v>EPA
United States
Environmental Protection
Agency
Office of Water Regulations
and Standards
Washington, DC 20460
EPA 440/2-82-018
November 1982
Water
Economic Impact Analysis
of Effluent Limitations and
Standards for the Leather
Tanning Industry
QUANTITY
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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 22161 (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) 382-5397
The staff economist for this project is Joseph Yance (202/382-5379).
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v/
ECONOMIC IMPACT ANALYSIS OF EFFLUENT
LIMITATIONS AND STANDARDS
FOR THE LEATHER TANNING INDUSTRY
U.S. Environmental Protection Agency
Office of Analysis and Evaluation
Washington, D.C. 20460
November 1982
EPA 440/2 82-018
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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 Section 301, 304, 306 and 307 of the Clean Water Act to the leather
tanning and finishing industry.
The study supplements the technical study (EPA Development Document)
supporting 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 limitations 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 effect 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. The work was started under
Contract No. 68-01-4632 and completed under Contract No. 68-01-5858 by
Development Planning and Research Associates, Inc. (DPRA). The report was
prepared by Donald J. Wissman, Richard E. Seltzer and Arthur C. Barker of
DPRA and completed in November 1982.
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CONTENTS
Page
PREFACE 11
I. INTRODUCTION 1-1
A. Scope of this Report 1-1
B. Organization of this Report 1-1
C. Data Sources 1-2
1. Primary Data Sources 1-2
2. Secondary Data Sources 1-3
II. METHODOLOGY II-l
A. Industry Structure and Subcategorization 11-2
B. Financial Profile of the Industry II-2
C. Pricing Patterns II-4
D. Model Plants II-4
E. Waste Treatment Technological Options and Costs II-5
F. Analysis of the Economic Impacts 11-5
1. Price, Supply and Demand Impact Analyses 11-6
2. Financial Impact Analysis II-7
3. Production, Plant Closures and Employment
Analysis II-7
a. Model plant impact analysis II-7
b. Construction of the model plant cash flow
and capital outlays II-9
c. Cost of capital - after-tax 11-11
d. Investment determination 11-12
e. Plant closures and production effects 11-13
f. Employment impact analysis 11-16
4. Secondary Production Effects 11-16
5. Community Impact Analysis 11-17
6. Balance of Trade Impact Analysis 11-17
7. Other Impact Analysis 11-17
III. STRUCTURE OF THE INDUSTRY III-l
A. Industry as a Process 111-2
B. Characteristics of the Industry 111-4
C. Importance of Integrated Capacities II1-13
D. Level of Diversification 111-13
E. Employment Characteristics 111-14
F. Ownership Type and Size 111-14
G. Industry Segments 111-16
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Contents (Continued)
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY IV-1
A. General Financial Situation IV-1
B. Cost Structure of the Industry IV-3
1. Revenues IV-3
2. Variable Costs IV-5
3. Fixed Costs IV-5
C. Industry Profitability IV-9
1. Net Profits on Sales IV-9
2. Return on Investment IV-12
3. Cash Flow IV-12
D. Financial Structure of the Industry IV-12
1. Assets IV-12
2. Liabilities IV-14
3. Net Worth IV-14
E. Terms of Debt Capital IV-16
1. Financing New Investment IV-16
2. Expenditures for Plant and Equipment IV-17
3. Terms of Debt IV-17
F. Cost of Capital - After Tax IV-17
V. PRICE AND PRICE DETERMINATION V-l
A. Leather Prices, Demand, and Supply V-l
1. The Price of Leather V-2
2. Demand for Leather V-5
3. Elasticity of Demand for Leather V-8
4. Supply of Leather V-13
B. Imports of Finished Leather Products into the
United States V-14
1. Trends in Imported Leather Goods V-14
2. Trade Restrictions V-17
C. The Raw Hide Market V-19
1. United States Supply of Hides V-19
2. World Supply of Hides and Skins V-24
3. The Demand for Raw Hides V-24
4. Trade Restrictions in Raw Hide Supply V-27
5. Quantitative Analysis of Hide Prices V-29
VI. REPRESENTATIVE MODEL TANNERIES VI-1
A. Types and Sizes of Model Plants VI-1
B. Operational Characteristics VI-3
C. Investment Characteristics VI-7
1. Fixed Assets VI-7
2. Operating Capital VI-11
3. Total Investment VI-11
4. Salvage Value VI-11
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Contents (Continued)
D. Sales and Costs Characteristics
1. Annual Sales
2. Raw Material Costs
3. Labor Costs
4. Tanning Materials and Other Costs
5. Depreciation and Interest Costs
E. Model Plant Income and Annual Cash Flow
Characteristics
1. Existing Direct Discharging Models
2. Existing Indirect Discharging Models
3. New Source Models
VII. WASTEWATER CONTROL COSTS
A. Discharge Status of the Industry
B. Wastewater Treatment Technologies
C. Wastewater Treatment Costs
1. Investment Costs
2. Annualized Costs
3. Aggregated Industry Costs
D. Availability of Land for Controls
VIII. PROJECTED ECONOMIC IMPACTS
A. Price Effects
1. Increases in the Cost of Production
2. Expected Price Increases
B. Financial Effects
1. Return on Sales
2. Return on Total Assets
3. Annual Cash Flows
4. Net Present Values
C. Production Effects
1. Baseline Plant Closures
2. Plant Closure Criteria
3. Estimated Tannery Closures - Recommended Options
D. Secondary Production Effects
E. Community Effects
F. Balance of Payments Effect
G. New Source Effects
IX. SMALL BUSINESS ANALYSIS
A. Definition of "Small" Leather Tanning and
Finishing Plants
B. Alternative Treatment Technologies Considered
C. Baseline Economic Conditions and Estimated Impacts
Resulting from BAT and PSES
1. Direct Dischargers - BAT I
2. Indirect Dischargers - PSES II
3. Indirect Dischargers - PSES IV
APPENDIX A - Bibliography
APPENDIX B - Data Used in Price Analysis
VI-12
VI-12
VI-24
VI-24
VI-24
VI-24
VI-26
VI-26
VI-26
VI-30
VII-1
VII-1
VII-2
VII-5
VII-5
VII-6
VII-6
VII-6
VIII-1
VIII-1
VIII-1
VIII-2
VIII-4
VIII-4
VIII-7
VIII-7
VIII-7
VIII-10
VIII-10
VIII-12
VIII-13
VIII-18
VIII-20
VIII-21
VIII-21
IX-1
IX-1
IX-3
IX-4
IX-4
IX-9
IX-10
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I. INTRODUCTION
The Environmental Protection Agency is charged with the responsibility to
restore and maintain the chemical, physical and biological integrity of the
nation's waterways. This authority is granted under the Clean Water Act
(the Federal Water Pollution Control Act Amendments of 1972 as amended by
the Clean Water Act of 1977). Section 301(b)(l)(A) of the Act requires
that all industries discharging into navigable waterways achieve the "best
practicable control technology" (BPT). These same dischargers are required
to meet effluent limitations achievable by the application of "best
available technology economically achievable" (BAT) and best conventional
pollutant control technology pursuant to Sections 301(b)(2)(A), (b)(2)(C)
and (b)(2)(E). Additionally, new industrial dischargers are required to
comply with the New Sources Performance Standards (NSPS) under Section 306
of the Act, and new and existing industrial dischargers to publicly owned
treatment works (POTW's) are subject to Pretreatment Standards under
Sections 307(b) and 307(c) of the Act. The purpose of this study is to
assess the economic impacts of these requirements on the leather tanning
and finishing industry.
A. Scope of this Report
EPA proposed regulations on July 2, 1979, to limit effluent discharge from
the leather tanning industry to public waterways and limit the introduction
of pollutants into publicly owned treatment works. Additional information,
both technical and economic, has been developed since the proposed
standards were made public. As a result, on June 2, 1982, the Agency made
available for public review this data. EPA requested comments on these
supplementary record materials and on the Agency's preliminary analysis of
how these materials might influence final rulemaking.
B. Organization of this Report
This draft report includes a total of nine chapters. The methodology used
in estimating the economic impacts of the various control options for the
effluent limitation guidelines pretreatment standards and new source
performance standards is defined in Chapter II. In general, model plants
were developed to represent the various sizes and types of plants found in
the industry. A net present value analysis was then employed to determine
the economic and financial impacts of the regulatory alternatives.
Chapters III, IV, and V deal with various aspects of the industry
background such as the structure of the industry including the number,
sizes and types of plants and employment characteristics. A financial
profile of the
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industry and a discussion of prices and price determination are also
included. Chapter VI describes the representative model plants and how
they are related to the total industry.
The treatment alternatives are briefly discussed in Chapter VII, along with
the investment and operating cost for each alternative. Various
alternatives are developed for each size and type of plant. The economic
impacts are described in Chapter VIII. For each control alternative
considered, the specific types of economic impacts that are examined in
this report include:
1) Price Effects
2) Financial Effects
3) Production Effects
4) Secondary Production Effects
5) Community Effects
6) Balance of Payment Effects
7) Effects on New Sources
C. Data Sources
Data utilized in the preparation of this report were obtained from both
primary and secondary sources. Primary sources were those associated with
the industry itself and included tanneries and trade associations.
Secondary sources were publications prepared by the government, industry,
and private institutions. Some of the more relevant data and data sources
are discussed below.
1. Primary Data Sources
Information acquired directly from tanneries or from representatives of the
industry are considered primary data. The major sources of primary data in
this study included -an industry survey, plant visits, and informal
discussions with industry representatives.
The initial survey was conducted in 1976 under the Authority of Section 308
of the Clean Water Act and used in the development of the economic analysis
for proposed standards as -published in July of 1979. If A follow-up survey
was conducted by the Agency in 1980 and additional data were obtained from
this survey. Also, plant visits were made to all direct dischargers. The
information obtained from the follow-up survey and plant visits was used to
establish a more complete data base and update the model plant financial
profiles from 1977 to 4th quarter 1979.
\J Complete details of the industry survey are contained in the 1979
report: Economic Impact Analysis of Proposed Effluent Limitations
Guidelines, New Source Performance Standards and Pretreatment
Standards for the Leather Tanning and Finishing Point Source Category,
EPA-400/2-79-019, July, 1979.'•
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Visits to the tanneries allowed the Agency to gain an important insight
into the operational and managerial characteristics of these plants. These
visits were coordinated through the Tanners' Council of America, the
industry's trade organization.
2. Secondary Data Sources
The published data utilized in this analysis were obtained from both public
and private sources. The Tanners' Council publishes annually the U.S.
Leather Industry Statistics which contains data on industry volumes,
prices, imports, and exports. Major public sources of information included
the Annual Survey of Manufactures and the Census of Manufactures, both
published by the Bureau of Census, U.S. Department of Commerce. These and
other secondary data sources were utilized throughout this analysis to
depict historical trends and to supplement and verify information from
primary sources. This latter use of secondary information was particularly
important in the development of the financial model plants to assure the
representativeness and accuracy of the models. A complete listing of the
secondary sources used in the development of this report is contained in
the Bibliography.
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11. METHODOLOGY
The methodological approach utilized to assess the likely economic impact
of the regulations on the leather tanning industry is summarized in this
chapter. In this impact study, economic impact is defined as the
difference between (1) the projections of the likely effects on a plant, a
local area, the United States, and on foreign activity which would result
from an industry's compliance with a given level of effluent limitations
and standards and (2) the projection of industrial activity and changes
which would likely occur in the absence of effluent limitations and
standards (baseline conditions).
In particular, the principal economic variables of interest in this study
are:
1) price effects
2) profitability
(3) number, size, and location of plants that can be expected to
close or curtail employment,
4) changes in employment,
5) community impacts,
(6) dislocation effects,
(7) balance of trade consequences,
(8) other impacts.
In the case of best available technology economically achievable (BAT) and
pretreatment standards for existing sources (PSES), the analysis focuses on
price increases, plant closings, curtailments of production, dislocations
of production, unemployment, community impacts, and balance of trade
effects. For new source performance standards (NSPS) and pretreatment
standards for new sources (PSNS), the impacts are assessed in terms of the
effects on industry growth, prices, plant locations (i.e., domestic or
foreign production), and balance of trade. The specific bases for effluent
control relating to the leather tanning industry are described in detail in
a separate EPA report. I/
If Final Development Document for Effluent Limitations Guidelines New
Source Performance Standards and Pretreatment Standards for the
Leather Tanning and Finishing Industry Point Source Category, U.S.
Environmental Protection Agency, EPA 440/11-82-016, November 1982.
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Several interrelated analyses were used to evaluate likely economic impacts
resulting from effluent control requirements on the leather tanning
industry. These in-depth analyses included: (1) a characterization and
subcategorization of the technical and economic structure of the industry,
(2) a description of the financial profile of the industry, (3) the
construction of representative model plants, (4) an evaluation of pricing
patterns within the industry, (5) a description of the technological
options for meeting designated levels of pollution control and the costs
associated with each option, and (6) the analysis of economic impacts.
The overall analysis, however, was not a simple sequential one; rather, it
employed interacting feedback steps. The schematic of the analytical
approach is shown in Exhibit II-l. Due to the fundamental causal
relationships among the financial and production effects and other impacts,
a greater emphasis was devoted to plant closure analysis.
A. Industry Structure and Subcategorization
The industry structure and subcategorization analysis primarily involved
describing and segmenting the industry in terms of its past and current
economic characteristics in order to provide an information base for the
subsequent analytic steps. In particular, the information on industry
characteristics was useful in determining an appropriate disaggregation
design for industry subcategorization. This delineation of industry
subcategories served as the basis for the definition and construction of
representative model plants and the determination of the wastewater
treatment technological options and costs appropriate to each.
B. Financial Profile of the Industry
The ability of firms within the industry to comply with various levels of
pollution control was determined, in part, by the past and expected
financial conditions of those firms. Under the heading "financial profile
of the industry," various factors were studied to develop insight into the
financial characteristics of actual plants in the industry. Much of the
data compiled in this section was also useful in determining the financial
profiles of representative model plants.
Key financial statistics include after-tax profit as a percent of sales,
after-tax profit as a percent of invested capital, sales to total assets
ratios, sales per employee, assets per employee, and after-tax profit to
net worth. Other financial factors are studied with respect to the ability
of firms to generate funds to finance investment for effluent management,
either internally through cash flow or externally through new debt or
equity issues. The data compiled in this phase of the analysis provide an
information base useful for projecting key technical and economic factors
and for carrying out subsequent economic impact analysis.
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Industry
Industry
Structure
Industry
Financial
Data
EPA Pollution
Control Costs
Base
Closures
».
Plant Closures
Due to Control
Subcate-
gorization
Model Plant
Parameters
Budget Data
Development
Employment
Effects
i
Community
Effects
Model
Financial
Analyses
Price
Industry
Pricing
Financial
Profiles
increases
1
Shutdown
Analysis
4
Production-
Expected
Effects
I
, Foreign
5 Trade
Effects
«— •
•* 1 1 1 1
Exhibit II-l.
Schematic of economic impact analysis of effluent
control guidelines
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C. Pricing Patterns
The analysis of pricing patterns in the leather tanning industry focused on
factors determining supply and demand. Market structure and the nature of
competition were evaluated, a step which, for the leather tanning industry,
involved the influence that international markets and competition exert on
the domestic industry's prices. Finally, the ability of impacted plants to
recover the increased costs of pollution controls was assessed.
D. Model Plants
The model plant analysis used is a systematic framework within which to
assess likely economic impacts on individual types and sizes of actual
plants within the industry. Usually more than one model plant is required
for an industry in order to represent various types and sizes of existing
plants or plants which are likely to be constructed after the promulgation
of effluent control guidelines.
The model plant profiles represent a variety of financial, economic, and
technical variables such as sales, investment, fixed and variable costs,
profits, size, and type of process. The profiles are constructed from
information and data gathered in the industry characterization phase of the
analysis. This information is generally obtained from the industry survey,
plant visits, discussions with industry representatives, trade
publications, other secondary data sources, and from engineering
cost-synthesis methods.
In developing the model plants, the best data source was the industry
surveys which provided detailed financial data from the various types and
sizes of existing firms. However, data obtained from the industry surveys
were compared with published financial information to assure the
reliability of the data contained in the surveys. Also, data from
published sources are available annually which allow historical trends to
be considered and enable the industry's financial situation to be updated
without resurveying the industry.
Thus, the model plants were developed by considering data from both primary
and secondary sources. In a typical development of a model plant, key
economic/financial data (e.g. sales, production costs, margins, asset
structure) are collected from numerous sources and converted to a common
base. These data are, in turn, analyzed and compared, considering also
nonquantifiable aspects of the industry, to determine the appropriate
parameter to use for the particular model plant. The consolidation of the
various parameters results in the depiction of the key economic and
financial components in the form of a representative model plant.
The applicability of utilizing model plant data for assessing expected
economic impacts of pollution controls rests principally on the
representativeness of the selected model plant(s). For example,
"economies-of-scale" in production are often present in processing plants,
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e.g., average unit costs of production are usually lower for large plants
than for medium or small plants of the same type. Furthermore, there are
expected economies-of-scale in waste treatment, which, in effect, will
compound the economies-of-scale relationships among differing sizes of
plants.
In general, economies-of-scale relationships in pollution control costs
have been demonstrated, and this alone necessitates multiple model plant
analyses to evaluate differential economic effects. Other processing
factors, e.g., type of manufacturing process employed (technology) may also
affect processing costs and wasteflows. This again may necessitate a
further segmentation of an industry and the inclusion of additional model
plants for a more comprehensive analysis.
E. Waste Treatment Technological Options and Costs
Waste treatment options and their associated costs are obviously
instrumental in the assessment of the economic impacts of water pollution
controls. In general, basic technical and cost data were developed
specifically for various types and sizes of model plants using the
appropriate discharge method (direct or indirect). This analysis also
examined model plants reflecting new facilities which were projected most
likely to be built after the promulgation of the guidelines. In
determining appropriate options and costs, it was necessary to specify
1) the types of discharge in each industry segment, and 2) the types and
proportions of effluent systems in place. This information was developed
as part of the Agency's engineering analysis.
Cost data includes estimated investment costs for various treatment options
for each model plant and their respective estimated annual operating and
maintenance costs based upon normal operating rates or annual production
capacity.
F. Analysis of the Economic Impacts
Fundamentally, the impact analysis was similar to that usually required for
any capital budgeting study of new investments in which the problem is one
of deciding whether a commitment of time or money to a project is
worthwhile in terms of the expected benefits. The analysis was complicated
by the fact that benefits and investments will accrue over a period of time
and that, in practice, the analyst cannot reflect all df the required
imponderables in making future projections. The industry segments were
described in the form of financial budgets of model plants. Key
non-quantifiable factors were considered in the interpretation of the
quantified data.
This study's economic impact analysis required the establishment of a
basecase of industry conditions that would prevail without pollution
controls in order to estimate the consequent economic impact of pollution
controls by showing the change from this basecase attributable to their
imposition. In particular, the Agency estimated the number of plants that
will be subject to these regulations, since some tanneries are expected to
close before the regulations become effective.
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1. Price, Supply and Demand Impact Analyses
Price and supply and demand impact analyses necessarily have to proceed
simultaneously. In order to evaluate these impacts, two types of analyses
were used: one—the micro level--utilized the model plant as the basis of
the analysis to arrive at price increases required to maintain
profitability levels; the other—the industry level--utilized supply and
demand analysis.
Application of the Net Present Value (NPV) procedure to these costs yielded
the present value of pollution control costs (i.e., investment plus
operating cost less tax savings). (This NPV procedure is discussed in a
following section.) When this was known, the price increase required to
pay for pollution control could readily be approximated by the
formula: I/
X =
PVP
T-T
100)
PVR)
where:
PVP
PVR
average required percentage increase in price over the
planning period
present value of pollution control costs after taxes
present value of gross revenue starting in the year
pollution control is imposed
average tax rate
Since the program calculates the price increase required by period, an
average price increase over the five-year period following installation of
the control facilities was used.
The required price increase or the increase in cost of production at the
plant level was evaluated in light of the price elasticities of the
commodity involved and the competitive structure of the industry. This
represented the second approach using supply and demand analysis. The
supply and demand analysis provided some insights into likely quantities
and supply responses to different prices. This allowed a preliminary
estimate of the production and price impacts of pollution control costs.
Following this, further analysis at the micro level was performed to obtain
a more detailed insight into the plants' responses to expected price
changes, cost absorption, or plant closure (the plant closure criteria are
discussed in Section 3, below). The indicated plant shutdowns were then
aggregated to test whether or not the lost production could be absorbed by
the remaining capacity or whether such curtailments would increase prices.
\j The above procedure is conceptually correct where an average tax rate
is used. However, to insure accuracy in the machine program where the
actual tax brackets were incorporated, a more detailed iterative
process was developed.
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2. Financial Impact Analysis
The financial impact analysis involved the preparation of pro forma income
statements and cash flow statements (including computations of the models'
net present values) following the assessment of the likely price change.
The analysis provided estimates of profitability with and without pollution
control costs and also provided information relative to the ability of the
industry to finance this investment and estimated financial requirements.
The ability to finance plant investment for pollution control could have a
definite bearing on judgments and estimates with regard to likely plant
closures.
3. Production, Plant Closures and Employment Analysis
The core analysis for this study was based upon synthesizing the physical
and financial characteristics of the various industry segments through
representative model plant projections. Estimated financial profiles and
cash flows are presented in the model plant chapter. The primary factors
involved in assessing the financial and production impact of pollution
control were profitability changes—a function of the cost of pollution
control and a plant's ability to pass along these costs in the form of
higher prices.
a. Model plant impact analysis
This study's analytical techniques are sufficient to provide useful and
reliable insight into such potential business responses to required
investment and operating costs for pollution control facilities. In
reality, however, these decisions are seldom made as a set of well-defined
and documented economic rules. They include a wide range of personal
values, external forces such as the inability to obtain financing, or the
relationship between a dependent production unit and its larger cost center
whose total costs must be considered.
Such circumstances include but are not limited to the following factors:
(1) Inadequate accounting systems or procedures. This is especially
likely to occur in small, independent plants which do not have
effective cost accounting systems.
(2) Inefficient production units. This is particularly true of
plants where the equipment is old and fully depreciated, and the
owner has no intention of replacing or modernizing it.
Production continues as long as labor and materials costs are
covered until the equipment fails entirely.
(3) Personal values and goals associated with business ownership that
override or constrain rational economic rules. This complex of
factors may be referred to as the value of psychic income.
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(4) Production dependence. This is characteristic of a plant that is
a part of a larger integrated entity which either uses raw
materials being produced profitably in another of the firm's
operating units or supplies raw materials to another of the
firm's operations where the source of supply is critical. When
the profitability of the second operation more than offsets the
losses in the first plant, the unprofitable operation may
continue indefinitely because the total enterprise is profitable.
(5) Temporary unprofitability. This may be found whenever an
owner-operator expects that losses are temporary and that adverse
conditions will change. His ability to absorb short-term losses
depends upon his access to funds through credit or personal
resources not presently utilized.
(6) Low (approaching zero) opportunity costs for the fixed assets and
for the owner-operator's managerial skills and labor. As long as
the operator can meet labor and materials costs, he will continue
to operate. He may even operate with gross revenues below
variable costs until he has exhausted his working capital and
credit.
(7) Plant-site appreciation. This factor is important in those
situations where the value of the land on which the plant is
located is appreciating at a rate sufficient to offset short-term
losses.
These factors are generally associated with proprietorships and closely
held enterprises such as many of the leather tanning firms rather than with
publicly held corporations.
Although the above factors are present in and relevant to business
decisions, they are not always susceptible to quantifiable analysis. Thus,
this studies analytical techniques were designed to provide insite into
such potential business responses. Accordingly this analysis of the model
plants' impacts was primarily based on the determination of the model
plants' net present values (NPV) both before and after expenditures for
controls. This NPV analysis was then combined with considerations for
unique influencing factors (such as those listed above) so that its
assessment of impacts reflects, as accurately as possible, the responses
actual businesses will make.
The computation of the net present values in such an analysis involves the
discounting of the models' cash flows over some period of time (in this
analysis 21 years) through the discounting function:
t
NPV = I An (l+K)"n - I
n=l
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where:
NPV = net present value .,
A = the cash flow in the n year
K = discount rate (after-tax cost of capital)
n = number of the conversion period, i.e., year 1, year 2, etc.
t = total number of conversion periods (years)
I = value of facility for nonconforming uses (salvage value
for existing facilities and initial investment for new
source facilities)
The resulting net present value indicates the excess of the present value
of projected cash flows for an operating facility over the present value of
what the equity holders could earn if they liquidated in year zero and
invested the resulting money plus any additional investments they would
normally be expected to invest to maintain the facility in operation during
the time period at the firm's estimated cost of capital. Thus, if the NPV
is positive, the equity holders are earning a return which is greater than
the model's cost of capital. If the NPV is negative, then the equity
holders are earning less than the cost of capital, and in such a situation,
they would be better off liquidating, realizing the salvage value in cash
I/, and reinvesting it at the cost of capital.
Model plant NPVs are determined both without and with expenditures for
pollution controls. Comparison of the base case (without controls) and the
impacted case (with controls) allows the net effects of the controls to be
determined. These effects, in combination with other relevant economic
considerations, enable overall impacts to be determined.
b. Construction of the model plant cash flow and capital outlays
The cash flow and capital outlays used in this analysis of pollution
control costs were constructed in the following manner:
(1) The cash flows were presented in current dollars thus requiring
the use of different cash flows for each of the respective years.
(2) For existing model plants, the initial investment was considered
to be outlays for the model fixed assets (salvage value) and
working capital.
(3) The after-tax cash proceeds were taken for years t, to t .
These were adjusted annually for inflation. A 6 percent annual
rate of inflation was used.
_!/ Salvage value is defined here as the liquidation value of fixed assets
plus working capital, i.e. sold for nonconforming uses.
II-9
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(4) Annual reinvestment for replacement of depreciated assets was
estimated for year t. and was adjusted annually to compensate
for inflation and the net between reinvestment and depreciation.
(5) Terminal value of the model was taken in year t and reflected
the salvageable assets plus the net working capital,
(6) Capital outlays for pollution controls were added to the models'
total assets in increments, 50 percent in years t, and tg.
(7) Annual pollution control expenses were incurred incrementally in
years t, and tr reflecting the stages of construction
completion for the capital outlays. After year tr, pollution
control expenses were adjusted annually for inflation.
(8) Depreciation of depreciable assets was computed utilizing rapid
depreciation techniques for tax computations and the
straight-line method for the pro forma income statements.
Replacement investments of pollution control equipment began in
year tn.
(9) No terminal values of the pollution facilities were computed as
it was anticipated there would be few, if any, salvageable assets
in year tn.
Base case cash flows consisted of Steps 1 through 5 and excluded
investments and annual costs associated with pollution controls. Impacted
cash flows consisted of Steps 1 through 9 and reflected the model plant
after the imposition of environmental requirements.
In the construction of the cash flow for the net present value analysis,
after-tax cash proceeds were defined as:
(1) After-tax income = (1 - T) x (R - E - I - D)
(2) After-tax cash proceeds = (1 - T) x (R - E - D) + D
where:
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = interest expenses
D = depreciation charges
Depreciation was included only in terms of its tax effect and was then
added back to obtain after-tax cash proceeds.
11-10
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There is a temptation to include outlays for interest payments when
computing the cash proceeds of a period. Cash disbursed for interest
should not affect the cash proceeds computation. The interest factor is
taken into consideration by the use of the present-value procedure. To
also include the cash disbursement would result in double counting. The
effect of interest payments on income taxes is also excluded from the cash
proceeds computation. This was brought into the analysis when computing
the effective rate of interest of debt sources of capital, which is used in
the determination of the cost of capital.
A graduated federal income tax rate was used reflective of the tax rates
for 1979. This amounted to: 17 percent on the first $25,000 of taxable
income; 20 percent on taxable income over $25,000 up to $50,000; 30 percent
on taxable income over $50,000 up to $75,000; 40 percent on taxable income
over $75,000 up to $100,000; and 46 percent on taxable income over
$100,000. Investment credits and carryforward and carryback provisions
were not used due to their complexity and special limitations. The annual
inflation rate used for this analysis was 6.0 percent. This rate reflects,
approximately, the annual rate for the past ten years based on the
historical implicit price deflators for the gross national product. A
period of twenty-one (21} years was selected for the length of time to
discount models' cash flows because this period of time was determined to
be representative of the useful economic life of actual industry
facilities. This length of time represents a complete cycle of the
construction period of the control equipment and its useful life.
Furthermore, the 21 year period is sufficiently long enough to allow for
business cycles and fluctuations to balance out.
While profitability is an important input to the net present value
analysis, the overall assessment of a model plant's viability is not
dependent only upon the plant's level of profits. The NPV also is
determined by the cost of capital (the value of equity to equity holders,
etc., as discussed below), used as a discounting rate to equate cash flows
at different times. A more common measure of profitability is return on
investment (ROI) where after-tax income (as defined in Equation 1) is
expressed as a percent of invested capital (book value) or as a percent of
ret worth. Such measures should not be viewed as necessarily different
estimates of profitability when compared to the net present value concept;
rather, these should be considered as entirely different profitability
concepts. It should be noted that the data requirements for ROI and NPV
measures are derived from the same basic financial information, although
the final inputs are handled differently for each.
c. Cost of capital - after-tax
Return on invested capital is a fundamental notion in U.S. business. It
provides both a measure of the actual performance of a firm as well as its
expected performance. In the latter case, it is also called the cost of
capital, and this, in turn, is defined as the weighted average of the cost
of each type of capital employed by the firm--in general terms—equities
and interest-bearing liabilities. Although no methodology yields the
precise cost of capital, it can be approximated within reasonable bounds.
11-11
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Equity capital. Two methods that can be used to estimate the cost of
equity capital are the dividend yield method and the earnings stock price
(E/P ratio) method. Both are simplifications of the more complex
discounted cash flow (DCF) methodology.
The earnings/price ratio method is:
<• I
where:
c = cost of equity capital
E = current earnings per share
P = current stock price
This latter method assumes that future earnings per share will be the same
as the current earnings. - Since most tanneries do not have current stock
prices to calculate on earnings/price ratio, we used an earnings/equity
ratio derived from Robert Morris data. The value of equity is used as a
surrogate for a stock price. Stock prices generally do not fall below book
values, so the cost of equity would not be underestimated using this
approach.
Debt Capital. The after-tax cost of debt capital was estimated by using an
estimated cost of debt (interest rate) and multiplying it by 0.64 --
assuming a 36 percent tax rate.
d = 0.64 i
where:
d = after-tax cost of debt capital
i = before-tax cost of debt (interest rate)
Weighted Cost of Capital. The sum of the cost of equity and debt capital
weighted by the respective, equity to equity plus debt and total debt to
equity plus debt (where debt is"long-term debt) ratios yields the estimated
average cost of capital (k), after tax. This is depicted below.
, _ Equity x c + Total debt x d
Debt plus equity . Debt plus equity
d. Investment determination
In evaluating the feasibility of new plants, investment is thought of as an
outlay for fixed assets and working capital; however, in evaluating closure
of an on-going plant, the investment basis is its salvage value
11-12
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(opportunity cost or shadow price). If For this analysis, salvage value
was taken as the sum of liquidation value of fixed assets plus working
capital (current assets less current liabilities') tied up by the plant.
This same amount was taken as a negative investment or "cash out" value in
the terminal year.
The rationale for using total shadow priced investment was that the cash
proceeds do not include interest expenses which are reflected in the
weighted cost of capital. This procedure required the use of total capital
(salvage value) regardless of source. An alternative would have been to
use as investment, net cash realized upon liquidation of the plant (total
cash realized from liquidation less debt retirement). In the single plant
firm, debt retirement would be clearly defined. In the case of the
multiplant firm, the delineation of the debt by the plant would likely not
be clear. Presumably this could be reflected in proportioning total debt
to the individual plant on some plant parameter (i.e., capacity or sales).
Under this latter procedure, interest and debt retirement costs would be
included in the cash flows.
The two procedures will yield similar results if the costs of capital and
the interest charges are estimated on a similar basis. The former
procedure, total salvage value, was used as it gives reasonable answers and
simplified both the computation and explanation of the cash proceeds and
salvage values.
Replacement investment was considered to be equal to 100 percent times the
annual depreciation. This corresponds to the operating policies of some
managements and serves as a good proxy for replacement in an ongoing
business.
Investments in pollution control facilities were determined from estimates
provided by EPA. Incremental values are used in order to reflect in-place
facilities where information is available.
e. Plant closures and production effects
Plant closures may result from the inability of less profitable plants to
adequately recover required pollution abatement cost through increased
product prices, decreased input prices, or improvements in economic
efficiency. Often closures can be anticipated among older, smaller and
less efficient plants as a result of economies of scale in pollution
control which would lower the overall costs to competing larger operations.
J7 This should not be confused with a simple buy-sell situation which
merely involves a transfer of ownership from one firm to another. In
this instance, the opportunity cost (shadow price) of the investment
may take on a different value.
11-13
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Since the larger plants, whose unit pollution control costs are usually
much less, will be able to afford to sell at a lower price than the smaller
high-cost plants, the high-cost plants will have no recourse other than to
sell at the long run equilibrium price set by the low-cost plants.
Consequently, the older, smaller, less efficient plants would probably and
eventually yield to the dominance of the larger, more efficient units.
However, in the short run, a plant may continue to operate even when
economic considerations indicate closure, especially when the smaller,
high-cost plants are protected by regional markets and other non-price
impediments to competition from the larger low-cost plants.
Most firms would cease operations if they could not adequately absorb the
required wastewater control expenditures. The most obvious measurement of
a firm's ability to absorb the costs is its ability to maintain a positive
income or cash flow after incurring control expenditures. If incomes are
negative, some firms would remain in operation as long as variable costs
were covered (positive cash flows); however, the requirements for overhead
expenses would eventually cause such firms to cease.
The remaining situation that could arise would be one in which firms
maintain positive incomes and generate net present values (NPV of their
cash flows at their cost of capital) which are positive. This indicates
that these firms are earning a return on their operation which exceeds
their cost of capital. If their NPV's are negative then the firms would
liquidate, realize salvage value in cash, and reinvest in a more
financially viable investment (one which would earn at least their cost of
capital).
A review of the potential financial effects of the imposition of wastewater
controls on the model indirect discharging plants results in some confusion
in the determination of which plants would be forced to close due to an
inability to absorb the control expenditures, a confusion which can result
from a large number of models and wastewater control treatment alternatives
applicable to each model. Accordingly, for this analysis, formalized
closure criteria were developed. In the development of these criteria,
certain necessary assumptions were made to simplify the interpretation of
the impact results.
The closure criteria utilized are depicted below. These criteria basically
represent the models' abilities to continue operations after incurring
expenditures for wastewater controls.
Model's Net Present Annual Cash
Viability Value Flow in the 21st Year
Viable Positive Positive
Marginal Slightly Negative If Slightly Negative \J
Closure Negative Negative
17The criteria utilized here was that the sum of the cash flow and NPV
~~ must be positive. If not, then plant was projected to close.
II-14
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An additional factor that is considered in determining plant closures is
liquidity. Debt capital would not be made available to a plant if it is
not profitable and if it is not sufficiently liquid, i.e., the plant has an
inadequate cash balance to repay its debt obligation. The liquidity test
assesses the firm's ability to make the necessary investment in pollution
control facilities and repay its debt obligation. Adequate liquidity is
tested by examining the cash flows over an assumed five year loan period
(see Chapter IV, Section E for a discussion of the terms of debt capital).
If the cash flows are negative for two of the five years the plant is
projected to have difficulty in obtaining capital.
The projection of the model plant's ability to repay a loan is made whether
or not a model is considered viable under the NPV approach and is used in
conjunction with the NPV analysis in determining model plant closures. The
specific way the results of these two tests are combined are as follows.
The NPV/21-year cash flow test described above can have the outcomes V, M
or C. The 5-year liquidity test can have the outcomes Negative or
Positive. The results for the model, depending on the test outcomes, are
defined as:
Model
NPV/21-CF Liquidity result
V POS V
NEG M
M POS - M
NEG C
C POS C
NEG C
Based on these criteria, closure decisions are made for each indirect
discharger model at each level. The number of existing facilities
associated with the representative models which will cease operations due
to wastewater control expenditure requirements are projected utilizing the
following methodology.
(1) Based on the NPV/cash flow and liquidity closure criteria
described previously, the subcategories and associated models
projected to close are identified.
(2) Once identified, the following factors are considered in the
determination of the number of actual existing plant closures
associated with each projected model plant closure based on the
Agency's overall knowledge of each factor.
(a) The number of existing facilities associated with the model.
(b) The degree to which existing facilities already have at
least some of the treatment controls in-place, and those
in-plant controls have not been fully recognized in the cost
data.
11-15
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(c) Historical trends for existing facilities within the
subcategory as well as projections of the subcategory's
future expectations {helps establish the base case).
(d) The severity by which the model's financial data are
reduced. Are the financial data substantially reflective of
closure or are the data reflective of a borderline
situation?
(e) Review of data utilized (both published and survey data) to
develop models. This allows the determination of the
probable distribution of the financial profiles of existing
facilities when compared to the financial profile of the
closing model plant.
(f) Consideration of the reliability of the data utilized in the
development of the model plants.
The determination of the production effects resulting from the plant
closures is made by applying the projected number of existing facility
closures to production quantities associated with the applicable model
plant. For directly discharging tanneries the above described analysis of
closures was done on a plant by plant basis rather than on a model plant
basis, since the agency had more detailed information for each of these
tanneries.
f. Employment impact analysis
This analysis was concerned with estimating likely employment losses due to
curtailed production or plant closures as a result of pollution controls.
If the actual plants which are expected to curtail production or to close
could be identified, their employment impacts could be estimated directly.
When, however, they cannot be identified, the employment impact analysis
must involve the application of estimates of employment changes by model
plants. Employment changes in model plants would then be generalized
according to the number of actual plants represented by the model plant and
aggregated to derive an estimate of total employment effects for the
industry. Employment dislocations are noted as appropriate. For direct
dischargers, employment effects are estimated on a plant by plant basis.
4. Secondary Production Effects
The secondary production effects are those change in the overall production
level of the industry due to changes in the price. This change in output
is calculated by estimating the likely price increase resulting from
controls, then combining that price increase with an estimate of the
elasticity of demand for leather products.
11-16
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5. Community Impact Analysis
The community impact analysis identified the potential impacts on local
community economies when the impacted plant represented a major source of
employment and income. This analysis was based on a knowledge of the
location of plants, particularly threatened plants, and a general
understanding of the economic base of those communities and the relative
importance of threatened plants to local economies.
6. Balance of Trade Impact Analysis
Balance of trade impact analysis dealt with those products that have
competitive import and export positions. The analysis considers whether or
not the estimated price changes would hinder competitive positions of the
products with regard to exports or increases in foreign imports. Where
important, estimates on the amount of trade that potentially could be
impacted and total trade levels are presented.
7. Other Impact Analysis
Other potential impacts may be created by the imposition of pollution
control guidelines. These are unique to given industries and require a
case-by-case approach. An illustration of such an impact would be a plant
that produces a critical intermediate, an input for other industries. The
loss of this plant or large price increases could produce serious backward
or forward effects on producers or consumers. To the extent additional
impacts were important, they are noted.
11-17
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III. STRUCTURE OF THE INDUSTRY
The Census of Manufactures defines the leather tanning and finishing
industry (SIC 3111) as an industry comprised of establishments primarily
engaged in tanning, currying, and finishing hides and skins into leather.
The Census classifies the leather tanning and finishing industry into three
types of establishments. These include:
1. Regular tanneries - the regular tannery purchases raw materials,
employs production workers in the plant to tan, curry and finish
hides and skins, and sells the finished product. In effect, this
type of establishment performs all of the usual manufacturing
functions within one organization.
2. Converter - the converter typically performs only the
entrepreneurial functions of the manufacturing concern, such as
buying raw materials, and arranges processing with outside
factories, i.e., contract tanneries for the production of the
finished leathers. The actual tanning and finishing of hides and
skins is done on contract by the contract tanneries. Thus these
establishments do not generate an effluent and as such, will not
be required to meet effluent limitations and standards.
3. Contract tanneries - the contract tanner employs production
workers in his own establishment to process materials owned by
converters and makes products to specification, but does not
become involved in the sale of the finished product.
It should be noted, however, that the above classification is not mutually
exclusive since some firms in the industry act as both regular tanners and
leather converters, or as regular tanners and contract tanners.
Included in the SIC 3111 industry are establishments that tan leather, tan
and finish leather, and only finish leather. Those establishments which
only finish leather essentially use little water and accordingly generate
little, if any, wastewater. As this analysis is concerned with the
economic impacts of effluent controls on the industry, the primary emphasis
of this report will concern the "wet tanners," those that do generate
wastewaters.
Unfortunately, most published data pertains to the entire leather tanning
and finishing industry. As such, it is difficult to delineate just the
relevant data for the wet tanners. When possible, distinctions between the
wet and dry process tanneries will be made; however, where no such
distinctions are possible, aggregate data will be used.
III-l
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A. Industry as a Process
The leather tanning and finishing industry includes processing plants
primarily engaged in processing the raw animal hide into usable finished
leather. As mentioned previously, the industry is classified into three
types of establishments: (1) regular tanneries, (2) converters, and (3)
contract tanneries.
Establishments in these classifications provide the link between the raw
hides and the finished leather products industry, by converting the raw
hides and skins into usable leather. The leather tanning and finishing
industry represents one of six four-digit industries in the SIC 31 Tanning;
Industrial Leather Goods; and Shoes Industrial Group. A summary of the
1977 Census of Manufactures data for SIC 31 provides a basis for comparing
the leather tanning and finishing industry (SIC 3111) with other industries
in the group. This is depicted below.
SIC Description
3.111 Leather Tanning
and Finishing
3131 Boot and Shoe Cut
Stock & Findings
3142 House slippers
3143 Men's Footwear,
except athletic
3144 Women's Footwear,
except athletic
3149 Footwear, except
rubber N.E.C.
Number of
Establishments
465*
190
78
213
328
159
All
Employees
!£
ifr
(1000)
23.0
8.5
8.1
55.0
57.6
24.8
Value Value of
Added Shipments
$1,000,000—--
535.1 1,456.1
109.4
108.8
270.6
201.2
871.9 1,734.5
755.0 1,361.2
333.7
594.8
As is shown in the summary, the leather tanning and finishing industry is
an important industry segment within the group. Exhibit III-l illustrates
many of the interrelationships of the leather tanning and finishing
industry with regards to major supplier and customer industries. The
domestic leather tanning industry utilized 33 percent of the raw hides and
skins produced in the United States in 1979 with the remaining 67 percent
being exported.
Please note the 465 establishments reported here represent all
establishments included in the SIC 3111. Not all of these
establishments are leather tanneries. This is discussed in detail
Section B of this chapter.
in
III-2
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Meat Packing
Industry
Hides & Skins
Materials,
Chemicals,
Processing Cost
N.E.C.
Exports
of Salt Cured
Hides
! Leather
fanning and
Industrial
.eathers
OJ
Misc.
Rubber
Products
Footwear
Except
Rubber
POther
Leather
roducts
Exports
of Leather
Products
Personal
Consumption
Expenditures
Exhibit III-l. Leather tanning and finishing industry, sales and expenditures.
Source: U.S. Department of Commerce, Industrial Outlook.
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B. Characteristics of the Industry
The leather tanning and finishing industry consists of a wide diversity of
types of firms. Firm ownership ranges from family-owned companies and
closely held corporations to divisions of relatively large conglomerates.
Tanneries vary considerably in size as well as tanning techniques for
tanning a variety of hides and skins into several distinct leathers.
Number of Tanneries
The U.S. Department of Commerce has reported the number of establishments
in the leather tanning and finishing industry as follows:
Year Number of Establishments
1963 525
1967 519
1972 517
1973 490
1974 484
1975 441
1977 465
Table III-l shows the total number of establishments in the leather tanning
and finishing industry by classification for 1967, 1972 and 1977. The
Census has used the primary plant operation as the delineating
classification criteria. If the direct wage and salary payments for one
category were less than the payments for the second, the plant was
classified according to the category in which the higher amount of wage and
salary payments were made. In 1977, 68 percent of the establishments were
classified as tanneries, 9 percent as converters, and 23 percent as
contract tanneries.
According to the Census of Manufactures, the total number of tanneries
(excluding converters which do not actually process hides or skins) with 20
or more employees has declined steadily from 240 in 1967 to 181 in 1977.
This general classification more nearly reflects the tanneries addressed in
this study as it it believed that many of the small operators would be
classified as taxidermists rather than tanners or finishers.
To establish the number of wet tanneries in the industry, an industry
survey was conducted in 1976 based on a plant list which was provided by
the industry. This survey and more recent updates by EPA resulted in the
determination that there are currently (1982) 158 tanneries in existence
which generate wastewater. This number reflects a continuation of plant
closures that have been occurring over recent years, exclusion of small
operations that may be classified as taxidermistic and other establishments
that are believed to be finishers (dry processors).
III-4
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Table III-l. Total number of establishments in the leather tanning
and finishing industry by classification
Contract
Total Tanneries Converters Tanneries
1967
No. of establishments
With 1 - 19 employees
With 20 - 99 employees
With 100 employees or more
1972
No.
With
With
With
1977
of establishments
1-19 employees
20 - 99 employees
100 employees or more
519
261
171
87
517
294
148
75
314
163
91
60
301
154
89
58
70
52
13
5
76
64
8
4
135
46
67
22
140
76
51
13
No. of establishments 465
With 1 - 19 employees 274
With 20 - 99 employees 129
With 100 employees or more 62
315
191
76
48
43
33
8
2
107
50
45
12
Source: U.S. Department of Commerce, Census of Manufactures. 1977 and
earlier.
III-5
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Size of Tanneries
Based on the the number of employees, an indication of plant size is
available from the Census of Manufactures (Table III-l). Overall, the
decline in plant numbers is reflected more severely in plants with 100 or
more employees (excluding converters). The larger sized plants experienced
a 26 percent decline from 1967 to 1977 compared with a 23 percent decline
in plant numbers with 20 to 99 employees.
Number of tanneries with 20 or more employees
Number of employees
20-99 > 100 Total
1967 158 82 240
1972 140 71 211
1977 121 60 181
An alternative size classification was developed from the EPA survey data
and recent updates for the number of wet tanneries. This was based on the
number of cattlehide equivalents processed daily. \J This is shown below.
Daily Capacity Number of Wet Tanneries Percent
(cattlehide
equivalents) \J
Less than 300 39 25
300 - 699 38 24
700 - 1,199 33 21
1,200 - 1,999 27 17
2,000 or more 21 13
T5B
The wet tanners identified by the industry survey are somewhat more evenly
distributed according to size than are the establishments of the Census
data. However, as was the case for the Census data, the smaller size
categories do represent a larger portion of the tanneries than the larger
categories.
Types of Major Products
Six major categories of animal skins are used today. They are as follows:
cattlehides, kipskins, and calfskins; sheep and lamb skins; goat and
kidskins; pigskins; horsehides; and deer and elk skins.
The products of the industry can be identified in traditional terms based
upon primary raw materials employed and end use.
CATTLEHIDES;
CATTLE SIDE LEATHER. This is the principal product of the industry
which accounts for approximately 67% of total industry sales. Its end
T7One cattlehide equivalent equals 40 square feet of leather.
III-6
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use includes shoe uppers, linings, garments, gloves, sporting goods,
handbags, small leather goods, and waist belts. Side leather is
primarily chrome tanned.
CATTLE SIDE SPLIT LEATHER. Cattle side split leather is a by-product
of hides which is not processed in full thickness. It is primarily
used for shoe uppers, linings, insoles, work gloves, small leather
goods, handbags, and protective industrial clothing. It is chrome
tanned and is processed by side leather tanners or sold to "split
tanners" for finishing into specialized products.
SOLE LEATHER. Sole leather is almost entirely vegetable tanned. Its
major use is for shoe soles. Secondary uses include welting,
counters, box toes, and waist belts.
CATTLE SIDE PATENT LEATHER. This product is a sub-class of chrome
tanned cattle sides and is finished with special compounds
(polyurethanes) for glossy surface.
KIP SIDE LEATHER. This leather is tanned from kips, which are small
hides, intermediate between calfskins and cattlehides. It is used
almost entirely for shoe uppers.
UPHOLSTERY LEATHER. This product is primarily vegetable tanned, with
some chrome retannage. Its end use includes automotive and furniture
upholstery.
HARNESS AND SADDLERY LEATHER. This is a composite group of the same
plants which possess different characteristics useful for various
parts of equine equipage or related uses (collar, harness, skirting,
latigo, bridle, etc.). It is also used for holsters, gun cases, etc.
SPORTING GOODS LEATHER. Combination tannages of chrome, vegetable,
alum, and glutaraldehyde are used to produce footballs, baseballs,
baseball gloves and laces.
BAG, CASE AND STRAP LEATHER. This is a trade description for a
specialized group of leathers which are vegetable, chrome and
combination tanned. End uses include luggage briefcases, small
leather goods, decorative items, equipment cases, straps, and heavy
bookbinding.
MECHANICAL LEATHER. Vegetable, chrome and impregnated leather are
produced for industrial uses including belting, gaskets, washers, and
seals for equipment.
CALFSKINS. Chrome tanned leather from skins of immature cattle are
used for shoe uppers and handbags. The volume produced is in sharp
decline due to shrinkage of raw material supply.
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SHEEP AND LAMB SKINS:
This is the second largest raw material category. Chrome, alum, oil
and combination tannages are used to produce garments, gloves, shoe
uppers and linings handbags and wallets, bookbinding and chamois.
GOAT AND KID LEATHER SKINS:
Chrome tanned leather in a smooth or suede finish is used for shoe
uppers and linings.
PIGSKIN:
Vegetable or chrome tanned leather is used to produce shoe uppers,
gloves, garments, and small-leather goods.
HORSE HIDES:
Chrome and vegetable processed leather is used in the production of
shoe uppers, garments, and baseballs. Cordovan is included in this
group.
DEER AND ELK HIDES:
Chrome and vegetable tanned leather is used to produce gloves,
garments, and to a minor degree, shoe uppers (buckskin).
MISCELLANEOUS AND EXOTIC LEATHERS
Aggregate volume of these products is minor and the number of
producers in the U.S. is less than 10. Products manufactured include
kangaroo for athletic shoe uppers, reptile for shoe uppers, belts, and
small leather goods, and peccary and carpincho for gloves.
In summary, cattlehides are the dominant raw material of the industry with
the major products of cattle side leather, sole leather, upholstery,
garment and bag, and case and strap leathers. Sheep and lamb skins are the
second and much smaller raw material base yielding mainly garment and glove
leather, lining and shoe stock, chamois and leather for small leather
goods.
Value of Shipments
Value of shipments and other receipts of the leather tanning and finishing
industry in 1981 totaled $2,181 million compared with $1,456 million in'
1977 (as shown in Table III-2). This included shipments of tanned and
finished leather (primary products) valued at $2,112 million, and
miscellaneous receipts (mainly contract work and resales) of $69 million.
Historically the value of shipments has fluctuated from year to year;
however, the overall average annual increase in current dollars has been
5.3 percent since 1960.
111-8
-------
Table 111-2. The leather tanning and finishing industry,
value of shipments, 1960 to 1981
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Value of
shipments
(mil. $)
790.7
761.1
765.9
758.4
783.6
856.7
940.5
870.1
877.9
853.9
794.4
838.3
1,059.5
1,082.0
980.0
1,105.0
1,326.0
1,456.1
1,579.7
1,803.0
1,900.0
2,181.2
Percentage
change
(%)
_ _
-3.7
-0.6
-1.0
3.3
9.3
9.8
-7.5
0.9
-2.7
-7.0
5.5
26.4
2.1
-9.4
12.8
20.0
9.8
8.5
14.1
5.4
14.8
Source: Department of Commerce, Bureau of the Census.
III-9
-------
Shipments of tanned and finished leather (primary products) in 1972 and
1977 represented 99 percent (specialization ratio) of the industry's total
product shipment. The industry specialization ratio in 1967 was 98
percent. Secondary products shipped by the industry in 1972 consisted
mainly of boot and shoe cut stock and linings.
Shipments of tanned and finished leather from establishments classified in
industry SIC 3111 in 1977 represented 99 percent (coverage ratio) of total
leather shipments valued at $1,380.1 million shipped by all industries. In
1967, the coverage ratio was also 99 percent. Thus for all practical
purposes, it can be concluded that all establishments tanning and finishing
leather are classified in industry SIC 3111.
Location of Tanneries
Leather tanning and finishing establishments tend to be concentrated in the
Northeastern region of the country. As shown in Table II1-3, 62 percent of
the total number of establishments were located in that area in 1972.
Massachusetts ranked first, in total number of plants; New York second; and
New Jersey third, with 25, 19 and 8 percent respectively.
The second area of concentration is the East North Central region with
Wisconsin reporting 22 plants or 4.3 percent of the total. Other states
of importance in this region include Ohio, Illinois, and Michigan. The
remaining plants are scattered widely throughout the United States.
The 1977 Census data failed to identify the location of a significant
number of tanneries (52 total and 17 with over 20 employees). As a result
percentages of tanneries by area for 1977 are no longer meaningful.
Historically, tanneries were established where there was an adequate supply
of hides, water and tanning materials (i.e., tree bark). This began in New
England and the Mid-Atlantic states and followed the cattle herds west,
though with a long time delay. As indicated above, tanneries are still
located in New England and Chicago as well as in the dairy country of
Wisconsin. However, with the recent spatial dispersion of slaughter
facilities away from the traditional centers such as Chicago and Kansas
City, the few new tanneries have followed the same trend and located near
the supply of hides.
The locations of all the wet tanneries are difficult to pinpoint as
adequate data are not presently available. However, based on the survey
responses, 54 percent were located in the New England states; 10 percent
were located in the Southern states; 25 percent were located in the
Midwest; and the remaining 11 percent were located in the Western and
Southwestern states.
111-10
-------
\\\-i. \-ocatto\\ of
wvd f\«\\sH
-------
If these percentages are extrapolated for the current listing of wet
tanneries, the locational breakdown appears as follows:
Area Number of Wet Tanneries
New England 86
South 16
Midwest 39
West and Southwest 17
Total 158
Age of Plants and Level of Technology
The leather tanning and finishing industry can be described as having
basically old plants in terms of actual brick and mortar with slightly over
70 percent of the plants 50 years of age or older. From the membership
records of the Tanners' Council, the age of tanning and/or finishing
leather plants, excluding converter, is as follows:
Percent of Members
Less than 10 years 1
10-15 years 1
15-20 years 3
20-30 years 5
30-50 years 19
Over 50 years 71
Total TOT)
Although the majority of industry units are in old buildings, a substantial
number of plants have been rebuilt, modernized and re-equipped at a
cumulative cost approaching the capital investment required for new plants.
In a previous report developed for EPA, I/ tanneries were categorized with
respect to their level of technology. The technological levels considered
were older, prevalent and new, i.e., 1950, 1963 and 1967 vintage
respectively. Using this classification scheme, 20 percent of the
tanneries were placed in the older category and the remainder categorized
in the prevalent or new category. Thus while the tanneries themselves may
be older, it is obvious that from a technological standpoint, they are
relatively modern. Finally, it should be noted that while a majority of
the tanneries have technological levels of 1963 or later, the tanning
technique has not changed significantly, instead the processes are being
performed utilizing newer equipment.
T7 Urban Systems and Engineering, "The Leather Industry—A Study of the
Impact of Pollution Control Costs," December, 1971.
111-12
-------
C. Importance of Integrated Capacities
The industry is not characterized by any appreciable integration either
back to the raw material supply or forward to finished or fabricated leather
products. There is, in fact, less integration today than several years ago
when two major packers owned tanning facilities and four leading shoe
manufacturers operated tanneries. In 1973, the only remaining firm
integrated with the raw material source was A. C. Lawrence Leather Company
(Swift) and during 1974 it was sold by Swift to its employees. Armour and
Company, which had operated the Armour Leather Company for two generations,
had earlier sold its leather subsidiary and liquidated all leather
operations.
With regard to forward integration, the Brown group (Brown Shoe) still
operates a tannery as does Genesco, both of which manufacture shoes.
However, other shoe manufacturers such as Endicott, Johnson, Wolverine,
and Interco have sold or liquidated all tanning enterprises. A few
tanneries are associated with the leather garment industry (e.g.. Sawyer
Tanning Company); however, these types of arrangements are not common. It
is estimated that the sales volume of tanning or finishing establishments
integrated with raw material producers is very small, less than five
percent of gross annual volume. Leather tanning facilities owned or
operated by manufacturing companies account for an equally small percentage
of leather sales or value.
D. Level of Diversification
The Census of Manufactures shows the leather tanning and finishing industry
with a very high specialization ration of 99 percent for 1972. This
indicates that 99 percent of sales are in the primary SIC code. The
typical production unit of the industry is not diversified for two main
reasons. First, tanning equipment and processes are specialized and
non-interchangeable in terms of raw materials or end product. For example,
equipment suitable for tanning and finishing pigskins cannot be used for
cattle hides. Hence, most plants have confined production to a very
limited range of products.
Second, shoe manufacturing has been and still is the principal consuming
industry. In 1962, shoes accounted for 83 percent of all leather used. By
1972 this ratio had declined to 74 percent, and tanneries were seeking to
diversify output. Cattle side leather plants entered the garment leather
market and sought outlets in waist belts, handbags or small leather goods.
However, this trend does not reflect diversification of basic product line.
It indicates rather, an effort to adapt available plants and equipment to
moderately different needs of end uses other than shoes.
A further observation is pertinent. Tanning machinery and equipment cannot
be adapted for any purpose other than treating hides and skins. It is
fixed capital which must be written off at scrap value in the absence of
demand for used machines.
111-13
-------
E. Employment Characteristics
Employment
Total employment within the leather tanning and finishing industry has
decreased by over 37 percent since 1965 from 32,000 employees in 1965 to
21,300 employees in 1981 (Table III-4). Of the total employees in 1981,
production workers were approximately 84 percent or about 17,100
individuals. Since 1965, the number of production workers in the industry
has declined by nearly 37 percent from 27,900 in 1965 to 17,100 in 1981.
The leather tanning industry employs unskilled, semi-skilled and skilled
labor dependent upon the requirement of the task being performed.
Tanneries can be either union or nonunion shops, with the number of
tanneries in each category being about equal.
Production workers average approximately 1900 hours per year which
represents 230 to 250 employed days per year. With respect to the
productivity of production workers, Table III-4 depicts the average number
of hours required to produce one cattlehide equivalent. As shown in the
table, this productivity measure has varied from year to year but has
remained reasonably close to 1.7 hours per hide since 1965.
Level of Wages
In 1977, the total industry's payroll amounted to $220.0 million. The
total wages paid to production workers for the same year totaled $192.2
million or about 78 percent of the industry's total payroll, up from 74
percent in 1972.
Annual wages per production worker averaged $9,806 in 1977 which
represented an increase of 97 percent since 1965. During this same period,
the average hourly rate increased by 118 percent from $2.44 per hour in
1965 to $5.33 per hour in 1977. The rate increased to $7.29 per hour in
1981.
F. Ownership Type and Size
As indicated above, the leather tanning and finishing industry consists of
a wide diversity of types and sizes of firms. Firm ownership ranges from
family-owned companies and closely held corporations to divisions of large
conglomerates. However, the majority of the tanneries would fall into the
family-owned or closely held corporation group. This is attributable to
the fact that most tanneries are relatively small and were established
years ago by either a family or a small group of individuals who have
remained in control of the operation.
IU-14
-------
Table III-4. The leather tanning and finishing industry,
employment characteristics
All employees
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Source:
Number
(1000)
32.0
32.7
30.7
31.1
28.8
24.1
24.5
25.7
23.4
21.0
22.0
23.0
23.0
23.0
21.2
19.4
20.3
U.S.
Payrol 1
(mil. $)
180.0
189.2
186.4
196.0
188.1
171.5
183.9
200.0
186.5
194.3
220.0
254.8
243.9
NA
NA
NA
NA
Department
Number
(1000)
27.9
28.2
26.4
26.7
24.4
20.4
20.7
22.1
19.8
18.0
19.0
19.6
19.4
19.7
17.9
16.3
17.1
of Commerce
Wages
(mil. $)
139.0
144.4
142.5
151.2
142.8
129.8
137.6
151.3
138.2
141.4
165.5
181.4
192.2
NA
NA
NA
NA
, Bureau
D w^ f\ 1 1
Annual
hours/worker
(hours)
2,039
2,039
2,000
1,985
1,943
1,980
1,976
1,896
1,909
1,934
1,979
1,944
1,948
NA
NA
NA
NA
of the Census (U
iction workers-
Annual
wages/worker
(dollars)
4,982
5,121
5,398
5,663
5,852
6,363
6,647
6,846
6,980
7,726
8,619
9,350
9,806
NA
NA
NA
NA
.S. Industrial
Ave. hourly Ave. hours per
rate equiv. hide
(dollars)
2.44
2.51
2.70
2.85
3.01
3.21
3.36
3.61
3.66
3.99
4.36
4.81
5.33
5.62
5.92
6.71
7.29
Outlook for 1978
(hours)
1.74
1.78
1.71
1.66
1.67
1.56
1.62
1.70
1.79
1.74
1.73
1.62
1.76
NA
NA
NA
NA
to 1981).
-------
G. Industry Segments
The leather tanning and finishing industry has traditionally been segmented
by the industry by the type of leather manufactured such as cattlehide
leathers, sheep and lamb skins, goat skins, etc. Most of the industry
production data are given in these terms. However, categorization of the
industry by manufacturing processes and raw materials is more appropriate
for evaluating the imposition of pretreatment control on the industry since
a major factor affecting the waste production in the leather industry is
the type of manufacturing process used to convert the various types of
animal skins to finished leathers, the type of skins also affects water
use, and hence treatment costs.
The following material discusses industry segments using two taxonomies:
(1) conventional industry segments, and (2) categorization of plants by
manufacturing process and raw materials.
Conventional Industry Segments
Cattlehide leathers are the predominant type of leather processed, and
accounted for 78 percent of the value of shipments in 1977. Of this
amount, cattlehide and kip side leathers were the predominant segment
accounting for 73 percent of the total value of production. This is a
slight increase in value over 1972 (Table III-5). In 1972, 1,132 million
square feet of cattle side leathers were processed compared with 1,055
million square feet in 1977.
Sheep and lamb leather was the second most important category in 1977 and
accounted for 6.3 percent of the total value of production. However,
volume dropped in this category from 111 million square feet in 1972 to 79
million in 1977.
Categorization of Plants
For the purposes of establishing effluent limitation guidelines and
standards of performance, the leather tanning and finishing industry has
been divided into nine major subcategories. These subcategories have been
developed by the agency principally by similarities in process and raw
materials. The subcategories are:
1. Hair pulp, chrome tan, retan-wet finish—a tannery that primarily
processes raw or cured cattle or cattle-like hides into finished
leather, chemically dissolves the hide hair, and uses chrome
tanning.
2. Hair save, chrome tan, retan-wet finish—a tannery that primarily
processes raw or cured cattle or cattle-like hides into finished
leather, with at least a portion of the hide hair loosened and
removed as a solid and then discarded or saved, and uses chrome
tanning.
111-16
-------
Table III-5. Quantity and value of production by conventional industry segment, 1972 and 1977
Industry segment
Cattlehide and kip side leather
Sole leather
Bag case & strap
Upholstery
Upper leather (sides)
Patent leather (sides)
Garment leather (sides)
Other grains
Offal (heads shoulders bellies)
sale, waist belt and welting
Finished splits
Finished cattlehide NSK
Finished calf and whole kip leather
^ Sheep and lamb leather
i
t^ Other finished leathers I/
Rough & crust
Other
Total
I/ Includes cabretta, horse, colt,
Source: U.S. Department of Commerce
Quantity
(million sq ft)
1,055
111
NA
70
472
11
36
84
44
171
35
NA
79
59
X
NA
mule, ass and pony leathers
.Census of Manufactures.
1977
Value
(J million)
1,005
130
29
100
487
11
31
74
26
86
34
26
88
36
48
177
1,380
Percent of
production
(value basis)
72.8
9.4
2.1
7.2
35.3
0.8
2.2
5.4
1.9
6.2
2.5
1.4
6.3
2.6
3.5
12.8
100.0
Quanti ty
(million sq ft)
1,132
99
32
38
556
85
140
37
136
8
3?
Ill
108
NA
NA
1972
Value
($ million)
684
64
25
39
352
52
85
18
44
5
35
55
48
52
153
1,026
Percent of
production
(value basis)
66.7
6.2
2.4
3.8
34.3
5.1
8.3
1.8
4.3
.5
3.4
5.4
4.7
5.1
14.9
100.0
-------
3. Hair save nonchrome tan, retan-wet finish—a tannery that
primarily processes raw or cured cattle or cattle-like hides into
finished leather using less than 20 percent (by hide weight)
chrome tanning; includes vegetable, alum, syntans, oils, and
other methods and their combinations.
4. Retan-wet finish sides—a tannery that primarily processes
previously tanned hides and/or skins into finished leather, the
major wet process consisting of retanning, coloring, and
fat-liquoring.
5. No Beamhouse—a tannery that primarily processes hides and/or
skins, with the hair previously removed, into finished leather
using either chrome or nonchrome tanning methods, primarily
includes pickled sheepskins and cattlehides and pigskins.
6. Through the blue—a tannery that primarily processes raw or cured
cattle or cattle-like hides through the blue-tanned state only,
with no retanning or finishing operations, and uses chrome
tanning.
7. Shearling—a tannery that processes raw or cured sheep or
sheep-like skins, with the wool or hair retained on the hide,
into finished leather using chrome or nonchrome tanning; or, a
wool pullery—a plant that processes hair-on raw or cured sheep or
sheep-like skins by first removing the wool and then pickling the
skin for use by a sheepskin tannery.
8. Pigskins—a tannery that processes raw or cured pigskins into
finished leather using chrome tanning.
9. Retan-wet finish (splits)—a tannery that primarily processes
previously tanned splits into finished leather, the major wet
process consisting of retanning, coloring, and fat liquoring.
111-18
-------
IV. FINANCIAL CHARACTERIZATION OF THE INDUSTRY
Because the industry primarily consists of family-owned businesses or
relatively small privately-held corporations, published information
regarding the financial position of the leather tanning and finishing
industry is not readily available. Limited data are available from the
Internal Revenue Service, but these data are generally 3-4 years old when
published and represent the aggregated leather and leather products
industry. More recent data for leather tanners are available from Robert
Morris Associates' Statement Studies, representing financial information
from about 40 different statements.
Information used to develop this chapter on the financial profile of the
industry draws on the above sources where applicable. Additional
information was obtained from the U.S. Department of Agriculture, the U.S.
Department of Commerce, the responses to the Agency's survey, and from
discussions with persons knowledgeable about the industry.
A. General Financial Situation
The leather tanning and finishing industry in the United States has
experienced a substantial decline in volume of hides processed over the
past two decades. In addition the industry has experienced a somewhat
volatile financial situation in recent years. The industry reached a low
in 1973 and 1974 but beginning in late 1974 and continuing through 1976,
the industry experienced a much brighter financial situation. However,
beginning in late 1977 the industry's financial situation again showed
signs of deterioration. In 1981, output increased for the first time since
1976, but from mid-1981, output decreased at a rapid rate.
The volatility of revenues varies from firm to firm and reflects differing
tannery operations and leather products. The causes of this volatility are
primarily the changes in the volume of leather sold, and the competition
from foreign countries for both raw hides and for the leather and leather
products markets. Leather production has been declining since 1965,
decreasing from 32.7 million cattlehide equivalents in 1965 to 19.5 Billion
in 1981 (Table IV-1).
The growth in the industry's value of shipment may be attributed primarily
to a substantial increase in the cost of the leather tanning and finishing
industry's major expense, raw hides and skins in the late 1970s. The large
decline in slaughter and high foreign demand forced hide prices up.
IV-1
-------
Table IV-1. The leather tanning and finishing industry, production and value of shipments,
imports, and exports in current and real dollars, 1965-1981
INJ
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Sources :
Total industry
production !/
1,000 equiv. hides
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21,894
23,526
21,528
20,199
18,170
17,600
19,500
I/ Tanners Council
Edition.
2J U.S. Department
Value of ind
shipments
Current
857
940
870
878
854
794
838
1,060
1,082
1,076
1,092
1,326
1,456
1,580
1 ,803
1,900
2,181
JJtry
Real 3_/
1,153
1,226
1,101
1,063
985
869
873
1,060
1,021
843
858
991
1,051
1,039
1,397
855
940
of America, Inc., Membership
of Commerce, Annual Survey of
Value of lee
imports ^
Current
---million doll
67
75
68
81
86
87
83
139
127
125
88
181
156
222
283
217
323
ither Value of leather
-' exports 2/
Real
lars
90
98
86
98
99
95
86
139
120
107
69
135
110
146
184
97
139
Bulletin Leather Industry
Manufacturers
Current
39
42
42
45
42
37
43
67
83
102
142
139
150
195
251
271
279
Statisti
and U.S. Industrial
Real
52
55
53
54
48
40
45
67
78
88
112
104
106
128
146
122
120
cs, 1979
Outlook.
3_/ Real dollars based on Implicit GNP Deflator (1972=100).
-------
Over the past decade consumer acceptance of synthetics as a substitute for
leather—particularly for men's dress shoes, women's and children's shoes,
and handbags—has become widespread. As a result, a significant portion of
the market previously held by leather has been lost to synthetic products.
During the past few years, however, consumers have developed a renewed
appreciation for natural leather products. Accordingly, leather increased
its share of several product markets. This increase, however, has not been
totally absorbed by domestic tanners; much has been met by imported leather
and leather products.
The value of leather imports has increased at an average annual rate of
14.3 percent since 1965. Imports climbed to a value of close to $140
million in 1972 and then declined for three successive years reaching a low
of $88 million in 1975. In 1977 the exceeded $200 million and in 1981 they
reached a record high of $323 million. The major effect of imports on the
leather industry is from shoe importing which is discussed below.
The economic analysis contained in this report is based on historical
information and our projections of this information to reflect conditions
at the time of compliance with the regulations being issued. The
information presented in this chapter shows that the leather tanning
industry is experiencing a general decline for a variety of reasons. The
Agency believes that this general decline will continue for the foreseeable
future without any significant changes in the underlying factors causing
the decline. There may, however, be temporary reversals of the decline or
a faster decline due to conditions in the overall economy. The historical
data used covers business cycles and is the basis for projections on future
cycles. The financial characteristics presented in this chapter are the
basis for projections.
B. Cost Structure of the Industry
1. Revenues
In 1979, the leather tanning and finishing industry had estimated shipments
valued at $1,803 million (Exhibit IV-1), an increase of about 14 percent
over the value of shipments for 1978. However it should be noted that
value added actually decreased from $564 million to $541 million. The
substantially higher value of shipments was due primarily to higher hide
prices with resulting higher leather prices. Historically, the industry's
values of shipments have fluctuated from year to year. However, since
1970, shipments have increased during every year except 1974, when they
decreased 0.5 percent over the value in 1973.
In addition to experiencing a general slump in production prior to 1975-76,
the real value of the industry's production has declined noticeably. From
1966, when the real value of shipments I/ was $1,226 million (Exhibit
IV-1), real revenues have fallen to as Tow as $843 million in 1974, a 31
JL/ Value of Industry Shipment., where i = year
Implicit GNP Deflator.n (1972 = 100.0)
IV-3
-------
Ol
0.-— »
•r- in
-C i.
CO
-------
percent decrease over eight years. This decline in real revenue mirrors a
decline in production, and is attributable to a variety of factors,
especially foreign competition.
The 1979 value of shipments for the industry was based or? information
provided by 360 establishments and the Bureau of the Census. The average
tannery's value of shipment was $6.4 million, and its average annual
production was 50,000 cattle-hide equivalents (Table IV-2). This compares
to an average value of shipments of $4.2 million in 1978, $2.5 million in
1975, $2.0 million in 1972, and $1.7 million in 1967. Average production
per establishment was 53,000 cattlehide equivalents in 1978, 50,000 in
1975, 48,000 in 1972, and 59,000 in 1967.
2. Variable Costs
Leather tanning industry variable costs represent approximately 80 percent
of total sales. These costs include expenditures for raw hides and/or
skins, labor, tanning materials, and miscellaneous other direct costs.
According to a survey of the industry in 1976, hides and skins comprise
37.2 percent of the sales dollar, tanning materials, 14.3 percent, labor,
15.1 percent, and miscellaneous expenditures, 12.4 percent. These sum to
79 percent of the sales dollar.
The only time series depicting the composition of the sales dollar is
available from the Department of Commerce and is limited in its
disaggregation. These data are shown in Table IV-3. Historically, raw
materials, primarily hides, have represented about 50 percent of the sales
dollar. Since 1976-77, prices of new materials have all increased,
particularly the prices paid for hides. Therefore this historical data is
not representative of current sales dollar composition, which is presented
in Chapter V, Prices.
3. Fixed Costs
Fixed costs are defined as those which do not vary with the level or
quantity of production. These include:
t sales expenses—general and administrative,
• plant and labor overhead,
• taxes and insurance, and
• maintenance and repair.
Data were not available to discuss each of the above costs separately;
therefore, fixed costs were grouped. Fixed costs vary from firm to firm;
however, they usually represent 10 to 15 percent of sales.
Interest is considered a fixed cost although it is somewhat influenced by
total sales. As shown in Table IV-4, interest costs vary by size of
operations. Although there are exceptions, larger tanneries generally
allocate a greater portion of their sales dollar to interest.
IV-5
-------
Table IV-2. The leather tanning and finishing industry, total and per establishment data, selected
years 1963 to 1979.
Item
Establishments
VALUE OF SHIPMENTS
Industry
Per establishment
VALUE ADDED
Industry
Per establishment
PRODUCTION
Industry
Per establishment
EMPLOYEES
Industry
Per establishment
Units
No.
$1,000
$1,000
$1,000
$1,000
1,000 equiv.
hides
1,000 equiv.
hides
Number
Number
1963
525
758,000
1,440
273,000
520
31,325
60
31,400
60
1967
519
850,000
1,680
319,000
615
30,861
59
30,700
59
1972
517
1,060,000
2,050
368,000
710
24,661
48
25,700
50
Year
1975
441
1,092,000
2,476
443,500
1,006
21,894
50
22,500
51
1976
430
1,326,000
3,884
521,000
1,212
23,526
55
23,000
53
1977
416
1,489,000
3,579
549,000
1,260
21,528
52
23,400
56
1978
380
1,580,000
4,157
564,000
1,482
20,199
53
23,000
60
1979
360
2,313,000
6,425
541 ,000
1,502
18,170
50
20,100
56
Source: U.S. Department of Commerce.
-------
Table IV-3.
The leather tanning & finishing industry, distribution of
the sales dollar
TOTAL
SALES
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Source
Mi 11 i on
Dollars
856.7
940.5
870.1
177.9
853.9
794.4
838.3
1059.5
1081.5
1075.5
1091.8
1326.0
1489.0
1579.7
1803.0
1822.7
Percent
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
: Department of
COST OF
MATERIALS
Million
Dollars
535.6
614.1
547.0
524.5
514.9
471.4
498.5
708.0
744.3
680.4
643.3
816.5
945.1
1041.5
1252.1
1200.4
Commerce,
OTHER
PAYROLL TAXES &
Million
Percent Dollars
62.5
65.3
62.9
59.8
60.3
59.3
59.5
66.8
68.8
63.3
58.9
61.6
63.5
65.9
69.4
65.9
Bureau
180.0
189.2
186.4
196.0
188.1
171.5
183.9
200.0
186.5
194.3
220.0
243.9
261.5
270.8
264.9
281.3
COSTS,
PROFITS
Million
Percent Dollars
21.0
20.1
21.4
22.3
22.0
21.6
21.9
18.9
17.3
18.1
20.2
18.4
17.6
17.1
14.7
15.4
of the Census, Census
141.1
137.2
136.7
157.4
150.9
151.5
155.9
151.5
150.7
200.8
228.5
265.6
281.4
267.4
286.1
341.0
Percent
16.5
14.6
15.7
17.9
. 17.7
19.1
18.6
14.3
13.9
18.7
20.9
20.0
18.9
16.9
15.9
18.7
of Manufactures
and the Annual Survey of Manufactures.
IV-7
-------
Table IV-4. The leather industry, interest as a percent of sales (business receipts).
ZERO OVER ZERO
FISCAL YEAR ASSETS UNDER 100
ASSET SIZE ($000)
100 250 500 1000
UNDER UNDER UNDER UNDER
250 500 1000 5000
5,000 10,000 25,000 50,000
UNDER UNDER UNDER UNDER
10,000 25,000 50,000 100,000
100,000
UNDER INDUSTRY
250,000 TOTAL
1968-69
1969-70
1970-71
1971-72
~ 1972-73
i> 1973-74
1974-75
1975-76
1976-77
Source:
0.
0.
0.
0.
0.
-•
18
43
00
29
47
0.33
0.52
1.34
1.20
0.37
0.79
0.30
0.80
0.40
1968-69 through 1973-74:
of Income, Annual. Active
0.42
0.43
0.82
0.98.
0.66
0.99
1.33
0.90
0.30
0.52
0.55
0.64
0.77
0.48
0^75
0.70
0.90
0.20
0.48
0.36
0.56
0.54
0.64
0.79
0.90
1.00
0.60
0.59 0.88
0.80
0.99
0.81
0.63
0.99
1.40
1.10
0.70
0.69
0.84
0.46
0.39
0.98
1.00
0.90
0.70
Department of the Treasury, Internal
Corporations with and without Return
1.37 - 1.14
1.66 — 1.67
1.27 - 1.85
1.58 — 1.27
1.74 1.53
j 20
0.90
0.70 0.30
Revenue Service, Source
s.
1.60 0.
2.45 0.
2.61 1.
1.36 0.
o
1.
1
1.
0.
69
84
03
84
83
03
.10
0
60
Book of Statistics
1974-75 through 1976-77: Troy, Leo, Almanac of Business and Industrial Financial Ratios. 1978.
-------
Depreciation is also considered a fixed cost. Typically it represents
between 5 and 10 percent of the firm's total fixed assets for an expected
asset life of between 10 and 20 years.
C. Industry Profitability
The leather tanning industry in the United States experienced difficulty
during the early 1970's, particularly in 1972 and 1973, as a result of the
rapid rise in the price of hides, which was caused by the tremendous
increase in cattlehide exports. Between 1970 and 1973, 31 tanneries
discontinued operations and total movement of cattlehides to U.S. tanners
dropped from 19.2 million hides in 1972 to 17.7 million in 1973.
Between 1974 and 1976, industry performance was considerably improved.
Demand for leather was up and the long-run picture appeared strong.
Industry production increased in both 1975 and 1976, with 1976 production
the highest level since 1972. Because of large herd reductions from
1974-1976, cattle hides were readily available. Sales were at an all-time
high in 1976 and profits were acceptable; however, in 1977, American
tanning began to decline both in real dollar volume and units produced.
The end of herd liquidation and the retention of large numbers of cattle to
rebuild stocks, plus increasingly high foreign demand, tightened the supply
of raw hides. From 1977-1979, hide prices rose and production declined.
The production decline continued through 1980. A high level of raw hide
and skin exports and sustained level of imports of leather and leather
products are expected to limit real growth as measured by unit production.
1. Net Profits on Sales
Net profits, before taxes and expressed as percentages of sales, are
depicted in Table IV-5 for the years 1970 through 1981. Prior to 1974, the
industry's profits were relatively stable, but low. As explained above,
1973 was a particularly bad year for the industry and profits were the
lowest during the twelve year period. Increased demand for leather
products as well as improvements in the industry's raw hide supply were
significant factors in the industry's improved profitability during 1974
and 1975. However, strong competition from foreign leathers and even
stronger competition from these foreign tanners for raw hides have caused
the industry's profit to decline since 1976, fluctuating generally between
2.0 and 4.0 percent. Compared to the profit levels of all manufacturing
industries, the leather tanning industry's profits were considerably less
than those of all manufacturing, which has ranged between 7.5 to 9.0
percent.
When the leather industry's profitability is viewed for various sized
operations, it becomes apparent that the medium and large tanneries tend to
be more profitable than are the smaller operations (Table IV-6). This may
reflect some economies of scale, however it should be noted that the
profits of the largest size category in Table IV-6 are consistently less
than the next smaller size category for the year between 1968 and 1973.
Thus, while economies of scale may be important, other factors like
operating efficiency and serving a unique market have influence also.
IV-9
-------
Table IV-5. The leather tanning industry profitability, 1970-1981
Year
1970
1971
1972
1973
1974
1975 DPRA Survey
Robert Morris
1976
1977
1978
1979
1980
1981
Profits Before
Tax as Percent
of Sales
1%)
2.2
2.4
2.5
1.9
6.Q
6.7
6; 5
4.2
2.1
3.7
1.9
3.6
2.4
Percent Profits
Before Tax
to Worth
I*)
N.A.
N.A.
10.0
14.1
12.7
17.9
20.0
15.5
19.6
23.9
15.5
13.1
NA
Cash Flow
as Percent
Sales
(%)
4.7
4.0
4.4
2.9
N.A.
N.A.
N.A.
5.7
3.3
4.7
2.8
4.9
NA
Source: 1970 & 1971, Department of the Treasury, Internal Revenue Service,
Source Book of Statistics of Income, Annual.
1972 to 1981 Robert Morris Associates, Statement Studies. Annual.
1975, Information from a data collection portfolio sent to the
industry by DPRA.
IV-10
-------
Table IV-6. The leather industry, net profits before tax by asset size, FY 1969-1977
ZERO
FISCAL YEAR ASSETS
1968-1969 11.7
1969-1970 4.0
1970-1971
1971-1972 21.9
1972-1973
1973-1974 2.3
1974-1975
1975-1976
1976-1977
Source: 1968-69 to
1974-75 to
100
OVER ZERO UNDER
UNDER 100 250
-2.2
-0.0
-6.5
-4.6
—
-9.5
—
2.4
2.3
1973-74:
1976-1977
1.7
1.2
-0.9
2.5
0.9
1.6
0.8
5.4
3.4
ASSET SIZE ($000)
250 500 1,000 5,000 10,000 25,000 50,000 100,000
UNDER UNDER UNDER UNDER UNDER UNDER Under UNDER INDUSTRY
500 1,000 5,000 10,000 25,000 50,000 100,000 250,000 TOTAL
2.1
2.1
0.1
-0.5
1.8
-1.1
1.9
2.7
2.3
Department of the
Income, Annual .
: Troy,
4.0
0.4
2.7
2.6
3.1
0.1
0.5
—
1.8
Percent of Ne
5.0 7.5
2.
2.
2.
1.
2.
2.
2.
1.
5
0
8
3
2
0
8
9
3.8
5.1
1.7
1.4
1.4
—
0.7
1.3
Treasury, Internal
Leo, Almanac of
Business
and
>t *\aloc- --
6.2
0.1
5.9
6.9
3.8
2.4
7.2
8.4
6.2
7.7
4.5
4.8
6.1
1.5
6.4
— —
— —
17.3
Revenue Service, Source Book
Industrial
Financial Ratios,
3.8 4.
2.7 2.
3.6 2.
1.9 2.
1.0 1.
1.
1
3
3,
of Statistics
1
2
4
4
7
2
.7
.3
.1
Annual 1978 and 197
(Compiled from IRS data).
-------
2. Return on Investment
Information regarding the industry's return on investment is difficult to
obtain. However, as reported in Robert Morris' Statement Studies, the
industry's returns before taxes appear to have been between 10 and 15
percent during the 1972 to 1974 time period. In 1975, the industry's
returns were determined to be 17.9 percent according to an industry survey
and 20.0 percent according to the Robert Morris data. Returns in 1976 were
somewhat lower, 15.5 percent, while in 1977 returns rose to 19.6 percent.
In 1978, returns jumped to 23.9 percent and then declined to 13.1 percent
in 1980. F
3. Cash Flow
Cash flow represents the cash that is actually available for distribution,
retention, or use in acquiring additional assets. The data in Table IV-5
indicates that cash flows as a percent of sales were relatively small from
1970 to 1973. While data are not available for 1974 and 1975, increased
profits probably would result in substantially higher cash flows. Robert
Morris Associates data shows high cash flows of 5.7 percent in 1976. In
1979, cash flows in the industry dropped to only 2.8 percent of sales. In
1980, cash flows were 4.9 percent of sales.
D. Financial Structure of the Industry
1. Assets
The leather tanning and finishing can be considered a raw materials
oriented industry. Tanners maintain relatively large quantities of hides
and skins as a major component of their firms' capital requirements. As
shown in Table IV-7, current assets, which reflect the capital that tanners
require to maintain in-process leather and adequate supplies of raw hides
and skins, have represented between 61 and 75 percent of the industry's
total assets between 1969 and 1980.
Contract tanners and finishers are major exceptions, since they do not buy
hides to process and only perform a service for hide owners. In their
operations, tanning and finishing supplies and equipment would account for
most of the capital requirements.
The fixed assets of the industry represent the conventional elements in
every manufacturing or processing industry, i.e., the plant, land, and
equipment. The fact that fixed asset requirements are a relatively minor
portion of total assets does not imply that the industry requires
relatively few fixed assets. Rather, it reflects the significant amount of
capital required for hides, and the fact that most tanneries are older
facilities whose costs of fixed assets are significantly less than newer
capital.
IV-12
-------
Table IV-7. The leather industry assets, liabilities and equity, selected years
CO
Assets
Current Assets
Fixed Assets
Total Assets
Liabilities and Equity
Long Term Debt
Current Liabilities
Net Worth
Total Liabilities &
Equity
1969
70
30
100
19
28
53
100
Source: 1968-1972, Department of
Income, Annual.
1970
66
34
100
17
32
51
100
1971
61
39
100
15
27
53
100
the Treasury,
1972
70
30
100
13
29
58
100
Internal
1973
69
31
100
16
35
49
100
Revenue
1974
pe
75
25
100
•17
33
51
100
Service,
1975
rcent- -
69
31
100
18
28
54
100
Source
Industry
response
1975 1976 1977 1978
65
35
100
11
28
61
100
Book of
67
33
100
19
35
46
100
Statistics
69 71
31 29
100 100
15 14
46 44
39 42
100 100
of
1979 1980
69 72
31 28
100 100
14 14
46 42
40 44
100 100
1973-1978, Robert Morris Associates, Statement Studies-Annual, 1974-1981.
Response to industry data collection portfolio, 1975, Development Planning and Research Associates,
portfolio sent to industry in 1976.
-------
The distribution of assets varies among the various sizes of tanneries. As
shown in Table IV-8, the smaller tanneries reflect a lower proportion of
the total assets as fixed assets than do the larger tanneries, because the
larger facilities are often newer, or have modernized their equipment and
production process, and their capital expenditures are proportionately
higher than those of the older, smaller facilities.
2. Liabilities
The liabilities of the leather tanning industry have been classified into
two basic categories: (1) current, or short-term liabilities, and (2)
long-term debt. The industry has maintained a large portion (approximately
two-thirds) of its total liabilities in the form of short-term liabilities
(Table IV-7). These short-term liabilities typically represent accounts
payable, unpafcf wages, ?oans for inventories and minor plant and equipment
maintenance and replacement expenses. When expressed as a percent of total
liabilities and equity, current liabilities have traditionally represented
from 18 to 35 percent, and long term-debt from 15 to 19 percent. Equity
has accounted for approximately 50-60 percent of total liabilities and
equity. However, a significant change occurred in 1977 and 1978.
Tanneries were forced to increase their short-term liabilities to finance
higher priced hides resulting in an increase in current liabilities to 40
and 44 percent respectively.
Long-term debt within the leather industry represents approximately 20
percent of the industry's total assets and 40 percent of the industry's
total liabilities. The somewhat low proportion of long-term debt reflects
the relative age of the industry as most of the facilities and equipment
were purchased many years ago and, thus, have been paid for or, at least,
represent a lower purchase price than that obtainable today.
Most of the industry's long-term debt represents the debts of a few newer
tanneries as well as debts incurred by older tanneries that have modernized
or expanded their facilities.
When the industry's liability structure is viewed with respect to size
{Table IV-8), it becomes apparent that the larger tanneries have a much
more sizeable long-term debt proportion of total liabilities than do the
smaller tanneries. Furthermore, the larger tanneries maintain a somewhat
lower overall liability commitment than do the smaller tanneries.
3. Net Worth
The net worth of the industry is defined as its total assets less Us total
liabilities; thus, net worth represents that portion of the industry's
assets that are owned by the industry. Net worth, expressed as a percent
of total assets, has declined from a level of 50 to 60 percent of total
assets during the 1969-1975 period to a level of about 40 percent in
1977-1978. This currently represents a debt-to-equity ratio of 1.4.
Net worth varies for both larger and smaller tanneries (Table IV-8),
implying that tanneries' dependence on creditors for providing funds either
for normal operations or capital improvements is not size dependent.
IV-14
-------
Table IV-8. The leather and leather products assets, liabilities and equity, by asset size, 1975
Assets
Current Assets
Fixed Assets
Total Assets
Liability and Equity
Long Term Debt
Current Liabilities
: Net Worth
; Total Liability &
Equity
Under
100
79
21
100
25
59
16
100
100-
249
78
22
100
23
32
45
100
250-
499
72
28
100
15
31
54
100
500-
999
68
32
100
16
38
46
100
1,000-
4,999
75
25
100
12
42
46
100
Asset Size
5,000- 10,000-
9,999 24,999
77
23
100
17
36
47
100
•Hercent-
72
28
100
12
26
62
100
($000)
25,000-
49,999
69
31
100
25
26
49
100
50,000-
99,999
60
40
100
32
23
45
100
100,000-
249,999
NA
NA
NA
NA
NA
NA
100
250,000
or more
63
37
100
21
29
50
100
Industry
Total
68
32
100
20
31
49
100
Source: Department of the Treasury, Internal Revenue Service, Source Book of Statistics of Income. 1974-75.
-------
E. Terms of Debt Capital
1. Financing New Investment
The ability of a firm to finance new investment for pollution abatement is a
function of several financial and economic factors. In general terms, new
capital must come from one or more of the following sources: (1) funds
borrowed from outside sources; (2) equity capital acquired through the sale
of common or preferred stock; and (3) internally generated funds—retained
earnings and the stream of funds attributed to the depreciation of fixed
assets.
For each of the three major sources of new investment, the most critical
factor is the financial condition of the individual firm. For debt
financing, the firm's credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio, and the lenders'
confidence in management will be major considerations. The discussions
held with commercial lenders (brokers,and representatives of commercial
lending institutions) reported the final consideration in granting a loan
is the expected profitability of the firm. Also potential investors tend
to view investments in assets that will improve productivity more favorably
than investments that will not reduce costs or increase sales. New equity
funds through the sale of securities will depend upon the firm's future
earnings as anticipated by investors, which in turn, will reflect past
earnings records and the general condition of the money market. The firm's
record, compared to others in its own industry and to firms in other
similar industries, will be a major determinant of the ease with which new
equity capital can be acquired. In the comparisons, the investor will
probably look at the trend of earnings for the past five years.
Internally generated funds depend upon the margin of profitability and the
cash flow from operations. Also, in publicly-held corporations,
stockholders must be willing to forego dividends in order to make earnings
available for reinvestment.
The firm's industry and general economic conditions are also major
considerations in attracting new capital. The industry will be compared to
other similar industries in terms of net profits on sales and on net worth,
supply-demand relationships, trends in production and consumption, the
state of technology, impact of government regulations, foreign trade, and
other significant variables. Declining or depressed industries are not
good prospects for attracting new capital. At the same time, the overall
condition of the domestic and international economy can influence capital
markets. A firm is more likely to attract new capital during a boom period
than during a recession. On the other hand, the cost of new capital will
usually be higher during an expansionary period. Furthermore, the money
markets play a determining role in new financing.
IV-16
-------
2. Expenditures for Plant and Equipment
Capital expenditures, as reported by the Annual Survey of Manufactures and
the Census, fluctuated between $4.7 and $7.2 million from 1960 through 1964
and increased sharply in 1965 and, again, in 1966, to $17.3 million.
Expenditures remained at about the same level, with only slight declines,
between 1966 and 1972. In 1973 and 1974, expenditures declined to about
$13 million. Since 1974, expenditures have increase, with 1976
expenditures totaling $32.6 million and 1977 expenditures equalling $31.9
million (Table IV-9). A closer look at the $31.9 million spent in 1977
shows $6.8 million or 21 percent used for new structures and plant
additions; 75 percent or $24 million on new machinery and equipment; and
$1.2 million on used equipment. Total expenditures in 1977 amounted to 14
percent of the estimated fixed assets of the industry. Since 1977,
expenditures have increased at an average annual rate of 16 percent,
reaching $48.3 million in 1980.
3. Terms of Debt
The industry has a large number of family-owned and operated plants,
especially in the small and medium size categories. A few of the larger
plants are divisions of major corporations; however family owned firms
predominate in the industry. The industry has tended to finance capital
investments with internally generated capital. This is indicated by the
low level of long term debt (14 percent) on Table IV-7.
To estimate the likely loan terms a tanner might receive, a telephone
survey was made to tanners and lending institutions. The phone survey
indicated that loan repayment periods would range from 3 to 7 years. For
the economic analysis a 5-year loan period is used. Based upon the
telephone survey, interest rates on these loan are expected to be
approximately 1.5 percentage points above prime interest rates. This is
because tanneries would have to pay a premium interest rate compared to the
large companies that can obtain prime rate loans.
F. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U.S. business. It
provides both a measure of the actual performance of a firm as well as its
expected performance. It is also called the cost of capital—the weighted
average of the cost of each type of capital employed by the firm, generally
equities and interest-bearing liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
reasonable bounds.
The after-tax cost of capital was estimated by evaluating various financial
parameters relevant to the tanning industry over the period of 1979 to
1981. The cost of debt capital and return on equity realized by the
tanning industry was estimated as discussed below. Debt capital and equity
IV-17
-------
Table IV-9. Expenditures for new plant and new equipment in the
leather tanning and finishing industry ($ million)
Total new New structures New machinery Used plant
Year expenditures and plant additions and equipment and equipment
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
6.1
4.7
7.2
6.5
7.8
11.3
17.3
16.7
16.6
14.4
12.4
17.7
16.3
12.8
13.1
22.7
32.6
31.9
51.1
43.9
48.3
.8
5.2
3.0
1.9
3.5
3.6
6.1
12.4
6.8
6.2
11.6
11.4
10.6
14.3
12.7
16.6
20.2
23.9
.5
.9
1.2
1.2
Source: Census of Manufactures and Annual Survey of Manufactures.
IV-18
-------
capita] were weighted utilizing Robert Morris1 survey data; the equity
weight is estimated at 42 percent and the debt weight at 58 percent. This
represents the weight of all capital—short and long term—as described on
Table IV-8. The after tax cost of capital developed for the leather
tanning industry, representing the average rate over the 1979-1981 period,
is estimated to be 11 percent as shown below:
Before Average After Weighted
Item Weight tax cost tax rate tax cost cost
Debt .58 17.1 .36 10.94 6.35
Equity .42 17.5 .36 11.20 4.70
ITM
Before tax cost of debt was based on the average prime rate of 15.6 over
the 1979-81 period, plus 1.5 percent which represents an average premium
tanners would pay. An average tax rate of 36 percent was used representing
the average actual corporate tax rate paid by all manufacturing firms over
the same period as reported by the Federal Trade Commission's Financial
Quarterly Report.
IV-19
-------
V. PRICE AND PRICE DETERMINATION
The analysis of price determination is a highly complex subject area and is
dependent on many factors outside the direct markets for leather.
Leather is priced in an intermediate market. The price of leather is
highly dependent on the price of cattle hides, which is set in an
international market. Demand for leather, on the other hand, is derived
from the demand for finished leather goods. The interaction of economic
and natural forces affecting the various components of supply and demand
result in a very volatile price for raw hides and tanned leather.
In this chapter, the tanning industry's prices and price determination
processes will be analyzed to determine the ability of individual firms to
pass increased costs, resulting from the imposition of effluent control
guidelines, forward to the users of tanned leather, backward to the hide
suppliers, or both. If price pass-through cannot be accomplished because
of market forces, then it must be determined if the firms have the ability
to absorb the incremental costs in their profit margins.
In the following sections, characteristics of recent price and price
determination factors will be assessed, including a qualitative and
quantitative analysis of supply, demand, and leather prices plus an
evaluation of leather product imports and associated trade restrictions.
Finally, an analysis of the raw hide markets will be presented and will
include discussions of the international trade in and trade restrictions
over raw hides.
A. Leather Prices, Demand, and Supply
The price of leather in the United States has been highly variable in
recent years. Market prices were fairly low in the early seventies and
increased steadily through 1976. In 1977, the leather industry again
experienced a depressed market as both dollar volume and unit production
declined. Hide prices escalated rapidly in 1978 and 1979, due primarily to
lower slaughter numbers and the weakness of the U.S. dollar. This caused a
period of great uncertainty in the industry as hide prices doubled from
1977 to 1979 before returning to more normal levels in 1980 and 1981.
During the 1970 to 1980 period, leather production declined at an average
rate of 3 percent per year and shoe imports increased from 33 percent of
total U.S. consumption to 50 percent.
This section discusses the supply, demand and resulting prices for finished
leather. Hide prices, a major component of leather price, are discussed in
Section C of this Chapter, "The Raw Hide Market."
V-l
-------
1. The Price of Leather
Historically, there has been a stable relationship between the prices of
leather and hides. The relationship was essentially absolute and was
reflected by stable margins between the raw material and finished product
prices—especially for the period from the late 1950's to 1971. After
1971, market disruptions made it difficult to maintain historical margins,
and classical relationships had to be adjusted in order to retain sales,
although the margin adjustment usually resulted in a loss.
The data in Table V-l include the current and real dollar values for
leather (wholesale), cattlehides (pound-price converted to equivalent of
one square foot of leather), and the equivalent square foot price spread or
margin. The hide-to-finished price spread is shown in Figure V-l to more
clearly depict the recent price spreads. Over time, the current dollar
price spread has been increasing at about the rate of 1.0 cents per square
foot, per year. I/ Based on the 1955-81 average price spread of 39 cents
per square foot, the average annual change or increase has been about 2.6
percent per year. The increase is necessary to offset increasing
production costs which consume much of the price spread.
In real dollars, however, the price spread has been declining at about .56
cents per square foot, per year. 2J This is equal to the average annual
decrease of 1.3 percent per year with the 26 year average real-dollar
margin of 40.9 cents per square foot. Thus, although the margin has been
increasing in current dollars, the increase has not kept pace with the
value of the dollar and the margin has declined in real terms.
Leather is priced in an intermediate market. A statistical examination of
the factors effecting the change in leather prices over the period 1972
through 1979, identified 86 percent of the variation as attributable to
change in hide prices and the volume of leather produced. As expected,
leather prices move in a direct relationship to hide prices and as the
volume of leather produced increased (decreased) the leather price
correspondingly decreased (increased). Since most costs of the tannery
(with the exception of hides) are fixed over the short run, including
labor, greater volume decreases the cost to produce additional tanned
hides. Because of competitive forces within the industry, these savings
are passed through to the consumer.
This relationship using quarterly data from 1972 through 1979 is shown in
the following equation:
T71.00 cents per square foot per year is coefficient of the trend line
equation Yt=24.57 + l.Ot, r=.69, where Y.=margin in year.., and
t-1, 2,...,25 starting with 1955. c
21 .56 cents per square foot per year is the coefficient of the trend
line equation: V =49.6 - .56t
Where: y,. = real dollar margin in year.
t = 1,2,;.., 25 starting with 1955.
V-2
-------
Table V-l. Leather, price per square foot, 1955 to 1981 if
Current Dollars
Year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
198?
Hide
Price 21
. —
21.7
21.7
19.2
20.0
33.6
24.0
26.1
26.6
19.6
18.0
24.3
30.4
20.5
20.6
25.2
22.4
25.4
52.1
59.0
45.3
41.1
57.8
63.4
82.6
126.9
77.6
76.7
Finished
Leather
Wholesale
Price 3/
— 4/sq. ft.-
44.4
49.9
48.6
50.6
62.5
55.5
58.9
61.9
57.7
58.1
59.3
64.4
59.8
61.1
66.1
64.1
63.9
80.4
88.6
82.8
79.9
110.9
108.7
128.9
204.3
121.1
124.5
Hide to
Finished
Leather
Spread
Real Dollars
Hide
Price
Finished
Leather
Wholesale
Price
- -
-------
60-
50-
s_
rO
0)
CC
o;
LU
a.
20.
LU i.
Q£ rt3
CL I—
to 1—
i_
3
55
57
59
61
63
65 67
Year 19
69
71
73
75
77
79
Figure V-l. The tanned leather equivalent price spread between the price
of cattle hides and wholesale price of leather, cents oer
square foot, current and real dollars, 1955-1979.
V-4
-------
Leather Price -701.00 Hide Price n nn,
- rrrr -- 72.1 + 2.8 - rrp? - - 0.006
(t stat) 4.7 12.7 -2.0
(std error) 15.3 .22 .003
R2 = .86
where:
Leather price = wholesale price index for leather
Hide price = Heavy native steer hides ($ per pound)
Deliveries = Cattlehide leather deliveries
(1000 hide equivalent)
WPI = Wholesale price index for all commodities
Both independent variables are statistically significant. A third
independent variable, wage rates in the leather tanning industry, was
tested and found to be statistically insignificant in terms of identifying
changes in finished leather prices. The above multiple regression analysis
tells us that a one percentage increase (decrease) in hide prices will
result in a .56 increase (decrease) in leather prices. I/
Similarly, a one percent increase (decrease) in deliveries has historically
resulted in a decrease (increase) in leather prices by 1.3 percent, all
other factors held constant. It is interesting to note that in a similar
analysis using quantity data over the period 1968-1978, the USDA found that
a 1 percent increase (decrease) in the price of hides increased (decreased)
the index of leather prices by 0.26 percent. 2J
2. Demand for Leather
The leather tanning industry's annual production declined during recent
years, decreasing from nearly 32.7 million hide equivalents in 1965 to 19.5
million in 1981 (Table IV-1). This reduction reflects a declining demand
for U.S. produced leather and leather products caused, in part, by
increased competition from both the foreign tanneries and leather product
Xi
_!/ Calculated by the elasticity formula E, = B. -B*-
J J '
where .56 - 2.8
2/ USDA "The Structure, Pricing Characteristics, and Trade Policy of
Hides, Skin, Leather and Leather Products Industry - A Task Force
Report," Washington, D.C. 20250, July 1979.
V-5
-------
manufacturers, and leather substitute manufacturers. This section
discusses both the domestic and international markets for U.S. produced
leather and their respective trends and influences on the demand for
leather. These sections are followed with a quantitative analysis of the
demand for leather.
Domestic Markets. The demand for leather in the United States has largely
been derived from the needs of the U.S. shoe industry. However, in recent
years the domestic shoe manufacturing industry has lost major portions of
its markets to imported shoes; its demand for leather has declined and the
demand from producers of other leather products has increased.
The domestic shoe manufacturing industry, the primary customer for U.S.
tanned leather, has slowly but steadily been losing its share of the
domestic market to international competition. In 1965, only 12.3 percent
of the shoes purchased in the U.S. were manufactured overseas; however, by
1981, this had increased to 50.0 percent, and indications are that this
trend will continue over the foreseeable future. During this time, the
total U.S. demand for shoes fluctuated only slightly but in recent years,
since the advent of high inflation, the trend has been down. Per capita
consumption of shoes reached a peak in 1968 with 4.07 pairs and declined to
3.28 pairs in 1975. In 1976, it recovered significantly, increasing to
3.68 pairs, but has declined each year, since reaching 3.27 pairs in 1981.
The effect of the relatively stable U.S. demand for shoes and increasing
imports has been that the total pairs of shoes manufactured in the U.S. has
declined steadily from 626 million pairs in 1965 to the 1981 level of 375
million pairs, a decline of 40 percent over the sixteen year period (Table
V-2). A further indication of the decline in the shoe industry's demand
for leather can be seen in Table V-2 which shows the percent of U.S.
manufactured shoes made with leather soles. This has declined steadily
over the past thirty years; by 1981, only 11.0 percent of the U.S. shoes
were made with leather soles, down from 24.6 percent in 1965. Also, during
the 70's, the substitution of synthetics for leather in shoe uppers made
substantial inroads in the market. In 1960, only 16.9 percent of the U.S.
shoes were made with all synthetic uppers. In 1979 the figure was 44.4
percent.
In summary, the quantity demanded by domestic shoe manufacturers for U.S.
produced leather declined from 78 percent of the total leather produced in
the U.S. in 1970 to 53 percent in 1977. Since that time it has increased
steadily to 56 percent in 1978 and 62 percent in 1981.
Other domestic markets for U.S. produced leather include manufacturers of
such products as leather garments, gloves, and handbags. In 1975, leather
garment demand was encouraging, utilizing 190 million square feet of
domestic leather or 14.4 percent of domestic production. The rapid
increase of imports of Korean leather garments—some imported at extremely
low prices—have depressed that market. By 1981, utilization had dropped
to 35 million square feet or 3.6 percent of domestic production. Markets
where demand still appears strong, however, include: leather work gloves,
V-6
-------
Table V-2. U.S. production of shoes 1965-1981 (1,000 pair)
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Total U.S.
Production
626,229
641 ,696
599,964
642,427
576,961
562,318
535,777
526,655
490,033
452,955
413,080
422,507
413,726
418,948
398,872
396,851
375,473
Percent of U.S.
Imf
>orts
Production Percent of Total
With Leather Soles Total U.S. Consumption
24.6
24.8
21.7
17.4
14.8
16.4
16.0
17.0
14.0
14.2
13.3
13.7
12.1
11.9
11.5
10.2
11.0
87,632
96,135
129,137
175,292
202,040
241,560
268,569
296,665
315,514
266,423
286,538
370,001
368.069
373,515
404,563
365,743
375,605
12.3
13.2
17.7
21.4
25.9
30.0
33.4
36.0
39.2
37.0
41.0
46.7
47.1
47.1
50.4
48.0
50.0
Total
Shoes
713,861
737,831
729,101
817,719
779,001
803,878
804,346
823,320
805,547
719,378
699,618
792,508
781,795
792,463
803,435
762,594
751,078
Pairs
per
Capita
3.67
3.75
3.66
4.07
3.83
3.91
3.89
3.94
3.83
3.39
3.28
3.68
3.61
3.62
3.57
3.35
3.27
Source: Tanner's Council of America, "Membership Bulletin Leather Industry Statistics."
-------
8.6 percent of the domestic leather produced; leather handbags, 6.1
percent; leather belts, 5.6 percent; small leather goods, 7.1 percent; and
miscellaneous, 7.1 percent (Table V-3). However these segments represent
less than 40 percent of the leather utilization in the United States.
Foreign Markets. Leather exports offer the newest potential market for
U.S. leather tanners. In 1968, U.S. exports of leather and leather
products consisted mainly of leather luggage and represented only 1 percent
of the total 1968 domestic leather production. By 1975, exports of leather
amounted to 13.8 percent, and exports in 1979 were approximately $250
million or 12.7 percent of the total domestic production.
While U.S. tanners and leather product manufacturers are attempting to
expand their exports, higher wages and raw material costs have forced
manufacturers to raise the prices of domestic leather and leather products.
While the devaluation of the U.S. dollars in the early 1980s has helped to
keep U.S. leather prices competitive, the devaluation was not uniform. In
some cases, it reduced the ability of some U.S. manufacturers to compete in
that country's market and has actually increased the attractiveness of the
U.S. market for potential imports of foreign finished leather products from
that country. There is, however, an encouraging trend among foreign
exporting leather manufacturers: some import semi-tanned or semi-processed
leather instead of raw hides and produce finished leather products for
their domestic or export markets. Several reasons support this trend.
First, more foreign leather tanners must import raw hides to supplement
their domestic supplies. The semi-tanned leather is considerably lighter
in weight than are raw hides and, accordingly, less costly to ship. Also,
many countries are facing increasingly more strict pollution control
regulations, and the importation of semi-tanned leather instead of raw
hides significantly reduces their pollution control requirements. Tanners
in many foreign developed countries are finding it difficult to maintain an
adequate, experienced labor force. The importation of semi-tanned leather
eliminates the need for a large labor force.
The increased trend for foreign tanners and leather product manufacturers
to buy semi-tanned leather is reflected by data appearing in the Reports of
the Bureau of the Census. These data are depicted in Table V-4 and show
the U.S. exports of leather by classes for 1975 through 1979. As shown,
leather exports increased from $140 million in 1975, to $150 million in
1977, and to $250 million in 1979. While many classes of leather shown on
Table V-4 increased in monetary value, a substantial portion of the
increase was for the rough and crust.
3. Elasticity of Demand for Leather
If pollution control costs are passed on in higher leather prices, what
would the effect be on the demand for leather? A 1976 study I/ concluded
17 James Jondrow and others, The Effects of Effluent Discharge
~ Limitations on Foreign Trade in Selected Industries, Document 260-76,
Public Research Institute, Alexandria, Va., Feb. 1976; a report for
the National Commission on Water Quality.
V-8
-------
Table V-3. Leather markets profile, 1977-1981
Products
Shoes (non rubber)
Leather garments
Leather work gloves
(million dozen pairs)
Leather handbangs
Small leather goods
Leather Belts
Miscellaneous
TOTAL
Shoes (non rubber)
Leather garments
Leather work gloves
(million dozen pairs)
Leather handbags
Smal 1 leather goods
Leather belts
Miscel laneous
TOTAL
Shoes (non rubber)
Leather garments
Leather work gloves
(million dozen pairs)
Leather handbags
Smal 1 leather goods
Leather belts
Miscellaneous
TOTAL
Shoes (non rubber)
Leather garments
Leather work gloves
(mill ion dozen pairs)
Leather handbags
Small leather goods
Leather belts
Miscellaneous
TOTAL
Total
market
supply
(mil)
759
10
5.8
31.6
74.5
48
NA
763
10
6.1
36
81
51
NA
785.7
9.2
7.2
30
86
57
NA
751.1
8.4
5.6
33.2
78.0
58.5
NA
Domestic
production
(mil)
391
3.6
3.5
19
65
43
NA
389.9
3
3.8
15.5
70
44
NA
381.1
1.9
3.6
13
76
50
NA
375.5
1.8
2.6
12.2
70.0
51.5
NA
Imports
(mil)
1977
368
6.4
2.2
12.6
9.5
5
NA
1978
373.5
7
2.3
20.4
11
7
NA
1979
404.5
7.3
3.6
17
10
7
NA
1981
375.6
6.6
3.0
21.0
8.0
7.0
NA
Imports
as % of
total
market
W
48.5
64
38.5
40
13
10.4
NA
49.0
70
37.7
57
13.6
14
NA
51.5
79
50
56.6
11.6
12.3
NA
50.0
78.6
53.6
63.3
10.3
12.0
NA
Leather equivalent
of domestic prod.
Sq. ft.
(mil)
630
150
105
105
65
48
90
T7T91
625
100
111
70
70
45
90
TTTTT
550
40
115
55
75
50
80
?6T
610
35
85
60
70
55
70
955"
Percent
m
52.8
12.6
8.8
8.8
5.5
4.0
7.5
TOO
56.2
9.0
10.0
6.3
6.3
4.1
8.1
T5O
57.0
4.1
11.9
5.7
7.8
5.2
8.3
100. 0
61.9
3,6
8.6
6.1
7.1
5.6
7.1
TOO
Source: Tanners' Council of America "Membership Bulletin Leather Industry Statistics.1
V-9
-------
Table V-4. United States exports of leather by classes 1975-1979 (quantity in thousands of
units showing value in thousands of U.S. dollars)
i
o
Item
Cattle-
Patent
Side Upper
Sole, Belting, Melting
Belting
Glove & Garment
Bag, Case, Strap, Collar
Rough, Russet & Crust
Bovine, NSPF, Not Fancy
Upholstery
Calf & Kip
Sheep & Lamb
Unit
SFT
SFT
LB
SFT
SFT
SFT
Lb
SFT
SFT
SFT
SFT
1975
Quantity
5,534
105,073
9,377
-
-
-
11,778
-
-
2,020
62,096
Value
3,210
52,831
5,938
-
-
-
3,702
-
-
1,040
41,073
1976
Quantity
2,078
131,038
8,797
-
-
-
8,272
-
-
3,112
61,666
Value
1,399
58,204
4,350
-
-
-
3,061
-
-
1,921
40,361
1977
Quantity
2,209
124,099
7.986
-
-
-
13,386
-
-
3,334
69,771
Value
1,503
51,178
5,685
-
-
-
9,315
-
-
2,536
43,694
1978
Quantity
1,844
24,470
3,371
_
33,928
-
101,620
20,466
5,702
8,545
53,725
Value
1,945
18,578
3,192
_
28,173
-
40,200
10,128
4,326
6,206
41,386
1979
Quantity
1,091
31,030
5,016
_
33,447
-
77,953
28,167
4,937
5,784
40,758
Value
1,320
36,389
8,241
_
34,573
-
42,267
19,053
12,346
6,459
39,592
Sheep & Lamb, Vegetable Tan LB- -- -- -- --
Goat & Kid
Goat & Kid, Vegetable Tan
Other
Pig & Hog Leather
TOTAL
SFT
LB
--
--
7,140
-
-
-
5,071
-
27,632
-
140,497
4,197
-
-
-
4,029
-
-
-
139,268
3,573
-
-
-
3,564
-
32,311
-
149,787
4,332
-
49,464
6,324
4,777
-
31.751
3.894
194,555
3,741
-
46,079
7,534
6,131
-
39,170
4.921
250,462
Source: Reports of the Bureau of the Census, Office of Consumer Goods & Service Industries, Bureau of Domestic Business Develop-
ment, Industry and Trade Administration, U.S. Department of Commerce, May, 1976-March, 1980.
-------
that the main effect on the demand for domestically produced leather would
come not from a reduction in the number of shoes bought by U.S. consumers,
but, rather, through an increase in shoe imports, substituting
for domestically produced shoes, thereby reducing the demand for
domestically tanned leather. Hence, a critical variable is the import
elasticity for shoes.
An increase in the price of domestically produced leather can also result
in an increase in the imports of leather as U.S. manufacturers are
encouraged to substitute foreign leather for domestic. This effect was
discussed by Cambridge Research Institute in their comments on the 1979
economic impact study on proposed guidelines. Other more minor effects
would include the imports of other leather goods (other than shoes) and a
decrease in the export of leathers. Each of these effects will be
discussed in turn.
A review of the literature provides estimates of the import elasticities
for shoe imports and leather imports as summarized in Stern I/ in terms of
the lowest estimate reported in the literature, the highest and the "best"
estimate.
Low "Best" High
Shoe imports -0.79 -2.39 -4.31
Leather imports -0.74 -1.58 -2.42
The elasticities are defined as the percentage change in import quantity
resulting from a one percent increase in the price of the domestic product
relative to the price of imports.
Calculation of the effects of an increase in the price of leather on
domestic leather production requires the consideration of various linkages.
For example, for shoes and leather goods, we consider the linkages from the
increase in leather prices to the increase in the price of the product
faced with foreign competition (e.g., shoes), to the change in impact
quantity (shoes), to the change in domestic production (shoes), to domestic
leather production. In calculating the effects, it is assumed that
domestic leather production is distributed as follows:
Shoe production .58
Other leather products .29
Leather exports .13
Off
T7Robert Stern, Jonathan Francis and Bruce Schumacher, Price
Elasticities in International Trade, An Annotated Bibliography, New
York, Macmillan, 1976, p. 22.
V-ll
-------
and that leather imports are equivalent to 16 percent of domestic
production. _!/ The calculations are for the effects of a hypothetical one
percent increase in leather prices (the price increase actually estimated
is presented later) and are described for the "best" estimate of
elasticity.
In estimating the effect of a leather price increase on shoe imports, the
leather price increase first has to be translated into a shoe price
increase. Based on 1977 data, the cost of leather relative to the value of
shipments for shoe manufacturing was 0.20. ZJ Hence, the elasticity of
shoe imports relative to a one percent increase in leather prices is
(0.20)(shoe import elasticity) = (.020)(2.4) = 0.48.
Imports and domestic shoe production split the U.S. market in 1981. Hence,
a 0.48 percent increase in shoe imports corresponds to a 0.48 percent
decrease in domestic shoe production. Since shoe production accounts for
0.58 of domestic leather production, domestic leather production is reduced
by 0.28 percent (0.48 x 0.58 = 0.28 percent).
Imports of leather products other than shoes will also increase with an
increase in domestic leather prices. However, we do not have estimates of
the corresponding elasticities and thus will use those for shoe imports
(2.39 for the "best" estimate). Similarly, to translate the leather price
increase into a leather goods price increase we will use the cost of
leather as a percent of the value of shipment for shoe manufacturing or 20
percent as a proxy. Then the elasticity of leather product imports
relative to a one percent increase in leather prices is (0.20)(2.4) = 0.48.
Since the quantity of leather good imports is approximately equal to
domestic production of such goods, 0.48 is the expected decline in domestic
production. Leather goods production uses 0.29 of domestic leather
production, so the effect on domestic leather production is a reduction of
0.14 percent for a one percent increase in leather prices (0.48 x 0.29 =
0.14 percent).
The third effect, the impact on leather imports, can be estimated as
follows. Actual leather imports amounted to approximately $350 million in
1981, 16 percent of domestic tanners' sales of approximately $2.2 billion.
Hence, a one percent increase in the price of domestic leather would result
in a 1.6 percent (best estimate) increase in the volume of imported leather.
This in turn would replace 0.26 percent of domestic production (1.6 x 0.16
= 0.26 percent).
_!/ Estimates are based on data for 1981 in TCA, U.S. Leather Industry
Statistics. 1982 edition, pp. 14-31.
2/ 1977 Census of Manufactures, overall average for men's, women's and
N.E.C. shoe manufacturing sectors.
V-12
-------
The fourth effect is the decline in leather exports. Again, we must use a
proxy, thus, we will use the leather import elasticity of -1.6 (best
estimate). The U.S. exports $275 million worth of leather or 13 percent of
domestic production. A one percent in the price of leather would decrease
exports by 1.6 percent. As a result, a one percent increase in the price
of leather would then decrease demand for domestic production by 0.21
percent (1.6 x 0.13 = 0.21 percent).
In summary (using best estimates), a one percent increase in the price of
leather will decrease demand for domestically produced leather by 0.89
percent:
Effect on domestic producers
Percent
Imports of shoes -0.28
Imports of leather goods -0.14
Imports of leather -0.26
Impacts on leather exports -0.21
Total effects -0.89
Similar calculations show that, using the low and high elasticities, the
reduction in domestic leather production resulting from a one percent
increase in leather prices would range from 0.35 to 1.46 percent.
4. Supply of Leather
The United States leather supply originates from two general
sources—domestic tanneries and foreign tanneries. While the domestic
tanneries supply most of the finished leather to U.S. leather product
manufacturers, the foreign tanneries predominately supply their leathers to
foreign manufacturing firms which, in turn, compete with U.S. leather
product manufacturing firms for the finished leather goods markets. In
this section of this report, the discussion emphasizes the supplies of
leather available to U.S. leather manufacturing firms. The discussion of
the importation of finished leather products into the U.S. is presented in
the next section of this chapter.
While the ability of the U.S. leather tanning industry to meet the demand
for leather could be restricted by the availability of hides or skins, it
generally has been able to respond to the domestic demand for leather.
Historically, U.S. tanneries have been able to purchase all the necessary
hides to meet their forecasted demands although often not at a price they
would prefer. In recent years, however, the expanding percentage of
exported U.S. cattlehides, which in 1979 had reached 70 percent of total
commercial slaughter, has become a problem of major concern to domestic
tanners and leather products manufacturers. The export restrictions that
many developing countries have placed on the access to their indigenous raw
material supplies, in order to promote growth in their own tanning and
leather products industries, have helped to increase the demand for the
freely-traded U.S. produced cattlehides.
V-13
-------
As will be discussed in a later section of this chapter, while the total
U.S. supply of hides available for tanning had been increased steadily,
reaching 41,856 million head of cattle in 1977, in 1978 the supply began to
decline and had dropped to an estimated 33.6 million in 1979. Shown in
Table V-5 are the U.S. leather tanning industry's annual production data
from 1955 to 1981. The industry's output has steadily declined throughout
this period, falling from 37.2 million equivalent hides in 1955 to a low of
17.6 million in 1980 and increasing to 19.2 million in 1981.
B. Imports of Finished Leather Products into the United States
The United States is the world's largest importer of leather products, with
Germany, the United Kingdom, and Switzerland following in that order.
Importers have realized the United States is an attractive market for
foreign leather products and the market has been expanding at a rapid rate.
As a result, importers of leather goods into the U.S. have been growing at
an accelerating rate to create what some industry experts perceive as a
serious threat to the domestic tanning and leather goods industries.
This trend has also occurred in other developed countries. In Germany,
Sweden, and in other countries, leather imports have reduced their
respective leather tanning and leather products industries to a fraction of
their former size. The exact reasons for this shift are many and complex.
Basically, the leather industry is labor intensive and developing countries
have certain cost advantages. Second, because the industry does not
require a high level of technology, it can be adapted to developing
countries. Third, a complicated series of trade restrictions prohibit the
U.S. tanning and leather products industries from competing favorably in
foreign markets. Fourth, developing countries such as Korea, Taiwan, and
Brazil see in this industry's development a valuable source of badly needed
foreign exchange and as a result, they encourage its development. The
following sections discuss the trends in U.S. imports of leather products
and the factors affecting the foreign trade of leather and leather
products.
1. Trends in Imported Leather Goods
Table V-6 presents the U.S. foreign trade in leather products. The value
of imports have more than tripled from 1969 to 1981, increasing from $631
million to over $3.78 billion in 1981. The value of exports during this
period increased rapidly, but in 1979 they amounted to only $269 million or
only 7.1 percent of all leather imports.
Footwear, the major product imported into the U.S. accounted for two-thirds
of total leather product imports in 1981, approximately the same proportion
of total imports as in 1971. Leather wearing apparel made rapid increases
from 1972-1978 in its proportion of total imports and was the second most
important imported leather product in 1978. In 1979, imports declined and
leather wearing apparel imports fell behind handbags and luggage. Handbags
and luggage now make up the two most important categories with imports of
$399 million and $385 million, respectively, in 1981.
V-14
-------
Table V-5. The tanning industry production, cattlehide equivalents,
1955-1981
Year
1,000 cattlehide
equivalents
% change from
previous year
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
37,220
36,810
35,820
33,810
34,090
31,850
32,226
31,596
31,325
32,187
32,697
32,252
30,861
31,884
28,388
25,941
25,267
24,661
21,062
19,998
21,894
23,526
21,528
20,199
18,170
1 7 ,600
19,189
— —
-1.1
-2.7
-5.6
+0.8
-6.6
+1.2
-2.0
-0.9 a'
+2.8 cl
+1.6 1!
-1.4 a
-4.3
+3.3
-10.9
-8.6
-2.6
-2.4
-14.6
-5.0
+9.5
+7.5
-8.5
-6.2
-10.0
-3.1
+9.0
Source: Tanners' Council of America, "Membership Bulletin Leather
Industry Statistics."
average annual
change from
1955 to 1979
equals -2.8%.
1972-81
-2.8%
V-15
-------
Table V-6. United States foreign trade in leather products
cr>
Imports
Year
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Footwear-'
435,884
559,347
678,352
832,652
976,106
980,668
1,132,228
1,448,561
1,599,170
2,057,351
2,429,284
2,298,308
2,480,984
Wearing
apparel
19,674
38,233
59,251
91,773
109,728
123,066
154,263
236,587
204,135
318,269*
257,955*
107,907*
207,067*
Handbags
& purses**
58,420
62,974
67,606
83,623
108,211
106,853
124,776
185,000
207,247
310,382
299,806
350,562
399,299
Luggage &
flat goods***
<1 ooo
38,393
41,366
49,758
76,795
100,231
95,890
89,486
160,754
190,283
266,184
295,557
321,789
384,675
Other
products
78,643
87,282
74,188
83,561
94,380
106,723
94,343
140,086
186,259
240,917
281,187
295,789
306,112
Total
imports
631,014
789,202
929,155
1,168,404
1,388,656
1,413,200
1,595,096
2,170,988
2,387,094
3,193,103
3,563,789
3,437,355
3,788,137
Total
exports
33,984
35,732
36,987
43,756
55,037
79,754
88,852
110,904
119,501
141,004
188,894
257,432
269,346
Exports
as a
percent of
imports
I Qj \
\ /
5.4
4.5
4.0
3.7
4.0
5.6
5.6
5.1
5.0
4.4
5.3
13.4
7.1
V Other than rubber.
* No direct comparison can be made with previous years due to category description change as of 1 March 1977,
** Includes leather, vinyl and other materials.
*** Includes leather and other materials.
Source: Tanners' Council of America.
-------
Latin American countries appear to have good access to the U.S. market with
Mexico, Columbia, and Brazil regularly exporting certain types of leather
goods. Lebanon, Morocco, Yugoslavia and Hong Kong are developing countries
outside Latin America which regularly export certain types of leather goods
to the United States. Some other developing countries have also begun to
emerge as suppliers. For example, Israel, the Republic of Korea, and Taiwan
have recently become important exporters of leather products to the U.S.
Within the shoe market, Spain and Italy have been large exporters to the
U.S.
While much of the historical data reflect U.S. imports of finished leather
products, a recent trend is emerging of shipping crust leather to the U.S.
According to industry sources, much of this is coming from Argentina and it
has been offered at prices very near the U.S. price for untanned hides.
While it has been reported that some of this crust leather is of lower
quality, several U.S. tanners are considering the purchase of it for
retanning purposes.
2. Trade Restrictions
One of the major restrictions of the U.S. leather tanning industry is that,
although foreign sources have free access to U.S. raw hides and skins, U.S.
tanners have traditionally been denied equal access to foreign leather
markets. Since representatives of the U.S. leather industry feel current
and past trade legislation and duties have not been effective in
controlling U.S. imports of leather and leather products, they have not
favored any further cuts in U.S. duties on competitive imports. The
following sections of this report offer an overview of some of the tariffs
and trade legislation which has and/or could affect the industry. The
discussions of tariff structures and non-tariff barriers described below
were largely taken from the report, Leather and Leather Products, which was
published by the United Nations in 1971 and reflects tariff status after
the Kennedy Round of trade negotiations.
Tariff Structures. Tariffs tend to increase as the degree of processing or
the manufacturing content of an article increases. The leather industry is
a fairly good example of this as in most countries raw hides and skins can
be imported duty free, while finished leather carries a tariff of about 5
to 10 percent of the imported value of the leather, and leather footwear
and other finished leather articles carry tariffs between 10 and 25
percent.
The Kennedy Round negotiations for leather and leather products resulted in
only modest tariff reductions. As mentioned above, since hides and skins
were already free of duty in most developed market-economy countries, no
reductions were called for. Tariff rates for pre-tanned leather were not
reduced much, except in the U.S., and the concessions made by the EEC and
Japan were confined to goat, sheep, and exotic leathers. In the case of
finished leather, the U.S. effectively halved its rates, the United Kingdom
made somewhat smaller concessions, EEC made smaller concessions still,
while Japan made only a few concessions and those mainly for the more
exotic leathers.
V-17
-------
More significant reductions in tariffs were agreed on for footwear and
leather products. The EEC tariff on footwear was halved, from 16 percent
to 8 percent, while the United Kingdom tariffs, in general, were also
halved. In the U.S., somewhat smaller reductions were conceded, but Japan
made no concessions, maintaining its tariff at 27 to 30 percent, the
highest tariff to be found in the post-Kennedy Round rates for leather and
leather products.
Non-Tariff Barriers. Apart from tariffs, imports of leather and leather
products are also subject to other restrictions of various kinds in a few
developed market-economy countries. For example, Japan has the most
elaborate set of restrictions on imports of leather and leather goods, and
appears to be the only developed country with import restrictions on
leather itself, as distinct from goods manufactured from leather. Japan
also has restrictions on footwear, as have two other developed countries,
Ireland and Norway. Australia restricts imports of leather clothing.
In general, therefore, only a few countries operate non-tariff barriers
against leather and leather goods; indeed, in Western Europe and North
America such restrictions are negligible. In Japan, a fairly complex set
of restrictions reinforces the relatively high tariff rates noted in the
previous section, and the effects of these two barriers, operating
simultaneously, must reduce the level of imports of leather and leather
goods into Japan.
Effect of Current Legislation. Past trade legislation and trade duties
have generally not been effective in curtailing U.S. imports of leather and
leather products. As such, industry leaders have stepped up lobbying
efforts for more effective tariff rates and the initiation of trade
restrictions.
One such effort was initiated in August, 1977, when the Tanner's Council of
America filed a complaint with the Office of Special Representative for
Trade Negotiations (STR) under Section 301 of the Trade Act of 1974. The
complaint alleged that Japan had maintained quantitative restrictions and
excessive tariffs that adversely affected U.S. exports of leather to Japan.
The Tanner's Council claimed that such restrictions unfairly limited access
to Japanese leather markets. As a result of the Tanners' Council
complaint, early in 1979, the U.S. Government announced it had achieved an
"understanding" with Japan that would increase U.S. leather exports to that
nation. The "understanding" eased Japanese quota restrictions against U.S.
leather to the extent that up to $30 million in new sales may be
forthcoming compared to the $1.5 million worth of products U.S. tanners
sold to Japan in 1978. Ij
\] "Japan, U.S. in Accord on Leather," Daily News Record, March 13, 1979.
V-18
-------
The domestic shoe industry, after working for nearly fifteen years to gain
government recognition of its serious import problem, late in 1977 gained a
positive stimulus to domestic producers when the U.S. Government completed
negotiations of Orderly Marketing Agreements {OMA's) with the Republic of
China (Taiwan) and Korea. These OMA's were designed to restrain the
exports of nonrubber footwear to the U.S. market by those two countries by
allowing only specified quantities until 1981. In 1979, although imports
from Taiwan and Korea remained stable, uncontrolled countries' imports to
the U.S. increased dramatically, giving leather imports an increasing share
of the U.S. market. The nonrubber footwear imports reached 400 million
pairs in 1979, with Italy accounting for 80 percent of the 40.7 million
pair increase between January-August 1978 and 1979. Imports from the
Philippines jumped 112 percent in quantity, Thailand imports rose 99
percent and Singapore shipments were up 1,307 percent. Imports from some
South American countries also rose substantially, El Salvador, 618 percent
and Brazil, 32 percent.
Other efforts by the leather and leather products industries to reduce
imports have included those to obtain countervailing duties against
specific leather products from countries whose export manufacturers receive
government subsidies on export products. While the overall effectiveness
of countervailing duty actions may or may not be great, their award does
reassure the U.S. industries that their efforts are not in vain.
C. The Raw Hide Market
Cattlehides and sheep skins are the primary raw materials used in the
leather tanning industry and, for the most part, are a by-product of the
meat packing industry. As the value of a raw cattlehide traditionally
represents only 3 to 6 percent of the value of the live animal, the supply
of hides is highly inelastic, i.e., neither hide prices nor demand has
substantial influence on the total supply of hides. Hide prices and demand
will, however, affect the destination of the raw hides.
Historically, some U.S. hides have always been exported to foreign tanners.
Over the past decade, however, demand has increased significantly, and the
international trade of raw hides has become a predominant influence on raw
hide prices. For example, in 1976, for the first time, over half of the
U.S. produced cattlehides were exported to foreign tanneries and
substantially affected the domestic prices of hides. By 1981, 55 percent
of total U.S. commercial slaughter was being exported. Thus, the broad
international setting must be considered to understand the price of raw
hides as well as the price of leather and leather products.
1. United States Supply of Hides
The supply of U.S. cattlehide has followed the cattle cycle which normally
lasts 10 years with the expansion phase lasting 6-7 years and the
liquidation phase lasting 3-4 years. J_/ The last cycle began in 1967-68
II DPRA and Schnittker Associates, "United States Production, Consumption
Trade and Stocks of Tallow/Grease, Lard, and Animal Protein
Meals—Estimates and Projections". Completed for the USDA Foreign
Agricultural Service, Washington, D.C. 1980.
V-19
-------
with the cattle on farms expanding to 1975 following by four years of
liquidation. The current cycle began in 1980 with an increase in cattle
numbers on farms which is continuing through 1982. In 1955, 26 million
cattle were slaughtered commercially in the U.S., including 19 million
which were slaughtered as Federal Inspected Slaughter (F.I.S.) and an
additional 7 million which were slaughtered in other commercial
establishments (Table V-7). _!/ During the 60's the number grew rapidly as
the cattle feeding industry greatly increased the total U.S. capacity over
the previously grass-fattened production. By 1970, the number of
slaughtered cattle increased to 35.0 million, stabilized for the next few
years, and then increased to 42.6 and 41.9 million head in 1976 and 1977,
respectively, as the large buildup of cattle on feed was reduced. A
decline in slaughter began in 1978 with a 5.5 percent drop from 1977, to
39.5 million head and continued into 1979 with a slaughter of 33.7 million
head.
Total slaughter in 1980 and 1981 was 33.8 and 35.0 million head,
respectively. Slaughter numbers are expected to increase steadily to
1988-1989 when the present cattle cycle is expected to peak out at about
42-44 million head. 2J
A further indication that herd expansion has begun is the 1979 calf
slaughter which declined a substantial 32 percent to 2.8 million skins.
The supply of cattlehides for domestic tanning production further tightened
in 1979 because hide exports remained high and supply dropped sharply. Net
exports as a percentage of total slaughter jumped from 60 percent in 1978
to 67 percent in 1979 and then declined to 52 percent in 1981.
The expanding percentage of cattlehides exported has been a major concern
to domestic tanners and leather products manufacturers. Restrictions that
many cattle-producing countries place on access to their raw material
supplier in order to foster the growth of their own tanning and leather
products industry (and provide much needed jobs and a source of foreign
currency) have increased the worldwide demand, for freely-traded U.S.
cattlehide (see Part 4 of this chapter for a discussion of trade
restrictions in raw hide supply).
J7 Federal Inspected Slaughter means that the animal is slaughtered and
processed in a slaughterhouse and inspected and identified by federal
meat inspectors to allow the meat to be sold interstate.
2J DPRA, United States Production, Consumption Trade and Stocks of
TallowTGrease, Lard and Animal Protein Meals - Estimates anJ
Projections.Completed for the U.S. Department of Agriculture.
April 1980.
V-20
-------
Table V-7. Annual cattle slaughter in the United States, 1955-1979 (1,000 head)
ro
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Cows &
heifers
9,330
9,460
9,031
7,509
7,538
8,567
8,554
8,670
8,964
10,452
12,712
13,055
12,710
13,771
14,284
13,677
13,856
13,932
13,293
14,755
19,838
20,815
19,994
18,894
14,659
14,903
15,653
%
Total
48.9
46.9
46.4
42.6
43.2
44.2
42.8
42.6
41.4
41.6
47.8
47.8
45.8
46.5
46.8
44.4
44.1
43.2
43.6
44.3
53.8
53.4
51.6
51.1
46.5
47.1
47.7
Breakdown of federally inspected slaughter
% Bulls & %
Steers Total stags Total
9,299
10,311
10,018
9,840
9.681
10,557
11,164
11,447
12,496
14,395
13,488
13,846
14,676
15,361
15,754
16,608
17,003
17,737
16,591
17,824
16,071
17,270
17,891
17,308
16,258
16,060
16,437
48.8
51.1
51.5
55.8
55.4
54.4
55.9
56.3
57.7
57.3
50.7
50.7
52.8
51.9
51.6
53.9
54.1
55.0
54.0
53.5
43.5
44.3
46.2
46.9
51:6
50.8
50.1
427
415
404
293
241
272
250
222
202
286
413
418
384
460
499
508
560
581
611
740
995
907
832
746
587
678
728
2.3
2.0
2.1
1.6
1.4
1.4
1.3
1.1
0.9
1.1
1.5
1.5
1.4
1.6
1.6
1.7
1.8
1.8
2.0
2.2
2.7
2.3
2.2
2.0
1.9
2.1
2.2
Total
F.I.S.
19,056
20,186
19,453
17,642
17,460
19,396
19,968
20,339
21,662
25,133
26,613
27,319
27,780
29,592
30,537
30,793
31,419
32,250
30,521
33,319
36,904
38,992
38,717
36,948
31,504
31,641
32,818
Total
commercial
slaughter
25,723
26,862
26,232
23,555
22,931
25,224
25,635
26,083
27,231
30,818
32,347
33,725
33,869
35,026
35,237
35,025
35,585
35,774
33,687
36,811
40,900
42,644
41,856
39,552
33,678
33,806
34,954
Source: U.S. Department of Agriculture.
-------
Recent action in the international trade area is of interest at this point.
In September 1978, skyrocketing hide prices had substantially increased
tanners' requirements for working capital, and the tanning industry was
urging the U.S. Government to provide relief through negotiating access to
other countries' raw material. Leather products industries were urging
imposition of export controls on U.S. cattlehides. With the leadership of
the American Footwear Industries Association (APIA) and the Tanner's
Council of America (TCA), 20 trade and professional associations joined the
Hide Action Program (HAP) Task Force. The legislation HAP sought was an
amendment to the Export Administration Act and would have permitted the
President to impose export controls on cattlehides when the number exported
reached 56 percent of U.S. production or when other raw material producing
countries denied U.S. access to hides and skins. The legislation was
strongly opposed by the hide and skin, cattle, and meat packing interests
and in August and September 1979, both the Senate and the House of
Representatives defeated it by narrow margins.
In October 1979, the U.S. and Argentina reached an agreement that
eliminated the Argentine export embargo on cattlehides, replacing it with
an export tax to be gradually phased out. This was an attempt to negotiate
for access to another country's raw material supply. However, Argentina
has not phased out the export tax.
Total cattlehide movement to U.S. tanners has been decreasing over the past
ten years as U.S. tanners and the U.S. shoe industry have met stiff
international competition and restrictive trade legislation. Total
wettings of domestic tanneries decreased from 23.6 million hides or 66.8
percent for the U.S. total cattlehide production in 1966, to 17.6 million
hides or 46.5 percent in 1974. Total wetting increased in 1975 and 1976 to
19.1 million and 20.4 million, respectively. These levels represented 46
and 47 percent of the total U.S. cattlehide production in those two years
(Table V-8). Between 1977 and 1981, wettings fluctuated between 14.8 and
18.6 million hides.
Supplies of other types of leather making raw materials have not shown the
same trends as have cattlehides. Prior to 1974 calfskin supplies had been
shrinking drastically in the U.S. Calfskin production in 1976 was
estimated at 4.5 million skins, a 40 percent rise above 1979 production of
3.2 million skins. As farmers and ranchers began to hold back calves and
herd rebuilding began, calfskin production declined in 1978, and dropped to
2.8 million skins in 1979, of which 93 percent or 2.6 million were
exported.
Sheep and lamb skins, the only other major source of hides and skins in the
U.S., have been declining steadily in the U.S. over the past two decades.
Although the numbers are responsive to price developments in meat and wool,
the long-term prospect for domestic sheepskins is declining.
Production amounted to an estimated 11.7 million sheepskins in 1975, and
subsequently has declined to 4.8 million by 1979. Of that amount, 2.4
million or 50 percent were exported.
V-22
-------
Table V-8. Movement into sight of cattlehides, expressed in number (1,000 hides)
and as a percent of total estimated slaughter I/
GO
Year
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Estimated
total
slaughter
35,260
35,381
36,076
36,118
35,740
36,280
36,480
34,700
37,700
41,800
43,582
42,770
40,404
34,400
34,520
35,640
Exports and
Re-Exports
number
14,205
11,866
12,853
14,790
15,229
15,969
17,584
16,871
18,444
21,287
25,280
24,501
24,805
23,736
19,520
19,729
percent
40.3
33.5
35.6
40.9
42.6
44.0
48.2
48.6
48.9
50.9
58.0
57.3
61.4
69.0
56.5
55.4
Imports
number
221
232
494
277
385
275
292
694
520
958
962
932
704
673
880
1 ,028
percent
0.6
0.6
1.4
0.7
1.1
0.7
0.8
2.0
1.4
2.3
2.2
2.2
1.7
2.0
2.5
2.9
Net Export
number
13,984
11,634
12,359
14,513
14,844
15,694
17,292
16,177
17,924
20,329
24,318
23,569
24,101
23,073
18,640
18,701
percent
39.6
32.9
34.2
40.2
41.5
43.2
47.4
46.6
47.5
48.6
55.8
55.1
59.7
67.0
54.0
52.5
Total Movement
to Tanners
number
23,572
23,607
23,617
21,096
20,199
20,189
19,218
17,733
17,536
19,067
20,397
18,616
17,329
14,999
14,816
15,461
percent
66.8
66.7
65.5
58.4
56.5
55.6
52.7
51.1
46.5
45.6
46.8
43.5
42.9
43.6
42.9
43.4
— ~ .' '" ' ™'~ i —
7/it should be noted net exports plus total movements to Tanners do not necessarily equal total estimated
~~ slaughter. This is accounted for by the fact that not all slaughtered animals produce useable hides as
well as the fact that some hides may move to tanners before they are exported.
Source: Tanner Council of America "Membership Bulletin Leather Industry Statistics", 1982.
-------
2. World Supply of Hides and Skins
World cattle numbers were increasing prior to 1976, but drought in many
countries and unfavorable prices in key countries have since caused
cattleherd reductions. World cattle numbers peaked in 1976 at 963 million.
The total number in 1980 was expected to be 949 million (Table V-9).
Of countries whose data are reported, the U.S.S.R. is the largest cattle
producer, accounting for about 12.1 percent of the world production. The
U.S. is second by a small margin with about 11.7 percent. India has more
cattle, but as they are not slaughtered, no major hide production occurs.
A more meaningful number depicting supply is the total hides produced by
country as shown in Table V-10. As estimated by the Foreign Agriculture
Service, total hide production in the 1966-1970 period averaged 176 million
hides per year. This decreased slightly over the next few years as
slaughter rates declined, but increased sharply in the 1974-1977 period
reaching 203 million hides in 1977. A decline over the next two years
brought production to an estimated 189 million in 1979.
According to the FAS data, the U.S.S.R. is clearly the leader in hide
production with a reported 37.9 million estimated take offs in 1979;
however, since this estimate includes death losses, it is probably
overstated by 6-8 million hides (hides from animals which die in the field
are often not useable for tanning). When such an adjustment is made, the
FAS estimate of hide production is in line with the estimate prepared by
the Tanners' Council (Table V-7). The U.S. is about the same with 37.0
million hides. Argentina and Brazil produced an estimated 15.3 and 10.6
million hides in 1979. It is interesting to note that, although Brazil has
an estimated 90 million head of cattle compared to Argentina's 60 million,
Argentina produces a higher number of hides because of the low quality and
low slaughter rate of many Brazilian herds.
Australian hide production has fluctuated widely from a low of 5.8 million
during the 1966-70 period to a high of 12.7 million in 1977, reflecting
Australia's volatile cattle market which depends on the fluctuating
international beef market.
3. The Demand for Raw Hides
Earlier sections of this study examined the demand placed on the U.S.
tanners for leather and leather products, a demand which results in that
for raw hides. Since U.S. tanners must compete directly with foreign
buyers for the livestock slaughter industry's by-product hides, this
section will consider that international demand.
The percentage of U.S. raw hides exported has increased steadily over the
past two decades even though the actual number of hides exported has not
changed significantly. The total international supply has been restricted
by trade practices and, accordingly, the U.S. leather tanning industry has
been gradually losing its market share to foreign shoe and leather-goods
V-24
-------
Table V-9
CATTLE AND 8UFFALO! NUMBERS IN SFECIFIJD COUNTRIES - AVCTACt 1571-1975, AKKUAI. 197&-«0
(IH THOUSAND HEADS)
DC010N iHO COUNTRY 1
NORTH ANCftIC*l
TOTAL NORTH AMERICA
SOUTH AMERICA!
TOTAL SOUTH AMERICA
eu*orci
HE9TCRNI
ECt
«CR« ANT, FCOCIUL «e>», or..
TOTAL VCSTCKN CUAO»C»...
I ASTERN 1
TOTAL CASTE»M CUftOPC . • . .
ASIA!
RCPVJOLXC OF CHINA (TAIWAN)
TOTAL SELECTED COUNTRIES
AVCHAOC 1
1971/79 1
1*000
1*074
1*441
27*033
1*305
122*799
174*207
47,000
3*199
21*944
10*071
0.923
192*924
2*901
22*494
14,070
9,999
4*999
13*790
79*391
2.937
1*737
1*101
943
1*194 '
4* 390
1,402
90,993
,492
5,1*4
1,927
3,473
5,4*1
13.003
12*. 79*
104,211
11.517
11.527
254
230.990
0.710
207
1.404
1(473
5,401
14(0*1
249(334
20(04*
4(130
11(04*
410.444
147*
1,041
1.450
1,110
2, 1*0
1,715
21(400
2,400
1,341
127,400
1*3,013
41,***
92,000
3,309
23,025
2,793
4,2*0
10,390
9,5**
207, *•*
3(011
3,055
23,4*1
14,4*3
4,214
4,404
13,415
77.444
2,500
1,7*2
941
1(0*0
4,401
2(001
43.102
1.725
4(533
5,53*
1.40*
12,7*2
4, 12*
5,751
3*. 13*
131,4*1
111.03*
12.77*
12.77*
244
240.500
7.250
123
1.723
1,442
4.4*2
14.002
33,434
4,777
43,211
442,7*4
1
1 1*77
2,000
1*1*2
2*270
1*770
29*300
2,4t*|
1*374
122*010
101*002
91,0*0
3,407
24(133
2,073
4,300
9(043
4(433
207(5*4
3(011
3(0*4
23(33*
14,4*4
4(210
0(013
4,32*
13(4*7
77,13*
2.502
1(4*1
1(11*
44*
1(100
4(3Ji
1.174
2,003
42(07*
1(7*0
4(09*
5.471
1.0*7
12.000
0(391
5(4*1
37(7**
130(473
110.3**
13.044
13.040
2««
241.44*
7.400
133
1.073
1,554
4,420
15,15*
11,533
4,472
41,005
490,14*
1 1*73
2.050
l»Z3t
1*034)
29*700
2*774
1*399
110*379
172*997
2(707
204(027
3.039
21(340
14(743
4(244
1(30*
4,473
11(523
77.21*
2.547
1.4*7
1(033
1(119
1(042
2(02*
43(053
1(739
4(750
5.349
1.9*9
12.399
4.30*
3.542
It. 19*
111.231
III. 440
13.133
13.135
250
242.4*0
7.500
124
4,00*
1.410
4.779
15.532
2*( 379
4.129
....... ...........
950(990
1
1 197*
2.009
2.150
1(294
2.245
2(04*
1(454
1*7.13*
00(174
90,000
1.330
20(137
2(531
4(100
9(413
10(1*0
200(2**
3(0*3
3(052
23(5*7
15(007
4(132
0(724
4.797
13.507
77.011
2,5*4
1,4**
9*5
1,090
4,090
1,911
2(030
43,05*
1,7*2
4,0*7
5.571
1,4**
12,404
0,511
3.441
1*(34«
132.234
114.01*
13,114
13.11*
2*0
242.500
7,000
200
4.120
1.707
4,453
15,944
27.107
0,400
15(507
943(92*
1 19*4 i'
2(153
1,35*
2,700
2(2*5
30(100
2,525
1,537
110(9*1
160(140
59,545
93,000
1,400
27(151
2(231
4(000
10(4(0
10(3*3
210(370
3(090
3(030
23(425
14(900
4(210
13(509
77(0*2
2,5*0
1,444
930
1(002
1(110
4(423
1(9(3
2(03*
43(73*
1(703
4(400
5(000
12,340
4,400
3(347
3*(5*3
132,314
115,000
12,4*1
12,441
275
241,000
7,200
231
4.250
2,003
4,444
14,200
24,1*4
0,300
34,444
449,079
Herri: VARIOUS OAIIS or cniHzx*Tior AU USED n n» counnucs UIOKTINC ANIMAL mraas. THIS TAILE CLAMIFIES THIS DATA AS CLOSE TO JANUAM i AS POSSIBLE
SOmCEi FKErAUD M ESTIMATED ON THE IASIS OF OFFICIAL STATISTICS OF FOREICX CCTOUMEXTS. OTHOt FOREIGN SOURCE MATERIALS. UFom OF U.S. AGRICULTURAL
ATTACHES AND FOREIGN SERVICE OFT ICTUS, RESULTS OF OFFICE RESEARCH, AND DELATED INFORMATION.
FEUDART 1900
OAIRT. LIVESTOCK 4 POULTRT DIVISION
dlty Prat»«, FAS, JSDA
V-25
-------
Table V-10
CATTUl SUOCHTZX III SFlCZflZD COOmtllS - AVUACZ M71-73, urmiU. 1»7«-«0
(ID THOUSAHD HZADS)
"CO ION 1NO COUNTRT 1
1
NORTH 4MCRIC1I
TOTAL NORTH AMtHICA.....
SOUTH »»C«ICU
AVCRAM
1*71/79
237
209
14*
393
272
4(39*
300
203
32(820
43(21*
10(311
10(440
031
2(**7
32*
742
1(31*
1
1 1*T»
9(420
307
234
1*8
3*4
30*
9(400
370
48(728
41(9*1
13(8**
11(3*0
*04
3(09*
381
44*
2(090
1(449
1
1 1*77
1(321
172
221
417
101
1(731
3*1
24*
48(071
41(214
14(748
12(9**
7*9
2(037
47*
4(0
1(73*
1(427
1
1 1»7*
4.724
4*9
229
221
473
390
4(200
491
44(272
97(03*
14(44*
11(200
712
1(100
110
700
1,4*9
Id**
: ,,7*i/
4(18*
4*7
219
22*
81*
38*
4,1(0
91)
37(000
40,440
19(380
10,480
780
3,288
193
710
1(319
1,4*0
: I.,.*/
1(0(0
221
29*
99?
170
4(200
94t
39(90*
44,144
14(900
10(400
000
3(440
14*
700
1(100
1,492
TOT1L SOUTH iHCDICl..... 20(111 33(**« 3»(2$7 35(022 34,1»«
33(9*1
CUAOPCl
KCSTIKNI
EC I
aCRMlNriFCOCMM. DIP. or....
1(1*0
»»*
7,1(4
1(234
1( 137
4(072
1(*S*
4(102
1(0*3
Idl*
0(0*2
S.414
1(2M
4,432
2(012
4,4*4
(Olt
(117
(8*3
(237
(487
(70S
(027
• 11*
(024
(«93
.»«*
(31*
(»4»
(4*»
(«49
!(*«•
,001
,100
,090
i*4«
(430
>*so
(00*
(7*0
1(099
1(100
0(317
f(4«0
1(430
4(**0
1(«00
3(47*
27(31*
2»t*M
27,79*
17,022
TOT«L VC9TERN CUROM....
ClfTtHNl
TOTAL C4.STCRN CUROFC....
4SI4I
>MILIP*1NCS...
OCttMM
TOTAL itteeteo COUNTBU*
24(099
779
739
938
342
418
l(7TT
4*0
78*
13(499
1(911
400
4,441
2(041
8(412
41(447
24(407
2(47*
74*
31
1(473
44*
((
1(14*
110
(01
2(*0*
7(93*
7(40*
2,079
10(9*1
142(047
c*(l«*
7*1
48*
41*
32*
3*9
1(899
708
832
14«32«
1(9*3
497
9(2*1
2(19*
*(71*
44(049
!•(!*!
2(9*1
4*3
4*
1(711
029
104
1(023
404
730
3(317
1(171
11(434
3(*4*
19(3*2
204(1*9
737
(32
13*
34*
34*
1,4(2
4*3
(2*
13(344
1(49*
440
4(37*
2(94*
0(77*
42(120
14,433
2(403
01
1(723
1(0*9
121
1(10*
472
79*
1(117
*(911
12(7*0
1(370
14(270
201(220
791
417
9*4
342
42*
1(778
4*7
029
32(878
_.
4*9
4(902
2(904
7(494
40(334
17,442
2(*48
490
79
1(737
1(100
149
1(243
4*1
2(7*7
((478
12(344
1,9*4
19(04*
1*4(**2
744
40*
479
39*
418
1(74*
47»
(70
33,40*
1,4*0
499
4,423
2(9*0
0,23*
42,033
37,000
3,200
4*0
77
1(790
118
1(240
123
040
2(470
7(238
0(099
3,202
13(197
10»(*24
(00
40*
47*
3**
41*
1.71*
478
0*8
33(799
1(400
4*4
4(0*7
2(9(0
0(193
42(008
la, 400
3(110
4*0
(1
1(780
too
1(2**
9*1
»*•
2(900
7,232
((900
2(4*0
11(488
)»5,}4,7
il rMLiMWAM. it roucasT.
sounci: FUFAUD oi csTTtuTtD on Tn lASis or omcuL STATISTICS or FouiQi aniumixii. omx rouioi sonci MARtuu, UTOKTS or 0.5.
ACHICW.TVXA1. ATTACHZS AND FOUICM SZIVICt OrTICCU, USHLTS OF OrTICZ USCAUCH, AMD UlATtD WTOKHATIOII.
FIIIUART 19(0
DAIM. UTISTOOC 4 FOULTlt DIVISION
CoBM4tC7 Freiria*. 7AS, DSDA
V-26
-------
manufacturers. In 1966, 40 percent of the cattlehides produced in the U.S.
were exported and by 1979, net exports had increased to 67 percent when
total hide production in the U.S. declined sharply. Exports as a percent
of total production declined to 52 percent in 1981. Imports of hides
increased to slightly over 1.0 million hides from foreign sources
(primarily Canada) in 1981.
The rate at which the United States exports raw hides has increased is
shown in Table Y-ll. In 1980, nearly one-third, 7.4 million, of the U.S.
hides were exported to Japan, 2.7 million to Korea, and nearly 2.0 million
to Mexico. It is significant to note the rapid increase in exports to
Korea as they jumped from 411 thousand hides in 1972 to the 3.7 million
reported for 1978. Other countries with rapid increases in U.S. hide
purchases are Italy and Taiwan. The majority of the remainder of the
increase in international demand for U.S hides is reflected in the hides
shipped to other countries which doubled from 1972 to 1975, with an
estimated 1.2 million hides exported in 1975, but then declined in recent
years.
Argentina has traditionally been a major exporter of hides with an annual
average of 8 to 8.5 million hides exported from 1966 to 1969. Its exports,
however, declined sightly in 1970, and then sharply in 1972, to amount to
only 1.3 million in 1972 as Argentina suffered production problems and
attempted to completely internalize its hide industry and, eventually,
export only finished leather products. In 1979, an agreement was reached
between the U.S. and Argentina for elimination of Argentina's cattlehide
export embargo which was replaced by a gradually fading export tax. Brazil
also internalized its hide tanning industry and banned exports of raw hides
to further reduce world supply by two million hides. Recently, Brazil has
become an importer of raw hides and is now competing for raw hides on an
international basis.
In summary, the industry is basically in a demand-pull situation for raw
hides. Foreign demand for raw hides now takes approximately 55 percent of
total U.S. produced cattlehides. Only the U.S., Canada and Australia
remain as major raw hide exporters. Nearly all other historical exporters,
such as India and Brazil, have internalized their leather tanning
industries and no longer allow the export of raw hides. Argentina is the
exception to this trend. Recently the U.S. has negotiated an agreement
with Argentina that has eliminated the export embargo on cattlehides,
replacing it with an export tax to be gradually phased out (Section C.I).
It is too early at this time to assess the actual effect of this agreement
on the World's exportable hide supply.
4. Trade Restrictions, in Raw Hide Supply
The systematic restriction of hides and skins exports appears to be the
trend in developing countries whose basic policies are to restrict exports
of raw materials (hides and skins), and simultaneously encourage exports
and restrict imports of manufacturered goods (leather and leather
products). This is done by levying taxes on exports of raw hides and
skins, imposing high tariffs and quotas on imports, and granting incentives
for exports of manufactured goods.
V-27
-------
Table V-ll. Exports of cattlehides from the U.S. to countries of destination, 1972-1981
Country of Destination
Unit
1972
1973
1974
1975
1976
1977
1978
1979
1980
Source: USDA, Foreign Agricuilture Service, Foreign Agricultural Circular Livestock and Meat.
1981
United States:
Japan 1,000 pcs.
Mexico "
Korea, Republic of "
Romania "
Spain "
Canada "
Czechoslovakia "
Poland "
China, Republic of (Taiwan) "
Italy
USSR
France "
Germany, West "
Hong Kong "
Hungary "
,_ Netherlands "
i Yugoslavia "
£ Israel
Turkey "
United Kingdom "
Chile
Other Countries "
TOTAL
7,769
1,806
411
1,200
854
1,121
857
568
226
263
518
771
729
68
228
449
459
132
42
245
261
673
19,650
7,596
2,036
908
1,006
620
905
821
766
332
605
48
591
656
98
201
160
273
140
66
199
273
452
18,752
7,199
2,534
1,535
1,781
643
907
676
666
486
434
450
339
641
161
532
159
226
134
79
50
134
829
20,595
7,760
2,588
2,543
1,226
1,009
958
877
866
864
773
660
510
440
381
262
239
160
152
102
61
24
1,217
23,672
9,356
1,708
3,270
1,651
957
1,057
678
389
817
1,561
143
816
518
253
270
326
263
63
12
137
8
1,017
25,270
8,419
1,944
3,538
1,472
897
842
680
433
830
1,030
56
751
435
196
227
417
478
48
9
190
87
716
24,160
8,789
1,933
3,663
1,942
1,008
1,028
586
349
989
1,269
298
543
379
110
180
211
431
33
__
50
__
755
24,545
7,396
2,428
2,528
1,317
892
1,244
686
513
955
2,248
73
699
454
117
144
324
769
55
__
86
813
23,741
7,476
1,972
2,653
1,046
112
1,046
318
522
1,285
690
3
238
206
215
94
164
440
22
48
7
955
19,512
7,512
2,485
3,579
680
394
1,212
334
203
1,312
486
137
319
134
112
94
230
26
32
422
19,703
-------
When raw hides and skins are converted into leather, their value increases
more than two and a half times. Benefits, particularly for developing
countries, are derived by restricting exports of raw hides and skins, by
developing domestic tanneries and by increasing their export of the
preferred semi-tanned leather. These advantages result from (1) the
developing countries' relative inability to rapidly adapt to changing
fashion markets and to develop the technological sophistication necessary
to high quality finished product development and (2) the leather processing
industry's inability in developed countries to attract and retain the labor
supply necessary to the semi-skilled labor-intensive character of the
primary leather processing production stages.
In a review of some of its more recent tariff legislation, such as the
Kennedy Round, the U.S. Government has indicated that little change has
been made in existing import-export patterns. An overview of the estimated
effects of the Kennedy Round on tariff barriers dealing with raw hides and
skins follows.
In 1968, one-third of the approximately $452.6 million raw hide and skin
imports was supplied by developing countries to the four major import
markets: the EEC, the United States, Japan, and the United Kingdom. Latin
American countries, i.e., Argentina, Brazil, and Uruguay, were the
suppliers for the main developing countries. Prior to the Kennedy Round,
entrance into major market areas was duty-free, with the exception of the
United Kingdom and the United States. The Kennedy Round negotiations
abolished the tariffs in these market areas and resulted in duty-free
access to all four major markets.
Almost one-half of the sheep and lambskin imports in 1968 were supplied by
developing countries. The biggest importers were the EEC, the United
Kingdom, and the United States, the latter of which was also an important
supplier. The Kennedy Round improved access to the four major markets and
"effective protection" of processing was reduced. Japan imposed relatively
high duties and quantitative restrictions on some items. Also in 1968,
eighty-seven percent of all goat and kid skins was supplied by developing
countries. The major importers were the EEC, United Kingdom United
States, and Japan. The Kennedy Round resulted in improved market access
and reduced the "effective protection" of major importers. Nominal duties
still apply to some varieties of goat and kid leather. The resultant
effect of these policies is that now only the United States, Canada,
Australia and New Zealand remain as open markets for the purchase of raw
goat and kid skins.
5. Quantitative Analysis of Hide Prices
An examination of the hide prices over the period of 1972 to 1979 shows
that hide prices have fluctuated widely from a low of 13.6 cents per pound
(heavy native steer hides average quarterly prices) in the 1st quarter of
1975, to a high of 88.6 cents per pound during the second quarter of 1979.
Since that time, they have dropped to a low of 32 cents in May of 1980.
V-29
-------
The supply of hides is predetermined by the number of cattle slaughtered.
It is generally held that the price of hides in no way determines the
number of cattle slaughtered, but that hide availability is determined by
factors affecting the cattle cycle i.e., livestock prices, grain prices
reproduction factors, etc. As a result, the supply of hides is inelastic
and changes in supply and demand result in wide swings in hide prices.
Economic theory implies that price of hides is dependent on the supply
of hides which is predetermined by other conditions, the price of competing
products and product demand. Exports of U.S. hides also play an important
role as foreign countries have been purchasing an increasing percentage of
the U.S. hides produced (see Section C-l of this chapter). The price paid
by foreign countries is influenced not only by demand conditions for
leather, but also by the respective dollar exchange rates. As the value of
the dollar declines (as it did in 1979) relative to other currencies,
buyers can afford to pay a higher U.S. dollar price. Fear of the dollar
decline can also cause foreign buyers to shift out of dollars into
commodities (hides) to preserve the value of their holdings.
A major difficulty in an analysis of hide prices results from the high
correlation among the independent variables (explanatory variables).
Because of this interdependence - technically called multicollinearity - it
is difficult to obtain a stable relationship. The best relationship, which
identified 71 percent of the variability in hide prices over 1972 through
1979 period using quarterly data, is shown below:
. . 29.6 - .003! °-ly * .0022 Exp. - 28.6 * .039 . .5.28D
where: • HP = Heavy Nature Steer Hide Prices ($ per Ib)
• Dom. Supply = Domestic Supply of Hides (1,000 hides), i.e.
slaughter
• Exp. = Hide Exports (1,000 hides)
• PVC = Product Price Index for Polyvinylchloride, 1967 = 100
• Disp. Pers. Income = Disposable Personal Income, 1972
dollars
t
WPI = Wholesale Price Index, all commodities, 1967 = 100
• D = Dummy Variable for 1974 - 4th quarter through 1975 -
1st quarter
All variables were statistically significant, with the possible exception
of hide exports which is marginally significant. The calculated
Durbin-Watson statistic (a test for serial correlation) is indeterminant.
V-30
-------
Because of the significantly lower price for hides realized during the Arab
oil embargo and subsequent disruptions to world trade patterns, a dummy
variable was included to account for price disruptions during the last
quarter of 1974 and first quarter of 1975. This improved the statistical
fit slightly over a similar equation without the dummy variable.
One problem not overcome is the role of the polyvinylchloride price (PVC)
(a leather substitute). According to economic theory, PVC price should be
directly correlated with hide price. That is, as PVC prices increase, hide
prices should move in the same direction. The variable used for PVC price
is a general indicator of all PVC prices divided by the wholesale price
index, and in this case has an inverse relationship with hide prices.
Basically, PVC price is correlated with the petroleum price and use as a
leather substitute would constitute only a small portion of its total use.
When excluded from the equation, the IT drops from .69 to .49 with other
variables maintaining approximately the same coefficients.
As a result of this analysis, we can conclude that a one percent increase
(decrease) in the supply of hides will result in a decrease (increase) of
1.2 - 2.0 percent in the price of hides. The above equation results in a
best estimate of price elasticity of 1.4. The level of exports also
affects the real domestic price. From the above equation, the real price
increase (decrease) resulting from an increase of one percent in hide
exports is estimated at .2 percent.
Domestic hide prices are also influenced indirectly by the level of real
disposable income. As incomes increase (decrease) consumers demand more
(or less) leather goods as final end products. This change in final demand
is reflected on hide prices as a derived demand. The above regression
equation demonstrates that the price of hides is highly income elastic in
that a one percent increase (decrease) in real income will increase
(decrease) the price of hides by 1.67 percent.
Other variables which were used in the analysis, but were statistically
excluded primarily because of the high level of correlation with other
independent variables included: the exchange rate of U.S. dollars agains
leading foreign currencies, the index of leading indicators, the index of
coincident indicators and the lagged exchange rate.
V-31
-------
VI. REPRESENTATIVE MODEL TANNERIES
The leather tanning industry is comprised of 158 wet process tanneries
which utilize variations of the basic tanning process to produce
differentiated types of leather. As this chapter is concerned with the
development of economic models representative of tanneries which could be
affected by the imposition of effluent control guidelines, an attempt will
be made to describe those models which, together, could typify most tannery
operations in the United States. The use of models is necessary due to the
large number of plants in the industry and the lack of available financial
data for individual tanneries. These models have been developed from data
obtained from the EPA surveys of industry members as well as from published
sources. It should be noted that, for the existing direct dischargers,
actual tannery data were obtained and analyzed for estimating plant
closures. However, those direct discharger data have been aggregated into
model plants for estimating other economic effects.
The model plants for both direct and indirect dischargers were based on
industry conditions during the 1977 time period. The models were then
updated to reflect sales and production levels of late 1979, with fourth
quarter 1979 dollars and the industry's long term profit position. I/ This
was accomplished using both primary and secondary data sources. The model
plants, as described in this chapter, are considered to be the "base case";
that is, reflecting industry conditions before compliance with the
regulations.
A. Types and Sizes of Model Plants
Tanneries vary by operational and financial characteristics; thus, the
models will not accurately depict the characteristics of each existing
tannery. However, since the various existing tanneries can be grouped into
general categories which reflect their processes and discharge methods,
fairly accurate representative models can be developed. While the
representative models may not correspond exactly to actual tanneries, they
do reflect operational and financial characteristics similar to those of
industry tanneries.
_!/ Dollar sales were adjusted utilizing the Implicit Price Deflators,
GiNP, 1972=100. Profit rates have been revised relative to the 1979
report.
VI-1
-------
The subcategories of tanneries utilized
below:
Subcategory
1
in this analysis are described
Name/Description
Chrome Tan/Pulp—plants which process raw or cured
cattle or cattle-like hides into finished leather
by chemically dissolving the hair (hair pulp);
tanning with chrome; and retanning and wet
finishing.
Chrome Tan/Save—plants which process raw or cured
cattle or cattle-like hides into finished leather
by chemically loosening and mechanically removing
the hair; tanning with chrome; and retanning and
wet finishing.
Nonchrome Tan—plants which process cured or raw
cattle (or similar) hides into finished leather by
chemically loosening and mechanically removing the
hair, tanning primarily with vegetable tanning,
alum, syntans, oils, or other chemicals, and
retanning and wet finishing.
Retan/Sides—plants which process previously
unhaired or pickled sheepskins and tanned hides or
splits into finished leather by retanning and wet
finishing, including coloring, fatliquoring, and
mechanical conditioning.
No Beamhouse—plants which process previously
unhaired or pickled sheepskins or cattlehides into
finished leather by tanning with trivalent
chromium or other chemicals, and retanning and wet
finishing.
Through Blue—plants which process cured or raw
cattle (or similar) hides into the "blue" stage
only, by chemically dissolving the hair and
tanning using trivalent chromium, with no
retanning or wet finishing.
Shearling—plants which process cured or raw sheep
(or similar) skins into finished leather by
retaining the hair on the skin, tanning with
trivalent chromium or other chemicals, and
retanning and wet finishing.
Pigskin—plants which process cured or raw pig
skins into finished leather by chrome tanning.
VI-2
-------
Retain/Splits—plants which process previously
unhaired or pickled sheepskins and tanned hide
into finished leather by retanning and wet
finishing, including coloring, fatliquoring, and
mechanical conditioning.
Note for the existing direct dischargers, a model representing four
subcategories was developed. This model is described below:
4, 6, 7 & 8 Other—plants with processes similar to
those described in either Subcategory 4, 6, 7 or 8
above.
For each of the above subcategories, at least one representative model was
developed. Where there were several corresponding tanneries of varying
sizes associated with the specific subcategory, various representative
sizes of models for that subcategory were developed. The models were also
differentiated according to the corresponding tanneries' methods of
effluent discharge. The most common method of discharge for the industry
is an indirect discharge of effluents to publicly owned treatment works
(POTW's). Thus, indirect discharging models were developed for all
subcategories. Direct discharging leather tanneries—those that discharge
directly to a river, stream, lake, etc.--are not as numerous and,
accordingly, can be represented by models from three of the subcategories.
These direct discharging subcategories include Chrome Tan (1 & 2),
Nonchrome Tan (3), and another category called "Other" (4, 6, 7 & 8). This
latter category represents a combination of subcategories. Finally, model
plants were also developed for each subcategory which were believed to be
representative of new, yet-to-be constructed tanneries. These models,
referred to as "new source models," are similar in many characteristics to
the indirect discharging models although they can be either direct or
indirect dischargers.
The various models utilized in this report to represent the leather tanning
industry and their respective sizes are depicted in Table VI-1. These
models were based on various assumptions; these are discussed in the
following sections. The number of existing tanneries applicable to each of
the models is depicted in Table VII-1.
B. Operational Characteristics
The operational characteristics for the direct discharging models and the
indirect discharging and new source models are summarized in Tables VI-2
and VI-3, respectively. These characteristics were determined from the
industry survey as well as discussions with industry members. As shown in
the tables, most Chrome Tan (1 & 2), Nonchrome Tan (3), and Retan (4 and 9)
models operate approximately 250 days per year. The Through Blue (6) model
operates almost everyday of the year, and the No Beamhouse (5) and
Shearling (7) models operate about 240 days each year. The Pigskin (8)
model operates 300 days a year.
VI-3
-------
Table VI-1. The leather tanning industry, representative model plants' capacities
Model
INDIRECT DISCHARGERS AND
Chrome Tan/Pulp
Chrome Tan/Save
Nonchrome Tan
Retan/Sides
No Beamhouse
Through Blue
Shearling
Pigskin
Retan/Splits
DIRECT DISCHARGERS
Chrome Tan
Nonchrome Tan
Other
Subcategory
NEW SOURCE TANNERS
1
2
3
4
5
6
7
8
9
1 & 2
3
4,6,7,8
Units X-Small
Hides 175
Hides
Hides
Sides
Skins
Hides
Shearlings
Skins
Splits
Hides
Hides
Skins & Pelts
Small
500
500
150
1,350
900
600
900
—
2,700
800
210
- —
Capacity
Medium
ts per day)-
1,000
—
750
—
2,700
—
__
3,625
--
715
2,500
Large
2,000
2,000
2,200
6,600
8,600
4,200
2,500
__
7,400
1,500
—
--
X-Large
5,400
—
__
__
_ _
__
__
_ _
--
__
—
Source: DPRA estimates based on survey and published data.
-------
Table VI-2. The leather tanning industry, representative direct discharging model plants' operational charcteristics
Dai]y capacity
Raw materials
Model/size
Chrome Tan
Small
Large
Nonchrome Tan
Small
Medium
Other
Medium
Sub- Hides/
category skins
1 & 2
800
1,500
3
210
715
4,6.7,8
2,500
1000
pounds
44.1
82.5
U.6
39.2
22.9
KKG
20.0
37.4
5.2
16.3
10.4
Days
per
year
250
250
250
250
250
Annual Capacity
Raw materials
Hides/
skins
203,670
384,707
52.212
176.566
588,235
1000
pounds
11,217
17,549
2,872
9,710
5,392
KKG
5,087
7,959
1,302
4,402
2,445
Annual production
Utilization
rate (%)
85
90
85
90
85
Hides/
skins
173,120
346,237
44,380
158,910
500,000
Square
feet
(1,000)
7,666.3
15,322.5
3,775.0
6,989.6
4,166.7
Number
of
employees
90
180
40
140
65
Source: DPRA estimates based on survey and published information.
-------
Table VI-3. The leather tanning industry, representative existing indirect discharging and new source model plants' operational characteristics
Daily capacity
Sub- Hides/
Model/size category skins
Chronic Tan/Pulp
X-Sniall
Small
Medium *
Large *
X -Large *
Chrome Tan/Save
Small
Large *
Nonchrome Tan
Small
Medium *
Large *
Retan/Sides
Small
Large *
No Beamhouse
Small
Medium *
Large *
Through Blue
Small *
Large *
Shearling
Small
Large *
Pigskin
Medium *
Retan/Splits
Small
Large *
1 Hides
175
500
1,000
2,000
5,400
2 Hides
500
2.000
3 Hides
150
750
2,200
4 Sides
1,350
6,600
5 Skins
900
2,700
8,600
6 Hides
600
4,200
7 Shearlings
900
2,500
8 Skins
3,625
9 Splits
2,700
7,400
Raw materials
1000 pounds
9.5
27.0
54.0
108.0
291.6
25.0
100.0
9.0
45.0
132.0
27.7
135.3
1.8
5.4
17.2
34.5
241.5
10.8
30.0
68.9
27.0
74.0
KKG
4.3
12.2
24.5
49.0
132.2
11.3
45.4
4.1
20.4
59.9
12.6
61.4
0.8
2.4
7.8
15.6
109.5
4.9
13.6
31.2
12.2
33.6
._! l.'i J
Days
per
year
250
250
250
250
250
250
250
250
250
250
250
250
250
250
250
350
350
240
240
300
250
250
Annual capacity
Hides/
skins
43,750
125,000
250,000
500,000
1,350,000
125,000
500,000
37,500
187,500
550,000
337,500
1,650,000
225,000
675,000
2,150,000
210,000
1,470,000
216,000
600,000
1,087,500
675,000
1,850,000
«._, . — rr
Raw materials
1000 pounds KKG
2,363
6,750
13,500
27 ,000
72,900
6,250
25 ,000
2,250
11,250
33,000
6,919
33,825
450
1,350
4,300
12,075
84,525
2.592
7,200
20,663
6,750
18,500
_ « 1-l-T'T" —
1,072
3,061
6,122
12,245
33,061
2,834
11,388
1,020
5,102
14,966
3,138
15,340
204
612
1,950
5,476
38,333
1,176
3,265
9,371
3,061
8,390
Utili-
Annual production
zation Hides/
rate(%) skins
90
80
90
85
90
80
85
90
90
90
80
90
85
85
90
95
90
90
90
95
80
90
40,000
100,000
225,000
425,000
1,215,000
100,000
425,000
33,750
168,750
495,000
270,000
1,485,000
191.250
573,750
1,935,000
199,500
1,323,000
194,400
540,000
1,033,500
540,000
1,665,000
Number
Square of
feet employees I/
(1000)
1,680
4,200
9,450
17,850
51,030
4,200
17,850
1,350
6,750
19,800
5,670
31,185
1,338.8
4,016.2
13,545.0
8,379.0
55,566.0
1,555.2
4,320.0
11,368.5
4,320
13,320
40
100
165
355
570
80
390
45
140
270
105
410
25
70
215
65
275
65
220
210
70
190
employees.
* Denotes new sources models, also.
Source: OPRA estimates based on survey and published information.
-------
Indirect and new source Chrome Tan (1 & 2), Nonchrome Tan (3), Retan (4 and
9), and Through Blue (6) models all utilize approximately 85 percent of
their daily capacity. Indirect and new source No Beamhouse (5) models
operate on a 85-90 percent utilization rate, Shearling (7) and Pigskin (8)
models maintain a 90 and 95 percent rate, respectively. Direct discharging
models' utilization rates vary from those shown for the indirect and new
source models: the direct discharging Chrome Tan (1 & 2} models reflect an
85 percent utilization rate for the small model and a 90 percent rate for
the large model, the Nonchrome Tan (3) direct discharging models reflect 85
percent for the small operation and 90 percent for the medium, the
utilization rate for the Other (4, 6, 7 & 8) direct discharging model was
determined to be 85 percent of the daily capacity.
Also shown in Tables VI-2 and VI-3 are the models' annual production
estimated in terms of units (hides, skins, pelts) tanned and square feet of
leather produced each year. To convert units-per-year to square feet of
leather, the following standards were used:
Cattlehides yield 40 square feet per hide, cattle splits yield
8 square feet per split and sheepskins yield 6.67 square feet per
skin or pelt.
Finally, the estimated numbers of employees employed at each model tannery
are also shown in the tables. It should be noted that the new source
models' number of employees was estimated to be approximately 15 percent
fewer than those determined for the indirect models. This slightly reduced
employment requirement reflects the utilization of labor saving equipment
and the requirement for a reduced maintenance force in the new source
tanneries. This would not be available to the existing tanneries as they
typically are committed to the majority of their fixed equipment and the
costs for them to replace the equipment would be prohibitive.
C. Investment Characteristics
The investment characteristics for the direct discharging, indirect
discharging, and new source models are depicted in Tables VI-4, VI-5, and
VI-6, respectively. Included in these tables are estimates for the models'
assets (both fixed and current), current liabilities, net working capital,
total invested capital, and salvage value for nonconforming uses. These
are discussed below.
1. Fixed Assets
The fixed assets depicted in the tables are representative of the book
value of the acquisition costs of the tanneries' various assets. As would
be expected in an industry with a substantial number of older plants and
equipment, the book values of the models' assets do not reflect significant
amounts. However, the book values do reflect the amount of capital the
tannery owners have invested in assets and, accordingly, represent a
portion of what is used as a basis for determining the return on the
owners' equity.
VI-7
-------
Table VI-4. The leather tanning Industry, representative existing direct discharging model plants' investment characteristics I/
Model/size Subcategory
Chrome Tan 1 & 2
Small
Large
Nonchrome Tan 3
Small
Medium
Other 4,6,7,8
Medium
Capacity
/m/locKUnc/flaul
800
1,500
210
715
2,500
Total
assets
2,197
6,603
1,498
6,351
2,937
Fixed
assets
538
2,279
683
2,057
1,257
Current
assets
1,659
4,324
815
4,294
1,680
Current
liabilities
,000)
685
3,576
281
1,271
580
Net
working
capital
974
748
534
3,023
1,100
Total
invested
capital
1,512
3,027
1,217
5,081
2,357
Salvage
value
1,240
3,236
677
3,892
1,390
«°iau A"ets/ f.^d Assets + Cerent Assets; Net Working Capital = Current Assets - Current Liabilities; Total Invested Capital = Fixed Assets +
Net Working Capital; Salvage Value = Net Working Capital + Fixed Assets times a salvage factor (10 to 20*). *.«M»".«i "xea Assets +
Source: DPRA estimates based on survey and published data.
CO
-------
Table VI-5. The leather tanning industry, representative existing indirect discharging model plants' investment characteristics
Model/size
Chrome Tan/Pulp
X -Small
Small
Medium
Large
X-Large
Chrome Tan/ Save
Small
Large
Nonchrome Tan
Small
Medium
Large
Retan/Sides
Small
Large
No Bearnhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Re tan/Splits
Small
Large
Daily
Subcategory capacity
1 Hides
175
500
1,000
2,000
5,400
2 Hides
500
2,000
3 Hides
150
750
2,200
4 Sides
1,350
6,600
5 Skins
900
2,700
8,600
6 Hides
600
4,200
7 Shearlings
900
2,500
Skins
8 3,625
9 Splits
2,700
7,400
Total
assets
674.9
1,743.4
3,367.8
7,905.8
29,381.5
1,743.4
7,905.8
615.5
3,573.3
17,207.0
2,972.6
14,422.1
532.4
1,714.1
6,175.1
1,796.6
11,164.9
2,023.1
5,827.8
1,724.4
968.5
2,750.6
Fixed
assets
236.2
650.0
1,200.0
2,100.0
7,020.0
650.0
2,100.0
337.5
1,462.5
3,960.0
675.0
3,300.0
150.3
475.1
1,568.2
810.0
4,704.0
450.0
1,187.5
509.8
297.0
740.0
Current
assets
438.7
1,093.4
2,167.8
5,805.8
22,361.5
1,093.4
5,805.8
278.0
2,110.8
13,247.0
2,297.6
11,122.1
382.1
1,239.0
4,606.9
986.6
6,460.9
1,573.1
4,640.3
1,214.6
671.5
2,010.6
Current
liabilities
($1,000)
216.3
540.8
973.4
1,195.1
2,890.8
540.8
1,195.1
165.2
774.6
1,969.1
584.0
3,051.5
207.8
525.9
1,313.9
654.4
3,156.2
681.2
1,655.6
491.1
267.6
785.9
Net
working
capital
222.4
552.6
1,194.4
4,610.7
19,470.7
552.6
4,610.7
112.8
1,336.2
11,277.9
1,713.6
8,070.6
174.3
713.1
3,293.0
332.2
3,304.7
891.9
2,984.7
723.5
403.9
1,224.7
Total
invested
capital
458.6
1,202.6
2,394.4
6,710.7
26,490.7
1,202.6
6,710.7
450.3
2,798.7
15,237.9
2,388.6
11,370.6
324.6
1,188.2
4,861.2
1,142.2
8,008.7
1,341.9
4,172.2
1,233.3
700.9
1,964.7
Salvage
value
269.6
682.6
1,434.4
5,030.7
20.874.7
682.6
5,030.7
180.3
1,628.7
12,069.9
1,848.6
8,730.6
204.4
808.1
3,606.6
494.2
4,245.5
981.9
3,222.2
825.5
463.3
1,372.7
Source: DPRA estimates based on survey and published information.
-------
Table Vl-6. The leather tanning industry, representative new source model plants' investment characteristics
Model /size
Chrome Tan/Pulp
Medium
Large
X -Large
Chrome Tan/Save
Large
Nonchrome Tan
Medium
Large
Retan/Sides
Large
No Beainhouse
Medium
2 Large
i
Q Through Blue
Small
Large
Shearling
Large
Pigskin
Medium
Retan/Splits
Large
Subcategory
1
2
3
4
5
6
7
8
9
Daily
capacity
Hides
1,000
2,000
5,400
Hides
2,000
Hides
750
2,200
Sides
6,600
Skins
2,700
8,600
Hides
600
4,200
Shearlings
2,500
Skins
3,625
Splits
7,400
Total
assets'
7,715.9
16,285.5
52,321.2
16,285.5
7,997.5
30,514.6
30,394.4
3,576.0
12,490.1
4,377.6
28,948.5
10,316.8
4,488.7
6,725.9
Fixed
assets
5,548.1
10,479.7
29,959.7
10,479.7
5,886.7
17,267.6
19,272.3
2,337.0
7,883.2
3,391.0
22,487.6
5,676.5
3,274.1
4,715.3
Current
assets
2,167.8
5,808.8
22,361.5
5,805.8
2,110.8
13,247.0
11,122.1
1,239.0
4,606.9
986.6
6,460.9
4,640.3
1,214.6
2,010.6
Current
liabilities
(Jl.OOO)
973.4
3,549.5
16,054.2
3,599.5
774.2
1,969.1
3,051.5
525.9
1,313.9
654.4
3,156.2
1,655.6
491.1
785.9
Net
working
capital
1,194.4
2,206.3
6,307.3
2,206.3
1,336.2
11,277.9
8,070.6
713.1
3,293.0
332.2
3,304.7
2,984.7
723.5
1,224.7
Total
invested
capital
6,742.5
12,686.0
36,267.0
12,686.0
7,222.9
28,545.5
27,342.9
3,050.1
11,176.2
3,723.2
25,792.3
8,661.2
3,997.6
5,940.0
Salvage
value
2,026.6
3,778.3
10,796.8
3,778.3
2,219.2
13,868.0
10,961.4
1,063.7
4,475.5
840.9
6,677.8
3,836.2
1,214.6
1,932.0
Source: DPRA estimates based on survey and published data.
-------
2. Operating Capital
The models' operating capital is defined as that capital necessary to
maintain the day-to-day operations of the tanneries. Included in the
computation of operating capital are a firm's current assets and current
liabilities. Current assets represent those assets a firm maintains that
could be converted to cash with relative ease. Current assets include such
items as raw materials inventory, finished product inventory and accounts
receivable.
As can be seen in the tables, current assets for the models are sizeable
because substantial quantities of hides and leather must be maintained at
any given time in order to assure continuous operation. This reflects a
sizeable additional investment requirement to the tanneries' owners.
Current liabilities represent those a firm maintains on short-period
demand, and include short-term notes and accounts and wages payable.
The difference between current assets and current liabilities represents
the firm's operating capital or, as it is sometimes called, net working
capital. Net working capital represents the quantity of capital that the
firm is required to maintain for daily cash balances.
3. Total Investment
Two measures of investment for each model plant are provided. First, total
assets—the sum of fixed assets and current assets. Second, the total
invested capital—which represents fixed assets plus net working capital
for each model is shown. These measures are summarized on Table VI-4, 5
and 6. While each represents an interpretation of the models' investments,
total assets will be predominately utilized as the basis for measuring the
models' returns on investment.
4. Salvage Value
The salvage value for nonconforming uses of the model tanneries represents
the amount of money that the owners could recover should a tannery cease
operation. This will vary widely from plant to plant, depending on the
location and the age of the facility, its condition, and the usability of
its equipment. In some instances, the salvage value of an old, obsolete
plants will be equal to its site value and its equipment scrap value.
As described earlier in the report, only a limited market exists for
certain types of used machinery and equipment; thus, most of a closing
plant's equipment would be scrapped.
Data are not available depicting the salvage value of tanneries.
Discussions with industry members determined that salvage values for most
tanneries would range between 10 and 20 percent of a tannery's fixed assets
plus its net working capital.
VI-11
-------
D. Sales and Costs Characteristics
Model plant sales and costs characteristics were developed from the
industry survey responses, conversations with industry personnel, and from
information available in published sources. Table VI-7 depicts the sales
and cost characteristics for the existing direct discharging models, Table
VI-8 the characteristics for the existing indirect discharging models, and
Table VI-9 the characteristics for the new source models. These
characteristics are reflective of 1979-1980 conditions.
Specific plant by plant data is available for direct dischargers and are
used to project plant closures and production effects. The direct
discharger models discussed below were developed to protect the
confidentiality of the individual plant data and used to analyze other
economic effects. It should be noted that some cost estimates for the
direct discharger may not exactly correspond to those used in the direct
discharge models because of the aggregation process used in developing the
models.
1. Annual Sales
Annual sales of the model plants were determined from the production
characteristics described in Tables VI-2 and VI-3 as well as from estimates
of final product prices. Prices were established to be reflective of the
average grade and quality of leather within each tannery type.
The prices utilized in this analysis are depicted below:
Type
Cattlehide, Chrome
Cattlehide, Vegetable
Cattlehide, Through-
the-Blue
Cattle, Sides
Cattle, Splits
Cattlehide, No Beamhouse
Shearlings
Pigskin
Price I/
$1.03 sq. ft.
$1.53 sq. ft.
$.71 sq. ft.
$1.03 sq. ft.
$.59 sq. ft.
$0.97 sq. ft.
$2.19 sq. ft.
$0.48 sq. ft.
Source
From industry surveys
From industry surveys
From industry surveys and
contacts
From industry surveys
From industry surveys
American Shoemaking
American shoemaking
From industry surveys
From industry surveys
II Prices presented are in 1979 dollars and the financial profiles of the
model plants have been adjusted to reflect 1979 dollars. Also, it
should be noted that cattlehide, vegetable leather and splits are
usually priced on a per pound basis. For this analysis, these prices
have been converted to a square footage basis.
VI-12
-------
Table VI-7. The leather tanning industry, representative existing direct discharging model plants' cost characteristics
Chrome Tan
Small
Sales
Total Costs
Cash Earnings
Less
Depreciation
Interest
Pretax Income
Income Tax
Aftertax Income
Cash Flow
1,000
dollars
8,049.6
7,558.6
491.0
48.3
64.4
378.3
154.8
223.5
271.8
Percent
100.0
94.0
6.1
0.6
0.8
4.7
1.9
2.8
3.4
(1 & 2)
Nonchrome Tan (3)
Large
1,000
dollars
16,099.1
14,891.7
1,207.4
289.8
209.3
708.3
306.6
401.7
691.5
Percent
100.0
92.5
7.5
1.8
1.3
4.4
1.9
2.5
4.3
Small
1,000
dollars
4,341.3
4,093.8
247.5
65.1
13.0
169.4
58.8
110.6
175.7
Percent
100.0
94.3
5.7
1.5
0.3
3.9
1.4
2.5
4.0
Medium
1,000
dollars
14,468.5
13,658.3
810.2
202.7
361.8
245.7
93.8
151.9
354.6
Percent
100.0
94.4
5.6
1.4
2.5
1.7
0.6
1.0
2.5
Other (4,6.7,8)
Medium
1,000
dollars
5,791.7
5,403.6
388.1
81.1
92.7
214.3
79.3
135.0
216.1
Percent
100.0
93.3
6.7
1.4
1.6
3.7
1.4
2.3
3.7
J7 Percentages may not add due to rounding.
Source: OPRA estimates based on survey and published data.
-------
Table VI-8. The leather tanning industry, representative existing indirect discharging model plants' cost characteristics I/
X-Sma 1 1
SALES
COSTS
Hides/Skins
Labor
Other
Total
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
1000
dollars
1,730.4
1,036.8
356.5
204.4
1,597.7
132.7
32.3
43.3
57.1
11.4
45.7
78.0
Percent
100.0
59.9
20.6
11.8
92.3
7.7
1.9
2.5
3.3
0.7
2.6
4.5
Chrome Tan/Pulp (1)
Smar'
1000
dollars
4,326.0
2,592.0
999.3
377.1
3,968.4
357.6
89.4
99.5
168.7
58.4
110.3
199.7
II Medium
Percent
100.0
59.9
23.1
8.7
91.7
8.3
2.1
2.3
3.9
1.3
2.6
4.6
1UUU
dollars
9,733.5
5,832.0
1,800.7
1.380.1
9,012.8
720.7
154.2
204.4
362.1
147.3
214.8
369.0
Percent
100.0
59.9
18.5
14.2
92.6
7.4
1.6
2.1
3.7
1.5
2.2
3.8
Large
1000
dollars
18,385.5
11,016.0
4,026.4
2.173.6
17,216.0
1,169.5
298.0
275.8
595.7
254.8
340.9
638.9
Percent
100.0
59.9
21.9
11.3
93.1
6.4
1.6
1.5
3.2
1.4
1.9
3.5
X- Large
1000
dollars
52,560.9
31,492.8
7,568.8
9,927.7
48,989.3
3,571.6
764.9
630.7
2,176.0
981.7
1,194.3
1,959.2
Percent
100.0
59.9
14.4
18.9
93.2
6.8
1.5
1.2
4.1
1.9
2.3
3.7
II Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table Vl-8 (continued). The leather tanning industry, representative existing indirect discharging model plants' cost characteristics
Chrome Tan/Save (2)
Small
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
Pretax Income
Income Tax
< Aftertax Income
i
i- CASH FLOW
01
1UUU
dollars
4,326.0
2,592.0
817.6
578.7
3,988.3
337.7
69.5
99.5
168.7
58.4
110.3
179.8
Percent
100.0
59.9
18.9
13.4
92.2
7.8
1.6
2.3
3.9
1.3
2.5
4.2
"Large
1000
dollars
18,385.5
11,016.0
3,842.6
2,378.1
17,236.7
1,148.8
277.3
275.8
595.7
254.8
340.9
618.2
Percent
100.0
59.9
20.9
13.0
93.8
6.2
1.5
1.5
3.2
1.4
1.9
3.4
Small
1UOO
dollars
2,065.5
1.215.0
477.1
260.6
1,952.7
112.8
30.2
8.3
74.3
16.5
57.8
88.0
Percent
100.0
58.8
23.1
12.6
94.5
5.5
1.5
0.4
3.6
0.8
2.8
4.3
Nonchrome Tan (3)
Medium
1000
dollars
10,327.5
6,075.0
1,414.9
2,319.9
9,809.8
517.7
162.5
51.6
303.6
120.4
183.2
345.7
Percent
100.0
58.8
13.7
22.5
95.0
5.0
1.6
0.5
2.9
1.2
1.8
3.3
Large
1000
dollars
30,294.0
17,820.0
3,574.7
7,006.0
28,400.7
1,893.3
626.9
212.1
1,054.3
465.7
588.6
1,215.5
Percent
100.0
58.8
11.8
23.2
93.8
6.2
2.1
0.7
3.5
1.5
1.9
4.0
\J Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-8 (continued). The leather tanning industry, representative existing indirect discharging model plants' cost characteristics \J
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
Small
dollars
5,840.1
3,798.9
1,076.6
651.9
5,527.4
312.7
96.6
58.4
157.7
53.3
104.4
201.0
Percent
100.0
65.0
18.4
11.2
94.6
5.4
1.7
1.0
2.7
0.9
1.8
3.4
Retan/Sides (4)
1000
dollars
32.120.6
20,894.0
4,184.5
5,260.5
30,339.0
1,781.6
496.8
321.2
963.6
424.0
539.6
1,036.4
Large
Percent
100.0
65.0
13.0
16.4
94.5
7.5
1.6
1.0
3.0
1.3
1.7
3.2
cr> if Percentanges may not add due to rounding.
Source: OPRA estimates based on survey and published data.
-------
Table VI-8 (continued). The leather tanning Industry, representative existing Indirect discharging model plants' cost characteristics I/
No Beamhouse (5)
Small
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
^ PRETAX INCOME
-i INCOME TAX
i, AFTERTAX INCOME
~j
CASH FLOW
1000
dollars
1,298.6
594.8
280.7
327.3
1,202.8
95.9
22.0
20.8
53.0
10.2
42.8
64.8
Percent
100.0
45.8
21.6
25.2
92.6
7.4
1.7
1.6
4.1
0.8
3.3
5.0
Medium
1000
dollars
3,895.7
1,784.4
769.6
1,069.6
3,623.6
272.1
65.7
54.5
151.9
50.6
101.3
167.0
Percent
100.0
45.8
19.8
27.5
93.0
7.0
1.7
1.4
3.9
1.3
2.6
4.6
Large
1000
dollars
13,138.6
6,017.8
2,435.2
3,890.7
12,343.5
795.1
190.7
131.4
473.0
198.3
274.7
465.4
Percent
100.0
45.8
18.5
29.6
93.9
6.1
1.4
1.0
3.6
1.5
2.1
3.5
Through
Small
1000
dollars
5,949.1
4,015.9
719.9
761.5
5,497.3
451.8
150.8
136.8
164.2
56.3
107.9
258.7
Percent
100.0
67.5
12.1
12.8
92.4
7.6
2.5
2.3
2.8
0.9
1.8
4.3
Blue (6)
Large
1000
dollars
39,451.9
26,632.0
3,472.5
7,508.1
37,612.6
1,839.3
1,111.3
591.8
1,136.2
503.4
632.8
1,855.4
Percent
100.0
67.5
8.8
19.0
95.3
4.7
2.8
1.5
2.9
1.3
1.6
4.7
\J Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-8 (continued). The leather tanning industry, representative existing indirect discharging model plants' characteristics IV
Shearling (7)
bnial 1
1 AAA —
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
< INCOME TAX
i AFTERTAX INCOME
»— •
00 CASH FLOW
1UUU
dollars
3,405.9
2,041.2
863.5
217.1
3,121.8
284.1
57.3
81.7
145.1
47.5
97.6
154.9
Percent
100.0
59.9
25.4
6.4
91.7
8.3
1.7
2.4
4.3
1.4
2.9
4.5
Large
IBOtf
dollars
9,460.8
5,670.0
2,600.8
407.5
8,678.3
782.5
97.5
264.9
420.1
174.0
246.1
343.2
Percent
100.0
59.9
27.5
4.3
91.7
8.3
1.0
2.8
4.4
1.8
2.6
3.6
Pigskin (8)
Medium
1000
dollars
5,456.9
1,788.0
2,385.8
827.2
5,001.0
455.9
124.1
76.4
255.4
98.2
157.2
281.3
Percent
100.0
32.8
43.7
15.2
91.6
8.4
2.3
1.4
4.7
1.8
2.9
5.2
Retan/Splits (9)
Small Large
1000
dollars
2,548.8
1,090.8
680.3
631.5
2,402.6
146.2
54.5
33.1
58.6
11.8
46.8
101.3
Percent
100.0
42.8
26.7
24.8
94.3
5.7
2.1
1.3
2.3
0.5
1.8
4.0
1000
dollars
7,858.8
3,363.3
1,899.7
2,143.1
7,406.1
452.7
158.0
94.3
200.4
72.9
127.5
285.5
Percent
100.0
42.8
24.2
27.3
94.2
5.8
2.0
1.2
2.6
0.9
1.6
3.6
_!/ Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-9. The leather tanning industry, representative new source model plants'
cost characteristics I/
Medium
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
1000
dollars
9,733.5
5,832.0
1,416.6
1,081.9
8,330.5
1,403.0
277.4
155.1
970.5
427.2
432.3
820.7
Percent
100.0
59.9
14.6
11.1
85.6
14.4
2.8
1.6
10.0
5.4
5.6
8.4
Chrome Tan/Pulp (1)
Large
1000
dollars
18,385.5
11,016.0
2,589.6
2,342.9
15,948.5
2,437.0
524.0
291.8
1,621.2
726.5
894.7
1,418.7
Percent
100.0
59.9
14.1
12.7
86.7
13.3
2.9
1.6
8.8
4.0
4.9
7.7
1000
dollars
52,560.9
31,492.8
5,673.8
7,965.2
45,131.8
7,429.1
1,498.0
834.1
5,097.0
2,325.4
2,771.6
4,269.6
X-Large
Percent
100.0
59.9
10.8
15.2
85.9
14.1
2.9
1.6
9.7
4.4
5.3
8.1
JY Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-9 (continued). The leather tanning industry, representative new source model plants'
cost characteristics I/
Chrome Tan/ Save (2)
Large
1000
dollars
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
< CASH EARNINGS
t— (
1
8 LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
18
11
3
1
15
2
1
1
,385.5
,016.0
,044.3
,905.8
,966.1
,419.4
524.0
291.8
,603.6
718.4
885.2
,409.2
Percent
100
59
16
10
86
13
2
1
8
3
4
7
.0
.9
.6
.4
.8
.2
.9
.6
.7
.9
.8
.7
1000
Nonchrome Tan (3)
Medium
dollars
10,327
6,075
1,131
1,870
9,077
1,250
294
166
789
344
445
789
.5
.0
.9
.6
.5
.0
.3
.1
.6
.0
.6
.9
Percent
100
58
11
18
87
12
2
1
7
3
4
7
.0
.8
.0
.1
.9
.1
.8
.6
.6
.3
.3
.6
1000
Large
dollars
30,294
17,820
2,829
5,566
26,216
4,077
863
656
2,557
.0
.0
.5
.7
.2
.8
.4
.5
.9
1,157.4
1,400
2,263
.5
.9
Percent
100.0
58.8
9.3
18.4
86.5
13.5
2.9
2.2
8.4
3.8
4.6
7.5
_!/ Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-9 (continued). The leather tanning industry, representative new source model plants'
cost characteristics l/
ro
Retan/Side (4)
Large
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
1000
dollars
32,120,5
20,894.0
3,307.2
4,175.1
28,376.3
3,744.2
963.6
628.9
2,151.7
970.5
1,181.2
2,144.8
Percent
100.0
65.0
10.3
13.0
88.3
11.7
3.0
2.0
6.7
3.0
3.7
6.7
No Beamhouse (5)
Medium
1000
dollars
3,895.7
1,784.4
618.9
858.3
3,261.6
634.1
116.9
70.2
447.4
186.6
260.8
377.7
Percent
100.0
45.8
15.9
22.0
83.7
16,3
3.0
1.8
11.5
4,8
6.7
9.7
Large
1000
dollars
13,138.6
6,017.8
1,961.8
3,147.0
11,126.6
2,012.0
394.2
257.1
1,360.7
606.7
754.0
1,148.2
Percent
100.0
45.8
14.9
24.0
84.7
15.3
3.0
2.0
10.4
4.6
5.7
8.7
\J Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-9 (continued). The leather tanning industry, representative new source model plants'
cost characteristics I/
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
< CASH EARNINGS
ro
" LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
1000
dollars
5,949.1
4,015.4
565.6
600.5
5,182.0
767.1
169.6
85.6
511.9
216.2
295.7
465.3
Through
Small
Percent
100.0
67.5
9.5
10.1
87.1
12.9
2.9
1.4
8.6
3.6
5.0
7.8
Blue (6)
Large
1000
dollars
39,451.9
26,632.0
2,477.3
5,362.3
34,471.6
4,980.3
1,124.4
593.2
3,262.7
1,481.6
1,781.1
2,905.5
Percent
100.0
67.5
6.3
13.6
87.4
12.6
2.9
1.5
8.3
3.8
4.5
7.4
Shearling
Large
1000
dollars
9,460.8
5,670.0
2,005.9
313.1
7,989.0
1,471.8
283.8
199.2
988.8
435.6
553.2
837.0
(7)
Percent
100.0
59.9
21.2
3.3
84.4
15.6
3.0
2.1
10.5
4.6
5.8
8.8
\j Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
Table VI-9 (continued). The leather tanning industry, representative new source model plants'
cost characteristics I/
f\5
CO
SALES
COSTS
Hides/Skins
Labor
Other
TOTAL
CASH EARNINGS
LESS
Depreciation
Interest
PRETAX INCOME
INCOME TAX
AFTERTAX INCOME
CASH FLOW
Pigskin (8)
1000
dollars
5,456.9
1,788.0
1,888.9
545.3
4,222.2
1,234.7
163.7
91.9
979.1
431.2
548.0
711.7
Percent
100.0
32.8
34.6
10.0
77.4
22.6
3.0
1-»
.7
17.9
7.9
10.0
13.0
Retan/Splits (9)
Large
1000
dollars
7,858.8
3,363.3
1,535.0
1,731.0
6,629.3
1,229.5
235.8
136.6
857.1
375.0
482.1
717.9
Percent
100.0
42.8
19.5
22.0
84.4
15.6
3.0
1.7
10.9
4.8
6.1
9.1
I/ Percentages may not add due to rounding.
Source: DPRA estimates based on survey and published data.
-------
2. Raw Material Costs
The raw material costs analyzed were for raw cattlehides or splits, or
sheep skins or pelts. Raw cattlehides are sold by slaughterhouses on a
poundage basis, and this analysis assumed an average hide weight of 55
pounds. Prices utilized reflected the annual average price for Chicago
Native Heavy hides of 47 cents per pound.
The price utilized for raw cattle splits, $2.02 per split, was determined
from industry surveys.
Raw sheepskin prices were assumed to be $5.88 per skin in the pickled
state. The price for sheep pelts was estimated to be $10.50 per pelt.
Both the sheep skin and sheep pelt prices were estimated from industry
surveys. Pigskin prices were assumed to be $1.44 per skin.
3. Labor Costs
Labor costs were developed by multiplying the estimated number of employees
for each model plant by an estimate of the annual costs per employee.
These costs, developed from industry-provided data, reflect varying wages
for different types and sizes of tanneries.
For the chrome tanneries (1 & 2), annual labor costs per employee averaged
$16,667. For the nonchrome tanneries (3), annual labor costs were
estimated to be $11,111 per employee. Labor costs for retan tanneries (4)
were estimated to be $14,444 per year; no beamhouse tanneries (5) $13,222
per year; through-the-blue tanneries (6), $16,667; shearling tanneries (7),
$14,295 per year; and pigskin tanneries (8), $10,962.
4. Tanning Materials and Other Costs
These costs include expenditures for materials used in the tanning process,
miscellaneous other direct costs, and indirect costs (i.e., administrative
expenses). These costs vary considerably for different tanneries. For the
models, the costs ranged between 4.3 and 29.6 percent of sales.
5. Depreciation and Interest Costs
Estimates of the model tanneries' depreciation and interest costs were
developed from responses to the industry survey as well as from data
available from the Internal Revenue Service. The models' depreciation
costs, expressed as a percent of sales and as a percent of fixed assets,
are shown in Table VI-10. . For both types of existing models (direct and
indirect), depreciation as a percent of fixed assets for the existing
models ranged from 8.2 percent to 24.3 percent. For the new source models,
depreciation as a percent of fixed assets was 5.0 percent. The resulting
new source depreciation expressed as a percent of sales ranged from 2.0 to
3.0 percent. Also shown in Table VI-10 are the models' interest charges
expressed as a percent of sales. As shown, these charges ranged from 0.3
percent of a models' sales to 2.8 percent. As would be expected, the
higher percentages were incurred by the new source models since the new
source models would have a significantly higher amount of debt.
VI-24
-------
Table VI-10. The leather tanning Industry, representative model plants' depreciation and Interest
Existing - Direct Dischargers Existing
- Indirect Dischargers
Depreciation Interest Depreciation
Model/Size
Chrome Tan/Pulp
X-Small
Small
Medium
Large
X -Large
Chrome Tan/Save
Small
Large
Nonchrome Tan
Small
Medium
Large
< Retan/Sides
71 Small
no Large
en
No Beamhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
fietan/Splits
Small
Large
Other Chrome
Medium
Percent of Percent of Percent of Percent of
Subcategory sales fixed assets sales sales
1
1.9
0.6 9.0 0.8 2.1
1.6
1.8 12.7 1.3 1.6
1.5
2
1.6
1.5
3
1.5 9.5 0.3 1.5
1.4 9.8 2.5 1.6
2.1
4
1.7
1.6
5
1.7
1.7
1.4
6
2.5
2.8
7
1.7
1.0
8
2.3
9
2.1
2.0
5 & 7
1.4 6.5 1.6
Percent of
fixed assets
13.7
15.1
12.9
14.2
10.9
10.7
13.2
8.9
11.1
15.8
14.3
15.1
14.6
13.8
12.2
18.6
23.6
12.7
8.2
24.3
18.4
21.4
Interest
Percent of
sales
2.5
2.3
2.1
1.5
1.2
2.3
1.5
0.4
0.5
0.7
1.0
1.0
1.6
1.4
1.0
2.3
1.5
2.4
2.8
1.4
1.3
1.2
New
Source Dischargers
Depreciation
Percent of
sales
--
—
2.8
2.9
2.9
--
2.9
--
2.8
2.9
--
3.0
—
3.0
3.0
2.9
2.9
--
3.0
3.0
- ~
3.0
Percent of
fixed assets
--
--
5.0
5.0
5.0
--
5.0
--
5.0
5.0
--
5.0
--
5.0
5.0
5.0
5.0
--
5.0
5.0
~~
5.0
Interest
Percent of
sales
--
--
1.6
1.6
1.6
--
1.6
--
1.6
2.2
—
2.0
--
1.8
2.0
1.4
1.5
--
2.1
1.7
1.7
Source: DPP.A estimates based on survey and published information.
-------
E. Model Plant Income and Annual Cash Flow Characteristics
For each model plant, the following were computed: its after-tax income,
returns on sales, total assets, total invested capital, and annual cash
flow expressed as an amount, as a percent of sales, and as a percent of
total invested capital. These are presented in Table VI-11 for the
existing direct discharging models, Table VI-12 for the existing indirect
discharging models, and Table VI-13 for the new source models. It should
be noted that these profits and annual cash flows represent tanneries as of
early 1979 conditions and the models are "baseline models" which do not
reflect the pollution control expenditures under consideration.
The before-tax returns on sales average 3.7 percent for the direct
discharger models, ranging from a low of 1.7 percent for the medium
Nonchrome model to 4.7 percent for the small Chrome Tan model. For the
indirect dischargers, the before-tax returns averaged 3.5 percent varying
from 2.3 percent for the small Retan/Splits model to 4.7 percent for the
Pigskin model.
The base case models' after-tax incomes and annual cash flows are discussed
below for each of the three major types of model plants.
1. Existing Direct Discharging Models
As shown in Table VI-11, after-tax income for the five direct discharging
models range from $110,600 for the small Nonchrome Tan (3) model to
$401,700 for the large Chrome Tan (1 & 2) model. The return on sales
varied from 1.2 percent for the medium Nonchrome Tan (3) model to 2.8
percent for the small Chrome Tan (1 & 2) model. The return on assets were
relatively low with four models showing rates less than 10 percent. The
highest return was earned by the small Chrome Tan (1 & 2) model at 10.2
percent.
The models' annual cash flows ranged from a low of $175,700 for the small
Nonchrome Tan (3) model to a high of close to $700,000 for the large Chrome
Tan (1 & 2). As percent of sales, cash flows ranged from 2.6 percent to
4.3 percent.
2. Existing Indirect Discharging Models
Table VI-12 depicts the models' after-tax income, and as can be seen, they
all are positive. The models' returns on sales are fairly consistent for
all models with a range from 1.6 percent to 3.3 percent. After-tax returns
on total assets are a bit more varied with a range from 3.4 percent to 9.4
percent.
The models' annual cash flows expressed as a percent of sales ranged from
3.2 percent to 5.2 percent and, as a percent of total invested capital,
from 7.4 percent to 23.2 percent.
VI-26
-------
Table VI-11. The leather tanning industry, representative existing direct discharging model plants' profitabilities
and annual cash flows
Model/size
Chrome Tan
Small
Large
Nonchrome Tan
Small
Medium
Other Chrome
Medium
Aftertax
Subcategory income
~ ($1,000)
1 & 2
223.5
401.7
3
110.6
151.9
5 & 7
135.0
Aftertax returns
Total
Sales assets
I*) W
2.8 10.2
2.5 6.1
2.5 7.4
1.2 2.7
2.3 4.6
Total invested
capital
U)
14.8
13.3
9.1
3.4
5.7
Amount
($1,000)
271.8
691.5
175.7
354.6
216.1
Annual cash flow
Percent of
sales
(X)
3.4
4.3
4.0
2.6
3.7
Percent of total
invested capital
(X)
18.0
22.8
14.4
7.4
9.2
Source: Computations based on information provided in previous Chapter VI Tables.
-------
Table VI-12. The leather tanning industry, representative existing indirect discharging model plants'
profitabilities and annual cash flows
Model /size
Chrome Tan/Pulp
X-Small
Small
Medium
Large
X-Large
Chrome Tan/Save
Small
Large
Mcncrhome Tan
Small
Medium
Large
< Retan/Sides
V Small
ro Large
CO
No Beamhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Retan/Splits
SlIUlll
Large
Aftertax
Subcategory income
(11,000)
1
45.7
110.3
214.8
340.9
1,194.3
2
110.3
340.9
3
57.8
183.2
588.6
4
104.4
539.6
5
42.8
101.3
274.7
6
107.9
632.8
7
97.6
246.1
6
157.2
9
46.8
127.5
Aftertax returns
Sales
on
2.6
2.6
2.2
1.9
2.3
2.5
1.9
2.8
1.8
1.9
1.8
1.7
3.3
2.6
2.1
1.8
1.6
2.9
2.6
2.9
1.8
1.6
lotai
assets
6.8
6.3
6.4
4.3
4.1
6.3
4.3
9.4
5.1
3.4
3.5
3.7
8.0
5.9
4.4
6.0
5.7
4.8
4.2
9.1
4.8
4.6
Total invested
capital
(?)
10.0
9.2
9.0
5.1
4.5
9.2
5.1
12.8
6.5
3.9
4.4
4.7
13.2
8.5
5.7
9.4
7.9
7.3
5.9
12.7
6.7
6.5
Amount
($1,000) —
78.0
199.7
369.0
638.9
1,959.2
179.8
618.2
88.0
345.7
1.215.5
201.0
1,036.4
64.8
167.0
465.4
258.7
1,855.4
154.9
343.2
281.3
101.3
285.5
Annual cash flows
Percent of
sales
U)
4.5
4.6
3.8
3.5
3.7
4.2
3.4
4.3
3.3
4.0
3.4
3.2
5.0
4.6
3.5
4.3
4.7
4.5
3.6
5.2
4.0
3.6
Percent of total
invested capital
U)
17 0
L 1 f\J
16.6
Q C
J • J
7.4
ISO
1 J . \J
9.2
12.4
a!o
8.4
9.1
20.0
14.1
9.6
22.6
23.2
11.5
8.2
22.8
14.5
14.5
Source: DPRA estimates based on survey and published information.
-------
Table VI-13. The leather tanning Industry, representative new source model plants'
profitabilities and annual cash flows
Model/size
Chrome Tan/Pulp
Medium
Large
X-Large
Chrome Tan/Save
Large
None h route Tan
Medium
Large
Retan/Sides
Large
7* No Beamhouse
ix> Medium
10 Large
Through Blue
Small
Large
Shearling
Large
Pigskin
Medium
Re tan/Splits
Large
Aftertax
Subcategory income
(Jl.OOO)
1
543.3
894.7
2,771.6
2
885.2
3
445.6
1,400.5
4
1,181.2
5
260.8
754.0
6
295.7
1,781.1
7
553.2
8
548.0
9
482.1
Aftertax returns
Sales
(*)
5.6
4.9
5.3
4.8
4.3
4.6
3.7
6.7
5.7
5.0
4.5
5.8
10.0
6.1
lotal
assets
(t)
7.0
5.5
5.3
5.4
5.6
4.6
3.9
7.3
6.0
6.8
6.2
5.4
12.2
7.2
Total Invested
capital
I*)
8.1
7.1
7.6
7.0
6.2
4,9
4.3
8.6
6.7
7.9
6.9
6.4
13.7
8.1
Amount
($1,000)
820.7
1,418.7
4,269.6
1,409.2
789.9
2,263.9
2,144.8
377.7
1,148.2
465.3
2,905.5
837.0
711.7
717.9
Annual cash flows
Percent of
sales
(*)
8.4
7.7
8.1
7.7
7.6
7.5
6.7
9.7
8.7
7.8
7.4
8.8
13.0
9.1
Percent of total
invested capital
(*)
12.2
11.2
11.8
11.1
10.9
7.9
7.8
12.4
10.3
12.5
11.3
9.7
17.8
12.1
Source: Computations based on information provided in previous Chapter VI tables.
-------
3. New Source Models
The after-tax incomes of the new source models were appreciably higher than
those of the existing indirect discharging models. Returns on sales ranged
from 3.7 percent for the large Retan/Sides model to 10.0 percent for the
Pigskin (8) model. The return of most of the models varied between 4.0 and
6.0 percent. As would be expected, the new source models' returns on total
assets were all lower than the returns for the models depicted in Table
VI-13 since the new source models have higher levels of investment which,
accordingly, would result in lower returns.
Because of the higher annual depreciation associated with the new source
models, their annual cash flows were all higher than those for the existing
indirect dischargers. New source annual cash flows expressed as percent of
sales ranged from 6.7 percent to 13.0 percent.
VI-30
-------
VII. WASTEWATER CONTROL COSTS
The various wastewater control alternatives and costs discussed in this
chapter were developed by the Environmental Protection Agency. The
supportive data and analyses for the treatment alternatives are presented
in a separate document. I/
Included in this chapter are a brief description of the discharge status of
the leather tanning industry and a presentation of the various pollution
control technologies and costs for each of the tannery models. It should
fae noted that while cost data presented in this chapter are reflective of
the models, for the existing direct discharging tanneries each facility
was individually costed. For purposes of presentation in this report, the
individual facilities data have been aggregated. In this chapter, both
direct and indirect existing sources are first discussed followed by both
direct and indirect new sources.
A. Discharge Status of the Industry
Current practices in the tanning industry range from no treatment of
wastewater to secondary treatment. In general, effluent quality
requirements for tanneries discharging to municipal sewer systems
(requirements set by POTW's) have been less stringent than for plants that
discharge directly to surface waters (requirements set by EPA or states)
This was reflected in the survey made of 89 wet-process tanners by EPA
which indicated that 12 percent of the tanners discharging to municipal
systems had no pretreatment, whereas all direct dischargers surveyed had at
least preliminary treatment. Further, 100 percent of the direct
dischargers operated some type of biological treatment.
EPA's information collection surveys, site visits, and verification
sampling visits of wet tanneries yielded the following breakdown of control
practices in the industry:
J7 Final Development Document for Proposed Effluent Limitations
Guidelines, New Source Performance Standards and Pretreatment
"!Ttandar(ls for the Leather Tanning and Finishing Industry Point Source
Category, U.S. Environmental Protection Agency, kPA 44Dyll-&?-016.
Nov. 1982, see p. II-l.
VIM
-------
Discharge to POTW's--90 percent of industry—78 percent of tanners
surveyed.
Number Percent of
of tanners
tanners surveyed
No pretreatment 4 7
Screening only 13 22
Primary treatment 32 54
Secondary treatment 4 7
Unknown (no response) _6 10
Total surveyed 59 ToTJ
Discharge to surface waters—10 percent of the industry--22 percent of
tanners surveyed.
Number Percent of
of tanners
tanners surveyed
Aerated lagoon 6 35
Activated sludge 5 29
Unaerated lagoon 2 12
Rotating biological contactors 2 12
Trickling filter-lagoon system 1 6
No secondary treatment 1 6
Total surveyed T7 ToU
The discharge status—direct and indirect—of the estimated 158 wet tanners
in the industry is shown in Table VII-1. Presently, 17 known tanneries
discharge directly into navigable streams or water. Of this group, 8 are
classified as small, 4 medium, and 5 large, with 7 of the of the 17 engaged
in nonchrome tanning, Subcategory 3. The remaining 141 plants are
classified as indirect dischargers. Of this number, 56 plants (40 percent
of the total indirect dischargers) are identified in Subcategory 1, Chrome
Tan/Pulp. The remainder are distributed among the remaining subcategories
and include all sizes from small to large.
B. Wastewater Treatment Technologies
The treatment technologies utilized in this impact analysis were developed
by EPA. For each model plant, alternative treatment technologies were
costed to enable the impacts to be assessed. The technologies costed were
designed specifically for the model plants described in Chapter VI and
reflect their respective discharge status, flow, and age (i.e., new source
versus existing).
VII-2
-------
Table VII-l. The leather tanning industry - discharge status
(before baseline closures)
Model/size
Crome Tan/Pulp
X-Small
Small
Medium
Large
X- Large
Chrome Tan/ Save
S"maTI
Large
Nonchrome Tan
Smal t
Medium
Large
Retan/Sides
SmaTT
Large
No Beamhouse
SmaTl
Medium
Large
Through Blue
Smal i
Large
Shearling
Small
Medium
Pigskin
Medium
Retan/Splits
Small
Large
Direct
Subcategory dischargers
1
—
1
2
2
--
2
1
1
3
3
—
2
4
1
--
5
—
«
"~
6
1
--
7
1
1
8
1
9
--
_
Number of plants
indirect
dischargers
6
22
12
11
5
3
2
3
4
1
8
7
7
7
10
7
5
3
3
1
9
5
Total
6
23
14
13
5
4
3
6
4
3
9
7
7
7
10
8
5
4
4
2
9
5
Total Plants 17 141 158
VII-3
-------
A detailed description of the technologies under consideration is contained
in the Development Document. _!/
The wastewater treatment technologies considered in this analysis include
the following treatment options and represent certain changes from the
previous options addressed in the July 2, 1979 proposed regulation. 2J
(1) Best Practicable Control Technology Currently Available (BPT)
Extended aeration activated sludge biological
treatment, including coagulation-sedimenta-
tion with equalization
Best Available Technology Economically Achievable (BAT)
BAT Option I - Equal to BPT
BAT Option II = In-plant control and segregated stream
pretreatment, plus activated sludge upgraded
primarily by powdered activated carbon (PAC)
BAT Option III = BAT II with the addition of multimedia
filtration
(2) Pretreatment Standards for Existing Sources (PSES)
PSES Option I = In-plant controls (depending on subcategory),
including stream segregation and water
conservation, segregated stream pretreatment,
including fine screening and catalytic
oxidation of beamhouse wastewater; and pH
control and monitoring (pH and flow) at the
combined sewer discharge
PSES I includes control capability for the
regulation of sulfide
PSES Option II = PSES I plus in-plant control,
including chromium recovery and reuse;
segregated stream pretreatment, including
fine screening/equalization and
coagulation-sedimentation of tanyard
wastewater; and dewatering of sludges
PSES II includes control capability for
sulfide and chromium
II EPA, op. cit.
2J The options identified herein are taken from the "Notice of
Availability and Request for Comments," Federal Register, June 2,
1982.
VII-4
-------
PSES Option III = Controls in addition to those in PSES II
(depending on subcategory) as follows:
segregated stream pretreatment, including
flue gas coagulation-sedimentation of
beamhouse wastewaters, equalization and
coagulation-sedimentation of combined
wastewaters in place of the same unit
processes applied to segregated tanyard
wastewaters
PSES III includes control capability for
sulfide and chromium
(3) New Source Performance Standards (NSPS)
NSPS Option I = Require limitations equal to BAT I with
reduced flow
NSPS Option II = Require limitations equal to BAT II with
reduced flow
NSPS Option III = Require limitations equal to BAT III with
reduced flow
(4) Pretreatment Standards for New Sources (PSNS)
PSNS Option I = Require limitations equal PSES I
PSNS Option II = Require limitations equal to PSES II
PSNS Option III = Require limitations equal to PSES III
C. Wastewater Treatment Costs
The wastewater treatment costs, as provided by EPA, were based on the model
plants' production levels, estimated wastewater flows, and wastewater
characteristics as discussed in the Development Document. I/
1. Investment Costs
The investment costs for the treatment alternatives were primarily based on
the estimated wastewater flow or hydraulic load of the model tanneries.
These costs were developed by -the technical contractor and were based on
the following assumptions.
t Costs were expressed in first quarter, 1980 dollars.
\j EPA, op. cit.
VII-5
-------
• Expected accuracy for these conceptual estimates was plus or
minus 30 to 40 percent.
• All design specifications were prepared by outside consulting
engineers in accordance with applicable codes.
• Construction work was performed by outside contractor using union
labor and no work was performed by in-plant labor or maintenance
personnel.
• No land acquisition costs were included because, for direct
dischargers, land acquisition is not necessary to accommodate
BPT. For indirect dischargers, it was assumed that no
acquisition of adjacent land would be necessary, as was found
generally to be the case in a survey.
• Approximately 23 percent of investment costs were allowed for
contingency and engineering design costs.
The wastewater control investment requirements for the existing direct and
indirect discharging models are depicted in Table VII-2. The costs
presented in Table VII-2, and all subsequent tables, reflect the costs
associated with the models going from the models' base cases to the various
treatment options. The investment requirements for the new source models
are shown in Table VII-3.
2. Annualized Costs
shown
source
Annualized wastewater treatment costs consist of annual operating and
maintenance expenditures, cost of capital and depreciation. The annual
operating and maintenance expenditures were provided by EPA and are she
in Table VII-4 for the existing models and Table VII-5 for the new source
models. The estimated industry cost of capital, discussed in Chapter IV,
was determined to be 11.0 percent. Depreciation assumed a 15 year asset
life with no salvage value. A straight-line depreciation method was used.
The estimated annualized costs for the wastewater control technologies are
shown in Table VII-6 for the existing models and Table VII-7 for the new
source models.
3. Aggregated Industry Costs
Table VII-8 depicts the aggregate industry investment and annualized costs
for each of the treatment options considered for existing sources. These
costs were developed from cost estimates presented in preceding sections of
this chapter, information concerning the estimated number of plants by
discharge status, type, and size presented in Table VII-1.
VII-6
-------
Table VII-2. The leather tanning industry, representative existing model plants, wastewater controls Investment requirements
Existing direct dischargers (BAT)
Sub- BAT BAT
Model/size category I II
Chrome Tan 1 « 2
Small 585 1,697
Large 1,046 2,906
Non Chrome Tan 3 291 613
Medium 753 1,789
Other
Medium 4, 6, 7 & 8 184 203
8AT
III Model/size
Chrome Tan/Pulp
1,827 X-Small
3,187 Small
Medium
691 Large
1,988 X-Large
Chrome Tan/Save
357 Small
Large
Nonchrome Tan
Small
Medium
Large
Re tan/Sides
Small
Large
No Beamhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Retan/Splits
Small
Large
Existing indirect dischargers
PSES
Subcategory I
1
301
364
449
586
1,040
2
350
547
3
296
407
609
4
143
250
5
96
106
123
6
299
469
7
135
190
473
9
122
163
(PSES)
PSES
II
633
901
1,169
1,572
2,609
1,006
1,780
646
1,140
1,813
805
1,566
264
395
618
716
1,538
707
1,075
1,478
655
996
PSES
III
1,063
1,622
2,203
3,046
5,094
1,745
3,281
1,076
2,090
3,475
805
1,566
264
395
618
1,554
3,706
707
1,075
2,717
655
996
Source: U.S. Environmental Protection Agency, Effluent Guidelines Division.
-------
Table VII-3. The leather tanning industry, representative new source model plants, wastewater controls investment requirements
Model/size
Chrome Tan/Pulp
Medium
Large
X -Large
Chrome Tan/Save
Large
Nonchrome Tan
Medium
Large
Retan/Sides
Large
•=; No Beamhouse
£ Medium
i Large
CD
Through Blue
Small
Large
Shearling
Large
Pigskin
Medium
Retail/Splits
Large
Sub-
category
1
2
3
4
5
6
7
8
9
New source
NSPS I
1,805
2,501
4,044
3,002
1,884
3,153
1,975
605
959
1,481
3,862
1,507
2,630
1,424
direct dischargers
NSPS II
2,654
3,722
6,158
4,136
2,647
4,484
2,072
631
1,014
2,009
5,068
1,560
3,471
1,552
(NSHS)
NS~P$ It!
($000)--
2,834
3,972
6.556
4,395
2,812
4,759
2,304
689
1,115
2,095
5,284
1,750
3,671
1,715
New source
PSNS 1
409
523
848
540
387
569
199
102
116
299
469
172
441
154
indirect dischargers I
PSNS 11
1,095
1,461
2,354
1,771
1,105
1,739
1,432
390
614
712
1.484
1,045
1,416
992
IPSNS)
PSNS 111
2,105
2,894
4,720
3,319
2,06?
3,389
1,469
409
639
1,676
3,757
1,084
2,641
1,028
Source: U.S. Environmental Protection Agency, Effluent Guidelines Division.
-------
Table VI1-4. The leather tanning Industry, representative existing model plants, wastewater controls' annual operating
and maintenance expenses
i
vo
Existing direct dischargers (BAT)
Sub- BAT BAT
Model/size category 1 II
Chrome Tan 182
Small 119.0 268.5
Medium 395.5 892.5
fton Chrome Tan 3
Small 72.0 154.5
Medium 318.5 587.5
Other 4, 6, 7 & 8
Medium 105.5 158.0
I
1
BAT
III Model/size
($000) —
Chrome Tan/Pulp
271.5 X-Small
898.5 Small
Medium
Large
157.5 X-Large
592.0
Chrome Tan/Save
Small
162.0 Large
Nonchrome Tan
Small
Medium
Large
Retan/Sides
Small
Large
No Beamhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Retail/Splits
Small
Large
Existing indirect dischargers
PSES
Subcategory I
1
20.3
35.1
62.5
101.1
236.9
2
31.4
88.8
3
18.9
50.4
114.0
4
25.2
98.0
5
5.2
8.4
17.7
6
20.3
68.7
7
23.1
50.5
73.3
9
16.1
37.3
(PSES)
PSES
II
51.1
76.8
124.0
195.3
449.4
81.8
i.'24.8
50.5
112.7
248.2
59.7
165.9
27.7
34.1
48.5
55.8
171.2
56.1
91.1
178.1
48.4
82.6
PSES
HI
77.1
135.3
242.2
404.7
1,008.4
165.1
521.4
80.1
233.6
563.9
59.7
165.9
27.7
34.1
48.5
175.0
844.5
56.1
91.1
400.2
48.4
82.6
Source: U.S. Environmental Protection Agency, Effluent Guidelines Division.
-------
Table VH-5. The leather tanning industry, representative new Source model plants, wastewater controls' annual operating and maintenance expenses
Model/size
Chrome Tan/Pulp
Med i urn
Large
X-Large
Chrome Tan/Save
Large
Nonchrome Tan
Med i um
Large
Retan/SideS
Large
No Beanihouse
Med i um
Large
Through Blue
Small
Large
Shearling
Large
Pigskin
Medium
Retan/Splits
Large
Sub-
category
1
2
3
4
5
6
7
8
9
New
NSPS I
152
239
507
267
150
331
167
46
71
107
475
126
256
105
source direct dischargers
NSPS 11
272
454
1,023
498
202
676
234
53
92
176
830
154
383
193
(NSPS)
NSPS III
275
459
1,032
504
285
682
239
55
95
179
834
158
387
197
New source
PSNS I
--($000)
54
93
209
99
47
109
46
5
12
19
73
32
63
25
indirect dischargers
PSNS II
90
149
325
171
82
180
89
23
37
39
128
62
114
55
(PSNS)
PSNS III
130
211
463
244
122
257
97
24
36
76
247
68
170
59
Source: U.S. Environmental Protection Agency, Effluent Guidelines Division.
-------
Table VII-6. The leather tanning industry, representative existing model plants, was tauter controls' estimated annualized costs
Existing direct dischargers (BAT)
Sub- BAT BAT BAT
Model/size category I (I m Model/size
($000)--
Chrome Tan 142 Chrome Tan/Pulp
Small 222.1 568.0 594.5 X-Small
Medium 580. Z 1,406.0 1,461.8 Small
Medium
Won Chrome Tan 3 Large
Small 123.9 262.8 279.6 X^Large
Hedium 511.5 883,5 923.5
... . Chrome Tan/Save
Other 4. 6, 7 * 8 Small
Medium 137.7 193.5 227.2 Large
Nonchrome Tan
Small
Medium
Large
Hetan/Sides
Small
Large
No Beamhouse
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Med i urn
Re tan/Splits
Small
Large
Existing indirect dischargers
PSES
Subcategory I
1
73.6
99.5
142.0
204.8
421.0
2
93.4
185.6
3
71.3
122.4
221.8
4
50.5
142.3
5
22.2
27.2
39.5
6
73.2
151.7
7
47.0
84.1
157.0
9
37.7
66.2
(PSES)
* PSES
11
163.1
236.3
330.9
473.5
911.2
259.9
539.9
164.8
314.5
569.1
202.2
277. 2
74.4
104.0
157.9
182.5
443.4
181.2
281.4
439.7
164.3
258.9
PSES
HI
265.3
422.4
632.1
943.8
1,910.0
474.0
1,102.1
270.6
603.5
1,179.0
202.2
443.1
74.4
104.0
157.9
450.1
1,500.5
181.2
281.4
881.1
164.3
258.9
Source: OPRA estimates based on annual operating and maintenance expenditures depicted in Table VII-6 and interest and depreciation
• as described in Chapter VIL
-------
Table ¥11-7. The leather tanning industry, representative new source model plants, wastewater controls' estimated annuitized costs
Sub-
Model/size category
Chrome Tan/Pulp 1
Medium
Large
X-Large
Chronie Tan/Save 2
Large
Nonchrome Tan 3
Medium
Large
Re tan/ Sides 4
Large
< No Beainhouse 5
~ Medium
i Large
^ Through Blue 6
Small
Large
Shearling 7
Large
Pigskin 8
Medium
Retan/Splits 9
Large
Hew source direct dischargers (NSPS)
NSPS I
819
1,264
2,508
1,286
792
1,600
622
176
289
553
1,960
422
1,108
408
NSPS II
845
1,301
2.616
1,318
808
1,646
653
180
298
557
2,004
440
1,128
422
NSPS III
877
1,345
2,688
1,366
837
1,695
694
192
317
573
2,044
475
1,164
451
New source indirect discharaurs (PSNS)
PSNS I
(JOOO)
500
753
1,432
927
498
948
341
87
135
371
1,200
241
704
189
PSNS 11
785
1,230
2,473
1,252
773
1,566
588
158
271
535
) ,956
388
1,074
389
PSNS III
811
1,266
2,582
1,284
790
1,612
619
161
280
538
1,970
406
1,093
404
PSNS IV
843
1,311
2,653
1.332
819
1,660
660
173
299
555
2,010
441
1,130
433
Source: DPRA estimates based on annual operating and maintenance expenditures depicted in Table VI1-7 and interest and depreciation expenses as
described on Page VI1-6.
-------
I
I—I
GO
Table VI1-8. The leather tanning industry, estimated aggregated costs for industry compliance
with selected treatment options (1980 1st quarter and 1982 1st quarter dollars)
Existing
Treatment
option
1980 dollars
BAT Option I
BAT Option II
BAT Option III
1982 dollars
BAT Option I
BAT Option II
BAT Option III
direct dischargers (BAT)
Total
investment
/ Cmi I 1 in
8.8
23.6
26.3
10.5
28.1
31.3
Total
annualized
costs
n)
n;
4.8
11.1
11.6
5.7
13.2
13.8
Existing
Treatment
option
PSES Option I
PSES Option II
PSES Option III
PSES Option I
PSES Option II
PSES Option III
indirect dischargers
Total
investment
/ Cm-i 1 I
45.5
141.5
230.9
54.1
168.4
274.8
(PSES)
Total
annualized
costs
• \
14.9
39.7
69.7
17.7
47.2
82.9
Source: DPRA estimates based on information provided in Tables VII-1. VII-2, and VII-6. 1982 costs are
based on the 1980, 1st qtr. costs, inflated by the ENR-Construction Cost Index to 1982, 1st qtr.
(factor of 1.19) Above figures are for all existing discharges (no exclusions).
-------
VIII. PROJECTED ECONOMIC IMPACTS
The imposition of wastewater control requirements on the leather tanning
industry will result in economic impacts for the industry because
expenditures must be made that will not result in improved operating
efficiency. Thus, the industry's average profitability will be reduced
and economic impacts on some individual plants will be severe. As the
capital and annual operating and maintenance expenditures for wastewater
controls increase, the resulting economic impacts become more significant.
The purpose of this chapter is to describe the various economic impacts
associated with the treatment alternatives outlined in Chapter VII and to
project the economic ramifications of tanneries incurring the associated
expenditures.
The economic impacts of the various control alternatives were projected
using the methodology discussed in Chapter II. The model plant approach
was used to assess the impacts of PSES on the indirect dischargers. These
impacts included plant closures, production and employment effect and
secondary effects as outlined in Chapter II. For direct discharging
tanneries, the impacts were based on an analysis of plant specific
Sal0?*11011' thus, plant closures, production and employment effects are
oasea on P'ant specific information not on model plant data. The plant
specific data were then aggregated and presented as model plants for
presentation purposes and for the calculation of related secondary effects.
A. Price Effects
1. Increases in the Cost of Production
An implicit indicator of the expected cost effects attributable to the
imposition of wastewater controls used in this analysis was the amount of
sales price increase required to maintain a tannery's net present value,
after control expenditures, at a level equal to that prior to control
expenses. The method of the computation of this cost of production
increase was described in detail in Chapter II (Methodology) of this
report. The cost increases computed under this method reflect the time
value of money and tax results as opposed to other more simplified methods,
such as using annualized cost as percent of sales as a proxy of the
increase. This latter method, which is frequently used, tends to overstate
the increases required because it does not account for the tax
implications. The ability of tanneries to pass on such cost increases is
evaluated in the next section of this chapter.
VIII-1
-------
The required price increases for models representing existing tanneries are
shown in Table VIII-1 for the 3 BAT options and 3 PSES options. As shown
for the direct discharger models, increases under BAT I are less than 2.5
percent for all models and range from 0.9 percent to a high of 2.3.
Increases are about 20 percent higher under BAT II varying from 1.1 percent
for the other model to 3.9 percent for the small Chrome Tan. Increases
required under BAT III are only slightly higher than those under BAT II.
As shown for indirect dischargers, increases required under PSES I are, in
most cases, less than two percent for small and X-small plants and less
than one percent for medium and large plants. Three models require
increases in excess of two percent: Chrome Tan/Pulp X-small (3.6); and
Nonchrome Tan small (2.8); and the Pig medium (2.1). Under Technology
PSES II, cost increases are more than double PSES I for most models.
Increases range from 0.9 percent for the large Through Blue model to 5.3
percent for the small nonchrome tan model. Increases required under
PSES III are substantially higher for all models except in those cases in
which the two options have the same cost. The largest increases required
are for the Chrome Tan/Pulp X-small and Pigskin medium models with required
increases of 10.2 and 8.7 percent, respectively. All of the small models
(except those for which PSES II and III are the same) require increases of
over three percent.
2. Expected Price Increases
The leather tanning industry is an extremely competitive industry in which
tanneries operate on relatively small profit margins. Primarily because of
strong competition from foreign tanners, domestic tanners are expected to
have a difficult time in passing on expenditures associated with wastewater
controls. Another factor contributing to the expected lack of ability to
increase prices would be the fact that individual tanneries would be
affected differently, depending upon their respective size, levels of
profitability, and magnitude of expenditure required. Thus, while some
tanneries will require relatively large price increases, others will not.
Because of the BAT and PSES limitations nearly all tanneries are expected
to realize a higher cost of production. Economic theory suggests that when
increased costs are incurred throughout an industry (or among all
producers), price increases will result over the long run. As a result, it
is expected that over the long run prices will increase to cover the
average increase in cost of production resulting from effluent controls of
medium and large plants. The expected price increase was calculated by
averaging the increases in the cost of production from the recommended
options—BAT I and PSES II--for all medium, large and extra large plants as
shown in Table VIII-1.
The required increases for the small plants were excluded from the
averaging since the production of these plants amounts to a very small
portion of the total industry output. Consequently, the upward pressure on
prices from these plants would be insignificant. The required increase of
the Pigskin plant was also excluded since it already has the recommended
VIII-2
-------
Table VIII-1. The leather tanning industry, representative existing model plants, required price increase to offset expenditures
for wastewater controls
i
u>
Existing direct dischargers (BAT)
BAT
Model/size Subcategory 1
Chrome Tan 1*2
Small 1.9
Large 1.7
Nonchrome Tan 3
Small 2.3
Medium 2.1
Other 4, 6, 7
Medium & 8 0.9
BAT BAT
11 III Model/size
— (percent)
Chrome Tan/Pulp
3.8 4.1 X-Small
3.9 4.1 Small
Medium
Large
4.5 5.0 X-Large
2.9 3.1
Chrome Tan/Save
Small
1.1 1.4 Large
Nonchrome Tan
Small
Medium
Large
Retan/Sides
Small
Large
No Beam House
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Retan/Spllts
Small
Large
Existing indirect dischargers
PSES
Subcategory I
PSES
II
(PSES)
PSES
III
{ percent}
1
3.6
1.8
1.1
0.8
0.5
2
1.7
0.7
3
2.8
0.9
0.5
4
0.6
0.3
5
1.5
0.6
0.2
6
1.0
0.6
7
1.0
0.6
8
2*
. 1
9
1]
.1
0.6
4.5
4.4
2.6
1.9
1.2
4.8
2.2
5.3
2.4
1.4
2.8
1.1
2.6
2.1
1.0
2.5
0.9
4.3
2.4
61
. 1
3^
.3
2.6
10.2
7.8
5.0
3.8
2.5
8.3
4.3
7.6
3.3
2.8
2.8
1.1
2.6
2.1
1.0
5.8
2. 1
A 3
" •
9 4
f. •
8-7
3-3
1- '^
-------
treatment in place. The expected price increase is 1.8 percent. This
expected price increase is not used in projecting plant closures,
production effects, or employment effects. The use of this price increase
would reduce the magnitude of these other effects.
B. Financial Effects
Based on the model tannery profiles described in Chapter VI and the
estimated cost of wastewater control costs described in Chapter VII, the
following financial indicators were computed for the base case (without
wastewater controls considered) and the impacted case (with wastewater
controls considered).
• After-Tax Return on Sales
t After-Tax Return on Total Assets
• Annual Cash Flow
t Net Present Value
These indicators were computed for each tannery model according to the net
present value (NPV) methodology and accounting procedures outlined in
Chapter II, Methodology. It should be noted that unlevel discounted cash
flows were used in determining the models' NPVs. That is, for each of the
twenty-one years, independent cash flows were computed based on certain
assumptions of inflation, profitability, depreciation, and reinvestment.
Accordingly, the after-tax returns on sales and total assets varied
slightly from year to year. To compensate for this, a 21-year average was
computed for each return. Since the model tanneries' annual cash flow
values varied from year to year, the cash flow for year 21 was presented
(cash flows for year 10 and 15 were also examined). Use of the cash flow
from year 21, after a full cycle of construction and use of pollution
control equipment, provides for another measurement of profitability over
the long term. Short term cash flows indicating the firms liquidity are
also used to estimate plant closures (See Chapter II, Section F). Because
of the above described procedures, the base case financial indicators may
differ slightly from similar indicators presented in Chapter VI, Model
Plants.
1. Return on Sales
After-tax return on sales reflects the general level of profitability in an
industry. For the leather tanning industry, returns on sales have been low
for the past few years due to a general decline in the industry. The
imposition of wastewater control requirements on the industry contributes
to a further deterioration of its returns.
The after-tax returns on sales for the existing model tanneries both before
and after expenditures for wastewater controls are shown in Table VIII-2.
Table VIII-3 indicates the corresponding percent reductions in income.
Under BAT I, the return of the small Chrome Tan model is a negative 0.8
percent (loss). The returns for the other models range between 0.5 percent
VIII-4
-------
Table VIII-2- The leather tanning Industry, representative existing model plants, effects of wastewater control expenditures on
average after-tax returns on sales
Existing direct dischargers (BAT)
BAT BAT
Model/size Subcategory Base case I 11
Chrome Jan 1 & 2
Small 1.2 -0.8 -3.8
Large 5.1 4.1 2.7
Noncnrome Tan 3
Small 2.7 1.6 -0.1
Medium 1.9 0.5 -1.0
Other 4, 6, 7
Medium & 8 2.4 1.8 1.6
Existing indirect
BAT
III Model/size Subcategory
Chrome Tan/Pulp 1
-4.0 X-Small
2.6 Small
Medium
Large
-0.3 X-Large
-1.1
Chrome Tan/Save 2
Small
1.5 Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sldes 4
Small
Large
No Beam House 5
Small
Medium
Large
Through Blue 6
Small
Large
Shearling 7
Small
Large
Pigskin 8
Medium
Retan/Splits 9
Small
Large
dischargers
Base case
3.2
3.2
2.8
2.3
2.6
3.1
2.3
2.8
2.0
2.3
2.0
2.0
3.6
2.9
2.4
2.8
1.9
3.3
3.2
3.5
2.3
2.2
(PSES)
PSES
r
f n^ypfint \
1.6
2.5
2.3
1.9
2.3
2.4
2.0
1.6
1.6
2.0
1.7
1.9
3.0
2.7
2.3
2.4
1.8
2.8
2.8
2.6
1.8
1.8
PSES
II
-1.0
1.3
1.7
1.5
2.0
0.9
1.3
-0.7
1.0
1.7
0.8
1.6
1.2
2.0
?.o
1.8
1.5
1.4
2.2
0.5
•0.5
1.0
PSES
III
-4.2
-0.8
0.4
0.4
1.3
-1.7
-0.1
-3.6
-0.3
0.9
0.8
1.6
1.2
2.0
2.0
-O.Z
0.5
1.4
2.2
-4.4
-0.5
1.0
-------
Table VIII-3. The leather tanning industry, representative existing model plants' impacts, percent reductions in average after-tax return on sales
due to wastewater control expenditures
i
en
Existing direct dischargers (BAT)
BAT BAT BAT
Model/size Subcategory I n nl
>ercent)
Chrome Tan 1 & 2
Sma11 >100.0 >100.0 >100 0
Lar9e 20.0 46.9 47.8
Nonchrome Tan 3
Sma11 40.2 >100.0 >100 0
Medium 76.6 >100.0 >100.0
Other 4, 6, 7
Medium & 8 27.2 37.2 43.1
Model /size
Existing indirect dis
PSES
Subcategory I
ichdrQers
PSES
n
(PSES)
III
(percent)
Chrome Tan/Pulp
X-Small
Small
Med i urn
Large
X -Large
Chrome Tan/Save
Small
Large
Nonchrome Tan
Small
Medium
Large
Retan/Sides
Small
Large
No Beam House
Small
Medium
Large
Through Blue
Small
Large
Shearling
Small
Large
Pigskin
Medium
Retan/Splits
Small
Large
1
49.1
23.5
17.7
16.8
11.1
2
22.8
15.3
3
44.4
19.7
11.3
4
15.0
8.4
5
16.6
7.7
4.3
6
13.8
6.9
7
14.7
10.3
6
28.1
9
23.7
14.2
>100.0
60.0
40.2
37.3
23.2
70.5
43.3
>100.0
50.9
27.9
60.0
22.4
67.2
30.0
16.1
35.7
19.5
56.3
30.2
86.4
>100.0
52.6
>100.0
>100.0
86.3
82.5
49.4
>100.0
>100.0
>100.0
>100.0
60.9
60.0
22.4
67.2
30.0
16.1
>100.0
74.9
56.3
30.2
>100.0
>100.0
52.6
-------
to 4.1 percent. The reductions in income are 20 percent or greater for all
models. Under BAT II, three models have negative returns. Those of the
remaining two models are 2.7 percent for the large Chrome Tan model and 1.6
percent for the Other model. The returns of all models are slightly lower
under BAT III than under BAT II.
In the case of PSES, the returns ranged from 1.6 percent to 3.0 percent
under PSES I. The reductions in income from baseline ranged from 4 percent
to 50 percent. Under PSES II, reductions were significantly higher than
those under PSES I—two to four times as high. Three of the models had
negative returns: the X-small Chrome/Tan Pulp, the small Nonchrome Tan,
and the small Retan/Splits. The other returns ranged from 0.5 percent to
2.2 percent.
2. Return on Total Assets
Due to the relative age of most tanneries, their respective assets were
acquired at considerably less cost than if acquired today. Accordingly,
the model tanneries1 average returns on total assets were relatively high
in the base case. This is especially true for X-small and small tanneries.
The imposition of wastewater controls affected the plants in the same
manner as was described for the return on sales; thus, the models' returns
on total assets would be reduced by approximately the same percentages. As
such, a detailed description of the reductions in the returns on total
assets for each model was not developed. The 21-year average returns on
total assets are shown in Table VIII-4 for the existing model tanneries. It
should be noted the returns shown are averages of each of the model's
21-years1 returns on total assets; thus, some slight differences of the
percentage reductions between the returns on total assets may be noted.
3. Annual Cash Flows
The annual cash flows for year 21 are shown in Table VIII-5 for the
existing models, both direct and indirect dischargers. For the direct
5™ n^ers' the cash/lows are all positive under BAT I, ranging from
$200,000 to close to $4 million. Under BAT II, the cash flow of the small
Chrome Tan model becomes negative. The others remain positive but are
substantially less than those under baseline. The cash flows of the
indirect discharge models all remain positive, both under PSES I and II.
The cash flows under PSES I are only slightly lower than those under
baseline. They range from a low of about $180,000 to a high of over $6
million. Under PSES II, the cash flows are reduced from about 25 to 35
percent from baseline and range from just over $130,000 to close to $6
million (for the X-large Chrome Tan/Pulp model).
4. Net Present Values
The model plant net present values (NPV) reflect the net present values of
the model tanneries discounted over a 21 year period. The NPV concept
indicates the size of the return to the equity holders in excess of the
firm's cost of capital (11.0 percent - see Chapter IV, Section F); thus, if
VIII-7
-------
Table VI1I-4. The leather tanning industry, representative existing model plants, effects of wastewater control expenditures
average after-tax returns on total assets
I
00
Existing direct dischargers (BAT)
BAT BAT
Model/size Subcategory Base case I II
•" ' " " " "• •" - - ™ r — • • - ii
(percent)
Chrome Tan 1 & 2
Small 6.5 .42 -14.5
L*r9e 23.5 17.5 10.4
Nonchrome Tan 3
Small 17.0 9.0 -1.3
Medium 8.7 2.0 -4 7
Other 4, 6, 7
Medium & 8 11.0 7.8 6.7
Existing indirect
HI Model/size Subcategory
Chrome Tan/Pulp 1
-15.0 X-Small
10.0 Small
Medium
-2.4 X-Large
-5.1
Chronic Tan/Save 2
Sma 1 1
6.0 Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sides 4
Small
Large
No Beam House 5
Small
Medium
Large
Through Blue 6
Small
Large
Shearling 7
Small
Large
Pigskin 8
Medium
Retan/Splits 9
Small
Large
dischargers
•3
Base case
16.6
15.8
16.2
10. fl
9.3
14.9
10.6
18.3
11.7
8.1
8.0
9.2
16.9
12.9
10.0
18.2
13.4
11.0
10.2
21.7
12.4
12.5
(PSES)
PSES
I
-(percent)
7.4
10.9
12.4
8.6
8.1
10.4
8.7
8.4
8.8
7.0
6.6
8.3
13.0
11.5
9.4
14.5
12.2
9.0
9.0
13.7
8.9
10.4
PStS
II
-1.8
5.4
8.3
6.1
6.8
3.9
5.4
-1.8
5.0
5.5
2.9
6.7
4.9
8.1
7.9
10.0
10.0
4.2
6.5
3.0
-0.7
5.2
PSES
III
-9.8
-1.1
2.4
1.8
4.2
-4.0
0.0
-10.8
-0.9
2.8
2.9
6.7
4.9
8.1
7.9
0.4
2.9
4.2
6.5
-13.0
-0.7
5.2
-------
Table VIII-5. The leather tanning industry, representative existing model plants, effects of wastewater control expenditures on
annual cash flows (year 21)
Existing direct dischargers (BAT)
BAT BAT
Model/size Subcategory Base case I 11
i K\f\r\ \
Existing Indirect
BAT
III Model /size Subcategory
dischargers
Base case
(PSES)
PSES
I
itm
PSES
II
w\ \
PSES
III
Chrome Tan 1 & 2
Small 498 229 -240
Large 4,500 3.797 2,894
Nonchrome Tan 3
Small 483 351 194
Medium 1.418 843 198
Other 4, 6. 7
Medium « 8 948 1.132 859
Chrome Tan/ Pulp 1
-261 X -Small
2.874 Small
Medium
Large
184 X-Large
175
Chrome Tan/Save 2
Small
847 Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sides 4
Small
Large
No Beam Mouse 5
Small
Medium
Large
Through Blue 6
Small
Large
Shearling 7
Snia 1 1
Large
Pigskin 8
Med i urn
Retan/Splits 9
Small
large
247
638
1,264
2.148
6.683
606
2.109
229
1,001
3,730
621
3,383
191
516
1.512
789
3,308
526
1.353
824
285
839
202
566
1,143
1,957
6,247
541
1,940
187
902
3.516
573
3,209
179
498
1,477
744
2,906
482
1,261
684
253
770
138
477
1,013
1,763
5,833
433
1,666
121
771
3.247
491
3,048
135
444
1,408
670
2,695
406
1,161
472
180
664
58
352
777
1.358
4,803
266
1,113
18
533
2.656
491
3.048
135
444
1.408
439
1,484
406
1,161
-77
180
664
-------
the NPV was positive, it is assumed the particular firm earns a return
during the 21 year period in excess of the minimum return necessary to
attract investors to the tanning industry (the cost of capital). If the
NPV is negative, then the firm's returns are less than the average industry
cost of capital.
The NPV's for existing models are shown in Table VIII-6. Under BAT I, two
models have negative NPVs: the small Chrome Tan and the medium Nonchrome
Tan. Under BAT II, the NPV of the small Nonchrome model becomes negative
in addition to those of the other two models. The NPVs under BAT III are
only slightly lower than those under BAT II.
Under PSES I, three indirect discharge models have negative NPVs: the
X-large Chrome Tan Pulp, the large Nonchrome Tan, and the small
Retan/Sides; the Nonchrome Tan model also had a negative NPV under
baseline. Under PSES II, the NPVs are considerably lower than those under
PSES I; however, no additional plant's NPVs become negative. PSES III
increases the negative NPVs to include; the large Chrome Tan/Pulp, the
large Chrome Tan/Save, the remaining Nonchrome Tan and the Pigskin model.
C. Production Effects
The leather tanning industry is experiencing a long term decline which
began in the early 196G's and has continued through 1982 except for short
periods in 1975-76 and 1981. Volume in 1960 was 38 million hides;
production in 1981 had declined to under 20 million hides representing an
average annual decline of approximately 3 percent.
There are 158 wet tanneries in the industry today. Thirty-one percent of
the tanneries are categorized as large (or extra-large) and handle
approximately 68 percent of the industry's volume. Twenty-one percent of
the tanneries are categorized as medium and process an estimated 19 percent
of the volume. The remaining 68 tanneries are small or extra-small
operations which as an aggregate produce only 13 percent of the total
industry volume.
1. Baseline Plant Closures
According to the records of the Tanners' Council of America, 45 tanneries
ceased operations between 1968 and 1975. After remaining stable through
the 70's, several tanneries have closed (and one burned) in the last
few years. The reasons for these closures vary; however, some of the more
important factors included:
increased international competition
increased production of synthetic leather
higher per unit cost of production in some plants -- especially
the smaller size
lower per unit profit
difficulty in meeting (physically and financially) occupational
safety requirements
plant obsolescence
VIII-10
-------
Table VIII-6. The leather tanning industry, representative existing model plants, effects of wastewater control expenditures on
net present values
Existing direct dischargers (BAT)
BAT BAT
Model/size Subcategory Base case I II
($000)
Chrome Tan 1*2
Small 341 -403 -1,420
Large 9,154 6,952 4,058
Noncbrcwte Tan 3
Small 897 472 -11
Medium 727 -1,106 -2,572
Other 4. 6, 7
Medium 4 8 2,989 2,424 2.160
Existing indirect
BAT
III Model/size Subcategory
Chrome Tan/Pulp 1
-1,468 X-Small
3,964 Small
Medium
Large
-44 X-Large
-2,641
Chrome Tan/Save 2
Small
2,103 Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sides 4
Small
Large
No Beam House 5
Small
Medium
Large
Through Blue 6
Small
Large
Shearling 7
Small
Large
Pigskin 8
Med 1 urn
Retan/Splits 9
Small
Large
dischargers (PSES)
Base case
671
1,506
2,935
1,975
1,383
1,430
1,905
610
1,420
-920
145
1,976
500
918
1,256
2,106
8,061
681
1,992
1,924
496
1,297
PSES
1
— -(JOOO)
491
1,247
2,521
1,338
-32
1,194
1,338
444
1,076
PSES
11
248
916
2,049
642
-1,448
792
378
202
597
-1.626 -2.571
-13
1,432
447
852
1,140
1,935
7,61?
735
1,698
1,451
384
1,074
-338
790
284
658
872
1,663
6,856
439
1,291
699
86
656
PSES
III
6
459
1,223
-737
-4,795
207
-1,440
-51
-223
-4,521
-338
790
284
658
872
678
3,017
439
1,291
-689
86
666
-------
• inadequate owner income
• owner retirement
• unable to meet state environmental regulations
It is anticipated that additional tanneries will close in the future for
similar reasons. Accordingly, it is estimated that approximately 7-12
tanneries will close prior to 1984 barring any atypical changes in the
industry's operating environment. Expected baseline closures include one
direct discharging tannery and the following indirects:
Chrome Tan/Pulp 2-4
Chrome Tan/Save 1
Nonchrome Tan 2-3
Retan/Sides 1-2
Retan Splits 1-2
While tanneries are projected to close, new tanneries are also expected to
be constructed prior to 1984. These new tanneries are expected to number
about 3-5 and will probably be relatively large operations in the Chrome
Tan or Through Blue categories.
2. Plant Closure Criteria
Based on the assumption of no price increases, the industry's production
effects resulting from the imposition of wastewater controls are best
measured in terms of the possibility of tanneries closing due to the
imposition of effluent control costs. As was discussed in Chapter II,
plant closures may result from the inability of less profitable plants to
adequately recover required pollution abatement costs through increased
product price. Plant closures for direct discharging facilities are
analyzed in a confidential report, since plant specific financial data is
used. The methodology, however, is the same as that used for our analysis
of indirect dischargers.
The closure analysis for indirect dischargers consists of two major steps.
First we determine which model plants appear to be potential closures.
This is done using the NPV/cash flow measure of profitability and the
liquidity test. The second step is to determine the number of plants
represented by the model that would actually close. Both these steps are
presented in detail in Chapter II.
a. The Net Present Value/Cash Flow Test - Indirect Dischargers
The NPV/cash flow test is based on the present value of future cash flows
discounted at a rate equal to the industry cost of capital. Thus, if a
firms net present value (after controls) exceeds its cost of capital it is
in the firms best interest to continue operations. Following are the
results of the NPV/cash flow test.
VIII-12
-------
NPV/Cash Flow Test
Model/Size SubcategoryPSES I PSES II PSES III
Chrome Tan/Pulp 1
Large M
X-Large M M M
Chrome Tan/Save 2
Large C
Nonchrome Tan 3
SmallC
Medium M
Large M M C
Retan/Sides 4
Small M M M
Pigskin 8
Medium C
M = Marginal
C = Closure
b. Liquidity Test - Indirect Dischargers
The liquidity test considers the firms ability to make the necessary
investment in pollution control facilities and repay its debt obligation.
This test considers the short-term (5 year) cash flow of the model plant
immediately following implementation of the control in contrast to the 21
year cash flow which examines longer term profitability. If the liquidity
test is negative the model plant can be expected to have difficulty
financing the necessary expenditures.
The results of the liquidity test are combined with the results of the
NPV/cash flow test in the way described on page 11-15 and are shown in
Table VIII-7. The combination of these tests is an attempt to simulate the
decision process of the firms owner. Is it economically viable to continue
operations? If so, can the pollution control expenditures be financed?
3. Estimated Tannery Closures
The individual plant analysis conducted for the 17 direct dischargers
projects the closure of two tanneries under BAT I. Under BAT II and III
six tanneries are expected to close.
VIII-13
-------
Table VIII-7. Results of the net present value/cash flow test and the
liquidity test, indirect dischargers
Chrome Tan/Pulp
X -Small
Small
Medium
large
X-Large
Chrome Tan/Save
Small
large
Nonchrotne Tan
Small
Medium
large
Retan/Sides
Small
large
No Beamhouse
Small
Medium
large
through Blue
Small
large
Shear! ing
Small
Large
Pigskin
Medium
Retan/Splits
Small
Large
PSES 1
1 — f 1 J f '
Liquidity
NPV/Cash Flow Test
Neg
Pos
Pos
Pos
M Pos
Pos
Pos
Pos
Pos
M Pos
M Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Status NPV/Cash Flow
M
V
V
V
M H
V
V
V
V
M M
H M
V
V
V
V
V
V
V
V
V
V
V
PSES II
liquidity
Test
Neg
Neq
Pos
Pos
Pos
Neg
Pos
Neg
Pos
Pos
POS
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Neg
Neg
Pos
Status
M
H
V
V
M
M
V
M
V
M
H
V
V
V
V
V
V
V
V
M
H
V
PSES III
Liquidity
NPV/Cash Flow Test
Neg
Neg
Pos
M Pos
M Pos
Neg
C Neg
C Neg
H Neg
C Pos
M Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
Pos
C Neg
Neg
Pos
Status
M
M
y
M
M
M
C
C
C
C
M
V
y
y
¥
V
y
V
y
V
C
M
V
-------
As discussed in Chapter II, Section F, once the model closure criteria have
been developed the second step is to determine the actual number of plant
closures that are associated with each model. This includes some qualitative
judgement associated with the following factors:
a. the number of existing facilities associated with the model,
b. the degree to which existing facilities already have controls in
place,
c. historical trends for the subcategory (baseline closures),
d. the severity by which the models financial data are reduced, in
particular, the conventional financial parameters, after-tax rate
of return on sales and assets,
e. the distribution of financial profiles of existing facilities
associated with the model plant, and
f. consideration of the reliability of the data utilized in the
development of the model plants.
A summary of the key indicators under PSES II is presented in Table VIII-8.
For the indirect dischargers, the plant closure analysis projects that from
10 to 15 plants may close under PSES II. This is discussed by subcategory
below.
Chrome Tan/Pulp - The x-small and small plants in this category are having
baseline difficulties due to overcapacity and price competition in the
industry. As a result, 1-2 baseline closures are projected in each size
category.
The X-small chrome tan plants will be very severely impacted with an
estimated production cost increase of 4.5 percent, a drop in the
conventional financial parameters (rate of return on sales and on assets)
and negative cash flow assuming 5-year financing. As a result all X-small
chrome tan plants are projected to close.
The small chrome tan plants will also incur a high production cost increase
due to the impact of PSES II. Profits will be reduced by an estimated 60
percent and the 5-year liquidity test indicates a slightly negative cash
flow. Over the long run the plants are expected to be profitable but it is
expected that 1-2 of the 20-21 plants remaining after baseline closures
will close and 6 will be included in the marginal category. These, of
course, will be the plants that are achieving lower profits than those
indicated by the model plants.
Economic impacts on the medium, large and X-large plants are not expected
to result in plant closures. Conventional financial parameters are reduced
from 20-40 percent but the NPV and liquidity tests remain positive. Three
of the large plants and two of the X-large plants are expected to become
marginal. Again, these plants would have a lower level of baseline
profitability than indicated by the model plants.
VIII-15
-------
Table VIII-8. Sunroary of key Indicators for PSES II
Nuntoer
Of
Model/Size Subcategory plants
Chrome Tan/Pulp 1
X- Small
Small
Medium
Large
X-Large
Chrome Tan/Save 2
Small
Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sldes 4
Small
Large
No Beamhouse 5
Small
Medium
Large
Through Blue 6
Small
Large
Shearling 7
Small
Large
Pigskin 8
Medium
Retan/Spllts 9
Small
Large
Total
T7 Oaftartt Kacnlino nrnti
6
22
12
11
5
3
2
3
4
1
8
7
7
7
10
7
5
3
3
1
9
5
141
Number of
employees
per plant
40
100
165
355
570
80
390
45
140
270
105
410
25
70
215
65
275
65
220
210
70
190
K .« f hn 77
PC
inv
633
901
1,169
1,572
2,609
1,006
1,780
646
1.140
1,813
865
1,566
264
395
8
716
1,538
707
1,075
1,478
665
996
PC
O&M
51
77
124
115
449
82
225
51
113
248
60
166
28
34
49
56
171
56
91
178
48
83
Production
Annual cost
cost increase
163
236
331
473
910
260
540
165
315
569
202
277
74
104
158
183
443
181
281
440
165
259
4.5
4.4
2.6
1.9
1.2
4.8
2.2
5.3
2.4
1.4
2.8
1.1
2.6
2.1
1.0
2.3
0.9
4.3
2.4
6.1
3.3
2.6
Mode)
viability
M
M
V
V
M
M
V
M
V
M
M
V
V
V
V
V
V
V
V
M
M
V
~^c — rrtV _ TTT
Facilities
in place
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
High
Low
Low
Severity
impacts
Baseline on No. of
closures profits \J closures
1-2 V High 4-5
1-2 High 1-2
Mod
Mod
Low
1 High
Mod
0-1 V High 1-2
1 High
1 Mod
1-2 High 0-1
Mod
High
Mod
Low
Mod -
Low
High
Mod
V High
1-2 V High 4-5
High
10-15
No. of Employees
marginal lost
160-200
6 100-200
3
2
1
1
1 46-90
2 0-105
280-350
585-945
-------
Chrome Tan/Save: The Agency is projecting one baseline closure among the
three small chrome tan plants. The imposition of controls will result in
one of the two remaining plants becoming marginal. Even though the
conventional financial parameters for the models remain positive, possible
difficulty in financing the control and reduction in the conventional
financial parameters (70 percent) will result in the marginal plant. Also,
one of the two plants represented by the large model is expected to become
marginal due to a combination of moderate financial impacts and a reduction
in the NPV from a baseline of $1,905,000 to $378,000.
Nonchrome Tan: Two to three baseline closures are expected in this
category and are expected in at least two size categories. These baseline
closures will leave the remaining plants in a slightly stronger position
due to the decrease in production capacity. The small nonchrome plants
will experience a very high 5.3 p.c.increase in the cost of production
and result in very high financial impacts including a negative cash
flow after imposition of controls. As a result, we expect 1-2 plants in
this category will close due to financing difficulty with two of the
remaining plant becoming marginal.
The medium and large plants are expected to have profits reduced as
indicated by the decline in conventional financial parameter but should be
able to finance the control investments as the liquidity tests are
positive.
Retan/Sides: The retan subcategories are in baseline difficulty because of
a decline in demand for their products. This is reflected in the one - two
baseline closures. It is possible that one additional small plant may
choose to close because of the low NPV. The financial parameters including
the liquidity test are positive; however, there are considerable variations
in the baseline financial condition of plants. Two additional small plants
are expected to become marginal. The large plants are projected to remain
viable after the imposition of control.
No Beamhouse: Our model plant analysis as well as an assessment of other
factors indicate that plants within this subcategory will remain viable.
Through Blue: Again, the model plant analysis and assessment of other
factors indicate that plants within this subcategory will remain viable.
Shearling: No baseline closures are projected nor are any of the plants
expected to close due to compliance with PSES II.
Pigskin: The single pigskin plant represented by the model is not expected
to close because a substantial portion of the treatment facilities and
equipment is in place. This in-place equipment was not reflected in the
cost estimates presented in Chapter VII.
VIII-17
-------
Retan/Splits: This subcategory is presently in difficulty due to a change
in consumer tastes and one to two baseline closures are likely in the small
category. Our analysis indicate a very severe economic impact on the small
plants. The model fails to pass the liquidity test by a wide margin and
the conventional financial parameters as averaged over the life of the
project are negative. This indicates financing difficulty and we are
forecasting from four to five closures in the size subcategory. The large
plant will be in a stronger financial position and should continue to
operate profitably.
Employment effects: The individual plant analysis conducted for the 17
direct dischargers project the closure of two tanneries under BAT Option I,
the selected option. This will result in an employment loss of 155
workers.
For the indirect dischargers, from 10 to 15 plants are projected to close
under PSES II. This would result in an employment loss of 585 to 945
employees. These data are summarized in Table VIII-8.
Production effects: The production displacements associated with the
estimated closures discussed above are contained in Table VIII-9 for BAT I
and PSES II. The BAT I requirements are expected to result in a
displacement of close to 12 million square feet of finished leather which
amounts to about 10 percent of the total finished product of the direct
dischargers. PSES II requirements are expected to result in displacement
of between 29.6 and 46.8 million square of leather. This represents from
1.8 to 2.8 percent of the total leather production of the indirect
dischargers. The most significant impact will occur in the Retan/Splits
subcategory. The large number of closures in this subcategory would result
in a displacement of from 16.4 to 20.5 percent of the splits production.
This impact could be expected to cause some short-term turbulence in the
splits markets. Displacements in the other subcategories are relatively
minor and can be expected to be absorbed by other tanneries remaining in
operation.
D. Secondary Production Effects
The impact of effluent control will increase the overall cost of production
on an industry wide basis. As a result it is likely that the industry will
be able to pass some of these costs through the consumers of leather
products. However, if prices are increased then secondary impacts can be
expected in the volume of leather and leather products purchased (See
Chapter V, Section A.3.) For purposes of this report, the financial
analysis was concluded assuming no price increase (worst case). Likewise,
no declines in sales were assumed due to lower production costs. The
following discussion is indicative of what may occur in the secondary round
of production effects.
VIII-18
-------
Table VIII-9. Summary of production displacement -
options BAT I and PSES II
Model /Size
Chrome Tan
Small
Other
Medium
Total (BAT)
(1000 square
Chrome Tan/Pulp
X-Small
Small
(Subcategory
Nonchrome Tan
Small
Retan/Sides
Small
Retan/Splits
Small
Total (PSES)
(1000 square
Annual
production
Subcategory displaced
1 & 2 (1,000 hides)
73
4, 6, 7 & 8 (1,000 skins)
500
11,833
feet)
1 (1,000 hides)
160-200
100-200
Total ) 260-400
3 (1,000 hides)
35-75
4 (1,000 sides)
0-270
9 (1,000 splits
2160-2700
29,550-46,700
feet)
Percent of
Subcategory
displaced
BAT T
10.0
20.0
DCCC T T
1.6-2.5
2.7-5.3
0-2.2
)
16.4-20.5
-
Percent of If
total
discharge
category
displaced
6.2
3.2
9.6
0.7-1.0
0.1-0.2
0.0.3
1.0-1.3
1.8-2.8
I/ Based on square feet.
VIII-19
-------
As developed in Chapter V, Section A.3, a one percent increase in the price
of leather will have the following cumulative effect on domestic leather
producers.
Type of impact Effect on domestic producers
Percent
Imports of shoes -0.28
Imports of leather goods -0.14
Imports of leather -0.26
Impact on leather exports -0.21
Total effects (best case) -0.89
The EPA model calculates the average price increase required to keep the
net present value of the firm, after controls, equal to baseline
conditions. This was averaged over a 5 year planning period. The
increases that are likely to occur in the market are unlikely to be as
large as the price increase that would be required for small plants to keep
profits constant. Thus, the required price increases resulting from the
recommended options were averaged for medium and large sized plants. This
amounted to a long term price increase of 1.8 percent.
On this basis, the combined effect of an increase in the price of
domestically produced leather on leather imports and shoe imports, and
hence on reducing domestic leather demand is estimated as follows:
Increase in Reduction in demand for domestically produced
domestic leather, based on import elasticity values
leather price Low Best High"
1.0% 0.35 0.89 1.45
1.8% 0.64 1.60 2.62
2.5% 0.89 2.23 3.64
A reasonable estimate of the reduction in leather demand would be in the
range of 0.64 to 2.62 percent with the best estimate of 1.60. Over the
past 12 years, the average decline in domestic leather output has been
approximately 3 percent per year.
E. Community Effects
As shown in Table III-3, over 70 percent of the tanneries are located
either in the Northeast or North-Central region. These tanneries are
estimated to be distributed fairly evenly among large urban areas
(Milwaukee, St. Louis, Chicago), towns of about 40,000 to 50,000 population
(Peabody, Massachusetts), and small towns of between 1,000 to 2,000
population (Hartland, Maine; Westfield, Pennsylvania). Of the tanneries
projected to close, most employ less than 100 workers. A closing of a
tannery of this size could be expected to have a significant impact on a
small town with a population of 1,000 to 2,000; however, the impact on a
VIII-20
-------
larger town or urban area would be relatively minor. The closing of two or
more in a town of 40,000 to 50,000 could be expected to have an appreciable
impact on these towns. Assuming that the distribution of tannery closures
follows the distribution pattern indicated above, pollution control can be
expected to have severe impacts on 3 to 5 small towns.
F. Balance of Payments Effect
On the basis of the assumptions used in Chapter VIII - Section F we can
estimate the net effect on the U.S. balance of payments.
A one percent increase in the domestic price of leather can increase the
leather-leather products balance of payments by $21.9 million (best
estimate) annually. Thus an expected price increase of 1.8 percent will
effect the balance of payments by $39.4 million with a possible range of
$15.8 to $64.5 million.
6. New Source Effects
The Agency is establishing standards for new sources equal to those for
existing sources. There is no incremental cost or economic effect for a
new source to enter the industry over and above the costs that must be
incurred by existing plants.
VIII-21
-------
IX. SMALL BUSINESS ANALYSIS
The Regulatory Flexibility Act passed by the 96th Congress requires that
Federal agencies consider the differences in the scale of resources of
regulated entities. The purpose of this chapter is to summarize the
information contained elsewhere in the report relative to the Regulatory
Flexibility Act and present the -impacts on "sinall" plants and firms in a
concise statement.
A. Definition of "Small" Leather Tanning and Finishing Plants
The first step in completing the regulatory flexibility analysis is to
define small entities for each subcategory. The definition of small,
medium and large sized plants as used in this report was developed jointly
between representatives of the Tanners Council of America, EPA, the
technical contractor and the economic contractor. It was agreed that this
size categorization reasonably represented the size structure of the
industry and was adapted for use in this study. This definition was
originally developed in EPA's 1973 report entitled Economic Analysis of
froEgsed Effluent Guidelines: Leather Tanning and Finishing IndustryTs
developed by DPRA. It was modified and expandeTTo include new
subcategones, with the last modification occurring in 1980. While it is
believed the size structure used as a basis of Chapters VI, VII and VIII
more correctly characterizes the industry, the Small Business
Administration (SBA) definition is used for purposes of the Regulatory
Flexibility Analysis.
The SBA has proposed a definition of "small" leather tanning and finishing
firms as those firms with 200 or fewer employees (federal Register Vol. 47,
No. 35.) This definition is used herein to distinguish "smau" from
"large11. A minor problem should be mentioned. The SBA definition is
applicable to firms whereas the analysis in this report is based upon
plants. The 1977 Census of Manufactures lists 427 companies in the leather
tanning and finishing industry and 465 plants, indicating that most firms
(85-90 percent) in the industry are single plant firms. If As a result the
SBA definition can adequate]/ serve for this purpose,
The industry structure for direct and indirect dischargers is shown on
Table IX-1 with the corresponding proposed SBA classification.
_!/ Note: excluding converters and plants witr under 20 employees there
were 181 plants reported in 1977. See Chapter III Section A for
further discussion.
IX-1
-------
Table IX-1. Proposed small plant classification, leather tanning and finishing industry
Model/size Subcategory
Chrome Tan 1 & 2
Small
Medium
Large
Nonchrome Tan 3
Small
Large
Other 4,6,7,8
Small
Medium
Large
Total direct dischargers
Number Number of
of employees
plants per plant
Direct
2
2
3
3
2
2
2
1
17
uiscnargers
90
180
45
250
65
55
135
Chrome Tan/Pulp 1
X -Small
Small
Medium
Large
X-Large
Chrome Tan/Save 2
Small
Large
Nonchrome Tan 3
Small
Medium
Large
Retan/Sides 4
SmaT!
Large
Ho Beamhouse 5
Small
Medium
Large
Through Blue 6
Sma 1 1
Large
Shearling 7
SmaTl
Large
Pigskin 8
Medium
Retan/Splits 9
Sma 1 1
Large
Total
Total Industry
Proposed
SBA
classification
Small
Small
2 small
1 large
Small
Large
Small
Small
Small
14 small
3 large
6
22
12
11
5
3
2
3
4
1
8
7
7
7
10
7
5
3
3
1
9
5
141
158
40
100
165
355
570
80
390
45
140
270
105
410
25
70
215
65
275
65
220
210
70
190
Small
Small
Small
Large
Large
Small
Large
Small
Small
Large
Small
Large
Small
Small
Large
Small
Large
Small
Large
Large
Small
Large
80 small
61 large
94 small
64 large
Daily
capacity
Hides
800
No data
1,500
Hides
210
715
Skins
No data
2,500
No data
Hides
175
500
1,000
2,000
5,400
Hides
500
2,000
Hides
150
750
2,200
Sides
1,350
6,600
Skins
900
2,700
8,600
Hides
600
4,200
Shearl ings
900
2, SCO
Skins
3,625
Splits
2,700
7,400
Annual
sales
$1,000
8,050
available
16,099
4,341
14,469
available
5,792
available
1,730
4,326
9,734
18,386
52,561
4,326
18,386
2,066
10,326
30,294
5,840
32,121
1,299
3,896
13,139
5,949
39,452
3,406
9,461
5,457
2,549
7,859
IX-2
-------
B. Alternative Treatment Technologies Considered
Three treatment alternatives were considered for both small and large
tanning plants that are classified as direct dischargers. These include:
Best Practicable Control Technology Currently Available (BPT)
Extended aeration activated sludge
biological treatment, including
coagulation-sedimendation with
equalization.
Best Available Technology (BAT)
BAT Option I = Activated sludge.
. BAT Option II = In-plant control and segregated stream
pretreatment, plus activated sludge
upgraded primarily by powdered activated
carbon (PAC)
BAT Option III = BAT II with the addition of multimedia
filtration.
Four treatment alternatives were also considered for both small and large
tanning plants that discharge their wastewater to a POTW. These include:
Pretreatment Standards for Existing Sources (PSES)
PSES Option I = In-plant controls (depending on subcategory),
including stream segregation and water
conservation, segregated stream pretreatment,
including fine screening and catalytic
oxidation of beamhouse wastewater; and ph
control and monitoring (ph and flow) at the
combined sewer discharge
PSES I includes control capability for
sulfide
PSES Option II = PSES I plus in-plant control, including chromium
recovery and reuse; segregated stream
pretreatment, including fine
screening/equalization and coagulation-
sedimentation of tanyard wastewater; and
dewatering of sludges
PSES II includes control capability for
sulfide and chromium
IX-3
-------
PSES Option III = Controls in addition to PSES I! (depending on
subcategory) as follows: segregated stream
pretreatnent, including flue gas coagulation-
sedimentation of beamhouse wastewaters,
equalization and coagulation-sedimentation of
combined wastewaters in place of the same unit
processes applied to segregated tanyard
wastewaters
PSES III includes control capability for sulfide
and chromium
PSES Option IV = Apply PSES I technology for plants represented by
Chrome Tan/Pulp x-small model plants and by
Nonchrome Tan small model plants. Require no
treatment for plants represented by Retan/Splits
small model plants. The remaining plants would be
subject to PSES II technology requirements.
C. Baseline Economic Conditions and Estimated Impacts
Resulting from BAT and PSES
Baseline financial conditions for small plants in contrast to large plants
in the subcategory are presented on Table IX-2 and plant closure estimates
in Table IX-3. In general, larger plants are in a stronger financial
condition than small plants. In many cases small plants earn the same
percentage return on sales or on assets; however their associated cash
flows and NPVs are considerably smaller. Also, the price increase required
to keep the plants net present value equal to the baseline conditions is
generally higher for small plants reflecting the economies of scale in the
pollution control facilities.
1. Direct Dischargers - BAT I
The existing direct discharging tanneries for which economic data were
available were analyzed individually. The results of these analyses were
aggregated for presentation. In general, the economic impact of the
recommended BAT I is similar for small and large plants. The price
increase required to maintain the same NPV is slightly higher for "small"
plants. Profitability impacts are greater for "small" plants in the Chrome
Tan subcategories but are more severe for "large" plants in the Nonchrome
Tan subcategory. These profitability impacts are largely the result of
percent of the total pollution control investment that plants must still
incur, and the profitability of the individual firms.
Of the 17 direct dischargers, 14 are classified as small and 3 large. As
shown in Table IX-3, all three estimated closures (including one plant that
is a baseline closure) are projected to occur in the small plant category.
IX-4
-------
Table IX-?. The leather tanning and finishing industry, financial effects of options on "small" business
I
en
Model/size
Chrome Tan
Small
Large
Nonchrome Tan
Small
Large
Chrome Tan/Pulj>
Chrome I an/ Save
-wrr —
large
Nonchrome Tan
1 arge
Retan/Sides
"SmaTT
large
No Beamhousr
"ISaTT
1 arge
Ihruuuh blue
I »t
-------
Table IX-2 (continued)
Model/size
Sub-
category
Daily
capacity
Required
price
increase
Return on Sales
Return on Assets
Cash Flow
Baseline
BAT-1/
PSES II
Baseline
EAT-1/
PSES II
Baseline
BAT-1/
PSES II
Met Present Value
BAT-1/
Baseline PSES II
Shearling
Small
I arge
Pigskin
Large
Retail/Splits
SmaTT
Large
-Percent-
41000-
7
8
9
(shearlings)
900
2500
(skins)
3625
(splits)
2700
7400
4.3
2.4
6.1
3.3
2.6
3.3
3.2
3.5
2.3
2.2
1.4
2.2
0.5
-0.5
1.0
Indirect Dischargers-
11.0
10.2
21.7
12.4
12.5
4.2
6.5
3.0
-0.7
5.2
526
1353
824
285
839
406
1161
472
180
664
881
1992
1924
496
1297
439
1291
699
86
656
x
i
-------
Table IX-3. Leather tanning and finishing industry - BAT I and PSES II
Model/Size Subcategory
Chrome Tan 1 & 2
Small
Large
Nonchrome Tan 3
Small
Large
Other 4, 6, 7 & 8
Small
Chrome Tan/Pulp 1
Small
_« Large
X
' Chrome Tan/Save 2
Small
Large
Nonchrome Tan 3
Small
Large
Retan/Sides 4
Small
Large
No Beamhouse 5
Small
Large
Through Blue 6
Small
Large
Shearling 7
Small
Large
Number
of
plants
6
1
3
2
5
40
16
3
2
7
1
8
7
14
10
7
5
3
3
Baseline
closures Closures
Direct Dischargers---
1 1
0 0
0 0
0 0
0 1
-------I n/J i far- f f}ic r ha rno vc
2-4 5-7
0 0
1 0
0 0
1-2 1-2
1 0
1-2 0-1
0 0
0 0
0 0
0 0
0 0
0 0
0 0
Marginal
2
0
0
0
0
6
5
1
1
3
0
2
0
0
0
0
0
0
0
Employment
loss
90
0
0
0
65
260-400
0
0
0
45-90
0
0-105
0
0
0
0
0
0
0
Model
plant
capacity
Hides
800
1500
210
715
Skins
2500
Hides
175-1000
2000-5400
500
2000
150-750
2200
Sides
1350
5600
Skins
900-2700
8600
Hides
600
4200
Shearl ing
900
2500
Production
displacement
annual
Hides (000)
170
0
0
0
Skins (000)
500
Hides (000)
1700-2200
0
0
0
30-70
0
Sides (000)
0-270
0
Skins (000)
0
0
Hides (000)
0
0
Shearling (000)
0
0
Continued..
-------
Table IX-3. Leather tanning and finishing industry (continued)
Model/Size
Pigskin
1 arge
Retan/Splits
Small
Large
Industry Total
Small
Large
Total
X
i
00
Number
Of
Subcategory plants
8
1
9
9
5
106
53
T5B
Baseline
closures Closures
Indirect Dischargers-
0 0
1-2 4-5
0 0
6-11 12-17
1 0
^T? TFT7
Marginal
0
3
0
17
71
Model
Employment plant
loss capacity
Hides
Skins
0 3625
Splits
280-350 2700
0 7400
740-1255
Production
displacement
annual
Hides (000)
Skins (000)
0
Splits (000)
2160-2700
0
-------
2. Indirect Dischargers - PSES II
Chrome Tan/Pulp (1) Price increases required for small plants range from
2.6 to 4.5 percent in contrast to 1.2 to 1.9 percent for large plants.
Likewise, financial impacts are more severe for small plants.
Of the forty small plants in this category, 5 to 7 are projected to close
under PSES Option II compared with no estimated closures for the 16 large
plants. Also, it should be noted that two to four baseline closures can be
expected in contrast to no expected baseline closures for large plants.
Chrome Tan/Save (2) The price increase required for small plants is
estimated at 4.8 percent in contrast to 2.2 percent for large plants.
After controls profitability levels are lower for small plants. For
example, after-tax returns on assets for small plants are reduced froml4.9
percent to 3.9, whereas, for large the reduction is from 10.6 to 5.4
percent. The effluent controls are expected to result in one marginal
situation for the small plants and one marginal situation for the two large
plants.
Nonchrome Tan (3) A pattern similar to the Chrome tanners exists for the
Nonchrome Tan subcategory. One to two of the seven small tanners are
expected to close and an additional three placed in the marginal category.
The only large plant is also expected to close as a baseline closure.
Retan/Sides (4) Control expenditures are expected to have approximately
twice the impact on small plants than on large plants in this category.
For example, after tax returns on assets are reduced from 8.0 percent to
2.9 percent on the small plants in contrast to a reduction from 9.2 to 6.7
percent for large plants. Likewise the NPV for small plants is reduced to
negative levels. Zero to one closure is expected among the eight small
plants in contrast to no closures among the seven large plants.
No Beamhouse (5) This subcategory incurs moderate economic impacts.
Through Blue (6) This subcategory incurs moderate economic impacts.
Shearling (7) This subcategory incurs moderate economic impacts.
Pigskin (8) This subcategory incurs minimal economic impacts.
Retan/Splits (9) Four to five of the nine small plants are expected to
close with three subjected to marginal profitability conditions. No large
plants are expected to close. This segment has been rather depressed
because of a change in consumer tastes and impacts from imports. Baseline
closures in 1 or 2 plants can reasonably be expected.
IX-9
-------
3. Indirect Dischargers - PSES IV
PSES IV reflects modification from PSES II in three categories, 1) chrome
Tan/Pulp, 2) Nonchrome Tan, and, 3) Retan/Splits. The economic effects are
the same for the remaining categories as identified in PSES II above.
Chrome Tan/Pulp (1): The extra-small plants in this subcategory are
exempted from PSES II requirements and are required to meet PSES I. As a
result, of the forty small plants in this subcategory one to two plants are
expected to close. None of the extra small plants are expected to close.
Nonchrome Tan (3): No plant closures are expected in this subcategory.
Mantsrrepresented by the small model plant are excluded from PSES II
requirements and are required to meet PSES I requirements.
Retan/Splits (9): No plant closures are expected in this subcategory.
Plants represented by the small model plant are excluded from PSES I and
PSES II requirements, since there is no sulfide limitation under PSES I.
This modification of the regulation to exclude the smallest size plants in
three subcategories, referred to for purposes of the present discussion as
PSES IV, would reduce the estimated cost of compliance as follows:
Reduction 1980 dollars 1982 dollars
(millions) (millions)
Capital cost $7.84 9.33
Annualized cost 1.96 2.33
The total cost for indirect dischargers for this option (compared to the
cost of PSES II in Table VII-8) would be:
PSES IV
Capital cost 133.7 159.1
Annualized cost 37.7 44.9
IX-10
-------
APPENDIX A
Bibliography
-------
BIBLIOGRAPHY
1. American Shoemaking. Cambridge, MA: Shoe Trades Publishing Company.
2. Baker, A.J. 1971 (November). Hides and Skins. Livestock Marketing
Situation. Economic Research Service. U.S. Department of
Agriculture. Washington, D.C.
3. Battelle Columbus Laboratories. 1977 (October). Costs of Complying
with Hazardous Waste Management Regulations. U.S. Environmental
Protection Agency.
4. Bernstein, L.A. 1978. The Analysis of Financial Statements.
Homewood, IL. Dow Jones-Irvnn.
5. Development Planning and Research Associates, Inc. 1977 (May).
Economic Analysis of Final Pretreatment Standards. Leather Tanning and
Finishing Industry!! U.S. Environmental Protection Agency.
6. Development Planning and Research Associates, Inc. 1978 (February).
Economic Impact Analysis of Hazardous Waste Management Regulations on
the Leather Tanning Industry.Office of Water and Waste Management,
U.S. Environmental Protection Agency.
7. Development Planning and Research Associates, Inc. 1979 (July).
Economic Impact Analysis of Proposed Effluent Limitations Guidelines,
New Source Performance Standards and Pretreatment Standards for the
Leather Tanning and Finishing Point Source Category.Office of Water
and Waste Management, U.S. Environmental Protection Agency.
ERA-440/2-79-019.
8. Helfert, E.A. 1972. Techniques of Financial Analysis. Homewood, IL.
Richard D. Irwin, Inc.
9. Leather Manufacturer. Cambridge, MA: Shoe Trades Publishing Company.
10. The Leather Manufacturer Directory. 1982. Cambridge, MA: Shoe
Trades Publishing Company.
11. Leone, R.A. 1976. Environmental Controls - The Impact on Industry.
Lexington, MA: D.C. Heath and Company.
12. National Commission on Water Quality. 1975 (November). The Leather
Tanning Industry. Economic Impact of Water Pollution Controls on
Selected Food Industries. Washington, D.C.
A-l
-------
13. New England Tanners Club. 1972. Leather Facts. Peabody, MA.
14. Poats, F. 1972 (August). Cattle Hides and Shoe Prices. Marketing
and Transportation Situation. Marketing Economics, Economic Research
Service, U.S. Department of Agriculture. Washington, D.C.
15. Poats, F.J. and J.W. Thompson. 1965 (February). Alternative Markets
for Cattle Hide Trim. Marketing Economics Division, Economic Research
Service, U.S. Department of Agriculture. Washington, D.C.
16. Robert Morris Associates. 1973-1981. Annual Statement Studies.
17. Tanners' Council of America. 1978-1982. U.S. Leather Industry
Statistics. Washington, D.C.
18. Thompson, J.W. 1965 (February). Marketing Spreads for Leather
Products. Marketing and Transportation Situation. Economic Research
Service, U.S. Department of Agriculture.Washington, D.C.
19. Thompson, J.W. and F.J. Poats. 1965. Economics of Segmenting Cattle
Hides. Marketing Economics Division, Economic Research Service, U.S.
Department of Agriculture. Washington, D.C.
20. Troy, Leo. 1978-1981. Almanac of Business and Industrial Financial
Ratios.
21. United Nations/CTAD. 1968. The Kennedy Round Estimated Effects on
Tariff Barriers. United Nations. New York, NY
22. United Nations/CTAD. 1971. Leather and Leather Products. United
Nations. New York, NY.
23. United Nations/CTAD/GATT. 1969. The Market for Leather Goods.
International Trade Centre. Geneva.
24. United Nations/CTAD/GATT. 1974. Selected Markets for Leather Goods.
International Trade Centre. Geneva.
25. United Nations/Industrial Development Organization Vienna. 1972.
Marketing and Export Possibilities for Leather and Leather Products
Manufactured in Developing Countries. United Nations. New York, NY.
26. U.S. Department of Agriculture, Foreign Agriculture Service. Foreign
Agriculture Circular - Livestock and Meats. Washington, D.C.
27. U.S. Department of Agriculture, Foreign Agriculture Service. 1959.
Problems of U.S. Hides and Calf and Kip Skins in International Trade.
Washington, D.C.
28. U.S. Department of Agriculture, A Task Force Report. 1979. The
Structure, Pricing Characteristics, and Trade Policy. Washington,
__
A-2
-------
29. U.S. Department of Commerce, Bureau of the Census. 1976-1980.
Statistics for Industry Groups and Industries. Annual Survey of
Manufactures. Washington.
30. U.S. Department of Commerce, Bureau of the Census. 1977. Census of
Manufactures. Washington: U.S. Government Printing Office.
31. U.S. Department of Commerce, Bureau of Industrial Economics.
1974-1982. U.S. Industrial Outlook. Washington: U.S. Government
Printing Office.
32. U.S. Department of Commerce, Domestic and International Business
Administration, Bureau of Domestic Commerce. 1976. United States
Leathers in World Markets. Washington, D.C.
33. U.S. International Trade Commission. 1976. Footwear, Washington,
D.C.
34. U.S. International Trade Commission. 1975 (August). Foreign Trade
Elasticities for Twenty Industries. USITC Publication 738.
Washington, D.C.
35. U.S. Treasury Department, Internal Revenue Service. 1974-1979.
Corporation Source Book of Statistics of Income. Washington, D.C.
36. Van Home, J.D. 1974. Financial Management and Policy. Englewood
Cliffs, N.J.: Prentice-Hall, Inc. ^
37. Weston, J.F. and E.F. Brigham. 1978. Managerial Finance. Hinsdale,
IL: The Dryden Press.
A-3
-------
APPENDIX B
Data Used in Price Analysis
-------
Cattlehide leather deliveries, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
5,420
4,640
4,348
4,259
5,361
4,905
4,505
4,202
3,736
3,889
2nd
quarter
.j i nnft h-IH
5,526
4,649
4,374
4,840
5,201
4,758
4,582
3,749
3,526
4,037
3rd
quarter
4,822
4,093
4,001
4,829
4,849
4,344
4,157
3,458
3,603
3,863
4th
quarter
4,712
4,332
4,305
5,269
4,654
4,630
4,032
3,523
3,880
3,672
Source: Tanners' Council of America
Total U.S. commercial cattle slaughter, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
8,692
8,647
8,503
9,720
10,911
10,466
10,209
8,896
8,146
8,586
2nd
quarter
i nn
9,026
8,139
8,813
9,548
10,169
10,193
9,876
8,045
8,193
8,495
3rd
quarter
fl hpaH
9,011
7,988
9,359
10,540
10,907
10,629
9,743
8,248
8,615
8,878
4th
quarter
9,045
8,861
10,103
11,092
10,657
10,568
9,724
8,489
8,853
8,994
Source: Tanners' Council of America
B-l
-------
Producers price index for upper leather, 1972-81
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
118.03
159.60
148.13
128.30
159.83
182.20
191.50
301.70
319.20
308.60
2nd
quarter
138.23
149.57
148.00
146.47
179.43
185.53
191.67
395.77
283.10
313.40
3rd
quarter
139.60
149.93
142.33
142.87
179.90
180.33
224.30
350.63
287.43
301.10
4th
quarter
156.80
151.43
135.30
148.47
177.47
178.87
254.83
318.20
303.30
296.37
Source: Bureau of Labor Statistics
Heavy native steer hide price, 1972-81
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
20.10
31.60
25.87
13.67
29.07
36.07
37.67
70.33
45.83
43.60
2nd
quarter
w
27.07
34.13
24.63
24.90
36.90
38.13
42.37
88.63
36.37
45.73
3rd
quarter
'ik \
IU. }
32.20
37.87
24.87
26.53
36.33
35.30
53.20
71.77
46.53
44.17
4th
quarter
39.53
31.13
16.53
28.70
29.67
35.13
55.40
59.27
49.37
41.83
Source: Tanners' Council of America
B-2
-------
Exports - U.S. hide exports, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
4,061
4,973
4,257
5,370
5,978
6,332
5,990
5,998
4,753
5,024
2nd
quarter
1,000
5,167
3,822
4,110
5,365
6,256
5,991
6,447
6,339
5,235
4,670
3rd
quarter
hides
4,463
3,295
4,464
4,549
5,869
6,087
5,512
5,444
4,668
4,802
4th
quarter
4,512
4,087
5,113
5,045
6,215
5,159
6,152
5,282
4,864
5,233
Source: Tanners' Council of America
F Exports - Foreign bovine hide exports (excluding U.S. & E.G. exports)
1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
104.65
87.78
89.33
107.00
114.20
122.88
123.10
109.35
NA
NA
2nd
quarter
104.65
87.78
89.33
107.00
114.20
122.88
123.10
109.35
NA
NA
3rd
quarter
104.65
87.78
89.33
107.00
114.20
122.88
123.10
109.35
NA
NA
4th
quarter
104.65
87.78
89.33
107.00
114.20
122.88
123.10
109.35
NA
NA
Source: USDA Foreign Agriculture Service-Foreign Agricultural Circular
Hides and Skins
B-3
-------
Shoe imports, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
74,166
78,879
66,606
71,635
92,500
92,017
101,521
110,321
71,858
106,672
2nd
quarter
5
74,166
78,879
66,606
71,635
92,500
92,017
83,284
103,585
89,888
81,678
3rd
quarter
74,166
78,879
66,606
71,635
92,500
92,017
94,993
105,219
89,250
93,382
4th
quarter
74,166
78,879
66,606
71,635
92,500
92,017
94,717
85,438
83,780
93,873
Source: Tanners' Council of America
Producer price index (1967=100) for polyvinylchloride 1972-1981
Year
1972
1973
1974
1975
1 rt T f
1976
1977
1978
1979
1 980
1981
1st
quarter
86.5
93.3
115.5
178.9
176.9
178.1
186.7
204.0
254.6
253.3
2nd
quarter
87.3
98.0
150.3
163.8
179.9
184.6
190.6
216.2
263.3
270.1
3rd
quarter
88.2
99.1
165.9
167.6
186.9
194.6
195.1
229.4
239.9
248.8
4th
quarter
90.1
99.1
178.9
170.1
185.2
191.3
193.7
245.4
216.1
219.6
Source: Bureau of Labor Statistics
B-4
-------
Domestic shoe prices-estimated average factory value per pair, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
5.49
6.28
6.77
7.54
7.98
8.55
8.55
9.75
NA
NA
2nd
quarter
5.56
6.16
6.84
7.56
8.21
8.58
9.42
10.24
NA
NA
3rd
quarter
5.63
6.28
7.03
7.46
8.43
8.44
9.16
10.78
NA
NA
4th
quarter
5.60
6.33
7.40
7.46
8.56
8.63
9.76
11.03
NA
NA
Source: Tanners' Council of America
Domestic shoe production, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
137,541
130,624
120,264
98,328
121,312
96,814
102,238
106,150
104,322
96,446
2nd
quarter
i nnn
135,535
124,860
114,845
103,387
121,441
97,323
104,291
97,764
102,239
95,312
3rd
quarter
127,578
115,097
95,115
112,360
104,452
92,457
90,555
86,315
93,235
90,558
4th
quarter
126,001
117,745
94,919
119,414
96,882
97,738
93,113
91,137
97,055
93,157
Source: Tanners' Council of America
B-5
-------
Leading Indicators, 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
110.3
123.9
126.9
105.6
122.1
127.9
134.9
142.8
135.7
NA
2nd
quarter
113.2
125.3
129.3
111.6
124.4
130.0
136.9
140.0
135.6
NA
3rd
quarter
115.6
126.7
129.3
118.0
125.5
131.1
137.0
140.4
132.6
NA
4th
quarter
119.4
126.0
113.6
119.2
126.9
134.5
143.4
136.0
NA
NA
Source: Bureau of Labor Statistics - Business Conditions Digest
Coincident Indicators 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
107.7
121.4
124.0
108.0
120.0
126.8
133.9
145.5
NA
NA
2nd
quarter
110.7
123.0
123.7
106.8
122.1
129.6
138.2
145.0
NA
NA
3rd
quarter
113.3
124.6
123.8
110.9
123.0
130.8
139.6
144.9
NA
NA
4th
quarter
118.1
126.4
120.2
114.1
124.2
133.3
144.3
144.9
NA
NA
Source: Bureau of Labor Statistics - Business Conditions Digest
B-6
-------
Rate of exchange index for U.S. dollars, 1972-81
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
107.5
100.0
100.4
97.1
105.0
105.3
97.4
92.0
94.4
97.4
2nd
quarter
107.0
96.2
100.6
100.0
105.3
104.5
94.8
92.5
94.3
106.0
3rd
quarter
107.7
96.8
101.0
103.4
105.2
103.2
91.0
92.0
92.0
111.1
4th
quarter
104.5
100.7
99.0
104.0
105.3
100.6
90.6
92.2
94.3
107.4
Source: Federal Reserve Bank of St. Louis
WPI - Wholesale price index 1972-1981
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
1.17
1.27
1.49
1.71
1.80
1.90
2.02
2.24
2.59
2.88
2nd
quarter
1.18
1.33
1.55
1.73
1.82
1.95
2.08
2.33
2.64
2.94
3rd
quarter
1.20
1.39
1.65
1.77
1.84
1.95
2.11
2.39
2.73
2.96
4th
quarter
1.21
1.40
1.71
1.79
1.86
1.97
2.16
2.48
2.79
2.96
Source: Bureau of Labor Statistics
B-7
-------
Disposable personal income
(billions of dollars, reasonably adjusted at annual rates)
Year
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1st
quarter
772.8
851.5
846.7
829.9
883.1
908.0
956.6
1,011.1
1,022.8
1,035.0
2nd
quarter
1Q79C
785.4
869.7
843.1
874.1
887.8
921.5
966.1
1,011.7
1,005.5
1,036.6
3rd
quarter
800.9
891.1
843.0
863.1
893.3
936.3
976.2
1,019.8
1,018.2
1,048.8
4th
quarter
828.7
918.0
835.1
871.8
903.3
951.8
991.5
1,020.1
1,025.7
1,051.9
Source: Survey Current Business
B-8
------- |