
 Chemicals is expected to  bring onstream a new plant for
                            IV-20

-------
                           TABLE IV-5a:   USES OF MONOCHLOROBENZENE
       Percent
 MONOCHLOROBENZENE
    Production
               Usage
   Growth
    Rate
     Substitute
          for
 MONOCHLOROBENZENE
        60%
        29% u
        30-50%


        1%

        10%
Organic  Intermediate  (dyes, organo-
phosphorous chemicals, parathion, and
o- and p-dichloronitrobenzene)

Solvent  manufacture diisodyanate  (poly-
urethanes, phenol formaldehyde  resin
formulations, bonding rubber to nylon
and rayon)

Solvent  (degreasing, pesticides)**
DDT (export and emergency only)

DPO (diphenyl oxide)
static
increasing
1-2%
static
static
none
o-dichlorobenzene
perchloroethylene in
degreasing formulations
none
      SOURCES:  References 20 and 4.

        Information  in parentheses indicates, areas of  manufacture or end-use of product
obtained subsequent to use of  o-dichlorobenzene.

-------
                                TABLE IV-5b:   USES OF  O-DICHLOROBENZENE
            Percent
       O-DICHLOROBENZENE
         Production
                               Usage
                                         Growth
                                          Rate
     Substitute

O-DICHLOROBENZENE
            65%
             15%
             10%
ro
5%

5%
                 Organic intermediates  (3,4-dichloro-
                 aniline,  urea herbicides)**

                 Solvent manufacture toluene diisocya-
                 nates (polyurethanes,  cross-linking
                 agent for nylong)

                 Miscellaneous solvents
                                      static or
                                      declining

                                      increasing
                                      1-2%
                                      static
Dyestuff manufacture

Fumigants and insecticides
                                                                    static
monochlorobenzene
industrial solvents,
perchloroethylene, etc.,
nitrobenzene in some
processes.
                                                                      none
          SOURCES: References 20, 4, 26.
          **
            Information in parentheses indicates areas  of manufacture or end-use of product
     obtained  subsequent to use of o-dichlorobenzene.

-------
                             TABLE  IV-5c:  USES OF  p-DICHLOROBENZENE
         Percent
   p-DICHLOROBENZENE
       Production
                                Usage
                                        Growth
                                         Rate
     Substitute
         for
 p-DICHLOROBENZENE
         50%

         30%

         10%
10
Ul
10%
Space deodorant

Moth control

Organic intermediates (pesticides,
Pharmaceuticals, other organic inter-
mediates) **

Soil fumigant

PPS - Polyphenyl Sulfide
                                                       static

                                                       statis

                                                       static
naphthalene

none
        SOURCES:  References 25, 27,  21, 20.
        * *                                                                                 v
          Information in parentheses  indicates areas of manufacture or end-use of product
  obtained subsequent to use of o-dichlorobenzene.

-------
                       TABLE  IV-5d:  USES OF 1,2,4- and 1,2,3-TRICHLOROBENZENE
            Percent
     1,2,4- and  1,2,3-
       TRICHLOROBENZENE
          Production
              Usage
  Growth
   Rate
  Substitute
       for
TRICHLOROBENZENES
10
*».
            50-60%


            20-30%

            5-10%



            5-10%
Organic intermediates (Tetraqhloroben-
zenes, dyes)**

Dye carrier

Synthetic transformer oils and
dielectric fluids
Solvent in chemical manufacture
declining-to-
static
                                                                                  none
              other dielectric fluids
              such as jydrocarbon oils,
              silicone oils, etc.
           SOURCES:  Refernces 20,  21, 4.
           **
             Information in parentheses indicates areas of manufacture or  end-use of  product
     obtained subsequent to use of o-dichlorobenzene.

-------
                               TABLE IV-5e i  USES OP  1,2,4 ,5-TETRACHLOROBENZENE
            Percent
      1,2,4,5-TETRACHLDHOBENZENE
          Production
               Usage
Growth
 Rate
     Substitute
         for
1,2,4,5-TEnWCHLOHOBENZENE
to
UI
             100%*
Pentachlorobenzene
                                                    none
            Estimates compiled  from various  sources.
           SOURCES:  Reference  31.

-------
                             TABLE IV-5f: USES OF  PENTACHLOROBENZENES
          Percent
      PENTACHLOROBENZENES
        Production
               Usage
Growth
 Rate
     Substitute
        for
PENTACHLOROBENZENES
            100%*
to
a\
Pentachloronitrobenzene (fungicide,
  slime preventor)**
                                                                              none
        SOURCES: References 6, 21, 31,

          Information  in parenthesis indicates end-use of pentachloronitrobenzene.

-------
MDI  (diphenylmethane diisocyanate) with  a  capacity  of  25
million  Ibs. in  late 1980J0   This plant will require  either
monochlorobenzene or o-dichlorobenzene for use  as a solvent
in the production process.

IV.A.I.e.2.    .o-Dichlorobenzene
     o-Dichlorobenzene is used primarily as an organic inter-
mediate  for the production of amide (propanil) and urea herbi-
cides (diuron, neburon).  The main substitute for propanil
(nine million Ibs. in 1975) is the thiocarbamate herbicies,
molinate.
     Dyes currently made from o-dichlorobenzene are C.I.
Mordant  Red 27, D.I. Direct Blue 108, and C.I. Direct Violet
54.  At  present, there is no substitute for o-dichlorobenzene
in the manufacture of C.I. Mordant Red 27.  However, a pro-
cess using nitrobenzene may be used in the production of
C.I. Direct Violet 54, and D.I. Direct Blue 108 can also
be produced by a process not requiring o-dichlorobenzene.

IV.A.I.e.3.    p-Dichlorobenzene
      p-Dichlorobenzene is mainly  used as a space deodorant,
where o-dichlorobenzene may be a  substitute,  and for moth
control, where it has entered markets formerly  dominated by
naphthalene.   If synthetic fibers continue to penetrate
wool markets,  then  a  decline in the  consumption of  p-
dichlorobenzene  for moth control  might be  expected.3
                           IV-27

-------
IV.A.I.e.4.    Trichlorobenzenes
     1,2,4-Trichlorobenzene  and 1,2,3-trichlorobenzene  are
used primarily as organic  intermediates  in  the  production of
dyes and pesticides  (for example,  2,4-D).   The  trichloroben-
zenes are also used  extensively as dye carriers and find
some use as  solvents in chemical  processed  and  as  dielectric
fluids.20'21'4

IV.A.I.e.5.    Tetrachlorobenzenes
     At present  all  1,2,4,5-tetrachlorobenzene  production is  usec*
for  the manufacture  of pentachlorobenzene.   In  the past the pri-
mary use was for manufacture of herbicides  2,4,5-T- and  silvex.
However, recent  restrictions on uses of  2,4,5-T and silvex
have caused  this market to decline significantly.

IV.A.I.e.6.    Pentachlorobenzene
     Pentachlorobenzene is used only for the production of
pentachloronitrobenzene  which is used as a fungicide and
slime preventor.
     Although there  is no   substitute for pentachlorobenzene
in the production  of pentachloronitrobenzene (PCNB),  there
are  numerous fungicides presently manufactured,  some of which
are  likely to be substitutes for  pentachloronitrobenzene..
However, PCNB is a broad  spectrum fungicide and has found
increasing use since the  early 1970s. This may be due  to the
restriction  on use of mercury fungicides which  occurred at
about the  same time.18'19'23'24
                           IV-28

-------
IV,A.2.   Potential for Economic Impact
     As described in Chapter II, Economic Impact Methodology,
a series of market characteristics are considered in assess-
ing the potential impact of testing requirements on chloro-
benzenes.  These are (1) demand sensitivity, (2) market
expectations, (3) cost characteristics, and (4) industry
structure.
IV.A.2.a. Demand Sensitivity
     The first factor of importance  is demand sensitivity
as approximated by the availability of substitutes in
consumption.  The largest use for monochlorobenzene—the
highest volume chlorobenzene—is in organic intermediates and
dyes.  In this area imports have in recent years been extremely
attrictive substitutes for domestic products,  presumably on
the basis of price differentials.  Thus, monochlorobenzene
demand appears sensitive to price factors.  The second largest
market for monochlorobenzenes is in industrial solvents.  This
is an area with a large array of potential substitutes, both
in economic and technical terms, implying significant demand
sensitivity for monochlorobenzene.
     o- and p-Dichlorobenzene appear to face similar market
conditions.  o-Dichloroberizene has a number of good substitutes
in the markets for herbicides and dyes that consume the bulk
of its production.  p-Dichlorobenzene competes heavily with
naphthalene for the moth control market.
     The less prominent chlorobenzenes—1,2,4-trichlorobenzene,
1,2,4,5-tetrachlorobenzene, and pentachlorobenzene—appear to

                          IV-29

-------
face somewhat  less  competition in their markets.  Even here,
however, proportions  of 1,2,4-trichlorobenzene-based herbicides
could, for instance,  be cut  back in the face of price increases.

IV.A.2.b. Market Expectations
      Closely tied to the above  observations  is  the  very  weak
 market performance of  chlorobenzenes  over  the past  few years,
 and what must probably be  the  pessimism with which the  industry
 regards the future,  in 1977, for  instance,  there were ten
 producers and two processors  (using the general  industry defi-
 nitionl of dichlorobenzenea  across the nation.  Today, that num-
 ber has declined to six producers and two processors.  While those
 firms leaving the market were  generally small with older plant
 facilities, such behavior would  be ublikely were there strongly
 optimistic expectations among  chlorobenzenes producers.
       Of all the markets surveyed  for  chlorobenzenes,  only
 that for solvent carriers used  in  the  manufacture of
 ispcyanates appears  to be growing.  Overall, this market alone
 does not appear large  enough  to counteract a continued down-
 trend in other markets.

 IV.A.2.C. Cost Characteristics
      The highest volume chlorobenzenes (moaochlorobenzene,
 o- and p-dichlorobenzenes)  are  produced as complementary
 products.  While the proportions of the products can be varied
 fairly widely, none  can go  to zero.  That  is, if one product
 is desired, all must be produced,  if only  in minor  quantities.
 However, the higher  chlorobenzenes are produced by  further
                            IV-30

-------
chlorination of para- and ortho-dichlorobenzene in a stepwise
manner.  This suggests the possibility of cascading effects
from testing on the higher chlorobenzenes; that is, at each
successive level, the production process combines the testing
costs with the higher cost of the input chlorobenzene.  Given
that all joint products might be separately faced with the
expense of testing requirements and the possibility of cas-
cading costs,there is the potential that this could lead to
situations associated with significant economic impacts.
(see Section II.B.3.)

IV.A.2.d. Industry Structure
     As pointed out above, industry structure has changed
rapidly over the past few years.  Cost structure for the
industry appears to be quite homogeneous.  There are no
unique factor inputs and no unique production processes.
Transportation costs are not significant.
     Today, a relatively small number of producers, each with
relatively large production capacities, populate the industry.
Given the declining nature of the market and homogeneity of
costs, there is no reason to believe that industry behavior
is other than competitive.

IV.A.3.    Summary
     On  the  basis of competitiveness,  low transportation
costs, and production complementarity  alone,  chlorobenzenes
could  be regarded as a potentially  sensitive  chemical product,
and  thus,  a  candidate for  a  Level II economic analysis.   In
                           IV-31

-------
addition, the existence of highly price-sensitive markets  and
declining demand call  for a Level II  analysis,  so that  the
potential impact of testing requirements may  be quantified.
IV.B.     Level II. Evaluation
IV.B.I.   Overview
     As  stated in  the  discussion of economic  impact method-
ology, the  steps involved in  conducting Level II analysis
build upon  the foundation of  the Level I analysis.  Whereas
the  Level I objective  is to identify  cases  where a  potential
for  economic impact exists, the Level II analysis attempts
to quantify the factors considered to be of greatest  importance.
      Thus,  Level  II  evaluation does not stand on its  own.
.The  information presented  at  Level  I  is not.repeated  here;
 however, much of it is required for the Level II analysis.
 In particular, the description of the chlorobenzene produc-
 tion process and the discussion of product uses contained in
 Level I are necessary for  a full understanding of  Level II.
           Six compounds of the chlorobenzene  group are
 examined here.  These are:
           o Mgnochlorobenzene;
           o Ortho-dichlorobenzene;
           o Para-dichlorobenzene;
           o 1,2,4-Trichlorobenzene;
           o 1,2,4,5-Tetrachlorobenzene;
           o Pentachlorobenzene.
                           IV-32

-------
          Of these, the first three are the most prominent
in terms of physical quantities and economic value.  These
three are sufficiently described by existing data to analyze
in some detail.  Data on the last three chlorobenzenes  (the
"higher level" chlorobenzenes), are very limited.
     The following sections adhere closely to the methodology
described earlier.
IV.B.2.   Demand Analysis
IV.B.2.a.  Specification
          As was discussed in Section IV.A.2.a.  the most
important factor in the demand for chlorobenzenes is the
availability of substitutes.  Demand for a product can,
in general, be divided into two distinct categories:
final consumption demand and intermediate input demand.
The determinants of final demand are derived from utility
maximization, whereas, demand for the products as a factor
of production is based on profit maximization by the firm.
          The demand for a final product derived from utility
maximization depends upon:
          a) The price of the product  (referred
             to as "own" price);
          b) The prices of other products consumed;
          c) The consumer's income;
                         IV-33

-------
          c) Other  "shift"  factors,  such  as  tastes,
             income distribution,  total population,
             etc.
For purposes of estimation  through multivariate regression
analysis  (see Appendix for  an explanation of this common
statistical methodology), the consumer demand  function  is
specified as follows:
           QD  "  f 
-------
          P  = Price of the output product
          Q  = Quantity of the output produced
           Z = Exogenous shock factors affecting
               production
           u = Stochastic disturbance term
          The estimation of demand for the three major
chlorobenzenes will be discussed in the following section.
IV.B.2.b. Estimation
          Chlorobenzenes are utilized in a wide range of
products.  These products include consumer products such as
space deodorants, and producer products, such as organic
intermediates.  Hence demand for chlorobenzenes is a
composite of final consumer demand, as well as demand by
other manufacturing firms.   The demand functions for these
two types of purchasers of chlorobenzenes.are based on dif-
ferent assumptions regarding their economic behavior.   Hence,
it is not immediately obvious which form of the demand speci-
fication discussed in the previous section is appropriate.  In
addition to this, economic theory has not developed a model
which satisfactorily incorporates both sources of demand for
a single product.
          Thus, the demand functions to be estimated for the
three principal chlorobenzenes will be of a simple nature
and will employ commonly used multivariate regression
techniques (See Appendix).  In general, the demand for the
product is estimated as a function of its own price, the price
of an important technical substitute and national
                          IV-3 5

-------
income, as measured by  real  (i.e.,  price  deflated)  GNP.
The purpose of  including  GNP  as  an  explanatory  variable
is an attempt to bridge the gap  between the  two types  of
demand functions.  GNP  is used as a measure  of  income  for
final demand and as a measure of business activity  or  output
for intermediate demand.
           The  date used  for  this study are  time-series data
 compiled from  various  sources,  including trade publications
 and government documents (see  Table IV-6).  All prices  are
 expressed in real terms, deflated  by the Producers Price Index.
 The period covered by  the data  is  from 1962  through 1978.
 The total production and real prices for the three chlorobenzenes
 considered in  this demand analysis (monochlorobenzene, ortho-
 dichlorobenzene, and para-dichlorobenzene)  are plotted in
 Figures IV-3a, b, and  c.
           For  the purposes  of the  current analysis, it was
 felt  a  simple  functional form for  the demand equations
 would yield  satisfactory results.   Although linear demand
 equations have been  estimated,  a  log-linear specification
 provides better  fits  and facilitates interpretations  of
 the coefficients.  The results  reported  here are from the
 log-linear  specification.
           The  demand for monochlorobenzene  is  estimated  as  a
 function of  its  own  price,  the  price of  perchloroethylene
  (a competing solvent in some uses) and real GNP.   The estimated
  equation  is:
                            IV-3 6

-------
        TABLE IV-6sCHLOROBENZENES PRODUCTION AND PRICES
Year
Mono-chlorobenzene
Production
(Million Ifco J
Real Price^
<$ per Ib.)
Ortho-dichlorobenzene
Production
Real Price
Para-dichlorobenzene
Production
Real Price
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
554*3
518*8
537.5
546*3
576.7
483.3
575*8
602*0
484.9
408.9
403.5
397.4
379.4
306*0
329*1
325*5
295.4
7.3840
7.4074
6*3358
6.2112
6*0120
6*0000
5*8537
5*6338
5*4348
4*3898
5*0378
5.1967
13.3666
14.2939
14.2077
10.2987
10*5112
"^Sources: Compiled from
Organic Chemicals, U.S.I.T.C.
46.7 10.5485
52.3 10.5820
52.3 11.6156
41.1 11.3872
51.4 10*0200
50*4 10.0000
60.6 10.7317
70.4 9.3897
66.2 9*0580
53.6 8.7796
62.4 10.0756
66*0 9.6511
54.7 10.3061
54.6 16*0091
48*9 16*9399
47.7 13.9032
41.1 12.4224
74.6 10.5485
74.6 10.5820
63.2 9.5037
65*8 9*3168
66.3 9.0180
66*5 9.0000
70*3 9.7561
52*1 8.4507
69.6 8.1522
70*4 7.0237
77.3 7.5567
62.7 6.6815
. .
48.5 14.2939
36.7 13.1148
65.1 11*8435
41*2 12.9001
various publications, including Synthetic
» and Chemical Marketing Reporter.
'Deflated by the Producer's Price Index, U.S. Department of Commerce.

-------
         FIGURE IV-3s;MONOCHLOROBENZENE,  QUANTITY  PRODUCED  (Q)  AND  REAL  PRICE (P)


Klrtll'H \
      \
      \
voo   »
      \
      \
      \
      \
800   +
      \
      X
      \
      \
700   t
      \
      X
      X
      \
400   #                                           a
      \                           an
      \    a
      \                oo
      NO
BOO   f
      \                                00

      5
      \
400   t                                                      a     a     a
      \                                                                       a
      \
      \
      \                                                                                  oa
300   t                                                                             a                a
      \
      \
      x
      \
200   t
      \
      x
      x
      x
100   t
      X
      x
      x
      X                                                                       f>     f     F     f    P
 OtPPPppppppppp
      	+	+	1	f	f	f	f	1	+	4	f	+	+	f	1	+	f_.
         1962  1963   1964   1965  1966   1967  196S   1969  1970   1971   1972   1973   1974  1975   1976  1977   1970

                                                     YEAR

-------
FIGURE IV-3b: ORTHO-DICHLOROBENZENE, QUANTITY PRODUCED  (Q) AND REAL PRICE (P)






















3
1
Ul
10






















RHIIM:IIB


90




BO




70




60



so




4O



30




20




10



o


X
X
X
*
X
X
X
X
t
X
X
X
X
+
X
X
X
X
t
X
X
X
X
X
X

X
*
X
X
X
*
X
X
X
X
*
X
X
X
X
*
X
X
X
*















a

o o

0
a


o a o
ao n
a
o a
0

a n











p P
p
p p p
pp PPPPP PPP
p



1962 196.1 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978
YEAR

-------
       FIGURE W-3c;PARA-DICHLOROBENZENE,  QUANTITY  PRODUCED  (Q) AND REAL  PRICE (P)
VO
/O
AO
50
40
.40
10
       \
       \
       I-
       \
       N
       \
       \
       +
       \
       \
       \
       \
       *
      \
      \
      \
      \
      I
      \
      N
      N
      \
      I
      \
      \
NO IE!
         1962   1943   1V64  1945   I9A4  1967   1968   1969  1970   1971  1972   1973  1974   1975   1976  1977   197B

                                                     YEAR

         '? OHS HAD HISSING VAI .IIEB

-------
     JZ,n QM = 12.52 - .24fcn PM + .09Hn P  -  . 88Jln GNP
             (4.22)*   (-2.73)*    (0.34)     (-2.49)*
         R2 * .79    F = 16.32     N = 17     DW = 1.48
where
        Q« ~ Quantity of monochlorobenzene  produced
         M
        P  = Average annual selling price of monochloro-
             benzene
        P  = Average annual price of perchloroethylene
       GNP = Real Gross National Product in 1972 dollars
The values in parentheses below each estimated  coefficient
are the t-statistics , used to test the hypothesis that
the value of the coefficient is zero.  An asterisk indicates
that the coefficient is significant at the  95 percent level
of significance (t>95 = ± 2.160).  The coefficient of
determination  R  indicates that 79 percent of the variation
in monochlorobenzene  production is explained by the model.
The F-statistic indicates that the null hypothesis that all
coefficients are equal to zero is rejected.  The Durbin-Watson
statistic lies between the upper and lower  bounds and, hence,
the test for autocorrelation is inconclusive.  The coefficients
on the variables will be interpreted in the next section.
          The demand for ortho-dichlorobenzene is estimated
to be a function of its own price, that of  perchloroethylene,
and of real GNP .  The estimated equation i s :
      In  Qnn  =  1.83  - . 5Un Pn_  + .14fcn P  + .44fcn GNP
          UO                  UD           p
              (0.48)   (-2.17)*     (0.91)      (0.38)
          R2  =  .29      F  =  1.79      N = 17     DW = 1.32
      An asterisk after the reported t-statistic indicates
significance at the 95 percent level.
                          IV-41

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Although the coefficient on own price is negative,  reflecting
                                       2
a negatively sloped demand curve, the R  is low  and from the
statistic we cannot reject the null hypothesis that the model
explains none of the variation in quantity demanded.  Again,
the Durbin-Watson statistic lies in the nonconclusive range.
          The primary uses for p-dichlorobenzene are in the
space deodorant and moth control markets.  As noted above,
the major substitute for p-dichlorobenzene in the moth
control market is naphthalene.  Thus, the quantity  of para-
dichlorobenzene is estimated as a log-linear function of
its own price, the price of naphthalene, and real GNP.
The estimated equation is:
     fcn Q   = 8.52 - .16£nP - - .28£n PN - ,51£n GNP
             (4.46)* (-0.47)    (-1.15)    (-1.97)
         R2 = .64     F = 6.95     N = 16     DW =  2.81
In this case as well, the equation implies a negatively
sloped demand curve; however, the coefficient on own price
is not statistically significant.  In fact, none of the
variables is found to be significant at the 95 percent level
of significance.  In spite of this, the overall  equation
does account for 69 percent of the variation in  quantity
demanded, and from the F-statistic we reject the hypothesis
that all coefficients are equal to zero.   A possible expla-
nation for this discrepancy is that significant multi-
colinearity  may exist among the independent variables.
This has the effect of increasing the standard error for
each coefficient (and,  hence, reducing the t-statistics),
                          IV-42

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whereas  the  overall model may  fit the  data very well.
Once more, the  Durbin-Watson statistic lies between the two
bounds and no conclusion may be  drawn  regarding serial correla-
tion.  The number of observations for  this regression  is 16,
due to the fact that some data is unavailable  for 1974.

IV.B.2.C. Interpretation
          The specification of log-linear  demand functions
allows simple interpretation of  the estimated  coefficients.
This functional form implies a hyperbolic  demand curve
which exhibits  a constant price  elasticity of  demand along
all portions of the curve.  The  estimate of the elasticity
is the same as  the estimated coefficient for the own price
variable.  In addition, the other coefficients can be
interpreted as  elasticities of demand  with respect to  the
other variables.
     The price  elasticity of demand measures the proportionate
change in quantity demanded due  to a small proportionate
change in the price of the product CeDsa%AQ/%AP).*  The basic
determinants of the (own) price  elasticity of  demand are:
          a)  The availability of  substitutes;
          b)  The nature and number of  uses for the  product;
          c)  The time horizon;
          d)  The proportion of income  spent  on the  product.
     For monochlorobenzene,-the estimated  equation  appears to
be a reasonable model of demand.   The  own  price  coefficient
      Demand is termed inelastic  (insensitive to price) when
 E_|<1, and elastic (sensitive to price) when |en|>l.
                          IV-43

-------
is statistically significant and of the expected sign.  The
(own) price elasticity of demand is low  (-.24), indicating
rather inelastic demand.  This usually occurs if the product
has very specialized uses with few good substitutes.  This
appears to be borne out by the equation:  the cross-price
elasticity of demand for the best substitu%e, perchloroethylene,
is low (inelastic) and statistically insignificant.  This
would imply that either perchloroethylene is not the major
substitute, or there is no reasonable substitute for monochloro-
benzene.  The coefficient on real GNP is negative, indicating
that as real GNP has risen, the quantity of monochlorobenzene
produced has dropped.  This is explained by a shift in tech-
nology away from monochlorobenzene in the production of several
end products.  Ideally, a shift variable would be specified in
the equation to account for this trend.
     With respect to ortho-dichlorobenzene, the equation
appears to be a less than satisfactory model for demand.
In spite of the fact that a negatively sloped demand curve
 results, the equation overall fits poorly.  No other variable
 is significant, although the expected signs are obtained.
 According to the equation, demand is price inelastic (-.51)
 and the cross-price elasticity with respect to the substitute
 is also low (0.14).  Econometrically the reason for the low
 explanatory power of the equation is that the independent
 variables exhibit less variation over time than the dependent
 variable.
                          IV-44

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     For both monochlorobenzene and o-dichlorobenzene, the
coefficient on the price of perchloroethylene variable is not
statistically significant at the 90 percent level.  The reason
for this is the fact that these chlorobenzenes have a wide
range of uses with many competing substitutes.  Thus, no single
product accounts for the major substitution possibilities and
results in a statistically significant effect on the chloro-
benzenes.  In light of comments received from industry on these
models, alternative hypotheses were tested for substitute pro-
ducts.  These included nitrobenzene and phenol, as well as
toluene diisocyanate and xylene.  In each case the effects were
insignificant and the results less satisfactory.  The reason
for this may be that perchloroethylene better represents the
class of substitutes for these chlorobenzenes (i.e., is more
highly correlated with changes in the prices of other actual
substitutes) than the alternative substitutes.  This is, of
course, speculative.  Because the data are derived from the
same sources, there is no reason to suspect differences in
the quality of the data.  However, this may well be the case.
Unfortunately, there is no way to evaluate this or to incor-
porate such discrepancies into the model.
          For p-dichlorobenzene, demand appears to be price
inelastic  (-.16); however, as noted above, the coefficient
is not statistically significant.  Also, all estimates of the
coefficients are negative and insignificant.  Thus, although
naphthalene is a known substitute for p-dichlorobenzene,
in the estimated equation it appears as a complement.  Again,
demand for p-dichlrobenzeno appears to be necratively correlated
with real GNP.             IV-45

-------
     Since the major objective of this estimation section is
to obtain estimates of the price elasticities of demand, the
specification of simple demand functions has yielded useful
results.  The  (constant) elasticities of demand for the chloro-
benzenes are:
             EOD
      The following section will begin to develop some of the
information that will be necessary to interpret these results
for the chlorobenzenes industry.  Specifically, the relation-
ships estimated to this point have ignored the supply side of
the chlorobenzenes markets and this must be included.  Integra-
tion of supply and demand will take place in Section IV. B. 6
Impact Analysis.

 IV . B . 3 .    Industry Structure and Competition
 IV.B.S.a.  Methodology
           The objective of this section is to present and
 interpret  information on the production system for chloro-
 benzenes in order to illuminate further (1)  the nature of
 the industry supply function and (2)  the pathways through
 which regulatory impacts might proceed.   Information com-
 piled in this section will help link the outputs of previous
 sections to subsequent potential impacts or production,
 employment, profitability, etc.
                           IV-46

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          Several factors are of particular interest with
regard to industry supply.  First of all, it is important
to determine whether there are differences in the average
costs of producing chlorobenzenes among the several firms
participating in the market.  Economic theory suggests that
the equilibrium price for chlorobenzenes will be set below
the costs of the most efficient firm excluded from the
market, but about or equal to the costs of the least efficient
producer included.  Thus, the greater the diversity of costs
among firms, the greater the economic rents earned for the
industry and the greater its ability to absorb testing costs
without major dislocation.  On the other hand, the more
uniform are costs, the greater the potential for significant
impact since the firms are not able to absorb the additional
costs.
      While the cost diversity can result from a number of
causes, particularly entrepreneurial abilities, this level
of analysis focuses primarily upon those factors determined
external to the firm itself, namely, raw material inputs
and transportation costs.  Such factors are relatively
easy to observe and to examine for cost advantages.
          The following  section also examines evidence
bearing upon an important related factor: the significance
of scale economies.

IV.B.3.b. Change in Industry Structure
          Chlorobenzenes have been produced domestically
since 1915 when Hooker Electrochemical Company opened a

                           IV-47

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20 million Ib. monochlorobenzene facility at Niagara Falls,
Nelw York.  Dow Chemical began production later in the same
year, and since then for more than 60 years, chlorobenzenes
have been a major industrial organic chemical group.
     Recently however, the continued commercial viability of
this established chemical group has appeared open to question.
In particular, the past two years have witnessed a  significant
decline in the number of chlorobenzene producers.   The total
number has dropped from ten in 1977 to six  in 1979.  An addi-
tional facility appear to have exited in 1975 or 1976.
     Table IV-7 lists information regarding the facilities
recently closed.  All  closed  facilities  produced the three
basic  chlorobenzenes—monochlorobenzene,  o-dichlorobenzene,
and p-dichlorobenzene—but the extent to which the higher
order  chlorobenzenes were  produced is unknown.   Capacity is
listed in terms  of monochlorobenzene production,  and this
indicates that the decline in capacity was  not nearly as
significant  as the decline in the number of producers.   Those
producers leaving the  industry were extremely small, with
none exceeding 20 million  Ibs.  per year  capacity.   Total
monochlorobenzene capacity fell by only  five to ten percent,
even though  the  number of  producers was  nearly halved.
           Although the exit of small producers is certainly
an indication of the existence of scale  economies in the
production of chlorobenzenes,  it should  also be noted,  first,
that despite reduced monochlorobenzene capacity,  the industry
                           IV-48

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     TABLE 3V- 7: CAPACITIES OF RECENTLY* CLOSED CHLOROBENZENE PLANTS
    Manufacturer
Location
Plant Capacity
Millions Ibs.
 Per Year
Allied Chemical Corp.        Syracuse NY                    20

Dover Chemical Corp.         Dover OH                       10
 (Subsidiary of ICC
  Industries, Inc.)

Guardian Chemical Corp.      Hauppauge NY                   n.a.

Solvent Chemical Co.         Maiden MA                        3
                             Niagara Balls NY                20

Vertac                       Jacksonville AR                n.a.

     Closed during raid-to-late 1970s.

-------
capacity utilization rate appears  to  have  fallen  significantly/
and second, that four of the  six closed  facilities  were  located
in the northeast, with three  of these in New York State.   Thus,
falling demand and geographical location may have had  as much
to do with commercial viability as plant scale  and  costs.
          Another factor with possible significant  influence
is the loss of inexpensive benzene supplies  from  coke  ovens.
Problems in the domestic steel industry  have lead to a general
reduction in coking capacity nationwide, with particularly
drastic reductions in some localities.   While this  factor is
not examined in depth here, it may well  have been a factor in
the closing of the plants in upstate New York and in Ohio.
           The following sections  examine the individual
 characteristics  of the chlorobenzene plants currently in
 operation and their regional configuration.
 IV.B.S.c.  Regional Structure
      Chlorobenzene plants are located in the eastern,  southern,
 midwestern,  and western areas of  the United States (see Figure
 IV-4).   By far the majority of the production capacity is
 located west of the Alleghenies.   These facilities are Dow
 Chemical at Midland, Michigan; Monsanto at  Sauget, Illinois.
 PPG Industries is located at Natrium, West Virginia.
 The plants in the west are Montrose Chemical at  Henderson,
      Since captive production tends to obscure overall produc-
tion figures, it is not possible to quote an absolute capacity
utilization figure.  In relative terms, capacity utilization
appears to have dropped by about ten percentage points from
1974 to 1978.
                          IV- 50

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FIGURE 3V-4: CHLOROBENZENES PRODUCERS  AND PROCESSORS,
           LOCATIONS

-------
Nevada and Specialty Organics  (a processor)  at  Irwindale,
California.  In the east, Standard Chlorine  has a  production
plant located at Delaware City, Delaware  and a  processing
facility at Kearney, New Jersey; Olin Corporation  has a plant
at Mclntosh, Alabama.
          For all of the production plant locations, chlorine
—a .basic raw material for chlorobenzene  manufacture—
together with benzene, is available nearby.   Since  chlorine
is a gas at ambient temperature  and atmospheric pressure
and highly reactive, it is difficult and  dangerous to handle
and to ship.  This is an important factor in determining the
location of chlorobenzene plants.
          The products of a  chlorobenzene plant, however, are
generally readily transportable at reasonable cost.  This
characteristic effectively precludes insulation of local
markets against national competition.   For instance, although
there are no chlorobenzene producers on the  West Coast  (and
only one processor)* monochlorobenzene sells there for only
a penny a pound more than it does in the Bast.

IV.B.S.d.  Individual Plant Characteristics
          Each existing chlorobenzene plant is unique.   Each
exists in the context of related operations at the same
site, in relation to raw material supplies and to product
markets.   Such characteristics are examined below.
      Montrose in Nevada does not market chlorobenzenes.
                          XV-52

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 IV.B.3.d.l.    Dow Chemical; Midland, Michigan
           Dow Midland has the largest chlorobenzene  produc-
 tion capacity in the nation.  The annual capacity for mono-
 chlorobenzenes is 220 million Ibs. and that for o- and p-
 dichlorobenzenes is 30 million Ibs. each.   This facility
 alone accounts for nearly one-third of the total domestic
 monochlorobenzene capacity.   Dow Midland is also a producer of
 1,2,4-trichlorobenzene and 1,2,4,5-tetrachlorobenzene.
 However,  the production capacity of these  chemicals is  not
 available.  The other isomers of tri- and  tetrachlorobenzenes
 are also produced, but only as by-products and are probably
 disposed of.
          Dow's Midland chemical facilities and production
center at Midland, Michigan is also Dow Chemical corporate
headquarters.   Approximately 10,000 persons are employed by
Dow  in the Midland area.   Of this number,  between 6,500 and
7,000 are  employed at the production plants, and another
3,000 at headquarters offices.  The number of employees
                                                            20
 specifically associated with chlorobenzene production is 60.
           Dow Midland produces the chlorine input to the
chlorobenzene process on  site.  There is no specific infor-
mation regarding  the  source  of its benzene supply; however,
Dow Chemical owns the 22,000 bbl/day Bay Oil Refinery in
nearby Bay City,  Michigan.
           The chlorobenzenes produced at Midland are used both
as chemical intermediates on site and as marketable products.
Those used internally are made into various pesticides, herbi-
cides, flocculants, cosmetics, and medicinals.   It can be

                           IV-53

-------
 surmised  that  a  large portion of those chlorobenzenes pro-
 duced at  Midland and sold  externally are purchased by Dow
 Coming's adjacent  plant as  input to its silicone manufacture.
 IV.B.3.d.2.     Monsanto Chemical;  Sauget,  Illinois
           Monsanto Chemical maintains a facility of 150
 million Ibs. annual monochlorobenzene capacity at  its  Sauget,
 Illinois plant near East  St. Louis, Illinois.   The chemicals
 produced at this plant include phosphorous  compounds,  chlori-
 nated amines, hydrochloric  acid, chlorine-caustic  soda,
                                3
 sulphur compounds, and phenols.  Approximately 1,250 persons
 are employed at this location.
           The Sauget plant  produces its own chlorine and has
 ready access to petrochemicals including  benzene from  the
 oil refineries concentrated at Wood River,  Illinois, a few
 miles north of East St. Louis.
           All the monochlorobenzene produced at Sauget is
 used internally, probably  in the  synthesis of amine  compounds.
 p—Dichlorobenzene production reportedly is committed dbn its
 entirety ot three large industrial  customers, while  o-
dichlorobenzene is sold  on  a  spot  basis.

 IV.B.3.d.3.     Montrose Chemical; Henderson, Nevada
      Montrose Chemical  (owned  jointly by Chris Craft and
 Stauffer Chemical Co.,)  produces  chlorobenzene at Henderson,
 Nevada.  Although statistics are  almost nonexistent, this
 company uses its total  chlorobenzenes production captively for
                                    22
 the manufacture of DDT, a  pesticide.    As noted earlier,  DDT
                           IV-54

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domestic use has been severely restricted by Federal regulation
in recent years.  It is believed that today Montrose Chemical
is the only producer of this substance in the United States,
and that almost all is exported.
     Other chemicals produced by Montrose Chemical at this
location are chloral and hydrochloric acid.  The total opera-
tion requires 112 employees.  Chlorine is probably purchased
from a nearby Stauffer plant.  The source of benzene is not
known.  It is believed that the Henderson plant is the only
location of the Montrose Chemical Corporation.
IV.B.3.d.4.    01in Corporation; Mclntosh, Alabama
     01in Corporation produces pentachlorobenzene as an in-
the-pipe intermediate for the manufacture of pentachloronitro-
benzene (PCNB) at its plant at MeIntosh,. Alabama.  Fungicidal
                                                   ®3
                            are also prepared here.   01in
Corporation produces chlorine and sodium hydroxide on this
site.  Therefore, a ready supply of chlorine is available for
                                                             20
the chlorination of tetrachlorobenzene to pentachlorobenzene.
     Although Olin Corporation produces a wide range of halo-
genated benzenes and toluenes, cyclic amines, and isocyanates
at a number of locations, none of these chemicals are produced
at Mclntosh.3
                           IV-55

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IV.B.3.d.5.    PPG Industries; Natrium, West Virginia
     PPG Industries produces chlorinated benzenes at its
Natrium, West Virginia plant.  Monochlorobenzene, o- and p-
dichlorobenzenes, and 1,2,4-trichlorobenzene and mixed 1,2,3-
and 1,2,4-trichlorobenzenes are all manufactured here.
Other chemicals produced at this site are sulfur compounds,
sodium hydroxide, hydrogen, and ammonia.  Approximately 818
people are employed by PPG at the Natrium plants.
          PPG Industries produces chlorine  at  this  location
and thus,  has it readily available for  use in production of
chlorobenzenes.   The  source of benzenes is not  known,  but
might be at least partially drawn from the byproduct dis-
charges of nearby coke ovens.  It is believed  that  a  large
portion of PPG's monochlorobenzene production  at Natrium  is
claimed by the adjacent Mobay Chemical Co.  plant for  use  as
a solvent in the manufacture of isocyanates.

rv.B.3.d.6.    Standard Chlorine Chemical;  Delaware City,
               Delaware and Kearny, New Jersey
          Standard Chlorine, the only  producer of chloroben-
zenes on the East Coast, has two facilities.   The first is
located at Delaware City,  Delaware and produces a full range
of chlorinated benzenes, while the  second  is  in Kearny, New
Jersey and processes  only  o-  and p-dichlorobenzene  mixtures.
          The company has  150  million  Ibs.  production
capacity  for monochlorobenzene at Delaware  City, Delaware,
                          IV-56

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while the combined  total  capacity  for  o-dichlorobenzene for
both locations  is 66 million  Ibs.,  and for  p-dichlorobenzene
is 90 million Ibs.  Each  of the  plants employs  fewer than
100 persons.
          As might  be expected from the chemistry  of the
manufacture of  chlorobenzenes, hydrochloric acid is  also
produced at Standard Chlorine's Delaware City plant.  No
other chemicals are produced at either  site.  A subsidiary
of Standard Chlorine, Chloroben, Inc.,  operates a manufac-
turing facility adjacent to the Kearny  processing plant
that produces waste and septic system chemicals and  it is
believed that much of the p-dichlorobenzene production is
used there.  As the nation's largest producer of o-  and  p-
dichlprobenzenes, Standard Chlorine is  also thought  to be
a major exporter of these chemicals.

IV.B.3.d. 7.    Specialty Orqanics; Irwindale, California
          Specialty Organics of Irwindale, California, is one of
two processors  (in terms of conventional industry definition) of
o- and p- dichlorobenzenes in the nation, and is the  only pro-
ducer or processor of o- and p-dichlorobenzenes  on  the West
Coast.   Processors  separate mixtures of o-  and  p-dichlorobenzenes
into their individual components.   The Irwindale processing
capacity for o- and p-dichlorobenzene  is 2  million Ibs.  each.
In comparison,  Dow,_PPG,  and  Standard  Chlorine  have
dichlorobenzene capacities  of 30,  20,  and 66 million Ibs.,
respectively; and p-dichlorobenzene capacities  of  30, 30
and 90 million  Ibs.
                          IV-5 7

-------
          Processing  of  dichlorobenzenes accounts for

approximately  80 percent of Specialty Organics' business

which is approximately a million dollars a year.  The

Company employs  ten persons  The source of its materials

is not known.

           Table VI-8 summarizes the information on  chloro-

benzene  producers presented above.


IV.B.3.e.  Interpretation

           Several observations may be  drawn from the dis-

cussion above.

           o    There  appear to be economies of scale in
               the  production of chlorobenzene but the
               relative  importance of  scale is not clear.

           o    Transportation costs in the acquisition of
               chlorine  are potentially  important.   But,
               since  all existing producers have onsite
               sources of chlorine, this* is not a com-
               petitive  factor*.

           o    Transportation costs for  chlorobenzene
               products  are not a factor.  Local markets
               can  be insulated only to  a very small
               extent.

           o    No existing  producer appears to have  an
               assured low-cost  source  of benzene.
               Sources appear plentiful  and competitively
               priced.

           o    The  upperbound for the  number  of employees
               necessary to support a  large chlorobenzene
               production facility appears to be 100, as
               based  upon the Standard Chlorine Chemical
               Delaware  City plant, and  as confirmed by
               the  Montrose Chemical plant.   The employees
               incremental  to chlorobenzene production,
               particularly in larger, integrated chemical
               refineries,  are probably considerably  fewer.
                           IV-58

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                           TABLE  IV-8:  CHLOROBENZENBS PRODUCERS, 1979
Company
Dow Chemical
Monsanto Chemical
Intermediates
Hontrose Chemical
Olin Corporation
PPG Ind.
Specialty Organics
Standard
Chlorine Co. , Inc.
TOTAL
Location
Midland, MI
Sauget, IL
Henderson, NV
Mclntosh, AL
Natrium, WV
Irwindale,CA
Delaware
City ,DE
KearnyrNJ
Employees
6,500-
7,000
1,250
112
100
818
10
51-100
100
Monochloro-
benzene
Capacity
(MiUion Ibs.)
220
150
70
0
90
0
150
0
>680
Products
Manufactures more than 150 chemical products,
including halogenated organics, pesticides,
methylcellulose, flocculants, cosmetics,
heat transfer agents, medicinals, etc.
Manufactures industrial organic chemicals, in-
cluding phosphorous compounds, chlorinated
benzenes, chlorinated amines, hydrochloric
acid, chlorine-caustic soda, sulfur compounds,
phenols.
Manufactures chloral, chlorinated benzenes,
hydrochloric acid, DDT.
Manufactures pantachloronitrobenzene and PCNB.
Chlorine-caustic soda, sulfur compounds,
chlorinated benzenes, hydrogen, ammonia.
Processor of chlorinated benzenes.
Chlorinated benzenes, hydrochloric acid.
Processor of chlorinated benzenes.
m
vo
           SOURCES:  References 1,2,4,11,22,23,25,26,31,33,35,

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          Thus, given these conclusions in conjunction with
a common, relatively uncomplicated production process, it
is probable that the cost distribution for chlorobenzene
production is quite uniform across producers.  This implies
a rather flat  (elastic) industry supply curve.           ,
          While an elastic supply function would ordinarily
imply a potential for significant impact, this situation
is mitigated by other structural factors.  The recent closing
of a number of small, marginal producers has left the chloro-
 benzene industry with a smaller number of relatively large
 producers with highly devloped product supply arrangements.
 Generally speaking, only a very large demand shift would
 threaten the least efficient producer of those left in the
 industry.  However, in this case one processer may be vulnerable
 to a decrease in demand.

 IV.B.4.   Market Expectations
           The Level I analysis documented and emphasized
 the stagnant demand outlook for chlorobenzenes.  Little has
 occurred in this phase of the analysis to indicate any
 revision of this view.
           It does, however, appear that changes are taking
 place in the international trade of chlorobenzene that, while
 rather  limited in current impact, could affect the long term
 outlook.  Tables IV-9 and IV-UO set forth the intercountry
 trade flows with the United States during recent years.
 While the data does not allow examination of specific com-
 pounds, the Tables show a very large increase in chlorobenzene
                           IV-60

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   TABLE  IV-9 : UNITED  STATES  IMPORTS  BY COUNTRY OP ORIGIN

       Mono-, Pi-, and Tri-chlorobenzene  (MM Ibs.)
Prom
1977
1978
1979 (9mo.)
Canada
Japan
United Kingdom
Netherlands
Belgium
France
Germany
Poland
Italy
Other
   TOTAL
 .68
 .009

 .04

 .08
 .017

 .12
 .094
1.04
 .028

 .044
1.025
1.004
1.031
 .01
1.02
 .08

4.242
 .01
 .06
 .04

5.4
 .04
 .02
5.57
                            IV-61

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      TABLE  IV-10: U.S.  EXPORTS BY COUNTRY  OF DESTINATION
             o- and p-Dichlorobenzene (MM Ibs.)
To
1977
1978
1979 (9
TOO.)
Canada
Mexico
Costa Rica
Other, Central America
Brazil
Venezuela
Other, South America
United Kingdom
Other, Europe
Israel
Other, Middle East
Japan
Hong Kong
Taiwan
Ottjer, Asia
Rest of  World

    TOTAL
1.4
2.8
3.0
 .5
7.7
 3.5
 2.5
  .22
  .027
  .96
  .28
  .01
  .12
  .038
  .308
  .007
11.714
  .132
  .'158
  .049
20.023
 8.7
 3.5
  .26
  .001
  .70

  .183
  .005
10.9
  .044
  .196
  .04
24.529
                              IV-62

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 trade flows over the past three years.  Based on the nine-
 month annual rate for 1979, imports have increased sevenfold
 in two years; while exports, starting from a much larger base,
 have grown by nearly a factor of five.
      The export figures are even more startling when it is
 recognized that the figures do not include monochlorobenzene
 or the higher level chlorobenzenes.  Based on a gross estimate
 of 1979 combined domestic production of o- and p-dichlorobenzene,
 it can be seen that domestic consumption is dropped dramatically
 while exports are becoming a dominant market factor.
Year
1977
1979
Total
Production
(MM Ibs.)
112.8
(est.) 80.0
Exports
(.MM Ibs.)
7.2
32.7
Domestic
Consumption
CHM Ibs.)
105.6
47.3
Exports as
Percent of
Production
6.4 %
41.0 %
Today, exports to a single country, Japan, are equivalent
to a quarter of the total domestic consumption.
           While there is little hard information on the
causes of such a dramatic change, it is possible to speculate.
Benzenoid dyes, once a major item of domestic manufacture,
are now imported into the United States in large quantity.
It is possible that domestic health and safety regulations
on workplace exposure to benzene have had  a role  in  the
transfer of this industry overseas.  In addition, rapidly
growing textile production in Asian countries such as Taiwan
                           IV-63

-------
and Korea may have lead the Japanese to expand their bensenoid
dye capabilities.  Japan hai neither the cheap energy  to manu-
facture chlorine nor the aromatic petroleum  feedstocks to pro-
duct lignifleant quantities of benzene, and  thu§, muit Import
ohlorobenzenes.
     Another factor may be domeitic regulation of pesticides.
At a growing number of peiticidea have been  banned  from use
in the United Statea, production capabilities that  formerly
produced large volumes for export may have been transferred
to other countries.  Thus, instead of exporting the finished
product, the United States might instead be  exporting  feed-
stocks.
     Overalli while domestic market prospects for o- and p-
diohlorobenzenes and their products are not  bright, prospects
for foreign markets appear to be somewhat brighter.
     On the*  import side, figures are given for chlorobenasenes
as a group and some data is available by compound.  However,
it is interesting to note that while o- and  p-diohlorobenzene
are exported in trivial amounts to Europe, certain  European
countries  (particularly France) have become  important  exporters
of ohlorobenzenes, particularly the tetrachlorobenzenes.
     It is not clear, however, why imports of these substances
should be increasing when domestic monochlorobeniene capacity
utilisation  is generally felt to be low.  One theory is that
these imports are displacing the production  capacity lost in
the Northeast during the past several years.  Whatever the

                          1V-64

-------
ration, it is clear that foreign imports of ohlorobantanei are
competitive with domestic product*.

IV.B.5.   Alternative Approaches
     Under the proposed test rule, EPA has advanced three
possible regulatory approaches.  Th«aa were formulatad with
ragard to considerations of lampling within the ohlorobenzenea
group.  Where a deoiaion to sample within a group is made, it
also must be decided whether the chemicals selected  should  be
formally treated as individual chemicals or whether the group
should continue to be treated as a category for purposes of
allocating testing costs.  EPA is proposing one approach and
considering two alternative approaches for exemptions and
reimbursement.  Any of the three approaches described below
might be adopted in the final rule.

IV.B.S.a. Proposed Approach
     This approach envisions a rule requiring testing only of
a representative sample of chemicals, sufficient to charac-
terise the category.  Manufacturers and processors of all
ohlorobensenes, however, would be required to share the costs
of testing the sample compounds.  EPA specifies its choice
of a representative sample as shown in Table IV-11 .
                          IV-65

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                      TABLE IV-11
     Representative              Other
     Chlorobenzenes              Chlorobenzenes
     Monochlorobenzene              Meta-dichlorobenzene
     Ortho-dichlorobenzene          1,2,3-Trichlorobenzene
     Para-dichlorobenzene           1,3,5-Trichlorobenzene
     1,2,4-Trichlorobenzene         1,2,3,4-Tetrachlorobenzene
     1,2,4,5-Tetrachlorobenzene      1,2,3,5-Tetrachlorobenzene
     Pentachlorobenzene
      While the testing regulations do not prescribe the manner
in which testing  costs are shared among producers,  it is
necessary for the purpose of impact analysis  to assume a cost
distribution scheme.   The first component of  a distribution
scheme  is to establish the appropriate cost  pool.  Generally
speaking, this  can be done in one of  two ways:  pool costs by
compound, or pool costs by compound groups.   In the case of
the proposed approach, costs are assumed to  be distributed on
a group basis;  i.e., some producers share  in the testing costs
for compounds they do not produce.
      Secondly,  after the cost pool is established, a scheme
must  be adopted to distribute the pooled costs.  This is most
easily  done on  the basis of production volume, although it
could conceivably be done on the basis of  production capacity,
or even on  a uniform producer-by-producer  basis.  Since production
volume  seems to be a likely measure,  it  is assumed to prevail in
each  of the options examined.
      The direct costs of testing the representative sample are
shown in  Table IV-12 below.  The procedure for annualizing these
                            IV-6 6

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          TABLE IV-12 : SUMMARY OF ESTIMATED  TEST COSTS FOR CHLOROBENZENES  ($ thousands)
Compound
Monochlorobenzene
o-Dichlorobenzene
p-Dichlorobenzene
1,2, 4-Trichlorobenzene
1,2,4, 5-Tetrachlorobenzene
Pentachlorobenzene
SUBTOTAL (Proposed
Approach)
m-Dichlorobenzene
1,2, 3-Trichlorobenzene
1,3, 5-Trichlorobenzene
1,2,3, 4-Tetrachlorobenzene
1,2,3, 5-Tetrachlorobenzene
SUBTOTAL
GRAND TOTAL
Oncogen ic
Effects
	
—
—
$ 328- 983
328- 983
328- 983
$ 984-2,949
$ 650-1,200
328- 983
328- 983
328- 983
328- 983
$1,962-5,132
$2,946-8,081
Teratogenic
Effects
$ 50-100
50-100
50-100
27- 81
27- 81

$204-462
$ 50-100
27- 81
27- 81
27- 81
27- 81
$158-424
$362-886
Reproductive
Effects
$110- 220
110- 220
110- 220
	
57- 171
57- 171
$444-1,002
$110- 220
57- 171
57- 171
57- 171
57- 171
$338- 904
$782-1,906

Subchronic
Effects
$ 32- 96
32- 96
32- 96
28- 84
28- 84
28- 84
$180-540
$ 32- 96
28- 84
28- 84
28- 84
28- 84
$144-432
$324-972

Total by
Compound
(Alternatives 1&2)
$ 192- 416
192- 416
192- 416
383-1,148
440-1,319
413-1,238
$1,812-4,953
$ 842-1,616
440-1,319
440-1,319
440-1,319
440-1,319
$2,602-6,892
$4,414-11,845


en
   Guidelines.  Draft Report, Submitted to U.S. Environmental Protection Agency, Office of
   Regulatory Analysis, by Enviro Control, Inc., April 3, 1980.  Adjusted to correspond to pro-
   posed test rule.

-------
costs is described in Section IV.B.6.  following.   The total for
the six compounds—$1,812,000 to $4,953,000—represents the
overall cost pool to be divided  among the producers of the eleven
chlorobenzenes.

IV.B.S.b.  Alternative I
      This alternative is the most  difficult to  characterize in
terms of cost,  it requires that all  chemicals in the chloroben-
zenes category be tested in stages'   with the designated
representative sample comprising  the  initial  testing
stage.  If this stage were adequate to characterize the
entire category, manufacturers and/or processors of the
untested chemicals would obtain  an  exemption and reimburse
the manufacturers and processors who  sponsored the first-stage
tests.
      If  the  first stage were  found to be inadequate to charac-
terize the entire group of  chlorobenzenes, the second stage of
testing  would be required.    Producers would be respon^
sible for a share of the test' costs for only those com~
pounds they produce.
     The principal difficulty with analysis of such an
approach is that it involves assigning a probability tq the.
second stage of testing,  and such a probability would be
almost entirely speculative.  To circumvent this  difficulty,
it is assumed here that the probability is one; that is, second
stage testing is a certainty.   Such an assumption willobviously
bias the cost and impact calculations upward, consistent

                           IV-6 8

-------
with the "worst case11  methodology explained in a later
section.
     For purposes of  analysis, the grand  total of  $4,414,000-
$11,845,000 from Table IV-12 will represent  the testing  cost
pool applicable to Alternative I.

IV.B.S.c. Alternative II
     Although  chlorobenzenes would be analyzed as  a  group  for
purposes of a  Section 4 finding,  six chemicals would be  selected
from the category and tested as  individual cheifticals.  Exemp-
tion and reimbursement considerations would  be the same  as for
single  chemicals, with only the  manufacturers and/or processors
of the  selected chemicals  subject to testing requirements;
i.e., no producer would pay for  tests of  chemicals he  did
not produce  (or process).
     Under this alternative, there would  be  the equivalent of
six separate cost pools established—one  for each  chemical
in the  representative sample.  These costs would be  distributed
in an equitable manner, assumed  for purposes of analysis to be
based on production volume.

IV.B.6.   Impact Analysis
     In this section, the  results of previous steps  are  brought
together in order to  determine the economic  impact of  the
testing regulations.  It is assumed that  the costs of  the
tests will be  distributed  among  the firms according  to a reim-
bursement scheme yet  to be devised.  As discussed  in Chapter
                           IV-69

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II, it is assumed that each producing  firm pays a  share of  the
test costs for chlorobenzenes, based on  its proportion of
total production:
TC
                                   firm
     where
           L • P./TP   Proportion of ill chlorobenzenes
           J    -1      produced by the  jtn  firm
           *4 " X p<4  where i refers to the chlorobenzene
           -1   i   3  chemical
          TP =
          TC
     In the case of Alternative II, each producing firm
 pays a share  of the test costs for those chlorobenzenes
 it produces,  based on its proportion of total production
 of each individual chemical.
                 a..  T.   where   i refers to the chlorobenzene
                  ^   1          j refers to the firm
 The total cost imposed by testing a chlorobenzene is the sum
 of the costs to those firms producing it:
 where
           C.  = Total cost imposed by testing the i
                chlorobenzene
                                                   th
                           IV-70

-------
The total  costs of  testing  the  chlorobenzenes  is  the  sum of
the individual costs:

           TC = 2 C.
               i  1
           It should again be  noted that this analysis treats
testing costs as though  they  are  incurred  in a single year.
The "single year" assumption  reflects the  philosophy  of  con-
servatism  (i.e./ the "worst case"  approach) in estimating
economic impacts, since  the costs  may,  in  fact/ be incurred
over a two-to-three year period.
IV.B.6.a. Methodology
          •As discussed in Section II.C.2., the testing costs
represent a lump sum or fixed cost to the producers in the
chlorobenzene industry.  That is, the total cost of testing is
not affected by total chlorobenzene production and, hence, the
short-run decisions of the firm are unaffected.  In the long
run, however, firms view all costs as variable.  Thus, prior
to payment of the costs, firms must determine whether the ex-
pected stream of revenues, minus all costs, will yield a
                          IV-71

-------
positive net present value  (NPV).  Those firms projecting
negative NPV will, if rational,  decide to leave the industry.
Thus, testing costs may have an  impact on the long-run decisions
of the firm.  This will, in turn, affect the quantity produced
and price of the chemical.
     In general, an external or  exogenous lump sum disturbance
is likely to produce the following impacts on a market:.
          o    Aside from the perfectly inelastic demand
               case, output will fall as the industry
               supply curve shifts to the left in response
               to higher costs;
          o    The price paid by the consumer or buyer
               is likely to increase, while the seller  or
               producer will realize a lower net return;
          o    As output falls,  industry employment will
               decrease unless  increased production of
               other chemicals  absorbs excess labor.
In order to evaluate the impacts on these factors, a  "worst
case" methodology has been developed.  This will be discussed
following the treatment of  the  direct costs of testing.

IV.B.6.a.l.    Annualized Direct Costs of Testing
          The annual industry cost of testing depends upon
critical expectations concerning the chlorobenzene market
in the future.  The economically correct procedure here is
to discount the cost of testing over the expected  life  of
different chlorobenzenes.   As has already been indicated,
the  market  has declined substantially over the past several
years.   Projecting  the future economic life of each chemical
                          IV-72

-------
is extremely uncertain and has not been attempted here.  For
this reason, it is important that assumptions made regarding
the time horizon and the rate at which future revenues are
discounted be biased on the conservative side.
     For the purposes of this study, it is assumed that the
testing costs are capitalized at the before-tax rate of 20
percent.  The time horizon used in this study is 20 years.
(capital recovery factor=.20536).  These are important assump-
tions and are subjected to sensitivity analysis in a subsequent
section.
          In addition to these assumptions, an upper bound
to the costs of testing has been derived in order to account
for nonlaborabory administrative costs and for the pos-
sibility that additional in-depth testing  is required.
In the absence of hard data on  the probabilities that  these
tests will be required, as well as on the  actual cost  of
these tests, it was decided to  increase the high estimate
of the direct testing costs by a factor of two.  Thus,
for the proposed approach and the two alternatives', estimates
for the annualized, industry-wide costs of testing are derived
as shown in Table IV-13.  The low and medium estimates are
derived form the range of test costs presented in Table IV-12
for the different alternatives.  The high annualized cost
estimate is derived as discussed above.
                           IV-7 3

-------
            TABLE IV-1*
          OVERALL ANNUALIZED TEST
          COSTS  ($ thousands)

High Range
Medium Range
Low Range
Proposed
Approach
$2,034
1,017
372
Alternative I
$4,865
2,432
906
Alternative II
$2,034
1,017
372
    SOURCE: Table IV-13
These costs are utilized in the "worst case" scenarios  in
the following sections.
 IV.B.6 .a.2.
'Worst Case"  Scenario
           The"worst case? that is, the situation in which
the market will be most sensitive to economic disturbances
is the  long-run, competitive equilibrium case.  This market
scenario has the following characteristics:
           o     All firms have identical costs;
           o     Each firm produces at a point where price
                equals per-unit costs, thus eliminating
                any economic profit or rent;
           o     Within the range of relevant output, the
                industry supply curve is horizontal, or
                perfectly elastic; that is, no firm will
                operate if price falls below the current
                level.
           while it is unlikely that the chlorobenzenes
industry conforms exactly to these characteristics, from
the discussion in Section IV.B.4. we cannot rule out the
possibility that the firms in this industry behave in a
similar manner.  In addition, we consider the worst case
scenario for the following reasons:
                           IV-74

-------
          o    It will provide an upper-bound estimate
               of the potential economic disturbances
               attributable to TSCA testing requirements;
          o    It requires only the specification of a
               demand function, that is,  estimates of
               impacts are feasible even  if econometric
               estimates  of the supply curve fail;
          Some a priori statements concerning the economic
impacts can be made in this situation:
               Price will increase by the full amount of
               the per-unit cost of testing; in other
               words, buyers will bear the full burden
               of testing costs;
               The decrease in output will depend solely
               upon the elasticity of demand for chloro-
               benzenes (of course, if demand is inelastic,
               no change in output will occur).
          This case can be depicted graphically as in Figure
IV-5.  As we have previously indicated, the cost of TSCA
testing requirements is essentially a lump sum cost imposed
on the industry which will be viewed as a long-run variable
cost by firms participating in the industry.  However, in
order to determine its impact on the industry supply curve,
this lump sum fee must be converted to a per-unit cost.
Let the annualized industry cost of testing be, a.  The
per-unit cost, t, can then be expressed as
               t = a/Q
In general, the per-unit burden of testing depends on the
industry output; that is, the per-unit cost  (or supply curve
shift) will be simultaneously determined by the impact of
the cost on output.  However, in the worst case situation,
                          IV-75

-------
FIGURE IV-5
EXAMPLE OP SHIFT IN SUPPLY CURVE
     DUE TO TESTING COSTS
                   IV-76

-------
the supply curve shifts so that the entire amount of the
per-unit cost is passed on to the consumer.

IV.B.6.a. 3-    Results
     The differential impacts of each alternative are com-
pared through examination of resultant product price changes.
These price changes are calculated on a "worst case" basis;
i.e., all costs are fully passed through to prices, no "eva-
sive" actions by producers are possible, testing costs are
at the high end of the feasible range and production volumes
are at the low end of the minimal range.  Such assumptions
result in per-unit impacts probably much greater than can be
expected in the real world.
     Simulated price increases  (full pass-through of. per-unit
test costs) due to the imposition of testing requriements are
shown in Table IV-14.  The proposed approach results in con-
stant, across-the-board increases, small in relation to sales
price.  In this case, total testing costs are lumped together
and divided by the overall production volume of the represen-
tative chlorobenzenes.
                 •
     The by-product chlorobenzenes are  those that  are produced
in low volume and primarily as  by-products.  Most  are sold  in
mixture along with the principal products, some are disposed
of in reactor tars, and in at least one case, the  by-product is
purposely separated from the principal  product and dealt with
      a.  21
as waste.
                          IV-77

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                               TABLE IV-14:   PER-UNIT ANNUALIZED TEST  COSTS,  CHLOROBENZENES
PRIMARY PRODUCT
Monochlorobenzene
Ortho-dichlorobenzene
Para-dichlorobenzene
1,2,4-
Trichlorobenzene ,
1.2.4,5-
Tetracblorobenzene ,
<
Pentachlorobenzene
By-Product
	
Meta-dichlorobenzene
Heta-dichlorobenzene
a) 1,2.3-
Trichlorobenzene
b) 1.3.5-
Trichlorobenzene
a) 1,2,3,4-
Tetrachlorobenzene
b) 1,2,3,5-
Tetrachlorobenzene
*
TOTAL
Total Produc-
tion Primary
Product1
(million IDS.,
1978)
296.3
41.1
41.3
17.1
6.4
6.7
740.3
Sales Price
Primary
Product2
(fc/lb., 1978)
26$
26
27
36
n.a.
n.a.

ALTBRNA'
Total Direct
Test Costs3
(Primary C By-
product)
($ x 1000)
$192-416
613-12245
613-12245
1263-3786
•
1320-3957
413-1238
$4414-11845
1VE I
Per-0nit4
Annualized
Cost
(«/lb.)
.06*
1.2
1.2
9.1
25.4
7.6

ALTBRNA'
Total Direct
Test Coats3
(Primary only)
($ x 1000)
$192-416
192-416
192-416
383-1148
440-1319
413-1238
$1812-4953
1VE II
Per-Onit4
Annualized
Cost
($/lb.)
.06*
.4
.4
2.8
8.5
7.6

PROPOSED
APPROACH
Per-Unit«
Annualized
Cost
(*/lb.)
.27$
.27
.27
.27
.27
.27

-J
00
         .Total production - domestic production plus imports.  See Tables JV-2 and XV-4.
         ,See Table IV-2.
         ^See Table ZV-12.
          Prom Table XV-13? ; upper figures from cost distribution multiplied by two for High Range Estimate and annualized.  Divided by production on indivi-
     dual ehemcial basis for Alternatives I and II.  Total production equals divisor for Proposed Approach.
          Test cost for m-dlchlorobenzene apportioned on a 50 percent basis to both o- and p-dichlorobenxene.

-------
     Application of testing requirements to these compounds
will have the effect of increasing the costs of their associated
principal products/ even when the by-product is not present in
the commercial mixture.  Thus, a figure representing testing
costs per-pound for these secondary chlorobenzenes is not
relevant, since they are almost never sold as such.  (The sole
possible exception is meta-dichlorobenzene, which is imported
in small amounts as a separate compound.)
     Alternatives I and II produce price increases specific
to the particular primary chemicals, including allocated by-
product testing costs when appropriate.  These price incre-
ments vary widely from .06$/lb. on monochlorobenzene to 25.4$/
Ib. for 1,2,4,5-tetrachlorobenzene under Alternative I.  It
can be seen that the very high volume of monochlorobenzene
relative to the other chlorobenzenes (40 percent) greatly
effects the distribution of test costs among products from one
alternative to the other.
     It is now possible to combine the results of the demand
analysis in order to determine consumption decrements due to
the price increases for the lower chlorobenzenes.  For mono-
chlorobenzene the increase in price ranges from .27C/lb.
(proposed approach) to .064/lb. (Alternatives I & II).  Apply-
ing the statistically derived elasticity factor  (.24), quantity
is estimated to fall by amounts ranging between 902,000 and
193,000 Ibs. per year—decreases of .31 and .07 percent,
respectively.  (See Table IV-15.)   Due to the large quantity
of monochlorobenzene produced annually and the relatively large
                          IV-79

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        TABLE IV-15:
PRICE AND CONSUMPTION IMPACTS
OP TESTING COSTS BOR THREE
REGULATORY ALTERNATIVES

Mono ch lorobenz ene
Proposed Approach
Alternative I
Alternative II
Increase
in Price
(cents)
.27$
.06
.06
Percent
of 1978
Price*
1.27%
0.27
0.27
Decrease
in Con-
sumption
(000 Ibs)
902.3
193.4
193.4
Percent
of 1978
Consumption
.31%
.07
.07
Ortho- di chlorobenzene
Proposed Approach
Alternative I
Alternative II
Par a- di chlorobenzene
Proposed Approach
Alternative I
Alternative II
.27
1.20
.40
.27
1.20
.40
1.04
4.44
1.48
1.04
4.44
1.48
217.4
931.6
310.5
68.4
293.0
97.7
.53
2.25
.75
.17
.71
.24
1Using 1978 actual (not deflated) sales prices

-------
size of the plants producing it, this would appear to consti-
tute a minor impact on the monochlorobenzene producers.
     With respect to o-dichlorobenzene, the burden of the
additional costs is distributed over a smaller quantity of
production and, hence, the increase in price is greater—
ranging from .27 to 1.2 cents (1.0 to 4.4 percent).  Since
the demand for o-dichlorobenzene is more price elastic (although
still inelastic: e =-.51), the additional cost translates into
a decrease in quantity consumed of greater magnitude.  The
decrease in consumption is estimated to range from 217,000 Ibs.
to 932,000 Ibs., representing decreases of .53 and 2.25 percent
of 1978 production, respectively.  Given the nature of this
worst case model, the decrease in production is predicated upon
the decisions of some firms to move these resources into more
productive uses.  However, the analysis is incapable of pre-
dicting which companies or plants, if any, would be affected.
     The 1978 production and price for p-dichlorobenzene are
approximately the same as for o-dichlorobenzene, and hence, the
increases in price are similar,  ranging from .27 to 1.2 cents
(1.0 to 4.4 percent).  However,  demand for p-dichlorobenzene
is more inelastic (-.16), causing the decrease in consumption
to be less.  This decrease ranges from 68,000 to 293,000 Ibs.
(.17 to .71 percent) of 1978 production.  Again, for the analysis
we cannot determine which producers will be most affected.
However, as mentioned in Section IV.B.4.b, the possibility
exists that scale economies may place a smaller firm in a less
competitive position.
                          IV-81

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     As previously pointed out, while it is statistically
possible to derive meaningful demand functions for the lower
chiorobenzenes, it is not possible to follow the same procedure
for the "higher" compounds in the category.  This is a difficult
problem to cope with, since on the basis of per-unit costs and
production volumes, the higher chlorobenzenes would appear to
 be more heavily impacted by the proposed test rule.  Futher,
one of the most important characteristics of the chlorobenzenes
system is that the majority of the compounds are manufactured
sequentially; e.g., the tri- group is made from the di- group,
tetras from the tri- group, and penta- from tetra-.  While only
a small volume of ortho- and para-dichlorobenzene production
goes  to produce trichlorobenzenes, one-third to a half of all
trichlorobenzenes serve as inputs to tetrachlorobenzene, and all
tetra- production goes to pentachlorobenzene.
     In addition, all pentachlorobenzene is used to produce a
single product; pentachloronitrobenzene  (PCNB), a widely used
agricultural fungicide.  The Olin Corporation is the sole United
                                                  20
States producer of pentachlorobenzene and of PCNB.   PCNB obvi-
ously will have to absorb not only the testing costs associated
with its primary product, pentachlorobenzene, but also the test-
ing costs imposed on its "upstream" raw materials, the chloro-
benzenes in sequence.  This cumulative loading of test costs
into a single downstream product is termed "cascading."
     Figure IV-6 shows the material flow of chlorobenzenes neces-
sary to produce a pound of PCNB.  Weighting the per-pound test-
int cost increments by material requirements gives the cumulative
                           IV-8 2

-------
FIGURE IV-6 :  CHLOROBENZENE MATERIAL FLOW
               FOR PCNB PRODUCTION
              Dichlorobenzene
<	Chlorine
                          0.4 Ib.
              Trichlorobenzene
^	Chlorine
                          0.54 Ib.
             Tetrachlorobenzene
                                t;	Chlorine
                          0.645 Ib.
            Pentachlorobenzene
^	Nitrogen
                          0.86  Ib.
        Pentachloronitrobenzene
                   (PCNB)


                          1.0  Ib.
                   IV-83

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cost effect imposed on PCNB.  These are  shown by  regulatory
option in Table IV-16.

                       TABLE IV-16 :
                               Cost Increment  for
                               PCNB  (Worst Case Basis)
                               	(C/lb.)
             Proposed Approach          .7$
             Alternative I            28.34
             Alternative II           13.7C
                      •
      As would be expected, the  range of  cost  increments accru-
 ing to PCNB is quite wide.  The question still  remains, however,
 as to the impact of such cost increments,  and this reduces to
 a question of the specific attributes of PCNB and of the
 market for it.
      PCNB is a broad-spectrum fungicide used  on a wide variety
 of corps, including cotton, peanuts, field crops, and fruits
 and vegetables.  It appears to  be extremely effective and
 easy to use.  Fungicides that are potential substitutes for
 PCNB are not only viewed as inferior technological replacements,
 but also as more expensive in terms of overall  application
     23 24
 cost.  ' There is no specific price for PCNB publicly available,
 but the average price  for the group of fungicides to which it
 belongs is well in excess of $2.00 per Ib.
      Thus, at least preliminarily, it would appear that demand
 for PCNB is relatively inelastic.  If the^ price of PCNB is
 taken to be around $2.00 per Ib.,a 28.3$ increase (Alternative
                            IV-84

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I) would amount to 14.2 percent, and would cover the worst
possible increment due to testing cost regulations.
     An increase of this magnitude must be considered to be
significant, but the actual magnitude of impact would be
wholly dependent upon demand elasticity.  If demand were totally
inelastic/ industry impact would be zero.
     One important unknown involves the role of PCNB imports.
Imports of PCNB would not be subject to test cost reimbursement
since PCNB is not a TSCA chemical.  Thus, it is conceivable that
imports could undercut domestic PCNB price and cause a signifi-
cant shift of resources.  The most recent import figures are
                                                           14
for 1976 when 33,000 Ibs. of PCNB were reportedly received.
Roughly, this amounted to one percent of total domestic con-
sumption in that year.  This figure, however, sheds little light
on whether or not imports are currently a potentially signifi-
cant market factor.
IV.B.6.b. Summary and Interpretation
          The next step in assessing the economic  impact of
testing requirements would be to evaluate the effect on
employment in the industry.  This  is, typically, derived
from employment per unit  (e.g., million Ibs.) of output
for the industry.  From the estimate of the decrease in
production, an estimate for the decline in industry employ-
ment is obtained.  Alternatively,  from financial information
about the production process for each firm, a cost of capital
                          IV-85

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analysis may predict the closing of particular plants, if the
existing resources have no alternative uses.
      For the present analysis, neither of these methods appears
appropriate.  First, the decreases in production for the high
volume, lower chlorobenzenes represent a small percentage of
total production and, in most cases, is a small fraction of the
capacity of each company.  In addition, as noted in Section
IV.B.4.d., the producing companies manufacture a wide range of
products at the. particular plants and it is believed that in
many cases, the resources involved in chlorobenzenes production
potentially could be transferred to other activities with a
minimum of disruption.
     In  summary, the maximum decrease in consumption of the
three  lower chlorobenzenes is estimated to  be of 1.30 million
Ibs.,  representing a decrease of less than  one percent in total
production.   It appears that the industry would be able to
absorb this with minor disruptions.
     While the effect of the proposed test  rule on the higher
chlorobenzenes is not as clear-cut, it is possible to make a
tentative presumption that the  impact would be minor.  The
greatest impact due to cost "cascading" would clearly fall on
the  fungicide, PCNB; but its apparent demand  inelasticity,
its  relatively high price, and  the inconclusiveness of evidence
on import competition leads to  the conclusion that even with
the  most inflated possible projection of test costs, PCNB will
still  remain  a viable commercial product.
                            IV-8 6

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IV.B.7.    Limits of Analysis
      The above analysis has been conducted using limited
information and information of varying reliability.  It is
essential to consider the analysis in terms of its overall
reliability and to judge whether or not the conclusions reached
are sound and useable in a regulatory sense.
      The strongest results of the analysis rest on two basic
 sources:  (1)  estimates of testing costs,  and (2)  estimates of
 demand elasticity.  Estimates of testing costs have been made
 on the basis of current market intelligence;  however,  because
 these estimates are believed to be highly variable from lab to
 lab and from test to test, and because specific test
 protocols are not available, these data are given as ranges
 rather than point estimates.
           Tn addition to  the  testing  costs  estimated here,
there  are  the  costs  of  additional tests  that  would be  required
were positive  results to  occur on the set of  minimum test re-
quirements.  Further, there are administrative and regulatory
costs  associated with testing requirements  that are not yet
well, understood and  not included.  Also, as discussed  above,
due to the timing  of the  entire sequence of tests,  costs ex-
ternal to  those estimated here may be imposed.   To compensate
for these  deficiencies, the  "worst case" analysis  includes  a
scenario doubling  the high estimate of laboratory  testing
costs.   It is  believed  that this case should  more  than compen-
sate for unknown quantities.
                           IV-87

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      Testing costs are formulated here under the assumption
that each compound is tested once, in its pure form.
      In terms of demand estimation, the methodology employed
 is very commonly accepted as valid and incorporates its own
 measures of validity, as explained in the Appendix.  The data
 are more questionable.
           Price, for instance,  as officially quoted may not
 be representative of the year's transactions.   It may vary
 widely and quoted figures often do not reflect  actual values
 of the chemicals traded  (due, for example, to discounts).  How-
 ever, considerable volumes of chemicals are- traded  on  the  open
 market, and thus, in many respects, these price data are more
 representative statistically than many other price figures
 commonly employed in similar studies.
           In terms of sensitivity, it is important to note
 that even if the testing costs  are multiplied by, say, a factor
 of two, as was done to derive the maximum costs, the results
 are little affected.  The results are also very robust with
 respect to the estimated demand elasticities.   For example,
 if the elasticities are doubled, in order to greatly increase
 the potential for impact, there is little relative effect on
 prices and quantities.  Thus, while demand estimates might be
 wide of the mark, there is little reason to believe that this
 would alter the conclusions to  a significant extent.
                           IV-88

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      The assumptions behind annualization of the test costs are
also open to criticism.  However, a sensitivity analysis of
the annualized costs demonstrates that using a shorter
capitalization period  (10 instead of 20 years) and/or a lower
cost of capital (10 percent) has the effect of lowering annual-
ized costs, except when a 20 percent cost of capital is used
in conjunction with a 10-year period.  In this case, the
annualized costs increase about 17 percent.  The results of this
sensitivity analysis are presented in Table IV-17.  The potential
error in costs introduced by these assumptions is well within
the doubling of costs to account for external factors built
into the maximum cost figures.  Thus, the results appear to be
very robust with respect to the parameters in this model.

IV.B.7.   Conclusions
     The foregoing analysis leads to the general conclusion
that imposition of testing requirements on chlorobenzene pro-
ducers will, at worst, be small and, at best, be negligible.
     This general conclusion follows from several separate
findings:
          o    Annualized testing costs will not be unduly
               burdensome, particularly if the proposed
               approach is adopted.
          o    The elasticity of demand for high volume
               chlorobenzene compounds is inelastic with
               respect to price;
          o    The small, financially marginal producers
               have already abondoned the chlorobenzene
               market;
          o    The growth of export markets has the poten-
               tial to mitigate the otherwise static out-
               look for chlorobenzene demand;
                           iv-sa

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  TABLE IV-17:  SENSITIVITY ANALYSIS OF ANNUALIZED
                COSTS FOR TETRACHLOROBENZENES
Low Cost
Estimate  C$440)
 (From TABLE IV-13)
period  (yrs)
    10

    20
                                        Cost of Capital
                                        10%         20%
$72
                                        52
105
             90
High Cost
Estimate ($1,319)
 CProm TABLE IV-13)
period  (yrs)
    10

    20
                                  \
                  Cost of  Capital
                  10%          20%
$215
                                        154
315
            271
     All values are in  '000 dollars.
                        IV-90

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          o    The price and quantity impacts presented
               in Table IV-16 have been calculated on a
               "worst case" basis and appear relatively
               insensitive to data deficiencies and to
               methodological manipulations;

          o    Impacts on the higher chlorobenzenes, while
               not insignificant on a "worst case" basis,
               will probably be manageable given the nature
               of demand for these substances;

     There-are two principal caveats associated with this

overall conclusion, however;

          o    Estimates of demand shifts for o- and p-
               dichlorobenzenes appear to be of a magni-
               tude that could produce significant impacts
               on small or marginal firms.  This potential
               would be exacerbated were costs assessed on
               a per establishment basis, rather than on a
               production basis;

          o    If the price elasticity of demand for PCNB
               imports is high, the conclusions relative
               to impact on the higher chlorobenzenes
               could be overly optimistic.
                          IV-91

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REFERENCES FOR CHAPTER IV



       Kirk-Othmer Encyclopedia of Chemical Technology, Third
Edition, 1979, Volume 5, pp. 797-808.

       Kirk-Othmer Enclyclopedia of Chemical Technology, Second
Edition/ 1964, Volume 5, pp. 253-267.

       Directory of Chemical Producers, 1979, SRI International,
Menlo Park, California.
      4
       Draft Preliminary  Evaluation of the Economic Positions
of Selected Chemicals, Office of Toxic Substances, U.S. Environ-
mental Protection Agency, August 1979.

       Synthetic Organic Chemicals, United States Production and
Sales, USITC Publication 920, 1977, U.S.  International Trade Com-
mission, U.S. Government Printing Office, Washington, D.C., 1978.

       Condensed Chemical Dictionary, Ninth Edition, Hawley, G.G.,
editor, Van Nostrand, 1977.

       Foreign Trade Reports, FT410, United States Exports,
Schedule E, Commodity by Country, Quantity, and Value, Current
and Cumulative, Bureau of the Census, U.S. Department of Com-
merce, December 1978.
      Q
       Foreign Trade Reports, FT135, United States General Imports,
Schedule A, Commodity Groupings, Commodity by Country, Bureau of
the Census, U.S. Department of Commerce,  December 1978.
      Q
       Chemical and Engineering News, October 15, 1979, p. 12.

       Chemical and Engineering News, August 20, 1979, p.11.

     1J>A Study of Industrial Data on Candidate Chemicals for
Testing, Report PB274-264, U.S. Environmental Protection Agency,
Office of Toxic Substances, Washington, D.C.
     12
       U.S. International Trade Commission, Imports of Benzenoid
Chemicals and Products, 1978, Publication 990, U.S. Government
Printing Office, Washington, D.C. 1979.

       U.S. International Trade Commission, Imports of Benzenoid
Chemicals and Products, 1977, Publication 900, U.S. Government
Printing Office, Washington, D.C. 1978.
                            IV-92

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     14
       U.S. International Trade Commission, Imports of Benzenoid
Chemicals and Products, 1976, Publication 828, U.S. Government
Printing Office, Washington, D.C. 1977.

       U.S. International Trade Commission, Imports of Benzenoid
Chemicals and Products, 1975, Publication 816, U.S. Government
Printing Office, Washington, D.C. 1977.

       U.S. International Trade Commission, Imports of Benzenoid
Chemicals and Products, 1974, Publication 762, U.S. Government
Printing Office, Washington, D.C. 1976.

       Grant, E., W.G. Ireson, and R.S. Leavenworth, Principles
of Engineering Economy, Sixth Edition,  John Wiley and Sons,
New York, 1976.
     18
       Eichers, T., and P. Andribenas, Evaluation of Pesticide
Suppliers and Demand for 1979, U.S. Department of Agriculture,
Agriculture Economic Report No. 422, 1979.
     19
       Eichers, T., Evaluation of Pesticide Supplies and Demand
for 1980, U.S. Department of Agriculture, Agriculture Economic
Report No. 454, 1980.

       Hagerman, R.L., Comment of Dow Chemical U.S.A. regarding
Third Report of the Interagency Testing Committee, March 30, 1977.

       Burgess, Kenneth L., Dow Chemical Company, response to
Draft of Proposed TSCA Section 4 Testing Rules for Chlorobenzenes,
April 23, 1980.
     22
       Rotrosen, Samuel,  Montrose Chemical Corporation of Cali-
fornia, comments on Draft TSCA Section Test Rules, May 1, 1980.
     23
       U.S. Environmental Protection Agency, Office of Pesticide
Programs, Initial Scientific Review of PCNB, EPA540/1-75-016,
1976.
     24
       Natural Cotton Council of America, Statement in Response
to Rebuttable Presumption Against Continued Regulation of Pesti-
cide Products Containing PCNB, February 27, 1978.
     25
       "Chemical Profiles: p-Dichlor©benzenes," Chemical Marketing
Reporter, January 22, 1979.
     26
       "Chemical Profile: o-Dichlorobenzenes," Chemical Marketing
Reporter, June 4, 1979.
     27
       Materials Balance for Chlorobenzenes—Level I Preliminary,
Review Copy, EPA 560/13-80-001, U.S. Environmental Protection
Agency, Office of Toxic Substances, Washington, D.C., January 1980,
                           IV-9 3

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      28
        Merck Index, Ninth  Edition, Rahway, New Jersey,
Merck and Co., Inc., 1976.
      29
        National Occupational Hazard Survey Data Base/ U.S.
Department of Health, Education, and Welfare, National Institute
for Occupational Safety and Health, Washington, D.C. 1977.

        Toxic Substances Control Act Chemical Substances Inventory,
Volumes 1-5, U.S. Environmental Protection Agency, Office of
Toxic Substances, Washington, D.C., May 1979.

        Holmes, P., Olin Chemicals Group to U.S. Environmental
Protection Agency, Washington, D.C., March 20, 1979.

      32
        Cost Analysis Methodology and Protocol Estimates;  Envi-
ronmental Standards, Borriston, Laboratories, Inc. and Enviro
Control Inc., April 28, 1980.

        Barone, N.J., Olin Corporation to Mr. Newburg-Rinn
comments concerning Draft TSCA Section 4 Test Rules, May 8, 1980.
      34
        Cost Analysis Methodology and Protocol Estimates TSCA
Health Standards and FIFRA Guidelines, Draft Report submitted
to U.S. Environmental Protection Agency, Office of Regulatory
Analysis by Enviro Control, Inc., April 5, 1980.

        Synthetic Organic Chemicals, United States Production and
Sales, 1978, USITC Publication 1001, U.S. International Trade Com-
mission, U.S. Government Printing Office, Washington, D.C. 1979.

        Chemical and Engineering News, Frbruary 4, 19PO, p. 14.

      37Synthetic Organic Chemicals, United States Production and
Sales, 1973, USITC Publication 728, U.S. International Trade Com-
mission, U.S. Government Printing Office, Washington, D.C., 1975.
                            IV-94

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    APPENDIX;  ECONOMETRICS AND REGRESSION ANALYSIS

          Regression analysis is the statistical tool used
by econometricians to estimate relations among variables.
Sometimes referred to as "curve-fitting," regression analysis
involves representing an economic relationship in the form
of a mathematical model or equation.  The commonly used form
is a linear model:
     (1)  y = a + 6X + u
where
          y = Dependent variable;
          a = Constant term or slope intercept;
          B = Vectors of slope coefficients;
          X = Vector of independent variable(s);
          u = Stochastic disturbance term.
          The distrubance term, u, reflects the randomness
of economic variables and is assumed to be normally and
independently distributed with mean zero and constant variance:
     (2)  u~ NI(0,02I)
Using these assumptions we can estimate the coefficients of
the model from data on the dependent and independent vari-
ables and test hypotheses about the relationship.
          In order to estimate the parameter coefficients,
we wish to derive the curve (for each independent variable,
holding all others constant) which best fits the data.
                        A-l

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That is, we wish to minimize the combined difference
between the curve and each data point.  The common method
is that of "least squares," where the sum of squared dif-
ferences is minimized.  Of course, squaring the differences
eliminates any negative differences  and, thus, summing  the
squared idfferences yields a positive value.  The curve
which results in the smallest  "sum of squares" is the curve
which best fits the data.
          Any relationship which can be transformed into a
linear equation  (e.g., by taking logs, squaring, etc.)  can
be estimated in this manner.   One of the most popular rela-
tions estimated is the hyperbolic function:
      (3)  y = oXBeu
This is estimated after taking (natural) logs of both sides
of the equation, yielding:
      (4)  Jin y = a + 0Un X) + u
The predominant feature of this relationship is that it
implies a constant elasticity  of y with respect to X  (see,
Section II.C.2.).
          From the estimates of the  parameter coeficients
and residual statistics, hypotheses  concerning the model and
its estimation can be tested.  The tests fall into two
general categories:   (a) tests concerning the parameters of
the model, and  (b) tests concerning  the statistical assump-
tions made.
                        A-2

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          In this study, we generally report the results of
these tests; two of type  (a) and the remainder of type  (b).
The first of these tests is for statistical significance
of the estimated equation.  This is equivalent to testing
whether the true values of all coefficients  estimated are all
simultaneously equal to zero.  This test utilizes the "F-
statistic" derived from residual statistics of the estimated
equation.  The calculated F-statistic is compared to the F-
statistic at a given level of significance (e.g., 95 percent)
for the appropriate degrees of freedom to accept or reject
the hypothesis that the model is insignificant.
          To test whether each X has a linear influence on
y (or equivalently, whether each 3, separately, is equal to
zero) we utilize the "t-statistic."  This statistic is derived
by dividing the coefficient estimate by its estimated standard
error.  The t-statistics generally are reported in parentheses
under the coefficient estimates.  When compared with the
"critical value" for t, based on the level of significance
and degrees of freedom, it is used to test whether the true
value of the coefficient is zero.
          The final hypothesis test we investigate is the
Durbin-Watson test for serial correlation (positive or negative)
among the residuals.  This tests whether the assumption of
independently distributed disturbances is violated.  If so,
an alternate means of estimation  (other than ordinary least
squares) which accounts for this is required.  Since the
                        A-3

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                           July 198Q
method of testing is not as straightforward  as  for  the

other tests, we do not attempt  to describe it here.*
     *
      For a discussion of this, as we!3 as all other methods
mentioned in this section, see any good econometrics text*
Three examples are:  Johnston, J., Econometric Methods,  2nd
Edition, McGraw Hill, New York, 1972; Intriligator, Michael D.
Econometric Models, Techniques, and Applications, Prentice-
Hall, New Jersey, 1978; and Pindyck, Robert S. and Daniel L.
Rubinfeld, Econometric Models and Economic Forecasts, McGraw-
Hill, New York, 1976.
                        A-4

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                                  TECHNICAL REPORT DATA
                           (Please read Instructions on the reverse before completing}
1. REPORT NO.
  EPA  560/11-80-021
                             2.
                                                         3. RECIPIENT'S ACCESSION-NO.
4. TITLE AND SUBTITLE                                  .
  Economic Impact Analysis  of Proposed  Testing
  Regulations  for Chloromethane  and
  Chlorobenzenes
                                                         5. REPORT DATE
                          June  1980
             6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
  David R. Mayo, Joanne V.  Collins, and
  Barrett J.  Riordan
             8. PERFORMING ORGANIZATION REPORT NO.

                #2152-185
9. PERFORMING ORGANIZATION NAME AND ADDRESS
    MATHTECH,  Inc.
    Suite 200,  1611 North  Kent  Street
    Arlington,  Virginia 22209
             10. PROGRAM ELEMENT NO.
                2L5811
             11. CONTRACT/GRANT NO.
                68-01-5864
 12. SPONSORING AGENCY NAME AND ADDRESS
    Office of Pesticide and Toxic Substances
    U.S. Environmental Protection Agency
    401 M Street,  S.W.
    Washington. D.C,  20460	
             13. TYPE OF REPORT AND PERIOD COVERED
                Proposed Report	
             14. SPONSORING AGENCY CODE
 15. SUPPLEMENTARY NOTES
    EPA Project Officer:  Mr Sammy K.Ng
 16. ABSTRACT
 This report presents the methodology that will be used for analyzing the economic impact
 of this and future test rules.  The methodology follows a two-stage approach.  All chemi-
 cals are subjected to a Level I Analysis.  This analysis consists of evaluating four mar-
 ket characteristics: demand  sensitivity, costs, industry structure, and market expectations
 The results of the Level I analysis (along with a consideration of the costs of the required
 tests) indicate the potential for significant adverse economic impacts.  Where the indica-
 tion is negative,  no further economic analysis is required.  However, for those chemical
 substances or groups where the Level I analysis indicates a potential for significant eco-
 nomic impact, a more detailed and comprehensive analysis is conducted.  This Level II anal
 ysis attempts to predict more accurately whether or not this potential will be realized,
 and, if so, its magnitude.
 The Level I  analysis for Chloromethane indicates that the proposed health effects test
 rule will not impose any significant economic impact on manufacturers of Chloromethane.
 For the chlorobenzenes group, the results of the Level I analysis indicated that a poten-
 tial for economic  impacts exists; however, the Level II analysis concludes that the eco-
 nomic impacts are  expected to be minor.
17.
                               KEY WORDS AND DOCUMENT ANALYSIS
                 DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS
                                                                      c.  COSATI Field/Group
 Chloromethane
 Chlorobenzenes
 TSCA Section 4  Health Effects Test
    Rule
 Economic  Impact Analysis
18. DISTRIBUTION STATEMENT

 Release  Unlimited
19. SECURITY CLASS (TillsReport/
    Unclassified
21. NO. OF PAGES
     144
                                             20. SECURITY CLASS (This page)
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