Unittd State*
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-82-005
November 1982
Water
Economic Impact Analysis
of Effluent Limitations and
Standards for the Porcelain
Enameling Industry
QUANTITY
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ECONOMIC IMPACT ANALYSIS OF
EFFLUENT LIMITATIONS AND STANDARDS
FOR THE PORCELAIN ENAMELING INDUSTRY
Submitted to:
Environmental Protection Agency
Office of Analysis and Evaluation
Office of Water Regulations and Standards
Washington, D.C. 20460
November 1982
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
This document is an economic impact assessment of the recently-issued
effluent guidelines. The report is being distributed to EPA Regional
Offices and state pollution control agencies and directed to the staff
responsible for writing industrial discharge permits. The report includes
detailed information on the costs and economic impacts of various treatment
technologies. It should be helpful to the permit writer in evaluating
the economic impacts on an industrial facility that must comply with BAT
limitations or water quality standards.
The report is also being distributed to EPA Regional Libraries, and
copies are available from the National Technical Information Service
(NTIS), 5282 Port Royal Road, Springfield, Virginia 221fil (703/487-4600).
If you have any questions about this report, or if you would like
additional information on the economic impact of the regulation, please
contact the Economic Analysis Staff in the Office of Water Regulations
and Standards at EPA Headquarters:
401 M Street, S.W. (WH-586)
Washington, D.C. 20460
(202) 382-B397
The staff economist for this project is Debra Maness (202/382-5385).
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Mention of trade names
or commercial products
does not constitute endorsement
or recommendation for use.
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PREFACE
This document is a contractor's study prepared for the Office of Water
Regulations and Standards of the Environmental Protection Agency (EPA). The
purpose of the study is to analyze the economic impact which could result from
the application of effluent standards and limitations issued under Sections 301,
304, 306, 307, and 501 of the Clean Water Act to the porcelain enameling industry.
The study supplements the technical study (EPA Development Document) sup-
porting the issuance of these regulations. The Development Document surveys
existing and potential waste treatment control methods and technology within
particular industrial source categories and supports certain standards and limita-
tions based upon an analysis of the feasibility of these standards in accordance
with the requirements of the Clean Water Act. Presented in the Development
Document are the investment and operating costs associated with various control
and treatment technologies. The attached document supplements this analysis by
estimating the broader economic effects which might result from the application
of various control methods and technologies. This study investigates the effects
in terms of product price increases, effects upon employment and the continued
viability of affected plants, effects upon foreign trade, and other competitive
effects.
The study has been prepared with the supervision and review of the Office
of Water Regulations and Standards of EPA. This report was submitted in accor-
dance with Contract No. 68-01-6348, Work Assignment 14, by JRB Associates, and
was completed in November, 1982.
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TABLE OF CONTENTS
SUMMARY
CHAPTER 1
INTRODUCTION
1.1 PURPOSE
1.2 INDUSTRY COVERAGE
1.3 INDUSTRY SEGMENTATION
1.4 ORGANIZATION OF REPORT
S-l
1-1
1-1
1-1
1-2
1-3
CHAPTER 2 STUDY METHODOLOGY
2.1 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
2.2 STEP 2: SUPPLY-DEMAND ANALYSIS
COST OF COMPLIANCE ESTIMATES
PLANT-LEVEL PROFITABILITY ANALYSIS
CAPITAL REQUIREMENTS ANALYSIS
PLANT CLOSURE ANALYSIS
OTHER IMPACTS
NEW SOURCE IMPACTS
2.3 STEP 3:
2.4 STEP 4:
2.5 STEP 5:
2.6 STEP 6:
2.7 STEP 7:
2.8 STEP 8:
2.9 -STEP 9: SMALL BUSINESS ANALYSIS
2-1
2-1
2-3
2-8
2-8
2-11
2-12
2-13
2-14
2-14
CHAPTER 3 INDUSTRY CHARACTERISTICS 3-1
3.1 OVERVIEW 3-1
3.1.1 Industry Coverage 3-1
3.1.2 Industry History 3-4
3.2 FIRM AND PLANT CHARACTERISTICS 3-5
3.2.1 Types of Plants 3-6
3.2.2 Company Organization 3-6
3.2.3 Financial Profile 3-9
3.2.4 Industry Competition 3-11
3.3 PRODUCTS AND PRODUCTION TRENDS 3-16
3.3.1 Trends in Porcelain Enamel Product Shipments 3-17
3.3.2 End Product Prices 3-17
3.3.3 Trends in Production Capacity 3-21
3.4 DEMAND ELASTICITY 3-23
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TABLE OF CONTENTS (Continued)
CHAPTER 4 BASE CASE ANALYSIS 4-1
4.1 OVERVIEW 4-1
4.2 DEMAND RELATED FACTORS 4-2
4.2.1 New Products 4-2
4.2.2 Changing Use of Porcelain Enamel in Existing
Products 4-3
4.2.3 Demand for Porcelain Containing Products 4-9
4.2.4 Net Demand for Porcelain Enameling 4-9
4.3 SUPPLY FACTORS 4-11
4.3.1 Price of Porcelain Enameling 4-11
4.3.2 Number of Production Facilities 4-12
4.4 SUMMARY OF BASELINE CONDITIONS 4-14
CHAPTER 5 PORCELAIN ENAMELING EFFLUENT GUIDELINE CONTROL OPTIONS
AND COSTS 5-1
5.1 OVERVIEW 5-1
5.2 CONTROL AND TREATMENT TECHNOLOGY 5-1
5.3 TREATMENT COSTS 5-2
5.3.1 Assumptions Made in Estimating Compliance Costs 5-2
5.3.2 Compliance Cost of Existing Sources 5-3
5.3.3 Compliance Costs of New Sources 5-5
CHAPTER 6 ECONOMIC IMPACT ANALYSIS
6.1 PRICE AND QUANTITY CHANGES
6.2 PROFIT IMPACT ANALYSIS
6.3 CAPITAL REQUIREMENTS ANALYSIS
6.4 PLANT CLOSURE POTENTIAL
6.5 OTHER IMPACTS
6.5.1 Industry Structure and Competition
6.5.2 Substitution Effects
6.5.3 Community and Employment Impacts
6.5.4 Foreign Trade Impacts
6.6 NEW SOURCE IMPACTS
6-1
6-1
6-3
6-5
6-8
6-10
6-10
6-11
6-11
6-13
6-13
CHAPTER 7 SMALL BUSINESS ANALYSIS
7.1 SMALL BUSINESS ANALYSIS BASED ON SMALL BUSINESS
ADMINISTRATION EMPLOYMENT LEVELS
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT VALUE OF
SHIPMENTS
7.3 SMALL BUSINESS ANALYSIS BASED ON PLANT FLOW RATES
7-1
7-2
7-2
7-5
ii
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TABLE OF CONTENTS (Continued)
7.4 SUMMARY OF SMALL BUSINESS ANALYSIS 7-10
CHAPTER 8 LIMITATIONS TO THE ACCURACY OF THE ANALYSIS 8-1
8.1 DATA LIMITATIONS 8-1
8.2 METHODOLOGY LIMITATIONS 8-2
8.2.1 Price Increase Assumptions 8-2
8.2.2 Profit Impact Assumptions 8-3
8.2.3 Capital Availability Assumptions 8-3
8.3 SENSITIVITY ANALYSES 8-4
8.3.1 Compliance Cost Sensitivity Analysis 8-4
8.3.2 Plant Revenues Sensitivity Analysis 8-4
8.4 SUMMARY OF LIMITATIONS 8-7
APPENDIX A CALCULATION OF PROFIT DiPACT THRESHOLD VALUE A-l
APPENDIX B ESTIMATION OF KEY FINANCIAL PARAMETERS B-l
iii
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LIST OF TABLES
NUMBER TITLE PAGE
S-l ESTIMATED COMPLIANCE COSTS FOR PORCELAIN ENAMELING INDUSTRY S-10
S-2 ESTIMATED NEW SOURCE COMPLIANCE COSTS S-ll
S-3 SUMMARY OF ESTIMATED FACILITY CLOSURES FOR EXISTING SOURCES S-12
3-1 MAJOR END-USE PRODUCTS CONTAINING PORCELAIN ENAMEL BY
TECHNICAL SUBCATEGORY 3-3
3-2 PLANTS IDENTIFIED FROM EPA DATA COLLECTION PORTFOLIOS 3-7
3-3 SUMMARY OF PLANT PROFILES 3-8
3-4 SELECTED AVERAGE OPERATING RATIOS BY PRODUCT GROUP 3-10
3-5 CORPORATE FINANCIAL DATA, 1980 3-12
3-6 CONCENTRATION RATIOS FOR SIC CODES WHICH CONTAIN MAJOR ;
PORCELAIN ENAMELED PRODUCTS (in percent) 3-13
3-7 MARKET SHARES OF MAJOR APPLIANCE MANUFACTURERS, 1980 3-14
3-8 ESTIMATED VALUE OF SHIPMENTS OF MAJOR PORCELAIN ENAMELED
PRODUCTS, 1977 3-19
3-9 PRODUCT PRICES AND ENAMELING COSTS FOR MAJOR PORCELAIN
ENAMELED PRODUCTS (1977 Dollars) 3-20
3-10 SQUARE FEET PORCELAIN ENAMELED BY MAJOR MARKET, 1976-1977 3-22
3-11 ELASTICITY ESTIMATES FOR PORCELAIN ENAMELED PRODUCTS 3-25
3-12 PLASTIC AND STAINLESS STEEL SANITARY WARE MARKET SHARES 3-29
4-1 SUBSTITUTION AWAY FROM PORCELAIN ENAMEL USAGE SINCE 1960 4-4
4-2 PROSPECTS FOR PORCELAIN ENAMEL USAGE 4_g
4-3 ANNUAL SHIPMENTS (1968-1981) AND PROJECTED ANNUAL SHIPMENTS
(1982-1987) FOR HOUSEHOLD APPLIANCES AND SANITARY WARE 4-10
5-1 ESTIMATED COMPLIANCE COSTS FOR PORCELAIN ENAMELING INDUSTRY 5-4
5-2 AVERAGE ANNUAL COMPLIANCE COST PER SQUARE FOOT OF PORCELAIN
ENAMELED PRODUCT 5_6
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LIST OF TABLES (Continued)
NUMBER TITLE PAGE
5-3 NEW SOURCE COMPLIANCE COSTS 5-7
6-1 ANTICIPATED INDUSTRY PRICE AND PRODUCTION CHANGES 6-2
6-2 PROFIT IMPACT ANALYSIS INPUTS 6-4
6-3 SUMMARY OF PROFIT IMPACT ANALYSIS 6-6
6-4 SUMMARY OF CAPITAL REQUIREMENTS ANALYSIS 6-7
6-5 SUMMARY OF ESTIMATED FACILITY CLOSURES FOR EXISTING SOURCES
AT TREATMENT LEVELS 2 TO 5 6-9
6-6 SUMMARY OF EMPLOYMENT EFFECTS 6-12
6-7 IMPACT ANALYSIS OF NEW SOURCE ALTERNATIVE 2 6-14
7-1 DISTRIBUTION OF SMALL PORCELAIN ENAMELING PLANTS BASED
ON SMALL BUSINESS ADMINISTRATION EMPLOYMENT LEVELS 7-3
7-2 PLANT DISTRIBUTION BY VALUE OF SHIPMENTS 7-4
7-3 PLANT DISTRIBUTION BY FLOW RATES 7-6
7-4 SMALL BUSINESS ANALYSIS BASED ON EPA DEFINITION OF SMALL
PLANTS 7-8
7-5 SUMMARY OF PLANT AND LINE CLOSURES FOR SMALL PLANTS 7-9
8-1 SUMMARY OF 30 PERCENT COST SENSITIVITY ANSLYSIS - PROFIT
IMPACT 8-5
8-2 SUMMARY OF 30 PERCENT COST SENSITIVITY ANALYSIS - CAPITAL
REQUIREMENTS 8-6
8-3 SUMMARY OF 20 PERCENT REVENUE REDUCTION SENSITIVITY ANALYSIS 8-8
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LIST OF FIGURES
NUMBER TITLE PAGE
2-1 ECONOMIC ANALYSIS STUDY OVERVIEW 2-2
2-2 PRICE AND MARKET SHARE ADJUSTMENTS 2-7
3-1 TYPICAL PORCELAIN ENAMELING PROCESS SEQUENCE 3-2
3-2 UNIT SHIPMENTS OF REFRIGERATORS/FREEZERS, HOT WATER
HEATERS, WASHERS, RANGES, DRYERS, DISHWASHERS, AND
HOUSING STARTS 3-18
VI
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SUMMARY
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SUMMARY
INTRODUCTION
Purpose
This report provides an identification and analysis of the economic
impacts which are likely to result from the promulgation of EPA's effluent
regulations on the Porcelain Enameling Industry. These regulations include
effluent limitations and standards based on Best Practicable Control Tech-
nology Currently Available (BPT), Best Available Technology Economically
Achievable (BAT), New Source Performance Standards (NSPS), and Pretreatment
Standards for New and Existing Sources (PSNS and PSES) which are being pro-
posed under authority of Section 301, 304, 306, 307, and 501 of the Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1977 (Public
Law 92-500). The primary economic impact variables assessed in this study
include the costs of the proposed regulations and potential for these regula-
tions to cause plant closures, price changes, unemployment, changes in industry
profitability, structure and competition, shifts in the balance of foreign
trade, new source impacts, and impacts on small businesses.
Industry Coverage and Segmentation
Porcelain enameling is a metal finishing process performed by appliance,
plumbing fixture, job shops and other product manufacturers. It involves the
application of a glass coating called frit to steel, cast iron, aluminum, or
copper. The purpose of the coating is to improve resistance to chemical abra-
sion and corrosion, and to improve thermal stability, electrical insulation,
and appearance. The porcelain enameling process involves the preparation of
S-l
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the enamel slip (ball milling)*, the surface preparation of the base metal,
application of the enamel, and the drying and firing to permanently fuse the
coating to the metal. These processes comprise the focus of this study.
For regulatory purposes, EPA divided the porcelain enameling industry
into the following four technical subcategories based on basis material coated:
Porcelain enamel on steel
Porcelain enamel on cast iron
Porcelain enamel on aluminum
Porcelain enamel on copper.
Since the pollutants generated in the surface preparation of the metal vary
by type of metal enameled, this subcategorization scheme was chosen to subdi-
vide the industry into groups of plants with similar pollution profiles.
However, from an economic viewpoint, it is expected that the economic and
financial impacts of the regulations will vary with the type of product
enameled. This is because product market strength, pricing latitude, and the
ability of manufacturers to substitute alternative materials for porcelain
enameling vary by end product. Therefore, in order to develop a basis for
assessing economic impacts, these four subcategories were subdivided into the
following major end product groups:
Ranges
Home Laundry
Hot Water Heaters
Dishwashers
Refrigerators
Steel Sanitary Ware
* The slip is a suspension of ceramic material in either water or oil. Ball
milling is the process for grinding enamels utilizing vitreous china balls
in a rotating cylindrical mill.
S-2
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Cast Iron Sanitary Ware
Cookware
Architectural Panels.
In addition, while job shops do not represent a single end-product, they are
included as a separate economic group.
METHODOLOGY
The approach used to assess the economic impacts likely to occur as a
result of the costs of each regulatory option is to (1) develop an operational
description of the price and output behavior of the industry and (2) assess
the likely plant-specific responses to the incurrence of the compliance costs
enumerated in the body of this report. Thus, industry conditions before and
after compliance with the regulations are compared. Supplemental analyses
are used to assess linkages of the porcelain enameling industry's price, pro-
duction, and profitability changes to employment, community, industry struc-
ture, and balance of trade impacts. These analyses were performed for each
of five regulatory options considered by EPA. The methodology of the study
includes nine major steps. Although each step is described independently,
there is considerable interdependence among them. Specifically, the study
proceeded using the following nine steps:
Step 1; Description of Industry Characteristics
The first step in the analysis is to develop a description of basic
industry characteristics such as the determinants of demand, market structure,
the degree of intra-industry competition, and financial performance. The
resulting observations indicated the type of analysis needed for the industry.
The sources for this information include government reports, trade association
data, discussions with various trade associations and industry personnel, and
an EPA survey of firms in the industry.
S-3
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Step 2: Supply - Demand Analysis
The second step in the analysis is a determination of the likely changes
in market prices and industry production levels resulting from each regulatory
option. The estimates of post-compliance price and output levels are used in
the plant-level analysis (Step 4) to determine post-compliance revenue and
profit levels for specific plants in each group.
A pricing strategy which would maintain the industry's initial return on
sales is assumed as an approximation of industry-wide price increases. How-
ever, due to weak market conditions and declining demand for porcelain enameled
architectural panels, it was assumed that architectural panel producers will
not be able to raise their prices and, therefore, will have to absorb the
compliance costs. Industry-wide quantity reductions are also estimated.
Step 3: Cost of Compliance Estimates
Investment and annual compliance costs of five treatment options were
estimated for each porcelain enameling facility. These cost estimates form
the basis for the economic impact analysis.
Step 4: Plant-Level Profitability Analysis
The basic measure of profitability used to assess the impact of the regu-
lations on individual plants is return on investment (ROI). Plants with after-
compliance ROI below a threshold value of 7 percent are considered potential
plant closures. The 7 percent ROI threshold value is estimated to correspond
to a 12 percent after-tax return on equity which is assumed to be the minimum
return for a business to continue operation. Due to the unavailability of
plant-specific baseline financial characteristics for the porcelai-n enameling
industry, average industry financial and operating ratios for each product
group was applied to each plant.
3-4
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Step 5: Capital Requirements Analysis
In addition to analyzing the potential for plant closures from a profita-
bility perspective, the ability of firms to make the initial capital investment
needed to construct and install the required treatment systems is also assessed.
The analysis of capital availability is based on the ratio of "compliance capi-
tal investment requirements to plant revenues" (CCI/R). This ratio was calcu-
lated for each plant and compared to a threshold value to indicate the potential
for plant closure as a result of not being able to raise sufficient capital.
Step 6; Plant Closure Analysis
For this analysis, plant closure estimates are based primarily on the
quantitative estimates of post-compliance profitability and the ability to
raise capital developed in Steps 4 and 5, respectively. Although the decision
to close a plant, like most major investment decisions, is largely based on
financial performance, it is ultimately judgmental. This is because the
decision involves a wide variety of considerations, many of which are highly
uncertain and cannot be quantified. Thus, the identification of plants as
potential closures is interpreted as an indication of the extent of plant
impact rather than as a prediction of certain closure.
Step 7; Other Impacts
Other impacts evaluated include impacts on employment, communities,
industry structure, and balance of trade. These are assessed through supple-
mentary analyses on the basis of the findings of Steps 2, 4, 5, and 6.
Step 8; New Source Impacts
This step analyzes the effects of NSPS/PSNS guidelines. The analysis is
based on model plants developed for each technical subcategory and the corres-
ponding compliance costs of the alternative treatment technologies. The impacts
S-5
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of new source regulations are determined by a comparison of estimated compliance
costs to expected revenues for the model plants.
Step 9; Small Business Analysis
This analysis identifies the economic impacts which are likely to result
from the promulgation of the regulations on small businesses in the porcelain
enameling industry. The primary economic variables covered are those analyzed
in the general economic impact analysis such as plant closures and unemployment.
Most of the information and analytical techniques in the small business analy-
sis are drawn from the general economic impact analysis. The specific condi-
tions of small firms are evaluated against the background of general conditions
in the porcelain enameling markets.
The impacts on small plants were assessed by examining the distribution,
by plant size, of the number of porcelain enameling plants, plant revenues,
wastewater volumes, compliance costs and potential closures from regulations.
INDUSTRY CHARACTERISTICS
EPA has identified 116 plants in the U.S. that perform porcelain enameling
operations. Porcelain enameling plants can be subcategorized into two basic
types captive operations within an integrated manufacturing facility, and
independent job shops. Captive operations comprise about 80 percent of the
plants and 92-95 percent of the industry production, whereas job shops represent
about 20 percent of the plants and 5 to 8 percent of the industry production.
In 1976, the annual production rates of 108 plants (those which reported
production data in an EPA industry survey) ranged from 25,000 square feet (of
exposed surface area enameled) for a small job shop to 62,190,000 square feet
(of exposed surface area enameled) for an integrated appliance manufacturer,
totaling 775 million square feet for the industry. Also, approximately
50 percent of the plants are middle sized, with an employment of between
S-6
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50 to 500 workers; and while many plants were built before 1950, most plants
have had recent modification.
Industry competition among firms that manufacture products with porcelain
enamel finishes appears to be rather intense. Manufacturers appear to be
quite competitive in attempts to maintain and improve their brand names'
market share as well as maintaining or improving their private-label produc-
tion. There is evidence of a trend toward increasing market share among the
large manufacturers for most home appliance product groups.
Except for the cookware group, foreign competition is not significant
for the porcelain enameling industry.
In most of its major applications, porcelain enamel faces strong competi-
tion from alternative materials or finishing techniques such as plastic,
fiberglass, cultured marble, stainless steel, coated coil, and paint. Over
the last two decades, porcelain enamel use declined, the number of production
facilities decreased, and production capacity was reduced. However, most of
the substitution seems to have already taken place, and the substitution
pattern away from porcelain enamel appears to have leveled off in recent
years.
The demand for porcelain enameled products is dependent on two factors:
(1) the market strength of the various end products which contain porcelain
enamel, and (2) the availability of substitute materials for porcelain enamel-
ing finishes. Generally, the competition from alternative finishes appears to
affect the demand for porcelain enameled products more than from end product
competition. The responsiveness of demand factors to price changes is reflect-
ed in the measure of price elasticity. Inelastic coefficients were assigned
to each major product group (varying from -.3 to -.9) except architectural
panels, which proved to be elastic and assigned the coefficient -1.2.
S-7
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BASE CASE ANALYSIS
Baseline conditions in the porcelain enameling industry were projected
for the 1983-1987 period to assess the industry's status in the absence of
this regulation. These projections form the basic background for the economic
impact conclusions. In particular, it is projected that demand will remain
stable and there will be no baseline closures.
WATER POLLUTION CONTROL OPTIONS AND COSTS
Based on the analysis of the potential pollutant parameters and treatment
in place in the porcelain enameling industry, EPA identified five treatment
technologies that are applicable for the existing sources in the industry:
Treatment Level 1: Settling sump plus chemical
treatment
Treatment Level 2: Physical and chemical treat-
ment (lime and settle)
Treatment Level 3: In-process flow reduction plus
physical and chemical treatment (lime and settle
plus flow reduction)
Treatment Level 4: Physical and chemical treat-
ment plus filtration (lime and settle plus
filtration)
Treatment Level 5: In-process flow reduction,
physical and chemical treatment plus filtration
(lime and settle, filtration and flow reduction).
For new sources, two alternative treatment technologies were examined:
Treatment Level 1: Lime and settle, flow reduc-
tion
Treatment Level 2: Lime and settle, flow reduc-
tion plus filtration and 3-stage countercurrent
cascade rinse to further reduce wastewater flow.
S-8
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Table S-l presents the estimated total industry investment and annual
compliance costs of these technologies for the existing sources, and Table 5-2
summarizes the compliance cost estimates of the new source treatment alterna-
tives for model plants.
FINDINGS
Plant Closure Impact
Table S-3 summarizes the estimated number of closures among existing
sources as the result of the alternative treatment levels. Twenty-one plants
or production lines (10 job shops, 4 architectural panels, 4 cookware, 1
range, 1 hot water heater, and 1 steel sanitary ware) are estimated to close
at Treatment Levels 2 to 5. Nineteen of these closures were below the ROI
threshold and above the capital requirements threshold. Two facilities (both
job shops) were estimated to close solely on the basis of capital availability.
At Treatment Level 1, only one job shop is projected to close.
Industry Structure Impact
The impact of the regulations on industry structure and competition is
assessed via a review of post-compliance market concentration. For Treatment
Levels 2 to 5, significant increases in product group concentration could
occur in the job shop (10 closures), architectural panels (4 closures), and
cookware (4 closures) subcategories.
Substitution Effects
The effects of the alternative regulations on substitution potential are
fairly insignificant as the price increases associated with the compliance
costs and the corresponding quantity reductions are small.
S-9
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TABLE S-l. ESTIMATED COMPLIANCE COSTS FOR PORCELAIN ENAMELING INDUSTRY EXISTING SOURCES (1978 DOLLARS)
No. of
Product Croups Plant*
Range a 25
Home Laundry 9
Diahwashera 4
Hot Hater Heater* 9
Refrigerator* 2
Steel Sanitary
Hare 9
Caat Iron
Sanitary Hare 2
Cookware 11
Architectural
f Panel* 11
H-
o
Job Shop* 23
Barbecue a 1
Total for
Sample Plant* 106
Indirect
Dischargers 82
Direct
Discharger* 24
Total for
Industry 116
Indirect
Discharger* 88
Direct
Dischargers 28
Annual
Production
(10 xsq.ft.)
215.533
181.720
48,060
75,211
(a)
58.255
(a)
50,982
35,552
52,310
(a)
774,628
556,389
218,240
851,700
597,100
254,000
Total Compliance Capital Investment
Level 1
1,435.2
1.004.0
341.8
179.2
(a)
416.8
(a)
434.3
221.9
613.4
(a)
4.931.7
3,780.9
1,150.8
5,170.4
3,912.8
1.257.6
Level 2
4,991.9
1,771.2
1,429.3
1.309.6
(a)
2,296.9
(a)
2,526.0
1,464.9
4.452.4
(a)
21.450.3
17,326.3
4.124.0
23,242.8
18,529.3
4,713.4
l« Thousand )
Level 3 Level 4
5,340.4
1.900.6
1,507.4
1,385.7
(a)
2.384.5
(a)
2.681.5
1.532.8
4,674.8
(a)
22,673.9
18,300.8
4,373.0
24,544.8
19.565.8
4,979.0
6,690.0
3,293.3
1,909.9
1,418.4
(a)
2,807.8
(a)
3.136.0
1.590.6
5.018.8
(a)
27,498.1
21,866.8
5.631.2
29.487.3
23,143.9
6,343.4
Level 5
7,036.0
3,421.4
1,987.8
1,494.3
(a)
2.895.3
(a)
3.291.1
1.658.4
5,240.9
(a)
28,716.0
22.837.3
5,878.7
30,783.6
24,176.2
6,607.3
Level 1
371.4
259.8
88.5
46.4
(a)
107.9
(a)
112.4
57.6
158.7
(a)
1.276.5
978.7
297.8
1,338.3
1,012.8
325.5
Total Annual Cost of Compliance
Level 2
3,031.7
2,141.1
692.3
536.3
(a)
960.9
(a)
846.0
597.1
1.649.5
(a)
11,097.7
8.671.6
2,426.1
11,803.5
9.105.1
2,698.4
! Thousand)
Level 3
3,108.3
2.170.1
709.3
553.1
(a)
980.4
(a)
880.1
612.2
1,698.4
(a)
11,367.6
8.886.0
2,481.4
12.090.6
9,333.2
2,757.4
Level 4
3.504.8
2,560.9
824.0
565.7
(a)
1.100.7
(a)
1,011.7
629.5
1,802.2
(a)
12,760.5
9,911.7
2.848.9
13.520.3
10.364.4
3,155.9
Level 5
3,580.9
2,589.7
841.0
589.9
(a)
1,120.2
(a)
1,045.7
644.5
1,850.9
(a)
13.036.4
10.132.5
2.903.9
13,813.5
10,599.0
3.214.6
(a)Withheld to avoid disclosure of confidential data.
HA: Hot available.
Source: EPA.
-------
TABLE S-2. ESTIMATED COMPLIANCE COSTS FOR A MODEL NEW SOURCE
Technical Subcategory
Steel Aluminum Cast Iron Copper
Average Annual Production
per Plant* (thousand sq ft) 6,610 1,380 4,280 280
Treatment Level 1 Compliance
Costs per Plant ($ thousand)
Capital Investment 247.8 183.0 72.0 72.0
Annual Costs 80.6 61.6 22.1 22.1
Treatment Level 2 Compliance
Costs per Plant ($ thousand)
Capital Investment 259.8 195.0 82.0 84.0
Annual Costs 83.6 63.5 24.0 24.1
*0ne side of metal
Source: EPA
S-ll
-------
TABLE S-3. SUMMARY OF ESTIMATED FACILITY CLOSURES FOR EXISTING SOURCES
Treatment Level 1
All Plants Direct Indirect All Plants Direct
Treatment Levels 2 to 5 .
Indirect
Potential Closures
Line Closures
Plant Closures
All Closures
1
0
1
0
0
0
1
0
1
12
9
21
2
1
3
10
8
18
Employment at
Line Closures
Plant Closures
All Closures
Market Share of
Closures (%)
2
0
2
0
0
0
2
0
2
185
303
488
51
8
59
134
295
429
2.4
0.2
2.2
*Less than 0.05 percent
SOURCE: JRB Associates estimates.
S-12
-------
Community and Employment Impacts
The 21 porcelain enameling plants and lines projected to close are all
located in different localities/municipalities. Total employment affected by
these closures are 488 employees. The largest employment impact to a single
locality is 55 employees; thus, community impact seems to be insignificant.
Foreign Trade Impacts
Except for the cookware group, where a significant level of import compe-
tition already exists, the regulations will have no foreign trade impacts. For
the cookware manufacturers, the price increase due to regulations is less than
1 percent; such a price increase would not alter the trading pattern substan-
tially.
New Source Impacts
Two treatment alternatives are considered for newly constructed facilities
and existing facilities that are substantially modified. For the purpose of
evaluating the new source impacts, compliance costs of new source standards
are defined as incremental costs over the costs of selected standards for
existing sources.
New source Treatment Level 1 is similar to the selected treatment tech-
nology for existing sources, and there is no additional incremental compliance
cost for this alternative.
The costs of new source Treatment Level 2 are also low (annual compliance
costs are less than 1 percent of revenues) and are not expected to deter new
entry.
S-13
-------
Impacts on Small Entities
Economic impacts, as indicated by plant closures and unemployment, are
highest among the smaller plants:
17 of the 21 projected plant closures are among
small businesses as defined by the Small Business
Administration's employment levels
All 21 projected closures have less than $5 million
in plant revenues
14 projected closures are indirect dischargers with
flow rate less than 60,000 I/day and production rate
less than 1600 m^ per day.
S-14
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1. INTRODUCTION
1.1 PURPOSE
This report identifies and analyzes the economic impacts which are likely
to result from the promulgation of EPA's effluent regulations on the Porcelain
Enameling Industry. These regulations include effluent limitations and stan-
dards based on Best Practicable Control Technology Currently Available (BPT),
Best Available Technology Economically Achievable (BAT), New Source
Performance Standards (NSPS), and Pretreatment Standards for New and Existing
Sources (PSNS and PSES) which are being proposed under authority of Section
301, 304, 306, 307, and 501 of the Federal Water Pollution Control Act, as
amended by the Clean Water Act of 1977 (Public Law 92-500). The primary
economic impact variables assessed in this study include the costs of the
proposed regulations and potential for these regulations to cause plant
closures, price changes, unemployment, changes in industry profitability,
structure and competition, shifts in the balance of foreign trade, new source
impacts, and impacts on small businesses.
1.2 INDUSTRY COVERAGE
Porcelain enameling is a metal finishing process performed by appliance,
plumbing fixture, job shops and other product manufacturers. It involves the
application of a glass coating called frit to steel, cast iron, aluminum, or
copper. The purpose of the coating is to improve resistance to chemical
abrasion and corrosion, and to improve thermal stability, electrical insula-
tion, and appearance. The porcelain enameling process involves the prepara-
tion of the enamel slip (ball milling)*, the surface preparation of the base
metal, application of the enamel, and the drying and firing to permanently
fuse the coating to the metal. The focus of this study is on the ball
milling, metal preparation, and process application stages of porcelain
enameling.
*The slip is a suspension of ceramic material in either water or oil. Ball
milling is the process for grinding enamels utilizing vitreous china balls in
a rotating cylindrical mill.
1-1
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1.3 INDUSTRY SEGMENTATION
For regulatory purposes, EPA divided the porcelain enameling industry
into four technical subcategories based on basis material coated. These
subcategories are:
Porcelain enamel on steel
Porcelain enamel on cast iron
Porcelain enamel on aluminum
Porcelain enamel on copper.
Since the pollutants generated in the surface preparation of the metal vary by
type of metal enameled, this subcategorization scheme was chosen to subdivide
the industry into groups of plants with similar wastewater profiles. While
this scheme may be appropriate from a technical viewpoint, it is expected that
the economic and financial impacts of the regulations will vary with the type
of product enameled. This is because product market strength, pricing lati-
tude, and the ability of manufacturers to substitute alternative materials for
porcelain enameling vary by end product. Therefore, subdividing these four
subcategories into end product groups is required to develop a basis for
assessing economic impacts. The major end products which contain porcelain
enamel are:
Ranges
Home Laundry
Hot Water Heaters
Dishwashers
Refrigerators
Steel Sanitary Ware
Cast Iron Sanitary Ware
Cookware
Architectural Panels.
In addition, while job shops do not represent a single end-product, they are
included as a separate economic group.
1-2
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1.4 ORGANIZATION OF REPORT
The remainder of this report consists of seven chapters. Chapter 2
describes the analytical methodology, Chapter 3 provides the basic industry
characteristics, and Chapter 4 projects some of the critical parameters into
the future to enable an understanding of the expected characteristics of the
industry during the 1982 to 1987 time period, when the primary economic
impacts of the proposed regulations will be felt. Chapter 5 describes the
pollution control technologies considered by EPA and their associated costs.
The information in Chapter 5 is derived primarily from the technical
Development Document prepared by EPA's Effluent Guidelines Division. Chapter 6
describes the economic impacts estimated to result from the cost estimates
that are presented in Chapter 5. Chapter 7 presents an analysis of the
effects of the proposed regulations on small business, and Chapter 8 outlines
the major limitations of the analysis and discusses the possible effects of
the limitations on the study's major conclusions.
1-3
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2. STUDY METHODOLOGY
Figure 2-1 shows an overview of the analytical approach used to assess
the economic impacts likely to occur as a result of the costs of each proposed
regulatory option. For the Porcelain Enameling industry, five regulatory
options are considered in the economic impact study. The approach used in
this study is to (1) develop an operational description of the price and
output behavior of the industry, and (2) assess the likely plant-specific
effects of the compliance costs enumerated in Chapter 5.
The operational description of the price and output behavior is used, in
conjunction with compliance cost estimates, to determine new post-compliance
industry price and production levels for each regulatory option and for each
of the Porcelain Enameling product groups. Individual plants are then
subjected to a financial analysis that uses capital budgeting techniques to
determine potential plant closures. Effects on employment, community, foreign
trade and industry structure are also determined. Specifically, the study
proceeded in the following nine steps:
1. Description of industry characteristics
2. Industry supply and demand analysis
3. Analysis of cost of compliance estimates
4. Plant level profitability analysis
5. Plant level capital requirements analysis
6. Assessment of plant closure potential
7. Assessment of other impacts
8. New source impacts
9. Small business analysis.
Although each of these steps is described separately in this section, it is
important to realize that there are significant interactions between them, as
shown in Figure 2-1.
2.1 STEP 1: DESCRIPTION OF INDUSTRY CHARACTERISTICS
The first step in the analysis is to describe the basic industry
characteristics. These characteristics, which include number and type of
2-1
-------
EPA POLLUTION
CONTROL COSTS
INDUSTRY
SEGMENTATION
INDUSTRY
STRUCTURE
MARKET
STRUCTURE
FINANCIAL
DATA
NJ
I
ro
FOREIGN
TRADE
EFFECTS
INDUSTRY
MICROECONOMIC
ANALYSIS
PRICE INCREASE
ANALYSIS
COMMUNITY
EMPLOYMENT
EFFECTS
INDUSTRY
PRICE
LEVELS
INDUSTRY
PRODUCTION
LEVELS
IDENTIFICATION
OF HIGH-
IMPACT
SEGMENTS
EMPLOYMENT
EFFECTS
MODEL
FINANCIAL
ANALYSIS
PLANT
CLOSURES
FIGURE 2-1. ECONOMIC ANALYSIS STUDY OVERVIEW
-------
plants, the determinants of demand, market structure, the degree of intra-
industry competition, and financial performance, are presented in Chapter 3 of
this report.
It was also necessary to determine if, in the absence of effluent regula-
tions, the key parameters in industry structure would change significantly
during the 1980's. Projections of industry conditions begin with a demand
forecast. The demand during the 1980's is estimated via trend analysis and
market research analysis. The potential for change in porcelain enameling
prices and number of facilities is also assessed.
The sources for this information include government reports, trade
association data, discussions with various trade association representatives
and individuals associated with the industry, and an EPA industry survey.
2.2 STEP 2: SUPPLY-DEMAND ANALYSIS
The purpose of the supply-demand analysis, step 2 of the study approach,
is to determine the likely changes in market prices and industry production
levels resulting from each regulatory option. The estimates of post-
compliance price and output levels are used in the plant-level analysis to
determine post-compliance revenue and profit levels for specific plants in
each product group. If prices are successfully raised without significantly
reducing product demand and companies are able to maintain their current
financial status, the potential for plant closings resulting from the regula-
tion will be minimal. If prices cannot be raised to fully recover compliance
costs because of the potential for a significant decline in product demand or
because of significant intra-industry competition, the firms may attempt to
maintain their financial status by closing higher cost/less efficient plants.
The supply-demand analysis was divided into four basic components: determina-
tion of industry structure, projection of possible changes in industry struc-
ture to 1984 (the expected effective date for the regulation), determination
of plant- and firm-specific operational parameters (e.g., production costs,
profit rates), and development of price-quantity algorithms'.
2-3
-------
Short run pricing behavior depends upon the market structure of the
industry, which can range from competitive to monopolistic competition, to
oligopoly, and to monopoly situations. Many economic impact studies begin by
assuming perfect competition. However, the product groups covered in this
study exhibit some characteristics that are indicative of non-competitive
pricing mechanisms.
The perfectly competitive market structure is one in which there are many
buyers and sellers and the actions of any one of these do not significantly
affect the market. Firms in a competitive market generally earn a "normal"
rate of return on their assets. If it is assumed that (1) the market for a
competitive good is currently at equilibrium, or will be when the regulations
become effective, and (2) firms will attempt to maintain their current
financial status by passing through industry-wide cost increases in the form
of higher prices (to the extent the market will allow), the post-compliance
equilibrium price and quantity level can be derived from the interaction of
the elasticities of supply and demand.
The high concentration ratios for some of the product groups and the
existence of specialty markets suggest the possibility of non-competitive
pricing behavior. The oligopolistic pricing scheme is applicable for those
product categories which exhibit characteristics of oligopoly markets,
such as:
Few firms in the product group
High industry concentration
Low degree of foreign competition
Abnormally high profitability
Low demand elasticities
Highly capital intensive
Large degree of integration of production, marketing, and distribution
Large degree of specialized knowledge.
Industries -vhich exhibit the first three of these characteristics are
those in which the pricing and output actions of one firm will directly affiect
2-4
-------
those of other firms in the industry. While these conditions do not guarantee
oligopolistic behavior, they are necessary conditions and good indicators that
oligopolistic behavior exists. Abnormally high profits in an industry would,
in time, normally attract new entrants to the industry, thereby increasing
price competition (because there are more competitors) and industry marginal
cost (to the extent that new entrants have higher costs). However, very high
profits over long periods of time which are not explained by such factors as
excess risk, unusual amounts of technological innovation, or firm size may be
an indicator that an imperfect market structure exists. Such conditions may
occur when entry into an industry is difficult. The last three of the above
points are indicators of difficulty of entry into the market.
There is conflicting information regarding the pricing mechanism that
explains the industry's behavior. On one hand, the domestic industry exhibits
some of the above characteristics of non-competitive markets. On the other
hand, the existence of periodic price pressures caused by wide cyclical swings
in the industry are indicative of competitive pricing behavior. Because of
this conflicting information, the pricing strategy of individual producers is
indeterminate. Instead, the analysis assumes an industry-wide price increase
which would maintain the industry's initial return on sales for each product
group. This pricing strategy is incorporated in the following algorithm:
n
I ACC.
dp - i-i L (l)
n
£ TC
where
TC. - P^ a-PML) (2)
where
dP » industry-wide price increase
P
- annual compliance cost of plant i
- total cost of goods sold for plant i
2-5
-------
Q.. » pre-compliance production of plant i
P pre-compliance product price
PM. * industry average pre-compliance profit margin
n » total number of plants in the product group
The values of Q.. were obtained for the 1976-1977 period in an industry survey
conducted by EPA, and P. and PM. were estimated based on discussions with
industry representatives, analysis of industry level data from Census of
Manufactures, the Federal Trade Commission and Robert Morris Associates
Statement Studies, and review of corporate annual reports.
This price change algorithm implies some important dynamics in the inter-
action of competing firms in determining prices. Figure 2-2 illustrates how
the model assimilates the differential compliance costs of four plants
producing a similar product. Assume initially that each plant will raise
its price from P to an amount equaling the compliance cost per unit of its
production. Demand would then tend to shift from plants C and D to plants A
and B because their prices are now substantially less. As a result of this
shift, plants C and D would be under pressure to lower their prices while
plants A and B would be able to raise their prices. An equilibrium price, P_,
will be established, with plants C and D absorbing part of their compliance
costs. In this manner, the model serves as the basis for estimating the price
and production impacts for each product group as well as the basis for iden-
tifying plants that may have to absorb a significant portion of their cost of
compliance.
For all product groups except architectural panels, equation (1) above is
used to calculate the percentage price increase resulting from compliance
costs. Because of weak market conditions and declining demand for porcelain
enameled architectural panels (as discussed in Section 3.4 and 4.2), it was
assumed that architectural panel producers will not be able to raise their
prices and, therefore, will have to absorb the compliance costs.
2-6
-------
Price/
Unit
EQUILIBRIUM BEFORE COMPLIANCE
<
JJ
B
«
i i
PL,
«
4J
§
iH
PL,
O
4J
c
CO
I 1
PL,
Q
JJ
C
CO
I 1
PL,
Market
Price/
Unit
?2C
P2B -
INITIAL PRICE REACTIONS TO COMPLIANCE COSTS
Demand Shift
from .Plants
C & D
to Plants A & B .
Compliance
Costs
Market
Shares
Price/
Unit
.EQUILIBRIUM PRICE AFTER COMPLIANCE
Portion of
Compliance Costs
which must be
absorbed by the
plants
Market
Shares
FIGURE 2-2. PRICE AND MARKET SHARE ADJUSTMENTS
2-7
-------
Using the basic price elasticity equation and the dP/P ratios calculated
above, the rate of change in quantity demanded dQ/Q for each product group was
determined as follows:
dQ . dP (3)
Q 7 P
dQ - dP (4)
0~ P~ X E
where E * Coefficient of price elasticity of demand (estimated in
Section 3.4)
The post-compliance price and quantity levels are used, in a later step,
to assess the financial condition of individual porcelain enameling
facilities.
2.3 STEP 3: COST OF COMPLIANCE ESTIMATES
The estimated investment and annual compliance costs for five treatment
options, summary descriptions of the control and treatment technologies, and
the assumptions for the compliance cost estimates appear in Chapter 5.
2.4 STEP 4: PLANT-LEVEL PROFITABILITY ANALYSIS
The basic measure of profitability used to assess the impact of the
proposed regulations on individual plants is return on investment (ROl). The
use of this technique involves a comparison of the measure after compliance
with a minimum required return on investment.
The return on investment is defined as the ratio of annual profits before
taxes to the total assets of a plant. This technique has the virtues of
simplicity and common usage in comparative analyses of the profitabilities of
financial entities. Discounted cash flow capital budgeting techniques were
also considered in this analysis, but the data were insufficient for implemen-
tation of this technique.
2-8
-------
The profit impact assessment is determined by calculating the after-
compliance R01 for each plant. Plants with after-compliance ROI below the
threshold value are considered potential plant closures. The underlying
assumption is that plants cannot continue to operate as viable concerns if
they are unable to generate a return on investment that is at least equal to
the opportunity cost of other lower risk investment alternatives.
The critical value for ROI used in the analysis is 7 percent. Plants
with after-compliance ROI less than 7 percent are considered likely plant
closures. The 7 percent ROI threshold level is based on the condition that
plants cannot continue to operate as a viable concern if they are unable to
generate for the owners/stockholders an after tax return on their investments
(i.e., stockholder equity) equal to the opportunity cost of other investment
alternatives, which in this case is defined as the U.S. Treasury bond yield
expected to be in effect when the regulation is implemented. Data Resources,
Inc. forecasts that interest rates on long-term U.S. Treasury bonds will be
about 12 percent in 1983-1984 , which is approximately the time when the
plants will have to make investment decisions on the treatment facilities. It
was determined that a before tax ROI of 7 percent would yield a 12 percent
after-tax return on the liquidation value of the equity given the following
assumptions:
Stockholders' equity of porcelain enameling firms represents about
50 percent of total assets (based on published financial data for
selected appliance manufacturers). However, for the job shops and
architectural panels product groups, the stockholders' equity is
estimated to be 65 percent based on survey data of small porcelain
enameling companies provided by the Porcelain Enamel Institute (PEI).
^4
The average corporate tax rate is 40 percent , except for job shops
and architectural panels which are 35 percent according to PEI data.
The average liquidation value of the plants is 85 percent of their
book values. Because job shop and architectural panel plants are
generally older (see Section 3.2), the liquidation value is assumed to
be 75 percent.
*Data Resources, Inc., U.S. Long Term Review, Summer 1981
**Average for Fabricated Metal Products Industry group as reported in the
Federal Trade Commission's Quarterly Financial Report for Manufacturing,
Mining and Trade Corporations, Second Quarter 1981.
2-9
-------
Appendix A describes Che methodology that led to this ROI threshold level.
The after compliance ROI (ROI-) was estimated for each plant using the
following equations:
PROFIT.. + DPROFIT.
ROI.. - 1X * (5)
Ai + CCIi
where PROFIT.. - Pre-compliance profit of plant i
DPROFIT. - Change in profit of plant i
A. » Pre-compliance assets value of plant i
CCI. " Compliance capital investment for plant i
The variables in Equation (5) were further defined as follows:
PROFITU - RU x PMU (6)
DPROFITi - (R2. - a.Pj.Q^ - PC. - ACC.) -
-------
The values of Q.. and R. . were collected in an industry survey by EPA,
while dP/P was calculated by equation (1) presented in Section 2.3 and A.,
PMj., a^ and E were estimated based on Census of Manufactures, Federal Trade
Commission, company published financial data, and various inputs from industry
sources.
As discussed in Section 2.6, actual plant closure decisions made by
individual companies are usually based on many factors. However, the profit-
ability ratio (ROI) relates profits to plant total assets, and provides a
means of evaluating the attractiveness of the plant as an investment oppor-
tunity compared to other opportunities that may be available to stockholders
and potential lenders. For purposes of this analysis (Section 2.6) the
profitability impact is one of the major decision criteria for projecting
closure. All other things being equal, if the threshold value is violated,
then the plant is projected as a closure.
2.5 STEP 5: CAPITAL REQUIREMENTS ANALYSIS
In addition to analyzing the potential for plant closures from a profit-
ability perspective, it is also necessary to assess the ability of firms to
make the initial capital investment needed to construct and install the
required treatment systems. Some plants which are not identified as potential
closures in the profitability analysis may encounter problems raising the
amount of capital required to install the necessary treatment equipment. The
limit on a given firm's ability to raise capital to finance investment expen-
ditures is quite variable, depending upon factors such as the firm's capital
structure, profitability, future business prospects, the industry's business
climate, the characteristics of the financial markets and the aggregate
economy, and the firm management's relationships with the financial community.
The precise limit, considering all these factors, is difficult to determine.
Because firm-specific data is scarce, the analysis of capital avail-
ability was based on the ratio of "compliance capital investment requirements
to plant revenues" (CCI/R). This ratio provides an indication of the relative
magnitude of the compliance capital investment requirements.
2-11
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The ratio CCI/R was calculated for each plant and compared to a threshold
value. Assuming that re-investment in plant and equipment equals depreciation,
the plant's net after-tax profit margin is a measure of the internally
generated funds available for pollution control investment and is used as the
threshold value. For example, if the before-tax profit margin is 6 percent of
revenues and the corporate tax rate is 40 percent, 3.6 percent (60 percent of
6 percent) of revenues is taken to be the capital availability threshold. If
a plant's CCI/R ratio is less than the threshold value, the investment may be
financed out of a single year's cash flow, without additional debt. The.
actual threshold values vary among product groups because of variation in pre-
compliance profit rate.
Although this ratio provides a good indication of the relative burden
created by the compliance requirement, it does not provide precise or
universal conclusions regarding a firm's ability to make the investments.
For purposes of this analysis, a plant that exceeds the capital availability
threshold value is identified as a potential closure with the following
exception. Some plants that exceed the threshold value belong to larger
firms, and the required pollution control capital investments represent a
relatively small proportion of total firm revenues. This analysis assumes
that plants in this situation would have the required capital available to
them and would not close on the sole basis of capital requirements.
2.6 STEP 6: PLANT CLOSURE ANALYSIS
The plant level analysis examines the individual production units in
each product group to determine the potential for plant or production line
closures. The term "plant closure" refers to a porcelain enameling facility
projected to close as a result of incurring compliance costs. For these
facilities, porcelain enameling is the major production activity. The term
"production line closure" or "line closure" refers to the porcelain enameling
component within an establishment that has other production activities. For
example, a job shop nay do both electroplating and porcelain enameling. The
analysis of porcelain enameling compliance costs for this job shop may
indicate that the job shop would cease porcelain enameling operations, but not
close the entire job shop. In this case, a line closure would be projected.
2-12
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For this analysis, plant closure estimates are based primarily on the
quantitative estimates of post-compliance profitability and ability to raise
capital developed in Steps 4 and 5, respectively.
The decision by a company to close a plant also involves consideration of
other factors such as market and technological integration, and the existence
of speciality markets. Many of these factors are highly uncertain and cannot
be quantified. Situations in which information on the other factors
significantly affected the estimates of plant closure are noted in Chapter 6.
Nevertheless, because of the general uncertainty regarding the factors the
identification of plants as potential closures in this step is interpreted as
an indication of the extent of plant impact rather than as a prediction of
certain closure.
2.7 STEP 7: OTHER IMPACTS
"Other impacts" include economic impacts which flow from the basic price,
production, and plant level profitability changes. These impacts include
impacts on employment, communities, industry structure, and balance of trade.
The estimate of employment effects flows directly from the outputs of the
industry level analysis and the plant closure analysis. Employment estimates
for production facilities that are projected to close are taken from the EPA
308 data collection portfolios (obtained in EPA industry survey conducted
under authority of Section 308 of the Clean Water Act).
Community impacts result primarily from employment impacts. The critical
variable is the ratio of porcelain enameling industry unemployment to total
employment in the community. Data on community employment are available
through the Bureau of the Census and the Bureau of Labor Statistics.
2-13
-------
The assessment of industry structure changes is based on examination of
the following before and after compliance with the regulation:
Numbers of firms and plants
Industry concentration ratios
Effects of plant closures on specialty markets.
Decreases in the first factor and increases in the second factor would
indicate an increase in industry concentration and may change the pricing
behavior of the industry. Such potential changes are qualitatively evaluated
in Section 6.5.
Except for the cookware subcategory, foreign competition is not an
important factor in the porcelain enameling industry. The role of imports and
exports is qualitatively evaluated in Chapter 3 of this report. Basically,
impacts on imports and exports are a function of the change in the relative
prices charged by domestic versus foreign producers. In this study, the price
changes due to the regulations are estimated to be small. Therefore the
resulting changes in imports and exports of porcelain enameled products are
estimated to be small.
2.8 STEP 8: NEW SOURCE IMPACTS
This step in the study estimates the economic impacts of NSPS and PSNS
guidelines. The analysis is based on model plants developed for each
technical subcategory and the corresponding compliance costs of the treatment
technologies. The analysis covers both existing facilities undergoing major
modifications and greenfield (new) sites; costs of pollution control and
financial characteristics are estimated to be similar for both types of new
sources. For the purpose of evaluating new source impacts, compliance costs
of new source standards are defined as incremental costs over the costs of
selected standards for existing sources. The impacts of new source
regulations are then determined by comparing compliance costs to expected
plant revenues.
2-14
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2.9 STEP 9: SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. An initial
screening analysis is performed to determine if a substantial number of small
entities will be significantly affected. If so, regulatory alternatives that
eliminate or mitigate the impacts must be considered. This step in the study
addresses these objectives by identifying the economic impacts which are
likely to result from the promulgation of regulations on small businesses in
the porcelain enameling industry. The primary economic variables covered are
those analyzed in the general economic impact analysis such as compliance
costs, plant closures, and unemployment. Most of the information and
analytical techniques in the small business analysis are drawn from the
general economic impact analysis which is described above and in the remainder
of this report. The specific conditions of small firms are evaluated against
the background of general conditions in the porcelain enameling markets.
The impacts on small plants were assessed by examining the distribution,
by plant size, of the number of porcelain enameling plants, plant revenues,
wastewater volumes, compliance costs and potential closures due to the
regulations.
2-15
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3. INDUSTRY CHARACTERISTICS
3.1 OVERVIEW
As indicated in Chapter 1, porcelain enameling is a metal finishing
process performed by appliance, plumbing fixture, miscellaneous product
manufacturers, and job shops. It consists of the application of a glass
coating called frit to steel, cast iron, aluminum, strip steel, or copper.
The purpose of the coating is to improve resistance to chemical abrasion and
corrosion, and to improve thermal stability, electrical insulation, and
appearance. The liquid enamel applied to the metal workpiece is called a
"slip" and is composed of one of many combinations of frits, clays, coloring
oxides, water, and special additives such as suspending agents. This vitreous
inorganic coating is applied to the metal by a variety of methods such as
spraying, dipping, electrostatic deposition, and flow coating, and is bonded
to the base metal at temperatures in excess of 500 degrees centigrade (about
1,000 degrees Fahrenheit). At these temperatures, the finely ground enamel
frit particles fuse and flow together to form the permanently bonded hard
porcelain coating.
3.1.1 Industry Coverage
Regardless of the base metal being enameled, the porcelain enameling
process involves the preparation of the enamel slip (ball milling), the sur-
face preparation of the base metal, application of the enamel, and the drying
and firing to permanently fuse the coating to the metal. There are a few
porcelain enameling facilities that also manufacture their own frit. The
focus of this study is on the ball milling, metal preparation, and process
application stages of porcelain enameling. Figure 3-1 depicts the porcelain
enamel manufacturing process. The major end products which contain porcelain
enamel are listed in Table 3-1.
3-1
-------
Frit, Clays,
Oxides, Water, Etc.
I
N>
Metal
Tarts
Surface
Pre-
Treatment
Ball
Milling
Coating
Application
Drying
Firing
FIGURE 3-1 TYPICAL PORCELAIN ENAMELING PROCESS SEQUENCE
-------
TABLE 3-1. MAJOR END-USE PRODUCTS CONTAINING PORCELAIN ENAMEL
BY TECHNICAL SUBCATEGORY
Technical Subcategory
Steel
Cast Iron
Aluminum
Copper
End-Use Products
Ranges
Home laundry
Hot water heaters
Bathtubs, sinks
Dishwashers
Architectural panels
Cookware
Refrigerators
Chalkboards
Bathtubs
Range parts
Architectural panels
Cookware
Meter dials
Miscellaneous products
3-3
-------
3.1.2 Industry History
The basic porcelain enameling process has been in existence for thousands
of years. The first use of the process was for coating jewelry and other
decorative and ornamental items. However, commercial enameling did not begin
until about 1830 in Czechoslovakia, when the Bartelmes family began porcelain
enameling cast iron for cooking utensils. In 1859, this same family started
to enamel sheet iron. From these activities grew the great enamel industry of
Central Europe.
Porcelain enameling began in the United States around 1867 when two
cooking utensil plants began to enamel. Shortly afterward, one of the first
plants to enamel cast iron tubs, the Kohler Company, began operation in
Kohler, Wisconsin. Next came the first porcelain enameled stove (1890),
followed by refrigerators, washtubs, and many other products. The first
washing machine enameling plant was built by the A.B.C. Washer Company
in 1927.
Probably one of the greatest early technical advances in enameling was
the discovery of the use of clay to keep the powdered enamel frit suspended in
water, making it adhere better to the metal before firing. The suspended
enamel and clay in water was called slip, and was painted or poured on the
metal, dried, and then fired in a furnace. At a much later date, the spray
gun was developed, greatly facilitating the uniform application of frit,
especially on large pieces.
The use of enamel slips became known as the wet process, and the powder-
ing-on as the dry process. Both are in use at the present timethe dry
process being used primarily for cast iron, while the wet process is used both
for cast iron and steel enameling.
By 1930, porcelain enamel was used for signs, table tops, restaurant
equipment, automobile manifolds, and wall tile. Following the Depression, the
manufacture of porcelain enamel refrigerators, stoves, and washing machines,
as well as other household items, expanded many times. New products such as
automatic hot water heaters and architectural panels added to the growth.
3-4
-------
In 1941, when war was declared, porcelain enameling production all but
stopped as the industry put its efforts into war production. After World
War II, application techniques changed greatly. Before the war and a short
time afterwards, porcelain enamel thicknesses were up to 40 mm. Today, with
improved application and coating technologies, the thickness of coatings has
been reduced to 8 ram. Despite the elimination of porcelain enamel use from
many products following World War II (i.e., table tops, restaurant and service
station equipment, automobile manifolds, hospital bed pans, etc.), overall
porcelain enamel use increased as the demand for housing grew, resulting in
increased demand for sanitary ware and home appliances. The demand for
porcelain enamel products and finishes remained at a peak until the early
1960's, when substitute finishes began to supplant many uses of the more
costly enamel surfaces.
3.2 FIRM AND PLANT CHARACTERISTICS
EPA has identified 116 plants in the United States that perform porcelain
enameling operations, and collected annual production rate data on 108 of
these plants from an industry survey. In 1976, the annual production rates of
these plants ranged from 25,000 square feet (of exposed surface area enameled)
for a small job shop to 62,190,000 square feet (of exposed surface area) for
an integrated appliance manufacturer. In total these 108 plants enameled
775 million square feet of exposed metal surface area.*
EPA estimated the costs of complying with this effluent regulation for
all 116 identified plants. However, for two of the 108 plants with production
data, there was insufficient product and price data available to include them
in the economic impact analysis sample. Therefore, the remaining 106 plants
form the nucleus of the economic analyses presented in this report. Chapter 6
contains the results of the plant-by-plant economic analyses performed in this
report. Impacts for the remaining ten plants are discussed qualitatively in
Section 6.4.
*Even though both sides of the metal workpiece are enameled when the dip
process is used, only the exposed surface is important for end-product use.
This number is generally equal to one side of the metal that is enameled.
3-5
-------
Table 3-2 lists, by product group, the 106 sample plants and the 10 (116
minus 106) missing plants.
3.2.1 Types of Plants
Table 3-3 presents a summary of the plant profile characteristics by
product group for the 106 plants. In the analysis of discharger status, it
was found that approximately 77 percent of the plants are indirect
dischargers. Also, most of the plants (about 50 percent) employ between 50 to
500 workers; and, while many plants were built before 1950, most plants have
had recent modifications.
3.2.2 Company Organization
Porcelain enameling plants can be subcategorized into two basic types
captive operations within an integrated manufacturing facility and independent
job shops. Job shops are defined as plants that perform porcelain enamel
operations on a contract basis and are not part of an integrated appliance,
sanitary ware, or other product manufacturing facility. Of the 116 porcelain
enamel plants in the United States, approximately 25 are porcelain enamel job
shops. Job shops represent about 20 percent of the plants but only about 5 to
8 percent of the production in the porcelain enamel industry. A job shop may
perform other operations such as metal stamping, welding, or spray paint
finishing. However, almost all job shops have at least limited fabrication
capabilities and many of them make direct purchases of metal from metal
producers. Most do not market proprietary items, nor have a research depart-
ment to develop products. Practically all of the job shops are family or
privately owned and closely held. This factor hinders financial and market
data collection for this group.
The range of items which are enameled by job shops includes appliance
parts, sanitary ware, free-standing fireplaces, lanterns, hog feeders, shower
stalls, heat exchangers, architectural items, gauges, dials, pumps, cast iron
gates, and signs, as well as other miscellaneous items.
3-6
-------
TABLE 3-2. PLANTS IDENTIFIED FROM EPA DATA COLLECTION PORTFOLIOS
Industry
Ranges
Job Shops
Cookware
Home Laundry
Hot Water Heaters
Steel Sanitary Ware
Architectural Panels
Dishwashers
Cast Iron Sanitary Ware
Refrigerators
Barbecues
Other Products8
Total
No. of Plants
Included in
Economic Impact
Analysis Sample
25
23
11
9
9
9
11
4
2
2
1
0
106
No. of Plants
Identified by EPA
but Having
Insufficient Data
for Economic Analysis
2
-
-
-
1
-
-
-
1
-
-
6
10
Total
Number of
Identified
Plants
27
23
11
9
10
9
11
4
3
2
1
6
116
a/
Includes heat exchangers, pipes, iron parts, copper enameling, etc., as well
as plants for which products were not known.
Source: Responses to EPA industry survey, conducted under authority of
Section 308 of the Clean Water Act.
3-7
-------
TABLE 3-3. SUMMARY OF PLANT PRO₯ILES
Total
Number
of
Product 9 Sample
Group* Plants
Home Laundry
Range*
Hot Hater Heater*
Dishwashers
Steel Sanitary Hare
Job Shop*
u> Cookware
1
00
Architectural
Panel*
Ca*t Iron-
Sanitary Hare
3/
Be £ r igeratora^'
Barbecued
TOTAL
9
25
9
4
9
23
11
11
2
2
1
106
Employment Plant
Porcelain Built
Total Enamel Before
Plant Operation* 1950
16,255 1,095 3
19.4963/ 1.751*7 12
4,669 269 5
5,998 220 2
2,225 711 3
2.B662-' 1.116-' 16
7.676 323 5
1,134 174 4
9,763 476 3
70,082 6,135 53
(50)
Age
Built
After
1965
1
3
1
1
2
1
3
2
2
16
(15)
Plant Modification Plant Sice
La*t Modi- Last Modi- Employ Employ
fication fication Lea* More
Before After Than 50 Than 500
1965 1970 Employee* Employee*
0
1
2
0
3
6
2
4
2
20
(19)
6
15
6
3
5
11
7
3
3
59
(56)
0
1
0
0
0
7
0
3
0
11
(10)
8
14
4
4
0
0
7
0
2
39
(37)
Discharge Status
Indirect Direct
7
18
8
4
8
17
9
7
4
82
(77)
2
7
1
0
1
6
2
4
1
24
(23)
Number* in parentheaea represent percent of plant*.
Employment wa* not available for one of the plants.
Caat Iron, refrigerators, and Barbecues product groups hare two or lea* plant*; therefore, plant data are combined to avoid releasing
company confidential information.
Source: Environmental Protection Agency
-------
The vast majority of porcelain enamel plants are owned- by" large appli-
ance, plumbing fixture, and other miscellaneous product manufacturers. In
general, this group comprises about 92-95 percent of the industry production
and about 80 percent of the plants. The Porcelain Enamel Institute estimates
that the appliance market accounts for between 70-80 percent of all porcelain
enamel use, sanitary ware manufacturers comprise about 10 percent, and the
remaining 10-20 percent is distributed among other manufacturers. Generally,
the enameling facilities are situated in the same building as, or in close
proximity to, the assembly operations. Virtually none of the captive oper-
ation porcelain enameling facilities do jobs for outside customers.
3.2.3 Financial Profile
The indicators of the financial status of the plants and firms covered in
this study include:
Various financial ratios prepared from data contained in the U.S.
Department of Commerce 1977 Census of Manufactures for sanitary ware
(3431), cookware, architectural panels, and job shops (3469), ranges
(3631), home laundry equipment (3633), hot water heaters, and dish-
washers (3639)
Financial data from corporate reports of firms producing porcelain
enameled products (1978-1981).
Selected operating ratios from the 1977 Census of Manufactures are
presented in Table 3-4. Each ratio is described below:
Total assets to total employment represents the ratio of capital to
labor and measures the average capital intensity of the plants. SIC
3469, the cookware/architectural panels/job shop group, has the lowest
ratio ($13,035 per employee), while the home laundry group (SIC 3633)
has the highest ratio ($23,740 per employee).
Total assets to value of shipments provides a measure of the level of
investment required to generate each dollar of revenue. A fairly
large spread is shown for this ratio. The lowest is 19.6 percent for
SIC 3639 (hot water heaters and dishwashers), compared to 31.4 percent
for SIC 3431 (the sanitary ware group).
Cost of materials and labor to value of shipments measures the
relative cost structure of the plants, and varies only slightly from a
3-9
-------
TABLE 3-4. SELECTED AVERAGE OPERATING RATIOS BY PRODUCT GROUP
Product
Groups
by
SIC
Codes
SIC 3431
Y1 Sanitary Ware
o
SIC 3469
Cookware
Architectural Panels
Job Shops
SIC 3631
Ranges
SIC 3633
Home Laundry
SIC 3639
Hot Water Heaters
Dishwashers
1976
Total
Assets
to
Total ,
Employment
$17,589
13,035
14,701
23,740
13,510
1976
Total
Assets
to
Value of ,
Shipments8
(Z)
31.4
30.7
23.3
26.9
19.6
1977
Cost of
Materials
and Labor
to Value of
Shipments
(Z)
69.7
74.8
72.2
67.8
72.9
1977
New
Capital
Expenditures
to Value of
Shipments
(Z)
2.3
3.3
2.1
1.5
2.1
1977
Value
Added
per
Employee
$30,531
22,281
30,846
43,631
33,532
a/
Assets value data are not reported for 1977.
Source: U.S. Department of Commerce, 1977 Census of Manufactures.
-------
high of 74.8 percent for the cookware/architectural panels/job shop
group to a low of 67.8 percent for the laundry product group.
New capital expenditures to the value of shipments provides an indica-
tion of the plants ability to attract capital to their operations.
The industry groups vary on this measure from a low of 1.5 percent for
home laundry to a high of 3.3 percent for the cookware/architectural
panels/job shop group.
Value added per employee measures the economic contribution and
productivity of the industry's labor force. SIC 3469 was the convert
ratio ($22,281 per employee), while SIC 3633 has the highest ratio
($43,631 per employee).
To assess the financial status of the major firms engaged in porcelain
enameling, data were also collected for 18 companies which produce porcelain
enameled products and have publicly available financial data. Table 3-5 lists
the return on equity, debt-equity, and profit margin ratios for these 18 firms.
This table also shows that these 18 firms control a major market share in each
product group.
3.2.4 Industry Competition
Competition among firms which manufacture products with porcelain enamel
finishes appears to be rather intense, even though the four firm concentration
ratios increased between 1972 and 1977 for all home appliance product groups,
as shown in Table 3-6. Manufacturers appear to be quite competitive in
attempts to maintain and improve their brand names' market share as well as
maintaining or improving their private-label production. Competition for
private-label business (which for some manufacturers accounts for the greatest
proportion of production) demands a continuous emphasis on high quality at a
reasonable price. Although many private-label contracts have been controlled
by the same firms for many years (e.g., Roper ranges, and Whirlpool refrig-
erators, freezers, washer and dryers for Sears), the firms are constantly
having to maintain high standards in order to keep that business.
Market Share Competition
Market shares for the major porcelain enameled products are listed in
Table 3-7. For the major appliance products, General Electric, White, and
3-11
-------
TABLE 3-5. CORPORATE FINANCIAL DATA, 1980
to
i
Coapany Product* Manufactured*'
ER GR REF FRE HASH EDRT CDRT DISH HUH SSW CI COOK
Alcoa/Wear Ever X
American Standard X X
City Investing/Rheeai X
Crane X
General Electric X X X X X X X
General Housevarei X
Maytag X X X X
Mirro Aluainim X
Mor-Flo Induatriei X
Revere Copper & Bras* X
H.H. Robert aon
Roper X X
A.O. Smith X
Sitnbeaa X
Tappan XX X
Whirlpool X X X X X X X
White Consolidated X X X X X X X
Market Share
Represented (Z) 81 55 89 64 94 95 89 40 67 40 HA HA
All Manufacturing Average
Be fore-Tax
Profit
Margin
(Z)
14.0
9.8
2.9
5.4
9.9
8.1
1.0
18.6
4.0
2.0
4.9
4.2
2.5
(1.9)
6.0
1.2
8.3
5.1
7.7
Debt To.
Equity6'
0.77
1.48*
6.69*
1.54*
1.26*
1.65*
2.12*
0
0.82
0.77
1.39*
2.28*
1.12*
1.02
1.25*
0.92
0.48
1.66*
1.02
Be fore-Tax
Return
on Equity
(Z)
24.6
41.3
15.6**
21.0**
30.1
45.0
5.8**
31.6
12.2**
16.3**
20.4**
17.6**
13.0**
(6.3)**
21.5**
4.9**
25. 8
24.0
21.9
ER - Electric Rangea
EDRY Electric Dryer*
GR " Gaa Range*
GDRY Gas Dryers
CI - Cast Iron Sanitary Ware
b/
SSW - Steel Sanitary Ware
i
Current liabilities and long term debt divided by stockholders' equity
REF - Refrigerator*
DISH - Dishwashers
COOK " Cookware
FRE Freerers
HWH " Hot Water Heaters
WASH - Wishers
*Debt to equity ratio greater than All Manufacturing Average
**Return on equity lower than All Manufacturing Average
Source: Moody 's Induatrial Manual, 1981.
Federal Trade Coaaiasion, Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations, First Quarter 1981.
-------
TABLE 3-6. CONCENTRATION RATIOS FOR SIC CODES WHICH CONTAIN
MAJOR PORCELAIN ENAMELED PRODUCTS (in percent)
3631- Household cooking equipment
3632- Household refrigerators and freezers
3633- Household laundry equipment
3639- Household appliances, n.e.c.
36391- Household water heaters, electric
36392- Household water heaters, except
electric
36394- Dishwashing machines and food waste
disposers
34310- Metal plumbing fixtures
4 Largest
Companies
1977
1972
1977
1972
1977
1972
1977
1972
1977
1972
1977
1972
1977
1972
1977
1972
51
46
82
75
89
76
52
45
78
62
81
67
73
71
50
45
8 Largest
Companies
71
65
98
96
98
95
83
63
98
88
99
90
90
91
64
62
Source: U.S. Department of Commerce, 1977 Census of Manufactures.
3-13
-------
TABLE 3-7. MARKET SHARES OF MAJOR APPLIANCE MANUFACTURERS, 1980
Product/Company
Ranges (Electric)
General Electric/Hotpoint
White
Whirlpool
Roper
Tappan
Magic Chef
Jenn Air
Ranges (Gas)
Magic Chef
Tappan
Roper
Caloric
Hardwick
Refrigerators
Whirlpool
General Electric/Hotpoint
White
Admiral Div., Magic Chef
Amana
Freezers
Whirlpool
White
Revco
Admiral Div., Magic Chef
Washers
Whirlpool
General Electric/Hotpoint
Maytag
White
Norge Div., Magic Chef
Dryers (Electric)
Whirlpool
General Electric/Hotpoint
Maytag
White
Norge Div., Magic Chef
a/
Market Share
(percent)
35
18
9
8
6
5
5
20
20
15
12
10
31
26
21
11
5
30
25
15
9
40
20
15
14
5
40
20
15
15
5
Product/Company
Dishwashers
Design & Manufacturing
General Electric/Hotpoint
Hobart (Kitchen Aid)
Maytag
Water Heaters
Rheem/Ruud
Mor Flo
A.O. Smith
W.L. Jackson
Bradford White
State Industries
Steel Sanitary Ware*
Briggs
Norris
American Standard
Alliance Ware (Crane)
Verson
Active Products
Peerless Pottery
Lavndale
Kilgore Ceramics
Cast Iron Sanitary Ware
Kohler
Amer i c an-St and ard
Eyer
Dryers (Gas)
Whirlpool
General Electric/Hotpoint
Maytag
White
Norge Div., Magic Chef
Market Share
(percent)
45
25
15
6
32
20
15
8
8
8
30
21
10
9
6
5
5
4
4
NA
NA
NA
40
15
15
14
5
Estimated by Paul S. Gruber, Porcelain Enamel Consultant
NA: Not available
Source: Appliance, September 1981
3-14
-------
Whirlpool maintain sizeable market shares for virtually all products. These
companies, which produce a "full-line" of major appliance products, can offer
retailers and construction development companies the opportunity to buy all
appliances from a single company. For example, in 1979, Montgomery Ward, a
major retailer, expressed an interest in switching the purchase of its private
labeled appliances to a single full-line appliance maker.* The prospect of
increasing market shares for "full-line" firms has precipitated another
company, Magic Chef, through its purchases in 1979 of Admiral (refrigerators/
freezers) and Fedders (washers/dryers) to move into the "full-line" market.
Magic Chef's acquisition of these two product lines, which results in higher
concentration ratios in the appliance industry, could actually stimulate
competition within the industry, since there will be a new "full-line"
competitor in the new home builders market.
The leading market shares for each major appliance product are now con-
trolled by a "full-line" firm with one exceptionDesign and Manufacturing
(D&M), a private-label dishwasher manufacturing firm, maintains a 45 percent
market share. D&M's market strength is bolstered by its long standing rela-
tionship with Sears Roebuck & Company.
In other product groups, competition appears to be even more intense as
manufacturers of sanitary ware and other porcelain enamel products are not
only competing among themselves for business, but are also competing with
substitute products (i.e., fiberglass tubs, stainless steel sinks, cultured
marble sinks, stainless steel cookware, painted panels, plastic signs, etc.).
These porcelain enamel products have to remain price competitive with
alternative products or risk further erosion of their share of these markets.
The substitution pattern of porcelain enamel is discussed in greater detail in
Sections 3.3 and 3.4.
Industry Capacity and Competition
Although the production capacity for porcelain enameling has fallen
approximately 40 percent during the 1960s and early 1970s, industry sources
*American Metal Market, May 7, 1979.
3-15
-------
still considerable excess porcelain enameling capacity available within the
industry. In order for a firm to maximize plant operating efficiency, it is
necessary to maintain high operating levels. With the excess capacity pre-
sent, it appears likely that there would be strong competitive pressures to
set pricing strategies in a way that will keep operating levels high. These
pressures may force firms to absorb large portions of increased costs in order
to maintain stable prices and market shares.
In addition to price competition there is significant consumer brand name
loyalty within the appliance and, to a lesser extent, the sanitary ware
groups. In order to maintain a product's reputation among consumers, it is
necessary for a company to constantly strive for product quality and dura-
bility. Inferior product performance can easily damage a firm's well-
established reputation.
Import Competition
Except for cookware, where there is a considerable import problem, there
is virtually no competition from foreign producers. The lack of foreign
competition stems from the technological advantages of United States manufac-
turers of major home appliances. Additionally, the generally bulky nature of
most products that have porcelain enameled finishes (i.e., home appliances and
sanitary ware) results in prohibitively high transportation costs and, thus,
minimal import competition or export trade for these products. The imports of
porcelain enameled cookware have, however, been steadily increasing. Imports,
principally from developing countries, now exceed United States production for
porcelain enameled cookware.
3.3 PRODUCTS AND PRODUCTION TRENDS
Since, as stated in Section 3.1, porcelain enameling is a process which
is used as a finish in various products, the assessment of economic impacts
resulting from the effluent regulations must involve an examination of the end
products which contain porcelain enameling and a review of the competitive
conditions present in the markets in which these products are used. This
section will examine the prices, growth rates, and trends in production
capacity.
*Paul S. Gruber, JRB Porcelain Enamel Consultant.
**Psul EdsonMetal Cookware Manufacturers Association.
3-16
-------
3.3.1 Trends in Porcelain Enamel Product Shipments
In addition to trends in porcelain enamel usage, the growth of end prod-
uct shipments plays a major role in the overall usage of porcelain enamel and
in the assessment of the economic condition of the porcelain enamelera.
Figure 3-2 presents the 1971-1981 consumption patterns of major porcelain
enameled products. This figure shows that the demand for porcelain enameled
products fluctuated widely during that period and except for freezers, seemed
to correlate with new home construction.
3.3.2 End Product Prices
Using estimates of manufacturers' wholesale prices and average square
footage of enameling per unit, the value of shipments for each product group
is estimated and presented in Table 3-8. Manufacturers' prices are calculated
from 1977 Census of Manufactures data, except for barbecues, where the price
is based on the retail list price (assuming a 100 percent markup). The
average square footage per unit figures are based on estimates prepared by
Paul S. Gruber, JRB consultant, and Arnold Consdorf, editor of Appliance
Manufacturer. Value of shipments (plant revenues) were then estimated by the
following means:
Total porcelain enamel square footage , Number of Units Produced
Square footage per unit
Number of Units Produced x Manufacturers Unit Price - Plant Revenue
These calculated values of shipments range from $67.8 million for cast iron
tubs to $1.1 billion for ranges. Table 3-8 also shows the value of shipments
recorded for each product group by the Commerce Department. In each case, the
JRB estimated value of shipments is less than the corresponding Commerce
Deparment figures. This is as expected, since the EPA data sample missed some
plants in each product group.
As illustrated in Table 3-9, the porcelain enameling costs as a per-
centage of manufacturers' product price are highest for bathtubs, cookware,
and architectural panels. Of the home appliances, washers and ranges had the
3-17
-------
9-1
8-
7-
6-
5-
3-
2-
1-
/\
Refrigerators/
Freezers
V
Hot Water
Heaters
«« Washers
Ranges
Dryers
Dishwashers
Housing Starts
, 1 1 1I 1 1 1 1 1 "
71 72 73 74 75 76 77 78 79 80 81
Year
FIGURE 3-2. UNIT SHIPMENTS OF REFRIGERATORS/FREEZERS, HOT WATER HEATERS,
WASHERS, RANGES, DRYERS, DISHWASHERS, AND HOUSING STARTS
Source: American Home Appliance Manufacturers, and National Association
of Home Builders
3-18
-------
TABLE 3-8. ESTIMATED VALUE OF SHIPMENTS OF MAJOR PORCELAIN ENAMELED PRODUCTS, 1977
Product
Ranges
Washers /Dryers
(based on 59% washers,
41% dryers)
Hot Water Heaters
Dishwashers
Cast Iron Tubs
Steel Tubs and Sinks
Architectural Panels,
Signs, & Reflectors
Co ok ware
1977 Census
Value of
Shipments
Thousand ($)
1,581, 600^
1,460, 300^
504,100^
538, 700^
243, 01 I-1
NA
NA
Percentage of
Total Plants
in EPA Data
Base to Total
Known Plants
69%
96%
47%
71%
61%
NA
NA
Reported Porcelain
Enamel Production and JRB
Estimates of Value of Shipments
Sq. Ft.
(000)
215,933
181,720
75,211
48,060
18,659
58,255
35,552
50,982
Sq. Ft./
Unit
39
27.7
23
21.5
33
32
NA
1.7
Units
(000)
5,526
4,520
3,140
3,270
2,235
565
1,820
-
29,989
Thousand
($)
1,132,830
1,361,200
245,250
379,950
67,800
85,540
106,656-/
149,945
a/ Includes electric and gas household ranges and ovens and surface cooking unit equipment, and parts (except small
appliances; gas barbecuers grils and braziers for outdoor cooking; domestic cooking appliances (except electric).
_b_/ Includes househole washing machines, dryers, and washer-dryer combinations.
c/ Includes electric water heaters and nonelectric water heaters.
Aj Includes portable and built-in dishwashing machines.
e/ Includes porcelain enameled sinks, lavoratories, steel bathtubs, and cast iron bathtubs. (159,300 represents
bathtub equivalents by assuming that three sinks or lavatories equal one bathtub.)
_f/ Includes aluminum and steel. Assume average price of $3 per sq ft.
Source: Environmental Protection Agency and U.S. Department of Commerce 1977 Census of Manufactures.
-------
TABLE 3-9. PRODUCT PRICES AND ENAMELING COSTS FOR MAJOR
PORCELAIN ENAMELED PRODUCTS
(1977 Dollars)
Product
Ranges
Washers
Dryers
Refrigerators
Hot Water Heaters
Steel Bathtubs, Sinks
& Lavoratories
Dishwashers
Cast Iron Bathtubs
Aluminum Cookware
Aluminum Architectural Panels
Signs and Reflectors
Steel Architectural
Panels /Chalkboards
Representat ive
Manufacturers .
Product Price8
$205.00
190.00
160.00
290.00
75.00
47.00
170.00
120.00
5.00
3.50
2.50
Estimated
Enamel .
Cost/Unit3'
$16.73
12.62
8.20
2.39
2.27
18.50
6.42
17.30
0.89
0.93
0.17
Porcelain
Enamel
Cost As A
Percentage
of Price
8.2
6.6
5.1
.8
3.0
39.4
3.8
14.4
17.8
26.6
6.8
$/unit, except for architectural panels which is $/sq. ft.
Source: JRB Associates estimates.
3-20
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highest percentage, while refrigerators, hot water heaters, and dishwashers
had the lowest.
3.3.3 Trends in Production Capacity
The largest market for porcelain enamel materials is major home appli-
ances, which accounts for over 70 percent of square footage enameled (see
Table 3-10). Sanitary ware and cookware were the second and third largest
porcelain enamel markets, accounting for 9.9 and 6.5 percent, respectively.
During the 1960s and 1970s the square footage of enameling per product unit
has declined for most products, but the growth in unit shipments has partially
offset the loss in porcelain enameling production. During this period, it is
estimated that porcelain enamel production capacity decreased 40 percent.*
The trends in porcelain enameling production capacity for each major product
group over the 1960s and 1970s is summarized below:
Appliances
Refrigeratorsonce the largest user of porcelain enamel14 net plant
closures and a net loss in porcelain enamel production capacity of
90 percent
Rangespresently porcelain enamel's largest user20 net plant
closures and a net loss in porcelain enamel production capacity of
50 percent
Washers and dryers4 net plant closures and a 10 percent loss in
porcelain enamel production capacity
Dishwashersa growth market over this time periodone new plant
added and a 50 percent increase in production capacity
Hot water heaters13 net plant closures but a 25 percent increase in
production capacity.
Sanitary. Ware
Cast irononce the leader in sanitary ware; now shipments of cast
iron bathtubs are only about half as large as the shipments of pressed
steel tubsthree plant closures and a 50 percent loss in production
capacity
*Paul S. Gruber, JRB Porcelain Enamel Consultant
3-21
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TABLE 3-10. SQUARE FEET PORCELAIN ENAMELED BY
MAJOR MARKET, 1976-1977
Million , ,
Square Feet Percent
Home Appliance 550.1 71.1
Sanitary Ware 76.9 9.9
(Steel and Iron)
Architectural Panels, Signs, and 35.6 4.6
Reflectors
Cookware 51.0 6.5
Other 60.6 7.8
(Includes Job shops and
other misc. products)
Total 774.6 100.0
Based upon 106 plants with production data.
b/
Square footage of exposed surface area (one side of metal).
Source: EPA industry survey (conducted under authority of Section 308, Clean
Water Act).
3-22
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Steelfive net plant closures but no net change in production
capacity.
Cookware
These products have suffered large losses to alternative finishes and
imports from developing countries. There has been a net increase of
four plants; however, steel cookware has suffered a 50 percent loss in
capacity. For aluminum, it is uncertain whether the change in capa-
city has been due to the shift of domestic production to U.S.-owned
plants in developing countries. Foreign import penetration is most
severe in the porcelain-on-steel cookware market where only one
domestic producer still remains in business, and in January 1980 a
duty relief was granted to improve the competitive position of this
producer.
Architectural Panels
A net loss of 9 plants
A 50 percent loss in production capacity for steel panels
A 25 percent loss in production capacity for aluminum, (which has
always been a smaller proportion of the architectural panel business).
Job Shops
A net loss of seven plants, and a loss in production capacity of
40 percent.
In summary, the porcelain enamel industry experienced a net loss of approx-
imately 65 facilities during the 1960's and 1970's. From that point to
mid-1982, the declining trend in the number of porcelain enameling facilities
appears to have subsided. Indications are that the high degree of substitu-
tion leveled out, and the number of facilities has stabilized (see Chapter 4).
3.4 DEMAND ELASTICITY
The demand for porcelain enameled products is dependent on two factors:
The market strength of the various end products which contain
porcelain enamel (i.e., ranges, bathtubs, dishwashers, etc.)
The availability of substitute materials for porcelain enameled
finishes (i.e., plastic in bathtubs, painted steel on appliances,
etc.).
3-23
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In other words, substitutes for porcelain enameled products may be in the form
of competing products (i.e., use of a coin laundry vs. a washer and dryer,
hand washing vs. a dishwasher, brick and block vs. architectural panels, etc.)
or products with alternative surfaces (i.e., a porcelain enameled refrigerator
vs. a painted steel and plastic lined refrigerator with no porcelain enamel).
Generally, the competition from alternative finishes appears to affect the
demand for porcelain enameled products more than from end product competition.
Table 3-11 assimilates these factors and shows the elasticity coefficient
which has been estimated for each major porcelain enameled product.
The price elasticity measures the degree of responsiveness of quantity
demanded to price changes. The elasticity coefficients estimated in this
section are used to determine the change in quantity demanded for each product
group. An elasticity coefficient between -1.0 and 0 refers to a generally
inelastic (less responsive) market reaction to price increases, while a
coefficient of -1 or less will portray an elastic (more responsive) market
reaction. A price increase for a product with an inelastic coefficient will
yield a less than proportional reduction in quantity demanded while a similar
price increase for a product with an elastic coefficient will result in a more
than proportional reduction in quantity demanded. For example, if a product
with a price elasticity coefficient of -0.6 experiences a price increase of 2
percent, the quantity demanded will decrease by 1.2 percent (i.e., 0.6 times
2) which is less than the price increase.
A discussion of the elasticity assessment for each major product follows.
Ranges
The market strength of ranges is strong because there are few other
methods for home cooking. Microwave ovens, open fireplaces, wood stoves, and
barbecue grills are only partial substitutes. In addition, porcelain enamel
usage on ranges appears to be well established. Virtually all ranges contain
porcelain enameled oven interiors and over 90 percent have porcelain enameled
tops. Approximately 10 percent of oven tops are made of glass or stainless
steel. However, increased use of these alternatives appears limited since
glass range tops (which at one time were a popular new product) suffer from
3-24
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TABLE 3-11. ELASTICITY ESTIMATES FOR PORCELAIN ENAMELED PRODUCTS
Product
Ranges
Home Laundry
Dishwashers
Refrigerators
Hot Water Heaters
Sanitary Ware
Cookware
Architectural Panels, Signs
and Reflectors
Barbecues
Job Shop Services
Substitut-
ability
of the
End
Product
Low
Low-
Moderate
Moderate
Low
Low
Low
Low
High
Moderate
Moderate
Substitut- Estimated
ability Elasticity
of the of the
Porcelain Porcelain
Enameled Enameled
Finish Products
Low
Moderate-
High
Moderate-
High
High
Low
High
High
High
Moderate
Moderate-
High
-.3
-.7
-.8
-.9
-.3
-.9
-.9
-1.2
-.7
-.8
Source: JRB Associates estimates.
3-25
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energy efficiency problems and stainless steel is currently a more expensive
alternative than porcelain enamel. Therefore, porcelain enamel substitut-
ability appears to be low. With both low end product and porcelain enamel
substitutability, a low elasticity coefficient of -.3 is assigned to porcelain
enameled ranges.
Home Laundry
As compared with ranges, home laundry products (washers and dryers) have
less market strength. Many persons use commercial, coin laundries, and/or
outdoor clotheslines instead of buying their own machines. Also, in some
apartment buildings, one laundry room is shared by several apartments while a
range and refrigerator are provided for each unit.
Virtually all washer tops are currently being porcelain enameled with a
small proportion of units containing plastic or painted tops and, while stain-
less steel and plastic can be substituted in washer drums, porcelain enamel is
currently being used for 80-90 percent of washer drums.** Dryer tops and
drums are more susceptible to substitution of porcelain enameling because of
the lack of the requirement for acid and alkali protection necessary for
washers (no detergent or bleach spills are likely on dryers), and the lack of
a moisture problem for the drums. Therefore, since potentially viable sub-
stitutes exist for many of these porcelain enamel applications, a moderately
high elasticity coefficient of -.7 is assigned to the porcelain enamel usage
in this product group.
Dishwashers
The percent of the dishwasher interiors that are porcelain enameled has
decreased from close to 100 percent to about 80 percent. This slippage has
been due to the use of vinyl chloride interiors in some units. Currently, one
major manufacturer produces a line of dishwashers with no porcelain enamel.
In addition, it appears that the market strength of dishwashers is among the
weakest of all major appliance products. While shipments of dishwashers have
*"How To Identify Appliances Finishes." American Iron and Steel Institute.
**Arnold Consdorf, Editor, Appliance Manufacturing.
3-26
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grown the fastest of all appliance products over the last lO years, dish-
washers are still considered as somewhat of a luxury by many American families
and more families do without dishwashers than any other major appliance
product (besides freezers). With this moderately high degree of end-product
substitutability (dishwashers vs. hand washing) and a moderately high availa-
bility of porcelain enamel alternatives, porcelain enameled dishwashers are
assigned an elasticity coefficient of -.8.
RefrigeratorB/Freezers
The substitutability of porcelain enamel on refrigerators is among the
highest of all porcelain enameled products. In fact, only one manufacturer
is currently using any porcelain enamel on refrigerators; plastic is used
throughout the interior and either painted or coil coated steel is used on the
exteriors.
However, the end-product market strength of refrigerators is strong since
there are virtually no substitutes for storing refrigerated foods. In spite
of this high end-product market strength, the high availability of alternative
finishes leads to the assignment of an elasticity coefficient of -.9 for
porcelain enameled refrigerators.
Hot Water Heaters
A low elasticity coefficient of -.3 is assigned to porcelain enameled hot
water heaters, since there is a combination of high ond-product market
strength and low substitutability for porcelain enamel. There is virtually no
practical substitute for hot water heaters and with over 90 percent of the
heater liners porcelain enameled (glass lined), alternative finishes, i.e.,
stainless steel, copper, and concrete covered steel, do not appear to be cost
effective substitutes.
Sanitary Ware
Sanitary ware is similar to refrigerators in that there are no practical
substitutes for sinks and bathtubs, but the market share of porcelain enameled
sanitary ware is being eroded by plastic end stainless steel substitutes.
3-27
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In the past 10-15 years, substitutes for porcelain enameled sanitary ware have
become more prevalent. For example, fiberglass one-piece bathtubs and shower
stalls have made significant inroads into the market. In 1977, these "one-
piece" tubs had over 26 percent of the market.
As indicated in Table 3-12, the market share of these plastic tubs has
grown from 31 percent in 1976 to 49 percent in 1981. Similarly, stainless
steel has made a significant impact on kitchen sinks. In 1971, it had 42
percent of the market share and by 1981 it accounted for 80 percent of total
shipments. However, Table 3-11 also shows that the market penetration of
plastic and stainless steel seems to level off since 1978.
This combination of low-end product substitutability and high porcelain
enamel substitutability results in the assignment of an elasticity coefficient
of -.9.
Cookware
Cookware also appears to fall into the same situation as refrigerators
and sanitary ware, in that few substitutes exist for cookware, but many sub-
stitutes exist for porcelain enamel cookware finishes. Also, a large quantity
of imported porcelain enamel cookware offers a significant amount of competi-
tion. Therefore, a relatively high elasticity coefficient of -.9 is assigned
to United States-made porcelain enameled cookware.
Architectural Panels, Signs, and Reflectors
In this broad category, both substitute products and alternative finishes
are widely available and highly utilized. In fact, porcelain enameled panels
have evolved in the last two decades into a limited, more specialized product.
For example, brick, block, and aluminum and vinyl siding are most often used
in place of architectural panels, and lighted plastic signs are more fre-
quently used than painted signs. Therefore, because of the high degree of
substitutability and the weak demand, the elasticity is high and a coefficient
of -1.2 is assigned to this porcelain enameled product group.
3-28
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TABLE 3-12. PLASTIC AND STAINLESS STEEL SANITARY WARE MARKET SHARES
MARKET SHARES OF
1971
1976
1977
1978
1979
1980
1981
Plastic Bathtubs/
Shower Stalls
P/
a/
31.2
30.2
45.9
46.7
45.3
48.6
Stainless Steel
Kitchen Sinks
Tzl
41.7
67.5
66.7
76.1
75.2
79.9
82.6
a/
b/
Not reported
Preliminary
Source: Appliance, September 1981.
3-29
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Barbecues
First, even though a large number of American families own a barbecue
grill of some kind, they are generally considered to be non-necessity items.
Therefore, the market strength of these products is considered to be only
moderate. In addition, only a small percentage of barbecue grills are
currently porcelain enameled, indicating a high degree of substitutability
between porcelain enamel and other finishing materials, such as cast iron and
paint. However, the porcelain enameled barbecues are considered prestige
products and currently receive a premium price. Therefore, the high
elasticity coefficient which might have been assigned based solely upon
substitutability is revised downward to a moderate -.7.
Job Shop Services
It is difficult to develop a single, average elasticity coefficient for
job shop services, since job shops enamel so many different products. How-
ever, some insight can be gained by examining the following three main reasons
that lead various manufacturers to contract for enameling services:
The volume of enameling is too small to make it economically feasible
for the end-product manufacturer to create an in-house enameling
capability
In-house enameling capability is insufficient to meet peak demand
fluctuations
The products' future is too uncertain to justify the investment
required for the product manufacturer to establish an in-house
enameling capability.
Porcelain enameling in these cases appears to serve necessary functional
purposes, since the product raanufacterers would probably not bother with
contracting for the enameling services unless it was necessary. This factor
tends to indicate a high level of market strength for job shops. On the other
hand, the dependability of these markets appears to be quite weak. For
example, the growth in product demand may reach a point whereby the porcelain
enameling could be more economically performed by the end-use product manu-
facturer creating his own in-house enameling capability, and the risk of the
3-30
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product being displaced or phased out is very significant with small volume
products. These factors therefore tend to indicate a basic weakness in the
demand for job shop services. After considering these two counterbalancing
factors, a moderate-high elasticity coefficient of -.8 was assigned to job
shop services.
3-31
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4. BASE CASE ANALYSIS
4.1 OVERVIEW
This section provides projections of conditions in the porcelain
enameling industry for the mid-1980s in the absence of the effluent
regulations. These projections are used in Chapter 6, together with other
information such as estimated compliance costs, to assess the incremental
economic effects of the effluent control requirements on future industry
conditions.
The baseline projections provide a general point of reference for the
analysis and are not intended to be a comprehensive, authoritative forecast of
future industry conditions. Although minor changes to the baseline could
result from a more comprehensive treatment of forecasting techniques, they are
not likely to significantly alter the study's overall conclusions regarding
the extent of the economic impacts of the effluent guidelines.
The primary variables of interest have been divided into two broad
categories for consideration in this studydemand related factors and supply
related factors:
Demand Factors
- Quantity demanded
- Types of products demanded
- Price elasticities of demand
Supply Factors
- Cost of goods sold
- Profitability
- Industry structure (number and size of plants and firms,
competitiveness, etc.).
The basic approach followed in developing the projections begins with a
forecast of demand related factors. Demand related factors, in this report
',
are determined through projections of activity in the major porcelain enamel
consuming markets in combination with an assessment of technological trends.
It is assumed that output will be sufficient to at least meet demand. Then,
4-1
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industry supply factors are assessed to determine if there would be any
significant changes in the relative costs or profitability of porcelain
enameling over the next decade, which would be great enough to affect
substitution of other materials for porcelain enameling.
4.2 DEMAND RELATED FACTORS
The primary reason for beginning the baseline projections with the demand
analysis is that it is hypothesized that porcelain enameling supply factors
will adjust to demand conditions. This is because: (1) the porcelain
enameling industry is a very small proportion of total economic activity in
the U.S. and is, therefore, more likely to react to general trends, rather
than influence them; and (2) the demand for porcelain enamel is a derived
demand, depending on the sales and use of other products such as appliances,
sanitary ware, and cookware and is, therefore, complementary to the demand of
these other products. The demand analysis contains two basic components:
A projection of activity levels in major existing porcelain enamel
using industries, and
An assessment of technological trends that may affect the use of
porcelain enamel. This includes:
- the extent to which new porcelain enamel-containing products will be
developed and grow
- the extent to which porcelain enamel use in current products will
change.
These points are discussed below.
4.2.1 New Products
There are two types of new products that might affect growth for porce-
lain enameled products: products that are already developed and available for
commercial application, and those that are not yet conceived or are in the
experimental or developmental stage (i.e. technological breakthroughs).
Technological breakthroughs are not likely to affect this regulatory analysis
because it generally takes at least several years from the time a basic
4-2
-------
technology is perfected till it becomes of commercial significance and because
this study is concerned with an intermediate term analysis (1984-1987).
Therefore, the research focused on currently known commercial applications.
For the near future, two new developing markets for porcelain enamel were
identified - agricultural applications and solar heating panels. Both markets
are currently small in comparison to other porcelain enamel markets (e.g.
appliance) and it does not appear likely that these areas will become high
volume markets during the 1980s.
4.2.2 Changing Use of Porcelain Enamel in Existing Products
During the 1960s and 1970s, porcelain enamel use in many markets
declined. The primary reason for the decline is the increase in cost of
producing the final product with porcelain enameling relative to that of
producing the product with other materials. The major product groups and the
nature of the substitution of other materials for porcelain enamel is shown in
Table 4-1.
The future prospects for porcelain enameling depend on whether the sub-
stitutions shown in Table 4-1 represent substantially all of the technically
possible and economically viable substitutes. In some cases, i.e., oven
interiors and hot water heater liners, no viable substitutes are currently
being used. In other cases, porcelain enamel is being used because it offers
certain quality or cost advantages over available alternative materials. For
example, Sears (the largest U.S. appliance retailer) requires porcelain
enameling on many surface areas where substitute materials can be used. The
Sears catalogue and appliance advertisements emphasize the quality of the
porcelain enameling on their appliances. Nevertheless, it appears to be the
practice of appliance manufacturers today to use porcelain enameling only on
the surface areas where it has a clear functional or cost advantage. In
addition, new developments in plastics, fiberglass, paints, and coil coating
are all continually challenging porcelain enamel usage. Therefore, the key
question regarding the future of porcelain enamel use is whether all practical
substitutions have already been made.
4-3
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TABLE 4-1. SUBSTITUTION AWAY FROM PORCELAIN ENAMEL USAGE SINCE 1960
Product Group
Sanitary Ware
Refrigerators
Washers
Dryers
Ranges
Surface Area Where
Porcelain Enamel
use has been
Discontinued or
Heavily Substituted
Bathtubs
Sinks
Exterior surface
Interior liners
Door interiors
Crisper trays
Exterior front and
side panels
Exterior fronts,
tops and sides
Exterior side
panels
Substituted
Product or
Finish Being Used
Fiberglass, cultured marble
Stainless steel, cultured
marble
Painted steel, coil coated
Plastic, painted steel
Plastic, painted steel
Plastic
Painted steel
Painted steel
Painted steel
Architectural Panels
Miscellaneous
Architectural panels
Signs
Meter dials
Table tops
Painted, coil coated and vinyl
siding
Painted, plastic signs
Painted dials
Painted, coil coated and
plastic tops.
Source: JRB Associates estimates
4-4
-------
To answer this question, the nature of the substitutions for each major
porcelain enamel market was examined in terms of the availability, acceptance,
and cost of substitute materials.
Table 4-2 contains a summary of porcelain enamel usage for all major
porcelain enameled products. This table indicates that porcelain enamel usage
in architectural panels and chalkboards is likely to decrease significantly
over the next 5 years. Usage on ranges, kitchen sinks and in hot water
heaters is not expected to change significantly, while trends for washers/
dryers, bathtubs and dishwashers are uncertain and are likely to depend on
cost and marketing factors.
Ranges
Ranges currently account for more porcelain enamel usage than any other
individual product. For oven interiors, there are no alternative materials
being used, and over 90 percent of all range tops use porcelain enamel.
However, with the increased quantity of insulation currently being used in
ranges, fronts and side panels can now be painted steel. Much of this sub-
stitution has already been made and further decreases in porcelain enamel
usage on ranges appear unlikely.
Washers/Dryers
Potential substitutes exist for all current uses of porcelain enameling
on washers and dryers. Decisions on the utilization of substitute materials
involve product quality and consumer preference as well as cost consider-
ations. Although stainless steel, galvanized steel, plastic, and painted
steel could be substituted, porcelain enameled steel currently appears to have
an advantage over these materials. Exposure to water, detergents, bleaches,
and various cleaners requires corrosive resistant properties for washer and
dryer drums and washer tops. This need is currently being served by porcelain
enameled steel. Although product designers have considered using plastic,
stainless steel, or galvanized steel drums in washers and galvanized or stain-
less steel drums in dryers, no definite trend has been observed.
4-5
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TABLE 4-2. PROSPECTS FOR PORCELAIN ENAMEL USAGE
Porcelain
Enameled
Products
Ranges
Washers /Dryers
Dishwashers
Hot Water Heaters
Sanitary Ware
Architectural
Panels
Chalkboards
Cookware
Growth
Prospects:
Product
Shipments
Stable
Stable
Good
Good
Stable
Declining
Stable
Good
Possible Substitutes for Porcelain Enamel
Tops:
Interiors:
Exteriors:
Washer Drums :
Washer Tops:
Dryer Drums :
Interiors:
Fronts:
Liners:
Tubs:
Sinks :
Stainless Steel, glass
None
Paint, glass (doors), stainless
Stainless Steel, Plastic
Paint, Plastic
Stainless Steel, galvanized steel,
aluminized steel, painted steel
Plastic, vinyl coated steel
Paint
Copper, Concrete over steel
Fiberglass, Cultured Marble (plastic)
Stainless Steel, Cultured Marble
(plastic)
Painted Steel and Aluminum, plastics, glass, concrete
Particle Board
Stainless Steel
, Chrome-plated steel, china
Likelihood
of Additional
Substitutes
Unlikely
Unlikely
Unlikely
Possible
Possible
Possible
Possible
Possible
Unlikely
Possible
Unlikely
Likely
Likely
Possible
Source: JRB Associates estimates.
-------
Dishwashers
The interior of the door and the tub of dishwashers is generally por-
celain enameled. Potential substitutes exist for each of these uses. Plastic
tubs and interior door liners are presently being used by one dishwasher
manufacturer. In fact, this manufacturer is currently marketing one of its
dishwasher lines which has no porcelain enameling. However, some industry
sources report technical problems with plastic substitutes, and it does not
appear to be the general trend. Since (as discussed in Section 4.3) no change
in relative costs are expected, significant loss of this market is considered
unlikely, although possible if market acceptance factors shift away from
porcelain enameling.
Hot Water Heaters
Virtually all hot water heaters made in the United States have porcelain
enameled tanks. Since the porcelain enameling performed on an interior part
does not require a quality appearance finish and since it is a single-coat
application, the cost per square foot of porcelain enameling on these liners
is the lowest of all major products. The total porcelain enameling cost is
reported to average between $2.25 and $2.50 per hot water heater. By
comparison, the cost of using copper or concrete over steel liners would be
greater. Therefore, cost factors appear to point toward a continued use of
porcelain enamel on hot water heaters.
Sanitary Ware
Stainless steel and cultured marble (plastic) sinks have gained market
share at the expense of porcelain enameled products. However, most of the
sink makers have already abandoned porcelain enameling, indicating that the
potential for additional market share deterioration is minimal. For example,
in 1972 half of the 5.1 million kitchen sinks shipped were porcelain enameled
steel or cast iron. By 1981, this figure had dropped to 15 percent of the
kitchen sinks shipped.*
*Appliance, September 1981.
4-7
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Cast iron and steel bathtubs accounted for 76 percent of the bathtubs
shipped in 1976. By 1978 this figure had dropped to 60 percent. During the
next three years it did not fluctuate significantly around the 40 percent
figure*.
For these reasons, the porcelain enamel share of the sanitary ware market
is not expected to change significantly in the 1980s.
Architectural Panels/Signs/Reflectors
Porcelain enameled architectural panels have been steadily declining in
use. Coil coated (painted) aluminum and steel, as well as plastics, glass,
and prefabricated concrete panels offer substantial competition to porcelain
enameling in this market. All evidence seems to indicate that current trends
will not change and the use of porcelain enamel panels will continue to
decrease. Porcelain enameled signs and reflectors have also experienced
significant decreases in market shares. Painted metals and plastics have been
the principal beneficiaries of the decline of porcelain enameled signs and
reflectors. Primarily because of the substantial cost economies of the
substitute surfaces, little prospect exists for a reversal in the declining
trend for these porcelain enameled products.
Cookware and Small Appliances
This product group can be divided into two sections steel and aluminum
cookware and small appliances. The demand for steel cookware has substan-
tially diminished over the last 30 years, and porcelain enameled steel cook-
ware has become a rather specialized commodity. On the other hand, porcelain
enameled aluminum cookware and small appliances have experienced a growth in
demand over this same time period. Even though the production volumes of both
of these sectors combined is very small compared to the volumes contained in
the appliance and sanitary ware markets, the combined trend of these two
sectors probably reflects a slight positive movement. However, available
*Appliance, September 1981.
4-8
-------
substitutes exist for porcelain enameled cookware and small appliances, and
relatively small shifts in cost factors or consumer preferences could lead to
a substantial reduction of porcelain enamel usage over the next 5 years. In
addition, imported cookware is a possible substitute for domestic porcelain
enameled cookware.
4.2.3 Demand for Porcelain Containing Products
As described in Chapter 3, annual shipments of appliances and other
porcelain enamel containing products has fluctuated widely over the 1971 to
1981 period. Wide fluctuations of shipments of durable goods is not uncommon
in our economy primarily because in times of financial stress consumers can
postpone the purchase of most of these products and because of large inventory
adjustments at all stages of manufacturing and distribution. The forecasts
used in this study are derived from that published in the January, 1982
edition of Appliance magazine and in Predicasts Composite Forecasts of
June, 1982. These forecasts are primarily the result of surveys of industry
personnel and are contingent on an economic recovery starting in 1983. These
projections are shown in Table 4-3.
As the table shows, shipments of porcelain enamel containing products is
expected to increase with economic recovery in the next several years. Over
the 1982 to 1987 period, growth of household appliances that contain porcelain
enamel is expected to range from 3 to 7 percent annually. This compares to
4.2 percent from total durable manufactures. However, the industry is
expected to be quite sensitive to cyclical economic movements.
4.2.4 Net Demand For Porcelain Enameling
The estimated net demand increase for porcelain enameling for the 1983 to
1987 period is derived as the total porcelain enamel in new uses plus
increased porcelain enamel used in the production of existing products (due to
growth in demand of existing products) less expected market deterioration due
to substitution of other materials for porcelain in existing products. As
described above, there are few new uses identified; thus, no growth is
expected from new uses.
4-9
-------
TABLE 4-3. ANNUAL SHIPMENTS (1968-1981) AND PROJECTED
ANNUAL SHIPMENTS (1982-1987) FOR HOUSEHOLD APPLIANCES
AND SANITARY WARE ($ THOUSAND)
Average
Product
Ranges
Washers
Dryers
Dishwashers
Water Heaters
Kitchen Sinks
"f Bathtubs
i
o
Refrigerators/
Freezers
Shipments
1968-iQ7Ha'
4,906
4,714
3,349
2,877
5,164
4,222
2,635
7,357
.8
.9
.6
.1
.7
.3b/
.9b/
.1
1Q7Q
5,018
5,264
3,769
3,488
5,549
4,500
3,191
8,339
Actual
iQftn
iyo\j
4,224
4,816
3,384
2,738
5,269
3,787
2,278
7,658
,Qfl1d/
lyol
3,958
4,649
3,183
2,484
5,236
4,145
2,353
7,330
1982
4,267
5,062
3,485
2,744
5,666
3,916
2,223
7,346
1983
4,517
5,323
3,751
3,021
6,132
4,190
2,378
7,792
Projected Shipments
1984
4,653
5,384
3,761
3,100
6,553
4,483
2,545
7,921
1985
4,731
5,492
3,914
3,184
6,993
4,797
2,723
8,029
1986
4,894
5,696
4,115
3,294
7,506
4,941
2,804
8,361
1987
5,066
5,916
4,764
3,554
7,987
5,089
2,889
8,701
Total Household
Appliances
(index)0'
a/
138
150.2 136.1
138
122
142.7 169
196
204
212
American Home Appliance Manufacturers; American Gas Association; and Appliance Shipments. U.S.
Department of Commerce E
b/
c/
d/
Data average for 1968-1977
Federal Reserve Board index of industrial production, 1967=100
Preliminary data
Source: "30th Annual Forecasts," Appliance. January, 1982, and PREDICASTS Composite Forecasts,
1982 and extrapolations by JRB Associates.
June,
-------
Section 4.2.3 concluded that shipments of porcelain containing products
will probably grow moderately during the 1980s. Information in Section 4.2.2
indicates that porcelain use per unit of some existing products has declined
during the 1960s and 1970s and that this decline has slowed substantially.
The net effect of these trends cannot be precisely quantified. The net
effects of these two conflicting trends appears to be that demand for
porcelain enamel will be stable during the 1980s. That is, production levels
during the mid-1980s will be similar to those in existence at the time of the
EPA industry survey (1977). It is appropriate to assume, therefore, that
production data gathered in that survey is valid for this analysis.
4.3 SUPPLY FACTORS
The primary supply factors of interest are prices of porcelain enameling
and the number of production facilities.
4.3.1 Price of Porcelain Enameling
Large changes in the price of porcelain enameling could significantly
affect demand over the long run. Therefore, it is of interest to assess the
likelihood of baseline changes in the cost of porcelain enameling. This is
done by qualitatively assessing the likelihoood of changes in the relative
prices of the three major inputs to the porcelain enameling processfrit,
energy, and labor.
No reason was found to expect the price of frit to increase faster than
prices of other goods and services in the economy over the next 10 years.
That is, its relative price will remain constant. The future price of energy,
as we have seen in recent years, is highly uncertain and the projections of
various forecasters differ widely. Moreover, future energy cost increases may
be offset, somewhat, by technological development in the industry. In recent
years there has been progress in improving enamel furnace efficiency by
converting the furnace design from refractory and insulation materials to
ceramic fibers. This change permits a significant reduction in idling periods
of the furnace and, therefore, fuel savings (gas and electric).
4-11
-------
Other technological developments that could affect the future cost of
porcelain enameling include lower enamel firing temperatures, less expensive
metal preparation systems, and the use of direct-on-steel coatings (one coat).
These factors were not quantified in this study.
Most of the labor force used in porcelain enameling operations are not
highly trained, and do not exhibit characteristics that make them unique in
comparison to workers in other metal fabricating and finishing operations.
Therefore, labor costs are expected to remain constant in comparison to
general wage rates in the economy.
Because the prices of the three primary factor inputs of production for
porcelain enameling are expected to remain constant relative to the prices of
other products, there is no reason to expect porcelain enamel prices to change
relative to general price levels.
4.3.2 Number of Production Facilities
During the 1960s and 1970s there were 25 new plants built while about 90
plants have closed for a net reduction of 65 plants.* Further decline in the
number of plants is not expected in the baseline since, as described in
Section 4.2, the demand for porcelain enameling is expected to be stable
through the 1980s. It is believed that most of the technological change that
caused substitution of other materials for porcelain enameling appears to have
occurred. Although substitution of other products for porcelain enameling is
expected to continue, the rate of substitution is expected to be much lower
than that of the 1960s and 1970s. The above forecasts of major porcelain
enamel-using industries' activity for the 1983-1987 period also indicate no
decline in production. For these reasons, a stable level of demand through
the 1980s is projected and the number of facilities that exist in 1982 is
expected to remain the same over the 1983 to 1987 period.
*Paul S. Gruber, JRB Porcelain Enamel Consultant,
4-12
-------
4.4 SUMMARY OF BASELINE CONDITIONS
The above discussion of baseline conditions for the 1983-1987 period is
summarized as follows:
Quantity demanded will be stable
The types of products demanded will not change significantly
The cost of porcelain enameling metals relative to costs of other
metal finishing methods will not change
The number of porcelain enamel production facilities will not change
significantly. Therefore, for the impact analysis in Chapter 6, a
zero baseline closure estimate is used.
Because the above forecasts are fairly constant, there is no reason to
expect profitability of porcelain enameling operations to change over
the 1983-87 period.
These conclusions form the basic background for the conclusions regarding
economic impacts that are presented in Chapter 6.
4-13
-------
5. PORCELAIN ENAMELING EFFLUENT GUIDELINE CONTROL OPTIONS AND COSTS
5.1 OVERVIEW
The alternative water treatment control systems, costs, and effluent
limitations for the Porcelain Enameling Point Source Category are enumerated
in the Development Document. The Development Document also identifies various
characteristics of the industry, including manufacturing processes; products
manufactured; volume of output; raw waste characteristics; supply, volume, and
discharge destination of water used in the production processes; sources of
waste and wastewaters; and the constituents of wastewaters. Using this data,
pollutant parameters requiring limitations or standards of performance were
selected by EPA.
The EPA Development Document also identifies and assesses the range of
control and treatment technologies within each industry subcategory. This
involved an evaluation of both in-plant and end-of-pipe technologies which
could be designed for each subcategory. This information was then evaluated
for existing surface water industrial dischargers to determine the effluent
limitations required for the Best Practicable Control Technology currently
available (BPT), and the Best Available Technology economically achievable
(BAT). Existing and new dischargers to Publicly Owned Treatment Works (POTWs)
are required to comply with Pretreatment Standards for Existing Sources (PSES)
and Pretreatment Standards for New Sources (PSNS), and new direct dischargers
are required to comply with New Source Performance Standards (NSPS), which
require Best Available Demonstrated Control Technology (BDT). The identified
technologies were analyzed to calculate cost and performance. Cost data were
expressed in terms of investment, operating and maintenance costs plus
depreciation, and interest expense.
5.2 CONTROL AND TREATMENT TECHNOLOGY
Based on the analysis of the potential pollutant parameters and treatment
in place in the porcelain enameling industry, EPA identified five treatment
5-1
-------
technologies that are most applicable for the existing sources in the
industry:
Treatment Level 1: Settling sump plus chemical addition
Treatment Level 2: Physical and chemical treatment (Lime and settle)
Treatment Level 3: In-process flow reduction plus physical and .
chemical treatment (Lime and settle plus flow reduction)
Treatment Level 4: Physical and chemical treatment plus filtration
(Lime and settle plus filtration)
Treatment Level 5: In-process flow reduction, physical and chemical
treatment plus filtration (Lime and settle, filtration, and flow
reduction).
For new sources, two alternative treatment technologies were examined:
Treatment Level 1: Lime and settle plus flow reduction
Treatment Level 2: Lime and settle, flow reduction, plus filtration
and 3-stage countercurrent cascade rinse to further reduce wastewater
flow.
The above treatment technologies are described in detail in the
Development Document.
5.3 TREATMENT COSTS
5.3.1 Assumptions Made in Estimating Compliance Costs
A number of critical assumptions were used to estimate compliance costs:
Capital costs are amortized at 10 years and 16 percent
interest
Depreciation was straight line at 10 percent per year
for 10 years
All costs are expressed in January 1978 dollars
Where either a batch or continuous treatment system was
possible, the system with the lowest life-cycle costs (over
5-2
-------
a 10-year period) was selected for presentation in the
system cost tables. The mode of treatment is noted in the
tables for each case
Nonsupervisory labor costs assumed an average wage rate
reported by the Bureau of Labor Statistics of the U.S.
Department of Labor for January 1978 (as reported in BLS
periodical, Employment and Earnings)
An average rate of 3.3 cents per kilowatt hour was used for
all electric energy costs.
In addition to these basic assumptions, EPA also had to make some assumptions
in relation to the size of the treatment facility needed for each plant and
the cost of plant modifications and treatment system installation costs. The
assumptions are outlined in the Development Document.
5.3.2 Compliance Cost of Existing Sources
Table 5-1 presents total compliance capital investment and total annual
compliance cost estimates for each economic subcategory*. These costs were
tabulated from the plant-specific cost estimates for the 106 sample plants and
for the total 116 plants in the industry. Total capital investment require-
ments for the 116 plants range from $5.2 million for Treatment Level 1 to
$30.8 million for Treatment Level 5, while total annual compliance costs range
from $1.3 million to $13.8 million.
^Treatment Level 1 compliance costs were estimated on a plant-specific basis for
51 plants with flow rates less than 50,000 I/day only. Compliance costs for
the remaining plants with flow rates over 50,000 I/day were then calculated
based on compliance capital investment estimate ($14,267) and flow rate (6,156
gal/day) of a selected plant and using the following formulas:
/ ' \ °'7
CCI. - (14,267 - 500) xt^1?^1 ) + 500 (assumed $500 fixed
i yo,15o i cost for neutralization)
ACC. « CCI. - 4.66
i i
where: CCI. * Compliance capital investment of plant i
Flow i « Flow rate of plant i (in gal/day)
ACC. * Annual compliance costs of plant i
5-3
-------
Product Group*
Rangei
HOBM Laundry
Dishvaahera
Hot Water Beater*
Refrigerator*
Steel Sanitary
Ware
Caat Iron
Sanitary Ware
Cookvare
Architectural
V Panel.
*~
Job Shop*
Barbecue*
Total for
Sample Plant*
Indirect
Discharger*
Direct
Discharger*
Total for
Industry
Indirect
Discharger*
Direct
Diacharger*
Mo. of
Plant*
25
9
4
9
2
9
2
11
11
23
1
106
82
24
116
88
28
Annual
Production
(10 xaq.ft.)
215.533
181,720
48.060
75.211
(a)
58.255
(a)
50.982
35.552
52.310
(a)
774.628
556,389
218.240
851,700
597,100
254,000
Total Compliance Capital Inveatmen
Level 1
1,435.2
1,004.0
341.8
179.2
(a)
416.8
(a)
434.3
221.9
613.4
(a)
4.931.7
3,780.9
1,150.8
5,170.4
3,912.8
1,257.6
Level 2
4.991.9
1,771.2
1,429.3
1,309.6
(a)
2.296.9
(a)
2.526.0
1.464.9
4.452.4
(a)
21,450.3
17,326.3
4,124.0
23,242.8
18,529.3
4,713.4
15 Thou.and)
Level 3 Level 4
5,340.4
1,900.6
1,507.4
1,385.7
(a)
2,384.5
(a)
2,681.5
1.532.8
4,674.8
(a)
22.673.9
18,300.8
4,373.0
24,544.8
19,565.8
4,979.0
6,690.0
3,293.3
1,909.9
1,418.4
(a)
2,807.8
(a)
3,136.0
1,590.6
5,018.8
(a)
27,498.1
21.866.8
5,631.2
29,487.3
23,143.9
6,343.4
t
Level 5
7,036.0
3,421.4
1,987.8
1.494.3
(a)
2.895.3
(a)
3,291.1
1.658.4
5.240.9
(a)
28.716.0
22,837.3
5,878.7
30,783.6
24.176.2
6,607.3
Total Annual Coat of Compliance
Level 1
371.4
259.8
88.5
46.4
(a)
107.9
(a)
112.4
57.6
158.7
(a)
1,276.5
978.7
297.8
1,338.3
1,012.8
325.5 '
(5
Level 2
3,031.7
2,141.1
692.3
536.3
(a)
960.9
(a)
846.0
597.1
1,649.5
(a)
11,097.7
8.671.6
2,426.1
11,803.5
9,105.1
2,698.4
Thousand)
Level 3
3,108.3
2,170.1
709.3
553.1
(a)
980.4
(a)
880.1
612.2
1,698.4
(a)
11,367.6
8,886.0
2,481.4
12,090.6
9,333.2
2,757.4
Level 4
3,504.8
2.560.9
824.0
565.7
(a)
1.100.7
(a)
1.011.7
629.5
1,802.2
(a)
12.760.5
9,911.7
2,848.9
13,520.3
10,364.4
3,155.9
Level 5
3,580.9
2,589.7
841.0
589.9
(a)
1,120.2
(a)
1,045.7
644.5
1,850.9
(a)
13,036.4
10.132.5
2,903.9
13,813.5
10,599.0
3,214.6
(a)Withheld to avoid discloaure of confidential data.
KA: Not available.
Source: EPA.
-------
In terms of total annual compliance costs per industry segment, the
ranges and home laundry segments bear the heaviest aggregate burden (see Table
5-1). However, Table 5-2 indicates that the job shops and architectural
panels industry segment have the highest average annual compliance costs per
square foot of enameled surface.
5.3.3 Compliance Costs of New Sources
As indicated in Section 5.2, two treatment alternatives are considered by
EPA for new sources. Table 5-3 summarizes the compliance cost estimates of
these alternatives by each technical subcategory. The costs apply to both
major modifications of existing facilities and to greenfield (new) sites.
5-5
-------
TABLE 5-2. AVERAGE ANNUAL COMPLIANCE COST PER SQUARE FOOT OF
PORCELAIN ENAMELED PRODUCT (CENTS PER SQUARE FOOT)
Treatment Treatment Treatment Treatment Treatment
Product Groups Level 1 Level 2 Level 3 Level 4 Level 5
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron Sanitary
Ware
Cookware
Architectural Panels
Job Shops
Barbecues
Total for 106 Sample
Plants
Indirect
Dischargers
Direct
Dischargers
0.17
0.14
0.18
0.06
(a)
0.19
(a)
0.22
0.16
0.30
(a)
0.16
0.18
0.14
1.41
1.18
1.44
0.71
(a)
1.65
(a)
1.66
1.68
3.15
(a)
1.43
1.56
1.11
1.44
1.19
1.48
0.74
(a)
1.68
(a)
1.73
1.72
3.25
(a)
1.47'
1.60
1.14
1.63
1.41
1.72
0.75
(a)
1.89
(a)
1.98
1.77
3.45
(a)
1.65
1.78
1.31
1.66
1.43
1.75
0.78
(a)
1.92
(a)
2.05
1.81
3.54
(a)
1.68
1.82
1.33
(a) Withheld to avoid disclosure of confidential data
Source: JRB Associates estimates
5-6
-------
TABLE 5-3. NEW SOURCE COMPLIANCE COSTS
Technical Subcategory
Steel Aluminum Cast Iron Copper
Average Annual Production
per Plant* (thousand sq ft) 6,610 1,380 4,280 280
Treatment Level 1 Compliance
Costs per Plant ($ thousand)
Capital Investment 247.8 183.0 72.0 72.0
Annual Costs 80.6 61.6 22.1 22.1
*
Treatment Level 2 Compliance
Costs per Plant ($ thousand)
Capital Investment 259.8 195.0 82.0 84.0
Annual Costs 83.6 63.5 24.0 24.1
*0ne side of metal
Source: EPA
5-7
-------
TABLE 5-2. AVERAGE ANNUAL COMPLIANCE COST PER SQUARE FOOT OF
PORCELAIN ENAMELED PRODUCT (CENTS PER SQUARE FOOT)
Treatment Treatment Treatment Treatment Treatment
Product Groups Level 1 Level 2 Level 3 Level 4 Level 5
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron Sanitary
Ware
Cookware
Architectural Panels
Job Shops
Barbecues
Total for 106 Sample
Plants
Indirect
Dischargers
Direct
Dischargers
0.17
0.14
0.18
0.06
(a)
0.19
(a)
0.22
0.16
0.30
(a)
0.16
0.18
0.14
1.41
1.18
1.44
0.71
(a)
1.65
(a)
1.66
1.68
3.15
(a)
1.43
1.56
1.11
1.44
1.19
1.48
0.74
(a)
1.68
(a)
1.73
1.72
3.25
(a)
1.47
1.60
1.14
1.63
1.41
1.72
0.75
(a)
1.89
(a)
1.98
1.77
3.45
(a)
1.65
1.78
1.31
1.66
1.43
1.75
0.78
(a)
1.92
(a)
2.05
1.81
3.54
(a)
1.68
1.82
1.33
(a) Withheld to avoid disclosure of confidential data
Source: JRB Associates estimates
5-6
-------
TABLE 5-3. NEW SOURCE COMPLIANCE COSTS
Technical Subcategory
Steel Aluminum Cast Iron Copper
Average Annual Production
per Plant* (thousand sq ft) 6,610 1,380 4,280 280
Treatment Level 1 Compliance.
Costs per Plant ($ thousand)
Capital Investment 247.8 183.0 72.0 72.0
Annual Costs 80.6 61.6 22.1 22.1
Treatment Level 2 Compliance
Costs per Plant ($ thousand)
Capital Investment 259.8 195.0 82.0 84.0
Annual Costs 83.6 63.5 24.0 24.1
*0ne side of metal
Source: EPA
5-7
-------
6. ECONOMIC IMPACT ANALYSIS
This section provides an estimate of the economic impacts which are
associated with the costs of the effluent treatment technologies described in
Chapter 5. The analysis is based upon an examination of the estimated
compliance costs and other economic, technical, and financial characteristics
of the 106 porcelain enameling plants for which production and price data are
available and uses the analytical methodology described in Chapter 2. The
primary economic impacts include changes in industry profitability, ability to
raise capital, plant closures, industry concentration, and changes in
employment.
The 106-plant sample represents over 90 percent of the plants in the
industry and contains a wide range of both large and small plants. Production
level data for the analysis were obtained from the EPA industry survey. Most
of the reported production levels are for 1976-77. The economic impact
analysis in Chapter 6 uses this 1976-77 data. The projected production levels
for 1982-83 are similar to the actual levels used in the analysis. Therefore,
it is appropriate to assume that the 1977 production levels are realistic for
the analysis.
6.1 PRICE AND QUANTITY CHANGES
As discussed in Chapter 2, it is expected that, except for the architec-
tural panel product group, each product group will adopt a price increase that
will maintain the industry's initial return on sales. Due to weak market
conditions and declining demand for porcelain enameled architectural panels
(as discussed in Section 3.4 and 4.2), it is assumed that architectural panel
producers will not be able to raise their prices and, therefore, will have to
absorb the compliance costs.
Table 6-1 shows the estimated industry-wide price increases and the
resulting quantity changes at each compliance level. The price increases are
generally small for any treatment option, exceeding one percent for the steel
sanitary ware and job shops groups only for treatment levels 2 through 5.
Similarly, the quantity changes are also very small. The quantity changes
6-1
-------
TABLE 6-1. ANTICIPATED INDUSTRY PRICE AND PRODUCTION CHANGES
(in percent)
Ranges
Home Laundry
Dishwasher
Hot Water Heaters
T Refrigerators
N>
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural
Panels^-
Job Shops
Barbecues
It is assumed that
"' IJ,' kUU 1 J *. _.._JJ .
Level
dP/P
.03
.02
.02
.02
b/
.13
b/
.08
0
.27
b/
1
dQ/Q
-.01
-.01
-.02
-.01
b/
-.12
b/
-.07
0
-.24
b/
architectural
f
_ ^
Level 2
dP/P dQ/Q
.28
.16
.19
.23
b/
1.19
b/
.60
0
2.85
b/
panel
.
-.08
-.11
-.17
-.07
b/
-1.07
b/
-.54
0
-2.57
b/
producers
Level
dP/P
.29
.17
.20
.24
b/
1.22
b/
.62
0
2.93
b/
3
dQ/Q
-.09
-.12
-.18
-.07
b/
-1.10
b/
-.56
0
-2.64
b/
will not attempt
Level 4
dP/P
.33
.19
.23
.25
b/
1.37
b/
.72
0
3.11
b/
to
dQ/Q
-.10
-.13
-.21
-.08
b/
-1.23
b/
-.65
0
-2.80
b/
Level
dP/P
.34
.20
.24
.26
b/
1.39
b/
.74
0
3.19
b/
5
dQ/Q
-.10
-.14
-.22
-.08
b/
-1.25
b/
-.67
0
-2.87
b/
raise prices.
Source: JRB Associates estimates.
-------
result from applications of the elasticity estimates to the price changes.
For example, the price of job shop products will increase 3.19 percent at
level 5 and quantity demanded will fall 2.87 percent.
After the industry-wide price and quantity adjustments are determined,
attention is focused on the analysis of individual plant impacts. Individual
"plants" include establishments that are primarily engaged in porcelain
enameling as well as production "lines" that are parts of larger establish-
ments -whose primary activity might not be porcelain enameling. However, in
reporting the potential closures, later in this chapter, plants and lines are
identified separately.
6.2 PROFIT IMPACT ANALYSIS
As described in Chapter 2, the assessment of the impact of compliance on
plant profitability is based on the plants' after compliance return on
investment (ROI) ratios, investment being defined as total plant assets (i.e.
current assets plus net property, plant and equipment). Because plant-
specific baseline financial characteristics (e.g., plant profit margin, assets
value, variable and fixed costs of production) are not available, average
industry financial and operating ratios for each porcelain enameling product
group were applied to each plant. The resulting estimated baseline character-
istics are summarized in Table 6-2. Appendix B describes the methodology for
estimating the two key financial variables: plant average baseline profit
margin and assets value.
As explained in Section 2.6, plants with post-compliance ROI less than
7 percent were considered to be "potential" plant closures. The 7 percent ROI
threshold level was based on the condition that plants cannot continue to
operate as a viable concern if they are unable to generate for the owners/
stockholders an after taxes return on their investments (i.e. return on
equity) equal to the opportunity cost of other investment alternatives. In
this case the opportunity cost of their investments is defined as the 12 per-
cent yield on U.S. Treasury bonds expected to be in effect when the regulation
is implemented. Given certain assumptions regarding the capital structure
6-3
-------
TABLE 6-2. PROFIT IMPACT ANALYSIS INPUTS
I
.fs
Product Croups
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural Panels
Aluminum
Steel/Strip Steel
Job Shops
Barbecues
($/sq!ft.)
5.26
7.69
7.91
3.26
13.81
1.47
3.75
2.94
3.50
2.50
1.0
1.82
Baseline
Margin
Before Tax
6.0
6.0
6.0
6.0
6.0
6.0
6.0
6.0
5.0
5.0
7.0
6.0
Profit
After Taxa/
3.6
3.6
3.6
3.6
3.6
3.6
3.6
3.6
3.3
3.3
4.6
3.6
Assets to
Revenue
.50
.50
.50
.50
.50
.60
.60
.50
.50
.50
.55
.50
Variable
Cost to
Price
.70
.70
.70
.70
.70
.70
.70
.70
.70
.70
.70
.70
Price
Elasticity
-.3
-.7
-.9
-.3
-.9
-.9
-.9
-.9
-1.2
-1.2
-.9
-.7
a*
Assume average corporate tax rate of 40 percent, except for architectural panels and job shops
which is assumed to be 35 percent.
Source: JRB Associates estimates.
-------
(i.e., debt to equity ratio), tax rates, and salvage value of equipment that
are described in Section 2.6, the 12 percent return on equity is approximated
by the 7 percent RDI.
Table 6-3 presents the results of the profitability analysis of the
106 porcelain enameling sample plants. The table shows that at treatment
level 1, only one job shop and one cookware plant have after-compliance HOI
below the 7 percent threshold level. Treatment levels 2 to 5 present more
significant profit impacts affecting 19 plants in the ranges, hot water
heaters, steel sanitary ware, job shops, architectural panels, and cookware
product groups.
6.3 CAPITAL REQUIREMENTS ANALYSIS
As presented in Chapter 2, the ratio of "compliance capital investment to
revenues" (CCI/R) was used to evaluate a firm's ability to raise the capital
necessary to install the pollution control systems. Although the CCI/R ratio
does not precisely indicate whether or not firms can afford to make the
required investments, it provides a good indication of the relative magnitude
of the compliance capital investment requirements. The ratio CCI/R was calcu-
lated for each of the 106 sample plants and compared to the plants' respective
capital availability threshold values which are defined as the plants' net
after-tax profit margins (shown in Table 6-2). Exceeding the threshold is an
indicator of potential closure.
Table 6-4 presents the results of the capital requirements analysis and
suggests that at treatment level 1, two plants exceed the threshold values for
capital expenditures and at treatment levels 2 to 5, 31 to 37 plants exceed
the threshold. Sixteen of the 37 plants belong to larger establishments or
firms and the required pollution control capital investments represent a
relatively small proportion of total revenues for these entities. For this
reason, it is expected that these 16 operations would have capital available
to them. The remaining 21 plants (10 job shops, 4 architectural panel, 4
cookware, 1 range, 1 hot water heater and 1 steel sanitary ware) would have
difficulty raising the investment capital.
6-5
-------
TABLE 6-3. SUMMARY OF PROFIT IMPACT ANALYSIS
Product Groups
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural Panels
Job Shops
Barbecues
TOTAL
Number of
Plants
in Sample
25
9
4
9
2
9
2
11
11
23
__!_
106
Number of Plants with After-Compliance Return
on Investment less than Threshold
Level 1
0
0
0
0
0
0
0
1
0
1
_£
2
Level 2
1
0
0
1
0
1
0
4
4
8
_0
19
Level 3
1
0
0
1
0
1
0
4
4
8
J>
19
Level 4
1
0
0
1
0
1
0
4
4
8
_0
19
Level 5
1
0
0
1
0
1
0
4
4
8
JD
19
Source: JRB Associates estimates.
6-6
-------
TABLE 6-4. SUMMARY OF CAPITAL REQUIREMENTS ANALYSIS
Product Groups
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural Panels
Job Shops
Barbecues
TOTAL
Number of
Plants
in Sample I
25
9
4
9
2
9
2
11
11
23
_1_
106
Number of Plants with CCI/ Revenue
Greater than Threshold Value
,evel 1
0
0
0
0
0
0
0
1
0
1
_0
2
Level 2
1
0
0
2
0
4
0
4
5
15
_£
31
Level 3
1
0
0
2
0
5
0
4
5
16
_0
33
Level 4
1
0
0
2
0
6
0
4
5
17
_0
35
Level 5
2
0
1
2
0
6
0
4
5
17
JB
37
Threshold values are baseline after tax profit margins as reported in Table 6-2.
Source: JRB Associates estimates.
6-7
-------
6.4 PLANT CLOSURE POTENTIAL
Although major investment decisions, such as plant closure decisions, are
largely made on the basis of financial performance, they are ultimately
judgmental. That is, in addition to financial variables, decisions makers
must consider a number of other factors, such as market growth potential, the
existence of specialty markets, intra-industry competition, the potential for
technological obsolescence, and substitution potential for their products. As
discussed in Chapter 2, the plant closure estimates presented here are based
primarily on the financial variables.
Table 6-5 summarizes the estimated number of plant and line closure by
product group and by treatment level. Twenty-one facilities (10 job shops,
4 architectural panels, 4 cookware, 1 range, 1 hot water heater, and 1 steel
sanitary ware) are estimated to close at treatment levels 2 to 5. Nineteen of
these closures were below the ROI threshold and above the capital requirements
threshold. Two facilities (both job shops) were estimated to close solely on
the basis of capital availability. As shown in Table 6-5, the rate of plant
closure is higher among the indirect dischargers.
At treatment level 1, only one job shop is projected to close. Also at
treatment level 1, one cookware operation is slightly below the ROI threshold
and above the capital requirements threshold; however, this porcelain
enameling operation is part of a much larger plant that manufacturers other
types of cookware. Since the porcelain enameled cookware operation remains
profitable and the required compliance capital investment represents a small
percentage of the plant's total revenues, it is concluded that the company
will probably maintain this operation to offer a more complete product line.
The above plant closure analysis focused on 106 sample plants. Ten
plants were excluded from the analysis due to lack of data on plant production
volume and revenue. Among these ten plants are 6 specialty, 2 range, 1 hot
water heater and 1 cast iron sanitary ware plants.
6-8
-------
TABLE 6-5. SUMMARY OF ESTIMATED.FACILITY CLOSURES AMONG
EXISTING SOURCES AT TREATMENT LEVELS 2 TO 5
Product Groups
TOTAL 106 SAMPLE PLANTS
Ranges
Hoc Water Heaters
Steel Sanitary Ware
Cookware
Architectural Panels
Job Shops
Total
Number of
Plants
in Sample
25
9
9
11
11
23
106
Number of Estimated Closures
Total
1
1
1
4
4
10
Plant
0
0
1
0
3
5
Line
1
1
0
4
1
5
21
12
Market Share
of Closures
0.1
0.2
3.7
5.0
6.4
19.9
2.4
Changes in
Quantity
Demanded
0.08-0.10
0.07-0.08
1.07-1.25
0.54-0.67
0
2.57-2.87
T
VO
82 INDIRECT DISCHARGERS
Ranges
Hot Water Heaters
Steel Sanitary Ware
Cookware
Architectural Panels
Job Shops
Subtotal
18
8
8
9
7
17
82
1
1
1
3
3
9
18
0
0
1
0
2
5
8
1
1
0
3
1
4
0.1
1.2
3.7
2.7
5.4
19.2
10
2.2
24 DIRECT DISCHARGERS
Cookware
Architectural Panels
job Shops
2
4
6
Subtotal 24
Source; JRB Associates estimates.
0
1
0
1
0
1
2.3
1.0
0.8
0.2
-------
Because the demand for porcelain enameled specialty items is estimated to
be price inelastic and products are differentiated, producers will probably be
able to pass through most of the cost increase to their customers.
Consequently, it is estimated that the impacts of the regulations on plant
profits will be insignificant and that there will be no closure among the
specialty porcelain enameling plants. Finally, after extrapolating the
closure analysis from the 106 sample plants, to the remaining plants in the
industry, no additional closures are expected.
6.5 OTHER IMPACTS
6.5.1 Industry Structure and Competition
The impact of the regulations on industry structure and competition is
assessed via a review of estimated post-compliance concentration ratios and
the differential in compliance costs among small versus large plants. The
plant closures represent a decline in industry capacity and hence, an increase
in industry concentration. As Table 6-5 shows, the amount of production
capacity lost by plant closures is greater than the quantity demanded reduc-
tions due to regulation-induced industry-wide price changes.
The increase in concentration is most noticeable in the job shop, archi-
tectural panels and cookware subcategories. For example, 10 job shops
representing 25 percent of the job shop industry are estimated to close.
Given a 3 percent drop in quantity demanded there could be a potential net
increase in demand from the remaining 22 plants equal to 22 percent of pre-
compliance industry output.* This is equivalent to a 29 percent increase in
output for the remaining job shops. Increased concentration is often
associated with increased occurence of non-competitive pricing. However, the
competition from competing materials (e.g. coil coating, paint, etc.)
described in Chapters 3 and 4 is expected to mitigate such occurrences.
*There is insufficient information to determine the proportion of the 22 per-
cent lost output that will be produced by the remaining plants and that which
will be permanently lost to the porcelain industry.
6-10
-------
6.5.2 Substitution Effects
It is clear that effluent guidelines will add to the cost of using
porcelain enamel finishes on all products. These added costs may cause and/or
accelerate substitution of other materials for porcelain enamel, as previously
discussed in Chapter 4. Substitution can occur in a variety of forms in the
various subcategories. Manufacturers may use thinner coatings, substitute
other materials for some components and continue using porcelain enamel on
others, redesign their products to eliminate all porcelain enamel, or
consumers may switch to other products. The degree of these substitution
effects are approximated by the estimated reduction in quantity demanded shown
in Table 6-1. The highest quantity reduction is estimated for the job shop
and sanitary ware subcategories (2.9 and 1.3 percent, respectively at treat-
ment level 5). Quantity reductions for other subcategories are less than one
percent. A proportionate reduction in the demand for frit is expected.
6.5.3 Community and Employment Impacts
The findings on plant closure potential derived in Section 6.5 and the
conclusions concerning the possible impacts of compliance on substitution avay
from porcelain enamel formed the basis for the assessment of employment
impacts.
Using the plant and porcelain enameling process employment data collected
by EPA in an industry survey, Table 6-6 demonstrates the effects of this
regulation on employment. At treatment levels 2 to 5, a total loss of
488 jobs is associated with potential facility closures. Meanwhile, at
treatment level 1 only one line closure affecting 2 employees is projected.
The 21 facilities projected to close are all located in different
localities/municipalities. The largest employment impact to a single locality
is 55 employees. This particular porcelain enameling facility is located in a
large industrial city; thus, the impact on local employment situations will
prcbebly be insignificant.
6-11
-------
TABLE 6-6. SUMMARY OF EMPLOYMENT EFFECTS
Number of Employees Affected by
Total 106 Sample Plants
Treatment Level 1
Treatment Levels 2-5
82 Indirect Dischargers
Treatment Level 1
Treatment Levels 2-5
24 Direct Dischargers
Treatment Level 1
Treatment Levels 2-5
Plant Closures
0
303
0
295
0
8
Line Closures
2
185
2
134
0
51
Total
2
488
2
429
0
59
Source: JRB Associates estimates based on EPA Industry Survey (308 survey),
6-12
-------
6.5.4 Foreign Trade Impacts
Except for the cookware group, where a significant level of import
competition already exists, effluent regulations will have no foreign trade
impacts. Import and export of other porcelain enameled products are
negligible. The porcelain enamel cookware manufacturers, which already have
lost half of the domestic market to imports, could be further affected by
compliance requirements. However, Table 6-1 indicates that price increase due
to the regulation is only 0.7 percent at treatment level 5. A price increase
of this magnitude would not alter the trading pattern substantially.
6.6 NEW SOURCE IMPACTS
As reported in Section 5.2, two treatment alternatives are considered for
porcelain enameling new sources. Total system compliance costs of these two
alternatives for typical new sources are summarized in Table 5-3.
For the purpose of evaluating the new source impacts, compliance costs
of new source standards are defined as incremental costs over the costs of
selected standards for existing sources. The selected treatment technology
for existing sources corresponds to new source alternative 1. Consequently,
compliance costs for this new source option are zero and there will be no
associated economic impact.
The impact analysis of new source alternative 2 is summarized in Table
6-7. Assuming the minimum price of $1 per square foot for porcelain enameled
products (i.e., job shop price), the annual compliance costs of new source
treatment alternative 2 range from 0.03 to 0.7 percent of plant revenues for
the steel and copper subcategories, respectively. Incremental costs of such
magnitude will not deter new entry because they are small in relation to
expected profit margins.
Based on the low level of impact indicated from these results, new source
standards are not expected to result in barriers to entry.
6-13
-------
Table 6-7. IMPACT ANALYSIS OF NEW SOURCE ALTERNATIVE 2
Technical Subcategory
Steel Aluminum Cast Iron Copper
Annual Production of
Typical New Facility
(thousand sq.ft.) 6,610 1,380 4,280 280
Plant Revenue ($ thousand)8/ 6,610 1,380 4,280 280
Compliance Costs ($ thousand)
Investment 12.0 12.0 10.0 12.0
Annual 2.0 2.0 1.9 2.0
Ratio of Compliance Costs to
Plant Revenue (percent)
Investment 0.18 0.87 0.23 4.29
Annual 0.03 0.14 0.04 0.71
Assume $ 1 per sq.ft.
Source: EPA and JRB Associates estimates.
6-14
-------
7. SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act (RFA) of 1980 (P.L. 96-354), which amends
the Administrative Procedures Act, requires Federal regulatory agencies to
consider "small entities" throughout the regulatory process. The RFA requires
an initial screening analysis to be performed to determine if a substantial
number of small entities will be significantly affected. If so, regulatory
alternatives that eliminate or mitigate the impacts must be considered. This
chapter addresses these objectives by identifying and evaluating the economic
impacts on small porcelain enamelers. As described in Chapter 2, the small
business analysis is developed as an integral part of the general economic
impact analysis and is based on the examination of the distribution, by plant
size, of the number of porcelain enameling plants, plant revenues, wastewater
volumes, compliance costs and potential closures from the regulation.
Three approaches were selected to define small porcelain enameling plants
for purposes of the small business analysis. These approaches are based on
the following factors:
The Small Business Administration (SBA) definition of small business
based on firm total employment
Plant value of shipments for porcelain enameled products
Plant wastewater flow rates.
The SBA definition of small business had a disadvantage for purposes of
developing water pollution control regulations. It is based on firm size
rather than plant size. Because firm size often does not correspond to plant
size in this industry, the use of SBA definition would fail to recognize
economies of scale in the pollution control technologies. For this reason, an
alternative definition based on plant revenues was evaluated to account for
unit compliance cost differentials due to plant size. Similarly, another
alternative size definition based on plant wastewater flow rates was also
examined since flow rates often vary with plant size and is a major factor in
the development of effluent guidelines.
7-1
-------
7.1 SMALL BUSINESS ANALYSIS BASED ON SMALL BUSINESS ADMINISTRATION
EMPLOYMENT LEVELS
Using SBA loan eligibility size standards for SIC's 3431, 3469, 3631,
3632, 3633, and 3639, the porcelain enameling small business can be defined as
follows:
SIC 3431, Enameled Iron and Metal Sanitary Ware: Firms of fewer than
750 employees. This definition applies to the steel, cast iron
sanitary ware, and specialties product groups
SIC 3469, Metal Stampings: Firms of fewer than 250 employees. This
definition applies to the cookware, architectural panels and job shop
groups
SIC 3631, Household Cooking Equipment: Firms of fewer than 750
employees. This definition applies to the range and barbecue groups
SIC 3632, Household Refrigerators and Home and Farm Freezers: Firms
of fewer than 1,000 employees
SIC 3633, Household Laundry Equipment: Firms of fewer than 1,000
employees
SIC 3639, Household Appliances, Not Elsewhere Classified: Firms of
fewer than 500 employees. This definition applies to the hot water
heater and dishwasher groups.
Table 7-1 summarizes the distribution of "small" plants for the 106-plant
sample. The table shows that 42 plants are owned by "small" firms, of which
17 are projected to close at treatment levels 2 to 5. These 42 "small" plants
discharge a total of about 729,400 gpd (about 16 percent of all wastewater
discharged), and their annual compliance costs vary from $281,400 at treatment
level 1 to approximately $3.2 million at treatment level 5.
7.2 SMALL BUSINESS ANALYSIS BASED ON PLANT VALUE OF SHIPMENTS
Table 7-2 presents the distribution by value of shipments of the number
of porcelain enameling plants, plant production, revenues, flow rates,
compliance costs and potential closures from regulations. The five size
categories are:
Less than $1 million in value of shipments of porcelain enameled
products.
7-2
-------
TABLE 7-1. DISTRIBUTION OF SMALL PORCELAIN ENAMELING PLANTS
BASED ON SMALL BUSINESS ADMINISTRATION EMPLOYMENT LEVELS
i
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l*r«*Jwct 6totj|>«
TOTAL MALL
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MB
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TOTAL MAI 1
IMJIMCT »I4.
TOTAL TOO
AHTU ruum
of now KAC« rro4«cci*A tvvcwM
M»I» (400 C»> Uillio. . M-» > (t »illi«n»>
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(11.1)
104
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(O!A)
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(4.*)
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(1.*)
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(11.7)
114. 5
(0.0)
04)1.*
(M.I)
11*1.5
(7.1)
4511.4
(21.4)
1*714.*
; =1
(tow)
174.1
(1.1)
M.*
(4.1)
414.0
(4.7)
54.4
(0.4)
1*1.7
(0.0)
M4.4
(1.0)
1407.0
(12.1)
M.O
(0.1)
1142.7
(14.1)
757.4
(5.0)
2405.1
(10.5)
IMM.4
««.
1
0
1
1
4
*
0
14
1
11
11
( ) «!» U M'«MhtM> >*( MrcMCw. ( All i
'uUkk.14 I* U A»elM«r« .1 CMtUwUl OKA.
(ovrca: JOB A*Mciacn AMMAC**.
-------
TABLE 7-2. PLANT DISTRIBUTION BY VALUE OF SHIPMENTS
' d!»)
'(N!*)
4.MF.I
(4.1)
l.lll.l
(I.I)
I.M4.I
(44.*)
1M.1
(4.1)
1.1M.I
(14.*)
1,111.)
(I.*)
(*!i>
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(M.I)
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1*
*
0
I.4M.1
0.4)
4.1M.4
(M.I)
4.111.*
(I*.*)
1.IM.*
(1.1)
M.lll.l
(44.*)
111.*
(4.1)
1.414.1
(14.1)
1.4*1.4
(14.1)
ll.l
(I.I)
*.**!.!
(M.I)
W-:
II I* oil
MC Ml mitt
»t IMIMTT
riuti »iik
1
(I.I)
1
(4.7)
t
O.I)
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(1.1)
1.4
<*.!>
Ill.t
0.4)
17.1
(I.I)
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(1.1)
»!!.«
(U.I)
11
(*.*I)
I*.*
(1.1)
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(1.1)
W.I
(1.4)
lll.l
(tl.l)
1.1
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11.1
(1.1)
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(l.l)
ll.l
(1.*)
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ll.l
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(I.I)
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(1.4)
IN.*
(1.1)
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(11.1)
1.4
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(1.4)
44.1
(1.1)
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(ll.l)
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(4.1)
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(1.1)
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(14.7)
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(1.1)
11. 741.1
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(*.»)
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(4.1)
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(4.4)
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(1.1)
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(1.1)
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1.717.1
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(ll.l)
4.MI.I
(14.1)
1.4M.1
(1.4)
U.llt.l
(41.1)
17.4
(*.!>
I.1M.4
(4.1)
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(ll.l)
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7,111.1
(M.I)
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(1.1)
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(4.*)
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O.I)
114.4
(1.1)
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ll-l into*
tl*-lt
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N
(N.I)
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(1.1)
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(M.4)
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(I.I)
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(1.*)
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(1.1)
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(1.1)
1.411.1
(II. i)
174.1
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411.1
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(I.I)
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(1.1)
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(I.I)
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(M.I)
4,411.1
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(1.*)
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(14.1)
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(M.I)
4N.I
(4.1)
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(ll.l)
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(1.1)
l.lll.l
(41.1)
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1
1
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l.M*!l
(14.1)
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(14.4)
1.411.*
*.**!.
(N.I)
lll.l
(4.1)
1. 141.1
(l*.l)
1.177.1
(ll.l)
m.i
(l.i)
1,111.1
(47.1)
U 1,41*.*
(1.1)
l.lll.l
(11.*)
1.411. 1
(ll.l)
I.MI.l
. (1.4)
11.411. 1
(41.1)
>».!
(4.1)
I.M1.4
(1.4)
l.lll.l
(10.4)
M*.l
(I.I)
«.I17.I
(41.1)
II
I
*
II.4M.1 II.M1.I
H.II1.I 11,1*1.4
Il.tM.I 11.74*.*
(i
1,7*1
(II.
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(11
1,111
(4.
11.111.
(41.
.7
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I
1)
(4.1)
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(».*)
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(11.4)
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0.1)
4.144.1
(41.1)
M.4M.I 11.CM.4
-------
$1 million to $5 million
$5 million to $10 million
$10 million to $25 million
Over $25 million.
Table 7-2 shows that 38 of the 106 sample plants have less than $5
million in value of shipments of porcelain enameled products, and account for
11 percent of the total wastewater discharged and 5.3 percent of total
porcelain enameling square footage. The annual compliance costs for these
38 "small" plants range between $210,000 (16.5 percent of the total for the
106 sample plants) at treatment level 1 to $2.3 million (18 percent of the
total for the 106 sample plants) at treatment level 5. These observations are
consistent with earlier observations that average compliance costs are greater
per unit of production for small plants than for larger plants. All of the
projected plant closures are among these "small11 plants.
7.3 SMALL BUSINESS ANALYSIS BASED ON PLANT FLOW RATES
For purposes of developing water pollution regulations, plant wastewater
flow rate is a reasonable definition of plant size, as flow rates often vary
with production volume. Additionally, plant flow rate often correlates with
pollutant volume, although there are some exceptions in this industry. Flow
rate, therefore, serves as a reasonable measure of plant size both on economic
and technological grounds.
Table 7-3 presents the distribution of the 106 porcelain enameling sample
plants by plant flow rates for the number of plants, plant production,
revenues, compliance costs and potential closures. The plant size categories
are as follows:
Plants with less than 30,000 liters per day (I/day)
Plants with 30,000 to 60,000 I/day
Plants with 60,000 to 100,000 I/day
Plants with over 100,000 I/day.
7-5
-------
TABLE 7-3. PLANT DISTRIBUTION BY FLOW RATES
KUl
Ml I****
nmn
Ml IM »U
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svr^
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M.M»-
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(I.I)
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(ll.l) (1.1)
4 IMM.I I.ni.i
(41.4) (ll.l)
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4 11.7*1.1
(11.4)
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1 1.1M.4
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1 I.MI.I
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(71.1) v
1,114.1
(I.I)
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1,144.1
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(I.i)
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1
4
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i
IM 4.411.4
174.4
4^41.1
4.111.I l.lll.l
I II.4M.1 11,111.1
11,411.1 II,Ml .4
-------
Table 7-3 indicates that over 40 percent (46 plants) of 106 sample plants
discharge less than 60,000 I/day. These "small" plants account for approxi-
mately 7 percent of total wastewater discharged and about 17 percent of total
porcelain enameled square footage. Annual compliance costs for these 42
plants vary between $184,500 (14.5 percent of total industry annual compliance
costs) at treatment level 1 and $2.4 million (18.7 percent of total industry
costs) for treatment level 5. Sixteen of the "small" plants are projected to
close at treatment levels 2 to 5.
Small plants may also be defined in terms of flow rate and a measure of
production volume such as metal preparation surface area. Table 7-4 presents
a summary of the key parameters based on "small" plants defined as plants with
less than 60,000 I/day flow rate and with leas than 1,600 m metal preparation
per day. This table shows that the such defined 38 "small" indirect discharge
plants account for 5.8 percent of total industry wastewater discharged and
14.8 percent of the annual compliance costs at treatment level 5. Fourteen of
the projected plant and line closures at treatment levels 2 to 5 are among
these "small" indirect discharge plants.
Table 7-5 summarizes the projected potential closures by plant size and
discharge status. Comparing the results for indirect and direct dischargers
indicates that the potential plant and line closures are concentrated among
the "small" indirect dischargers (as defined by both flow rate and production
volume).
7.4 SUMMARY OF SMALL BUSINESS ANALYSIS
The following general conclusions are drawn from the above discussion:
Some categories contain primarily small plants (e.g., job shops and
cookware) while others contain primarily large plants (e.g.,
dishwashers)
7-7
-------
TABLE 7-4. SMALL BUSINESS ANALYSIS BASED ON
EPA DEFINITION OF SMALL PLANTS '
All 116
Plants
116
4,628.1
774.6b/
4,043.9b/
5,170.4
23,242.8
24,544.8
29,487.3
30,783.6
1,338.3
11,803.5
12,090.6
13,520.3
13,813.5
1
22
2
488
"Small"
Indirect
38
(32.8)
268.5
(5.8)
38.3
(4.9)
122.2
(3.0)
607.6
(11.8)
5,355.2
(23.0)
5,641.5
(23.0)
5,752.6
(19.5)
6,057.9
(19.7)
157.5
(11.8)
1,869.9
(15.8)
1,937.5
(16.0)
1,976.2
(14.6)
2,043.6
(14.8)
14
2
339
Plants*'
Direct
6
(5.2)
38.3
(0.8)
9.1
(1.1)
18.1
(0.4)
88.9
(1.7)
611.1
(2.6)
633.4
(2.6)
658.1
(2.2)
680.4
(2.2)
23.0
(1.7)
235.7
(2.0)
240.8
(2.0)
248.0
(1.8)
253.0
(1.8)
0
2
0
38
Number of Plants
Flow Elate - 000 gpd
Production - million sq.ft.
Value of Shipments
$ million
Investment Costs - $000
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Annual Costs - $000
Treatment Level 1
Treatment Level 2
Treatment Level 3
Treatment Level 4
Treatment Level 5
Closures (Plants and Line)
Treatment Level 1
Treatment Levels 2-5
Employees Affected by
Closures
Treatment Level 1
Treatment Levels 2-5
( ) Values in parentheses represent percentage of all plants
*'"Small" plants defined as plants with less than 60,000 I/day flow rate and
less than 1,600 m /day metal preparation.
Production and value of shipments reflect 106 plants only.
7-8
-------
TABLE 7-5. SUMMARY OF PLANT AND LINE
CLOSURES FOR SMALL PLANTS
a/
Indirect Dischargers
Direct Dischargers
Number of Plants
Number of Closures
Plant Closures
Line Closures
All Closures
Closure Rate
(percent of all plants)
Plant Closures
Line Closures
All Closures
Employees affected from
Plant Closures
Line Closures
All Closures
less than 1,600 m2/day metal preparations.
Do not add up due to rounding errors.
Source: JRB Associates estimates.
All Plants
88
8
10
18
9
295
134
429
i as plants
Large
Plants
50
2
2
4
2
53
37
90
with less
Small
Plants
38
6
8
14
7
9
16
242
97
339
than 60,
All Plants
28
1
2
3
11
8
51
59
000 I/day flow
Large
Plants
22
0
1
1
0
4
4
0
21
21
rate and
Small
Plants
6
1
1
2
4
A
D /
8
30
38
7-9
-------
Most of the projected closures are small plants (under one
criteriavalue of shipmentsall closures are "small" plants)
The compliance cost per unit of output is generally higher for smaller
than for larger plants
The number of plants involved varies with the definition of "small."
7-10
-------
8. LIMITATIONS TO THE ACCURACY OF THE ANALYSIS
This section discusses the major limitations of the economic impact
analysis. It focuses on the limitations of the data, methodology,
assumptions, and estimations made in this report.
8.1 DATA LIMITATIONS
The major assumptions and estimates made in the economic impact analysis
are related to the data used for the analyses. Of primary importance are
assumptions and estimates relating to the compliance cost estimates, plant-
level production and financial variables estimates, and the production levels
used in the analysis.
A critical data input to this study is the compliance cost estimates.
The assumptions relating to the estimation of compliance costs are outlined in
the technical Development Document and summarized in Chapter 5 of this report.
However, throughout this study, an effort was made to evaluate and update the
cost estimates whenever possible. For example, original EPA estimates used a
10 percent interest rate and, indeed, at the early stages of the study that
figure seemed plausible. However, recent high interest rate levels and
limitations on the availability of industrial revenue bond funding suggest
that a higher interest rate should be used. For these reasons EPA compliance
cost estimates were revised for purposes of this analysis to assume a 16
percent rate of interest.*
Since no industry survey was conducted to collect plant-specific
financial data, much of the data used in this report had to be estimated
and/or extrapolated from public sources. The limitations of major assumptions
made in the estimating and extrapolating of these data are outlined below:
The production rates reported to EPA measured production in terms of
square feet enameled. These figures had to be adjusted to reflect the
square footage of metal coated on one side so that the square footage
figures of porcelain enameling production could be converted to pro-
duct units.
*Assume cost of borrowing money is 2 to 3 percent above prime rate projected
by Data Resources, Inc. to be about 13 percent in 1983-1984.
8-1
-------
Estimates of average square feet of porcelain enameling per unit and
average manufacturer's price per unit were used to derive projected
plant revenue estimates from the adjusted porcelain enamel production
volumes.
Average product group financial and operating characteristics such as
profit margin, asset turnover (i.e., sales to assets ratio) and
capital structure were used in the economic impact analysis. These
financial characteristics were estimated based on published financial
data of selected porcelain enameling companies and on survey data from
11 companies provided by the Porcelain Enameling Institute.
The third major data limitation in the analysis lies in the fact that
only a single year's production data (1976) were collected. Multiple years
production data would have enabled a more in-depth analysis, encompassing the
cyclical nature of the industry. As shown in Figure 3-2, the 1976-1977 time
period used for the production data was neither a peak nor a trough for the
industry and the general economy; and is, therefore, considered to be
representative of average conditions in the industry over the long run.
Section 8.3.2 in this Chapter presents the results of a sensitivity analysis
on production levels. This sensitivity analysis responds to the limitation
inherent in assuming current production levels will recover to the level at
the time data was collected.
8.2 METHODOLOGY LIMITATIONS
In addition to the data limitations described above, this study is also
subject to limitations of the methodology used. These limitations are related
to critical assumptions on price increase, profit impact, and capital
availability analyses.
8.2.1 Price Increase Assumptions
Because most product groups in the porcelain enameling industry exhibit
characteristics of both competitive and non-competitive market behavior, it is
assumed that the industry would adopt the pricing strategy described in
Section 2.2 and would establish an industry-wide price increase which would
maintain the industry's initial return on sales for each product group. Due
to weak market conditions, it is assumed that architectural panel producers
will not be able to raise their prices.
8-2
-------
8.2.2 Profit Impact Assumptions
In studies where detailed, plant-specific data are available, potential
plant closures can be identified by using discounted cash flow analyses.
Using this approach, a judgment can be made about the ability of a plant to
continue in business after compliance with effluent regulations, by comparing
the discounted value of the plant's cash flow with the plant's estimated
salvage value. The application of this approach requires plant-specific data
on cash flows and salvage values, and since data at this level of specificity
were not available for this study, this approach was not deemed to be prac-
tical. As an alternative method, profitability impacts were measured through
the use of return on investment (assets) analysis. Although this financial
ratio analysis is based upon accounting data and does not account for the time
value of money, it is widely used in comparative financial analyses and is
simple to apply.
Another limitation relates to the ability of the profit impact
methodology to assess the combined effects of the business cycle and the
timing of the effective date of the regulation. As previously mentioned,
portions of the study rely on inferences from only one or a few years of data.
Where this occurred, care was taken to insure that any point estimate was not
taken for an extreme year, such as a trough of a recession or a peak of an
expansion. As shown in Figure 3-2, the 1976-1977 time period was neither a
peak nor a trough for the industry or the general economy; and is, therefore,
considered to be representative of average conditions in the industry over a
long period of time.
8.2.3 Capital Availability Assumptions
Because data on the current debt-equity position of many of the firms
were not available, an analysis of impacts of compliance costs on debt service
coverage could not be performed. Therefore, the capital investment require-
ments analysis was assessed through an evaluation of compliance investments in
comparison to cash flow. Although this technique does not provide a precise
conclusion on a firm's ability to make the investment, i-t does provide a good
indication of the relative burden of the requirement.
8-3
-------
8.3 SENSITIVITY ANALYSES
Two of the study's parameters, compliance costs and capital availability
threshold, were varied to assess the sensitivity of the study's results to
each of the parameters. The study's conclusions, as presented in Chapter 6,
are based on the best estimates for each of these two parameters. The
paragraphs below address the question of a change in these assumptions.
8.3.1 Compliance Cost Sensitivity Analysis
The major determinant of the economic impacts of the regulations is the
cost of compliance. Comments received from industry sources express serious
concern over the accuracy of the cost estimates. In response to this concern,
the compliance cost estimates were revised to consider many of the industry
comments. However, a comparison of the revised EPA estimates (which are used
in the above analyses) with industry plant-specific estimates shows a dis-
crepancy of 20 to 30 percent still exists. For this reason, a 30 percent
sensitivity analysis on the compliance costs was performed. The sensitivity
analysis also accounts for site specific costs that cannot be explicitly
identified in compliance cost estimates. Tables 8-1 and 8-2 present the
results of this sensitivity analysis on profit and capital requirements.
These tables show that at Treatment Level 5, six additional plants have
significant profit impacts and five other have high capital requirements.
However, only one additional steel sanitary ware plant is projected to close
at Treatment Levels 2 through 5 and one additional job shop at Treatment
Level 5. Both closures are line closures. The other plants with high profit
impacts have after-compliance ROIs only slightly below threshold level and are
expected to continue their operations. Meanwhile, the five plants with high
capital requirements are owned by larger firms and would be able to obtain the
required capital from their parent firms.
8.3.2 Plant Revenues Sensitivity Analysis
A sensitivity analysis based on 20 percent reduction in plants' baseline
revenues (which represents approximately the decline in porcelain enameled
product shipments between 1976 and 1981) was performed to estimate the
incremental capital requirements impacts. This sensitivity analysis assumes
8-4
-------
TABLE 8-1. SUMMARY OF 30 PERCENT COST SENSITIVITY ANALYSIS - PROFIT IMPACT
Number of
Plants
Number of Plants with After-Compliance Return
on Investment less than Threshold
Product Groups in Sample Level 1
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural Panels
Job Shops
Barbecues
TOTAL
25
9
4
9
2
9
2
11
11
23
_!.
106
0
0
0
0
0
0
0
1
0
1
£
2
Level 2
1
0
0
2
(+1)
0
3
(+2)
0
4
4
10
(+1)
0
24
(+4)
Level 3
1
0
0
2
(+1)
0
3
(+2)
0
4
5
(+1)
10
(+1)
0
25
(+5)
Level 4
1
0
0
2
(+1)
0
4
(+3)
0
4
5
(+1)
10
(+1)
0
26
(+6)
Level 5
1
0
0
2
(+1)
0
4
(+3)
0
4
5
(+1)
10
(+1)
0
26
(+6)
Source: JRB Associates estimates.
8-5
-------
TABLE 8-2. SUMMARY OF 30 PERCENT COST SENSITIVITY ANALYSIS - CAPITAL REQUIREMENTS
Product Groups
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookware
Architectural Panels
Job Shops
Barbecues
TOTAL
Number of
Plants
in Sample
25
9
4
9
2
9
2
11
11
23
1
106
Number of Plants with CC I /Revenue
Greater than Threshold
Level 1
0
0
0
0
0
0
0
2
(+1)
0
4
(+3)
0
6
(+4)
Level 2
2
(+1)
0
1
(+1)
3
(+1)
0
6
(+2)
0
5
(+1)
6
(+1)
18
(+3)
0
41
(+10)
Level 3
2
(+D
0
1
(+1)
3
(+1)
0
6
(+1)
0
5
(+1)
6
(+1)
18
(+2)
0
41
(+8)
Level 4
2
(+1)
0
1
(+1)
3
(+1)
0
7
(+1)
0
5
(+1)
6
(+1)
18
(+1)
0
42
(-1-7)
Level 5
2
0
1
3
(+1)
0
7
(+1)
0
5
(+1)
6
(+1)
18
(+1)
0
42
(+5)
Source: JRB Associates estimates.
8-6
-------
the event that the porcelain enamel industry sales would not recover from the
current recession and would remain at the current level even as the econoay
improves.
In terms of capital requirements, a 20 percent decline in revenues
affects an additional five to eight plants at Treatment Levels 2 to 5. The
additional plants are noted by product group in Table 8-3. In terms of
projected closures, however, there are only two cases where additional line
closures might be indicated. Even with the assumed reduced level of revenues,
both plants remain profitable after compliance. In terms of ability to raise
capital, both plants exceeded the threshold criteria by a small amount. The
conclusion of this analyses is a maximum of two additional product line
closures. Neither plant has porcelain enameling as its only production
activity.
8.4 SUMMARY OF LIMITATIONS
Although the above factors limit the quantitative accuracy of the impact
assessments, sensitivity analysis indicates the results to be relatively
consistent over a range of assumptions regarding complaince costs and
industry demand conditions. Therefore, it is believed that the results of
this study represent a valid industry-wide assessment of the economic impacts
associated with effluent guideline control costs.
8-7
-------
TABLE 8-3. SUMMARY OF 20 PERCENT REVENUE REDUCTION SENSITIVITY ANALYSIS
Product Groups
Ranges
Home Laundry
Dishwashers
Hot Water Heaters
Refrigerators
Steel Sanitary Ware
Cast Iron
Sanitary Ware
Cookvare
Architectural Panels
Job Shops
Barbecues
TOTAL
Number of
Plants
in Sample
25
9
4
9
2
9
2
11
11
23
1
106
Number of Plants with CCI /Revenue
Greater than Threshold
Level 1
0
0
0
0
0
0
0
2
(+1)
0
3
(+2)
0
5
(+3)
Level 2
2
(+1)
0
1
(+1)
3
(+1)
0
6
(+2)
0
.5
(+1)
6
(+1)
18
(+3)
0
41
(+10)
Level 3
2
(+1)
0
1
(+1)
3
(+1)
0
6
(+1)
0
5
(+1)
6
(+1)
18
(+2)
0
41
(+8)
Level 4
2
(+1)
0
1
(+1)
3
(+1)
0
7
(+1)
0
5
(+1)
6
(+1)
18
(+1)
0
42
(+7)
Level 5
2
0
1
3
(+1)
0
7
(+1)
0
5
(+1)
6
(+1)
18
(+1)
0
42
(+5)
Source: JRB Associates estimates.
8-8
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
-------
APPENDIX A
CALCULATION OF PROFIT IMPACT THRESHOLD VALUE
To assess the impact of compliance on plant profitability, the plants'
post-compliance return on assets (ROI) ratios were calculated and compared to
a threshold value. The threshold value was set at a level that would generate
to the stockholders/owners a return on the liquidation value of their invest-
ment (after taxes return on their equity) equal to the opportunity cost of
other investment alternatives, which in this case is defined as the U.S.
Treasury bond yield. The first step in relating the ROI threshold value and
the opportunity return is the following equation:
BTROI - NPBT . NPBT x EQUITY
ASSETS EQUITY ASSETS
- BTROE x EQUITY
ASSETS
ATROE x * x EQUITY
Cl - t) ASSETS
(1)
where
BTROI » Target before taxes return on assets
NPBT » Net profit before taxes
ASSETS - Asset book value
EQUITY - Equity book value
BTROE " Target before taxes return on equity
ATROE - Target after taxes return on equity
t Average corporate tax rate.
Using the above equation, a projected U.S. Treasury bond yield (or target
after taxes ROE) of 12 percent, corporate tax rate of 40 percent, and equity
to assets ratio of 50 percent, the before taxes ROI threshold value would be
10 percent.
A-l
-------
However, the liquidation value of a plant is generally a fraction of its
book value. Assuming that the liquidation value is 85 percent of the book
value, the liquidation value of stockholders' equity is only 85 - 50 - 35 or
35/50 " 70 percent of its value if liquidation value equaled book value:
Percent
Asset book value 100
Asset liquidation value 85
Book value of equity 50
Debt 50
Liquidation value of equity
(Assets liquidation value - debt) 35
As a result, a 12 percent return on equity book value (ATROE) would yield
an effective ATROE on liquidation value of 17 percent (12 * .70). That is,
ATROE (effective) » ATROE/(.70).
By similar reasoning, to get an effective ROE of 12 percent liquidation value
requires an 8.4 percent ATROE (12 x .70). Based on equation (1), the corres-
ponding before taxes ROI will be 7 percent (.084 * (1 - .4) x 50/100 » .07).
Table A-l presents estimates of profit impact threshold values based on
various assumptions on assets liquidation value and equity to assets ratio.
A-2
-------
TABLE A-l. ESTIMATED ROI THRESHOLD VALUES THAT GENERATE 12 PERCENT ROE
ASSUMING VARIOUS ASSETS LIQUIDATION VALUES AND EQUITY TO ASSETS RATIOS
CORPORATE TAX RATE: 40%
Assets Liquidation Value (Percent of Book Value)
'/Assets Ratio
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
60%
*
*
*
1
2
3
4
5
6
.0
.0
.0
.0
.0
.0
70%
*
I
2
3
4
5
6
7
8
.0
.0
.0
.0
.0
.0
.0
.0
75%
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
80%
2
3
4
5
6
7
8
9
10
.0
.0
.0
.0
.0
.0
.0
.0
.0
85%
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
90%
4
5
6
7
8
9
10
11
12
.0
.0
.0
.0
.0
.0
.0
.0
.0
100%
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
Equity/Assets Ratio
CORPORATE TAX RATE: 35*
Assets Liquidation Value (Percent of Book Value)
60% 70% 75% 80% 85% 90% 100%
0.60
0.65
0.70
4.3 6.0 6.8 7.7 8.5 9.4 11.I
4.6 6.5 7.4 8.3 9.2 10.2 12.0
5.0 7.0 8.0 8.9 9.9 10.9 12.9
A-3
-------
APPENDIX B
ESTIMATION OF KEY FINANCIAL PARAMETERS
-------
APPENDIX B
ESTIMATION OF KEY FINANCIAL PARAMETERS
This appendix describes the assumptions and methodology for estimating
two key financial ratios used in the economic impact analysis: plant baseline
assets to sales and return on sales (profit margin) ratios. Data used to
estimate these two ratios are obtained from:
A financial survey of eleven small porcelain emaneling
companies conducted by the Porcelain Enamel Institute
(PEI) in 1981
Robert Morris Associates' (RMA) Statement Studies,
1981 edition
Published corporate annual reports.
Tables B-l to B-3 summarize the critical data items. The following paragraphs
explain how the data are used in the analysis.
Table B-l lists the 1976-1980 profit margins and assets to sales ratios
as reported in the RMA's Statement Studies for the Metal Stampings industry
(SICs 3465, 3466, 3469); Enameled Iron, Metal Sanitary Ware and Plumbing
Supplies industry (SICs 3431, 3432); and Household Appliances industry
(SICs 3631, 3632, 3633, 3634, 3635, 3636). It is assumed that:
The 1976-1980 averages for Metal Stampings would
represent the porcelain enameled cookware industry
return on sales (profit margin) and assets to sales
ratio. Architectural panels plants are also classi-
fied under this industry group; however, due to weak
market conditions, the profit margin of architectural
panels is assumed to be lower than that for cookware
and is set to be 5 percent.
B-l
-------
The 1976-1980 average profit margin and assets to
sales ratio for the Enamel Iron, Metal Sanitary Ware,
and Plumbing Supplies industries would apply to the
steel and cast iron sanitary ware plants.
For the home appliances industry (i.e., ranges, home laundry, dish-
washers, hot water heaters, refrigerators, barbecues), average data for six
companies with published financial data (three are primarily appliance
manufacturers, and three are more diversified companies with financial data
on their appliances line of product) were selected to represent the financial
characteristics of the home appliances plants. These financial ratios are
presented in Table B-2 and are consistent with the RMA's averages shown in
Table B-l for the Household Appliances industry group.
Table B-3 describes the financial profile of small porcelain enameling
operations based on survey data collected by the PEL Since porcelain enamel
job shops are generally small operations, the financial ratios presented in
Table B-3 are assumed to apply to the job shops.
B-2
-------
TABLE B-l. SALIENT FINANCIAL RATIOS FOR SELECTED INDUSTRY GROUPS
BASED ON ROBERT MORRIS ASSOCIATES DATA
1976-1980
1976 1977 1978 1979 1980 Average
Metal Stampings
(SICs 3465, 66, 69)
Before Taxes Profit Margin (%) 6.50 6.70 6.40 6.60 4.30 6.10
Total Assets to Sales 0.47 0.49 0.46 0.49 0.54 0.49
Enameled Iron, Metal
Sanitary Ware, and
Plumbing Supplies
(SICs 3431, 32)
Before Taxes Profit Margin (X) 6.30 7.40 6.80 5.10 4.40 6.00
Total Assets to Sales 0.59 0.58 0.60 0.57 0.61 0.59
Household Appliances
(SICs 3631, 32, 33, 34,
35, 36)
Before Taxes Profit Margin (%) 5.50 8.40 5.20 6.70 8.10 6 80
Total Assets to Sales 0.53 0.57 0.56 0.51 0.64 0*.56
SOURCE: Robert Morris Associates, Statement Studies, 1981 Edition.
B-3
-------
TABLE B-2. FINANCIAL RATIOS FOR SELECTED HOME APPLIANCE MANUFACTURERS
Hobart Corp.
Magic Chef, Inc.b/
Roper Corp.b/
Tappan Co.
Whirlpool Corp.b/
White Consolidated Industries, Inc.b/
Average
Before Taxes
Profit Margin8/
(X)
Total Assets
to Sales*/
9.2
7.3
2.8
3.7
9.0
3.2
0.67
0.50
0.36
0.50
0.45
0.53
5.9
0.50
a/1978-1980 averages, except for Roper (1979-1981), Whirlpool and Hobart
(1977-1979).
b/Home appliances product line only.
SOURCE: Corporate Annual Reports.
B-4
-------
TABLE B-3. FINANCIAL CHARACTERISTICS OF SMALL PORCELAIN ENAMELING FIRMS
Operating Profit (percent of sales)
Before Taxes Gross Profit Margin 17.9a'
Interest Expenses 3.4b/
Other Overhead Expenses 7.5C'
Before Taxes Profit Margin 7.0
Total Assets to Sales 0.54*/
a/1978-1980 averages as reported in PEI's financial survey.
b/Assume 18.151 interest rate on average current and long-term liabilities
at beginning and end of year as reported in PEI's financial survey (1980).
c/1976-1980 average depreciation, lease, and rental expenses, and officers'
compensation for Metal Stampings industry (SICs 3465, 3466, 3469) as
reported in Robert Morris Associates' Statement Studies, 1981 Edition.
SOURCES: Porcelain Enamel Institute, 1981 Financial Survey.
Robert Morris Associates, Statement Studies, 1981 Edition.
B-5
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